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Archives for January 2026

How Business Owners Can Still Use a SEP to Lower Their 2025 Tax Bill

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If you’re a business owner or self-employed professional and haven’t yet put a retirement plan in place, there’s still an opportunity to reduce your 2025 tax liability. By establishing a Simplified Employee Pension (SEP) before filing your 2025 tax return, you may be able to make deductible contributions that directly lower your taxable income.

SEPs remain a popular option for small business owners because they are flexible, relatively easy to establish, and allow for substantial contributions. Even better, the deadline to set up and fund a SEP extends into 2026 for the 2025 tax year, giving you extra time for strategic planning.

SEP Deadlines That Work in Your Favor

Unlike many retirement plans that must be established by year-end, a SEP can be set up as late as the due date of your business’s 2025 income tax return, including extensions.

  • Calendar-year partnerships and S corporations: March 16, 2026, or September 15, 2026, with an extension
  • Calendar-year sole proprietors and C corporations: April 15, 2026, or October 15, 2026, with an extension
  • LLCs: Deadlines depend on how the LLC is taxed (sole proprietor, partnership, S corporation, or C corporation)

As long as the SEP is established and funded by the applicable deadline, contributions can still be deducted on your 2025 tax return.

Simple Setup With Minimal Administration

Setting up a SEP is straightforward. The plan is created by completing Form 5305-SEP, a short agreement that outlines the terms of the plan. This form is not filed with the IRS but should be retained with your permanent business records.

If you have eligible employees, you are required to provide them with a copy of the SEP agreement and a disclosure statement explaining how the plan works.

Contributions are made to SEP-IRAs for you and each eligible employee. All SEP contributions are immediately 100% vested. Employer contributions made on behalf of employees are not included in their taxable income when contributed, though distributions taken later in retirement are taxable.

Flexible Contributions With Generous Limits

One of the most appealing features of a SEP is flexibility. Contributions are discretionary, meaning you can decide each year whether to contribute and how much to contribute based on your business’s cash flow.

However, if you have employees, the same contribution percentage must be applied to all eligible participants, including yourself.

For the 2025 tax year, SEP contribution limits are:

  • Up to 25% of compensation (approximately 20% of net self-employment income)
  • Compensation capped at $350,000
  • Maximum contribution of $70,000

For 2026, the compensation cap increases to $360,000, and the maximum contribution rises to $72,000.

Is a SEP the Right Retirement Strategy for You?

While SEPs are simpler than many other retirement plans, they aren’t the best solution for every business. Factors such as employee count, income level, and long-term retirement goals all play a role in determining whether a SEP or another plan may be more effective.

At Botwinick & Co., we help business owners evaluate retirement plan options as part of a broader tax strategy. With proper planning, a SEP can be a powerful tool for both retirement savings and tax reduction.

Frequently Asked Questions

Question: Can I still set up a SEP in 2026 and deduct contributions for 2025?

Answer: Yes. A SEP can be established and funded as late as your 2025 tax return filing deadline, including extensions, and still qualify for a 2025 deduction.

Question: Do I have to contribute every year to a SEP?

Answer: No. SEP contributions are discretionary, allowing you to adjust contributions based on your business’s profitability each year.

Question: Am I required to include employees in my SEP?

Answer: In most cases, yes. If employees meet eligibility requirements, contributions must be made for them using the same percentage of compensation as the owner.

Question: How are SEP contributions taxed?

Answer: Employer contributions are tax-deductible for the business and not taxable to employees when contributed. Distributions taken in retirement are taxed as ordinary income.

Question: Should I choose a SEP or another retirement plan?

Answer: That depends on your business structure, income, and goals. A tax professional can help you compare SEPs with other retirement plans to determine the best fit.

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Groundhog Day Tax Deadline 2026: What Businesses Need to File by February 2

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Is your business prepared for the first major tax deadline of 2026? This year, an important compliance date lands on an unexpected day. Because January 31 falls on a Saturday, the IRS deadline for several critical employment and contractor tax forms moves to the next business day. That day is Monday, February 2, 2026, also known as Groundhog Day.

Missing this deadline can lead to penalties, filing corrections, and unnecessary stress. Here is what business owners need to know to stay compliant and avoid issues.

Employee Forms Due by February 2, 2026

Employers must both furnish forms to employees and file them with the federal government by February 2.

Form W-2: Wage and Tax Statement

Form W-2 reports wages paid and taxes withheld for each employee during 2025. Employers must provide a copy to employees and file the form with the Social Security Administration.

The IRS emphasizes the importance of accuracy because Social Security and Medicare benefits are calculated using W-2 information. Errors or late filings can cause long-term issues for employees and may result in penalties for employers.

Form W-3: Transmittal of Wage and Tax Statements

If your business files W-2s, you must also submit Form W-3. This form summarizes all W-2 information and transmits Copy A of the W-2s to the Social Security Administration.

The totals reported on Form W-3 should match your annual employment tax filings, such as Forms 941, 943, 944, or Schedule H.

Independent Contractor Forms: 1099-NEC

The February 2 deadline also applies to Form 1099-NEC, Nonemployee Compensation.

You are generally required to file a 1099-NEC if all of the following apply:

  • The payment was made to someone who is not your employee
  • The payment was for services related to your trade or business
  • The recipient was an individual, partnership, estate, or certain corporations
  • Total payments to the recipient were at least $600 during the year

Some business owners have heard about changes under the One Big Beautiful Bill Act, signed into law in 2025. While this legislation increases the 1099-NEC reporting threshold to $2,000, that change applies only to payments made in 2026 and later. Those payments will be reported on 2026 forms filed in early 2027. The threshold will also be adjusted annually for inflation starting in 2027.

Other 1099 Forms to Be Aware Of

Depending on your business activities, you may also need to furnish Form 1099-MISC for certain types of payments, including:

  • Rent
  • Medical and healthcare payments
  • Prizes and awards
  • Attorney fees and legal services

The deadline to furnish Forms 1099-MISC to recipients is February 2, 2026.

The deadline to file Forms 1099-MISC with the IRS depends on how you file:

  • Paper filing deadline: March 2, 2026
  • Electronic filing deadline: March 31, 2026

Understanding “Furnish” vs. “File”

When the IRS requires a form to be “furnished,” it means the form must be delivered to the recipient. This can be done in person, electronically with proper consent, or by first-class mail to the recipient’s last known address.

If you mail W-2s or 1099 forms, they must be postmarked by February 2, 2026 to be considered timely.

Avoid Penalties by Filing on Time

Failing to meet filing deadlines or submitting incorrect information can trigger IRS penalties that increase the longer the issue goes unresolved. Taking the time now to confirm accuracy and deadlines can help you avoid costly mistakes.

Do not let the Groundhog Day deadline cast a shadow over your tax season. If you have questions about W-2s, 1099-NECs, 1099-MISC forms, or filing requirements, the team at Botwinick & Co. can help you stay compliant and prepared.

Frequently Asked Questions

Question: Why is the tax deadline February 2, 2026 instead of January 31?
Answer: January 31 falls on a Saturday in 2026, so the IRS moves the deadline to the next business day, which is Monday, February 2.

Question: Do I need to file both W-2 and W-3 forms?
Answer: Yes. If you file W-2s for employees, you must also file Form W-3 to summarize and transmit the information to the Social Security Administration.

Question: Has the 1099-NEC reporting threshold already increased to $2,000?
Answer: No. The $2,000 threshold applies to payments made in 2026 and later. Payments made in 2025 are still subject to the $600 threshold.

Question: Can I email W-2s or 1099s to recipients?
Answer: Yes, electronic delivery is allowed if the recipient has provided proper consent under IRS guidelines.

Question: What happens if I miss the February 2 deadline?
Answer: Missing the deadline or filing incorrect forms may result in IRS penalties that increase based on how late the filing is. Working with a qualified tax professional can help minimize risk.

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2025–2026 Tax Filing Essentials for Pass-Through Businesses

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If your business operates as a partnership, an LLC taxed as a partnership, or an S corporation, it falls under the category of a pass-through entity. These structures are designed so that profits, losses, deductions, and credits pass directly to the owners, who then report them on their individual federal income tax returns. While pass-through entities generally don’t pay federal income tax at the business level, they still carry important filing obligations—and recent tax law changes make this filing season especially important.

Below is a clear breakdown of what pass-through business owners need to know for the 2025 tax year, including deadlines, required forms, key reporting documents, and significant tax law updates that may impact your return.

Key Filing Deadline: March 16, 2026

Even though pass-through entities typically don’t owe federal income tax directly, they are required to file annual federal income tax returns to report activity to the IRS.

  • Partnerships and LLCs taxed as partnerships must file Form 1065, U.S. Return of Partnership Income.
  • S corporations must file Form 1120-S, U.S. Income Tax Return for an S Corporation.

For businesses operating on a calendar-year basis (which applies to most entities), the deadline to file 2025 federal returns is March 16, 2026, since March 15 falls on a Sunday.

Extension Option

If additional time is needed, businesses can request an automatic six-month extension by filing Form 7004 no later than March 16, 2026. This extension moves the filing deadline to September 15, 2026.

Keep in mind: extending the business return often means owners will also need to extend their individual returns to October 15, 2026, since personal filings depend on information provided by the business.

Schedules K-1: Critical for Owners

Each year, pass-through entities must prepare and distribute Schedule K-1 forms to their owners. These schedules outline each owner’s share of income, deductions, credits, and other tax items.

Schedules K-1 may be delivered electronically and must be included with the entity’s federal return. Because owners rely on these forms to complete their personal tax filings, timely preparation is essential.

If the entity files an extension, the deadline for issuing Schedules K-1 is also extended to September 15, 2026. Delays at the business level often create bottlenecks for individual tax filings, making early planning especially valuable.

Major Tax Law Updates Affecting 2025 Returns

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced several provisions that directly impact pass-through entities. Here are three changes that business owners should pay close attention to:

1. Expanded First-Year Depreciation

The OBBBA permanently reinstated 100% first-year depreciation for qualifying assets acquired and placed in service after January 19, 2025. Prior to this legislation, full bonus depreciation had not been available since 2022.

In addition, for tax years beginning in 2025:

  • The maximum Section 179 expensing limit increased to $2.5 million.
  • The phaseout threshold now begins when asset purchases exceed $4 million.

The law also introduced 100% first-year depreciation for certain nonresidential real estate classified as qualified production property, which generally includes factory and manufacturing buildings.

2. Immediate Deduction for R&E Expenses

Under the OBBBA, eligible domestic research and experimental (R&E) expenditures paid or incurred in tax years beginning in 2025 and later can now be fully deducted in the year incurred.

Previously, these costs were required to be amortized over five years. The new rules also provide flexibility for prior years:

  • Eligible small businesses may elect to apply immediate expensing retroactively to tax years beginning in 2022, 2023, or 2024.
  • Taxpayers with unamortized R&E costs from 2022–2024 can elect to deduct the remaining balance over one or two years starting in 2025.

3. More Favorable Business Interest Expense Rules

For tax years beginning in 2025 and beyond, the OBBBA permanently adopted more favorable rules for calculating deductible business interest expense.

While many small and midsize businesses are exempt from the interest expense limitation rules, eligibility depends on specific financial thresholds and entity characteristics. A professional review is recommended to confirm how these provisions apply to your business.

Why Early Planning Matters

With a March 16 filing deadline approaching—and significant tax law changes in play—this is not a filing season to put off until the last minute. Even if you plan to extend, action must be taken by the original due date to avoid penalties and compliance issues.

Proactive planning helps ensure:

  • Accurate and timely filing of business returns
  • On-time delivery of Schedules K-1 to owners
  • Optimal use of new depreciation and deduction rules
  • Smoother coordination between business and individual tax filings

If you operate a pass-through entity and want guidance on filing requirements, extensions, or how recent tax law changes may affect your situation, the team at Botwinick & Company is here to help. Contact us today to start preparing for the 2025 filing season with confidence.

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Which Business Expenses Are Really Tax Deductible? What Companies Need to Know for 2025

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With 2025 behind us and the upcoming tax filing season ahead, now is the ideal time for business owners to review their records and identify which expenses may qualify as deductions. However, knowing what is truly deductible is not always as straightforward as it may seem. Many business expenses fall into gray areas, and proper interpretation — along with strong documentation — is essential.

Understanding the IRS Standard: “Ordinary and Necessary”

Most deductible business expenses are not specifically listed in the Internal Revenue Code. Instead, the IRS relies on the foundational rule under Section 162, which allows deductions for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” To claim a deduction, a business must also be able to clearly substantiate the expense.

An expense is considered ordinary if it is common and customary within a particular industry. For example, a landscaping company’s fuel, maintenance, and equipment servicing costs would typically qualify because such expenses are normal and expected for that type of business.

An expense is considered necessary if it is helpful or appropriate for operating the business — even if it is not essential. For instance, a retail store may operate without security cameras, but investing in them is appropriate for reducing theft risk and protecting employees and customers.

To qualify as deductible, an expense must meet both standards. An expense may be ordinary yet not necessary if it is excessive or unreasonable compared to the business purpose. For example, if a construction company replaces perfectly functional, professional-grade tools with ultra-premium upgrades solely for preference, the expense may no longer be considered necessary or reasonable — and deductibility could be challenged.

When the IRS or Courts Disagree

Even when business owners believe expenses are valid, the IRS or courts may rule otherwise. In many cases, the issue is not the expense itself but the lack of proper documentation — or whether a true trade or business was being operated.

In one court case, the owner of an engineering firm attempted to deduct the value of his own labor while developing a software program. The court denied the deduction, ruling that self-performed labor is not “paid or incurred,” and therefore does not qualify as a deductible expense.

In another case, a taxpayer engaged in various real estate activities claimed business deductions, but the Tax Court determined the properties were held for investment rather than an active trade or business. The deductions were further denied because adequate records were not maintained. On appeal, the Ninth Circuit Court upheld the ruling, noting the taxpayer failed to provide sufficient proof to support the claimed deductions.

What Can Your Business Deduct for 2025?

Determining whether an expense is deductible requires more than simply classifying it as a business cost. The expense must be ordinary, necessary, reasonable in amount, and fully documented with clear records and a legitimate business purpose.

As you prepare your 2025 tax filings, working with an experienced advisory firm can help ensure you are maximizing allowable deductions while staying compliant with IRS rules.

Botwinick & Co. can help you evaluate your expenses, review documentation requirements, and determine what your business may deduct on its 2025 tax return.

Contact us today to discuss your tax strategy and year-end planning.

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