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What to Know When Buying a Clean Vehicle


The Internal Revenue Service reminded consumers considering an automobile purchase to be sure to understand several recent changes to the new Clean Vehicle Credit for qualified plug-in electric drive vehicles, including qualified manufacturers and tax rules.

The Inflation Reduction Act of 2022 (IRA) made several changes to the new Clean Vehicle Credit for qualified plug-in electric drive motor vehicles, including adding fuel cell vehicles. The IRA also added a new credit for previously owned and commercial clean vehicles.

Before taxpayers purchase a clean vehicle they should be sure that the vehicle was made by a qualified manufacturer. Taxpayers must also meet other requirements such as the modified adjusted gross income limits.

To be a qualified manufacturer, the manufacturer must enter into an approved agreement with the Internal Revenue Service and supply the IRS with valid vehicle identification numbers (VINs) that can later be matched at the time of filing to the VIN reported on the return.

When purchasing a new or used clean vehicle, purchasers should check if the make and model are eligible. In addition, for a new or used clean vehicle to be eligible for a Clean Vehicle Credit, the seller must provide the buyer with a seller report verifying that the vehicle purchased will qualify for the credit, which will include the make, model, and VIN.

Also, the clean vehicles tax credits are non-refundable, meaning that they can increase a refund or reduce the amount of tax owed, they cannot be used to create a tax refund.

The amount of tax owed will determine if the full amount or only a portion of the credit can be claimed.


Cost of Medical Expenses Related to Nutrition, Wellness, and General Health


The IRS has updated their frequently asked questions (FAQs) addressing whether certain costs related to nutrition, wellness, and general health are medical expenses under IRC 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

IRC section 213 generally allows a deduction for expenses paid during the taxable year for medical care if certain requirements are met.Generally, taxpayers deductible medical expenses must exceed 7.5% of their Adjusted Gross Income for the next dollar to be deductible and the totality of their itemized deductions must exceed the standard deduction before any tax benefits can be realized. Furthermore, only unreimbursed medical expenses are eligible to be claimed on Schedule A. Thus, the vast majority of taxpayers are unable to meet these thresholds, unless they have catastrophic medical expenses.

Expenses for medical care also are eligible to be paid or reimbursed under an HSA, FSA, Archer MSA, or HRA. However, if any amount is paid or reimbursed under an HSA, FSA, Archer MSA, or HRA, a taxpayer cannot also deduct the amount as a medical expense on the taxpayer’s federal income tax return. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include the costs of medicines and drugs that are prescribed by a physician.

Medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They do not include expenses that are merely beneficial to general health. The following FAQs were added to on March 17, 2023.

Q1. Is the cost of a dental exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A1. Yes, because the dental exam provides a diagnosis of whether a disease or illness is present.
Q2. Is the cost of an eye exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A2. Yes, because the eye exam provides a diagnosis of whether a disease or illness is present.
Q3. Is the cost of a physical exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A3. Yes, because the physical exam provides a diagnosis of whether a disease or illness is present.
Q4. Is the cost of a program to treat a drug-related substance use disorder a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A4. Yes, because the program treats a disease (substance use disorder).
Q5. Is the cost of a program to treat an alcohol use disorder a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A5. Yes, because the program treats a disease (alcohol use disorder).
Q6. Is the cost of a smoking cessation program a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A6. Yes, because the smoking cessation program treats a disease (tobacco use disorder).
Q7. Is the cost of therapy a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A7.Yes, if the therapy is treatment for a disease. For example, an amount paid for therapy to treat a diagnosed mental illness is a medical expense, but an amount paid for marital counseling is not.
Q8. Is the cost of nutritional counseling a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A8. Yes, but only if the nutritional counseling treats a specific disease diagnosed by a physician (such as obesity or diabetes). Otherwise, the cost of nutritional counseling is not a medical expense.
Q9. Is the cost of a weight-loss program a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A9. Yes, but only if the program treats a specific disease diagnosed by a physician (such as obesity, diabetes, hypertension, or heart disease). Otherwise, the cost of a weight-loss program is not a medical expense.
Q10. Is the cost of a gym membership a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A10. Yes, but only if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). Otherwise, the cost of a gym membership is for the general health of the individual and is not a medical expense.
Q11. Is the cost of exercise for the improvement of general health, such as swimming or dancing lessons, a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A11. No, because the exercise, even if recommended by a doctor, is only for the improvement of general health.
Q12. Is the cost of food or beverages purchased for weight loss or other health reasons a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? A12. Yes, but only if 1) the food or beverage doesn’t satisfy normal nutritional needs,
(2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal
nutritional needs. If any of the three requirements is not met, the cost of food or beverages is not a medical expense.
Q13. Is the cost of nonprescription (over-the-counter) drugs and medicines a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A13.Yes. Except for the cost of insulin, the cost of a drug that is not prescribed by a physician is not a medical expense that is deductible under IRC section 213. However, the cost of over-the-counter drugs and also menstrual care products may be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA.
Q14. Is the cost of nutritional supplements a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A14. Yes, but only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a medical expense.

While much of the information shared by the IRS in the FAQ is not new some of the answers do bring a new level of clarification for those individuals, for example, who have Downs Syndrome and are dealing with obesity or diabetes or need physical and occupational therapy. Of particular relevance are the answers to Questions # 7-12 and 14. Please communicate with your physician to assure you have the proper documentation to support medical deductions for the categories discussed in these specific questions and answers.


What are Cost of Goods Sold and Does It Affect Your Business?


If you are starting a small manufacturing business, even if you are operating out of your home, there is a concept call Cost of Goods Sold (COGS) that you probably need to be aware of.  COGS is the total amount your business paid as a cost directly related to the sale of products. Operators just getting started, whether it’s a mobile sandwich business or you make jewelry in the basement often think that they can call their purchases “supplies” and expense the amount they’ve spent for the year. This is not the proper tax approach.

Depending on your business, COGS may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the good. The entrepreneur’s own labor is not a cost that can be expensed.  Labor is only what you paid to other people.

In other words, the materials that go into the product and the labor that goes into making each unit may be included in cost of goods sold. If you incur sales costs specific to that item, like commissions, those costs may also be included in COGS. The accounting term for this is direct costs.  By contrast, if a cost is general for your business, like rent, a new machine, or general marketing costs, it isn’t a cost 100% dedicated to a specific item. Those indirect costs are considered overhead, not the cost of goods sold.

Aside from just reporting your COGS, it is an important number for business owners and managers to track. That is the absolute lowest price you can sell a product to break even. Any additional margin goes back to covering overhead and eventually profit. If you don’t know your COGS and break-even point, you don’t know if you’re making or losing money.

Your cost of goods sold tells you a lot about your business, including the following:

  1. How much profit you’re making on each product
  2. If your product pricing is too high or too low
  3. Whether you need to find another vendor or supplier
  4. If you should continue to sell the product at all

Beginning inventory is the value of the raw materials and finished goods in stock at the beginning of the reporting period. In the first year of a business, the beginning inventory is typically zero, but in succeeding years, the previous year’s ending inventory becomes the next year’s beginning inventory number.

Purchases made during the reporting period include all raw materials, components, and merchandise acquired from other parties during the period.  Ending inventory is the amount counted as being on hand at the end of the reporting period. The standard formula to calculate cost of goods sold for physical products:

Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold

If you have any manufacturing labor costs or direct sales costs, you can include those as well, but that may not apply to all businesses. 

There are several methods to tracking.  First in, first out (FIFO) is the easiest method to use.  It assumes that the longest held inventory is what’s sold first whenever a company makes a sale. So, if a company paid $5 per unit a year ago and it pays $10 per unit now, when it makes a sale, COGS per unit is said to be $5 per unit until all of its year-old units are sold.

Last in first out (LIFO) is a method that considers the most recently purchased items in a company’s inventory to have sold first. So, if a company paid $5 per unit a year ago and it pays $10 per unit now, each time it makes a sale, COGS per unit is said to be $10 until all of its more recently purchased units are sold.

The averaging method for calculating COGS is a method that doesn’t consider the specific cost of individual units. It doesn’t matter what was purchased when or how a company’s inventory costs fluctuate. Instead, businesses using the averaging method establish an average per unit cost, and then multiply that average by the number of units sold during a particular period in order to determine COGS.  If you chose to track your profit and loss monthly, you would have to track COGS on a monthly basis too.

The average method is important because it represents a happy median between the FIFO and LIFO methods. It’s not the most advantageous method for tax purposes, but it’s not the worst, either. And, it’s relatively easy to apply and to use consistently.  However, once you select a method, you have to stick with it.

Inventory on hand at the end of the tax year (usually December 31st for self-employed business owners, has to be counted and valued, usually at cost.  It makes sense to create as many sub-accounts as necessary to give you as much business analytics as COGS is usually a business’ largest expense.  This will give you a fine-grained view of what constitutes this expense and also make it easier to identify cost control measures as your business grows.

If you’re purchase accounting software with a good inventory management system or point of sale (POS) module, most of these calculations will be completed automatically.  If not, you or a bookkeeper will need to track inventory and all associated costs separately in order to accurately calculate the value of your inventory and your cost of goods sold.  Based on the nature of the product and the sales cycle, it is possible for a small business owner to get their ending inventory down to a low number by each December 31st.  Speaking to an experienced bookkeeper may also be helpful.


Cryptocurrency: When Disaster Strikes


Everyone is talking about cryptocurrency such as Bitcoin, Litecoin, and Ethereum. Cryptocurrencies have become popular alternatives for online payments. Before converting real dollars into cryptocurrency, understand that there are real risks in using cryptocurrencies which is why I am not a fan.

A cryptocurrency is a digital currency, an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device.

What are the risks to using cryptocurrency? The market for these digital currencies is very volatile. Since cryptocurrencies don’t need banks or any other third party to regulate them, they are usually uninsured and hard to convert into a form of tangible currency. In addition, since cryptocurrencies are technology-based intangible assets, they can be hacked like any other intangible technology asset. Finally, since you store your cryptocurrencies in a digital wallet, if you lose your wallet, you have lost your entire cryptocurrency investment.

Like just about everything else in finance, crypto saw its prices tank when the Federal Reserve started to raise interest rates to fight rising inflation.

That caught bitcoin’s biggest backers by surprise, many of whom believed the virtual currency would be an inflation hedge, like precious metals. They had predicted bitcoin’s value would rise during a period of high inflation; instead, it was falling.

Generally, the IRS taxes cryptocurrency like property and investments, not currency. This means all transactions, from selling coins to using cryptos for purchases, are subject to the same tax treatment as other capital gains and losses.

Because of this, long-term crypto investors have a valuable opportunity: If they hold onto their coins for at least a year, they can benefit from lower long-term capital gains taxes, which range from 0% to 20%, depending on your income level. Short-term crypto gains on purchases held for less than a year are subject to the same tax rates you pay on all other income: 10% to 37% for the 2022-2023 tax filing season, depending on your tax bracket.

These taxes apply even if you use crypto to make purchases, meaning you may be on the hook for sales tax plus taxes on any gains your crypto has made since you first bought or received it.

You may also owe taxes on crypto if you earn it by mining cryptocurrency or receive it in exchange for goods and services. In these instances, it’s taxed at your ordinary income tax rates, based on the value of the crypto on the day you receive it. (You may owe taxes if you later sell the crypto you mined or received at a profit.) 

If all of your crypto transactions occur on one exchange, then, gathering the information you need to report cryptocurrency on your tax return should be easy. If you have crypto transactions across several exchanges, however, things may get more complicated. You’ll need to get a report from each place a transaction occurred or track the transactions yourself.

After you’ve collected all of your crypto transactions, you must report them to the IRS on Form 8949. This form is divided into two sections: short term (for crypto held one year or less) and long term (for crypto held longer than one year).

Recently, the Office of Chief Counsel advised that a taxpayer, who purchased for personal investment cryptocurrency in 2022 for $1 per unit that declined in value to less than one cent per unit at the end of 2022, did not sustain a loss under Code Sec. 165. According to the Chief Counsel’s Office, the taxpayer did not abandon or otherwise dispose of the cryptocurrency and the cryptocurrency was not worthless because it still had value; further, even if the taxpayer sustained a loss under Code Sec. 165, the loss would be disallowed because, under Code Sec. 67(g), miscellaneous itemized deductions were suspended for tax years 2018 through 2025. CCM 202302011.

But it only gets worse. The Office of Chief Counsel also advised that, when a taxpayer donates cryptocurrency for which a charitable contribution deduction of more than $5,000 is claimed, a qualified appraisal is required under Code Sec. 170(f)(11)(C) in order to obtain a charitable contribution deduction. Further, the Chief Counsel’s Office concluded that if a taxpayer determines the value of the donated cryptocurrency based on the value reported by a cryptocurrency exchange on which the cryptocurrency is traded rather than by obtaining a qualified appraisal, the reasonable cause exception in Code Sec. 170(f)(11)(A)(ii)(II) will not excuse noncompliance with the qualified appraisal requirement and the charitable contribution deduction will be disallowed. CCM 202302012.

As I said, I’m not a fan of cryptocurrency.


Tax Benefits for Grandparents


Regarding grandparents, the fact that they are grandparents, does not, in and of itself result in any tax benefits.  However, there are certain tax provisions that may apply.  First, any amounts given by a grandparent is usually considered a gift.  Beginning in 2022, the annual exclusion increased from $15,000 to $16,000.  Gifts to one person in excess of the annual exclusion require the filing of a gift tax return, although no gift tax is incurred because the gift tax credit is so large. Married grandparents can join together to give one grandchild $32,000 each year.

Grandparents can establish a Section 529 plan for a grandchild and possibly save state income tax in the state where the grandparent resides, depending on state law.  Maryland and DC, for example, give the donor a deduction for money contributed to their state’s Sec 529 plan. A grandparent who is married can deposit $160,000 into their grandchild’s 529 plan to cover K-12 expenses—an amount equivalent to a $32,000 contribution each year over five years. When filling out their federal tax forms, they can elect to include this gift over a five-year period (i.e., $32,000 x 5 = $160,000), thereby excluding the $160,000 from any gift taxes.

Assuming the grandparents live five more years, the entire $160,000, plus the money earned from this investment, will not be taxed as part of their estate. And after this five-year period elapses, they can deposit an additional $160,000. Grandparents should be sure to consult their tax advisor before making large deposits into a 529 plan.

Here’s another opportunity.  At age 72, IRA owners must start taking money – known as Required Minimum Distributions (RMD) –  from their retirement accounts.  Even if the person doesn’t need the RMD money, IRS still requires the distribution which is taxable.

If the grandparent contributes their RMD to a grandchild’s 529 account, the grandparent will still pay income tax on the RMD, but the money they invest in the 529 account will grow tax-deferred. And if the money is later used for qualified education expenses, the entire amount is available to the student tax-free.  Additionally, the amount contributed by the grandparent to a 529 account is not included in their estate for estate tax purposes — even though they retain control over the funds.  When applying for financial aid for college, by setting up a 529 account in the name of the grandparent with a grandchild as a beneficiary, these assets are not included as either the child or parent’s assets.

Finally, a grandparent can pay for college tuition. A special tax-code exemption allows a grandparent to pay college tuition and not have that money subjected to gift tax. The IRS makes an exclusion in the case of financial gifts used for tuition payments.

The exclusion, called the Gift Tax Education Exclusion for Tuition, means that money gifted to a friend or family member to pay for college tuition is not subject to the federal gift tax. Under the Internal Revenue Code, you can pay unlimited amounts for someone’s tuition and not be taxed.

To make a tuition gift that qualifies for the federal gift tax educational exclusion, the gift-giver should make the tuition payment directly to the student’s school—they should not give the money to the student.

Paying the school directly, instead of donating to a student’s 529 plan helps grandparents avoid potential gift taxes if they plan to make significant contributions. Of course, it’s not just the grandparent’s finances that must be considered, but also the student’s. Luckily, that is about to get easier.

In the past, grandparents faced issues when trying to pay for their grandchildren’s college tuition. However, with the arrival of the new Free Application for Federal Student Aid (FAFSA), a major change is coming that will be very beneficial.

Those who file the FAFSA will no longer be asked if their grandparents will be providing any assistance. This means that students whose grandparents pay part of their college expenses will no longer see their financial aid decrease, as long as the grandparents know how to properly give the money.