2022 TAX CHANGES

Article Dean Dorton

With legislation enacted in 2022, the Kentucky General Assembly imposed sales tax on over thirty services not previously subject to tax and made other changes that will increase costs for businesses and individuals alike. You can find a list of the specific services and most changes here. In exchange the legislature lowered Kentucky’s individual income tax rate to 4.5% for 2023, and the House of Representatives has lowered it again to 4.0% for 2024.

The Department of Revenue (“DOR”) has been working steadily to issue guidance on numerous issues raised by the 2022 changes. That guidance is being posted to a DOR website called “Tax Answers.” Through the site, taxpayers can access two newsletters (June and September Sales Tax Facts) and FAQs on several of the newly taxable services to help them navigate the changes.

Some of the common questions we’ve been asked are listed below. As you read through the answers please keep in mind that specific facts and circumstances can change the taxability of transactions and we encourage you to reach out to your Dean Dorton advisor or other professional advisor if you have further concerns.

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Article Dean Dorton

Yesterday afternoon, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”). The IRA includes provisions intended to combat climate change, promote clean energy, and lower prescription drug and health care costs. To pay for its spending, the IRA contains several tax changes, although the tax provisions are much narrower than those proposed in the Build Back Better Act that failed to progress in Congress last fall.

Notably, the IRA extends, through 2028, the limit on excess business losses (“EBL”) that can be deducted by noncorporate taxpayers. It also appropriates $80 billion to the Internal Revenue Service for enforcement, taxpayer services, operations support, and modernization, which could lead to increased audit activity. On a positive note, the IRA contains several tax incentives for individuals and businesses related to clean energy. Other tax provisions include a new corporate alternative minimum tax, an excise tax on the repurchase of corporate stock by publicly-traded companies, an increase in the research credit against payroll taxes for small businesses, and changes to the premium tax credit.

Extension of Limit on Excess Business Losses

The Tax Cuts and Jobs Act (“TCJA”), enacted at the end of 2017, introduced a limit on business losses deductible by individuals and other noncorporate taxpayers (trusts and estates) against non-business income. Specifically, the TCJA disallowed 2018 net tax losses from active businesses in excess of $250,000 (for individual taxpayers) and $500,000 (for joint filers), adjusted annually for inflation. Disallowed losses are converted into a net operating loss (“NOL”) and carried over to the following tax year. Under the TCJA, the EBL limit was effective for tax years 2018 through 2025.

In March of 2020, the CARES Act retroactively postponed the effective date of the EBL limit until tax years beginning in 2021. The American Rescue Plan Act of 2021 (“ARP”) later extended the EBL limit for one year, through 2026.

The IRA provides for a two-year extension of the EBL limit, through 2028. To illustrate the impact of this limitation, consider the following example:

H and W are married taxpayers filing a joint return. In 2022, H generates a net tax loss from his business of $600,000 and W generates a net tax loss from her business of $240,000. Both H and W actively participate in their businesses. Their aggregated net tax loss from trades or businesses is $840,000. For tax year 2022, the EBL limit is $540,000 for joint filers. Thus, their EBL for 2022 is $300,000 ($840,000 – $540,000).

How does this limitation impact the taxable income of H and W?

Let’s assume that, in addition to the losses generated from their businesses, H and W have other investment income totaling $1,000,000. The following table illustrates how taxable income is calculated before and after the EBL limit:

<table style="border-collapse:collapse;border:none;">
    <tbody>
        <tr>
            <td style="width: 197.75pt;border: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>&nbsp;</p>
            </td>
            <td style="width: 134.85pt;border-top: 1pt solid windowtext;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-image: initial;border-left: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>Before EBL limit</strong></p>
            </td>
            <td style="width: 134.9pt;border-top: 1pt solid windowtext;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-image: initial;border-left: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>After EBL limit</strong></p>
            </td>
        </tr>
        <tr>
            <td style="width: 197.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>Investment income</p>
            </td>
            <td style="width: 134.85pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><span style="color:black;">$1,000,000</span></p>
            </td>
            <td style="width: 134.9pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><span style="color:black;">$1,000,000</span></p>
            </td>
        </tr>
        <tr>
            <td style="width: 197.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>H&rsquo;s active business loss</p>
            </td>
            <td style="width: 134.85pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($600,000)</p>
            </td>
            <td style="width: 134.9pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($600,000)</p>
            </td>
        </tr>
        <tr>
            <td style="width: 197.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>W&rsquo;s active business loss</p>
            </td>
            <td style="width: 134.85pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($240,000)</p>
            </td>
            <td style="width: 134.9pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($240,000)</p>
            </td>
        </tr>
        <tr>
            <td style="width: 197.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>Excess business loss (see above)</p>
            </td>
            <td style="width: 134.85pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>$0</p>
            </td>
            <td style="width: 134.9pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>$300,000</p>
            </td>
        </tr>
        <tr>
            <td style="width: 197.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'><strong>Net taxable income</strong></p>
            </td>
            <td style="width: 134.85pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>$160,000</strong></p>
            </td>
            <td style="width: 134.9pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>$460,000</strong></p>
            </td>
        </tr>
    </tbody>
</table>

While H and W cannot reduce their 2022 taxable income by the $300,000 EBL, this loss is converted to a NOL and carried over to the following year. H and W can use the NOL in 2023 to offset up to 80% of their taxable income. To illustrate, let’s assume that H and W have the exact same facts as above for 2023. Their 2023 taxable income would be calculated as follows:

<table style="border-collapse:collapse;border:none;">
    <tbody>
        <tr>
            <td style="width: 332.75pt;border: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>&nbsp;</p>
            </td>
            <td style="width: 134.75pt;border-top: 1pt solid windowtext;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-image: initial;border-left: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>2023</strong></p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>Investment income</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>$1,000,000</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>H&rsquo;s active business loss</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($600,000)</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>W&rsquo;s active business loss</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($240,000)</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>Excess business loss (see above)</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>$300,000</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>Net taxable income before NOL carryover</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>$460,000</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'>NOL carryover from 2022 (lesser of NOL of $300,000 or 80% of taxable income before NOL ($368,000))</p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'>($300,000)</p>
            </td>
        </tr>
        <tr>
            <td style="width: 332.75pt;border-right: 1pt solid windowtext;border-bottom: 1pt solid windowtext;border-left: 1pt solid windowtext;border-image: initial;border-top: none;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:  justify;font-size:15px;font-family:"Arial",sans-serif;'><strong>Net taxable income after NOL</strong></p>
            </td>
            <td style="width: 134.75pt;border-top: none;border-left: none;border-bottom: 1pt solid windowtext;border-right: 1pt solid windowtext;padding: 0in 5.4pt;vertical-align: top;">
                <p style='margin-top:0in;margin-right:0in;margin-bottom:.0001pt;margin-left:0in;text-align:center;font-size:15px;font-family:"Arial",sans-serif;'><strong>$160,000</strong></p>
            </td>
        </tr>
    </tbody>
</table>

As illustrated above, the EBL limit is merely a timing issue. Fortunately, the IRA only extends the limit for two more years and does not make further changes to current law, such as the conversion of disallowed losses into a NOL.

Increased IRS Funding

As noted above, the IRA appropriates $80 billion to the IRS for enforcement and other activities. The $80 billion is appropriated over a ten-year period and approximately broken down as follows:

  • $3.2 billion for taxpayer services;
  • $45.6 billion for enforcement;
  • $25.3 billion for operations support; and
  • $4.8 billion for business systems modernization.

An additional $15 million is appropriated to the IRS with a directive to report to Congress on the potential development of an IRS-run e-file system.

The IRA does not instruct the IRS on how to spend this additional funding with respect to enforcement activities. However, in a letter Congress on August 4, the IRS Commissioner stated that the agency’s investment of these additional resources would follow the Department of Treasury’s directive that audit rates will not rise relative to recent years for households making less than $400,000. Instead, the letter stated that the IRS would “pursue meaningful, impactful examinations of large corporate and high-net-worth taxpayers to ensure they are paying their fair share.”

Clean Energy Incentives

Investment in clean energy is a focal point of the IRA, and the law contains several tax incentives for both businesses and individuals. Notable clean energy incentives include, but are not limited to, the following:

  • Modification and extension of the credit for nonbusiness energy property – This credit, which applies to energy-efficient windows and doors, in addition to certain HVAC systems and heat pumps, is extended through 2032. The $500 lifetime limit for the credit is replaced with an annual limit of $1,200.
  • Modification and extension of the credit for residential energy-efficient property – This credit is renamed the “residential clean energy credit” and extended through 2034. It applies to residential energy-efficient property installed in a dwelling unit used as a residence by the taxpayer, such as qualified solar electric property, solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property.
  • Modification and extension of the clean vehicle credit – The credit for the purchase of clean vehicles, such as plug-in electric vehicles, is extended through 2032. The IRA eliminates the current cap on the number of credit-eligible vehicles produced by a specific manufacturer. However, it also imposes sourcing requirements on a vehicle’s critical components and battery systems. For example, electric vehicles made with any battery components manufactured by “foreign entities of concern” would be ineligible to receive the credit after 2023. The IRA also imposes a new credit limit based on the taxpayer’s income. The credit is not allowed if a taxpayer’s modified adjusted gross income exceeds $150,000 (for individual taxpayers) or $300,000 (for joint filers). The maximum credit per vehicle remains at $7,500.
  • Credit for previously-owned clean vehicles – A new credit of up to $4,000 is created for the purchase of a previously-owned clean vehicle. The credit applies only to taxpayers whose modified adjusted gross income does not exceed $75,000 (for individual taxpayers) or $150,000 (for joint filers). The credit applies to vehicles acquired after 2022 and before 2033.
  • Credit for commercial clean vehicles – The IRA creates a new business credit for qualified commercial clean vehicles acquired after 2022 and before 2033. The maximum credit per vehicle is $7,500, or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds.

The IRA also appropriates funds for the establishment of state rebate programs geared towards low- and middle-income households that purchase energy-efficient appliances.

Other Provisions

  • Corporate Alternative Minimum Tax – Effective for taxable years beginning after 2022, the IRA imposes a new, 15% corporate alternative minimum tax on the adjusted financial statement income (“AFSI”) of large corporations. The minimum tax applies to C corporations which, for a three taxable year period, have average annual AFSI greater than $1 billion. A lower threshold applies to foreign-parented corporations that are members of an international financial reporting group. S corporations are not subject to the minimum tax.
  • Excise Tax on Repurchase of Corporate Stock – The IRA also establishes a new excise tax on the repurchase of certain corporate stock. An excise tax of 1% is imposed on the fair market value of stock repurchased by a publicly-traded U.S. corporation during the taxable year. Several exceptions apply, including an exception in any case in which the total value of the stock repurchased during the taxable year does not exceed $1 million. The excise tax applies to repurchases of stock after 2022.
  • Increase in Research Credit Against Payroll Taxes for Small Businesses – Under current law, taxpayers engaged in research and development activities may be eligible for a research credit against their income tax liability. Small businesses that meet certain requirements may elect to apply the credit against their payroll tax liability. The amount of the credit that can offset a taxpayer’s payroll tax liability currently is limited to $250,000. The IRA increases this amount to $500,000 for taxable years beginning after 2022.
  • Changes to Premium Tax Credit – Taxpayers who purchase health insurance through the Health Insurance Marketplace may be eligible for a premium tax credit under current law. Eligibility for the credit depends on various factors, including a taxpayer’s household income, family size, and the federal poverty line. For 2021 and 2022, the ARP expanded eligibility for the credit to individuals with household income in excess of 400% of the poverty line and increased the credit amount for qualifying taxpayers. The IRA extends these enhancements to the credit through 2025.

Article Dean Dorton

Recently signed into law by Kentucky Governor Andy Beshear, House Bill 499 establishes a statewide Employee Child Care Assistance Partnership to help working families afford the high cost of child care.

Expected to begin in July 2023, the partnership provides state funds to match employer-provided child care benefits. So if an employer contributes $400 a month toward their employee’s child care expenses, the state will contribute up to $400 of additional reimbursement, provided that program requirements have been met.

With annual child care costs in Kentucky totaling as much as $11,000 for a single infant, many parents are forced to choose between their kids and their careers. More than 50,000 respondents in a recent survey cited child care as a key reason for leaving the state workforce.

House Bill 499 addresses this situation in two ways: by substantially increasing the child care assistance going to parents each month and by creating an incentive for employers to offer (or increase) a childcare benefit. More money for child care will also, with time, help to improve and expand daycare offerings throughout the state.

Passed with broad public support and near unanimous legislator approval, this legislation is a big deal for working families. But it’s also important for their employers – especially at nonprofits.

How Child Care Costs Hurt the Nonprofit Workforce

Research suggests that nonprofit employees earn as much as 8% less than people in similar roles at for-profit companies. The reasons why are debatable. The result, however, is that child care costs put extra economic pressure on the nonprofit workforce. Many people leave nonprofits rather than see their wages consumed by daycare bills. Talented people avoid nonprofit jobs for the same reason.

Child care costs have become such an urgent issue for mission-driven organizations that the National Council of Nonprofits wrote a letter to the Senate encouraging federal action to cut costs. In that letter, they raise the alarm about widespread labor shortages and hiring challenges throughout nonprofits, citing the two leading causes as salary competition and child care.

What Congress will do remains to be seen. In Kentucky, however, the passage of House Bill 499 gives nonprofits the power to address both those issues at once – and retain or recruit great talent in the process.

Offering Relief to Nonprofit Workers

The economic realities at nonprofits make it difficult (or impossible) to substantially raise salaries and retain the amazing contributions of young working parents. By offering child care assistance rather than raises, nonprofits can address a major source of stress for their employees while potentially doubling the monetary impact of the benefit. It’s a clear win for everyone at nonprofits.

The nonprofit team at Dean Dorton has been closely monitoring the changing relief opportunities available to nonprofit organizations in these volatile times. We are here to provide consultation, collaboration, or confirmation as needed in your journey.

Contact us and we will add you to our email list for regular updates about nonprofit accounting in and around Kentucky.

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Article Dean Dorton

In its 2022 Regular Session, the General Assembly enacted two taxes aimed at newer components of the country’s economy – peer-to-peer car sharing and electric or hybrid motor vehicles. In addition, the state’s transient room tax, which typically applies to hotels, is extended.

The Newbies

An excise tax on peer-to-peer car sharing and power used to charge electric batteries plus registration fees on electric and hybrid vehicles are among the new products and services subject to tax.

Peer-to-peer car sharing

Beginning January 1, 2023, a six percent (6%) excise tax will be imposed on peer-to-peer car sharing, which is “the authorized use of a motor vehicle by an individual other than the vehicle’s owner through a peer-to-peer car sharing program.” The leasing of a motor vehicle is expressly excluded from the “peer-to peer” definition. “Peer-to-peer car sharing” is akin to renting a motor vehicle from a rental company except in this case, the rental company is an individual. Peer-to-peer car sharing is to motor vehicle rentals what Airbnb is to hotels.

Electric and hybrid vehicles and power used to charge electric batteries

Next, the Legislature ventured into the land of electric and hybrid vehicles. “Electric vehicle” or “electric motorcycle” means a vehicle or motorcycle that has plug-in charging capabilities, regardless of whether the vehicle has an electric motor only or a combination of an internal combustion engine and electric power. A “hybrid vehicle” is one that does not have plug-in charging capability, but is powered by a combination of an internal combustion engine and an electric motor.

Effective January 1, 2024, upon initial registration and then annually, the county clerk will collect a registration fee of $120.00 from owners of electric vehicles and $60.00 from owners of electric motorcycles or hybrid vehicles. The rate may be increased or decreased on an annual basis if there is an increase in the National Highway Construction Cost Index 2.0. However, the fees cannot be lower than the initial fees set by the new statute. The proceeds from the registrations will be split fifty-fifty between the general fund and road fund.

Finally, the General Assembly created an excise tax, with an initial base rate of three cents ($0.03) per kilowatt hour, to be adjusted annually, on “electric vehicle power” distributed in the state by an “electric vehicle power dealer.” “Electric vehicle power” means “electrical energy distributed into the battery or other energy storage device of an electric vehicle to be used to power the vehicle,” and “electric vehicle power dealer” is a person who owns or leases electric vehicle charging stations. If a charging station is located on state property, a surtax with an initial base rate of three cents ($0.03) per kilowatt hour is imposed.

Expand the base!

Speaking of Airbnb, included in the many tax changes is expansion of the scope of the state’s transient room taxes to include arrangements such as Airbnb, plus cabins, campsites, and other lodging. Cities, counties, and tourism districts also are authorized to extend their transient room taxes to include Airbnb, cabins, etc. This expansion is effective January 1, 2023.

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Kentucky’s last tax amnesty program took place about a decade ago, in 2012, and there was an amnesty program in 2002, also. More than 23,000 taxpayers participated in the 2002 program and the state netted about $40 million in new money after program expenses. The 2012 program was met with even greater enthusiasm. There were approximately 28,000 applicants and the net amount of tax collected was $53.4 million.

If the Department of Revenue is able to retain a service provider to run the program, Kentucky’s next tax amnesty program will be from October 1, 2022 through November 29, 2022. The program applies to tax liabilities for tax periods ending or transactions occurring on or after October 1, 2011 and prior to December 1, 2021. All taxes, penalties, fees, and interest administered by the Department of Revenue, except property taxes, are covered by the program. If there is no one to run the program in 2022, the Department is to administer the program in 2023. If taxpayers fail to participate and are later audited, increased penalties and interest will apply to any tax owed.

Stay tuned for more details.

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Did you say 35 new services will be subject to sales and use tax? Yes. Additionally, an exemption from sales tax was expanded, a de minimis threshold was enacted for the new services, and there is a new reporting requirement for organizers of festivals.

Expand the base, expand the base, expand the base!

Numerous tax reform commissions and paid tax consultants have advised the General Assembly for decades to “modernize” Kentucky’s sales tax statutes by “expanding the tax base.” “Expanding the base” can be done in different ways, such as by repealing exemptions from sales and use tax or by imposing tax on products or services not subject to tax. The Legislature started down the path of expanding the base in 2018 by adding ten services to the tax base and increasing the types of admissions subject to tax.

Effective January 1, 2023, 35 more services will be subject to sales and use tax. Here’s the list:

  • Photography and photo finishing services
  • Marketing services
  • Telemarketing services
  • Public opinion and research polling services
  • Lobbying services
  • Executive employee recruitment services
  • Web site design and development services
  • Web site hosting services
  • Facsimile transmission services
  • Private mailroom services, including presorting mail and packages by postal code; address barcoding; tracking; delivery to postal service; and private mailbox rentals
  • Bodyguard services
  • Residential and nonresidential security system monitoring services
  • Private investigation services
  • Process server services
  • Repossession of tangible personal property services
  • Personal background check services
  • Parking services, including valet services and the use of parking lots and parking structures, but excluding any parking services at an educational institution
  • Road and travel services provided by automobile clubs
  • Condominium time-share exchange services
  • Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
  • Social event planning and coordination services
  • Leisure, recreational, and athletic instructional services
  • Recreational camp tuition and fees
  • Personal fitness training services
  • Massage services, except when medically necessary
  • Cosmetic surgery services
  • Body modification services including tattooing, piercing, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing, and any other modifications that are not necessary for medical or dental health
  • Testing services, except testing for medical, educational, or veterinary reasons
  • Interior decorating and design services
  • Household moving services
  • Specialized design services including the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting
  • Lapidary services, including cutting, polishing, and engraving precious stones
  • Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction including service calls and trip charges
  • Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in that transaction
  • Prewritten computer software access services

While examples of the types of things to be taxed is included as part of the language of a few of the services, such as body modification and specialized design services, only five of the 35 are defined:

  • Cosmetic surgery services
    • Modifications to all areas of the head, neck, and body to enhance appearance through surgical and medical techniques, excluding reconstruction of facial and body defects due to birth disorders, trauma, burns, or disease;
  • Photography and photo finishing services
    • (1) The taking, developing, or printing of an original photograph, or (2) Image editing including shadow removal, tone adjustments, vertical and horizontal alignment and cropping, composite image creation, formatting, watermarking printing, and delivery of an original photograph in the form of tangible personal property, digital property, or other media, excluding photography services necessary for medical or dental health;
  • Marketing services
    • Developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning;
  • Telemarketing services
    • Services provided via telephone, facsimile, electronic mail, or other modes of communications to another person, which are unsolicited by that person, for the purposes of: (a)(1) promoting products or services; (2) taking orders; or (3) providing information or assistance regarding the products or services; or (b) soliciting contributions; and
  • Prewritten computer software access services
    • The right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party, wherever located, regardless of whether the charge for the access or use is on a per use, per user, per license, subscription, or some other basis.

The Department of Revenue is working to develop guidance for taxpayers as to the meaning and breadth of many of the new services. Two other changes were made to expand the reach of sales and use taxes.

Broaden the definition of “extended warranties”

First, the definition of “extended warranties” is amended to impose tax on extended warranties on real property. The phrase “extended warranties” is a bit of a misnomer. The phrase includes an agreement such as an extended warranty on your car, but it also includes what are commonly referred to as maintenance or service contracts. Thus, maintenance or service contracts for real property, such as parking lot cleaning, exterior maintenance of apartment buildings, and heating and air conditioning maintenance, will be subject to sales tax. (Snow removal is already taxable as a “landscaping” service.)

Limit the exemption for residential utilities

Second, the exemption from sales tax on residential utilities, such as sewer services, water, electricity, and natural gas, will be limited to services “purchased and declared by the resident as used in his or her place of domicile.” “Place of domicile” is defined as “the place where an individual has his or her legal, true, fixed, and permanent home and principal establishment, and to which, whenever the individual is absent, the individual has the intention of returning.” Many questions are popping up around this change, including: How does a resident “declare” their place of domicile? Will there be a form? Will there be a different form for every type of utility – water, gas, electric, etc.? What if you own rental property and you pay the utilities? The rental property is not your place of domicile, but it is someone’s place of domicile.

Add exemptions?

What is the opposite of “expanding the base?” The tax base is narrowed or constricted when existing exemptions are broadened or new exemptions are added. The General Assembly significantly expanded the current exemption for prescription drugs, which has applied only to drugs to treat humans. Effective January 1, 2023, both prescription and over the counter drugs used in the farming and treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids also will be exempt from sales and use tax. (Note that the exemption does not extend to horses.)

Two other exemptions added by the General Assembly are specifically related to the new services subject to sales and use tax. The first provides that the provision of services related to lump sum, fixed-price, or similar contracts executed on or before February 25, 2022 are to be exempt from the additional taxable services imposed. (February 25, 2022 is the date on which House Bill 8 was introduced in the General Assembly.) That date now having passed, any businesses entering multi-year fixed price or lump sum contracts need to factor in the additional taxable services when quoting or bidding on jobs.

Second, there is a partial exemption for the newly taxed services if the gross receipts from the provision of the services were less than $6,000 during calendar year 2021. However, once gross receipts exceed $6,000 in 2022 or a subsequent year, all additional receipts are subject to tax. If a business that will provide one of the new taxable services has no doubt but that it will exceed the $6,000 de minimis threshold, we recommend collecting the tax beginning on January 1, 2023 on all receipts to eliminate the administrative burdens associated with keeping track of when $6,000 is reached and rushed actions to register for sales tax and revised accounting and other activities the day after the $6,000 is met.

Miscellaneous

The final sales tax change of note is aimed at increasing compliance in the state by vendors at events. Beginning July 14, 2022, coordinators of festivals or similar events must provide the Department of Revenue a list of vendors selling at the event. While a precise definition of “festivals or similar events” has not yet been provided, it is possible the reporting requirement could apply to everything from a city or county’s annual spring, summer, or fall festival to large events such as The Kentucky Derby and The Breeder’s Cup.