With school out, you might be hiring your child to work at your company. In addition to giving your son or daughter some business knowledge, you and your child could reap some tax advantages.

Benefits For Your Child

There are special tax breaks for hiring your offspring if you operate your business as one of the following:

These entities can hire an owner’s under-age-18 children as full- or part-time employees. The children’s wages then will be exempt from the following federal payroll taxes:

In addition, your dependent employee-child’s standard deduction can shelter from federal income tax up to $14,600 of 2024 wages from your business.

Benefits For Your Business

When hiring your child, you get a business tax deduction for employee wage expense. The deduction reduces your federal income tax bill, your self-employment tax bill and your state income tax bill, if applicable.

Note: There are different rules for corporations. If you operate as a C or S corporation, your child’s wages are subject to Social Security, Medicare and FUTA taxes, like any other employee’s. However, you can deduct your child’s wages as a business expense on your corporation’s tax return, and your child can shelter the wages from federal income tax with the $14,600 standard deduction for single filers.

Traditional and Roth IRAs

No matter what type of business you operate, your child can contribute to an IRA or Roth IRA. With a Roth IRA, contributions are made with after-tax dollars. So, taxes are paid on the front end. After age 59½, the contributions and earnings that have accumulated in the account can be withdrawn free from federal income tax if the account has been open for more than five years.

In contrast, contributions to a traditional IRA are deductible, subject to income limits. So, unlike Roth contributions, deductible contributions to a traditional IRA lower the employee-child’s taxable income.

However, contributing to a Roth IRA is usually a much better idea for a young person than contributing to a traditional IRA for several reasons. Notably, your child probably won’t get any meaningful write-offs from contributing to a traditional IRA because the child’s standard deduction will shelter up to $14,600 of 2024 earned income. Any additional income will likely be taxed at very low rates.

In addition, your child can withdraw all or part of the annual Roth contributions — without any federal income tax or penalty — to pay for college or for any other reason. Of course, even though your child can withdraw Roth contributions without adverse tax consequences, the best strategy is to leave as much of the Roth balance as possible untouched until retirement to accumulate a larger tax-free sum.

The only tax law requirement for your child when making an annual Roth IRA contribution is having earned income for the year that at least equals what’s contributed for that year. There’s no age restriction. For the 2024 tax year, your child can contribute to an IRA or Roth IRA the lesser of:

Making modest Roth contributions can add up over time. For example, suppose your child contributes $1,000 to a Roth IRA each year for four years. The Roth account would be worth about $32,000 in 45 years when he or she is ready to retire, assuming a 5% annual rate of return. If you assume an 8% return, the account would be worth more than three times that amount.

Caveats

Hiring your child can be a tax-smart idea. However, your child’s wages must be reasonable for the work performed. Be sure to maintain the same records as you would for other employees to substantiate the hours worked and duties performed. These include timesheets, job descriptions and W-2 forms. Contact us with any questions you have about employing your child at your small business.

© 2024

Now is an excellent time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum estimated tax amount without triggering the penalty for underpayment of estimated tax.

Four Possible Options

The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under one of the following four methods:

Also, note that a corporation can switch among the four methods during a given tax year.

We can examine whether your corporation’s tax bill can be reduced. If you’d like to discuss this matter further, contact us.

 

© 2024

Navigating through various financial strategies is essential for any business owner aiming to enhance profitability and ensure sustainable growth. These financial benefits, offered by state governments, are designed to spur economic development and encourage investments within their jurisdictions. By leveraging such incentives, businesses can significantly reduce their tax liabilities, enhance cash flow, and optimize their financial strategy.

What Are State Tax Credits and Incentives?

State tax credits and incentives are reductions in tax obligations provided by states to businesses that meet specific criteria. These can range from credits for job creation and investment in some geographic regions to incentives for implementing green initiatives or investing in new technology. Unlike deductions, which reduce the amount of income subject to tax, credits directly decrease the tax owed, often making them more valuable.

A typical scenario where a business might receive a state tax credit is through job creation incentives. For example, a company that expands its workforce might qualify for credits designed to encourage employment growth within the state. These credits often provide a direct offset against the business’s tax liability for each new job created under specific conditions such as salary levels and full-time status, aiming to stimulate local economic growth and reduce unemployment.

Why Prioritize State Tax Credits and Incentives?

Reduced Tax Liability: One of the most immediate benefits of utilizing state tax credits and incentives is the potential reduction in tax liability. This helps improve your business’s bottom line and frees up resources that can be reinvested into the industry.

Enhanced Cash Flow: Many state tax incentives are refundable, which means they can provide cash refunds to businesses even if they owe no tax. This injection of cash can be crucial for funding operations, expansion, or new investments.

Strategic Business Growth: By taking advantage of incentives related to expansion or relocation, businesses can strategically position themselves in markets that offer the most economic benefit while minimizing costs.

Navigating the Complexity

Determining whether your business qualifies for specific state tax credits involves understanding the various criteria set by state laws. Typical qualifications include investing in property, creating jobs, or engaging in business activities such as research and development. Since these incentives vary widely from state to state and year to year, staying informed about the latest opportunities and legislative changes is vital.

Claiming these incentives can be complex, involving stringent compliance and reporting requirements. Additionally, the timing of claiming these credits is often critical, with many having specific filing deadlines or caps on the amount that can be claimed.

Given the complexities associated with state tax credits and incentives, consulting with a Certified Public Accountant (CPA) knowledgeable about tax law and the specifics of these incentives is crucial. A CPA can help you:

Final Thoughts

State tax credits and incentives represent a significant opportunity for business owners to reduce costs and enhance profitability. These financial tools can catalyze business growth and success with the right approach and professional guidance. As you consider your business’s financial planning and strategic direction, evaluating potential state tax credits and incentives with the help of a qualified CPA can provide a competitive edge and help ensure that your business thrives in an ever-evolving economic landscape.

The IRS recently released guidance providing the 2025 inflation-adjusted Health Savings Accounts (HSAs) amounts. These amounts are adjusted each year based on inflation, and the adjustments are announced earlier than other inflation-adjusted amounts, allowing employers to prepare for the next year.

Fundamentals of HSAs

An HSA is a trust created or organized exclusively to pay the qualified medical expenses of an account beneficiary. An HSA can only be established to benefit an eligible individual covered under a high-deductible health plan (HDHP). 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 contribution 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 2025

In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300, and for an individual with family coverage, it will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024.

In addition, for 2024 and 2025, there’s a $1,000 catch-up contribution amount for those age 55 or older by the end of the tax year.

High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024).

Heath Reimbursement Arrangements

The IRS also announced an inflation-adjusted Health Reimbursement Arrangements (HRAs) amount. An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements for eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024).

Collect the Benefits

There are a variety of benefits to HSAs that employers and employees appreciate. 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. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us.

© 2024

Navigating the complexities of business ownership requires a keen understanding of financial planning. A comprehensive financial plan is more than just a set of documents; it’s a roadmap that guides your business through the ever-changing landscape of commerce, helping to steer day-to-day decisions and long-term strategies. 

Essential Components of Financial Planning 

Efficient cash management is foundational to a business’s financial health. A robust financial plan helps you establish budgets that accommodate short-term operational needs while aligning with long-term financial goals. This dual focus prevents common pitfalls such as inadequate cash reserves to make payroll or take advantage of supplier bulk purchase discounts. 

Strategic Investment for Long-Term Growth 

It’s easy to get caught up in the immediacy of daily business challenges. However, a forward-looking financial plan shifts some of your focus to the future, enabling you to make informed investments in your business’s growth. This might involve expanding your physical space, investing in new technology, or enhancing your marketing efforts to outpace competitors. 

Optimizing Expenditures and Resources 

Through financial planning, businesses can identify critical expenditures that yield immediate improvements in efficiency and profitability. This prioritization helps allocate resources more effectively, ensuring that investments are made in areas that provide the most significant returns, thereby enhancing the overall financial stability of the business. 

Monitoring Progress and Adjusting Strategies 

A well-crafted financial plan allows business owners to set quantifiable targets and measure actual performance against these benchmarks. This ongoing evaluation helps recognize successful initiatives and identify areas needing adjustment. For instance, an increase in advertising spending should correlate with an uptick in sales, providing a clear picture of your marketing strategies’ effectiveness. 

Facilitating Access to Capital 

A detailed financial plan is invaluable in scenarios where external financing is required. Lenders and investors are more likely to engage with businesses that demonstrate a clear understanding of their financial trajectory and the capability to manage finances effectively. A solid financial plan enhances your credibility and increases the likelihood of securing the necessary funding. 

Managing Risks and Enhancing Profitability 

Financial planning is crucial in risk management, effectively preparing businesses to handle uncertainties. Whether it’s an economic downturn or a sudden market shift, a financial plan helps you navigate potential challenges without jeopardizing your business’s stability. 

The Value of Professional Advice 

While the benefits of financial planning are vast, the complexity of creating and implementing an effective plan suggests the importance of professional guidance. Partnering with a Certified Public Accountant (CPA) who understands your business sector can provide you with insights and strategies tailored to your specific needs. These professionals help refine your financial plan to ensure that it meets current regulatory and economic conditions and positions your business for success in the future. 

In sum, a strategic financial plan is not just about keeping your business afloat; it’s about setting the stage for prosperity and growth. It empowers you to make smarter decisions, optimize cash flow, and achieve your business aspirations with confidence. 

 

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

Asset Purchase Tax Basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset Purchase Results With a Pass-Through Entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset Purchase Results With a C Corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.

A Tax-Smart Purchase Price Allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
Assets that can be depreciated relatively quickly (such as furniture and equipment), and
Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.
You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan Ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.

© 2024

Choosing the right business entity has many implications, including the amount of your tax bill. The most common business structures are sole proprietorships, partnerships, limited liability companies, C corporations and S corporations.

In some cases, a business may decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.

Here are four considerations:

1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

Other Issues to Explore

These are only some of the factors to consider when switching a business from C to S status. For example, shareholder-employees of S corporations can’t get all the tax-free fringe benefits that are available as a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors must be taken into account in order to understand the implications of converting from C to S status.

If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes.

© 2024

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

Tax Rate Considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-Party Debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.

When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.

Owner Debt

If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.

An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.

An Example to Illustrate

Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.

This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.

This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings.

© 2024

There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in your partnership interests is sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your basis to zero.

More Complex Than It Seems

Although adding a new partner may appear to be simple, it’s important to plan the new person’s entry properly to avoid various tax problems. Here are two issues to consider:

The upshot of these rules is that the new partner must be allocated a portion of the depreciation equal to his or her share of the depreciable property based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other outcome is that the built-in gain or loss on the partnership assets must be allocated to the current partners when the partnership assets are sold. The rules that apply in this area are complex, and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.

Follow Your Basis

When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s important to keep proper track of your basis because it can have an impact on these areas:

We Can Help

Contact us if you’d like assistance in dealing with these issues or any other issues that may arise in connection with your partnership.

© 2024

Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to?

One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.

If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial.

To Fast-Track Income

Consider these options if you want to accelerate revenue recognition into the current tax year:

To Postpone Deductions

Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:

Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation.

© 2024

Navigating the realm of capital gains and optimizing tax outcomes require strategic thinking and informed decision-making. Understanding and employing effective capital gains tax strategies is crucial for businesses contemplating asset sales or long-term investments. However, it’s important to note that every business situation is unique, and leveraging the expertise of a Certified Public Accountant (CPA) is advisable for tailored tax planning and advice.

Understanding Capital Gains in Business

Capital gains typically arise from selling an asset at a price higher than its purchase price. For small to medium-sized businesses, these gains can manifest in several common scenarios:

Strategic Holding Periods

One fundamental strategy to manage capital gains involves the consideration of asset-holding periods. Long-term capital gains, typically from assets held for more than a year, are taxed at a lower rate than short-term gains from assets sold within a year of purchase. Planning the sale of assets to qualify for long-term capital gains tax rates can result in considerable tax savings.

Opportunity Zone Investments

Investing in designated Opportunity Zones offers another avenue for capital gains tax advantages. These investments encourage economic development in low-income areas, providing tax benefits such as deferral of capital gains taxes, potential reduction of the taxable amount, and, if held for at least 10 years, elimination of taxes on future appreciation of the Opportunity Zone investment. This strategy supports tax optimization and contributes to meaningful social impact.

Utilizing 1031 Exchanges

For real estate investments, 1031 exchanges present a valuable strategy for deferring capital gains taxes. By reinvesting the proceeds from the sale of real estate into another property, businesses can defer the recognition of capital gains, thereby postponing tax liabilities. This tool is particularly useful for real estate investors looking to reinvest and grow their portfolios without the immediate tax burden.

Timing Asset Sales and Investments

The timing of asset sales and investments is crucial in managing capital gains and associated taxes. Monitoring market conditions and projecting future tax rate changes can guide strategic decision-making. Selling assets in a year when the business expects lower overall income may result in a lower tax rate on capital gains. Conversely, delaying asset sales or accelerating investment expenses can defer tax liabilities and improve cash flow in the short term.

Consulting with a CPA

Given the complexity of tax laws and the uniqueness of each business scenario, consulting with a CPA is invaluable. Tax professionals can provide personalized advice, ensuring compliance while optimizing tax strategies tailored to the business’s goals and circumstances. They can offer insights into current tax regulations, potential legislative changes, and their implications for your business strategy.

Managing capital gains effectively requires a multifaceted approach, incorporating strategic planning, understanding tax laws, and timely decision-making. Employing strategies such as optimizing asset holding periods, investing in Opportunity Zones, leveraging 1031 exchanges, and carefully timing asset sales can significantly impact a business’s tax liabilities and financial growth. Remember, each business’s situation is distinct, and professional advice from a CPA is essential to successfully navigate the complexities of capital gains tax planning.

If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000).

Other Possibilities

There are more small business retirement plan options, including:

Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older.

Watch the Calendar

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.

For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year.

While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning, and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that if your business has employees, you may have to make contributions for them, too.

© 2024

If you operate a business, or you’re starting a new one, you know records of income and expenses need to be kept. Specifically, you should carefully record expenses to claim all the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.

Be aware that there’s no one way to keep business records. On its website, the IRS states: “You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” But there are strict rules when it comes to deducting legitimate expenses for tax purposes. And certain types of expenses, such as automobile, travel, meal and home office costs, require extra attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

Ordinary and Necessary

A business expense can be deducted if a taxpayer establishes that the primary objective of the activity is making a profit. To be deductible, a business expense must be “ordinary and necessary.” In one recent case, a married couple claimed business deductions that the IRS and the U.S. Tax Court mostly disallowed. The reasons: The expenses were found to be personal in nature and the taxpayers didn’t have adequate records for them.

In the case, the husband was a salaried executive. With his wife, he started a separate business as an S corporation. His sideline business identified new markets for chemical producers and connected them with potential customers. The couple’s two sons began working for the business when they were in high school.

The couple then formed a separate C corporation that engaged in marketing. For some of the years in question, the taxpayers reported the income and expenses of the businesses on their joint tax returns. The businesses conducted meetings at properties the family owned (and resided in) and paid the couple rent for the meetings.

The IRS selected the couple’s returns for audit. Among the deductions the IRS and the Tax Court disallowed:

Retirement Plan Deductions Allowed

The couple did prevail on deductions for contributions to 401(k) accounts for their sons. The IRS contended that the sons weren’t employees during one year in which contributions were made for them. However, the court found that 401(k) plan documents did mention the sons working in the business and the father “credibly recounted assigning them research tasks and overseeing their work while they were in school.” Thus, the court ruled the taxpayers were entitled to the retirement plan deductions. (TC Memo 2023-140)

Lessons Learned

As this case illustrates, a business can’t deduct personal expenses, and scrupulous records are critical. Make sure to use your business bank account for business purposes only. In addition, maintain meticulous records to help prepare your tax returns and prove deductible business expenses in the event of an IRS audit.

Contact us if you have questions about retaining adequate business records.

© 2024

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. 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.

April 15

April 30

May 10

May 15

June 17

© 2024

Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 Deduction Basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction.

Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.

The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus Depreciation Basics

Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. Bonus Depreciation

The current Sec. 179 deduction rules are generous, but there are several limitations:

First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage Tax Breaks

As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have.

© 2024

If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses.

However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Fair Market Value

Here are some examples of an exchange of services:

In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

In addition, if services are exchanged for property, income is realized. For example:

Joining a Club

Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.

Tax Reporting

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Exchanging Without Exchanging Money

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information.

© 2024

For many business owners, taxes often represent a hurdle to clear rather than a strategic asset to leverage. However, those who look beyond mere compliance can unlock the transformative power of tax planning as a key driver for sustainable business growth. Rather than viewing tax as a static annual obligation, repositioning it as a dynamic component of your business strategy can substantially impact your bottom line. Effective tax planning goes beyond preparing for tax season; it integrates with your company’s financial decision-making process, influencing everything from cash flow management to long-term investment strategies. This article outlines practical steps for business owners to harness tax planning effectively in their growth strategies.

Comprehensive Tax Analysis

Initiate your tax strategy by comprehensively analyzing your company’s financial situation. Assess all aspects—revenue, expenses, investments, and potential risks—to understand your tax obligations. Engaging with financial advisors to conduct this analysis can uncover valuable tax-saving opportunities that align with your business growth plans.

Tax Strategy and Business Goals Alignment

Ensure that your tax strategies are in sync with your business objectives. If expansion or capital investments are on the horizon, tailor your tax approach to support these aims. This could involve tax planning methods like income deferral or identifying deductions that can be claimed to reduce taxable income, thereby aligning with your business’s future financial goals.

Tax Credits and Incentives Utilization

Stay informed about tax credits and incentives that could benefit your business. Regularly review government offerings for R&D, environmental initiatives, or employment practices, and consider how to integrate these into your tax planning effectively. Consult with tax professionals to apply these credits in the most advantageous ways for your business.

Income and Expense Timing

The timing of income recognition and expense incurrence is crucial. Make informed decisions about when to realize income and incur expenses to manage your tax liabilities effectively. Adjusting the timing can lead to a more favorable tax position and improved cash flow, aiding reinvestment in your business.

Technology Investment for Tax Planning

Invest in technology to enhance your tax planning and business management processes. Accounting software and automation tools can provide accurate, real-time data, allowing for better financial decisions. This technological support is essential for maintaining efficiency and compliance with tax obligations.

Strategic Employee Compensation

Review your compensation strategies to optimize tax outcomes for the business and employees. Consider various compensation models, such as deferred compensation plans or other fringe benefits, which may offer tax advantages while supporting your talent acquisition and retention objectives.

Retirement Planning for Owners and Succession

Business owners should view retirement planning as a component of the company’s tax strategy. Structuring retirement savings tax-efficiently benefits both the individual’s and the business’s future. This planning also involves considering the tax implications of business succession and transition.

Tax planning is more than compliance; it’s a critical element of a sustainable business strategy. While navigating through these areas, it’s essential to maintain a forward-thinking approach, utilize available resources, and continuously adapt to changing tax laws. Before implementing any tax-related changes, consult a CPA to ensure the strategies are appropriate and beneficial for your business’s unique context. This careful and informed approach to tax planning will support your business’s growth and stability over the long term.

With lease accounting standards ASC 842 and IFRS 16 in place for several years, private businesses have navigated a significant shift in how lease obligations are reported on the balance sheet. Now is an opportune moment to assess the practical impacts of these changes on companies and explore the latest updates to these standards.

The Initial Shift: Balance Sheet Transformations

Previously, operating leases were conveniently tucked away in the footnotes of financial statements. They take center stage on the balance sheet as both a right-of-use asset and a lease liability. This accounting makeover affects a company’s debt-to-equity ratio, working capital, and financial health. Suddenly, businesses have seen their liabilities swell, presenting a new challenge to stakeholders interpreting balance sheet health.

Implementing ASC 842 and IFRS 16: A Closer Look

Upon implementation, private companies had to start recognizing nearly all leases on the balance sheet, recording them as right-of-use assets with a corresponding liability. For many, this was a departure from past practices, necessitating a meticulous review of contracts and commitments that had been, until then, off the books.

The lease liability reflects the present value of future lease payments, significantly affecting reported debt levels. Concurrently, the right-of-use asset has to be depreciated over the lease term, impacting the balance sheet and the income statement. The net result? Increased assets and liabilities can skew financial ratios and potentially trip debt covenants.

Challenges and Opportunities

The most immediate challenge was the data-intensive requirements of the new standards. Companies needed to gather extensive details on every lease, a process often marred by decentralized data and varying documentation quality. Accounting complexity skyrocketed, especially in recognizing and measuring lease components and understanding the impact on financial covenants.

Yet, there are opportunities amidst these challenges. The enhanced transparency can improve stakeholder trust and provide a clearer picture of long-term financial commitments. It also allows for more strategic decision-making regarding leasing versus buying and can even catalyze renegotiating terms with lessors.

Recent Updates: Continuing to Adapt

Accounting bodies have responded to the feedback from the business community with amendments aimed at simplifying certain aspects of lease accounting. For example, recent updates offer practical expedients on the reassessment of lease terms, providing relief for businesses grappling with the administrative burden of the standards.

Additionally, the standard-setters have addressed the intricacies of lease modifications, especially pertinent in the evolving business landscape shaped by the global pandemic. These amendments aim to reduce complexity and facilitate a smoother adaptation to the new lease accounting reality.

Looking Forward: Implications for Business Strategy

The balance sheet is now more than a historical document; it’s a strategic tool, and lease accounting plays a significant role. Companies must consider the balance sheet implications in their business strategies, particularly concerning credit availability and asset management.

The elevated importance of lease accounting in financial reporting and the enhanced balance sheet transparency calls for businesses to maintain a sharper focus on lease management. It emphasizes the need for integrated systems that can handle the recording, tracking, and reporting of lease elements efficiently and accurately.

An Essential Dialogue with Financial Advisors

Lease accounting under ASC 842 and IFRS 16 presents a new frontier in financial reporting. The impact on balance sheets has been profound, with significant implications for business strategy and financial planning. As the landscape evolves with recent updates, businesses must proactively dialogue with financial advisors or CPAs. Professional guidance is crucial in navigating these complexities, ensuring compliance, and optimizing strategic decisions to leverage these accounting changes effectively.

The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver.

Deduction Basics

The QBI deduction is written off at the owner level. It can be up to 20% of:

How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.

Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.

Limitations

At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.

If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.

Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

Unfavorable Rules for Certain Businesses 

For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.

Other Factors

Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.

There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.

Use It or Potentially Lose It

The QBI deduction is scheduled to disappear after 2025. Congress could extend it, but don’t count on it. So, maximizing the deduction for 2024 and 2025 is a worthy goal. We can help.

© 2024

The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to certain eligible small businesses. Claiming the credit involves complex calculations, which we’ll take care of for you.

But in addition to the credit itself, be aware that there are two additional features that are especially favorable to small businesses:

Let’s take a look at the second feature. The Inflation Reduction Act (IRA) has doubled the amount of the payroll tax credit election for qualified businesses and made a change to the eligible types of payroll taxes it can be applied to, making it better than it was before the law changes kicked in.

Election Basics

Subject to limits, your business can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, you could receive some tax relief.

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Eligible Businesses

To qualify for the election, a taxpayer must:

In making these determinations, the only gross receipts that an individual taxpayer considers are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.

Limits on the Election

The research credit for which the taxpayer makes the payroll tax election can be applied against the employer portion of Social Security and Medicare. It can’t be used to lower the FICA taxes that an employer withholds and remits to the government on behalf of employees. Before a provision in the IRA became effective for 2023 and later years, taxpayers were only allowed to use the payroll tax offset against Social Security, not Medicare.

The amount of research credit for which the election can be made can’t annually exceed $500,000. Prior to the IRA, the maximum credit amount allowed to offset payroll tax before 2023 was only $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit to reduce current or past income tax liabilities.

These are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex task. Contact us about whether you can benefit from the payroll tax election and the research tax credit.

© 2024

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

The Employee Retention Credit (ERC) Voluntary Disclosure Program is a program introduced by the Internal Revenue Service in response to certain businesses claiming the ERC improperly or failing to claim it when they were eligible. The ERC was introduced as part of the CARES Act in 2020 and was aimed at providing financial relief to businesses affected by the COVID-19 pandemic.

Under the ERC, eligible employers could receive a refundable tax credit against employment taxes for qualified wages paid to employees. However, there were specific criteria and limitations for eligibility, and some businesses may have erroneously claimed the credit or failed to claim it when they were eligible.

The Voluntary Disclosure Program allows these businesses to come forward voluntarily to correct any errors or omissions related to claiming the ERC. By participating in the program, businesses could potentially avoid penalties or other enforcement actions that might otherwise be imposed for incorrect claims or noncompliance with ERC requirements.  Eligible taxpayers can repay only 80% of the gross amount of the credit erroneously claimed while retaining the remaining 20% (IRS Announcement 2024-3).  Taxpayers that repay the 80% of their ERC are deemed to have made a full repayment.

Taxpayers participating in the Voluntary Disclosure Program must file Form 15434 (Application for ERC Voluntary Disclosure Program) on or before March 22, 2024 and be submitted thru the IRS Document Upload Tool: www.irs.gov/help/irs-document-upload-tool

Participation in the program typically involves disclosing the relevant information to the IRS and working to rectify any discrepancies or issues with ERC claims. The specifics of the program, including eligibility criteria and procedures for participation, would be determined by the IRS and outlined in official guidance.

Businesses considering participation in such a program should consult with tax professionals or legal advisors familiar with ERC regulations and IRS procedures to ensure compliance and to understand the potential benefits and implications of voluntary disclosure.  For complete information, including eligibility and processing, please visit: www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit-voluntary-disclosure-program

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

In the landscape of financial planning and tax optimization, Qualified Charitable Distributions (QCDs) stand out as a powerful mechanism for individuals looking to enhance their philanthropic impact while optimizing their tax situation. This article delves into the core of QCDs, providing insights into how they can serve as a strategic tool in your charitable giving and financial planning.

Understanding QCDs

Qualified Charitable Distributions allow individuals aged 70½ or older to directly donate up to $100,000 from their Individual Retirement Accounts (IRAs) to a qualified charity, tax-free. This unique provision supports your philanthropic endeavors and offers a tax-efficient way to meet Required Minimum Distributions (RMDs), particularly for those aged 73 and above. QCDs differ from regular IRA distributions, which is typically taxable, by excluding these donations from your taxable income, thus achieving the dual objective of aiding charitable causes and reducing your tax liability.

Strategic Giving

QCDs embody the essence of strategic giving, allowing you to see the impact of your generosity firsthand. This proactive approach to philanthropy provides a more immediate and gratifying experience compared to traditional legacy giving. With the onset of charity-focused events early in the year, it’s an opportune time to consider QCDs as a key element of your giving strategy.

Enhancing Tax Efficiency

Effective tax planning is a crucial element of sound financial management. Utilizing QCDs can significantly improve the tax efficiency of your charitable contributions. By transferring funds directly from your IRA to a charity, the donation does not count as taxable income, therefore not only advancing your charitable objectives but also potentially reducing your overall tax burden. This can be especially beneficial in light of increased standard deductions, which may diminish the tax advantages of itemized deductions for many taxpayers.

Compliance and Limitations

To fully benefit from QCDs, accurately navigating associated regulations is essential. You must be at least 70½ years old at the time of the distribution and the donation must go directly to a qualifying charity, excluding private foundations and donor-advised funds. The annual limit for QCDs is $100,000 per individual, with recent updates allowing for inflation adjustments. Ensuring that your IRA trustee correctly processes the QCD is required for it to qualify for tax-free treatment.

Living Your Legacy

Opting to donate your RMD through a QCD enables you to embody your philanthropic values, creating a legacy of support and impact. This strategy provides the satisfaction of contributing to worthy causes and smartly aligns with your tax planning, potentially influencing various tax considerations such as Social Security taxation and Medicare premiums.

Conclusion

Leveraging Qualified Charitable Distributions within your philanthropic and financial strategy can offer substantial rewards. QCDs enable impactful contributions to the community and present an intelligent way to manage your tax obligations. Consulting with your financial advisor and tax professional is advised to ensure that your charitable giving initiatives are well integrated with your overall financial objectives. By incorporating QCDs into your planning, you can achieve a fulfilling balance between meaningful giving and prudent financial management.

To ensure that this strategy aligns with your overall financial goals and tax situation, it is crucial to seek the advice of your CPA or certified financial planner. They can provide personalized guidance to determine if QCDs are the right choice for you.

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.

When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:

Turn to Us

Contact us if you want additional information regarding the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements.

© 2024

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.

A new year marks a fresh start for businesses, offering a chance to enhance financial management practices and unlock opportunities for growth and success. As a business owner, improving your financial management can open doors to many possibilities. This article will explore essential tips for leveraging accounting software, particularly QuickBooks, to boost your financial oversight and operational efficiency in 2024.

Embrace Regular Account Reconciliation

One of the foundational steps in effective financial management is regular account reconciliation. This involves ensuring that your QuickBooks accounts align accurately with your bank statements. Regular reconciliations allow you to identify and rectify any discrepancies that may arise swiftly. This practice maintains the integrity of your financial records and provides you with a clear understanding of your business’s financial health.

Utilize Class and Location Tracking

QuickBooks’ class and location tracking feature can be a game-changer for businesses with multiple departments or product lines. This tool offers deeper insights into the profitability and expenses of various segments within your business. By categorizing transactions according to classes or locations, you can make more informed decisions and allocate resources more effectively.

Set Up Recurring Transactions

Repetitive financial tasks, such as monthly subscriptions or rent payments, can be automated through QuickBooks and other accounting software. Setting up recurring transactions saves time and ensures consistency and accuracy in your financial records. This feature eliminates the risk of missing essential payments and helps you maintain a seamless financial workflow.

Make the Most of Your Accounting Software Mobile App

In today’s fast-paced business environment, mobility is crucial. Most cloud-based accounting software, including QuickBooks, offers mobile apps that allow you to manage your finances on the go. Whether you need to track expenses, send invoices, or access financial data from anywhere, these mobile apps provide convenience and flexibility. This accessibility ensures that you always stay in control of your finances.

Leverage Advanced Reporting Features

Modern accounting software systems offer advanced reporting capabilities that provide valuable insights into your business finances. QuickBooks, for example, offers customizable reports, including cash flow statements and profit and loss reports. Here are four essential reports to consider running:

Keep Tabs on Accounts Receivable and Payable

Maintaining a healthy cash flow is essential for business sustainability. Regularly monitoring your accounts receivable and payable in QuickBooks, with the help of the reports mentioned earlier, will ensure that you stay on top of overdue payments and effectively manage your bills. This proactive approach is key to maintaining financial stability.

Integrate with Other Business Software

Consider further integrating your accounting software with other business tools to enhance your financial management. Integration can streamline workflows, improve data accuracy, and enhance business efficiency. For example, integrating with Customer Relationship Management (CRM) systems can provide a holistic view of your business operations, helping you better understand customer interactions and needs.

By implementing these features and strategies, you can elevate your financial management practices, gain deeper insights into your business operations, and make well-informed decisions that drive your business forward. As you embark on this journey in 2024, remember that effective financial management is the cornerstone of business success, and with the right tools and practices, you can achieve your growth and profitability goals.

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

If you’re an employer with a business where tipping is routine when providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

Credit Fundamentals

The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesn’t matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, they’re treated as if you paid them to your employees.

As you know, your employees are required to report their tips to you. You must:

How the Credit is Claimed

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

Let’s Look at an Example

Let’s say a server works at your restaurant. She is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips which she reports to you.

The server’s $2.13-an-hour rate is below the $5.15 rate by $3.02 an hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the server’s employer, you pay FICA taxes at the rate of 7.65% for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65%.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.

Get the Credit You Deserve

If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.

© 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