Archives for August 2024

Cash or Accrual Accounting: Which is Best for Tax Purposes?

Ken Botwinick, CPA | 08/26/2024

Businesses often face the choice between using the cash or accrual method of accounting for tax purposes. While the cash method can offer substantial tax benefits for those who qualify, some businesses might find the accrual method more advantageous. It’s crucial to carefully assess the most suitable tax accounting method for your business to maximize benefits.

Understanding Your Options

According to the tax code, “small businesses” generally have the option to use either the cash or accrual accounting method for tax purposes. In some cases, businesses may also be eligible to use a hybrid approach. Prior to the Tax Cuts and Jobs Act (TCJA), the gross receipts threshold for qualifying as a small business ranged from $1 million to $10 million. This variation depended on factors such as the business’s structure, industry, and whether inventory played a significant role in income generation.

The TCJA brought simplification by setting a single gross receipts threshold and increasing it to $25 million (adjusted for inflation). This change extended small business benefits to a larger group of companies. For 2024, a business is considered a small business if its average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (an increase from $29 million in 2023).

In addition to eligibility for the cash method, small businesses benefit from simplified inventory accounting, exemption from uniform capitalization rules, and the business interest deduction limit, among other tax advantages. Notably, certain businesses can use the cash method even if their gross receipts exceed the threshold, including S corporations, partnerships without C corporation partners, farming businesses, and specific personal service corporations. However, tax shelters, regardless of their size, are not eligible for the cash method.

Key Advantages

For many businesses, the cash method offers significant tax benefits. Under this method, businesses recognize income when it is received and deduct expenses when they are paid, providing greater control over the timing of income and deductions. For example, a business can defer income by delaying invoicing until the next tax year or accelerate deductions by paying expenses earlier.

Conversely, businesses using the accrual method recognize income when it is earned and deduct expenses when they are incurred, irrespective of when cash transactions occur. This method offers less flexibility in managing the timing of income and expense recognition for tax purposes.

The cash method can also aid in cash flow management, as income is taxed in the year it is received, ensuring businesses have the necessary funds to meet their tax obligations.

However, in some cases, the accrual method might be more advantageous. If a company’s accrued income is typically lower than its accrued expenses, using the accrual method could result in a reduced tax liability compared to the cash method. Other potential benefits of the accrual method include the ability to deduct year-end bonuses paid within the first 2.5 months of the next tax year and the option to defer taxes on certain advance payments.

Considerations When Changing Methods

Even if switching from the accrual to the cash method (or vice versa) offers tax advantages, it is essential to weigh the administrative costs of making the change. For example, businesses that prepare financial statements according to U.S. Generally Accepted Accounting Principles (GAAP) must use the accrual method for financial reporting.

Does this mean the cash method cannot be used for tax purposes? No, businesses can still use the cash method for tax purposes, but this would require maintaining two separate sets of books. Additionally, changing accounting methods for tax purposes may require approval from the IRS.

Choosing between cash and accrual accounting methods is a significant decision with considerable tax implications. Contact us to learn more about each method and determine the best option for your business.

Q&A:

What are the main differences between the cash and accrual methods of accounting for tax purposes?

The cash method recognizes income when it’s received and deducts expenses when they’re paid, offering businesses flexibility in timing income and deductions. The accrual method recognizes income when it’s earned and expenses when they’re incurred, regardless of when cash transactions occur, providing less flexibility in timing for tax purposes.

How did the Tax Cuts and Jobs Act (TCJA) impact small businesses regarding their choice of accounting method?

The TCJA simplified the definition of a small business by establishing a single gross receipts threshold and increasing it to $25 million (adjusted for inflation). For 2024, the threshold is $30 million. This change allowed more businesses to qualify as small businesses, making them eligible for the cash method of accounting and other tax benefits.

What are the potential advantages of using the cash method of accounting for tax purposes?

The cash method offers significant tax advantages by allowing businesses to control the timing of income and deductions. It also provides cash flow benefits, as income is taxed when received, ensuring funds are available to pay tax liabilities. Additionally, it allows for income deferral and deduction acceleration, offering greater flexibility.

What considerations should businesses keep in mind when switching between cash and accrual accounting methods?

Businesses should consider the administrative costs of maintaining two sets of books if using different methods for financial reporting and tax purposes. They should also be aware that switching methods may require IRS approval. It’s essential to evaluate the overall tax benefits against these potential costs before making a change.

Stop Drilling Over Your Books: Outsource Your Dental Practice’s Bookkeeping Today!

Cheri Schmidt | 08/22/2024

Running a dental practice isn’t just about creating bright smiles—it’s about keeping your finances in perfect alignment. If managing your books feels more like pulling teeth than a smooth process, it’s time to take action. Waiting too long to get your bookkeeping in order can cost you more than just a few headaches. Here’s why you should outsource your accounting today—before things get out of hand.

When Does Outsourcing Make Sense?

You might consider outsourcing your bookkeeping if you’re struggling to keep up with your financial tasks and it’s taking too much time. Here are some tell-tale signs that you need to outsource right now:

Your books are not up to date – Falling behind on your books is like skipping your patients’ check-ups—things can go south quickly.
You’re missing out on tax write-offs – Overlooking deductions is like leaving money on the table. Don’t let Uncle Sam take more than his fair share!
You’re having trouble tracking accounts receivable and payable – If you’re losing track of who owes you money and what bills need to be paid, it’s time to get help.
You’re struggling to stay on top of your cash flow – If cash flow feels more like a drip than a steady stream, you need to take action now.
Making estimated tax payments is a hassle – If calculating your tax payments gives you a migraine, it’s time to call in the experts.

Why You Need to Outsource—Yesterday!

You’ve worked hard to build your practice, so why let financial mismanagement chip away at your success? Outsourcing your bookkeeping can save you time, money, and a ton of stress. Here’s how:

Lower Staffing Costs Let’s be real, hiring a full-time bookkeeper is expensive. Salaries, benefits, training—it all adds up. Outsourcing lets you sidestep these costs while still getting top-notch service from a team that knows the dental industry inside and out.
Expertise at Your Fingertips When you work with us, you’re not just getting an accountant—you’re getting a team of dental-specific CPAs with over 30 years of experience. We stay on top of the latest tax laws and financial best practices, ensuring your books are accurate, compliant, and optimized for savings.
Improved Accuracy and Reliability One of the biggest advantages of outsourcing your bookkeeping is the improved accuracy and reliability it brings. Our dedicated team focuses solely on managing your books, without the distractions or multitasking that can lead to errors. We follow strict processes and standardized methods to ensure consistency in your financial records. Plus, with our use of cloud-based accounting software, you’ll have access to real-time information, allowing for better decision-making based on accurate, up-to-date data.
Scalable Services Your practice isn’t static, and your bookkeeping shouldn’t be either. Whether you’re expanding, adding new services, or just need extra support during tax season, we scale our services to meet your needs—no more, no less.
More Time for Patient Care Why spend yours or your staff’s valuable time buried in spreadsheets when you could be focusing on your patients? Let us handle your bookkeeping so you can get back to what you do best—creating healthy, happy smiles.
Risk Mitigation Employee turnover can be a major disruption for dental practices, especially if a key staff member who manages all your accounting needs unexpectedly leaves. This can leave your practice vulnerable, with important financial and administrative duties hanging in the balance. By partnering with us, you eliminate this risk entirely. While turnover can occur at our firm as well, the impact on your practice is nonexistent. We’ll seamlessly integrate another dental accounting expert into your team, ensuring that your financial operations remain uninterrupted. Employee turnover becomes our responsibility, not yours, allowing you to focus on patient care while we handle the rest.
Enhanced Security and Fraud Prevention Your patients trust you with their health—trust us with your financial security. We use top-tier security measures to protect your data and prevent fraud, so you can rest easy knowing your practice is safe.
Predictable Costs Surprise costs are fun in dental emergencies, but not in your accounting. With our clear, transparent pricing, you can budget with confidence, knowing exactly what you’ll pay each month.
Avoiding In-House Challenges Managing your books in-house can be overwhelming and prone to errors, especially as your practice grows. With constantly changing regulations and the need for precise financial management, it’s easy to fall behind or make mistakes that could be costly. Working with a dental specific CPA firm ensures that your financial management is handled by experts, allowing you to avoid these pitfalls and keep your practice running smoothly.

Conclusion: Secure Your Practice’s Future Today

Outsourcing your accounting to Botwinick & Company isn’t just a smart move—it’s an essential one. Don’t wait until financial mismanagement becomes a crisis. Let us handle your bookkeeping so you can focus on growing your practice and delivering the best care to your patients. It’s time to stop worrying about your books and start planning for your practice’s bright future.

Navigating Federal Income Tax Implications on Real Estate Gains

Ken Botwinick, CPA | 08/16/2024

When selling real estate that has been held for over a year, you may anticipate paying federal income tax at the standard long-term capital gains rates of 15% or 20%. This rate typically applies to assets held beyond one year. However, if your real estate investment is held through a pass-through entity such as an LLC, partnership, or S corporation, the tax implications may vary. It’s important to understand the potential complexities involved in taxing real estate gains, particularly when depreciation deductions are factored in. Below is an overview of the federal income tax considerations associated with different types of real estate gains.

1. Vacant Land

For the sale of vacant land, the maximum federal long-term capital gains tax rate is 20%. This rate applies only to high-income individuals. In 2024, for a single filer, the 20% rate applies if taxable income—including any gains from land sales and other long-term capital gains—exceeds $518,900. For married couples filing jointly, the 20% rate applies when taxable income surpasses $583,750. Heads of households will face this rate if taxable income exceeds $551,350. If your income is below these thresholds, the maximum federal tax rate on land sale gains is 15%. Additionally, you may be subject to the 3.8% Net Investment Income Tax (NIIT) on some or all of the gain.

2. Gains Attributable to Depreciation

Gains resulting from real estate depreciation, calculated using the straight-line method, fall under the category of unrecaptured Section 1250 gain. This type of gain is generally taxed at a flat 25% federal rate unless it would be taxed at a lower rate if included in taxable income without special treatment. The 3.8% NIIT may also apply to some or all of the unrecaptured Section 1250 gain.

3. Gains from Depreciable Qualified Improvement Property (QIP)

Qualified Improvement Property (QIP) refers to improvements made to the interior of a nonresidential building placed in service after the building’s initial service date. However, QIP excludes expenditures for enlarging the building, adding elevators, escalators, or modifying the building’s structural framework.

When QIP is sold, gains may be impacted by prior depreciation deductions. Specifically:

Section 179 Deductions: If first-year Section 179 deductions were claimed for QIP, the gain up to the amount of these deductions will be subject to high-taxed Section 1245 ordinary income recapture. This means the gain will be taxed at your ordinary income tax rate rather than the lower long-term capital gain rates. The 3.8% NIIT may also apply.
Bonus Depreciation: For QIP with first-year bonus depreciation, gains up to the excess of bonus depreciation over straight-line depreciation will be subject to high-taxed Section 1250 ordinary income recapture. Similar to Section 179 deductions, this gain will be taxed at your regular income rate, and the 3.8% NIIT may apply.

Tax Planning Considerations

Opting for straight-line depreciation for real property, including QIP, avoids Section 1245 and Section 1250 ordinary income recapture. Consequently, the gain will be classified as unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%. However, the 3.8% NIIT may still apply to all or part of this gain.

Conclusion

The federal income tax implications of real estate transactions can be intricate, involving various tax rates and potential additional taxes such as the NIIT. Navigating these complexities requires careful planning and consideration. Our team is here to assist with the details of your tax return preparation. Please contact us with any questions regarding your specific situation.

Decoding Real Estate Capital Gains Taxes

Ken Botwinick, CPA | 08/12/2024

If you own real estate that has appreciated over time and decide to sell it after holding it for more than a year, you might expect to pay the standard federal income tax rates of 15% or 20% on your long-term capital gains. This applies whether you own the property directly or through a pass-through entity like an LLC, partnership, or S corporation.

However, taxes on real estate gains can sometimes be more complex, particularly when depreciation is involved. Below is a breakdown of key federal income tax considerations that may impact the taxes on your real estate gains.

Taxes on Vacant Land

For sales of vacant land, the maximum federal long-term capital gain tax rate is currently 20%. This rate applies only to those with high incomes. For example, in 2024, the 20% rate kicks in for:

Single filers with taxable income over $518,900,
Married couples filing jointly with taxable income over $583,750, and
Heads of household with taxable income over $551,350.

If your income is below these thresholds, your land sale gain will generally be taxed at a 15% rate. However, you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain, depending on your overall income.

Gains from Depreciation

When you sell real estate, a portion of your gain may be due to depreciation you previously claimed. This is known as “unrecaptured Section 1250 gain,” which is typically taxed at a flat 25% federal rate. However, if your taxable income would place you in a lower tax bracket, the gain may be taxed at that lower rate instead. Additionally, the 3.8% NIIT may also apply to this gain.

Gains from Depreciable Qualified Improvement Property

Qualified improvement property (QIP) refers to certain improvements made to the interior of nonresidential buildings, excluding expansions, elevators, escalators, or structural framework. You may have claimed first-year Section 179 deductions or bonus depreciation on QIP. If you sell QIP:

Any gain up to the amount of Section 179 deductions claimed will be taxed as high-taxed Section 1245 ordinary income. This means it will be taxed at your regular income tax rate rather than the lower long-term capital gains rate.
If you claimed bonus depreciation, any gain up to the amount of the bonus depreciation deduction over what would have been claimed under straight-line depreciation will also be taxed as high-taxed ordinary income.

In either scenario, the 3.8% NIIT may apply to some or all of the gain.

Strategic Tax Planning Tip

If you choose to use straight-line depreciation for your real property, including QIP, instead of claiming Section 179 or bonus depreciation, you can avoid Section 1245 and Section 1250 ordinary income recapture. In this case, your gain will be treated as unrecaptured Section 1250 gain, which is taxed at a maximum federal rate of 25%. However, the 3.8% NIIT may still apply.

As you can see, the tax implications of selling real estate can be more complicated than they might appear at first glance. Different tax rates may apply depending on the nature of the gain, and you may also face additional taxes like the 3.8% NIIT or state income taxes. To navigate these complexities and optimize your tax situation, reach out to us. We’re here to handle the details when it’s time to prepare your tax return and to answer any questions you may have.

Potential Future Tax Landscape for Businesses

Ken Botwinick, CPA | 08/06/2024

The forthcoming presidential and congressional elections may have a substantial impact on the tax landscape for U.S. businesses. A key factor in the potential shift is a tax provision set to expire in approximately 17 months and how Washington politicians might address it.

Background

The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, introduced significant changes to small business taxation. Many provisions within the TCJA are scheduled to expire on December 31, 2025.

As this expiration date approaches, you might be concerned about how future federal tax changes could affect your business. The uncertainty stems from differing perspectives between Democrats and Republicans on how to handle the TCJA’s various provisions.

Corporate and Pass-Through Business Rates

The TCJA reduced the maximum corporate tax rate from 35% to 21%. It also lowered the tax rates for individual taxpayers involved in non-corporate pass-through entities, such as S corporations, partnerships, and sole proprietorships. The highest individual rate is now 37%, down from 39.6% prior to the TCJA.

While the TCJA made the corporate tax rate cut permanent, the individual rate cuts are set to expire in 2025. However, future tax legislation could potentially alter the corporate tax rate.

In addition to rate reductions, the TCJA introduced several other changes. A notable provision for small business owners is the Section 199A qualified business income (QBI) deduction, which allows a deduction of up to 20% of QBI from noncorporate entities. The expiration of this deduction is a significant concern.

Another provision subject to expiration is the gradual phaseout of first-year bonus depreciation. The TCJA initially provided 100% bonus depreciation for qualified new and used property placed in service in 2022. This benefit is set to decrease to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and phase out completely by 2027.

Potential Outcomes

The results of the upcoming presidential election and the composition of Congress will influence the future of the TCJA provisions. Four potential scenarios include:

All TCJA provisions scheduled to expire will indeed expire at the end of 2025.
All TCJA provisions scheduled to expire will be extended beyond 2025 or made permanent.
Some TCJA provisions will expire while others are extended or made permanent.
Some or all TCJA provisions will expire, with new laws enacted that introduce different tax benefits or rates.

The impact on your tax situation in 2026 will depend on which scenario unfolds, as well as the effects of the TCJA on your tax bill when it was first implemented. Factors influencing this include your business income, filing status, state of residence (with the SALT limitation affecting certain states), and the presence of dependents.

Additionally, the outcome of the presidential election and congressional control will play a crucial role, given the differing approaches of Democrats and Republicans. Tax proposals must pass both houses of Congress and be signed by the President to become law, or secure enough votes to override a presidential veto.

Looking Ahead

As the expiration of TCJA provisions approaches and election outcomes become clear, it is important to stay informed about potential changes and strategize accordingly. We are available to address any questions you may have and will continue to provide updates on the latest developments.

Business Website Expenses: Managing Them for Tax Benefits

Ken Botwinick, CPA | 08/01/2024

Understanding Tax Treatment for Business Website Expenses

With most businesses now having websites, it’s important to know how these costs can be handled for tax purposes, even though the IRS hasn’t provided specific guidance on this topic.

However, there are general rules for business expense deductions that can offer some clarity, as well as guidance on software costs from the IRS. Here’s a breakdown of how website-related expenses might be treated for tax purposes:

Tax Treatment of Hardware vs. Software

Hardware Costs: The hardware required for a website, such as servers and computers, is generally considered depreciable equipment. For 2024, you can deduct 60% of the cost in the first year it is placed in service under the bonus depreciation provision. This rate has decreased from 100% in 2022 to 60% in 2024, and it will continue to decline until it phases out in 2027 unless Congress extends or modifies it.

Alternatively, you might be able to fully or partially deduct these costs in the year they are placed in service using the Section 179 deduction. For 2024, the maximum Section 179 deduction is $1.22 million, but it phases out if the total amount of qualifying property exceeds $3.05 million. Additionally, the deduction cannot exceed your business taxable income, though any unused amount can be carried forward to future years.

Software Costs: For off-the-shelf software, tax treatment is generally similar to hardware. Payments for leased or licensed software used on your website are deductible as ordinary and necessary business expenses. However, costs associated with purchased software are treated differently.

Internally Developed Software: If your website is developed in-house or by a contractor, you can apply bonus depreciation to the extent allowed. If bonus depreciation does not apply, you can either:

Deduct the development costs in the year they are incurred, or
Amortize the costs over five years starting from the midpoint of the tax year in which the expenses were incurred.

For websites primarily used for advertising, internal development costs can be deducted as ordinary business expenses.

Third-Party Costs: Payments to third parties for setting up or managing your website are generally deductible as ordinary business expenses.

Start-Up Expenses: Website development costs incurred before your business starts can be considered start-up expenses. You can deduct up to $5,000 in these costs in the year your business begins. If start-up expenses exceed $50,000, the $5,000 deduction limit is reduced dollar-for-dollar for every dollar over this threshold. The remaining costs must be capitalized and amortized over 60 months, starting from the business commencement month.

Need Assistance?

Determining the correct tax treatment for your website expenses can be complex. Contact Botwinick & Company for help in navigating these rules and ensuring proper tax treatment for your business’s website costs.