If you want to withdraw cash from your closely held corporation at a low tax cost, the easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits,” but it’s not deductible by the corporation.

5 Different Approaches

Thankfully, there are some alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five possible options:

1. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.

2. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.

3. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.

4. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.

5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize Taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.

© 2024

A recent report shows that post-pandemic global business travel is going strong. The market reached $665.3 billion in 2022 and is estimated to hit $928.4 billion by 2030, according to a report from Research and Markets. If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.

Is your spouse an employee?

The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify for the deduction, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose, unless the spouse is an employee of your business. This requirement prevents tax deductibility in most cases.

If your spouse is your employee, you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t enough for his or her presence to be “helpful” to your business pursuits — it must be necessary.

In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.

If your spouse’s travel satisfies these requirements, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

What if your spouse isn’t an employee?

Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.

And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse aren’t deductible.

Have questions?

You want to maximize all the tax breaks you can claim for your small business. Contact us if you have questions or need assistance with this or other tax-related issues.

© 2024

Businesses basically have two accounting methods to figure their taxable income: cash and accrual. Many businesses have a choice of which method to use for tax purposes. The cash method often provides significant tax benefits for eligible businesses, though some may be better off using the accrual method. Thus, it may be prudent for your business to evaluate its method to ensure that it’s the most advantageous approach.

Eligibility to Use the Cash Method

“Small businesses,” as defined by the tax code, are generally eligible to use either cash or accrual accounting for tax purposes. (Some businesses may also be eligible to use various hybrid approaches.) Before the Tax Cuts and Jobs Act (TCJA) took effect, the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured, its industry and factors involving inventory.

The TCJA simplified the small business definition by establishing a single gross receipts threshold. It also increased the threshold to $25 million (adjusted for inflation), expanding the benefits of small business status to more companies. For 2024, a small business is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million for 2023).

In addition to eligibility for the cash accounting method, small businesses can benefit from advantages including:

Note: Some businesses are eligible for cash accounting even if their gross receipts are above the threshold, including S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations. Tax shelters are ineligible for the cash method, regardless of size.

Difference Between the Methods

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when they’re paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating the payment of expenses.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, without regard to the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Switching Methods

Even if your business would benefit by switching from the accrual method to the cash method, or vice versa, it’s important to consider the administrative costs involved in a change. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. That doesn’t mean it can’t use the cash method for tax purposes, but it would require maintaining two sets of books.

Changing accounting methods for tax purposes also may require IRS approval. Contact us to learn more about each method.

© 2024

Understanding and implementing the proper accounting method is a cornerstone for financial clarity and operational success. As a business owner, choosing between cash-basis and accrual accounting methods affects how you report financial transactions. This article delves into the essence of these accounting methods, their significance, and how to discern which is most conducive to your business’s growth and fiscal management.

The Essence of Accounting Methods

Accounting methods are the backbone of financial record-keeping, providing a structured approach to tracking financial transactions and maintaining accurate financial records. The primary objective is to depict an organization’s financial performance and position. Understanding the nuances of each accounting method helps business owners make informed decisions, manage tax obligations effectively, and forecast future growth with precision.

Cash-Basis Accounting: Simplicity and Immediate Financial Insight

Cash-basis accounting, renowned for its simplicity, only records income and expenses when cash is exchanged. This method offers a straightforward perspective on cash flow, allowing small business owners to ascertain their financial standing at any given moment easily. However, its simplicity comes at the cost of a comprehensive view, as it doesn’t account for pending receivables or payables, potentially skewing the real financial health of the business. Small enterprises, particularly those without inventory or complex financial obligations, often find cash-basis accounting advantageous for its direct reflection of cash on hand and ease of management.

Accrual Accounting: A Comprehensive Financial Overview

In contrast, accrual accounting provides a more detailed financial picture by recording transactions when they are incurred, irrespective of cash movement. This method is essential for businesses that engage in credit transactions, carry inventory, or require a detailed understanding of their financial status for decision-making and strategic planning. Accrual accounting enables business owners to anticipate future revenues and expenses, offering insights into the company’s long-term financial trajectory. While it necessitates a more meticulous record-keeping process, its benefits in providing a complete financial overview are undeniable.

Choosing the Right Path: Factors to Consider

The choice between cash-basis and accrual accounting hinges on several factors, including the size of your business, regulatory requirements, and strategic financial planning needs. The IRS mandates accrual accounting for businesses surpassing $26 million in gross receipts over a three-year average, underscoring its relevance for larger enterprises. Additionally, businesses aiming for growth or those engaging in complex financial activities may find accrual accounting more suitable due to its in-depth financial insights and forecasting capabilities.

For small businesses, particularly those at the threshold of significant growth or with plans to scale, starting with accrual accounting can lay a solid foundation for future financial management needs. Conversely, cash-basis accounting may suffice for businesses with simpler transactions and those seeking straightforward financial tracking.

Modified Cash-Basis Accounting: Bridging the Gap

Businesses looking for a middle ground may consider modified cash-basis accounting, which combines elements of both methods. This hybrid approach allows for recording short-term cash transactions and long-term financial activities, offering flexibility and a balanced view of a business’s financial health.

Empower Your Business with Informed Decisions

In choosing the right accounting method for your business, being well-informed cannot be overstated. Whether cash-basis or accrual accounting is better depends on your business’s specific needs, regulatory requirements, and growth aspirations. Remember, this decision is about compliance, strategic financial planning, and management. Given the complexities involved, it’s advisable to seek the guidance of a Certified Public Accountant (CPA). A CPA can offer personalized advice, ensuring your accounting method aligns with your business goals and paves the way for sustainable growth.  Making this critical decision with professional insight allows you to navigate your business toward financial clarity and success.

The Employee Retention Tax Credit (ERTC) was introduced back when COVID-19 temporarily closed many businesses. The credit provided cash that helped enable struggling businesses to retain employees. Even though the ERTC expired for most employers at the end of the third quarter of 2021, it could still be claimed on amended returns after that.

According to the IRS, it began receiving a deluge of “questionable” ERTC claims as some unscrupulous promotors asserted that large tax refunds could easily be obtained — even though there are stringent eligibility requirements. “We saw aggressive marketing around this credit, and well-intentioned businesses were misled into filing claims,” explained IRS Commissioner Danny Werfel.

Last year, in a series of actions, the IRS began cracking down on potentially fraudulent claims. They began with a moratorium on processing new ERTC claims submitted after September 14, 2023. Despite this, the IRS reports that it still has more than $1 billion in ETRC claims in process and they are receiving additional scrutiny.

Here’s an update of the other compliance efforts that may help your business if it submitted a problematic claim:

Much-Needed Relief

Commissioner Werfel said the disclosure program “provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied.”

In addition to the programs described above, the IRS has been sending letters to thousands of taxpayers notifying them their claims have been disallowed. These cases involve entities that didn’t exist or didn’t have employees on the payroll during the eligibility period, “meaning the businesses failed to meet the basic criteria” for the credit, the IRS stated. Another set of letters will soon be mailed to credit recipients who claimed an erroneous or excessive credit. They’ll be informed that the IRS will recapture the payments through normal collection procedures.

There’s an application form that employers must file to participate in the Voluntary Disclosure Program and procedures that must be followed for the withdrawal program. Other rules apply. Contact us for assistance or with questions.

© 2024

The newly approved Tax Relief for American Families and Workers Act of 2024, symbolizing a legislative victory for taxpayers, especially small business owners and professionals, deserves a detailed look due to its retroactive provisions and potential to affect the upcoming tax season.

For Families: A More Generous Child Tax Credit

The Child Tax Credit (CTC) sees a notable expansion for individuals. This credit calculates the refundable portion per child once the taxpayer’s earned income exceeds $2,500 by 15%. For tax years 2023 through 2025, the credit increases to $1,800, $1,900, and $2,000, respectively, offering substantial savings for families. Additionally, for the tax years 2024 and 2025, taxpayers can calculate their CTC based on the previous year’s earned income, providing flexibility in fluctuating income.

For Businesses: Incentives to Sustain and Grow

Several key provisions have been introduced to support business growth and adaptability:

Research and Experimentation Costs:

The bill delays the onset of a five-year amortization rule for domestic research and experimental costs to tax years beginning after December 31, 2025, providing an incentive for innovation.

Business Interest Limitation:

For tax years starting after 2023 and before 2026, businesses can compute adjusted taxable income (ATI) for interest limitation with reinstated depreciation, amortization, and depletion deductions, enhancing cash flow.

Bonus Depreciation:

The Act extends the 100% bonus depreciation for qualifying property placed in service before January 1, 2026. This extension allows businesses to deduct the full cost of eligible property in the year of service, promoting investment in new assets.

Section 179 Deduction:

The deduction limit under Section 179 is increased for tax years starting after 2023, allowing businesses to expense up to $1.29 million and phase out thresholds starting at $3.22 million, indexed for inflation thereafter.

Combating Fraud and Ensuring Compliance:

The Act introduces stringent measures to curb fraudulent claims, specifically targeting the misuse of the Employee Retention Tax Credit (ERTC). It shortens the claim period for the ERTC to January 31, 2024, and amplifies penalties for incorrect or fraudulent claims.

International Relations: U.S. and Taiwan

In a significant move, the bill extends tax treaty-like benefits to Taiwan to avoid double taxation, which may impact businesses with operations or interests in Taiwan.

Disaster Relief: Continued Assistance

Disaster relief provisions from the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are extended. This includes benefits for those affected by federally declared disasters between January 1, 2020, and 60 days post-enactment of the new bill.

Simplifying Tax Reporting:

The reporting threshold for Form 1099-NEC and 1099-MISC increases from $600 to $1,000 for payments made after December 31, 2023, easing the administrative load for small businesses.

Promoting Affordable Housing:

The bill boosts the 9% low-income housing tax credit ceiling by 12.5% for calendar years 2023 through 2025 and reduces the bond financing threshold to 30% for projects financed by bonds issued before 2026.

Practical Implications:

This Act presents a mosaic of opportunities and considerations. Small business owners and professionals must promptly assess how these changes impact their operations and tax strategies. As the provisions have retroactive effects, it’s crucial to consult with tax professionals to maximize benefits and navigate the complexities of the new law.

 

In light of the IRS’s recent announcement regarding tax inflation adjustments for the 2024 tax year, business owners must understand and adapt to these changes. As your experienced accounting advisors, we’re here to guide you through this complex landscape. Our goal is to help you comply with these new regulations and seize opportunities for growth and enhanced profitability.

Leveraging Increased Standard Deductions

The standard deduction for the 2024 tax year has increased across all filing statuses. For married couples filing jointly, it’s now $29,200; for single taxpayers and married individuals filing separately, it’s $14,600; for heads of households, it’s $21,900.

Adapting to the Revised Marginal Tax Rates

The marginal tax rates for 2024 have been adjusted. The top tax rate remains at 37% for individuals earning over $609,350 ($731,200 for married couples filing jointly), with graduated rates for lower income brackets.

Addressing the Alternative Minimum Tax Adjustments

The Alternative Minimum Tax (AMT) exemption amount has been raised to $85,700, phasing out at $609,350 for individuals ($133,300 for married couples filing jointly, phasing out at $1,218,700).

Claiming the Enhanced Earned Income Tax Credit

The maximum Earned Income Tax Credit (EITC) for 2024 is $7,830 for taxpayers with three or more qualifying children, an increase from the previous year.

Understanding Changes in Transportation and Parking Benefits

The monthly limit for qualified transportation fringe benefits and parking has increased to $315 for 2024.

Adjusting to Health FSAs and MSAs Updates

For Health Flexible Spending Arrangements (FSAs), the employee salary reduction contribution limit is now $3,200, with a maximum carryover of $640. The deductible and out-of-pocket limits for Medical Savings Accounts (MSAs) have also been adjusted.

Embracing the Foreign Earned Income Exclusion Increase

The foreign-earned income exclusion has been increased to $126,500 for 2024.

Estate and Gift Tax Planning

The basic exclusion amount for estate tax has been raised to $13,610,000, and the annual exclusion for gifts is now $18,000.

Making the Most of the Adoption Credit Increase

The maximum adoption credit has been increased to $16,810 for 2024.

Turning Adjustments into Advantages

Tax adjustments should be viewed as strategic opportunities rather than mere compliance matters. We encourage proactive planning and offer personalized assistance in navigating the complexities of the 2024 tax landscape. Let’s partner together to optimize your tax strategies and position your business for success, maximizing its potential and profitability. Contact us for tailored advice today.

As part of the SECURE 2.0 law, there’s a new benefit option for employees facing emergencies. It’s called a pension-linked emergency savings account (PLESA) and the provision authorizing it became effective for plan years beginning January 1, 2024. The IRS recently released guidance about the accounts (in Notice 2024-22) and the U.S. Department of Labor (DOL) published some frequently asked questions to help employers, plan sponsors, participants and others understand them.

PLESA Basics

The DOL defines PLESAs as “short-term savings accounts established and maintained within a defined contribution plan.” Employers with 401(k), 403(b) and 457(b) plans can opt to offer PLESAs to non-highly compensated employees. For 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee.

Here are some more details of this new type of account:

Proof of an Event Not Necessary

A participant in a PLESA doesn’t need to prove that he or she is experiencing an emergency before making a withdrawal from an account. The DOL states that “withdrawals are made at the discretion of the participant.”

These are just the basic details of PLESAs. Contact us if you have questions about these or other fringe benefits and their tax implications.

© 2024

Operating your small business as a Qualified Small Business Corporation (QSBC) could be a tax-wise idea.

Tax-Free Treatment for Eligible Stock Gains

QSBCs are the same as garden-variety C corporations for tax and legal purposes — except QSBC shareholders are potentially eligible to exclude from federal income tax 100% of their stock sale gains. That translates into a 0% federal income tax rate on QSBC stock sale profits! However, you must meet several requirements set forth in Section 1202 of the Internal Revenue Code, and not all shares meet the tax-law description of QSBC stock. Finally, there are limitations on the amount of QSBC stock sale gain that you can exclude in any one tax year (but they’re unlikely to apply).

Stock Acquisition Date is Key

The 100% federal income tax gain exclusion is only available for sales of QSBC shares that were acquired on or after September 28, 2010.

If you currently operate as a sole proprietorship, single-member LLC treated as a sole proprietorship, partnership or multi-member LLC treated as a partnership, you’ll have to incorporate the business and issue yourself shares to attain QSBC status.

Important: The act of incorporating a business shouldn’t be taken lightly. We can help you evaluate the pros and cons of taking this step.

Here are some more rules and requirements:

2017 Law Sweetened the Deal

The Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent, assuming no backtracking by Congress. So, if you own shares in a profitable QSBC and you eventually sell them when you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be all the income tax that’s ever owed to Uncle Sam.

Tax Incentives Drive the Decision

Before concluding that you can operate your business as a QSBC, consult with us. We’ve summarized the most important eligibility rules here, but there are more. The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are two strong incentives for eligible small businesses to operate as QSBCs.

© 2024

The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 67 cents (up from 65.5 cents for 2023).

The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.

Standard Rate vs. Tracking Expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.

Rate Calculation

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.

Not Always Allowed

There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct business vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return.

© 2023

If you’re interested in selling commercial or investment real estate that has appreciated significantly, one way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange. With this transaction, you exchange the property rather than sell it. Although the real estate market has been tough recently in some locations, there are still profitable opportunities (with high resulting tax bills) when the like-kind exchange strategy may be attractive.

A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Asset-for-Asset or Boot

Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.

If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.

Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”

However, in many cases, the properties aren’t equal in value, so some cash or other property is added to the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.

How it Works

For example, let’s say you exchange business property with a basis of $100,000 for a building valued at $120,000, plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000: your original basis in the relinquished property ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The reason is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Unload One Property and Replace it With Another

Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. But you have to make sure to meet all the requirements. Contact us if you have questions or would like to discuss the strategy further.

© 2024

The 3.8% net investment income tax (NIIT) is an additional tax that applies to some higher-income taxpayers on top of capital gains tax or ordinary income tax. Fortunately, there are strategies you can use to soften the blow of the NIIT.

Are you subject to the NIIT?

You’re potentially liable for the NIIT if your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for joint filers and qualifying widows or widowers; $125,000 for married taxpayers filing separately). Generally, MAGI is the same as adjusted gross income. However, it may be higher if you have foreign earned income and certain foreign investments.

The NIIT is calculated by multiplying 3.8% by the lesser of:

1) net investment income (NII), or

2) the amount by which MAGI exceeds the applicable threshold.

For example, if you’re single with $250,000 in MAGI and $75,000 in NII, your MAGI will exceed the $200,000 threshold for singles by $50,000, which is less than your NII. So, your NIIT will be 3.8% × $50,000, which equals $1,900.

But if your MAGI instead is $300,000, your NIIT will be 3.8% × $75,000, which equals $2,850. This is because your $75,000 NII is less than the $100,000 amount by which your MAGI will exceed the $200,000 threshold.

NII generally includes net income from taxable interest, dividends, capital gains, rents, royalties and passive business activities. Several types of income are excluded from NII, such as wages, most nonpassive business income, retirement plan distributions and Social Security benefits. Also excluded are alimony and nontaxable gain on the sale of a personal residence.

Planning strategies

Given the way the NIIT is calculated, you can reduce or defer the tax by reducing either your MAGI or your NII. Consider:

 

You also might be able to transfer — either directly or in trust — assets that generate investment income to lower-income family members who aren’t subject to the NIIT. With this strategy, though, be careful not to inadvertently trigger NIIT because of the transfer. For example, trusts have a dramatically lower income threshold level at which NIIT applies.

If you own rental real estate, talk to your tax advisors about how you can avoid NIIT and obtain other tax benefits by qualifying as a materially participating “real estate professional.”

If you hold interests in pass-through entities — such as partnerships, limited liability companies and S corporations — it’s important to consider the interplay between the NIIT and other taxes. For instance, it may be possible to avoid the NIIT by increasing your level of participation to convert a pass-through investment from passive to nonpassive. But in some cases, doing so may also trigger self-employment (SE) or payroll taxes, so it’s important to weigh the NIIT savings against the potential SE or payroll tax costs.

Handle with care

There are many potential strategies for reducing or deferring NIIT, but it’s important to consult with your tax advisor before you implement them. Tax reduction is an important objective, so long as it doesn’t come at the expense of prudent investment decision-making.

© 2023

We’ve closed another year marked by economic uncertainties, and one constant remains—the potential to enhance your company’s financial health by strategically managing your tax obligations. Below, we outline practical and timely strategies tailored for business owners looking to navigate the intricate landscape of tax planning.

Take Advantage of Entity (PTE) Tax Deduction

The Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap on federal income tax deductions for state and local taxes (SALT). Over 30 states, including California, have implemented “workaround” measures benefiting PTE owners to counter this. These provisions allow partnerships, LLCs, and S corporations to pay entity-level state tax, providing owners with corresponding benefits, such as tax credits or deductions. This strategy lets your business bypass the SALT limit, resulting in potential federal business expense deductions.

Explore the Power of Cash Balance Retirement Plans

Cash balance retirement plans are making a comeback, especially for businesses with high-earning individuals who consistently hit their 401(k) limits. These plans offer a unique fusion of defined contribution and defined benefit plans, allowing businesses to claim substantial deductions for contributions.

Remember, under the original SECURE Act, businesses have until their federal filing deadline (including extensions) to set up a cash balance plan. But here’s the practical insight: it takes some time to get everything in order—documents, contribution calculations, and administrative tasks. So, it’s wise to kickstart the process sooner rather than later.

This strategy helps secure your financial future and offers a valuable tax advantage for your business.

Strategically Time Income and Expenses

Are you using the cash method for income tax reporting? Consider accelerating year-end deductions in December and deferring income until January to optimize your 2023 income. For instance, pay bills and employee bonuses for 2023 before year-end and stock up on supplies to accelerate deductions. Conversely, if higher profits are anticipated in the upcoming year, consider the opposite approach—accelerate income and postpone deductions to maximize their value. Consider the impact on your Qualified Business Income (QBI) deduction, especially if your business operates as a pass-through entity.

Harness the Qualified Business Income (QBI) Deduction

A cornerstone of the 2017 tax reform, the QBI deduction for pass-through entities allows owners to claim up to 20% of their QBI, subject to specific limitations. Manage your taxable income wisely, as accelerated depreciation and certain tax breaks tied to taxable income can affect your QBI and subsequent deductions.

Optimize Asset Purchases

Seize the opportunity for first-year bonus depreciation for qualified property acquired and placed in service in 2023. While the benefit gradually diminishes, it remains at 80% for this tax year. Prioritize using IRC Section 179 expensing election for asset purchases, enabling you to deduct 100% of the purchase price for eligible assets. Be aware of the $1.16 million maximum deduction and plan strategically to maximize this tax-saving tool.

Leverage the 100% Gain Exclusion for Qualified Small Business Stock

Explore the 100% federal income tax gain exclusion for eligible sales of Qualified Small Business Corporation (QSBC) stock acquired after September 27, 2010. Hold QSBC shares for over five years to qualify for the gain exclusion. Planning is crucial to secure this exclusion privilege.

Embrace Family Employment

Employing family members can be a strategic move to reduce overall tax liability. Deduct wages and benefits, including medical benefits, paid to family employees, reducing self-employment tax liability. Wages paid to children under 18 are not subject to federal employment taxes, providing potential tax savings.

Remember, seemingly minor tax decisions may have significant consequences. Please consult with us to ensure your business makes informed year-end tax planning moves that align with your goals.

As the end of the tax year approaches, it’s essential to consider strategies to minimize your 2023 federal tax liability. The current landscape presents challenges with market volatility, persistent high-interest rates, and notable adjustments to retirement planning regulations. Despite this uncertainty, there is still an opportunity to implement year-end tax planning techniques to reduce your tax bill. Whether you are contemplating investment decisions, charitable contributions, or estate planning, there are practical strategies to optimize your tax plan.

Strategic Itemized Deductions

With a standard deduction of $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of households in 2023, assessing your itemized deductions is crucial. Consider strategically timing your itemized deduction items by “bunching” them to exceed the standard deduction every other year. This approach can help lower your tax bill this year, and in the following year, you can take advantage of the increased standard deduction to account for inflation.

Potential candidates for itemized deductions include:

It’s worth noting the possibility of future changes to the value of itemized deductions, emphasizing the importance of maximizing these deductions while current regulations permit.

Navigate Investment Gains and Losses

Effectively managing your investment portfolio can influence your tax liability. Consider the strategic sale of appreciated securities held for over 12 months in 2023, leveraging the favorable 15% federal income tax rate on long-term capital gains. It’s crucial to remember that this rate can increase to 20% for individuals with higher income levels. Equally important is evaluating stocks valued below your initial investment (tax basis). Realizing capital losses this year could offset various gains, including short-term capital gains taxed at ordinary income rates. Always be aware of the wash sale rules before reacquiring recently sold or purchased stocks. This approach allows you to navigate the complexities of the market while optimizing your tax position.

Strategic Philanthropy Options

Embrace unique avenues for philanthropy tailored to your preferences:

Roth IRA Conversions: 

Safeguard a portion or all of your retirement savings from potential tax rate increases by converting traditional IRAs into Roth accounts. While you’ll incur taxes on the conversion as if it were a traditional IRA distribution, this approach is most beneficial when anticipating remaining in the same or higher tax bracket during retirement. Notably, the current tax impact from conversion may be a small price to pay for evading potentially higher future tax rates on post-conversion earnings. Additionally, the flexibility exists to convert varying amounts over several years, allowing you to tailor the strategy to your circumstances.

Annual Gift Tax Exclusion:

If concerns arise about a potentially taxable estate, leverage the annual gift tax exclusion as an effortless method to reduce your taxable estate. In 2023, seize the opportunity to make annual exclusion gifts up to $17,000 per donee, with no limitations on the number of donees. The joint annual exclusion gift limit for couples reaches $34,000 per donee. These tax-free gifts don’t impact your lifetime gifting exemption, providing an effective means to manage your estate’s tax implications.

Energy Credits:

Homeowners investing in energy-efficient improvements can claim an Energy Efficient Home Improvement Credit, covering up to 30% of qualified expenses, capped at $1,200 annually for energy property costs and an additional $2,000 for qualified heat pumps. Ensure compliance with energy.gov guidelines to include expenses related to doors, windows, air conditioning, and insulation materials. Additionally, explore Residential Clean Energy Credits for qualifying expenses related to solar and alternative energy sources, offering potential tax advantages for environmentally conscious choices.

Pass-Through Entity (PTE) Regime:

Given the $10,000 limitation on state and local tax deductions for individuals, assess the advantages of participating in the Pass-Through Entity (PTE) tax regime. Many states allow pass-through entities to pay and deduct the full state taxes on behalf of partners/shareholders. If you receive substantial income from a partnership or S corporation, consider engaging in the PTE tax regime when recommended by the entity representative. Alternatively, if you hold a significant stake in a pass-through entity not currently electing this option, it’s worthwhile to explore whether participating makes sense for your overall tax strategy.

Retirement Account Contributions:

Strengthen your financial foundation and simultaneously impact your tax liabilities by directing funds into your 401(k) or IRA. Capitalize on valuable tax advantages, including tax-deferred growth and potential deductions. For the tax year 2023, individuals can contribute up to $22,500 to their 401(k), with an additional $7,500 catch-up contribution for those aged 50 or older. Traditional IRA contributions are capped at $6,500, with a $1,000 catch-up provision for individuals over 50. Remember to make contributions by April 15, 2024, to qualify for the 2023 tax year. This proactive approach allows you to fortify your financial future while making a meaningful impact on your tax obligations.

Taking a proactive approach to tax planning can yield significant benefits for your next tax bill. Strategically assessing your financial landscape and implementing these practical tips can help you navigate the complexities of the 2023 tax year.

In today’s competitive business landscape, understanding the intricate world of tax regulations is more than just compliance – it’s a strategic imperative for maximizing profitability. Effective tax planning is a vital component of financial management for business owners, influencing key decisions and shaping the path to growth and success.

 

The Impact of Tax Planning on Business Decisions

Tax planning is not just an annual ritual; it’s an ongoing process that requires foresight and strategic thinking. It involves understanding how different tax regulations impact your business operations and making informed decisions to minimize liabilities and maximize returns.

Strategic decision-making can be impacted by tax planning. Many crucial business choices, from investment options and capital allocation to expansion strategies, may offer opportunities for advanced tax planning. This involves identifying tax-efficient strategies to maximize deductions, credits, and incentives, especially beneficial in sectors like renewable energy or technology.

The choice of business structure –sole proprietorship, partnership, LLC, or corporation – carries significant tax implications. Understanding how each structure affects your tax obligations can guide you in structuring or restructuring your business for optimal tax efficiency.

Tax rates and regulations can vary significantly across regions. This aspect is crucial for businesses considering expansion or relocation. Analyzing local tax environments can lead to more informed geographical decisions, balancing operational costs with tax advantages.

Tax planning plays a critical role in managing both capital and operational costs. It involves strategies like timing expenses, purchases, and other financial moves to align with favorable tax conditions.

Staying abreast of potential tax laws and policy changes is crucial for proactive planning. This foresight allows businesses to adjust strategies in advance, avoiding surprises and capitalizing on new opportunities.

Effective Tax Management Techniques

Effective tax management is crucial for maximizing profitability and ensuring long-term business success. Here are 4 tax management techniques you can put into practice today.

  1. 1. Maximize Deductions and Credits:

Regularly review your expenses to identify all possible deductions. Keep abreast of new tax credits your business might qualify for, especially those related to innovation or environmental sustainability.

  1. 2. Leverage Tax Deferral Opportunities:

Explore opportunities to defer taxes, such as pension plans or other retirement savings options, which can significantly reduce current tax liabilities.

  1. 3. Utilize Technology for Tax Management:

Implementing tax management software can help track expenses, manage deductions, and stay compliant with ever-changing tax laws.

  1. 4. Seek Professional Advice:

Consulting with tax professionals can provide insights into complex tax scenarios and assist in strategic planning tailored to your business needs.

 

By understanding and utilizing tax planning as a strategic tool, you empower your business not just to comply with tax laws but to leverage them as a lever for financial success and stability.

Tax credits are far more valuable than tax deductions. Unlike a deduction, which reduces a business’s taxable income, a credit reduces the business’s tax liability dollar for dollar. Tax credits aren’t unlimited, however. For businesses, the aggregate value of tax credits may be limited by the general business credit (GBC), found in Internal Revenue Code Section 38. Taxpayers should familiarize themselves with the GBC so they can understand the value of their business credits and identify tax-saving opportunities.

How it works

The GBC isn’t a tax credit in the usual sense. Rather, it’s a collection of dozens of business-related credits scattered throughout the tax code. (See the sidebar, “What’s included in the GBC?”) Each credit must be claimed separately, according to its specific rules and using the relevant tax forms. Taxpayers that claim more than one credit, however, must also file Form 3800 to report the aggregate value of those credits and calculate the overall allowable credit under the GBC.

The GBC limits total credits in a given year to the excess (if any) of a taxpayer’s net income tax over the greater of:

For purposes of calculating the GBC, “net income tax” is the sum of the taxpayer’s regular tax liability and AMT liability, reduced by certain non-GBC credits. “Net regular tax liability” is regular tax liability reduced by certain credits.

The GBC limit essentially prevents taxpayers from using credits to avoid AMT. In recent years, that hasn’t been an issue for C corporations, because the Tax Cuts and Jobs Act (TCJA) repealed the corporate AMT. Although the recently enacted Inflation Reduction Act established a new corporate minimum tax for corporations with “book profits” over $1 billion for tax years beginning after December 31, 2022, it generally doesn’t limit the GBC.

The AMT for individuals still exists, though the TCJA substantially increased the AMT exemption and made other changes that mean fewer taxpayers are subject to it. Nevertheless, AMT still may limit the use of the GBC by individual taxpayers such as sole proprietors, partners and S corporation shareholders.

Treatment of unused credits

If the limits prevent a taxpayer from using all of the GBC, the unused credit may be carried back one year and then, if unused credit remains, carried forward up to 20 years. In a given year, the GBC is used in the following order:

These ordering rules essentially apply a first-in, first-out (FIFO) approach that minimizes the risk that unused credits will expire. Still, taxpayers with a large surplus of credits may risk losing credits that can’t be used within the 20-year carryforward period. Fortunately, the tax code provides some relief for taxpayers in this position.

Deduction for unused credits

To prevent taxpayers from “double-dipping,” the tax code generally doesn’t permit them to claim a tax credit and a tax deduction based on the same expenses. Thus, in the year that a GBC is generated, taxpayers generally must treat a portion of its expenses (equal to the amount of the credit) as nondeductible.

In many cases, when a credit is lost, Section 196 allows the lost credit amount to be claimed as a deduction. If the credit is lost because the 20-year carryforward period expires, the taxpayer may claim the deduction in the following tax year. If it’s lost because the taxpayer dies or ceases to exist, the deduction may be claimed for the year of death or cessation.

The Sec. 196 deduction may provide a tax-saving opportunity for C corporations contemplating a sale. It’s common for buyers to acquire a company’s stock and then make an election to treat the transaction as a deemed asset sale for tax purposes. But this can trigger substantial taxable gains for the seller. If the seller has significant unused GBCs, it may be able to use a Sec. 196 deduction to offset some or all of those gains (because the selling corporation ceases to exist).

Secure the credits you deserve

Determining GBCs for a given year, and calculating applicable limits, can be complicated. Be sure to work with your tax advisor to make the most of these valuable credits.

Sidebar: What’s included in the GBC?

A general business credit (GBC) consists of more than 30 individual tax credits that provide incentives for a variety of business activities. Examples include:

© 2023

The holiday season is here. During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good time to review the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Employee gifts

Many businesses want to show their employees appreciation during the holiday time. In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business.

But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits aren’t included in your employees’ taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Key point: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small they are and infrequently they’re given.

Customer gifts

If you make gifts to customers or clients, they’re only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4 each.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all of a customer’s team members to share) as long as the cost is “reasonable.”

A holiday party

Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of employees who aren’t highly compensated and their families. If customers, and others also attend, a holiday party may be partially deductible.

Holiday cards

Sending holiday cards is a nice way to show customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.

Boost morale with festive gestures

If you have questions about giving holiday gifts to employees or customers or throwing a holiday party, contact us. We can explain the tax implications.

© 2023

One of the most appreciated fringe benefits for owners and employees of small businesses is the use of a company car. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees driving the cars. (And of course, they enjoy the nontax benefit of using a company car.) Even better, current federal tax rules make the benefit more valuable than it was in the past.

Rolling out the rules

Let’s take a look at how the rules work in a typical situation. For example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers and satellite offices, check on suppliers and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55% for business and 45% for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.

The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45% personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.

Personal use is treated as fringe benefit income. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to personal use. If the corporation finances the car, the interest it pays on the loan is deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).

On the other hand, if the owner-employee buys the auto, he or she isn’t entitled to any deductions. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.

One other implication: The purchase of the car by the corporation has no effect on the owner-employee’s credit rating.

Careful recordkeeping is essential

Supplying a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use needs to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. (You may even be able to transfer the vehicle to the employee when you’re ready to dispose of it, but that involves other tax implications.) We can help you stay in compliance with the rules and explain more about this fringe benefit.

© 2023

In the midst of holiday parties and shopping for gifts, don’t forget to consider steps to cut the 2023 tax liability for your business. You still have time to take advantage of a few opportunities.

Time deductions and income

If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2023 and deferring income into 2024 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2023 even though you don’t pay the credit card bill until 2024. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2023.

As for deferring income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Buy assets

If you’re thinking about purchasing new or used equipment, machinery or office equipment in the new year, it might be time to act now. Buy the assets and place them in service by December 31, and you can deduct 80% of the cost as bonus depreciation in 2023. This is down from 100% for 2022 and it will drop to 60% for assets placed in service in 2024. Contact us for details on the 80% bonus depreciation break and exactly what types of assets qualify.

Bonus depreciation is also available for certain building improvements.

Fortunately, the first-year Section 179 depreciation deduction will allow many small and medium-sized businesses to write off the entire cost of some or all of their 2023 asset additions on this year’s federal income tax return. There may also be state tax benefits.

However, keep in mind there are limitations on the deduction. For tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million and a phaseout rule kicks in if you put more than $2.89 million of qualifying assets into service in the year.

Purchase a heavy vehicle

The 80% bonus depreciation deduction may have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.

Think through tax-saving strategies

Keep in mind that some of these tactics could adversely impact other aspects of your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.

© 2023

If your business completes minor repairs by December 31, you can deduct those costs on your 2023 tax return. But different tax rules apply to improvements. As opposed to repairs, improvements are capital expenditures that must be written off over time.

Safe harbors

How can you tell whether work constitutes a repair or an improvement? It can be tricky. Fixing a broken windowpane is clearly a repair, while adding an indoor parking facility is obviously an improvement. But many expenses fall in between those two examples. Fortunately, IRS tangible property regulations offer more clarity.

Notably, the final regulations provide a safe-harbor rule under which you can currently deduct for federal tax purposes amounts paid for tangible property if you deduct those amounts for financial accounting purposes or in keeping your books and records. However, a dollar limit applies:

Additional rules apply that may limit or eliminate your current deduction for a particular expense.

There’s also a small businesses safe harbor under which businesses with $10 million or less in average gross receipts can elect to currently deduct improvements to a building with an unadjusted basis of $1 million or less. However, the total amount paid for repairs, maintenance and improvements to the building can’t exceed the lesser of $10,000 or 2% of the unadjusted basis.

Further IRS guidance

Routine maintenance costs generally are deductible in the year in which they’re incurred. An activity is “routine” if the business reasonably expects to perform it more than once during the property’s useful life (more than once over a 10-year period for buildings). Note: A business may capitalize these costs if this is consistent with its financial statements.

In addition, the traditional rule that improvements are capitalized and depreciated over time remains in place. But the regulations authorize a business to deduct some improvements (for example, an HVAC unit) if they are properly segregated.

A potential tax trap

If your business makes repairs and improvements at the same time, be aware that the IRS may lump the costs together as a general plan of betterment, causing you to forfeit a current deduction for repairs. All else being equal, arrange repair work separately at another time — preferably before 2024 if you want to reduce your 2023 tax liability.

© 2023

The IRS recently announced various inflation-adjusted federal income tax amounts. Here’s a rundown of the amounts that are most likely to affect small businesses and their owners.

Rates and brackets

If you run your business as a sole proprietorship or pass-through business entity (LLC, partnership or S corporation), the business’s net ordinary income from operations is passed through to you and reported on your personal Form 1040. You then pay the individual federal income tax rates on that income.

Here are the 2024 inflation adjusted bracket thresholds.

Key Point: These thresholds are about 5.4% higher than for 2023. That means that, other things being equal, you can have about 5.4% more ordinary business income next year without owing more to Uncle Sam.

Section 1231 gains and qualified dividends

If you run your business as a sole proprietorship or a pass-through entity, and the business sells assets, you may have Section 1231 gains that passed through to you to be included on your personal Form 1040. Sec. 1231 gains are long-term gains from selling business assets that were held for more than one year, and they’re generally taxed at the same lower federal rates that apply to garden-variety long-term capital gains (LTCGs), such as stock sale gains. Here are the 2024 inflation-adjusted bracket thresholds that will generally apply to Sec. 1231 gains recognized by individual taxpayers.

If you run your business as a C corporation, and the company pays you qualified dividends, they’re taxed at the lower LTCG rates. So, the 2024 rate brackets for qualified dividends paid to individual taxpayers will be the same as above.

Self-employment tax

If you operate your business as a sole proprietorship or as a pass-through entity, you probably have net self-employment (SE) income that must be reported on your personal Form 1040 to calculate your SE tax liability. For 2024, the maximum 15.3% SE tax rate will apply to the first $166,800 of net SE income (up from $160,200 for 2023).

Section 179 deductions

For tax years beginning in 2024, small businesses can potentially write off up to $1,220,000 of qualified asset additions in year one (up from $1,160,000 for 2023). However, the maximum deduction amount begins to be phased out once qualified asset additions exceed $3,050,000 (up from $2,890,000 for 2023). Various limitations apply to Sec. 179 deductions.

Side Note: Under the first-year bonus depreciation break, you can deduct up to 60% of the cost of qualified asset additions placed in service in calendar year 2024. For 2023, you could deduct up to 80%.

Just the beginning

These are only the 2024 inflation-adjusted amounts that are most likely to affect small businesses and their owners. There are others that may potentially apply, including: limits on qualified business income deductions and business loss deductions, income limits on various favorable exceptions such as the right to use cash-method accounting, limits on how much you can contribute to your self-employed or company-sponsored tax-favored retirement account, limits on tax-free transportation allowances for employees, and limits on tax-free adoption assistance for employees. Contact us with questions about your situation.

© 2023

The imminent enforcement of the Corporate Transparency Act (CTA) is a critical turning point that demands immediate attention from business owners to avoid severe penalties. Ultimately, business owners need to understand that it’s the business owner’s responsibility to ensure you are following and meeting all reporting requirements for your business. This article will review some key points within the CTA, and business owners are advised to review the CTA to understand all of its requirements as they pertain to their specific situation.

The CTA Sets a New Standard for Business Ownership Disclosure

Under the CTA, the Beneficial Ownership Reporting requirements will be effective January 1, 2024. This reporting requirement mandates most U.S. corporate entities and foreign entities operating in the U.S. to report ownership information to the Financial Crimes Enforcement Network (FinCEN). The CTA’s enactment establishes unprecedented protocols, compelling reporting entities to disclose the identities of their beneficial owners.

Key terms and definitions to know from the CTA:

Key Information Releases to Watch For

All reporting companies will submit their information electronically through the Beneficial Ownership Secure System (BOSS). The system is still in development and has not been launched as of the date of this article. You can expect detailed guidelines from FinCEN that will direct your next steps once it has.

Concrete Steps Towards Meeting CTA Requirements

Consequences of Ignoring New Compliance Requirements

Reporting requirements do not start until January 1, 2024, and FinCEN will not accept any reports until then. However, preparing your business for this reporting requirement is essential. The enforcement of the CTA includes significant penalties, including daily fines and possible imprisonment for non-compliance.

Key timeframes:

How Compliance Strengthens Your Business

The CTA is not just a regulatory hurdle; it’s a chance to build trust with clients and partners by demonstrating your commitment to transparency and ethical business practices. By embracing these changes, you comply with the law and position your business as trustworthy in a competitive market. While the requirements can seem daunting on the surface, reach out to our firm, and we can help you navigate and guide your research.

Additional resources for information: Small Entity Compliance Guide

If you have a parent entering a nursing home, taxes are probably the last thing on your mind. But you should know that several tax breaks may be available to help offset some of the costs.

Medical expense deductions

The costs of qualified long-term care (LTC), such as nursing home care, may be deductible as medical expenses to the extent they, along with other qualified expenses, exceed 7.5% of adjusted gross income (AGI). But keep in mind that the medical expense deduction is an itemized deduction. And itemizing deductions saves taxes only if total itemized deductions exceed the applicable standard deduction.

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. Also, for those individuals, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense.

If the individual is chronically ill, all qualified LTC services are deductible. Qualified LTC services are those required by a chronically ill individual and administered by a licensed health care practitioner. They include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services.

For someone to qualify as chronically ill, a physician or other licensed health care practitioner must certify him or her as unable to perform at least two activities of daily living (ADLs) for at least 90 days due to a loss of functional capacity or severe cognitive impairment. ADLs include eating, transferring, bathing, dressing, toileting and continence.

Qualifying as a dependent

If your parent qualifies as your dependent, you can add medical expenses you incur for him or her to your own medical expenses when calculating your medical expense deduction. We can help with this determination.

If you aren’t married and you meet the dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than filing as single. You may be eligible to use this status even if the parent for whom you claim an exemption doesn’t live with you.

Selling your parent’s home

In many cases, a move to a nursing home also means selling the parent’s home. Fortunately, up to $250,000 of gain from the sale of a principal residence may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years of the five years before the sale.

Also, the seller must have used the home as a principal residence for at least two of the five years before the sale. However, there’s an exception to the two-of-five-year use test for a seller who becomes physically or mentally unable to care for him- or herself during the five-year period.

LTC insurance

Perhaps your parent is still in good health but is paying for LTC insurance (or you’re paying LTC insurance premiums for yourself). If so, be aware that premiums paid for a qualified LTC insurance contract are deductible as medical expenses (subject to limits) to the extent that they, when combined with other medical expenses, exceed the 7.5%-of-AGI threshold. Such a contract doesn’t provide payment for costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

The amount of qualified LTC premiums that can be included as medical expenses is based on the age of the insured individual. For example, for 2023 the limit on deductible premiums is $4,770 for those 61 to 70 years old and $5,960 for those over 70.

Need more information?

This is just a brief overview of tax breaks that may help offset nursing home and related costs. Contact us if you need more information or assistance.

© 2023

Is your business depreciating over 30 years the entire cost of constructing the building that houses your enterprise? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow.

Depreciation basics

Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). In most cases, a business depreciates a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — including equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.

Frequently, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases, the distinction between real and personal property is obvious. For example, computers and furniture are personal property. But the line between real and personal property is not always clear. Items that appear to be “part of a building” may in fact be personal property. Examples are removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, decorative lighting and signs.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. These include reinforced flooring that supports heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment and dedicated cooling systems for data processing rooms.

Identifying and substantiating costs

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Speedier depreciation tax breaks

The Tax Cuts and Jobs Act (TCJA) enhanced certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other changes, the law permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

In addition, the TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And the law temporarily increased first-year bonus depreciation from 50% to 100% in 2022, 80% in 2023 and 60% in 2024. After that, it will continue to decrease until it is 0% in 2027, unless Congress acts.

Making favorable depreciation changes

It isn’t too late to get the benefit of faster depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return you file, that will result in automatic IRS consent to a change in your accounting for depreciation.

Cost segregation studies can yield substantial benefits, but they’re not the best move for every business. Contact us to determine whether this strategy would work for your business. We’ll judge whether a study will result in tax savings that are greater than the costs of the study itself.

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If you’re planning to start a business or thinking about changing your business entity, you need to determine what will work best for you. Should you operate as a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation? There are many issues to consider.

Currently, the corporate federal income tax is imposed at a flat 21% rate, while individual federal income tax rates currently begin at 10% and go up to 37%. The difference in rates can be alleviated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, and some estates and trusts.

Individual rate caveats: The QBI deduction is scheduled to end in 2026, unless Congress acts to extend it, while the 21% corporate rate is not scheduled to expire. Also, noncorporate taxpayers with modified adjusted gross incomes above certain levels are subject to an additional 3.8% tax on net investment income.

Organizing a business as a C corporation instead of a pass-through entity may reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.

More to take into account

There are other tax-related factors to take into consideration. For example:

As you can see, there are many factors involved in operating a business as a certain type of entity. This only covers a few of them. For more details about how to proceed in your situation, consult with us.

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In the business world, blending passion with profitability is essential. Financial accounting has evolved into a strategic cornerstone that sets successful enterprises apart. In the age of data-driven decision-making, integrating financial strategy is vital. This article will help you understand how strong financial accounting can help you achieve your goals.

The Intersection of Strategy and Finance:

Once regarded as a mere reporting tool, financial accounting now plays a crucial strategic role in advancing your business’s growth. This shift is driven by the concept that every financial data point conveys essential narratives about market trends, operational efficiencies, and untapped growth prospects. Understanding these insights can help you make better decisions that fuel your growth.

Evolving Metrics in the Business Landscape:

When it comes to making finance more strategic, consider starting with the metrics you are reviewing. The right metrics will not only help you manage and make more informed decisions about your business.

By integrating these financial metrics into your regular analysis, you can understand where your business stands financially and what strategic moves you can make to enhance its financial performance and value creation.

Implement a Balanced Scorecard:

Outside of upgrading the metrics you monitor, it’s also important to build a scorecard for your business. Beyond enhancing the metrics you track, it’s also vital to construct a business scorecard. The Balanced Scorecard approach goes beyond conventional financial measures, providing a holistic perspective of your organization that’s essential for long-term growth. This strategic planning and management system empowers you to align your business activities with the company’s vision and strategy, enhance both internal and external communication, and continually assess organizational performance relative to strategic objectives. Four Key areas to consider for your scorecard are listed below.

By integrating these four perspectives, the Balanced Scorecard helps you not only measure current performance but also provides a roadmap for operational excellence that drives future financial success.

Your Next Move:

The future belongs to businesses that blend financial acumen with operational prowess. Pause for a moment. Is your business truly leveraging the potential of integrated financial accounting? Reflect, re-strategize, and re-align. Need help? Reach out to see how we can help you make finance more strategic.

You may be familiar with the rule that permits a business to deduct employee bonuses this year if it pays them within 2½ months after the end of the tax year. It’s an attractive year-end planning technique that benefits your business and your employees: You enjoy a tax deduction this year, while your employees needn’t report the income until next year.

These tax benefits aren’t always available, however, so it’s important to understand the requirements. Here’s a quick review.

Accrual-basis taxpayers only; no related parties

If your business uses the cash method of accounting, you must deduct bonuses in the year they’re paid, even if they’re earned in the previous year. To accelerate bonus deductions into this year, your business must be on the accrual method of accounting.

Favorable tax treatment is limited to bonuses paid to unrelated parties. For a corporation, a related party is an individual who owns more than 50% of the company. For S corporations, partnerships and limited liability companies, related parties include any of their shareholders, partners or members.

Fixed and determinable

Even if the first two requirements are met, you can’t deduct a bonus this year unless it’s fixed and determinable as of December 31. Generally, this means that:

Many companies get tripped up by the “fixed and determinable” requirement because their bonus plans condition payment on the recipient’s continued employment through the payment date. If employees who leave the company before the payment date forfeit their bonuses, the company’s liability isn’t established by year end.

There may be a way to avoid this problem, however. Under IRS guidance, it’s possible to deduct bonuses earned this year, even if there’s a risk of forfeiture. The solution can be to use a properly designed bonus pool. For this strategy to work, the aggregate amount in the pool must be fixed by the end of the year. And, any forfeited bonuses must be reallocated among the remaining employees.

Handle with care

If you wish to accelerate deductions for bonuses paid next year, consult your CPA to make sure that you meet the requirements. It’s critical to design your bonus plan carefully to avoid any language that suggests bonuses aren’t fixed by the end of the year, such as retaining discretion to modify or cancel them or conditioning payment on board approval.

© 2023

Are employees at your business traveling and frustrated about documenting expenses? Or perhaps you’re annoyed at the time and energy that goes into reviewing business travel expenses. There may be a way to simplify the reimbursement of these expenses. In Notice 2023-68, the IRS announced the fiscal 2024 special “per diem” rates that became effective October 1, 2023. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidentals when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)

Basics of the method

A simplified alternative to tracking actual business travel expenses is to use the “high-low” per diem method. This method provides fixed travel per diems. The amounts, provided by the IRS, vary from locality to locality.

Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, and San Francisco. Other locations, such as resort areas, are considered high-cost during only part of the year.

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

Reduced recordkeeping

If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.

The FY2024 rates

For travel after September 30, 2023, the per diem rate for all high-cost areas within the continental United States is $309. This consists of $235 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $214 for travel after September 30, 2023 ($150 for lodging and $64 for meals and incidental expenses). Compared to the FY2023 per diems, the high-cost area per diem increased $12, and the low-cost area per diem increased $10.

Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.

For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.

If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information or read the IRS notice here.

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Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues unique to certain taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guide titles that have been revised or added in recent years:

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website.

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Owning a business is an exciting journey filled with highs and lows. Establishing a clear, profit-driven strategy is one key factor that can tilt the scales toward success. The recent tax court case, Gregory v. Commissioner, highlighted how blurring the lines between hobbies and genuine business ventures can have significant financial implications. Not only did this case underscore the importance of clear delineation, but it also highlighted the potential tax pitfalls of not doing so. In this article, we’ll cover how to ensure your venture is seen as a legitimate business and not just a pricey pastime.

Understanding the Hobby Loss Conundrum

The “hobby loss” rules have made waves in the tax world, affecting many business activities, from horse breeding to charter boat operations and even Airbnb rentals. Only activities classified as what the IRS refers to as “engaged in for profit” are able to deduct expenses associated with the work. In other words, to be considered “engaged in for profit” means you set out with the intention of your business and activity to generate a profit. If the IRS determines the activity was not “engaged in for profit,” your ability to deduct associated expenses will be impacted. If your venture is potentially labeled a hobby, you could find yourself in a situation where you’re reporting full income without the benefit of crucial deductions.

In the case of Gregory discussed above, the business owner reported gross income equaling the business expenses, yet he couldn’t use the deductions due to the hobby classification. As a result, the ruling reduced his profit and increased the business’s taxes due, which is not the ideal scenario for any business owner.

Establishing a Profit Motive

The U.S. Tax Court and the Internal Revenue Service use a range of factors to determine whether a business truly has a profit motive. Remember, while starting a business around your passion is fantastic, the profit motive is what separates it as a sustainable business rather than an expensive hobby.

Four steps can make it a clear and recurrent theme in your business strategy.

Why This Matters to Business Owners

When your business displays a consistent profit-driven strategy, you’re protecting yourself from potential tax pitfalls and setting your venture up for long-term success. Adhering to these guidelines reflects solid business judgment that can benefit your company in the long run. Remember the consequences: a misclassified hobby can lead to reporting full income without deducing the expenses.

Take the Next Step

Are you currently engaged in a business activity that could toe the line between hobby and legitimate venture? Chat with your tax advisor. Discuss your profit-driven strategies and plans, taking lessons from the Gregory case. Continual reflection and adaptation, even in the face of enjoyable or recreational activities, are the keys to solidifying your business’s market placement.

The line between passion and profit is a fine one. Yet, with a clear, profit-driven strategy and awareness of nuances like the “hobby loss” rules, you can ensure your business thrives in today’s competitive marketplace. Stay informed, stay adaptable, and always keep that profit motive at the forefront of your business operations.

As of Sept. 14, 2023, the Internal Revenue Service (IRS) announced an immediate halt to the processing of new claims for the Employee Retention Credit (ERC) program. This decision is effective until at least the end of the current year. It comes in response to a significant influx of questionable ERC claims.

Why the IRS has Stopped Processing ERC’s:

The IRS has raised serious concerns about scams targeting honest small business owners. Reports suggest that many businesses, influenced by what the IRS termed aggressive marketing tactics, are applying for credits they’re not eligible for. Such questionable claims endanger businesses’ financial stability and put undue strain on the tax system. The intention behind this moratorium is to protect businesses and the integrity of the tax system from predatory tactics and fraudulent claims.

The IRS’s increasing focus on reviewing these claims for compliance has led to a substantial number of audits and criminal investigations. Their collaboration with the Justice Department aims to address and reduce the number of fraudulent claims and to tackle promoters pushing businesses toward such actions.

What This Means for Business Owners:

Based on what we know right now, here is how this halt might affect you as a small business owner:

When Will More Information be Available:

The IRS has said they will provide more details on various initiatives in the upcoming fall season—including more information on the settlement program, allowing businesses to repay any mistakenly received ERC funds without incurring penalties.

What Are the Next Steps for Small Business Owners:

This moratorium underscores the need for businesses to be vigilant and informed. In times of crisis, while relief measures like the ERC are invaluable, they can also become fertile ground for scams and misinformation. Ensure your business is protected from these threats by staying informed and seeking advice from trusted professionals.

If you read the Internal Revenue Code (and you probably don’t want to!), you may be surprised to find that most business deductions aren’t specifically listed. For example, the tax law doesn’t explicitly state that you can deduct office supplies and certain other expenses. Some expenses are detailed in the tax code, but the general rule is contained in the first sentence of Section 162, which states you can write off “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

Basic Definitions

In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, insurance premiums to protect a store would be an ordinary business expense in the retail industry.

A necessary expense is defined as one that’s helpful or appropriate. For example, let’s say a car dealership purchases an automated external defibrillator. It may not be necessary for the operation of the business, but it might be helpful and appropriate if an employee or customer suffers cardiac arrest.

It’s possible for an ordinary expense to be unnecessary — but, in order to be deductible, an expense must be ordinary and necessary.

In addition, a deductible amount must be reasonable in relation to the benefit expected. For example, if you’re attempting to land a $3,000 deal, a $65 lunch with a potential client should be OK with the IRS. (Keep in mind that the Tax Cuts and Jobs Act eliminated most deductions for entertainment expenses but retained the 50% deduction for business meals.)

Examples of Taxpayers Who Lost Deductions in Court

Not surprisingly, the IRS and courts don’t always agree with taxpayers about what qualifies as ordinary and necessary expenditures. Here are three 2023 cases to illustrate some of the issues:

The deductibility of some expenses is clear. But for other expenses, it can get more complicated. Generally, if an expense seems like it’s not normal in your industry — or if it could be considered fun, personal or extravagant in nature — you should proceed with caution. And keep careful records to substantiate the expenses you’re deducting. Consult with us for guidance.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 2

Monday, October 16

Tuesday, October 31

Monday, November 13

Friday, December 15

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

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In recent years, merger and acquisition activity has been strong in many industries. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. Assets

From a tax standpoint, a transaction can basically be structured in two ways:

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask us if this would be beneficial in your situation.

Buyer vs. Seller Preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other areas, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional Advice is Critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed.

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Do you and your spouse together operate a profitable unincorporated small business? If so, you face some challenging tax issues.

The Partnership Issue

An unincorporated business with your spouse is classified as a partnership for federal income tax purposes, unless you can avoid that treatment. Otherwise, you must file an annual partnership return, on Form 1065. In addition, you and your spouse must be issued separate Schedule K-1s, which allocate the partnership’s taxable income, deductions and credits between the two of you. This is only the beginning of the unwelcome tax compliance tasks.

The Self-Employment (SE) Tax Problem

The SE tax is how the government collects Social Security and Medicare taxes from self-employed individuals. For 2023, the SE tax consists of 12.4% Social Security tax on the first $160,200 of net SE income plus 2.9% Medicare tax. Once your 2023 net SE income surpasses the $160,200 ceiling, the Social Security tax component of the SE tax ends. But the 2.9% Medicare tax component continues before increasing to 3.8% — thanks to the 0.9% additional Medicare tax — if the combined net SE income of a married joint-filing couple exceeds $250,000.

With your joint Form 1040, you must include a Schedule SE to calculate SE tax on your share of the net SE income passed through to you by your spousal partnership. The return must also include a Schedule SE for your spouse to calculate the tax on your spouse’s share of net SE income passed through to him or her. This can result in a big SE tax bill.

For example, let’s say you and your spouse each have net 2023 SE income of $150,000 ($300,000 total) from your profitable 50/50 partnership business. The SE tax on your joint tax return is a whopping $45,900 ($150,000 x 15.3% x 2). That’s on top of regular federal income tax.

Here are some possible tax-saving solutions.

Strategy 1: Use an IRS-approved method to minimize SE tax in a community property state

Under IRS Revenue Procedure 2002-69, for federal tax purposes, you can treat an unincorporated spousal business in a community property state as a sole proprietorship operated by one of the spouses. By effectively allocating all the net SE income to the proprietor spouse, only the first $160,200 of net SE income is hit with the 12.4% Social Security tax. That can cut your SE tax bill.

Strategy 2: Convert a spousal partnership into an S corporation and pay modest salaries

If you and your unincorporated spousal business aren’t in a community property state, consider converting the business to S corporation status to reduce Social Security and Medicare taxes. That way, only the salaries paid to you and your spouse get hit with the Social Security and Medicare tax, collectively called FICA tax. You can then pay modest, but reasonable, salaries to you and your spouse as shareholder-employees while paying out most or all remaining corporate cash flow to yourselves as FICA-tax-free cash distributions.

Strategy 3: Disband your partnership and hire your spouse as an employee

You can disband the existing spousal partnership and start running the operation as a sole proprietorship operated by one spouse. Then hire the other spouse as an employee of the proprietorship. Pay that spouse a modest cash salary. You must withhold 7.65% from the salary to cover the employee-spouse’s share of the Social Security and Medicare taxes. The proprietorship must also pay 7.65% as the employer’s half of the taxes. However, since the employee-spouse’s salary is modest, the FICA tax will also be modest.

With this strategy, you file only one Schedule SE — for the spouse treated as the proprietor — with your joint tax return. That minimizes the SE tax, because no more than $160,200 (for 2023) is exposed to the 12.4% Social Security portion of the SE tax.

Find Tax-Saving Strategies

Having a profitable unincorporated business with your spouse that’s classified as a partnership for federal income tax purposes can lead to compliance headaches and high SE tax bills. Work with us to identify appropriate tax-saving strategies.

© 2023

The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments. And due to high inflation, the adjustments for 2023 were big. Here are the numbers that small business owners need to know.

Section 179 Deductions

For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software.

Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.

Deduction for Heavy SUVs

There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.

First-Year Bonus Depreciation has Been Cut

For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.

However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60% (40% in 2025, 20% in 2026 and 0% in 2027 and beyond).

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.

Exception: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.

Passenger Auto Limitations

For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:

These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.

Advantage for Heavy Vehicles

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As such, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.

Here’s the catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.

Consult with us for the maximum depreciation tax breaks in your situation.

© 2023

In business, where every decision can tip the scales of success or failure, a robust financial strategy is imperative. Enter Financial Planning & Analysis (FP&A) – an often underappreciated yet pivotal function that can revolutionize how businesses plan, analyze, and project their financial future.

The Essence of FP&A in Accounting

What exactly is FP&A? At its core, FP&A serves as the bridge between strategic planning and its execution. It’s the analytical arm of the finance department, scrutinizing past performances and forecasting future trends. While traditional accounting looks backward, detailing where a company has been, FP&A looks forward, charting where it’s headed. It complements the accounting function by bringing an analytical and predictive dimension to the table. Together, they provide a holistic view of a company’s financial health.

Adding Value and More Than Just Number Crunching Through FP&A

FP&A is more than a tool reserved for accountants or financial experts. It’s an invaluable financial guide that acts as a compass for every entrepreneur and project manager. This financial guide offers:

By analyzing financial trends, FP&A drives strategic direction, ensures profitable revenues, and assists in budgeting and forecasting. It’s no wonder that businesses integrating FP&A report a 30% increase in forecast accuracy.

The Need for Agile FP&A

The business world is in constant flux. The days of static annual reviews have been left behind. With rapidly changing market dynamics, agility in financial planning isn’t a luxury—it’s a necessity. This fluid approach ensures that businesses remain proactive, ready to seize opportunities or avoid impending challenges.

Challenges Addressed by FP&A:

 Steps to Seamlessly Integrate FP&A in Project Planning

Conclusion: Navigating Tomorrow with FP&A Today

By understanding the nuances of FP&A and weaving it into business processes, companies can make informed decisions, minimize risks, and amplify profitability. In the unpredictable world of modern commerce, FP&A stands as a trusted compass, guiding firms towards a brighter future.

Inheritance brings its own set of challenges. Within the vast world of financial legacies, inherited Individual Retirement Accounts (IRAs) stand out thanks to their annual withdrawal requirements, also known as Required Minimum Distributions (RMDs). With these RMDs comes the caveat of taxation. However, when the Secure Act of 2019 was introduced, it brought clarity and confusion, mainly by introducing new beneficiary categories.

The Secure Act’s Beneficiary Categories Decoded

The Secure Act ushered in three beneficiary categories, each with distinct withdrawal rules:

Many beneficiaries, particularly NEDBs, found these rules intricate. The real task was classifying themselves correctly and adhering to the associated RMD rules to avoid tax penalties.

The IRS Offers Clarification and Relief

In response to the confusion stemming from the Secure Act’s implementation, the IRS released Notice 2022-53 in October 2022. For those beneficiaries whose original IRA owner had begun their RMDs, they must commence their own RMDs in the year following the owner’s passing. Furthermore, the complete balance should be dispensed by the 10th year after the owner’s death.

Recognizing the challenges arising from the Secure Act, the IRS also waived penalties for NEDBs who missed RMDs in 2021 and 2022 to show its commitment to assist during these regulatory transitions.

Things to remember:

Empowering Beneficiaries with Actionable Steps

To navigate the inherited IRA terrain confidently, beneficiaries should:

Wrapping Up

Although financial regulations seem intimidating, beneficiaries can efficiently manage their inherited IRAs with the right guidance and proactive approach. By understanding their specific obligations under the Secure Act and seeking expert advice, beneficiaries can comply with regulations and make informed decisions that honor their inheritances and bolster their financial futures.

If you’re getting a divorce, you know the process is generally filled with stress. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.

Transferring Property Tax-Free

In general, you can divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding period for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:

Additional Future Tax Issues

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid Surprises by Planning Ahead

Like many major life events, divorce can have significant tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Contact us. We can help you minimize the adverse tax consequences of settling your divorce.

© 2023

Let’s say you decide to, or are asked to, guarantee a loan to your corporation. Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax implications. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be caught unaware.

A Business Bad Debt

If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.

In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.

Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.

If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.

More Rules

In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three requirements:

Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.

These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. To learn all the implications in your situation, consult with us.

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The SECURE 2.0 law, which was enacted last year, contains wide-ranging changes to retirement plans. One provision in the law is that eligible employers will soon be able to provide more help to staff members facing emergencies. This will be done through what the law calls “pension-linked emergency savings accounts.”

Effective for plan years beginning January 1, 2024, SECURE 2.0 permits a plan sponsor to amend its 401(k), 403(b) or government 457(b) plan to offer emergency savings accounts that are connected to the plan.

Basic Distribution Rules

If a retirement plan participant withdraws money from an employer plan before reaching age 59½, a 10% additional tax or penalty generally applies unless an exception exists. This is on top of the ordinary tax that may be due.

The goal of these emergency accounts is to encourage employees to save for retirement while still providing access to their savings if emergencies arise. Under current law, there are specific exceptions when employees can withdraw money from their accounts without paying the additional 10% penalty but they don’t include all of the emergencies that an individual may face. For example, while participants can take penalty-free distributions to pay eligible medical expenses, they can’t take them for car repairs.

Here are some features of pension-linked emergency savings accounts:

Another Option to Help Employees

In addition to these accounts, SECURE 2.0 adds a new exception for certain retirement plan distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions beginning January 1, 2024.

Determine Whether There’s Time

In addition to what is outlined here, other rules apply to pension-linked emergency savings accounts. The IRS is likely to issue additional guidance in the next few months. Be aware that plan sponsors don’t have to offer these accounts and many employers may find that they need more time to establish them before 2024. Or they may decide there are too many administrative hurdles to clear. Contact us with questions.

© 2023

Does your business receive large amounts of cash or cash equivalents? If so, you’re generally required to report these transactions to the IRS — and not just on your tax return.

The Requirements

Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. Who is a “person”? It can be an individual, company, corporation, partnership, association, trust or estate. What are considered “related transactions”? Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

In order to complete a Form 8300, you’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

The Definition of “Cash” and “Cash Equivalents”

For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

The Reasons for Reporting

Although many cash transactions are legitimate, the IRS explains that the information reported on Form 8300 “can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

Failing to comply with the law can result in fines and even jail time. In one case, a Niagara Falls, NY, business owner was convicted of willful failure to file Form 8300 after receiving cash transactions of more than $10,000. In a U.S. District Court, he pled guilty and was recently sentenced to five months home detention, fined $10,000 and he agreed to pay restitution to the IRS. He had received cash rent payments in connection with a building in which he had an ownership interest.

Forms Can be Sent Electronically

Businesses required to file reports of large cash transactions on Forms 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic confirmation of receipt when they file.

Effective January 1, 2024, you may have to e-file Forms 8300 if you’re required to e-file other information returns, such as 1099 and W-2 forms. You must e-file if you’re required to file at least 10 information returns other than Form 8300 during a calendar year.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Record Retention

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS. “Confirmation receipts don’t meet the recordkeeping requirement,” the tax agency added.

Contact us with any questions or for assistance.

© 2023

Let’s say you own highly appreciated land that’s now ripe for development. If you subdivide it, develop the resulting parcels and sell them off for a hefty profit, it could trigger a large tax bill.

In this scenario, the tax rules generally treat you as a real estate dealer. That means your entire profit — including the portion from pre-development appreciation in the value of the land — will be treated as high-taxed ordinary income subject to a federal rate of up to 37%. You may also owe the 3.8% net investment income tax (NIIT) for a combined federal rate of up to 40.8%. And you may owe state income tax too.

It would be better if you could arrange to pay lower long-term capital gain (LTCG) tax rates on at least part of the profit. The current maximum federal income tax rate on LTCGs is 20% or 23.8% if you owe the NIIT.

Potential Tax-Saving Solution

Thankfully, there’s a strategy that allows favorable LTCG tax treatment for all pre-development appreciation in the land value. You must have held the land for more than one year for investment (as opposed to holding it as a real estate dealer).

The portion of your profit attributable to subsequent subdividing, development and marketing activities will still be considered high-taxed ordinary income, because you’ll be considered a real estate dealer for that part of the process.

But if you can manage to pay a 20% or 23.8% federal income tax rate on a big chunk of your profit (the pre-development appreciation part), that’s something to celebrate.

Three-Step Strategy

Here’s the three-step strategy that could result in paying a smaller tax bill on your real estate development profits.

Establish an S corporation

If you individually own the appreciated land, you can establish an S corporation owned solely by you to function as the developer. If you own the land via a partnership, or via an LLC treated as a partnership for federal tax purposes, you and the other partners (LLC members) can form the S corp and receive corporate stock in proportion to your percentage partnership (LLC) interests.

Sell the Land to the S Corp

Sell the appreciated land to the S corp for a price equal to the land’s pre-development fair market value. If necessary, you can arrange a sale that involves only a little cash and a big installment note the S corp owes you. The business will pay off the note with cash generated by selling off parcels after development. The sale to the S corp will trigger a LTCG eligible for the 20% or 23.8% rate as long as you held the land for investment and owned it for over one year.

Develop the Property and Sell it Off

The S corp will subdivide and develop the property, market it and sell it off. The profit from these activities will be higher-taxed ordinary income passed through to you as an S corp shareholder. If the profit is big, you’ll probably pay the maximum 37% federal rate (or 40.8% percent with the NIIT. However, the average tax rate on your total profit will be much lower, because a big part will be lower-taxed LTCG from pre-development appreciation.

Favorable Treatment

Thanks to the tax treatment created by this S corp developer strategy, you can lock in favorable treatment for the land’s pre-development appreciation. That’s a huge tax-saving advantage if the land has gone up in value. Consult with us if you have questions or want more information.

© 2023

If you play a major role in a closely held corporation, you may sometimes spend money on corporate expenses personally. These costs may end up being nondeductible both by an officer and the corporation unless the correct steps are taken. This issue is more likely to happen with a financially troubled corporation.

What can’t you deduct?

In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.

To make matters worse, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.

What expenses may be deductible?

On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.

What’s the best alternative?

Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.

Contact us if you’d like assistance or would like to discuss these issues further.

© 2023

If you own an unincorporated small business, you probably don’t like the size of your self-employment (SE) tax bills. No wonder!

For 2023, the SE tax is imposed at the painfully high rate of 15.3% on the first $160,200 of net SE income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. The $160,200 Social Security tax ceiling is up from the $147,000 ceiling for 2022, and it’s only going to get worse in future years, thanks to inflation. Above the Social Security tax ceiling, the Medicare tax component of the SE tax continues at a 2.9% rate before increasing to 3.8% at higher levels of net SE income thanks to the 0.9% additional Medicare tax, on all income.

The S Corp Advantage

For wages paid in 2023 to an S corporation employee, including an employee who also happens to be a shareholder, the FICA tax wage withholding rate is 7.65% on the first $160,200 of wages: 6.2% for Social Security tax and 1.45% for Medicare tax. Above $160,200, the FICA tax wage withholding rate drops to 1.45% because the Social Security tax component is no longer imposed. But the 1.45% Medicare tax wage withholding hits compensation no matter how much you earn, and the rate increases to 2.35% at higher compensation levels thanks to the 0.9% additional Medicare tax.

An S corporation employer makes matching payments except for the 0.9% Additional Medicare tax, which only falls on the employee. Therefore, the combined employee and employer FICA tax rate for the Social Security tax is 12.4%, and the combined rate for the Medicare tax is 2.9%, increasing to 3.8% at higher compensation levels — same as the corresponding SE tax rates.

Note: In this article, we’ll refer to the Social Security and Medicare taxes collectively as federal employment taxes whether paid as SE tax for self-employed folks or FICA tax for employees.

Strategy: Become an S Corporation

While wages paid to an S corporation shareholder-employee get hit with federal employment taxes, any remaining S corp taxable income that’s passed through to the employee-shareholder is exempt from federal employment taxes. The same is true for cash distributions paid out to a shareholder-employee. Since passed-through S corporation taxable income increases the tax basis of a shareholder-employee’s stock, distributions of corporate cash flow are usually free from federal income tax.

In appropriate circumstances, an S corp can follow the tax-saving strategy of paying modest, but justifiable, salaries to shareholder-employees. At the same time, it can pay out most or all of the remaining corporate cash flow in the form of federal-employment-tax-free shareholder distributions. In contrast, an owner’s share of net taxable income from a sole proprietorship, partnership and LLC (treated as a partnership for tax purposes) is generally subject to the full ravages of the SE tax.

Potential Negative Side Effect

Running your business as an S corporation and paying modest salaries to the shareholder-employee(s) may mean reduced capacity to make deductible contributions to tax-favored retirement accounts. For example, if an S corporation maintains a SEP, the maximum annual deductible contribution for a shareholder-employee is limited to 25% of salary. So the lower the salary, the lower the maximum contribution. However, if the S corp sets up a 401(k) plan, paying modest salaries generally won’t preclude generous contributions.

Other Implications

Converting an unincorporated business into an S corporation has other legal and tax implications. It’s a big decision. We can explain all the issues.

© 2023

Government officials saw a large increase in the number of new businesses launched during the COVID-19 pandemic. And the U.S. Census Bureau reports that business applications are still increasing slightly (up 0.4% from April 2023 to May 2023). The Bureau measures this by tracking the number of businesses applying for Employer Identification Numbers.

If you’re one of the entrepreneurs, you may not know that many of the expenses incurred by start-ups can’t be currently deducted on your tax return. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

Handling Expenses

If you’re starting or planning to launch a new business, here are three rules to keep in mind:

Rules to Qualify

In general, start-up expenses are those you incur to:

To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Decision to be Made

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

© 2023

As we increasingly embrace the post-pandemic era, the world of work has undergone a significant shift. Many companies have opted for remote work models, dispersing employees across various states and countries. However, while beneficial in many respects, this transition carries complex tax implications for businesses. Understanding and adapting these implications has become vital to business planning and decision-making.

Unraveling State Taxation Laws

To navigate the labyrinth of tax consequences linked with remote work, it’s crucial first to understand the term ‘nexus.’ In tax language, ‘nexus’ indicates a sufficient connection between a taxpayer and a jurisdiction that establishes tax obligations in that jurisdiction. Generally, there are two types of nexus tests – physical and economic.

  1. Physical Nexus: This is established by some form of physical presence within the jurisdiction, such as an office, warehouse, or employees. With the rise of remote work, employees in various states may create a physical nexus, thereby imposing tax obligations in those states.

 

  1. Economic Nexus: This is defined by a company’s economic activity within a state. Revenue from sales, the number of transactions, or service income sourced to the state can all create an economic nexus. It means that businesses may still have tax obligations even without physical presence due to their economic activity in a state.

The Risk of Double Taxation

One primary concern for remote workers and businesses is the potential risk of double taxation. Double taxation occurs when an employee works remotely in one state for a company located in another, resulting in tax obligations in both states. This can occur due to conflicting tax laws among states or the lack of coordination regarding the taxation rights of remote workers.

As such, the convenience of remote work might sometimes lead to the inconvenience of grappling with multiple state tax obligations. Understanding each state’s tax laws is essential and discussing with your financial advisor how to mitigate the risk of double taxation.

Employer’s Tax Obligations

The location of your employees can impact your business’s tax obligations significantly. As a business owner, you may need to register with each state where you have employees and comply with all tax obligations, including corporate income tax, gross receipts tax, franchise tax, and sales and use tax.

In addition, employment tax requirements such as income tax withholding, unemployment insurance, and workers’ compensation insurance need to be addressed in each jurisdiction where a remote employee is located. Failure to comply with these obligations can result in penalties, affecting your business’s financial health.

Preparing for the New Tax Landscape

Given the complexity of these tax issues, it’s important to conduct thorough research and consult with a financial advisor or tax professional. This can help you develop a comprehensive understanding of the relevant concepts, conduct regular reviews of the factors impacting your business, and, ultimately, avoid unwelcome surprises.

While navigating this new tax landscape can be challenging, it’s crucial to remember that being proactive in understanding these changes can help your business adapt more effectively to the evolving world of work. Through an informed approach and consistent monitoring, business owners can ensure compliance and take full advantage of the opportunities presented by the remote work model.

As a small business owner, every decision you make can significantly impact your business’s financial health and profitability. Among your numerous choices, selecting the right accounting method for your business stands out for its importance. The accounting method you opt for shapes your business’s bookkeeping practices, affects your financial reporting, tax liabilities, and profitability, and influences your future decisions. This article aims to demystify the two primary accounting methods – cash and accrual accounting, helping you understand their implications and selecting the most appropriate one for your business’s needs.

Understanding Cash and Accrual Accounting

At the core of accounting lie two main methods: cash-based and accrual-based accounting. Each approach has pros and cons and varies in suitability depending on your business’s size, scale, and nature.

Cash-Based Accounting: This method, characterized by simplicity and straightforwardness, records transactions only when cash is received or paid. It provides a clear picture of your actual cash flow, making it an ideal choice for small businesses, sole proprietors, or companies operating without inventory or on a purely cash basis. However, it’s worth noting that while this method helps you monitor your cash inflows and outflows closely, it might not offer a comprehensive overview of your financial health since it doesn’t account for outstanding receivables or payables.

Accrual-Based Accounting: Though more complex, this method provides a comprehensive picture of your financial status. Accrual-based accounting records income and expenses as earned or incurred, regardless of the actual cash transaction’s timing. It accounts for receivables, payables, assets, and liabilities, offering a real-time snapshot of your business’s financial status. This method benefits larger companies dealing with inventory, credit transactions, or businesses that are required to comply with Generally Accepted Accounting Principles (GAAP). However, it may seem overwhelming for small businesses due to its complexity and the resources required to maintain detailed records.

Choosing Between Cash and Accrual Accounting

Deciding between cash-based and accrual-based accounting requires careful consideration of several key factors:

  1. Nature and Size of Your Business: Cash-based accounting could be suitable if your business is relatively small and operates mainly on a cash basis without inventory. Conversely, accrual accounting might provide the detailed insights you need if your operations involve credit transactions, inventory, and a higher volume of transactions.
  2. Regulatory Requirements: According to regulatory requirements like GAAP, certain businesses must use accrual-based accounting. Understanding the regulations relevant to your industry and business size is important.
  3. Ease of Use vs. Comprehensive Overview: While cash-based accounting is simple and intuitive, making it ideal for small businesses, accrual-based accounting provides a detailed overview of your financial health, which is crucial for strategic decision-making.
  4. Financial Management Software: Various financial management software options are available today that cater to both accounting methods. FreshBooks, for instance, can be an excellent choice for cash-based accounting, while QuickBooks Online is highly suitable for businesses using accrual accounting.
  5. Business Goals and Available Resources: Consider your business goals and the resources you have at your disposal. If growth and expansion are your priorities, accrual accounting may provide the comprehensive financial perspective needed. However, cash-based accounting may serve you better if you focus on simplicity and effective cash flow management. Remember that accrual accounting, while comprehensive, may require more time and resources for record-keeping.

 

Remember, choosing an accounting method is not merely about understanding numbers; it’s about using this understanding to make informed decisions that align with your business’s financial goals. By selecting the right accounting method – cash or accrual – you can gain valuable insights into your business’s financial health and make decisions that steer your business toward a profitable future. The right choice will empower you, equipping you with the financial clarity necessary to successfully navigate your business’s financial landscape.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31 

August 10 

September 15

© 2023

Your business may be able to claim big first-year depreciation tax deductions for eligible real estate expenditures rather than depreciate them over several years. But should you? It’s not as simple as it may seem.

Qualified Improvement Property

For qualifying assets placed in service in tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. Importantly, the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP), up to the maximum annual allowance.

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. For Sec. 179 deduction purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems and security systems that are placed in service after the building is first placed in service.

However, expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP and must be depreciated over several years.

Mind the Limitations

A taxpayer’s Sec. 179 deduction can’t cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property is placed in service in the tax year. The Sec. 179 deduction limitation rules can get tricky if you own an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation). Finally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. We can give you full details.

First-Year Bonus Depreciation for QIP

Beyond the Sec. 179 deduction, 80% first-year bonus depreciation is also available for QIP that’s placed in service in calendar year 2023. If your objective is to maximize first-year write-offs, you’d claim the Sec. 179 deduction first. If you max out on that, then you’d claim 80% first-year bonus depreciation.

Note that for first-year bonus depreciation purposes, QIP doesn’t include nonresidential building roofs, HVAC systems, fire protection and alarm systems, or security systems.

Consider Depreciating QIP Over Time

Here are two reasons why you should think twice before claiming big first-year depreciation deductions for QIP.

1. Lower-taxed gain when property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create depreciation recapture that’s taxed at higher ordinary income rates when the QIP is sold. Under current rules, the maximum individual rate on ordinary income is 37%, but you may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

2. Write-offs may be worth more in the future

When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If federal income tax rates go up in future years, you’ll have effectively traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

As you can see, the decision to claim first-year depreciation deductions for QIP, or not claim them, can be complicated. Consult with us before making depreciation choices.

© 2023

If you and your employees are traveling for business this summer, there are a number of considerations to keep in mind. Under tax law, in order to claim deductions, you must meet certain requirements for out-of-town business travel within the United States. The rules apply if the business conducted reasonably requires an overnight stay.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules That Come Into Play

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. Although there was a temporary 100% deduction in 2021 and 2022 for business food and beverages provided by a restaurant, it was not extended to 2023. Therefore, there’s once again a 50% limit on deducting eligible business meals this year.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Mixing Business with Pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure it isn’t a vacation in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other Expenses

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, let’s say you have to board a pet while you’re away. The cost isn’t deductible. Contact us if you have questions about your small business deductions.

© 2023

If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.

Facts of the Case

In the case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”

The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”

A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.

The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)

Stay on the Right Track

This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.

DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.

With organization and guidance from us, your tax records can stand up to inspection from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.

© 2023

As we approach the halfway point of 2023, it’s the perfect opportunity to evaluate your business tax planning and determine ways to decrease your tax burden. Employing the right strategies can reduce your taxes, optimize your cash flow, and enhance your long-term financial success.

In this article, we’ll introduce three tax strategies for 2023: Roth IRA conversions, tax loss harvesting, and year-round charitable giving. By familiarizing yourself with these tactics and how they can benefit your enterprise, you can make well-informed decisions and capitalize on available tax savings. Let’s dive into these tax-saving concepts and explore the options available for your business.

The Benefits of Roth IRA Conversions for Your Retirement Plan

Roth IRA conversions effectively transform a portion of your traditional IRA into a tax-free asset that can provide you with cash distributions in your retirement years. Converting a portion of your traditional IRA can save you taxes at a potentially lower marginal tax rate and create a tax-free asset that can serve as a mechanism for tax redistribution during retirement. Even better, consider using this strategy as a future legacy asset for your beneficiaries.

By converting to a Roth IRA, you can ensure your desired assets are passed onto your loved ones.

Tax Loss Harvesting

Tax loss harvesting is a strategy that involves taking advantage of market volatility to generate a tax asset using captured capital losses. These losses can be used to offset future capital gains, and any remaining losses can be used to offset gains in subsequent years. Another effective strategy involves pairing these losses with qualified opportunity zones, which can further reduce your tax liabilities.

Investors who suffered losses due to the steep decline of the cryptocurrency and stock markets can benefit from this approach. The recent market downturn could also lead more investors to opportunity zone funds, presenting an excellent opportunity to maximize tax benefits.

Year-Round Charitable Giving

End-of-year charitable donations have long been a go-to for taxpayers seeking tax deductions. However, there are benefits to giving year-round, especially when combined with investments.

For example, investors with appreciated securities in a taxable account can use these securities to fulfill their philanthropic goals. This strategy allows for a fair market value deduction without having to pay taxes on the capital gain. It’s a practical way to donate without sacrificing your end-of-the-year cash or check donation.

Charitable remainder trusts offer another means of donating to worthwhile causes and taking advantage of tax breaks. Although the lower interest rates over the last few years have cooled investor interest in these trusts, the benefits of using these trusts become increasingly clear as rates rise.

Don’t wait until the end of the year to give back. Consider these charitable giving strategies to boost your philanthropic impact and build a better future.

Actionable Key Takeaways

Remember, it’s essential to review your tax planning regularly to take advantage of available opportunities and ensure you’re putting your assets to their best use. With these actionable takeaways, you can start making informed decisions today and set your business up for long-term financial success.

 

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA Fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation Adjustments for Next Year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

© 2023

Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.

On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).

No One Definition

Who’s an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.

You Can Ask the IRS but Think Twice

Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.
It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.

Workers who want an official determination of their status can also file Form SS-8. Dissatisfied independent contractors may do so because they feel entitled to employee benefits and want to eliminate their self-employment tax liabilities.

If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

These are the basic tax rules. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.

© 2023

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a Deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

The following generally aren’t allowed when determining your NOL:

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

Limitations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

Excess Business Losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning Ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.

© 2023

Fraud. Scam. Phishing. Regardless of what you call these illicit activities, it’s important to protect yourself against the bad players that take advantage of weaknesses for their gain. Not only is it inconvenient, but there’s often a financial cost when you’re a victim of fraud.

The IRS releases an annual ‘Dirty Dozen’ list featuring the top taxpayer scams for the coming year. The list is certainly not exhaustive of every potential pitfall out there, but it is an excellent place to start educating yourself (and your team if you’re a business owner). Here’s a summary of the 2023 IRS Dirty Dozen.

Employer Retention Credit Promoters: Businesses have been targeted by companies claiming to help them submit tax returns and adjustments to take maximum advantage of the Employee Retention Credit (ERC). These promoters collect a fee for preparation services, which is often tied to the value of the proposed credit. Usually, the targeted businesses don’t qualify for the credit, so when the adjustment claim is either rejected by the IRS or found to be incorrect during an audit, the business is out the funds paid to the promoter, as well as any monies received from the ERC they were not eligible for and potential IRS fees.

Phishing and Smishing Scams: Emails, texts, phone calls. These are all popular channels for scammers trying to obtain sensitive information from taxpayers by lying and saying they work for the IRS. Please remember that the IRS will always initiate contact with taxpayers by mail.

Online Account Assistance: The IRS Online Account tool provides helpful information to taxpayers. Scammers are using this as an opportunity to learn social security numbers and other sensitive information by calling and offering to help taxpayer set up their online accounts. This can lead to identity theft and a big headache for taxpayers trying to sort everything out.

Fuel Tax Credit Promoters: Like the Employee Retention Credit promotors, Fuel Tax Credit promoters claim that the taxpayer is qualified for the credit when they may not be. These scammers usually charge a big fee to assist the taxpayer in submitting these claims.

Fake Charity Scams: Major disasters like hurricanes, floods, and wildfires can lead to an increase in counterfeit charities to dupe taxpayers. When these disasters occur, people want to help those affected. Scammers take advantage of this generosity by using fake charities as a front for stealing money and private information. Be sure to take the time to thoroughly research any organization before donating.

Shady Tax Preparers: Common warning signs of a shady tax preparer include charging a fee based on the size of the refund or refusing to sign the form as a preparer as required by law. Make sure you’re using a trusted and knowledgeable tax preparer.

Social Media Trends: While this may seem unsurprising to most, it bears repeating – you can’t always trust what you hear on the internet. Social media can circulate misinformation quickly, including ‘hacks’ for getting a bigger tax refund. These trends usually involve lying on tax forms or creating false income. The IRS reminds taxpayers that falsifying tax documents is illegal and penalties are involved.

Spearphishing Email Scams: Bad players have been sending email requests to tax preparers, and payroll and human resources teams to try and gain sensitive client and employee data like W-2 information. These requests can look like they’re from a potential new client, and the scammers then use the data they collect to submit a series of false tax refund filings and collect on the tax returns. Businesses can protect themselves with these cybersecurity tips.

Offer in Compromise Mills: Promoters target taxpayers that owe the IRS money by offering to settle their debts with the IRS at a steep discount for a fee. Many times, the targeted taxpayers don’t meet the technical requirements to obtain an offer, meaning they still owe the IRS the same amount and are paying excessive fees to these companies. Taxpayers can check their eligibility for an Offer in Compromise using this free IRS tool.

Charitable Remainder Annuity Trust Schemes: Promoters can misuse Charitable Remainder Annuity Trusts and monetized installment sales by misapplying the rules, leaving filers vulnerable. These types of schemes are often targeted at wealthy taxpayers.

Tax Avoidance Schemes: The IRS warns taxpayers to be wary of anyone claiming to reduce their taxes owed drastically or even to nothing. This could include micro-captive insurance arrangements, international accounts, and syndicated conservation easements.

Be diligent with your information, teach your employees how to recognize scams, and be sure to discuss any changes in tax strategy with your trusted tax professional. If anyone contacts you with a claim that seems too good to be true, it probably is.

 

If your business occupies substantial space and needs to increase or move from that space in the future, you should keep the rehabilitation tax credit in mind. This is especially true if you favor historic buildings.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the adjusted basis of the existing building.

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. QREs must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs with respect to the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

The Tax Cuts and Jobs Act, which was signed at the end of 2017, made some changes to the credit. Specifically, the law:

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits might be available depending on your preferences as to how a building’s energy needs will be met and where the building is located. In addition, there may be state or local tax and non-tax subsidies available.

Getting beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you do find a building that you decide you’ll buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the compliance of the project with the requirements of the credit and any other tax benefits.

© 2023

California taxpayers should note the changes made to these tax laws over the last several months. Here’s an overview of what you may have missed:

Unclaimed Property Law and CA AB 466

California law requires holders of unclaimed property to attempt to notify owners of the property regularly, to keep records of the property and to turn over the property to the State Controller’s Office after the appropriate dormancy period. Unclaimed property could be:

Under California Assembly Bill 466, the dormancy period has been set to one year for payroll accounts and three years for Securities, Accounts Receivable and Payable, and Disbursements. The law also requires businesses to review their books and records annually to determine if they have any unclaimed property to report. Keep in mind, businesses must also complete the following reporting requirements:

In addition, the State of California identifies the following filling and reporting deadlines:

Property Tax Compliance

Personal property owners in California will receive annual assessments and tax bills for the personal property based on their county or local jurisdiction laws. In order to stay in compliance with tax laws, keep these points in mind:

Pass-through Entity (PTE) Taxes

The Tax Cuts and Jobs Act limited the state tax deduction for personal income in pass-through entities to $10,000. In California, pass-through entities pay tax, and the PTE owns remain taxable on the distributive shares of income. However, the owners receive a tax credit for a share of the PTE tax. The nonrefundable tax credit can be carried forward for up to 5 years.

In order to qualify as a pass-through entity, the election must be made annually and consented to by each owner to the pass-through entity. Payments of more than $1,000 or 50% of the prior year PTE tax are due by June 15 of the current tax year, with the remaining due on March 15 of the following year. This is effective for tax years beginning January 1, 2021 or later and before January 1, 2026.

California City Business Taxes of Note

The following are business taxes that business owners should be aware of for San Francisco and Los Angeles.

Middle Class Tax Refund Tax Treatment

In late 2022 and early 2023, California issued qualified taxpayers a total of $9.2 billion in refunds of tax overpayments, called the Middle Class Tax Refund. The State of California noted these payments are not liable for state taxes previously. In February, the IRS determined that it will not challenge the tax treatment of these payments on 2022 tax filings, citing their general welfare and disaster relief exception.

Extension of Tax Filing and Payment Due Dates

Due to historically high rain, snow, and flooding in much of California, the IRS is offering disaster relief assistance in the form of due date extensions on required tax filings and payments. The new deadline for tax payments due from January through October is October 16, 2023. This includes:

For more information on the counties qualified for tax relief and what payments have been extended, please visit the IRS press release or call our team.

If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.

SEP Involves Easy Setup

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.

Contact us for more information or to discuss any other aspect of your retirement planning.

© 2023

Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. It’s a win-win!

Here are four tax advantages.

1. Shifting Business Earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $13,850 standard deduction for 2023 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

2. Claiming Income Tax Withholding Exemption

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,250 for 2023 (and includes more than $400 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

3. Saving Social Security Tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

4. Saving for Retirement

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $66,000 for 2023).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

© 2023

It’s been years since the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law, but it’s still having an impact. Several provisions in the law have expired or will expire in the next few years. One provision that took effect last year was the end of current deductibility for research and experimental (R&E) expenses.

R&E Expenses

The TCJA has affected many businesses, including manufacturers, that have significant R&E costs. Starting in 2022, Internal Revenue Code Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the United States). Previously, businesses had the option of deducting these costs immediately as current expenses.

The TCJA also expanded the types of activities that are considered R&E for purposes of IRC Sec. 174. For example, software development costs are now considered R&E expenses subject to the amortization requirement.

Potential Strategies

Businesses should consider the following strategies for minimizing the impact of these changes:

Recent IRS Guidance

For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses (Revenue Procedure 2023-11). The guidance provides a way to obtain automatic consent under the tax code to change methods of accounting for specified research or experimental expenditures under Sec. 174, as amended by the TCJA. This is important because unless there’s an exception provided under tax law, a taxpayer must secure the consent of the IRS before changing a method of accounting for federal income tax purposes.

The recent revenue procedure also provides a transition rule for taxpayers who filed a tax return on or before January 17, 2023.

Planning Ahead

We can advise you how to proceed. There have also been proposals in Congress that would eliminate the amortization requirements. However, so far, they’ve been unsuccessful. We’re monitoring legislative developments and can help adjust your tax strategies if there’s a change in the law.

© 2023

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

Facts of the Recent Case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located, and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep Meticulous Records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.

© 2023

If you’re buying or replacing a vehicle that you’ll use in your business, be aware that a heavy SUV may provide a more generous tax break this year than you’d get from a smaller vehicle. The reason has to do with how smaller business cars are depreciated for tax purposes.

Depreciation Rules

Business cars are subject to more restrictive tax depreciation rules than those that apply to other depreciable assets. Under the so-called “luxury auto” rules, depreciation deductions are artificially “capped.” Those caps also extend to the alternative deduction that a taxpayer can claim if it elects to use Section 179 expensing for all or part of the cost of a business car. (It allows you to write-off an asset in the year it’s placed in service.)

These rules include smaller trucks or vans built on truck chassis that are treated as cars. For most cars that are subject to the caps and that are first placed in service in calendar year 2023, the maximum depreciation and/or expensing deductions are:

Generally, the effect is to extend the number of years it takes to fully depreciate the vehicle.

Because of the restrictions for cars, you may be better off from a tax timing perspective if you replace your business car with a heavy SUV instead of another car. That’s because the caps on annual depreciation and expensing deductions for passenger automobiles don’t apply to trucks or vans that are rated at more than 6,000 pounds gross (loaded) vehicle weight. This includes large SUVs, many of which are priced over $50,000.

The result is that in most cases, you’ll be able to write-off a majority of the cost of a new SUV used entirely for business purposes by utilizing bonus and regular depreciation in the year you place it into service. For 2023, bonus depreciation is available at 80%, but is being phased down to zero over the next few years.

If you consider electing Section 179 expensing for all or part of the cost of an SUV, you need to know that an inflation-adjusted limit, separate from the general caps described above, applies ($28,900 for an SUV placed in service in tax years beginning in 2023, up from $27,000 for an SUV placed in service in tax years beginning in 2022). There’s also an aggregate dollar limit for all assets elected to be expensed in the year that would apply. Following the expensing election, you would then depreciate the remainder of the cost under the usual rules without regard to general annual caps.

Please note that the tax benefits described above are all subject to adjustment for non-business use. Also, if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Contact us for more details about this opportunity to get hefty tax write-offs if you buy a heavy SUV for business.

© 2023

Many people began working from home during the COVID-19 pandemic — and many still work from their home offices either all the time or on a hybrid basis. If you’re self-employed and run your business from home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expense method and the simplified method.

How to Qualify

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

Expenses You Can Deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

But keeping track of actual expenses can take time and it requires organized recordkeeping.

The Simpler Method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Changing Methods 

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2022 return, use the simplified method when you file your 2023 return next year and then switch back to the actual expense method for 2024. The choice is yours.

What if I Sell the Home?

If you sell — at a profit — a home on which you claimed home office deductions, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Different Rules for Employees

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive paychecks or Form W-2s aren’t eligible for deductions, even if they’re currently working from home because their employers closed their offices due to COVID-19.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

© 2023

The IRS has released the updated tax brackets, deductions, and credits for the 2023 tax year. While tax filing for this year won’t happen until early 2024, it’s important to pay attention to your tax rate. Strategizing now can help minimize your tax liability and maximize your income potential. Here are the updated numbers for 2023.

2023 Tax Brackets

The tax brackets for the 2023 tax year (filing in the spring of 2024) are as follows:

Tax Rate Single Filers, Married Filing Separately* Heads of Household Married Filing Jointly
10% < $11,000 <$15,700 < $22,000
12% $11,000 $15,700 $22,000
22% $44,725 $59,850 $89,450
24% $95,375 $95,350 $190,750
32% $182,100 $182,100 $364,200
35% $231,250 $231,250 $462,500
37% $578,125/$346,875* $578,100 $693,750

 

In addition to the tax brackets for 2023, taxpayers should be aware of these credits, deductions, and phase-outs.

To discuss how these updates may affect your unique tax situation or to create a tax plan for the year, please reach out to one of our knowledgeable professionals today!

Many businesses in certain industries employ individuals who receive tips as part of their compensation. These businesses include restaurants, hotels, and salons.

Tip Definition

Tips are optional payments that customers make to employees who perform services. They can be cash or noncash. Cash tips include those received directly from customers, electronically paid tips distributed to employees by employers, and tips received from other employees under tip-sharing arrangements. Generally, workers must report cash tips to their employers. Noncash tips are items of value other than cash. They may include tickets, passes, or other items that customers give employees. Workers don’t have to report noncash tips to employers.

For tax purposes, four factors determine whether a payment qualifies as a tip:

Tips can also be direct or indirect. A direct tip occurs when an employee receives it directly from a customer, even as part of a tip pool. Directly tipped employees include wait staff, bartenders and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees include bussers, service bartenders, cooks and salon shampooers.

Daily Tip Records

Tipped workers must keep daily records of the cash tips they receive. To keep track of them, they can use Form 4070A, Employee’s Daily Record of Tips. It is found in IRS Publication 1244.

Workers should also keep records of the dates and value of noncash tips. Although the IRS doesn’t require workers to report noncash tips to employers, they must report them on their tax returns.

Reporting to Employers

Employees must report tips to employers by the 10th of the month following the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include:

Note: Employees whose monthly tips are less than $20 don’t need to report them to their employers but must include them as income on their tax returns.

Employer Requirements

Employers should send each employee a Form W-2 that includes reported tips. Employers also must:

In addition, “large” food or beverage establishments must file an annual report disclosing receipts and tips on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Tip Tax Credit

If you’re an employer with tipped workers providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare taxes that you pay on employees’ tip income. The tip tax credit may be valuable to you. If you have any questions about the tax implications of tips, don’t hesitate to contact us.

© 2023

An array of tax-related limits that affect businesses are indexed annually, and due to high inflation, many have increased more than usual for 2023. Here are some that may be important to you and your business.

Social Security Tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2023 at $160,200 (up from $147,000 for 2022).

Deductions 

Retirement Plans 

Other Employee Benefits

These are only some of the tax limits and deductions that may affect your business and additional rules may apply. Contact us if you have questions.

© 2023

With the 2023 filing season deadline drawing near, be aware that the deadline for businesses to file information returns for hired workers is even closer. By January 31, 2023, employers must file these forms:

Form W-2, Wage and Tax Statement. W-2 forms show the wages paid and taxes withheld for the year for each employee. They must be provided to employees and filed with the Social Security Administration (SSA). The IRS notes that “because employees’ Social Security and Medicare benefits are computed based on information on Form W-2, it’s very important to prepare Form W-2 correctly and timely.”

Form W-3, Transmittal of Wage and Tax Statements. Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of Form W-2 to the SSA. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944 or Schedule H for the year) should agree with the amounts reported on Form W-3.

Failing to timely file or include the correct information on either the information return or statement may result in penalties.

Independent Contractors

The January 31 deadline also applies to Form 1099-NEC, Nonemployee Compensation. These forms are provided to recipients and filed with the IRS to report non-employee compensation to independent contractors.

Payers must complete Form 1099-NEC to report any payment of $600 or more to a recipient.

If the following four conditions are met, you must generally report payments as nonemployee compensation:

Your business may also have to file a Form 1099-MISC for each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services and more.

We Can Help 

If you have questions about filing Form W-2, Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

© 2023

If your small business has a retirement plan, and even if it doesn’t, you may see changes and benefits from a new law. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was recently signed into law. Provisions in the law will kick in over several years.

SECURE 2.0 is meant to build on the original SECURE Act, which was signed into law in 2019. Here are some provisions that may affect your business.

Retirement plan automatic enrollment. Under the new law, 401(k) plans will be required to automatically enroll employees when they become eligible, beginning with plan years after December 31, 2024. Employees will be permitted to opt out. The initial automatic enrollment amount would be at least 3% but not more than 10%. Then, the amount would be increased by 1% each year thereafter until it reaches at least 10%, but not more than 15%. All current 401(k) plans are grandfathered. Certain small businesses would be exempt.

Part-time worker coverage. The first SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans with a dual eligibility requirement (one year of service and at least 1,000 hours worked or three consecutive years of service with at least 500 hours worked). The new law will reduce the three-year rule to two years, beginning after December 31, 2024. This provision would also extend the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.

Employees with student loan debt. The new law will allow an employer to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” This means that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers into retirement plans. This will take effect beginning after December 31, 2023.

“Starter” 401(k) plans. The new law will allow an employer that doesn’t sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) that would require all employees to be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit with an additional $1,000 in catch-up contributions beginning at age 50. This provision takes effect beginning after December 31, 2023.

Tax credit for small employer pension plan start-up costs. The new law increases and makes several changes to the small employer pension plan start-up cost credit to incentivize businesses to establish retirement plans. This took effect for plan years after December 31, 2022.

Higher catch-up contributions for some participants. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 or older. The catch-up contribution limit for 401(k) plans is $7,500 for 2023. SECURE 2.0 will increase the 401(k) catch-up contribution limit to the greater of $10,000 or 150% of the regular catch-up amount for individuals ages 60 through 63. The increased amounts will be indexed for inflation after December 31, 2025. This provision will take effect for taxable years beginning after December 31, 2024. (There will also be increased catch-up amounts for SIMPLE plans.)

Retirement savings for military spouses. SECURE 2.0 creates a new tax credit for eligible small employers for each military spouse that begins participating in their eligible defined contribution plan. This became effective in 2023.

These are only some of the provisions in SECURE 2.0. Contact us if you have any questions about your situation.

© 2023

Please join us in congratulating Kim Spinardi, Partner at Hamilton Tharp, for being named a 2023 Rising Aztec!

Kim is one of ten SDSU alumni to earn the biennial award, which recognizes up-and-coming alumni. Recipients of this prestigious accolade are young professionals with extraordinary career achievements who are also recognized for their support of SDSU and engagement with the University and community.

Kim is a passionate supporter of the Aztec community. She is an SDSU Alumni board member and part of the Intercollegiate athletics committee. Kim mentors students through the Aztec Mentor Program (AMP) and Aztecs Going Pro. Additionally, Kim supports the university through fundraising for campus initiatives, colleges, and student organizations.

We are proud to have Kim on our team and to support SDSU in recognizing the achievements of its alumni. Congratulations, Kim, for this remarkable recognition of your endeavors. Keep up your exemplary work! Learn more about Kim and the other SDSU Alumni 2023 Rising Aztecs.

The Employee Retention Credit (ERC) was a valuable tax credit that helped employers that kept workers on staff during the height of the COVID-19 pandemic. While the credit is no longer available, eligible employers that haven’t yet claimed it might still be able to do so by filing amended payroll returns for tax years 2020 and 2021.

However, the IRS is warning employers to beware of third parties that may be advising them to claim the ERC when they don’t qualify. Some third-party “ERC mills” are promising that they can get businesses a refund without knowing anything about the employers’ situations. They’re sending emails, letters and voice mails as well as advertising on television. When businesses respond, these ERC mills are claiming many improper write-offs related to taxpayer eligibility for — and computation of — the credit.

These third parties often charge large upfront fees or a fee that’s contingent on the amount of the refund. They may not inform taxpayers that wage deductions claimed on the companies’ federal income tax returns must be reduced by the amount of the credit.

According to the IRS, if a business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. Your tax advisor can assist with this.

Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.

ERC Basics

The ERC is a refundable tax credit designed for businesses that:

Eligible taxpayers could have claimed the ERC on an original employment tax return or they can claim it on an amended return.

To be eligible for the ERC, employers must have:

As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.

How to Proceed

If you didn’t claim the ERC, and believe you’re eligible, contact us. We can advise you on how to proceed.

© 2023

The new Secure Act 2.0 legislation expands upon the Secure Act of 2019 with updates to retirement savings plans across the country. Here’s what you need to know.

Automatic Enrollment Requirements

Plan sponsors of 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a starting contribution of 3% of their salary beginning in 2025. This amount will increase annually by 1% until the deferral amount reaches 10% of their earnings. Employees can opt-out if they do not wish to enroll in the sponsored retirement plan. This goes into effect for all existing defined-contribution plans if the employer has more than 10 employees and has existed for more than three years. Government and churches are excluded.

In addition, unenrolled participant notification requirements have been eliminated except for an annual reminder of plan requirements and their opportunity to participate.

Required Minimum Distribution

Over the next 10 years, the age when required minimum distributions go into effect will increase. Here are the highlights:

For those who failed to make their required minimum contribution, the Act reduces the penalty from 50% to 25%.

Penalty-Free Early Withdrawals

Certain hardships are eligible for penalty-free early withdrawals from retirement accounts, where retirement account owners are only responsible for applicable taxes instead of the early withdrawal fee. Eligible hardships have been expanded to include victims of domestic violence, terminally ill patients, and certain personal financial emergencies. In addition, victims of qualified federal disasters who have experienced significant financial impact may take an early withdrawal without penalty within 180 days of the disaster.

Catch-up Contributions

Currently, taxpayers aged 50 or older can make catch-up contributions to eligible retirement plans, like a 401(k) or IRA. Beginning in 2025, The Secure Act 2.0 increases limits to the greater of $10,000 or 50% more than the original catch-up amount for those aged 60, 61, 62, or 63. In addition, IRA catch-up limits will no longer be set to $1,000 per year but will increase with inflation. In 2024, catch-up contributions will also be subject to after-tax (ROTH) rules.

Roth Designated Employer Contributions

The Secure Act 2.0 permits qualified 403(b) and governmental 457(b) plans to allow employees to designate employer matching, nonelective contributions, and student loan matching contributions as pre- or post-tax contributions. Take note that Roth-designated employer contributions must be 100% vested.

Part-Time Worker Eligibility

If a part-time worker has worked for an employer for at least three consecutive years and worked a minimum of 500 hours per year for those three years, the plan sponsor must allow them to contribute to qualified 401(k) plans. Effective for 401(k) and 403 (b) plans beginning after December 31, 2024, the three-year requirement has been reduced to two years.

Credit for Small Employer Retirement Plans

Beginning in 2023, businesses with 50 employees or fewer can take a credit of up to 100% of the startup costs for workplace retirement plans, up to the annual cap of $5,000. This is an increase from the 50% credit previously offered.

To review how your tax strategy is affected by the Secure Act 2.0, reach out to our team of knowledgeable professionals.

If you’re considering converting your C corporation to an S corporation, be aware that there may be tax implications if you’ve been using the last in, first out (LIFO) inventory method. That’s because of the LIFO recapture income that will be triggered by converting to S corporation status. We can meet to compute what the tax on this recapture would be and to see what planning steps might be taken to minimize it.

Inventory Reporting

As you’re aware, your corporation has been reporting a lower amount of taxable income under LIFO than it would have under the first in, first out (FIFO) method. The reason: The inventory taken into account in calculating the cost of goods sold under LIFO reflects current costs, which are usually higher.

This benefit of LIFO over FIFO is equal to the difference between the LIFO value of inventory and the higher value it would have had if the FIFO method had been used. In effect, the tax law treats this difference as though it were profit earned while the corporation was a C corporation. To make sure there’s a corporate-level tax on this amount, it must be “recaptured” into income when the corporation converts from a C corporation to an S corporation. Also, the recapture amount will increase the corporation’s earnings and profits, which can have adverse tax consequences down the road.

Soften the Blow

There are a couple of rules that soften the blow of this recapture tax to some degree.

We can help you gauge your exposure to the LIFO recapture tax and can suggest strategies for reducing it. Contact us to discuss these issues in detail.

© 2022

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have questions about filing requirements, contact us. We can ensure you’re meeting all applicable deadlines.

January 17 (The usual deadline of January 15 is on a Sunday and January 16 is a federal holiday)

January 31

February 15

Give annual information statements to recipients of certain payments you made during 2022. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments:

February 28

March 15

© 2022

If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction is:

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2022, if taxable income exceeds $170,050 for single taxpayers, or $340,100 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. For 2023, these amounts are $182,100 and $364,200, respectively.

The situations in which the QBI deduction may be limited include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in.

Year-End Planning Tip

Some taxpayers may be able to achieve significant savings with respect to this deduction (or be subject to a smaller phaseout of the deduction), by deferring income or accelerating deductions at year-end so that they come under the dollar thresholds for 2022. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so contact us with questions and consult with us before taking the next steps.

© 2022

These days, most businesses have some intangible assets. The tax treatment of these assets can be complex.

What Makes Intangibles so Complicated?

IRS regulations require the capitalization of costs to:

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an Intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

Are There Any Exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need Help or Have Questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.

© 2022

These days, most businesses buy or lease computer software to use in their operations. Or perhaps your business develops computer software to use in your products or services or sells or leases software to others. In any of these situations, you should be aware of the complex rules that determine the tax treatment of the expenses of buying, leasing or developing computer software.

Software You Buy

Some software costs are deemed to be costs of “purchased” software, meaning it’s either:

The entire cost of purchased software can be deducted in the year that it’s placed into service. The cases in which the costs are ineligible for this immediate write-off are the few instances in which 100% bonus depreciation or Section 179 small business expensing isn’t allowed, or when a taxpayer has elected out of 100% bonus depreciation and hasn’t made the election to apply Sec. 179 expensing. In those cases, the costs are amortized over the three-year period beginning with the month in which the software is placed in service. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

If you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the software cost as part of the hardware cost. Therefore, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. Additionally, if you buy the software as part of your purchase of all or a substantial part of a business, the software must generally be amortized over 15 years.

Software That’s Leased

You must deduct amounts you pay to rent leased software in the tax year they’re paid, if you’re a cash-method taxpayer, or the tax year for which the rentals are accrued, if you’re an accrual-method taxpayer. However, deductions aren’t generally permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software That’s Developed

Some software is deemed to be “developed” (designed in-house or by a contractor who isn’t at risk if the software doesn’t perform). For tax years beginning before calendar year 2022, bonus depreciation applies to developed software to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either deduct the development costs in the year paid or incurred, or choose one of several alternative amortization periods over which to deduct the costs. For tax years beginning after calendar year 2021, generally the only allowable treatment is to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change.

We Can Help

Contact us with questions or for assistance in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

© 2022

Many companies are eligible for tax write-offs for certain equipment purchases and building improvements. These write-offs can do wonders for a business’s cash flow, but whether to claim them isn’t always an easy decision. In some cases, there are advantages to following the regular depreciation rules. So it’s critical to look at the big picture and develop a strategy that aligns with your company’s overall tax-planning objectives.

Background

Taxpayers can elect to claim 100% bonus depreciation or Section 179 expensing to deduct the full cost of eligible property up front in the year it’s placed in service. Alternatively, they may spread depreciation deductions over several years or decades, depending on how the tax code classifies the property.

Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is available for property placed in service through 2022. Without further legislation, bonus depreciation will be phased down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026; then, after 2026, bonus depreciation will no longer be available. (For certain property with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.)

In March 2020, a technical correction made by the CARES Act expanded the availability of bonus depreciation. Under the correction, qualified improvement property (QIP), which includes many interior improvements to commercial buildings, is eligible for 100% bonus depreciation not only following the phaseout schedule through 2026 but also retroactively to 2018. So, taxpayers that placed QIP in service in 2018 and 2019 may have an opportunity to claim bonus depreciation by amending their returns for those years. If bonus depreciation isn’t claimed, QIP is generally depreciable on a straight-line basis over 15 years.

Sec. 179 also allows taxpayers to fully deduct the cost of eligible property, but the maximum deduction in a given year is $1 million (adjusted for inflation to $1.08 million for 2022), and the deduction is gradually phased out once a taxpayer’s qualifying expenditures exceed $2.5 million (adjusted for inflation to $2.7 million for 2022).

Examples

While 100% first-year bonus depreciation or Sec. 179 expensing can significantly lower your company’s taxable income, it’s not always a smart move. Here are three examples of situations where it may be preferable to forgo bonus depreciation or Sec. 179 expensing:

You’re planning to sell QIP. If you’ve invested heavily in building improvements that are eligible for bonus depreciation as QIP and you plan to sell the building in the near future, you may be stepping into a tax trap by claiming the QIP write-off. That’s because your gain on the sale — up to the amount of bonus depreciation or Sec. 179 deductions you’ve claimed — will be treated as “recaptured” depreciation that’s taxable at ordinary-income tax rates as high as 37%. On the other hand, if you deduct the cost of QIP under regular depreciation rules (generally, over 15 years), any long-term gain attributable to those deductions will be taxable at a top rate of 25% upon the building’s sale.

You’re eligible for the Sec. 199A “pass-through” deduction. This deduction allows eligible business owners to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities, such as partnerships, limited liability companies and S corporations, as well as sole proprietorships. The deduction, which is available through 2025 under the TCJA, can’t exceed 20% of an owner’s taxable income, excluding net capital gains. (Several other restrictions apply.)

Claiming bonus depreciation or Sec. 179 deductions reduces your QBI, which may deprive you of an opportunity to maximize the 199A deduction. And since the 199A deduction is scheduled to expire in 2025, it makes sense to take advantage of it while you can.

Your depreciation deductions may be more valuable in the future. The value of a deduction is based on its ability to reduce your tax bill. If you think your tax rate will go up in the coming years, either because you believe Congress will increase rates or you expect to be in a higher bracket, depreciation write-offs may be worth more in future years than they are now.

Timing is Everything

Keep in mind that forgoing bonus depreciation or Sec. 179 deductions only affects the timing of those deductions. You’ll still have an opportunity to write off the full cost of eligible assets; it will just be over a longer time period. Your tax advisor can analyze how these write-offs interact with other tax benefits and help you determine the optimal strategy for your situation.

©2022

If you need to hire, be aware of a valuable tax credit for employers hiring individuals from one or more targeted groups. The Work Opportunity Tax Credit (WOTC) is generally worth $2,400 for each eligible employee but can be worth more — in some cases, much more.

Targeted Groups

Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:

Employer Eligibility and Requirements

Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Taxable employers can claim the WOTC against income taxes. However, eligible tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.

Many additional conditions must be fulfilled before employers can qualify for the credit. Each employee must have completed a minimum of 120 hours of service for the employer. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer.

Credit Amounts

WOTC amounts differ for specific employees. The maximum credit available for the first year’s wages generally is $2,400 for each employee, or $4,000 for a recipient of long-term family assistance. In addition, for those receiving long-term family assistance, there’s a 50% credit for up to $10,000 of second-year wages. The maximum credit available over two years for these employees is $9,000 ($4,000 for Year 1 and $5,000 for Year 2).

For some veterans, the maximum WOTC is higher: $4,800 for certain disabled veterans, $5,600 for certain unemployed veterans, and $9,600 for certain veterans who are both disabled and unemployed.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth is $1,200 per employee.

Worth Pursuing

Additional rules and requirements apply. For example, you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work. And in limited circumstances, the rules may prohibit the credit or require an allocation of it.

Nevertheless, for most employers that hire from targeted groups, the credit can be valuable. Contact your tax advisor with questions or for more information about your situation.

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Throughout the year, the Federal Emergency Management Agency (FEMA) will designate incidents that adversely affect residents in the affected areas as disasters. This FEMA designation puts relief efforts in motion, both short and long-term.

While immediate needs like food, water, and shelter are at the top of the list, long-term efforts, like relief options through the IRS, aim to help those affected get back on their feet.

What Does the IRS Do in the Event of a Disaster?

In the past, the Senate was required to vote every time the IRS wanted to grant disaster relief provisions to FEMA-designated disaster areas. Now, the IRS can give disaster relief by extending deadlines for “certain time-sensitive acts.” This includes filing returns and paying taxes during the disaster period. For example, affected taxpayers usually receive a tax refund more quickly by “claiming losses related to the disaster on the tax return for the previous year.”

Preparing for a Disaster

While in some areas of the country, disaster preparedness feels more like a what-if scenario, other parts of the country are all-too-familiar with preparing for floods, wildfires, and tornados. The IRS recommends:

Recovering After a Disaster

Suppose you or your business have gone through a natural disaster, and you cannot access your original tax documents. In that case, the IRS recommends the following resources for obtaining important financial information when you are ready:

Current Disaster Areas

The IRS keeps a list of current and past disaster relief offered on its website. Some of the more recent disaster-related tax relief programs include:

We recommend talking with your tax advisor and visiting the IRS Disaster Relief Website for a comprehensive list.

If you’re thinking about selling your home, it’s important to determine whether you qualify for the home sale gain exclusion. The exclusion is one of the most generous tax breaks in the tax code, so be sure to review its requirements before you sell.

Exclusion Requirements

Ordinarily, when you sell real estate or other capital assets that you’ve owned for more than one year, your profit is taxable at long-term capital gains rates of 15% or 20%, depending on your tax bracket. High-income taxpayers may also be subject to an additional 3.8% net investment income (NII) tax. If you’re selling your principal residence, however, the home sale gain exclusion may allow you to avoid tax on up to $250,000 in profit for single filers and up to $500,000 for married couples filing jointly.

Don’t assume that you’re eligible for this tax break just because you’re selling your principal residence. If you’re a single filer, to qualify for the exclusion, you must have owned and used the home as your principal residence for at least 24 months of the five-year period ending on the sale date.

If you’re married filing jointly, then both you and your spouse must have lived in the home as your principal residence for 24 months of the preceding five years and at least one of you must have owned it for 24 months of the preceding five years. Special eligibility rules apply to people who become unable to care for themselves, couples who divorce or separate, military personnel, and widowed taxpayers.

Limitations Apply

You can’t use the exclusion more than once in a two-year period, even if you otherwise meet the requirements. Also, if you convert an ineligible residence into a principal residence and live in it for 24 months or more, only a portion of your gain will qualify for the exclusion.

For example, John is single and has owned a home for five years, using it as a vacation home for the first three years and as his principal residence for the last two. If he sells the home for a $300,000 gain, only 40% of his gain ($120,000) qualifies for the exclusion, and the remaining $180,000 is taxable. (Note: Nonqualified use prior to 2009 doesn’t reduce the exclusion).

Partial Exclusion

What if you sell your home before you meet the 24-month threshold due to a work- or health-related move, or certain other unforeseen circumstances? You may qualify for a partial exclusion.

For example, Paul and Linda bought a home in California for $1 million. One year later, Paul’s employer transferred him to its New York office, so the couple sold the home for $1.2 million. Paul and Linda didn’t meet the 24-month threshold but, because they sold the home due to a work-related move, they qualified for a partial exclusion of 12 months/24 months, or 50%.

Note that the 50% reduction applied to the exclusion, not to the couple’s gain. Thus, their exclusion was reduced to 50% of $500,000, or $250,000, which shielded their entire $200,000 gain from tax.

Crunch the Numbers

Before you sell your principal residence, determine the amount of your home sale gain exclusion and your expected gain (selling price less adjusted cost basis). Keep in mind that your cost basis is increased by the cost of certain improvements and other expenses, which in turn reduces your gain. Also, be aware that capital gains attributable to depreciation deductions (for a home office, for example) will be taxable regardless of the home sale gain exclusion.

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Do you own commercial or investment real estate that has substantially increased in value? If you sell the property, you may be hit with a huge capital gain tax liability. Possible solution: Consider a Section 1031 exchange (also known as a like-kind exchange) in which you swap qualifying properties while paying zero or little current tax.

Recent legislation has narrowed the availability of Sec. 1031 exchanges, but you can still use this technique for qualified real estate transactions. However, keep in mind that a repeal or modification of the rules has been discussed. So, if you’re interested in an exchange, you may want to act soon.

What’s the Deal?

Under Sec. 1031 of the Internal Revenue Code, you can defer tax on the exchange of like-kind real estate properties if specific requirements are met. Previously, this tax break was available for various types of property, such as trade-ins of business vehicles. But as of 2018, the Tax Cuts and Jobs Act strictly limits the Sec. 1031 rules to real estate transactions.

Note that the properties — both the one you relinquish and the one you receive — must be business or investment properties. You can’t avoid current tax if you swap personal residences, but you may be able to exchange a vacation home that is treated as a rental property. (There may be other complications, so consult with your tax advisor.)

Normally, a sale of appreciated real estate would result in capital gains tax. For individual property owners, the maximum tax rate is 20% if the property has been owned for longer than one year. Otherwise, the gain for individuals is taxed at ordinary income tax rates currently topping out at 37%.

If you meet the requirements under Sec. 1031, there’s no current tax due on the exchange — except to the extent that you receive “boot” as part of the deal. Boot includes cash needed to “even things out” or other concessions of value (such as a reduction of mortgage debt). In some cases, cash may be combined with a valued benefit.

If you receive boot, you owe current tax on the amount equal to the lesser of:

On the other hand, if you’re the one paying boot, you won’t realize any taxable gain.

What Are the Requirements?

For these purposes, “like-kind” refers to the property’s nature or character. The prevailing tax regulations provide a liberal interpretation of what constitutes like-kind properties. For instance, you can exchange improved real estate for raw land, a strip mall for an apartment building or a marina for a golf course. It doesn’t have to be the exact same type of property (for example, a warehouse for a warehouse).

Timing is everything. The following two deadlines must be met for a like-kind exchange to qualify for tax-free treatment:

The 180-day period begins to run on the date of the transfer of legal ownership of the relinquished property. If that period straddles two tax years, it might be shortened by the tax return due date. So, if you give up title to the property in November or December this year, the due date for 2022 returns (April 18, 2023) would arrive before 180 days are up. Keep this in mind as the end of the year approaches.

Also, in the real world, it’s unlikely that you’ll own property that another person wants to acquire while he or she also owns property that you desire. These one-for-one exchanges are rare. The vast majority of Sec. 1031 real estate exchanges involve multiple parties. (See the sidebar, “Multiple-party exchanges.”)

Who Can Help?

Unless you’re an expert in the field, a Sec. 1031 exchange is not a do-it-yourself proposition. Enlist the services of professionals, including your CPA, who can provide the assistance you need.

Sidebar: Multiple-Party Exchanges

Depending on your situation, you might use a “qualified intermediary” to cement a Section 1031 exchange. Essentially, the qualified intermediary is a third party that helps facilitate the deal. The parties create an agreement whereby the qualified intermediary:

Note that the agreement must limit the taxpayer’s rights to receive, pledge, borrow or otherwise obtain benefits of cash or other property held by the intermediary. In addition, specific IRS reporting requirements must be met. Typically, the intermediary charges a fee based on the value of the properties.

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Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.

Here are examples of two types of benefits which employees generally can exclude from income:

However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.

Court Case Provides Lessons

The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.

A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter, and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.

The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.

The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)

You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.

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You and your small business are likely to incur a variety of local transportation costs each year. There are various tax implications for these expenses.

First, what is “local transportation?” It refers to travel in which you aren’t away from your tax home (the city or general area in which your main place of business is located) long enough to require sleep or rest. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest in order to do your work.

Costs of Traveling to Your Work Location

The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive simply to get to work and home again are personal and not business miles. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone, or by performing business-related tasks while on the subway).

An exception applies for commuting to a temporary work location that’s outside of the metropolitan area in which you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does in fact last) for no more than a year.

Costs of Traveling From Work Location to Other Sites

On the other hand, once you get to the work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the costs of traveling between them is deductible.

Recordkeeping

If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook. Record the date, amount spent, destination, and business purpose. If you use your own car, note miles driven instead of the amount spent. Note also any tolls paid or parking fees and keep receipts.

You’ll need to allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.

Your deduction can be computed using:

Employees Versus Self-Employed

From 2018 – 2025, employees, may not deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — a category that includes employee business expenses — are suspended (not allowed) for 2018 through 2025. However, self-employed taxpayers can deduct the expenses discussed in this article. But beginning with 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income.

Contact us with any questions or to discuss the matter further.

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IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well.

From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations, and high-income individuals are more likely to be audited, but overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all records in one place.

Audit Targets

It also helps to know what might catch the attention of the IRS. Certain types of tax-return entries are known to involve inaccuracies, so they may lead to an audit. Here are a few examples:

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee’s salary that’s much higher or lower than those at similar companies in his or her location may catch the IRS’s eye, especially if the business is structured as a corporation.

If You Receive a Letter

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve claimed. Only the strictest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited emails or text messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

The tax agency doesn’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. Collect and organize all relevant income and expense records. If anything is missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If you’re audited, our firm can help you:

The IRS normally has three years within which to conduct an audit, and an audit probably won’t begin until a year or more after you file a return. Don’t panic if the IRS contacts you. Many audits are routine. By taking a meticulous, proactive approach to tracking, documenting and filing your company’s tax-related information, you’ll make an audit less painful and even decrease the chances you’ll be chosen in the first place.

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Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability, and estate planning advantages of separating real estate ownership from the business.

Tax Implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protectin Assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate Planning Options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the Transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed Cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

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Tax deadlines seem to sneak up on some people. Maybe you’re busy handling other business or personal matters, or perhaps you’re waiting on one last piece of information before calling your tax advisor for an appointment. Our clients know that we do everything in our power to get their tax returns filed on time but getting your paperwork to us early offers several benefits.

Let’s take a look at those benefits now.

Mistakes Are Less Likely to Happen

At Hamilton Tharp, we work hard to ensure every tax return that goes out the door is accurate and error-free. But it’s human nature that mistakes happen when people work long hours and rush to get work done before a deadline.

Hopefully, reviewers catch those mistakes before the tax return is sent to the client for review. But in the worst-case scenario, an error escapes notice until after the return has been filed, and we need to amend the return.

Getting your paperwork in early ensures our preparers and reviewers have the time and energy to do their jobs to the best of their abilities.

You Avoid IRS Notices

IRS notices are never fun to deal with, and they’re especially bothersome when they’re entirely avoidable.

For example, say you had less than $10 of interest income from a savings account in the prior year, but you don’t include the 1099-INT with your tax documents this year. Since your tax preparer is up against a deadline, they mistakenly assume you closed the account or didn’t earn any interest from it.

In fact, the balance in your account was significantly higher this year, and you earned more interest but forgot to download the tax form. As a result, you receive a notice from the IRS requesting you to pay the additional tax owed, plus interest and penalties.

If the preparer had more time, they would follow up on the missing 1099-INT to ensure it’s not overlooked.

You Have What You Need to Fill Out the Free Application for Federal Student Aid (FAFSA)

If you have college-age children, you’re likely familiar with the FAFSA. The FAFSA filing season opens each year on October 1. If you file your return by the April 15 deadline (or shortly thereafter), you have the tax information you need to submit your FAFSA early.

Clients sometimes run into issues when they go on extension, then put off getting us the information needed to complete and file their return until just before the October 15 extended deadline. Even if we can get your tax return filed quickly, there’s no guarantee that the IRS will process it, which can cause problems with your FAFSA if the U.S. Department of Education selects your application for verification.

Thwart Identity Thieves

Tax-related identity theft—where thieves use a victim’s Social Security number (SSN) to file a fraudulent return and claim a tax refund—is a growing problem. Often, the first indication a client has that their identity has been stolen is having their e-filed tax return rejected because someone else has already filed using their SSN.

Getting your tax documents to us early helps us file your tax returns before identity thieves have a chance. This also helps us avoid the last-minute scramble of getting signatures to file a paper return.

If you’re waiting on one last K-1, 1099, or another tax document, we recommend giving us what you have rather than waiting until you have everything. It’s much easier for us to get your return 99% complete early in the year and finalize it later than to get a pile of tax documents a week before the filing deadline.

It’s our goal to take the pain and stress of tax season off our client’s shoulders, and you can help us—by getting your paperwork to your tax advisor early. If you need help figuring out what documents you need or have another tax question, reach out to a Hamilton Tharp advisor.