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Operating as a C Corporation: Key Benefits and Drawbacks

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Choosing the right structure for your business is one of the most important decisions you’ll make as an entrepreneur. A C corporation (C corp) is a popular option, but it comes with its own set of advantages and disadvantages that can influence your business operations and financial outcomes. Here’s a detailed exploration of what you need to know about operating as a C corporation.

Tax Implications

One of the key features of a C corporation is that it is taxed as a separate entity. The corporate tax rate, currently set at 21%, is significantly lower than the highest individual tax rate of 37%. This separation allows the corporation to manage its tax obligations independently from its owners.

However, double taxation is a notable drawback. The corporation’s profits are taxed first at the corporate level, and then again at the individual level when dividends are distributed to shareholders. For some businesses, this can lead to a higher overall tax burden.

That said, double taxation may not always be a major concern. If much of the corporate income is paid out as reasonable salaries to employees (including owner-employees), these expenses can be deducted from corporate taxable income, minimizing the risk of double taxation.

For new businesses, another potential downside is that losses are “trapped” within the corporation and cannot be used to offset the owners’ personal income. However, if your business is expected to turn a profit in its first year, this may not pose a significant issue.

Liability Protection

One of the strongest advantages of a C corporation is the limited liability it offers. Shareholders are generally not personally responsible for the corporation’s debts and liabilities. This means that in the event of legal disputes or financial troubles, your personal assets remain protected. This level of security makes the C corporation an attractive option for many entrepreneurs.

Corporate Compliance Requirements

Operating as a C corporation requires adherence to formalities to maintain its status as a separate legal entity. Some of the key requirements include:

  • Filing articles of incorporation
  • Adopting corporate bylaws
  • Electing a board of directors
  • Holding regular organizational and shareholder meetings
  • Keeping detailed minutes of these meetings

Ensuring compliance with these requirements is essential. Failure to do so could compromise the corporation’s limited liability protections, exposing shareholders to personal risk.

Access to Fringe Benefits

C corporations offer flexibility in providing tax-advantaged fringe benefits to their employees. The corporation can deduct the cost of benefits such as health insurance and group life insurance, without these expenses being considered taxable income for the employees (subject to certain limits).

Additionally, contributions to qualified pension plans are typically tax-deductible for the corporation while remaining tax-deferred for employees. This can make a C corporation an excellent vehicle for offering competitive employee benefits.

Raising Capital

If you’re planning to grow your business and attract outside investors, a C corporation can be an ideal structure. It allows for multiple classes of stock, each with unique rights and preferences. This flexibility can help tailor investment opportunities to meet the needs of potential investors.

C corporations also benefit from deducting interest on debt financing, making it easier to raise capital through loans. Whether you opt for equity or debt, a C corporation provides avenues to scale your business.

Future Flexibility

If your business needs change, converting from a C corporation to an S corporation is often an option. This transition can typically be accomplished tax-free, although certain built-in gains on corporate assets may be subject to taxation if those assets are sold within 10 years of the change.

This ability to adapt makes the C corporation a versatile choice for businesses that want to keep their options open.

Is a C Corporation Right for You?

Choosing the right business structure depends on your specific goals, financial projections, and growth strategy. A C corporation offers significant benefits such as limited liability, tax-advantaged benefits, and robust capital-raising options. However, it also comes with challenges like double taxation and compliance requirements.

To determine if a C corporation is the right fit for your business, consult a professional who can evaluate your unique situation. Contact us today to explore your options and make an informed decision for your business’s future success.

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Mastering the Tax Treatment of Intangible Assets: A Complete Guide

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Intangible assets, such as patents, trademarks, copyrights, and goodwill, play a pivotal role in the success of modern businesses. However, the tax treatment of these assets is notoriously complex, often leaving business owners searching for clarity. This guide answers frequently asked questions and provides insights into navigating the tax implications of intangible assets effectively.

What Are Intangible Assets?

Intangible assets refer to non-physical items that hold significant value for businesses. These assets include:

  • Patents
  • Trademarks
  • Copyrights
  • Goodwill
  • Customer lists
  • Financial derivatives (e.g., options, futures contracts)
  • Memberships and licenses
  • Franchises and trade names

Determining whether a specific item qualifies as an intangible asset for tax purposes often requires a detailed analysis of its characteristics and intended use.

What Are the Typical Expenses Associated with Intangible Assets?

When acquiring or creating intangible assets, businesses may incur expenses that are subject to IRS capitalization rules. Examples include:

  • Licenses and Agreements: Fees to obtain, renew, or renegotiate business or professional licenses.
  • Contract Modifications: Costs to modify lease agreements or other contract rights.
  • Legal Defense: Expenses to defend or perfect title to intangible property, such as patents.
  • Agreement Termination: Costs to end leases, exclusive licenses, or non-compete agreements.

Additionally, expenses to facilitate the creation or acquisition of intangible assets—such as consulting fees, legal services, and valuation assessments—are often capitalized. For instance:

  • Hiring legal counsel to draft a lease agreement.
  • Paying accountants to establish stock value during a shareholder buyout.
  • Engaging consultants to prepare a competitive bid.

Why Is the Tax Treatment of Intangibles So Complex?

The IRS requires businesses to capitalize costs related to:

  1. Acquiring or creating intangible assets.
  2. Enhancing an existing intangible asset.
  3. Creating a “future benefit” specified in IRS guidance.
  4. Facilitating any of the above transactions.

Unlike deductible expenses, capitalized costs are amortized over the useful life of the asset or a timeframe specified by tax regulations. However, there are exceptions, including:

  • Costs not exceeding $5,000.
  • Short-term benefits that last less than 12 months or end before the close of the following tax year.

Understanding and applying these rules requires meticulous attention to detail, as even small missteps can lead to costly errors or penalties.

Are There Exceptions to Capitalization Rules?

Yes, several exceptions and elections may apply:

  • De Minimis Threshold: Costs under $5,000 are generally exempt from capitalization.
  • Short-Term Benefits: Payments for rights or benefits lasting less than 12 months may also be excluded.
  • Optional Elections: Taxpayers may choose to capitalize certain costs that wouldn’t typically require it.

Given the intricacies of these rules, it’s essential to review transactions involving intangible assets carefully to optimize tax benefits and maintain compliance.

Why Proper Tax Planning Matters

Effective tax planning for intangible assets ensures businesses maximize deductions and avoid unexpected liabilities. Mismanagement can lead to:

  • Overpayment of taxes.
  • Non-compliance penalties.
  • Missed opportunities for financial optimization.

Frequently Asked Questions (FAQs)

1. What qualifies as an intangible asset for tax purposes?
Intangible assets include non-physical items like patents, copyrights, trademarks, goodwill, and financial instruments. Proper classification is key to determining tax treatment.

2. What expenses are common when acquiring or creating intangible assets?
Legal fees, consulting services, license renewals, and valuation assessments are typical examples of capitalized costs associated with intangible assets.

3. Why are the IRS rules for intangible assets so complex?
The IRS requires businesses to capitalize costs over the asset’s useful life, with exceptions adding layers of complexity. A clear understanding of these rules is crucial for compliance.

4. Are there any exceptions to the capitalization requirements?
Yes, exceptions include the $5,000 de minimis rule and short-term benefits lasting less than 12 months. Taxpayers may also elect to capitalize certain costs for strategic advantages.

5. How can businesses ensure compliance with IRS regulations?
Engaging experienced tax professionals can help businesses navigate the complex rules, ensure compliance, and identify opportunities to maximize tax benefits.

Let Us Help You Navigate Intangible Asset Taxation

Managing the tax treatment of intangible assets requires specialized knowledge and strategic planning. Whether you need assistance in determining the correct classification of assets or optimizing your tax strategy, our team is here to help. Contact us today to discuss your unique needs and ensure compliance with the latest IRS regulations.

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Maximize Your Small Business Tax Savings with Local Transportation Deductions

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Understanding how to deduct local transportation expenses can help reduce your small business’s tax liability significantly. Both you and your employees likely incur transportation costs annually, and knowing which expenses are deductible can make a substantial difference come tax time.

What Is Local Transportation?

Local transportation refers to travel within your tax home when the trip doesn’t require sleep or rest. Your “tax home” is the city or general area where your primary place of business is located. If your travel takes you far enough to necessitate rest or sleep, different rules for travel deductions may apply.

Key Rules for Work Locations

The primary rule is that commuting costs are not deductible. This includes expenses for travel between your home and your regular workplace, even if you’re performing business-related tasks during the commute (e.g., making calls or sending emails).

An exception applies if you’re commuting to a temporary work location outside your usual metropolitan area. For tax purposes, a location is considered temporary if your work there is expected to last (and actually does last) for no more than a year.

Deductible Business Travel

Once you’ve reached your regular work location, local travel related to your business becomes deductible. For example:

  • Travel from your office to meet a client.
  • Trips to pick up supplies or visit a job site.
  • Travel between two business locations you own or operate.

The Importance of Recordkeeping

Maintaining accurate records is essential for substantiating your deductions. Here’s what you need to track:

  • Public transportation: Save receipts or log expenses with details about the date, destination, and business purpose.
  • Personal vehicle use: Note the mileage driven for business purposes, along with tolls and parking fees. Receipts for expenses like gas, repairs, insurance, and maintenance are also necessary if you opt to deduct actual expenses instead of using the standard mileage rate.

Your transportation deduction can be calculated using either:

  1. The Standard Mileage Rate: In 2024, the rate is 67 cents per mile, plus tolls and parking.
  2. Actual Expenses: Include gas, maintenance, insurance, depreciation, and other car-related costs. Allocate expenses between personal and business use based on the miles driven for each.

Employees vs. Self-Employed Deductions

Under the Tax Cuts and Jobs Act (TCJA), employees cannot deduct unreimbursed transportation costs from 2018–2025. These deductions, previously classified as “miscellaneous itemized deductions,” are suspended during this period.

However, self-employed individuals can still deduct qualifying transportation expenses related to their business. Starting in 2026, employees may regain the ability to deduct certain transportation expenses, provided their total miscellaneous deductions exceed 2% of their adjusted gross income.

Seek Expert Advice

Navigating tax laws can be complex, especially with potential changes on the horizon. Our team is here to help you understand your options and ensure you’re maximizing your deductions.

FAQs

1. Can I deduct the cost of commuting to and from work?
No, commuting expenses are considered personal and are not deductible, even if you perform business-related tasks during your commute.

2. Are travel expenses between two business locations deductible?
Yes, travel between business locations or for business purposes (e.g., client meetings) is deductible.

3. What’s the best way to track deductible transportation expenses?
Maintain detailed records, including receipts for public transportation or mileage logs for personal vehicles. Use either the standard mileage rate or actual expenses for calculations.

4. Can employees deduct unreimbursed transportation expenses?
Not currently. From 2018–2025, employees cannot deduct these costs due to TCJA regulations. Self-employed individuals, however, can deduct business-related transportation expenses.

Contact Us Today

Have questions or need help with your tax planning? Contact us to learn how to maximize your deductions and reduce your tax burden effectively.

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How HSAs Can Benefit Small Businesses and Employees in 2025

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Discover How Health Savings Accounts (HSAs) Empower Small Businesses and Employees

As a small business owner, managing health care costs can feel like an uphill battle. But there’s a tax-advantaged solution that can benefit both you and your employees: Health Savings Accounts (HSAs). These accounts not only help reduce health care expenses but also provide significant tax benefits. With the IRS releasing the inflation-adjusted HSA limits for 2025, now is the perfect time to revisit how HSAs can work for your business.

What Are HSAs? Key Benefits for Small Businesses

HSAs allow eligible individuals to save pre-tax dollars for future medical expenses, making them a powerful financial tool for both employers and employees. To qualify, employees must:

  • Be covered by a high-deductible health plan (HDHP).
  • Not be enrolled in Medicare.
  • Not be claimed as a dependent on someone else’s tax return.

Top Tax Advantages of HSAs

  • Tax-Deductible Contributions: Employee contributions are deductible, within IRS limits.
  • Employer Contributions Are Tax-Free: Employer-funded contributions aren’t included in employees’ taxable income.
  • Tax-Free Growth: Funds in an HSA grow tax-free, year after year.
  • Tax-Free Withdrawals: Distributions used for qualified medical expenses are not taxed.
  • Payroll Tax Savings: Employers don’t pay payroll taxes on employee HSA contributions made through payroll deductions.

Updated HSA Limits for 2024 and 2025

To establish an HSA, employees must have a high-deductible health plan (HDHP). Below are the latest contribution and coverage limits:

High-Deductible Health Plan Requirements

  • 2024: Minimum deductible of $1,600 (self-only) or $3,200 (family).
  • 2025: Minimum deductible of $1,650 (self-only) or $3,300 (family).

Contribution Limits

  • 2024: $4,150 (self-only); $8,300 (family).
  • 2025: $4,300 (self-only); $8,550 (family).

Out-of-Pocket Maximums

  • 2024: $8,050 (self-only); $16,100 (family).
  • 2025: $8,300 (self-only); $16,600 (family).

Catch-Up Contributions

For individuals aged 55 or older, an additional $1,000 can be contributed annually in 2024 and 2025.

Why Employers Should Offer HSA Contributions

Employers can make tax-free contributions to their employees’ HSAs, offering added value while reducing payroll tax liabilities. Unlike flexible spending accounts (FSAs), HSAs don’t have a “use-it-or-lose-it” provision, allowing employees to save funds year after year.

Compliance Tip:

Employers contributing to HSAs must offer “comparable” contributions to all eligible employees to avoid a 35% tax penalty on contributions.

Using HSA Funds: Qualified Expenses

HSA funds can be used tax-free for qualified medical expenses, including:

  • Doctor visits and prescription medications.
  • Chiropractic care and acupuncture.
  • Premiums for long-term care insurance.

If funds are withdrawn for non-qualified expenses, they’re subject to income tax and an additional 20% penalty unless the account holder is 65 or older, disabled, or deceased.

Why HSAs Are a Smart Choice for Small Businesses

HSAs offer unmatched flexibility and tax advantages, making them a win-win for small businesses and their employees. By integrating HSAs into your benefits package, you can:

  • Attract and retain top talent with enhanced health benefits.
  • Reduce overall health care costs for your business.
  • Provide employees with a powerful savings tool for medical expenses.

Take Action Today

Health Savings Accounts can be a game-changer for small businesses looking to manage healthcare costs effectively. With the 2025 limits now available, it’s the perfect time to explore how HSAs can benefit your business and employees.

Have questions or want to implement HSAs in your organization? Contact us today to learn more about integrating HSAs into your benefits package!

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Understanding Business Meal and Entertainment Deductions for 2024: What You Can and Can’t Write Off

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If you’re unsure about the rules for deducting business meals and entertainment expenses, you’re not alone. Recent changes to federal tax laws have left many business owners seeking clarity. Below we will break down what you can and can’t deduct in 2024 to help you maximize your tax benefits while staying compliant with IRS regulations.

Current Rules for Business Meal and Entertainment Deductions

The Tax Cuts and Jobs Act (TCJA) significantly altered the landscape for deducting business-related entertainment expenses. Most entertainment costs, such as treating clients to golf outings or sporting events, are no longer deductible.

However, business-related meal expenses remain partially deductible. You can generally write off 50% of the cost of food and beverages, provided they are related to business activities or consumed during business-related entertainment.

What Food and Beverage Costs Are Deductible?

The IRS broadly defines food and beverage expenses to include everything from meals to snacks, as well as associated costs such as sales tax, delivery fees, and tips. For these costs to qualify as 50% deductible, the following conditions must be met:

  • Purchased Separately: The food and beverages must be purchased separately from entertainment activities. Alternatively, they can appear as a separate item on a bill, invoice, or receipt showing the standard selling price of the food and beverages.
  • Reasonable Value: If they aren’t purchased separately, you can deduct 50% of the reasonable value of the food and beverages.

Key Requirements for Business Meal Deductions

For a 50% deduction to apply, the following conditions must be satisfied:

  1. The meal must not be lavish or extravagant under the circumstances.
  2. You or an employee of your business must be present at the meal.
  3. The meal must involve a business associate — someone with whom you expect to conduct business, such as a client, prospective customer, supplier, or employee.

Pro Tip: You can even deduct 50% of the cost of a business meal for yourself, such as when working late into the night.

Deductions While Traveling on Business

When traveling for work, you can deduct 50% of the cost of meals. However, it’s important to keep detailed records, including receipts, to substantiate your expenses.

Note that meal expenses for spouses, dependents, or others accompanying you on a business trip are generally not deductible unless:

  • The individual is an employee of your company.
  • The trip is for legitimate business purposes.

100% Deductible Business Meal and Entertainment Expenses

Certain meal and entertainment expenses remain 100% deductible under IRS regulations, including:

  • Employee Events: Costs for recreational activities benefiting all employees, such as holiday parties or team-building events.
  • Public Events: Food, beverages, and entertainment offered at promotional events open to the public.
  • Customer Sales: Meals or entertainment sold to customers at full value.
  • Taxable Compensation: Costs reported as taxable income to employees or non-employees (e.g., a prize dinner cruise reported on Form 1099).
  • Restaurant or Catering Businesses: Food and beverages provided to paying customers and consumed by employees at the worksite.

Navigating Complex Rules

Understanding IRS rules for business meal and entertainment deductions can help you reduce your taxable income, but the regulations can be nuanced. For example, mixing entertainment and meal expenses on the same bill can create complications unless they are clearly itemized.

Bottom Line

While deductions for business-related meals and entertainment expenses are still available in some situations, navigating the rules requires careful attention to detail. Maximizing these deductions can save you money, but compliance is essential to avoid IRS scrutiny.

Have questions or need assistance with your business deductions? Contact us today to ensure you’re leveraging every allowable tax benefit.

Optimize Your Business Tax Strategy in 2024

Understanding what you can and can’t deduct for business meals and entertainment can make a big difference during tax season. Stay informed and proactive to make the most of your eligible expenses.

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Self-Employment Taxes Explained: Strategies to Manage and Reduce Your Tax Burden

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Understanding Self-Employment Taxes

If you’re a self-employed individual or own a growing, unincorporated small business, understanding self-employment (SE) taxes is crucial. The SE tax serves as the mechanism through which Social Security and Medicare contributions are collected. While these taxes fund important social programs, they can result in hefty bills for business owners.

SE Tax Basics: What You Need to Know

For 2024, the self-employment tax rate is 15.3% on the first $168,600 of net SE income. This rate includes:

  • 12.4% for Social Security.
  • 2.9% for Medicare.

For 2025, the threshold increases to $176,100. However, once your income exceeds these limits, the 12.4% Social Security portion no longer applies, leaving only the 2.9% Medicare tax in effect.

How to Calculate Your SE Tax

Follow these steps to determine your SE tax bill:

  1. Take your net income from self-employed activities (commonly listed on Schedule C of Form 1040).
  2. Multiply that income by 0.9235 to get your net SE income.
  3. If your income is $168,600 or less (2024):
    • Multiply the amount by 15.3%.
  4. If your income exceeds $168,600:
    • Apply 12.4% to $168,600 for Social Security.
    • Apply 2.9% to the total income for Medicare.
    • Add these two amounts for your final SE tax.

Example:
In 2024, if your net SE income is $200,000, your SE tax calculation would be:

  • 12.4% × $168,600 = $20,906 (Social Security).
  • 2.9% × $200,000 = $5,800 (Medicare).
  • Total SE Tax = $26,706.

The Rising Cost of SE Taxes

SE taxes aren’t just high now; they’re projected to increase. As Social Security tax ceilings rise with inflation, small business owners may face growing tax burdens.

Here are the Social Security tax ceilings projected by the Social Security Administration (SSA):

  • 2026: $181,800
  • 2027: $188,100
  • 2028: $195,900
  • 2029: $204,000
  • 2030: $213,600
  • 2031: $222,900
  • 2032: $232,500
  • 2033: $242,700

A Disconnect Between Taxes and Benefits

While the Social Security tax ceiling increases yearly, the growth in Social Security benefits does not keep pace. For example:

  • The 2024 tax ceiling rose by 5.24% compared to 2023.
  • However, Social Security benefit payments only increased by 3.2% during the same period.

This discrepancy occurs because different inflation measures are used:

  • Tax ceilings are based on wage inflation.
  • Benefit increases are tied to general inflation rates.

A Smart Tax-Saving Strategy: S Corporations

If the weight of self-employment taxes feels overwhelming, there’s a potential solution: restructuring your business as an S corporation.

Here’s how it works:

  1. Pay yourself a reasonable salary.
  2. Distribute the remaining corporate profits to yourself as dividends.

This strategy ensures that only your salary is subject to Social Security and Medicare taxes. Dividends, on the other hand, are not subject to SE taxes, potentially saving you thousands each year.

Take Control of Your SE Taxes

Self-employment taxes are a reality for business owners, but careful planning can help you manage and reduce your tax burden. Whether you’re exploring restructuring options like an S corporation or want help calculating your SE tax obligations, expert advice is just a call away.

Contact Us Today!
Our team specializes in tax strategies for small business owners and self-employed individuals. Let us help you keep more of what you earn. By understanding SE taxes and implementing strategies to manage them, you can focus on growing your business without unnecessary financial stress.

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2025 Retirement Contribution Limits: How to Boost Your Savings This Year

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With new cost-of-living adjustments from the IRS, 2025 brings slight increases to retirement contribution limits, allowing you and your employees to save even more. These updates, detailed in IRS Notice 2024-80, apply to 401(k) plans, IRAs, SIMPLE plans, and more, though the adjustments are more modest than in recent years due to easing inflation.

401(k) Contribution Limits for 2025

Starting in 2025, employees contributing to a 401(k) plan can save up to $23,500—an increase from $23,000 in 2024. This limit also applies to 403(b) plans, most 457 plans, and the federal Thrift Savings Plan. For employees aged 50 and over, the catch-up contribution remains at $7,500. However, under the SECURE 2.0 Act, those aged 60 to 63 can take advantage of a higher catch-up amount of $11,250, boosting their total potential contribution to $34,750 in 2025.

SEP and Defined Contribution Plan Limits

Defined contribution plans, including SEP plans, will see an increase in contribution limits from $69,000 to $70,000 in 2025. To be eligible for a SEP plan, employees must earn a minimum of $750 annually—a threshold that remains unchanged from 2024.

SIMPLE Plan Contribution Limits

For 2025, the deferral limit for SIMPLE plans rises to $16,500 (up from $16,000). For employees 50 and over, the catch-up contribution stays at $3,500, but those between 60 and 63 can now contribute an additional $5,250, potentially saving up to $21,750.

Additional Retirement Plan Limits

In 2025, other plan limits also increase, allowing more flexibility for certain high-earning employees and plan participants:

  • Defined Benefit Plans: The annual benefit cap rises from $275,000 to $280,000.
  • Top-Heavy Plan Key Employee Limit: Increases from $220,000 to $230,000.
  • Highly Compensated Employee Threshold: Increases from $155,000 to $160,000.

IRA Contributions Remain Unchanged

The annual contribution limit for IRAs will remain at $7,000, with a fixed catch-up contribution of $1,000 for individuals 50 and older.

Plan for a More Secure Future

The increased contribution limits for 2025 can help you and your employees build a more robust retirement fund. If you have questions about these updates or want to explore other tax-advantaged retirement options, contact us today. We’re here to help you make the most of your retirement savings strategy.

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Maximizing Your Business Travel Deductions: Essential Tax Tips for Entrepreneurs

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As a business owner, travel may be essential for meeting clients, attending industry conferences, managing vendors, and much more. Understanding which travel expenses qualify as tax deductions can make a big impact on your business’s finances. By keeping careful records and knowing what’s deductible, you can ensure tax compliance and maximize savings on business travel.

What is Your Tax Home?

Eligible business travelers can deduct necessary and ordinary expenses incurred while traveling away from their “tax home.” In tax terms, “ordinary” means common in your industry, while “necessary” means beneficial and appropriate for your business. Personal, lavish, or extravagant expenses aren’t deductible. However, reasonable expenses like a first-class flight or luxury hotel stay may qualify as long as they align with business needs.

Your tax home is not necessarily where you live; rather, it’s the area around your main place of business. (Special rules apply if you have multiple business locations or don’t have a regular workplace.) Generally, you’re considered “away from home” if you’re away longer than a typical workday and need to rest to meet work requirements. Temporary assignments qualify, but expenses for indefinite assignments lasting over a year are not deductible.

Common Deductible Travel Expenses

If you meet the requirements for deductible travel, here are common expenses that may qualify:

  • Transportation: Airfare, train, or bus tickets, along with baggage fees.
  • Car Rentals or Mileage: Rental fees or the cost of using your own vehicle, plus tolls and parking fees.
  • Local Transportation: Taxis, rideshares, and other transport while at your destination for business purposes.
  • Lodging Costs: Hotel expenses while away on business.
  • Tips and Incidentals: Tips for service staff, laundry, and dry cleaning.
  • Meals: Generally, meals are 50% deductible, including solo meals and meals with clients if they serve a business purpose and aren’t extravagant.

Claiming Travel Deductions

If you’re self-employed, business travel expenses can be deducted on Schedule C. Employees, however, cannot deduct unreimbursed business travel expenses. Employers can deduct employees’ travel expenses if they provide advances, reimbursements, or pay directly under an “accountable plan.” This plan requires that expenses serve a business purpose and that employees substantiate expenses and return any excess funds.

Combining Business with Personal Travel

If a U.S. trip is primarily for business but includes personal days, you can still deduct the full cost of transportation to and from the destination. However, lodging and meal deductions apply only to the business days. To classify a trip as business, the majority of the time must be spent on business activities.

Recordkeeping Requirements

To deduct travel expenses, maintain adequate documentation, such as receipts and detailed records, noting the amount, date, location, and purpose of each expense. For non-lodging expenses under $75, receipts aren’t mandatory, but details must still be logged. Some employers may have stricter substantiation policies than the IRS requires.

If using your car for business travel, you may deduct either actual expenses or the standard mileage rate. For lodging, meals, and incidental expenses, employers can also use the per-diem method, which allows simplified record-keeping based on federal per-diem rates. Self-employed individuals can use this method for M&IE but not for lodging.

Alternatively, the optional high-low substantiation method allows using set per-diem rates for high-cost and other localities.

Need Help Navigating Business Travel Deductions?

Business travel tax rules can be complex, especially when considering international travel or traveling with family members. If you have questions or need assistance in managing these deductions, reach out to us for guidance to ensure you’re maximizing your tax savings.

Q&A below:

What is considered a “tax home” for travel deduction purposes?

A tax home generally refers to the city or general area where your principal place of business is located, not necessarily where you maintain your family residence. You’re considered to be traveling away from your tax home if your work duties require you to be away for substantially longer than an ordinary workday and you need rest to perform those duties. However, travel expenses aren’t deductible if you’re on an indefinite assignment expected to last more than a year.

What types of expenses can I deduct for business travel?

Common deductible business travel expenses include airfare, train or bus fare to your destination, car rentals or the cost of using your vehicle (plus tolls and parking), transportation at your destination, lodging, tips to service workers, and dry cleaning or laundry. Meals, including those eaten alone or with business contacts, are generally 50% deductible if they’re for a business purpose and not extravagant.

Can I deduct travel costs if I mix business and personal activities on a trip?

Yes, you can deduct the full cost of transportation to and from the destination if the trip is primarily for business. However, only the expenses directly related to the business portion of the trip, such as lodging and meals, are deductible. For the trip to qualify as primarily business-related, you generally need to spend more time on business activities than personal ones.

What documentation is needed to claim business travel deductions?

To claim travel deductions, you must substantiate each expense with adequate records, including receipts, canceled checks, or bills that show the amount, date, place, and nature of each expense. Non-lodging expenses under $75 don’t require a receipt, but they must still be documented in an expense report. Employers may choose to simplify tracking by using federal per-diem rates for meals and incidental expenses or the high-low substantiation method.

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Maximize Your Retirement: Building a Golden Nest Egg with a Solo 401(k) for Self-Employed Professionals

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Building a robust retirement plan is essential, especially if you’re self-employed. If you’re a small business owner without employees (other than your spouse), a Solo 401(k) plan can be an ideal choice for setting up a solid retirement foundation. This type of plan, also known as an individual 401(k), offers greater contribution potential, tax benefits, and flexibility, particularly compared to SIMPLE IRAs or SEP plans.

What is a Solo 401(k) Plan?

A Solo 401(k) is a retirement savings plan tailored for self-employed individuals, including sole proprietors, consultants, and owners of single-member LLCs. It’s designed to maximize contributions and tax savings for those who don’t have traditional employees. This plan offers significant advantages in terms of contribution limits and investment options, making it an appealing choice for individuals aiming to grow their retirement savings.

Contribution Limits: How Much Can You Invest in 2024?

For the 2024 tax year, the Solo 401(k) offers two types of contributions: elective deferrals and employer contributions. Here’s a breakdown:

  1. Elective Deferral Contribution: You can defer up to $23,000 of your net self-employment (SE) income into the plan. If you’re 50 or older by December 31, 2024, this contribution limit rises to $30,500, which includes a $7,500 catch-up contribution.
  2. Employer Contribution: On top of the elective deferral, you can contribute an additional 20% of your net SE income. This is termed an “employer contribution” for tax purposes, even though self-employed individuals are both employer and employee in this scenario. Importantly, net SE income for this purpose isn’t reduced by your elective deferral.

    For 2024, your total contributions—both elective deferral and employer—can’t exceed:

    • $69,000 (or $76,500 if you’re 50 or older).
    • 100% of your net SE income.

    Net SE income is calculated as the net profit reported on IRS Form 1040, Schedule C, E, or F, minus the deduction for 50% of self-employment tax.

Key Advantages and Disadvantages of a Solo 401(k)

Advantages:

  • High Contribution Limits: Solo 401(k) plans allow for substantial deductible contributions, which can lead to significant tax savings.
  • Flexibility in Contributions: Contributions are discretionary, meaning you can adjust them based on your financial situation.
  • Loan Options: If your Solo 401(k) plan allows loans, you can borrow up to 50% of the account balance or $50,000 (whichever is less), a helpful feature for business funding or emergencies. This option isn’t available in SEP plans.

Disadvantages:

  • Administrative Requirements: Solo 401(k) plans require more paperwork and compliance than simpler plans. A written plan document is mandatory, and contributions must be recorded and paid into the account. Additionally, once your balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
  • No Employees Allowed: You cannot have a Solo 401(k) if your business has non-spousal employees. However, you can exclude employees under 21 or those working fewer than 1,000 hours in any 12-month period.

Is a Solo 401(k) Right for You?

A Solo 401(k) plan can be a powerful retirement tool for self-employed individuals who:

  • Have a high net SE income and are looking to make sizable contributions.
  • Want flexibility in contributions, especially if cash flow fluctuates.
  • Are age 50 or older and can benefit from the additional catch-up contributions.

While Solo 401(k)s offer generous tax advantages and savings potential, they do come with administrative complexities. For those who are serious about retirement savings and can manage the paperwork, these plans provide an excellent way to build wealth for retirement.

If you’re ready to start planning for your future and want to know if a Solo 401(k) is right for your financial goals, reach out to us today. We’ll help you weigh the pros and cons of a Solo 401(k) alongside other retirement options so that you can secure your financial future confidently.

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Employers: Prepare for the 2025 Social Security Wage Base Increase

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As 2025 approaches, employers need to prepare for updates to the Social Security wage base. The Social Security Administration recently announced that the wage base will rise to $176,100 for 2025, up from $168,600 in 2024. Wages and self-employment income above this threshold will remain exempt from Social Security taxes.

For businesses, particularly those with high-earning employees, this increase means potential adjustments in payroll budgeting to account for additional Social Security tax costs.

Understanding Social Security Tax Basics

Under the Federal Insurance Contributions Act (FICA), employers, employees, and self-employed individuals are subject to two main taxes:

  1. Social Security Tax: Also known as the Old Age, Survivors, and Disability Insurance (OASDI) tax, this is capped at the wage base.
  2. Medicare Tax: Known as the Hospital Insurance (HI) tax, this has no wage base cap.

The FICA tax rate for employers in 2025 will remain 7.65%—comprised of 6.2% for Social Security and 1.45% for Medicare, the same as in 2024.

2025 Tax Rate Updates for Employers and Employees

For employees, the updated tax rates mean:

  • Social Security Tax: 6.2% on the first $176,100 in wages, with a maximum of $10,918.20.
  • Medicare Tax: 1.45% on the first $200,000 in wages ($250,000 for joint returns, $125,000 for married taxpayers filing separately).
  • Additional Medicare Tax: An extra 0.9% on wages exceeding $200,000 ($250,000 for joint returns, $125,000 for separate returns), bringing the rate to 2.35% for those earnings.

For self-employed individuals:

  • Social Security Tax: 12.4% on the first $176,100 in self-employment income, with a maximum of $21,836.40.
  • Medicare Tax: 2.9% on the first $200,000 in self-employment income ($250,000 for combined joint returns, $125,000 for separate returns).
  • Additional Medicare Tax: 3.8% on self-employment income exceeding $200,000 ($250,000 for joint returns, $125,000 for separate returns).

A Brief History of the Social Security Wage Base

Since its inception in 1937, the Social Security wage base has periodically increased to align with economic growth and inflation. Initially set at $3,000, it rose gradually, reaching $25,900 by 1980 and $76,200 by 2000. In recent years, it has continued to adjust, reaching $137,700 in 2020 and continuing upward to match inflation and wage growth trends.

Special Considerations: Employees with Multiple Employers

If your employees hold second jobs, both employers are required to withhold Social Security tax up to the wage base limit. If combined withholdings exceed the maximum, employees will receive a credit on their tax return for any over-withheld amount.

Preparing for 2025 Payroll Tax Compliance

With Social Security and Medicare tax changes on the horizon, it’s essential to review payroll systems and ensure compliance. If you have questions about managing payroll taxes or filing requirements for the coming year, contact us for guidance. We’re here to help you navigate the updates and stay in compliance as payroll costs shift in 2025.

Q&A below:

What is the new Social Security wage base for 2025?

The Social Security wage base for 2025 will increase to $176,100, up from $168,600 in 2024. Wages and self-employment income above this amount will not be subject to Social Security tax.

What are the FICA tax rates for employers and employees in 2025?

For 2025, employers and employees will continue to pay a total FICA tax of 7.65%, which includes 6.2% for Social Security (up to the $176,100 wage base) and 1.45% for Medicare. Employees earning more than $200,000 will also be subject to an additional 0.9% Medicare tax.

How will the Social Security wage base change impact self-employed individuals in 2025?

Self-employed individuals will pay 12.4% in Social Security tax on the first $176,100 of self-employment income, and 2.9% in Medicare tax on income up to $200,000. Any income over $200,000 will incur a 3.8% Medicare tax (2.9% regular Medicare tax plus 0.9% additional Medicare tax).

What happens if an employee works for multiple employers and exceeds the wage base?

If an employee works for more than one employer and exceeds the $176,100 Social Security wage base across multiple jobs, each employer is still required to withhold Social Security taxes up to the wage base limit. The employee can claim a credit on their tax return for any excess withholding.

 

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Essential Steps for Your Business to Prepare for and Respond to an IRS Audit

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The IRS has recently increased its audit efforts, particularly targeting large businesses and high-income individuals. By 2026, audit rates for large corporations with assets over $250 million will nearly triple, while partnerships with assets exceeding $10 million will experience a tenfold increase in audits. This surge in audit activity is fueled by the Inflation Reduction Act, with a clear focus on addressing high-dollar noncompliance and wealthier entities.

While small businesses and individuals making less than $400,000 annually are unlikely to see a significant uptick in audits, the IRS is concentrating on more complex returns. For example, one focal point includes taxpayers who use business aircraft for personal purposes—while businesses can deduct expenses for corporate planes, non-business travel isn’t tax-deductible.

How to Prepare for an IRS Audit

The best way to navigate an IRS audit is to be prepared well in advance. Here are some critical steps your business can take to safeguard itself:

  1. Maintain Accurate Records
    Keep organized documentation of all business transactions, including invoices, bills, canceled checks, and receipts. Properly maintaining these records will serve as vital proof for items reported on your tax returns.
  2. Know Common Red Flags
    Certain entries on your tax returns may trigger scrutiny. Be mindful of potential red flags such as:

    • Significant inconsistencies between previous returns and your latest filing.
    • Gross profit margins or expenses that differ dramatically from others in your industry.
    • Miscalculations or unusually high deductions that stand out to auditors.

    Pay particular attention to deductions with strict recordkeeping requirements, like auto and travel expenses. Additionally, owner-employee salaries that are out of sync with similar businesses can attract attention, especially for corporations.

  3. Stay Proactive
    Regularly review your business’s tax filings to ensure accuracy and compliance. By identifying discrepancies early, you can address issues before the IRS flags them for an audit.

How to Respond to an IRS Audit

If the IRS selects your business for an audit, you’ll be notified by letter. Contrary to some scams, the IRS does not initiate audits over the phone, email, or text message. Here’s how to handle the situation if you receive a legitimate audit notice:

  1. Stay Calm
    Many audits are routine, and not all require face-to-face meetings with an auditor. In fact, some audits may only request that you mail in supporting documentation for specific deductions.
  2. Gather Your Documentation
    Once notified, collect and organize all relevant financial records to support the information on your tax return. If some documents are missing, attempt to recreate them using other supporting evidence.
  3. Understand the Discrepancies
    The IRS will outline the specific items it is questioning. Be sure to understand exactly what is being disputed before responding.
  4. Respond to the Audit Properly
    If an in-person audit is required, ensure that all necessary documents are in order and ready to be reviewed. For mail-in audits, send the requested documentation promptly. Ignoring notices can result in further IRS actions.

How Our Firm Can Help

Facing an IRS audit can be overwhelming, but you don’t have to go through it alone. Our team can assist in:

  • Clarifying what the IRS is disputing (sometimes it’s not entirely clear),
  • Gathering the necessary documents and information to support your case,
  • Preparing the most effective response to the IRS inquiries.

Remember, the IRS typically has three years from the date of filing to audit your returns. By taking a proactive, organized approach to your tax filings, you can mitigate the chances of being audited in the first place and make the process more manageable if it does occur.

By implementing these best practices, your business will be well-prepared to navigate an IRS audit with confidence and minimize potential disruptions. Don’t wait until an audit happens—proactive preparation is key to safeguarding your business. If you need expert guidance or assistance with your tax documentation, our team is here to help. Contact us today to ensure your business is fully equipped to handle any IRS audit with ease.

Q&As

How can businesses prepare for an IRS audit?

To prepare for an IRS audit, businesses should maintain detailed and organized documentation of all financial activities. This includes keeping invoices, receipts, bills, and other proof of expenses in one central location. It’s also essential to be aware of common audit triggers, such as significant inconsistencies in returns, unusually high deductions, or financials that differ greatly from industry standards.

What are some red flags that might lead to an audit?

Certain tax return entries can attract IRS scrutiny, including significant differences between past returns and the most current one, gross profit margins or expenses that are out of line with other businesses in the industry, and high or miscalculated deductions. Specific deductions, like auto and travel expenses, often require strict documentation, and salary discrepancies for owner-employees in corporations may also raise red flags.

What should you do if the IRS notifies you of an audit?

If selected for an audit, the IRS will notify you by letter. It’s important to respond promptly, gather the necessary documentation, and stay calm. Many audits simply request documentation by mail, while more thorough audits may require in-person meetings. The IRS will provide time to collect all relevant records, and if anything is missing, you’ll need to reconstruct the information accurately from available sources.

How can a CPA firm help you during an IRS audit?

A CPA firm can assist by helping you understand what the IRS is disputing, gathering the specific documents and information needed to support your case, and responding effectively to the IRS’s inquiries. Having professional support can make the process more manageable and ensure that all responses are timely and accurate.

 

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The Benefits of Separating Your Business from Its Real Estate

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If your business requires real estate to operate or holds property under its business name, it might be time to reconsider this approach. Separating business operations from real estate ownership offers several long-term benefits, including tax savings, liability protection, and enhanced estate planning options. This strategy could be a smart move for business owners looking to maximize their financial advantages.

Tax Benefits of Separating Real Estate from Your Business

For businesses structured as C corporations, real estate is often treated like any other business asset such as equipment or inventory. Expenses related to owning these assets are typically deductible, appearing as ordinary business expenses on income statements. However, issues arise when it comes to selling the real estate. In a C corporation, the profits from the sale of property are subject to double taxation—once at the corporate level and again when distributions are made to individual shareholders.

By transferring ownership of the real estate to a pass-through entity such as an LLC or an LLP, you can avoid double taxation. With this setup, profits from a real estate sale are taxed only at the individual level, helping you retain more of your earnings and reducing your overall tax burden.

Asset Protection and Liability Shield

Separating real estate ownership from the business can also safeguard your assets. If your business faces a lawsuit or creditors seek compensation, they could potentially target all assets, including real estate owned by the business. However, if the real estate is held under a separate legal entity, it becomes much harder for plaintiffs or creditors to seize that property.

This separation can also protect you during bankruptcy proceedings. Generally, creditors cannot recover real estate held by a separate entity unless the property was used as collateral for business loans. This makes separating real estate an excellent way to shield valuable assets from legal risks.

Estate Planning Advantages

Keeping real estate separate from the business can provide more flexibility in estate planning. For instance, if you own a family business and not all of your heirs are interested in managing the company, you have the option to pass the business to one heir and the real estate to another. This separation of assets allows for smoother inheritance and distribution of wealth among family members.

How to Separate Real Estate from Your Business

If you’re ready to explore this strategy, you can transfer ownership of the business property to a different entity and lease it back to the company. One option is for the business owner to purchase the real estate from the business, holding the title under their own name. However, this approach could expose the owner to liabilities, putting their personal assets at risk.

A better alternative is to transfer the property to a separate legal entity, typically an LLC or LLP, specifically formed to hold real estate. LLCs are easier to set up, requiring just one member, while LLPs require at least two partners and are not permitted in every state. An LLC, with its pass-through taxation structure, allows any real estate expenses to be deducted on your individual tax return, offsetting rental income from leasing the property to the business.

Risks and Considerations

While separating your business from its real estate offers many advantages, it may not be the best strategy for every situation. It’s important to assess the potential costs, capital gains taxes, and the risks of transferring liabilities. In some cases, the liabilities associated with the property could still pose risks to the business, especially if an incident like a client injury occurs on-site, leading to a lawsuit.

Take the Next Step

Deciding whether to separate your business from its real estate can be complex. The best approach depends on your specific business needs, tax considerations, and long-term financial goals. Consulting with tax and legal professionals can help you determine the most effective strategy for minimizing transfer costs, reducing taxes, and protecting your assets. By separating your business from its real estate, you can unlock significant tax benefits, protect your assets, and enhance your estate planning. For expert guidance tailored to your unique situation, contact us today to learn how we can help you maximize these advantages and secure your financial future.

Q&As:

How do taxes affect the sale of real estate owned by a business?

If a C corporation owns real estate, the profits from its sale are taxed twice: first at the corporate level and then at the individual level when profits are distributed. This double taxation can be avoided by transferring the real estate to a pass-through entity, where the sale is taxed only at the individual level.

How can separating real estate from a business safeguard assets?

By keeping real estate ownership separate from the business, you protect the property from creditors and lawsuits targeting the business. In the event of a lawsuit or bankruptcy, property owned by a separate entity is generally shielded unless it was used as collateral for business debts.

What are the estate planning benefits of separating real estate from a business?

Separating real estate from a business provides flexibility in estate planning, especially in family-owned businesses. If not all heirs are interested in running the business, you can distribute the real estate to one family member and the business to another, offering more balanced asset distribution.

What are the considerations when handling a real estate transfer from a business?

When transferring real estate ownership, an LLC or LLP is often used to hold the property. An LLC is typically easier to establish and offers liability protection. The business owner could also personally purchase the real estate, but this carries the risk of assuming property-related liabilities, which could impact the business if lawsuits arise.

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Does Your Business Need to Report Employee Health Coverage? Key Obligations Explained

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Offering employee health coverage is a vital part of many businesses’ benefits packages, but navigating the reporting requirements can be challenging. As a business owner, it’s essential to understand your obligations under federal laws like the Affordable Care Act (ACA) to ensure compliance and avoid potential penalties. So, does your business need to report employee health coverage to the IRS? Let’s dive into the details and answer some common questions.

How Many Employees Trigger Reporting Requirements?

Under the ACA, businesses with 50 or more full-time employees, known as Applicable Large Employers (ALEs), are required to report employee health coverage to the IRS. Specifically, ALEs must file Forms 1094-C and 1095-C to report details of the health coverage offered and the enrollment status of each employee.

  • Form 1094-C: This form serves as a summary that provides details on health coverage offers made to employees and transmits the individual employee forms to the IRS.
  • Form 1095-C: Each full-time employee receives this form, which outlines the health insurance offered, the months they were covered, and the share of costs.

These forms are also used to determine if an employer is liable for any payments under the “employer mandate.” ALEs that fail to offer affordable minimum essential coverage to their full-time employees and their dependents may face penalties. Form 1095-C also helps the IRS determine employee eligibility for premium tax credits.

For businesses with fewer than 50 full-time employees, including equivalents, the employer is not considered an ALE and therefore is exempt from the employer mandate and related reporting requirements for that year.

What Information Needs to Be Reported?

On Form 1095-C, ALEs must include the following information for each full-time employee who was employed during any month of the calendar year:

  • The employee’s name, Social Security number (SSN), and address.
  • Employer’s EIN (Employer Identification Number).
  • Contact person’s name and phone number.
  • A description of the health coverage offered, using designated codes.
  • The monthly cost of the lowest-cost plan available to full-time employees.
  • Safe harbor codes related to the employer mandate penalty, if applicable.

Reporting for Self-Insured and Multiemployer Plans

If your business offers a self-insured health plan, you’ll need to include additional information on Form 1095-C. A self-insured plan may offer both insured and self-insured enrollment options, so ensure all necessary details are reported accurately.

For employers that offer coverage through a multiemployer health plan, the plan sponsor or insurance issuer is responsible for providing health coverage information to employees. However, if your business provides self-insured health coverage but is not subject to the employer mandate, you’ll need to file Forms 1094-B and 1095-B for covered employees instead.

Keep in mind that these reporting requirements become more complex if your business is part of an aggregated ALE group or uses a multiemployer plan. Be sure to consult with an expert if this applies to your situation.

What Are the W-2 Reporting Requirements?

In addition to Forms 1094-C and 1095-C, employers must also report certain health coverage information on employees’ W-2 forms. This information is for reporting purposes only and does not affect the taxability of the coverage provided. It’s essential to remember that W-2 reporting and Form 1095-C reporting are separate obligations.

Get Help with Health Coverage Reporting

Understanding your business’s employee health coverage reporting requirements is crucial for avoiding penalties and ensuring compliance. While this guide provides an overview of the essential obligations, the regulations can be complex, especially for businesses with unique circumstances like self-insured plans or multiemployer coverage.

If you need help navigating these rules or ensuring proper filing, contact us today for expert assistance.

By optimizing this blog post for SEO, you can increase its visibility to businesses looking for information on employee health coverage reporting requirements. Keywords like “Affordable Care Act,” “employee health coverage reporting,” “IRS Forms 1094-C and 1095-C,” and “employer mandate penalties” can help your content rank higher in search results, driving more traffic to your website.

 

Q&A below:

What is the minimum number of employees a business must have before being required to report health coverage?

Under the Affordable Care Act (ACA), businesses with 50 or more full-time employees, known as “applicable large employers” (ALEs), must report health coverage information using Forms 1094-C and 1095-C. Businesses with fewer than 50 full-time employees are exempt from these reporting requirements.

What information needs to be reported by applicable large employers?

ALEs must report details for each full-time employee, including their name, Social Security number, address, the employer’s EIN, and information about the health coverage offered, such as cost and the months of coverage. They must also indicate if any safe harbor provisions apply under the employer shared responsibility provisions.

What if our business offers a self-insured health plan?

If an ALE provides health coverage through a self-insured plan, additional information must be reported on Form 1095-C. If a business offers self-insured coverage but is not subject to the employer mandate, reporting is done using Forms 1094-B and 1095-B for enrolled employees.

What health coverage information should be reported on employees’ W-2 forms?

Employers are required to report specific health coverage details on employees’ W-2 forms, though this information differs from what is reported on Form 1095-C. The W-2 reporting is for informational purposes and does not make employer-provided coverage taxable to employees.

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Essential Tax Deadlines for Businesses and Employers: 2024 Q4 Tax Calendar

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As the fourth quarter of 2024 approaches, businesses and employers must be aware of important tax deadlines to avoid penalties and stay compliant. Below are key tax dates that may impact your business, but keep in mind that this list isn’t exhaustive. Additional deadlines may apply depending on your situation, so be sure to consult with us to ensure you’re meeting all filing requirements and staying on top of any tax-related obligations.

Note: Tax-filing and payment deadlines may be extended for those in federally declared disaster areas. Contact us for more information if this applies to you.

October 1, 2024

  • SIMPLE IRA Plan Deadline
    If you’re looking to establish a SIMPLE IRA plan for your business, this is the last day to do so provided neither you nor any predecessor employer has maintained a SIMPLE IRA in the past. New employers that come into existence after October 1 can set up a SIMPLE IRA plan as soon as administratively possible after the business begins operations.

October 15, 2024

  • C Corporation Income Tax Return (Form 1120)
    If your C corporation operates on a calendar year and you filed for an automatic six-month extension, this is the deadline to file your 2023 income tax return. Be sure to pay any outstanding tax, interest, and penalties.
  • Employer-Sponsored Retirement Plan Contributions
    Calendar-year C corporations should also make any 2023 contributions to qualified employer-sponsored retirement plans by this date.

October 31, 2024

  • Third Quarter 2024 Income Tax Withholding and FICA Reporting
    Employers must report third-quarter income tax withholding and FICA taxes (Form 941) and make any payments due by this deadline. See the exception below if you qualify for a November 12 deadline.

November 12, 2024

  • Third Quarter 2024 Income Tax Withholding and FICA (Form 941)
    If you deposited all associated taxes for the third quarter on time and in full, you qualify for an extended deadline to report your income tax withholding and FICA taxes.

December 16, 2024

  • Fourth Installment of 2024 Estimated Income Taxes for C Corporations
    Calendar-year C corporations must make the fourth installment of their 2024 estimated income tax payment by this date to avoid penalties.

Stay Compliant with Your Tax Deadlines

Missing a tax deadline can result in costly penalties and interest. If you need assistance navigating your business’s tax obligations, contact us today. We’ll help ensure you meet all applicable filing requirements and stay on track with your quarterly tax payments.

Reach out to us for more information on filing requirements and to stay up to date with all relevant deadlines.

Optimize your tax planning today!

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How to Keep Your Partnership or LLC Compliant with Tax Laws

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When drafting partnership and LLC operating agreements, addressing various tax considerations is crucial. This is equally important for multi-member LLCs treated as partnerships for tax purposes. To ensure your business complies with federal tax laws, here are several key tax issues that should be included in your operating agreement.

Identify and Outline Guaranteed Payments to Partners

Guaranteed payments in a partnership context are payments made by the partnership to a partner that meet these criteria:

  1. The partner is acting in their capacity as a partner,
  2. The payment is in exchange for services provided to the partnership or for the use of capital, and
  3. The payment is not contingent on the partnership’s income.

Special tax rules apply to guaranteed payments, so it’s essential that they’re clearly defined in the partnership agreement. Some important tax points include:

  • The partnership generally deducts guaranteed payments according to its accounting method at the time they’re paid or accrued.
  • For the individual partner, guaranteed payments are treated as ordinary income, subject to the maximum income tax rate, which is currently 37%. The partner must report the payment as income in the year that includes the end of the partnership’s tax year in which the partnership claimed the deduction, regardless of when the payment was actually received.

Address Tax Basis from Partnership Liabilities

Under partnership tax rules, a partner’s tax basis in the partnership interest increases based on the partner’s share of the entity’s liabilities. This creates a tax advantage because it allows the partner to deduct losses passed through from the partnership that exceed their actual investment, subject to various limitations like the passive loss rules.

Different rules apply to recourse and nonrecourse liabilities, impacting how a partner’s share of liabilities is calculated. The partnership agreement can influence how these liabilities are classified, so it’s important to account for this when drafting the agreement.

Clarify Payment Classifications for Retired Partners

Payments made to retired partners when liquidating their interest are subject to special tax treatment. This includes partners who have exited the partnership for any reason.

  • Payments made in exchange for the retired partner’s share of partnership property are generally treated as ordinary partnership distributions. If these payments exceed the partner’s tax basis, the excess amount is taxable.
  • Other payments made in the liquidation of a retired partner’s interest are either classified as guaranteed payments if they aren’t based on partnership income or as distributive shares of partnership income if they are. These payments are usually subject to self-employment tax.

To ensure the correct tax treatment, the partnership agreement should clearly define how payments to retired partners will be classified.

Consider Additional Partnership Agreement Provisions

With multiple partners, additional considerations often arise, even if you don’t anticipate them. A well-drafted partnership agreement can prevent disputes or complications down the road. You may want to include provisions for:

  • A buy-sell agreement outlining what happens if a partner exits the partnership.
  • A non-compete agreement to protect the partnership’s interests.
  • A plan for handling a partner’s divorce, bankruptcy, or death. For example, will the partnership buy out an interest acquired by an ex-spouse or inherited by a beneficiary? If so, how will the buyout amount be calculated and when will payments be made?

Minimize Potential Liabilities

Properly addressing tax issues in your partnership or LLC operating agreement is critical to avoiding complications down the road. Contact us to ensure your agreement is drafted with these considerations in mind and to help minimize potential liabilities.

Q&As

What are guaranteed payments in a partnership, and how are they taxed?

Guaranteed payments are payments made by a partnership to a partner in exchange for services or capital use, not dependent on the partnership’s income. These payments are treated as ordinary income for the recipient partner, subject to a maximum income tax rate of 37%. The partner must recognize the payment as income in the tax year that includes the end of the partnership tax year in which the payment was deducted by the partnership.

How does a partner’s share of partnership liabilities affect their tax basis?

A partner’s tax basis in their partnership interest increases by their share of the partnership’s liabilities. This allows the partner to deduct passed-through losses that exceed their actual investment, subject to income tax limitations like passive loss rules. The classification of liabilities as recourse or nonrecourse can be affected by the provisions in the partnership agreement, making it crucial to account for these rules when drafting the agreement.

What are the tax implications of payments made to a retired partner?

Payments made to a retired partner in liquidation of their interest in the partnership are generally treated as ordinary distributions. If the payments exceed the partner’s tax basis in the partnership, the excess triggers taxable gain. Other payments are either classified as guaranteed payments (if they don’t depend on partnership income) or as ordinary distributive shares (if they do depend on partnership income). These payments are typically subject to self-employment tax.

What additional provisions should be considered in a partnership agreement?

A partnership agreement should address potential issues, even if they are not expected. Key provisions may include a buy-sell agreement for partner exits, noncompete agreements, and guidelines for handling events such as a partner’s divorce, bankruptcy, or death. For example, the agreement should outline whether the partnership will buy out an interest inherited after a partner’s death or acquired in a divorce and specify how buyout payments will be calculated and paid.

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Year-End Tax Planning Tips For Your Small Business

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As the year winds down, it’s time for small business owners to start thinking about year-end tax planning strategies. With Labor Day behind us, now is the perfect time to take proactive steps to potentially lower your tax liability for both 2024 and 2025. A solid tax plan can help you optimize your finances, boost deductions, and minimize the tax burden on your business.

Here are some essential tax-saving strategies to consider before the year ends.

1. Deferring Income and Accelerating Deductions

A common year-end tax strategy for many small businesses is to defer income and accelerate deductions. By pushing income into the following year and taking as many deductions as possible in the current year, you can potentially reduce your taxable income for 2024. This approach works particularly well if you expect to be in the same or a lower tax bracket next year.

However, if you anticipate being in a higher tax bracket in 2025, the opposite strategy may be more effective. In that case, you might want to pull income into 2024 (when it will be taxed at a lower rate) and delay claiming certain deductions until 2025.

2. Pay Estimated Taxes

Avoiding penalties is critical, so make sure you’re on track with your estimated tax payments. The third-quarter estimated tax payment for 2024 is due by September 16, 2024, and the fourth-quarter payment is due by January 15, 2025. Ensuring that these payments are made on time can prevent you from incurring penalties and interest.

3. Maximize the QBI Deduction

If you own a small business structured as a pass-through entity (such as an LLC, sole proprietorship, S corporation, or partnership), you may be eligible for the Qualified Business Income (QBI) deduction. This can reduce your taxable income by up to 20%, but only if your taxable income is below a certain threshold.

For 2024, the QBI deduction starts phasing out for married couples filing jointly with taxable income over $383,900 (or half that amount for single filers). If you’re nearing this income threshold, you may be able to increase your QBI deduction by deferring income or accelerating deductible expenses to stay below the limit.

Additionally, increasing W-2 wages paid by your business before the end of the year may also help maximize your QBI deduction. Be sure to consult a tax professional to navigate these complex rules and make the most of your deduction.

4. Take Advantage of Cash Accounting

Many small businesses are eligible to use the cash method of accounting for federal tax purposes. This method allows you to record income when it is received and expenses when they are paid, offering more flexibility in deferring income and accelerating expenses.

If your business has average annual gross receipts of less than $30 million over the past three years, you may qualify to use cash accounting. Delaying invoices until the new year or prepaying expenses such as rent, supplies, or utilities can reduce your taxable income for 2024.

5. Utilize the Section 179 Deduction

Consider making capital investments that qualify for the Section 179 deduction before the year ends. For 2024, the maximum Section 179 deduction is $1.22 million, with a spending cap of $3.05 million. This deduction applies to qualifying business property, including equipment, machinery, and off-the-shelf software, as well as interior building improvements.

The high limit allows many small and mid-sized businesses to fully deduct most, if not all, of their capital expenditures. Even if you purchase and place eligible assets into service in the last few days of 2024, you can still claim the full Section 179 deduction for the year.

6. Consider Bonus Depreciation

In addition to the Section 179 deduction, businesses can take advantage of bonus depreciation. For 2024, businesses are eligible for a 60% first-year depreciation deduction on qualified property, including equipment, machinery, and qualified improvement property. This bonus depreciation applies whether the property is new or used, making it a powerful tool for reducing taxable income in the current year.

7. Stay Informed About Upcoming Tax Law Changes

Tax laws are always evolving, and it’s essential to stay up to date on potential changes that could affect your small business. Many current tax provisions, including the QBI deduction, are set to expire at the end of 2025. Additionally, the outcome of the upcoming elections could bring new tax breaks or changes that impact small businesses. Staying informed will help you adapt and make the most of any new opportunities.

Consult with a Professional

As tax season approaches, working with a tax professional can help ensure you’re making the best decisions for your small business. At Botwinick, we specialize in helping businesses like yours navigate tax planning strategies, saving you time and money.

Whether you’re considering an LLC, S corporation, or other business structure, we can provide expert advice tailored to your unique needs. Contact us today to discuss how to optimize your year-end tax planning and prepare your business for a successful financial future.

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Why An LLC Might Be The Perfect Choice For Your Small To Medium-Sized Business

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Choosing the right legal structure for your small or medium-sized business is a crucial decision that can significantly impact your tax obligations, personal liability, and overall business operations. For many entrepreneurs, forming a Limited Liability Company (LLC) offers a blend of advantages, making it a top choice. Whether you’re just starting out or looking to restructure your business, an LLC provides the flexibility and protection that many small and medium-sized businesses need.

What is an LLC?

A Limited Liability Company (LLC) is a hybrid business structure that combines the liability protection of a corporation with the tax benefits and flexibility of a partnership. Unlike corporations, which may face double taxation, LLCs are typically taxed only at the personal level, helping to simplify tax filing and reduce tax burdens.

Benefits of Forming an LLC for Your Business

  1. Limited Personal Liability

    One of the primary reasons many business owners choose an LLC is the protection it offers. The owners of an LLC, known as members, are typically not personally liable for the debts and liabilities of the business. This means your personal assets, such as your home or individual investment accounts, are protected from any lawsuits or creditor claims against the company. This level of protection is much greater than what is provided by partnerships, where general partners are personally responsible for business debts.

  2. Flexible Taxation Options

    LLCs offer flexibility in how they are taxed. By default, an LLC can be taxed as a sole proprietorship (if it has one owner) or a partnership (if it has multiple owners). Additionally, LLCs can choose to be taxed as an S corporation or C corporation under the “check-the-box” regulations. This allows LLC owners to enjoy the benefits of pass-through taxation, meaning business income flows through to the owners’ individual tax returns, avoiding double taxation at the entity level.

    For businesses that qualify for the Qualified Business Income (QBI) deduction, LLC members may also be eligible to deduct up to 20% of their business income, depending on specific IRS regulations and limitations.

  3. Operational Flexibility

    Unlike S corporations, which have restrictions on the number of shareholders (no more than 100) and only one class of stock, LLCs are not bound by such limitations. This makes LLCs particularly attractive for businesses looking to offer varying ownership interests or bring in a diverse set of investors without having to adhere to rigid tax code regulations.

  4. Tax Deduction Opportunities

    If you actively manage your LLC, you can deduct your share of any business losses on your individual tax return. This can help offset other forms of income, allowing you to potentially reduce your overall tax liability. Furthermore, LLCs can offer special allocations of profits and losses to different members, providing more flexibility in profit-sharing arrangements compared to S corporations.

Electing the Right Tax Classification

LLCs offer flexibility when it comes to tax classification. You can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on what works best for your business. For many small business owners, the default classification as a partnership (for multiple-member LLCs) provides the best balance of liability protection and tax savings.

If your LLC is taxed as a partnership, all profits and losses are passed through to the owners, allowing them to report this income on their personal tax returns. This simplifies the tax process and reduces the risk of double taxation.

Why Choose an LLC Over Other Structures?

For many small to medium-sized businesses, an LLC provides the ideal combination of liability protection and tax flexibility. Unlike corporations, LLCs don’t face the same ownership and management restrictions. Additionally, LLCs allow for profit-sharing arrangements and flexible distributions, making them a more versatile option for business owners looking to attract investors or share profits with employees.

Explore Your Options

When deciding whether an LLC is the right choice for your business, it’s essential to evaluate all available options. Every business has unique needs, and state regulations for LLCs can vary. At Botwinick, we specialize in helping small to medium-sized businesses navigate the complexities of business structures, tax obligations, and legal considerations.

Contact Botwinick for Expert Advice

An LLC may be the right fit for your business, but it’s important to review your specific situation with a professional. At Botwinick, we offer expert consultation services to help you determine the best structure for your business needs. Contact us today to learn more about how forming an LLC can benefit your business and protect your personal assets.

By focusing on the flexibility, liability protection, and tax benefits, an LLC might be the perfect structure to support the growth of your small or medium-sized business.

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Mastering Tax Complexity: Precision in Crafting Partnership and LLC Agreements

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Partnerships and multi-member LLCs, which are often treated as partnerships for tax purposes, are popular structures for business and investment ventures. These entities provide significant federal income tax benefits, particularly through pass-through taxation. However, they also come with specific and sometimes intricate tax rules that must be navigated carefully.

Governing Documents: Essential Components

Both partnerships and LLCs require governing documents to define the rights and responsibilities of their members or partners. A partnership is managed according to a partnership agreement, while an LLC operates under an operating agreement. These documents are crucial for addressing various tax-related issues. Here’s what you need to know:

Partnership Tax Fundamentals

In a partnership, income, deductions, and other tax items flow through to the individual partners, who report their share on their personal tax returns using Schedule K-1. The partnership itself does not pay federal income tax. This pass-through taxation means the tax impact is directly transferred to the partners.

Partners can also deduct their share of partnership losses, though this is subject to certain federal income tax limitations, including passive loss rules.

Special Tax Allocations

Partnerships have the flexibility to make special tax allocations, which allow them to distribute tax items in a manner that does not necessarily align with each partner’s ownership percentage. For instance, a high-tax-bracket partner might receive a larger share of the partnership’s depreciation deductions compared to a low-tax-bracket partner. These special allocations must be clearly outlined in the partnership agreement and adhere to complex IRS regulations.

Distributions for Tax Liabilities

Partners are responsible for paying taxes on their allocated share of partnership income and gains, regardless of whether these earnings are distributed in cash. To help partners manage their tax obligations, partnership agreements often include provisions for cash distributions specifically intended to cover anticipated tax liabilities. The agreement should detail how these distributions are calculated, such as a percentage of the partner’s allocated gains.

For example, a common approach might involve distributing 15% or 20% of each partner’s long-term capital gains allocation to assist with tax payments. These distributions are typically made in early April to address tax liabilities from the previous year.

Seek Expert Guidance

When drafting or reviewing partnership or LLC agreements, it’s vital to address all relevant tax issues within the agreement. For expert assistance and to ensure your agreements are crafted with precision, don’t hesitate to contact us. We’re here to guide you through the complexities of tax compliance and help you create well-structured partnership or LLC agreements.

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

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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.

 

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Managing Tax Responsibilities When Closing a Business

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While various facets of the economy have improved this year, the rising cost of living and other economic challenges have led many businesses to close. If you find yourself in this situation, we can assist you in managing the necessary tax responsibilities.

Filing Final Tax Returns

Closing a business requires filing a final federal income tax return and other related forms for the year it ceases operations. The specific return depends on the type of business:

  • Sole Proprietorships: File Schedule C, “Profit or Loss from Business,” with your individual tax return for the closing year. Self-employment tax may also need to be reported.
  • Partnerships: File Form 1065, “U.S. Return of Partnership Income,” for the closing year, along with Schedule D for capital gains and losses. Indicate this is the final return on both Form 1065 and Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
  • Corporations: File Form 966, “Corporate Dissolution or Liquidation,” if a resolution or plan to dissolve or liquidate is adopted.
    • C Corporations: File Form 1120, “U.S. Corporate Income Tax Return,” for the closing year, along with Schedule D for capital gains and losses, marking the return as final.
    • S Corporations: File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the closing year, along with Schedule D. Check the final return box on Schedule K-1.
  • All Businesses: Additional tax forms may be required to report the sale of business property and asset acquisitions if the business is sold.

Finalizing Employee Obligations

If you have employees, it is essential to pay final wages and compensation owed, make final federal tax deposits, and report employment taxes. Failure to withhold or deposit employee income, Social Security, and Medicare taxes can result in personal liability under the Trust Fund Recovery Penalty.

Payments to contractors of $600 or more during the calendar year must be reported on Form 1099-NEC, “Nonemployee Compensation.”

Additional Responsibilities

  • Retirement Plans: Terminate any employee retirement plans and distribute benefits to participants, adhering to detailed notice, funding, timing, and filing requirements.
  • Employee Programs: Address complex requirements related to flexible spending accounts, Health Savings Accounts, and other employee programs.

Other Tax Considerations

We can assist with several complex tax issues related to closing your business, including:

  • Debt cancellation
  • Use of net operating losses
  • Freeing up any remaining passive activity losses
  • Depreciation recapture
  • Potential bankruptcy issues

Closing Your IRS Account

Cancel your Employer Identification Number (EIN) and close your IRS business account. Additionally, maintain business records for the required retention period.

Payment Options

If your business is unable to pay all the taxes it owes, we can explain available payment options. Contact us to discuss these responsibilities and get answers to any questions you may have.

For personalized assistance with closing your business and managing associated tax responsibilities, please contact us today.

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Why Every Business with Co-Owners Needs a Buy-Sell Agreement

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Are you considering purchasing a business that will have one or more co-owners? Or do you currently own such a business? If so, implementing a buy-sell agreement is a crucial step. A well-drafted agreement can offer the following benefits:

  • Transform your business ownership interest into a more liquid asset
  • Prevent unwanted ownership changes
  • Avoid complications with the IRS

Agreement Basics

There are two primary types of buy-sell agreements: cross-purchase agreements and redemption agreements (sometimes referred to as liquidation agreements).

Cross-purchase agreements are contracts between you and the other co-owners. Under this agreement, if a triggering event such as death or disability occurs, the withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners.

Redemption agreements are contracts between the business entity and its co-owners. In this arrangement, the business entity is obligated to purchase the withdrawing co-owner’s ownership interest if a triggering event occurs.

Triggering Events

You and your co-owners can specify which triggering events to include in your agreement. Common events to consider are death, disability, and retirement at a specified age. Other events, such as divorce, can also be included based on your preferences.

Valuation and Payment Terms

Your buy-sell agreement should clearly outline the method for valuing business ownership interests. Common valuation methods include a fixed per-share price, an appraised fair market value, or a formula based on earnings or cash flow multiples.

Additionally, the agreement should specify how payments will be made to withdrawing co-owners or their heirs under various triggering events.

Life Insurance to Fund the Agreement

The death of a co-owner is often the most significant and catastrophic triggering event. Life insurance policies can serve as the financial foundation for your buy-sell agreement.

In a simple cross-purchase agreement between two co-owners, each co-owner purchases a life insurance policy on the other. If one co-owner dies, the surviving co-owner collects the insurance proceeds and uses them to buy out the deceased co-owner’s interest from the estate, surviving spouse, or other heirs. The insurance proceeds are generally free from federal income tax, provided the surviving co-owner is the original policy purchaser.

For arrangements involving more than two co-owners, the process can become complex, as each co-owner must buy life insurance policies on all the others. In such cases, using a trust or partnership to buy and maintain one policy on each co-owner can simplify the process. Upon the death of a co-owner, the trust or partnership collects the insurance proceeds tax-free and distributes the cash to the remaining co-owners, who then fulfill their buyout obligations under the cross-purchase agreement.

For redemption buy-sell agreements, the business entity purchases policies on the lives of all co-owners and uses the insurance proceeds to buy out deceased co-owners.

Ensure your agreement specifies that any buyout not funded by insurance proceeds will be paid through a multi-year installment plan. This provides the remaining co-owners with the necessary time to generate the required funds.

Certainty for Heirs

For many business co-owners, the value of their business share constitutes a significant portion of their estate. A buy-sell agreement guarantees that your ownership interest can be sold by your heirs under terms you approved. Furthermore, the price set by a well-drafted agreement establishes the value of your ownership interest for federal estate tax purposes, thereby preventing potential IRS disputes.

As a co-owner of a valuable business, having a comprehensive buy-sell agreement in place is essential. It offers financial protection for you, your heirs, and your co-owners, while also minimizing IRS complications regarding estate taxes.

Buy-sell agreements are complex and should not be handled as DIY projects. Contact us to assist you in setting up a robust buy-sell agreement.

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Understanding the Tax Implications of Selling Business Property

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When selling property used in your trade or business, it is crucial to understand the tax implications involved. Numerous complex rules may apply, but for the sake of simplicity, let’s focus on land or depreciable property used in your business that you have held for more than a year.

Note: Different rules apply to property held primarily for sale to customers, intellectual property, low-income housing, farming or livestock-related property, and other types of property.

Basic Rules

Under tax law, gains and losses from the sale of business property are netted against each other, with the following tax treatments:

  • Net Gain: If the netting of gains and losses results in a net gain, it typically qualifies for long-term capital gain treatment, subject to recapture rules discussed below. Long-term capital gains generally receive more favorable tax treatment than ordinary income.
  • Net Loss: If the netting results in a net loss, the loss is fully deductible against ordinary income, avoiding the limitations typically applied to capital losses.

Long-term capital gain treatment for business property net gains is restricted by “recapture” rules. These rules reclassify certain amounts as ordinary income due to prior ordinary loss or deduction treatments.

Recapture Rules

A special recapture rule applies exclusively to business property. If you have incurred a business property net loss within the past five years, any subsequent business property net gain is treated as ordinary income rather than long-term capital gain.

Different Types of Property

The Internal Revenue Code specifies different provisions for various types of property:

  • Section 1245 Property: This category includes all depreciable personal property (tangible or intangible) and certain depreciable real property used for specific functions. Upon selling Section 1245 property, any gain must be recaptured as ordinary income to the extent of previous depreciation deductions.
  • Section 1250 Property: Generally consisting of buildings and their structural components, Section 1250 property placed in service after 1986 does not subject the long-term capital gain attributable to depreciation deductions to recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions (up to the business property net gain) is taxed at a maximum rate of 28.8% (25% plus the 3.8% net investment income tax), as opposed to the standard 23.8% rate (20% plus the 3.8% net investment income tax) for long-term capital gains.

Different rules apply to Section 1250 property placed in service before 1987 but after 1980, and to property placed in service before 1981.

As demonstrated, even with simplified assumptions, the tax treatment of selling business assets can be complex. To accurately determine the tax implications of such transactions, or if you have further questions, please contact us for professional assistance.

Q&As

What is the basic tax treatment of net gains and losses from the sale of business property?

Gains and losses from the sale of business property are netted against each other under tax law. If this netting results in a net gain, it typically qualifies for long-term capital gain treatment, which is generally more favorable than ordinary income treatment. Conversely, a net loss is fully deductible against ordinary income. It’s important to note that long-term capital gain treatment for business property net gains is limited by “recapture” rules, which may reclassify certain amounts as ordinary income due to prior ordinary loss or deduction treatments.

What is the “recapture” rule in relation to business property net gains?

The “recapture” rule requires that any net gain from the sale of business property be treated as ordinary income rather than long-term capital gain to the extent of any business property net loss incurred within the previous five years. This ensures that previously claimed ordinary losses or deductions are “recaptured” and taxed as ordinary income upon the sale of the property.

How is Section 1245 property treated under the tax code when sold?

Section 1245 property includes all depreciable personal property, both tangible and intangible, as well as certain depreciable real property used for specific functions. When Section 1245 property is sold, any gain must be recaptured as ordinary income to the extent of the earlier depreciation deductions taken on that asset. This means that the amount of the gain that equals the total depreciation deductions previously claimed will be taxed as ordinary income.

What are the tax implications for selling Section 1250 property placed in service after 1986?

For Section 1250 property placed in service after 1986, the long-term capital gain attributable to depreciation deductions is not subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to these depreciation deductions, to the extent it does not exceed the business property net gain, will be taxed at a rate of no more than 28.8% (which includes the 25% rate plus the 3.8% net investment income tax). This is in contrast to the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains for noncorporate taxpayers.

What factors should be considered when determining the tax implications of selling business property?

Several factors should be considered, including the type of property being sold (e.g., Section 1245 or Section 1250 property), the length of time the property was held, the amount of depreciation previously claimed, and any prior net losses related to business property. Additionally, the taxpayer’s overall income, tax bracket, and any applicable recapture rules will affect the tax treatment of the gain or loss from the sale. Consulting with a tax professional is advisable to navigate these complexities and optimize tax outcomes.

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Borrowing from Your Closely Held Corporation: Essential Considerations

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If you own a closely held corporation, borrowing funds from your business at lower interest rates than those charged by banks can be advantageous. However, it is crucial to navigate certain risks and ensure the interest rate charged is adequate.

Strategy Basics

With the recent increase in interest rates, shareholders might prefer borrowing from their corporations instead of paying higher bank loan rates. Generally, the IRS expects closely held corporations to charge interest on related-party loans, including loans to shareholders, at least equal to the applicable federal rates (AFRs). Failure to comply with this can lead to adverse tax consequences. Fortunately, AFRs are typically lower than commercial lending rates.

Borrowing from your closely held corporation can be beneficial for covering personal expenses, such as college tuition, home improvements, a new car, or high-interest credit card debt. However, you must avoid two key risks:

Key Risks

  1. Not Establishing a Legitimate Loan: Establishing a bona fide borrower-lender relationship is crucial. If not, the IRS might reclassify the loan proceeds as additional compensation, resulting in an income tax bill for you and payroll tax liabilities for both you and your corporation. The business would be allowed to deduct the amount treated as compensation and the corporation’s share of related payroll taxes.

    Alternatively, if your company is a C corporation, the IRS might treat the loan as a taxable dividend, leading to taxable income for you without an offsetting deduction for your business.

    To avoid these issues, draft a formal written loan agreement that establishes your unconditional promise to repay a fixed amount under an installment repayment schedule or on demand by the corporation. Document the loan terms in your corporate minutes as well.

  2. Not Charging Adequate Interest: To avoid the unfavorable “below-market loan rules,” your business must charge at least the IRS-approved AFR. (An exception exists if the aggregate loans from the corporation to a shareholder are $10,000 or less.)

Current AFRs

The IRS publishes AFRs monthly based on market conditions. For loans made in July 2024, the AFRs are:

  • 4.95% for short-term loans of up to three years,
  • 4.40% for mid-term loans of more than three years but not more than nine years, and
  • 4.52% for long-term loans of over nine years.

These annual rates assume monthly compounding of interest. The applicable AFR depends on whether the loan is a demand or term loan. A demand loan is payable in full at any time upon notice and demand by the corporation, while a term loan has a fixed repayment schedule. The AFR for a term loan applies for its entire duration.

Example

Suppose you borrow $100,000 from your corporation, with the principal to be repaid in installments over 10 years. This term loan, being over nine years, would have an AFR of 4.52% compounded monthly for 10 years. The corporation must report the loan interest as taxable income.

Conversely, if the loan agreement allows the corporation to demand full repayment at any time, it is a demand loan. The AFR is then based on a blended average of monthly short-term AFRs for the year. If interest rates rise, you must pay more interest to comply with the below-market loan rules. If rates fall, you pay a lower interest rate.

Long-term loans of more than nine years are generally more tax-efficient than short-term or demand loans as they lock in current AFRs. If interest rates drop, a high-rate term loan can be repaid early, and a new loan agreement can be made at a lower rate.

Avoid Adverse Consequences

Shareholder loans can be complex, particularly if the interest charged is below the AFR, the shareholder ceases payments, or the corporation has multiple shareholders. Contact us for professional guidance tailored to your situation.

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Botwinick & Company LLC Named One of the ‘Best Places to Work’ in New Jersey by NJBIZ

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Botwinick & Company LLC, a leading certified public accounting and advisory firm, is proud to announce that it has been named one of the ‘Best Places to Work’ in New Jersey by NJBIZ. This prestigious award recognizes the company’s commitment to fostering an exceptional work environment, promoting employee well-being, and cultivating a culture of collaboration and innovation.

The selection process involved a comprehensive evaluation of workplace policies, practices, philosophy, systems, and demographics. It also included an anonymous employee survey which evaluated factors such as leadership, culture, role satisfaction, work environment, supervisor relationships, training, pay and benefits, and overall engagement.

“We are honored to be recognized by NJBIZ as one of the best places to work in New Jersey,” said Steven Botwinick, Managing Partner of Botwinick & Company LLC. “This achievement is a testament to the dedication and hard work of our entire team. We strive to create an environment where our employees can grow and thrive, both personally and professionally, and this award is a reflection of those efforts.”

Botwinick & Company LLC offers a range of benefits and initiatives designed to support its employees, including flexible work schedules, professional development opportunities, health and wellness programs, and a supportive, team-oriented culture. The firm’s commitment to excellence extends beyond client service to the well-being and growth of its employees.

As Botwinick & Company LLC continues to grow and evolve, it remains dedicated to maintaining its status as an employer of choice in the accounting and consulting industry. The firm looks forward to building on this success and continuing to provide a rewarding and fulfilling workplace for its employees.

For more information about Botwinick & Company LLC and its services, please visit Botwinick.com or contact them at info@botwinick.com or (201) 909-0090.

About Botwinick & Company LLC

Botwinick & Company LLC is a full-service certified public accounting and advisory firm with locations in Rochelle Park, New Jersey, and Boca Raton, Florida. With a team of experienced professionals, the firm provides a wide range of services, including accounting, audit, tax, and advisory services, to individuals and businesses across various industries. Botwinick & Company LLC is committed to delivering personalized service and innovative solutions to help clients achieve their financial goals.

About NJBIZ

NJBIZ, New Jersey’s leading business journal, provides comprehensive coverage of the state’s business news, events, and trends. The ‘Best Places to Work in New Jersey’ program identifies and honors the state’s top employers who show a dedication to their employees’ growth and quality of life.

© 2024

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Key Tax-Related Deadlines for Businesses and Employers in the Third Quarter of 2024

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As we move through the third quarter of 2024, it’s important for businesses and employers to be aware of key tax-related deadlines. Please note that this list is not exhaustive, and there may be additional deadlines applicable to your specific situation. Contact us to ensure you are meeting all relevant deadlines and to learn more about the filing requirements.

July 15

  • Monthly Deposit Rule: Employers should deposit Social Security, Medicare, and withheld income taxes for June if the monthly deposit rule applies.
  • Nonpayroll Withheld Income Tax: Employers should also deposit nonpayroll withheld income tax for June if the monthly deposit rule applies.

July 31

  • Form 941: Report income tax withholding and FICA taxes for the second quarter of 2024 and pay any tax due. (See the exception below under “August 12.”)
  • Form 5500 or Form 5500-EZ: File a 2023 calendar-year retirement plan report or request an extension.

August 12

  • Form 941: Report income tax withholding and FICA taxes for the second quarter of 2024, if you deposited on time and in full all the associated taxes due.

September 16

  • Estimated Income Taxes: Calendar-year C corporations should pay the third installment of 2024 estimated income taxes.
  • Income Tax Return: Calendar-year S corporations or partnerships that filed an automatic six-month extension should file their 2023 income tax return (Form 1120-S, Form 1065, or Form 1065-B) and pay any tax, interest, and penalties due.
  • Retirement Plan Contributions: Make contributions for 2023 to certain employer-sponsored retirement plans.
  • Monthly Deposit Rule: Employers should deposit Social Security, Medicare, and withheld income taxes for August if the monthly deposit rule applies.
  • Nonpayroll Withheld Income Tax: Employers should also deposit nonpayroll withheld income tax for August if the monthly deposit rule applies.

Staying compliant with tax deadlines is crucial for avoiding penalties and interest. For a comprehensive understanding of all applicable deadlines and filing requirements, please contact us. We are here to assist you in ensuring that all your tax obligations are met in a timely manner.

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Hiring Your Child for Your Business: A Smart Tax Strategy

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As the school year concludes in New Jersey, you might be contemplating ways to keep your child engaged in a learning environment. One valuable option is hiring your child to work at your business. This not only imparts essential business knowledge to your child but also offers potential tax advantages for both of you.

Benefits for Your Child

Special tax breaks are available for hiring your child if you operate your business as one of the following:

  • A sole proprietorship
  • A partnership owned by both spouses
  • A single-member LLC treated as a sole proprietorship for tax purposes
  • An LLC treated as a partnership owned by both spouses

These entities can employ an owner’s under-age-18 children either full- or part-time. The wages paid to these children will be exempt from the following federal payroll taxes:

  • Social Security tax
  • Medicare tax
  • Federal Unemployment Tax Act (FUTA) tax (until the child reaches age 21)

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

Benefits for Your Business

When you hire your child, you can deduct their wages as a business expense, reducing your federal income tax bill, self-employment tax bill, and state income tax bill, if applicable.

Note: Different rules apply to 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. However, you can still deduct your child’s wages as a business expense on your corporation’s tax return, and your child can use the $14,600 standard deduction for single filers to shelter the wages from federal income tax.

Traditional and Roth IRAs

Regardless of the 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, allowing for tax-free withdrawals of contributions and earnings after age 59½, provided the account has been open for more than five years.

In contrast, contributions to a traditional IRA are deductible, subject to income limits, and reduce the child’s taxable income. However, Roth IRA contributions are often more beneficial for young individuals. Since the standard deduction will shelter up to $14,600 of earned income, any additional income is likely to be taxed at very low rates, making traditional IRA deductions less impactful.

Furthermore, your child can withdraw Roth IRA contributions without any federal income tax or penalty for college or other expenses. Despite this flexibility, the optimal strategy is to leave the Roth balance untouched until retirement to maximize tax-free growth.

To make Roth IRA contributions, your child must have earned income for the year that equals or exceeds the amount contributed. There is no age restriction. For the 2024 tax year, the contribution limit is the lesser of:

  • Earned income
  • $7,000

Regular Roth contributions can accumulate significantly over time. For instance, if your child contributes $1,000 annually to a Roth IRA for four years, the account could grow to about $32,000 in 45 years at a 5% annual return, or significantly more with higher returns.

Caveats

While hiring your child can be tax-efficient, their wages must be reasonable for the work performed. Maintain thorough records, including timesheets, job descriptions, and W-2 forms, to substantiate hours worked and duties performed.

For any questions about employing your child in your business, please contact us. We are here to help ensure compliance and maximize your tax benefits.

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IRS Releases 2025 Inflation-Adjusted Amounts for Health Savings Accounts (HSAs)

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The IRS has recently issued guidance on the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These adjustments, made annually based on inflation, are announced earlier than other inflation-adjusted amounts to allow employers adequate time to prepare for the upcoming year.

Fundamentals of HSAs

A Health Savings Account (HSA) is a trust established exclusively for covering the qualified medical expenses of its beneficiary. An HSA can only be created for an eligible individual covered under a high-deductible health plan (HDHP). Additionally, participants must not be enrolled in Medicare or have other health coverage, with exceptions including dental, vision, long-term care, accident, and specific disease insurance.

Contributions to an HSA within specified limits are tax-deductible above the line. These annual contribution limits, along with the 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 announced the 2025 inflation-adjusted figures for HSA contributions:

  • Annual Contribution Limits: For 2025, the annual contribution limit is $4,300 for individuals with self-only coverage under an HDHP, and $8,550 for individuals with family coverage. These limits have increased from $4,150 and $8,300, respectively, in 2024.
  • Catch-Up Contributions: For both 2024 and 2025, individuals aged 55 or older by the end of the tax year can make an additional $1,000 catch-up contribution.
  • High-Deductible Health Plan Limits: For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage (up from $1,600 and $3,200 in 2024). Additionally, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, excluding premiums) must not exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100 in 2024).

Health Reimbursement Arrangements (HRAs)

The IRS also announced the inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). HRAs must receive contributions from an eligible individual (employers cannot contribute). These contributions are not included in income, and HRA reimbursements for eligible medical expenses are not 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.

Benefits of HSAs

HSAs offer various benefits that are appreciated by both employers and employees. Contributions to HSAs are made on a pre-tax basis, and the funds can accumulate tax-free over the years. Withdrawals from HSAs are tax-free when used to pay for qualifying medical expenses such as doctor visits, prescriptions, chiropractic care, and premiums for long-term care insurance. Additionally, HSAs are “portable,” meaning they remain with the account holder even if they change employers or leave the workforce. Many employers find HSAs to be a valuable fringe benefit that helps attract and retain employees.

For any questions regarding HSAs and their implementation in your business, please contact us.

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Structuring Asset Purchases in Business Acquisitions: Key Tax Considerations

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After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you are considering buying a business, optimizing the structure of your purchase for the best post-tax results is crucial. You can potentially structure the purchase in two ways:
  1. Buy the assets of the business
  2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC.

This article focuses on the asset purchase approach.

Tax Basics of Asset Purchases

When purchasing assets, the total purchase price must be allocated to the specific assets acquired. The amount allocated to each asset becomes its initial tax basis.

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

When you eventually sell a purchased asset, you will 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

If you operate the newly acquired business as a sole proprietorship, single-member LLC treated as a sole proprietorship, partnership, multi-member LLC treated as a partnership, or S corporation, 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 is 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 taxes on 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%.

Optimizing Purchase Price Allocation

A key tax planning opportunity in an asset purchase deal lies in how you allocate the purchase price to the acquired assets. To the extent permitted, you should aim to allocate more of the purchase 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)
  • Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years

Conversely, you should allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which cannot be depreciated.

Obtaining appraised fair market values for the purchased assets can help allocate the total purchase price to specific assets. As noted, you will generally want to allocate more of the price to certain assets and less to others for optimal tax results. Since the appraisal process can be subjective, multiple legitimate appraisals may exist for the same group of assets. The tax results from one appraisal may be more favorable for you than 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. Agreeing on appraised values is part of the purchase/sale negotiation process. However, the final agreed-upon appraisal must be reasonable.

Plan Ahead

When buying the assets of a business, remember that the total purchase price must be allocated to the acquired assets. This allocation process can significantly impact your post-acquisition tax results. Engage your advisor early in the negotiation phase to ensure the best tax outcomes. We are here to help you achieve favorable tax results. Contact us for guidance.

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Financial and Legal Considerations When Adding a New Partner to a Partnership

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Adding a new partner to a partnership involves several financial and legal implications that require careful planning to avoid various tax complications. Let’s consider an example: You and your partners are planning to admit a new partner, who will acquire a one-third interest in the partnership by making a cash contribution. Assume your basis in your partnership interests is sufficient, so the decrease in your portions of the partnership’s liabilities due to the new partner’s entry won’t reduce your basis to zero.

Complexity of Adding a New Partner

While admitting a new partner may seem straightforward, it is crucial to plan the entry meticulously to avoid potential tax issues. Here are two key considerations:

  1. Unrealized Receivables and Substantially Appreciated Inventory Items: Changes in partners’ interests in unrealized receivables and substantially appreciated inventory items are treated as a sale of those items, causing current partners to recognize gain. Unrealized receivables include accounts receivable, depreciation recapture, and certain other ordinary income items. To prevent gain recognition, these items must be allocated to the current partners even after the new partner joins.
  2. Built-In Gain or Loss: The tax code mandates that the “built-in gain or loss” on assets held by the partnership before the new partner’s admission be allocated to the current partners. Built-in gain or loss is the difference between the fair market value and the basis of the partnership property at the time the new partner is admitted. Consequently, the new partner must be allocated a portion of the depreciation equal to their share of the depreciable property based on current fair market value. This allocation reduces the amount of depreciation available to current partners. Additionally, built-in gain or loss on partnership assets must be allocated to the current partners when the assets are sold. These rules are complex and may necessitate special accounting procedures.

Monitoring Partner Basis

When adding a partner or making other changes, a partner’s basis in their interest may frequently adjust. Properly tracking basis is essential as it affects:

  • Gain or Loss on the Sale of Interest: Accurate basis tracking ensures correct calculation of gain or loss when selling your partnership interest.
  • Taxation of Partnership Distributions: Your basis determines how partnership distributions to you are taxed.
  • Deductible Partnership Losses: Basis also affects the maximum amount of partnership loss you can deduct.

We Can Assist

Contact us for assistance with these issues or any other concerns related to your partnership. We can help ensure that the process of adding a new partner is managed effectively, minimizing tax complications and ensuring compliance with relevant regulations.

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Tax Treatment of Partner-Incurred Expenses in Service Partnerships

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It is not uncommon for partners in service partnerships, such as architecture or law firms, to incur expenses related to the partnership’s business. For example, partners may incur entertainment expenses when developing new client relationships or expenses for transportation to and from client meetings, professional publications, continuing education, and home office expenses. What is the tax treatment of such expenses? Here are the answers.

Reimbursable Expenses

As long as the expenses are those that a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct these expenses on Schedule E of Form 1040. Conversely, a partner cannot deduct expenses if the partnership would have honored a request for reimbursement.

A partner’s unreimbursed partnership business expenses should also generally be included as deductions in arriving at the partner’s net income from self-employment on Schedule SE.

For instance, suppose you are a partner in a local architecture firm. According to the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in cases where attracting a large potential new client is a firm-wide goal. If you spend $4,500 of your own money on meal expenses to attract new clients and receive no reimbursement, you should report a deductible item of $2,250 (50% of $4,500) on your Schedule E. This $2,250 should also be included as a deduction in calculating your net self-employment income on Schedule SE.

However, it is crucial to note that a partner cannot deduct expenses if they could have been reimbursed by the firm. No deduction is allowed for “voluntary” out-of-pocket expenses. To avoid any confusion regarding the tax treatment of unreimbursed partnership expenses, it is advisable to establish a written firm policy clearly stating what will and will not be reimbursed. This ensures that partners can deduct their unreimbursed business expenses without issues from the IRS.

Home Office Deduction

Subject to the normal deduction limits under the home office rules, a partner can deduct expenses allocable to the regular and exclusive use of a home office for partnership business. The partner’s deductible home office expenses should be reported on Schedule E in the same manner as other unreimbursed partnership expenses.

If a partner has a deductible home office, the Schedule E home office deduction can provide multiple tax-saving benefits because it is effectively deducted for both federal income tax and self-employment tax purposes.

Additionally, if the partner’s home office qualifies as a principal place of business, commuting mileage from the home office to partnership business temporary work locations (such as client sites) and partnership permanent work locations (such as the partnership’s official office) counts as business mileage.

The principal place of business test can be satisfied in two ways:

  1. The partner conducts most of the partnership’s income-earning activities in the home office.
  2. The partner conducts partnership administrative and management tasks in the home office and does not make substantial use of any other fixed location (such as the partnership’s official office) for these tasks.

Conclusion

When a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, they should submit these expenses for reimbursement. Otherwise, the partner cannot deduct the expenses. The partnership should establish a written policy clearly stating what expenses will and will not be reimbursed, including home office expenses if applicable. This applies equally to members of LLCs treated as partnerships for federal tax purposes since those members are considered partners under tax law.

For assistance with these issues or any other concerns related to your partnership, please contact us.

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Alternative Tax Strategies: When Businesses Should Consider Opposite Approaches to Income and Deductions

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Businesses typically seek to delay recognizing taxable income into future years and accelerate deductions into the current year to minimize their current tax liabilities. However, there are instances where the opposite strategy may be advisable, particularly in anticipation of tax law changes that could increase tax rates.

One such scenario is the proposed increase in corporate federal income tax rates by the Biden administration, potentially raising the flat rate from 21% to 28%. Similarly, discussions about raising individual federal income tax rates could affect noncorporate pass-through entities, where income is taxed on personal returns.

If there’s a belief that income could be subject to higher tax rates in the future, accelerating income recognition into the current tax year can capitalize on the current lower rates. Conversely, postponing deductions to a later tax year, when rates are expected to be higher, can maximize their tax-saving impact.

To accelerate income recognition:

  • Consider selling appreciated assets with capital gains in the current year instead of waiting.
  • Review depreciable assets and sell fully depreciated ones to trigger taxable gains now.
  • Elect out of installment sale treatment for gains to be recognized in the year of sale.
  • Opt for taxable transactions instead of tax-deferred exchanges like Section 1031 for real property.

To postpone deductions:

  • Delay purchasing capital equipment and fixed assets that would lead to depreciation deductions.
  • Avoid claiming large first-year Section 179 or bonus depreciation deductions and spread out asset depreciation over time.
  • Capitalize professional fees and salaries associated with long-term projects to spread out costs.
  • Purchase bonds at a discount to increase interest income in future years.
  • Delay inventory shrinkage write-downs and other deductions to years with higher tax rates.

These strategies can be complex and tailored to your specific business circumstances. It’s recommended to consult with a tax advisor to determine the best approach for optimizing your tax planning amidst potential tax rate changes.

© 2024

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Establish a Tax-Advantaged Retirement Plan for Your Business Today

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Considering a Retirement Plan for Your Business: Tax Advantages and Planning Strategies

If your business has yet to establish a retirement plan, now presents a prime opportunity to do so. Current retirement plan regulations offer substantial benefits through tax-deductible contributions.

For instance, if you’re self-employed, setting up a SEP-IRA allows you to contribute up to 20% of your self-employment earnings, with a cap of $69,000 for 2024 (increased from $66,000 in 2023). For those employed by a corporation they own, contributions of up to 25% of their salary are permissible, also up to $69,000. In a 32% federal income tax bracket, maximizing these contributions could potentially reduce your 2024 tax liability by as much as $22,080 (32% × $69,000).

Exploring Your Options

Various retirement plan options are available for small businesses, including:

  • 401(k) plans, which can be tailored for sole proprietors (often referred to as solo 401(k)s),
  • Defined benefit pension plans, and
  • SIMPLE-IRAs.

The deductible contributions permitted by these plans can vary, depending on your specific circumstances. For instance, in 2024, participants in a 401(k) plan can contribute $23,000, with an additional $7,500 allowed as a catch-up contribution for those aged 50 or older.

Consider Timelines

Thanks to a provision introduced by the 2019 SECURE Act, qualified employee retirement plans (excluding SIMPLE-IRAs) can now be adopted by the due date (including extensions) of the employer’s federal income tax return for the year of adoption. This change allows deductible employer contributions to be made by this same deadline, with deductions claimed on the return for the adoption year.

Key Details

It’s important to note that this provision does not affect the October 1 deadline for establishing a SIMPLE-IRA plan, nor does it override requirements mandating certain plan provisions be active during the plan year, such as those governing employee elective deferral contributions in a 401(k) plan.

For example, for a sole proprietorship operating on a calendar tax year, the deadline to establish a SEP-IRA for the 2023 tax year, with extensions, is October 15, 2024. Similarly, contributions for the 2023 tax year must be made by this date. Looking ahead to the 2024 tax year, the deadline for both establishing a SEP and making contributions is October 15, 2025, with extensions.

While it’s permissible to delay setting up a retirement plan until next year (excluding SIMPLE-IRAs), taking action now as part of your tax strategy can prove advantageous. We can provide further insights into small business retirement plan options tailored to your needs, ensuring compliance with any applicable contribution requirements for your employees.

© 2024

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Effective Recordkeeping and Valid Business Expenses: Mitigating Challenges in IRS Audits

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Operating a business, whether established or newly launched, necessitates diligent record-keeping of income and expenses. It is crucial to accurately record expenses to maximize eligible tax deductions and to effectively substantiate reported amounts in the event of an IRS audit.

The IRS offers flexibility in choosing a recordkeeping system that best suits your business needs, emphasizing clarity in documenting income and expenses. However, strict guidelines govern the deduction of legitimate expenses for tax purposes. Certain expenses, such as those related to automobiles, travel, meals, and home offices, require meticulous recordkeeping due to specific requirements or limitations on deductibility.

Key to deductibility is establishing that a business expense is both “ordinary and necessary” for profit generation. A recent case serves as a poignant example where a married couple faced disallowed deductions primarily due to expenses being deemed personal and lacking sufficient documentation.

In this instance, the husband, a salaried executive, and his wife established separate businesses as S and C corporations, respectively. While conducting business meetings at properties they owned, the couple charged rent to their businesses. However, during an IRS audit, deductions for travel expenses were disallowed due to reconstructed rather than contemporaneous travel logs. Similarly, payments from the S corporation to the C corporation were disallowed as they were used for personal family expenses rather than marketing purposes. The rent payments for business use of their homes were also deemed excessive and not reflective of fair market rates.

Despite these challenges, the couple successfully defended deductions for contributions to their sons’ 401(k) accounts. Documentation proving the sons’ involvement in business operations played a crucial role in upholding these deductions.

Lessons drawn from this case emphasize the importance of segregating personal and business expenses and maintaining meticulous records. It is advisable to conduct all business transactions through dedicated business accounts and to retain comprehensive documentation to support tax returns and substantiate deductible business expenses during potential IRS audits.

For further guidance on effective business recordkeeping practices or inquiries regarding tax compliance, please feel free to contact us.

© 2024

Q&A

What defines an “ordinary and necessary” business expense?

An expense is deemed “ordinary and necessary” if it is customary in your industry and essential for your business operations. It should be reasonable in amount and directly contribute to generating income or facilitating business operations. Essentially, such expenses are typical within your trade and vital for your business’s effective functioning.

Why is maintaining good records of business expenses important?

Maintaining accurate records of business expenses is crucial, particularly during IRS audits. Comprehensive documentation substantiates claimed deductions, validating the legitimacy of business expenses. This practice significantly reduces the risk of penalties or fines due to inaccuracies or non-compliance. Furthermore, well-kept records streamline the audit process, enabling prompt and effective responses to IRS inquiries.

What are the implications if the IRS disallows business expenses during an audit?

When the IRS disallows business expenses during an audit, it signifies that certain expenses claimed on your tax return are not recognized as deductible. Consequently, you may face additional taxes, penalties, and interest related to the disallowed expenses. It is essential to carefully review the audit findings, consider appealing the decision, or furnish supplementary documentation to support your claimed expenses. In some instances, consulting with a tax professional may be necessary to navigate discussions and negotiations with the IRS.

These measures aim to resolve discrepancies and ensure compliance with tax regulations, safeguarding your business against potential financial repercussions.

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2024 Second Quarter Tax Calendar: Important Deadlines for Businesses and Employers

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Below are some of the key tax-related deadlines applicable to businesses and employers in the second quarter of 2024. Please note that this list is not exhaustive, so there may be additional deadlines specific to your situation. We recommend contacting us to ensure compliance with all relevant deadlines and to understand specific filing requirements.

April 15

  • Calendar-year corporations must either file their 2023 income tax return (Form 1120) or request an automatic six-month extension (Form 7004) and make any tax payments due.
  • Corporations should also pay the first installment of their estimated 2024 income taxes and retain Form 1120-W for record-keeping purposes.
  • Individuals should file their 2023 income tax return (Form 1040 or Form 1040-SR) or request an automatic six-month extension (Form 4868) and pay any taxes owed.
  • Individuals making estimated tax payments for 2024 (Form 1040-ES) should also pay their first installment if they do not pay income tax through withholding.

April 30

  • Employers must report income tax withholding and FICA taxes for the first quarter of 2024 using Form 941 and pay any taxes owed.

May 10

  • Employers should report income tax withholding and FICA taxes for the first quarter of 2024 using Form 941, provided they deposited all associated taxes due on time and in full.

May 15

  • Employers subject to the monthly deposit rule must deposit Social Security, Medicare, and withheld income taxes for April.

June 17

  • Corporations are required to make their second installment payment of estimated 2024 income taxes.

For comprehensive guidance tailored to your specific tax obligations and to ensure timely compliance, please do not hesitate to contact us.

© 2024

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Strategic Coordination of Sec. 179 Tax Deductions and Bonus Depreciation

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To optimize tax savings, businesses should prioritize maximizing depreciation write-offs for newly acquired assets within the current tax year. Two key federal tax incentives facilitate this strategy: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These provisions enable businesses to potentially deduct a significant portion or all of their qualifying asset costs in the first year of use. However, these deductions are subject to annual inflation adjustments and evolving tax laws that may phase out bonus depreciation.

Here’s how to strategically coordinate these deductions for optimal tax-saving outcomes:

Section 179 deduction overview:
Most tangible depreciable business assets qualify, including equipment, computer hardware, vehicles (with limitations), furniture, most software, and fixtures.
Depreciable real property generally does not qualify unless it meets the criteria for qualified improvement property (QIP).
For tax year 2024, the maximum Section 179 deduction is $1.22 million, with a phase-out beginning at $3.05 million in qualified asset additions.

Bonus depreciation overview:
Most tangible depreciable business assets, as well as software and QIP, generally qualify.
Used assets must be new to the taxpayer to be eligible.
For assets placed in service in 2024, the first-year bonus depreciation rate is 60%, reduced from 80% in 2023.

Comparison of Section 179 vs. bonus depreciation:
Section 179 deductions have generous rules but are subject to limitations such as phase-out thresholds, business taxable income constraints, and specific rules for certain types of assets and ownership structures.
First-year bonus depreciation deductions are not subject to complex limitations but are subject to declining percentage rates, with 60% applicable for assets placed in service in 2024.

Tax-saving strategy:
Maximize Section 179 deductions up to allowable limits.
Utilize first-year bonus depreciation for any remaining qualifying asset costs.
Example scenario:
In 2024, a calendar-tax-year C corporation places $500,000 of qualifying assets in service. Due to taxable income limitations, the corporation’s Section 179 deduction is capped at $300,000. The corporation can deduct $300,000 on its 2024 federal income tax return. Additionally, it can deduct 60% of the remaining $200,000 ($500,000 – $300,000) through first-year bonus depreciation, totaling a $420,000 deduction for the year.

Managing tax incentives:
Effective coordination of Section 179 and bonus depreciation deductions is crucial for maximizing tax benefits. We can provide detailed guidance on these strategies and address any specific queries you may have regarding tax rules and implications.

© 2024

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Bartering Is A Taxable Transaction Even If No Cash Is Exchanged

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If your small business is seeking to conserve cash or reduce expenses, engaging in barter or trade for goods and services can be advantageous. While bartering dates back to ancient times, modern technology, particularly the internet, has facilitated easier exchanges between businesses.

Tax Considerations

  • Bartering transactions involve taxable income based on the fair market value of goods or services received. Exchanging services with another business also results in taxable income for both parties.

Fair Market Value Examples

  • A computer consultant provides tech support to an advertising agency in exchange for free advertising.
  • An electrical contractor performs repairs for a dentist in exchange for dental services.
  • Both parties are taxed on the fair market value of the services exchanged, typically the amount they would charge for the same services.
  • If services are exchanged for property:
    • A construction firm doing work for a retail business in exchange for unsold inventory realizes income equal to the inventory’s fair market value.
    • An architectural firm performing services for a corporation in exchange for shares incurs income based on the fair market value of the received stock.

Joining Barter Clubs

  • Many businesses join barter clubs that utilize “credit units” awarded to members providing goods and services. These credits can be redeemed within the club’s network.
  • Taxation of bartering occurs in the year of transaction. If participating in a club, taxation may apply when credits are credited to your account, regardless of redemption timing.
  • Provide your Social Security number or Employer Identification Number and certify non-existence of backup withholding when joining a club; otherwise, a 24% tax rate will be applied to bartering income.

Tax Reporting

  • Barter clubs issue Form 1099-B by January 31 annually, summarizing cash, property, services, and credit values received during the prior year for IRS reporting.

Exchanging Without Currency

  • Bartering enables businesses to trade excess inventory or provide services during slow periods, conserving cash flow. It also offers solutions when customers lack immediate funds for transactions.
  • Understanding federal and state tax implications is crucial for optimizing benefits from bartering transactions.

For further guidance or detailed information on navigating tax implications related to bartering, feel free to contact us.

© 2024

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Optimize Your QBI Deduction Before Its Expiration

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The qualified business income (QBI) deduction offers significant tax advantages to eligible businesses until its scheduled expiration in 2025. Therefore, it’s crucial for eligible businesses to capitalize on this deduction while it remains in effect, as it can lead to substantial tax savings.

Key Points:

  • Overview of the QBI Deduction: The QBI deduction allows owners to deduct up to 20% of qualified business income from sole proprietorships, single-member LLCs treated as sole proprietorships, partnerships, LLCs treated as partnerships, or S corporations.
  • Definition of QBI: Qualified income and gains from eligible businesses are considered QBI, adjusted for specific deductions such as contributions to self-employed retirement plans, self-employment tax deductions, and self-employed health insurance premiums.
  • Limitations: Higher income levels trigger limitations on the QBI deduction. For 2024, these limitations begin to apply when taxable income exceeds $191,950 ($383,900 for married joint filers) and are fully phased in at $241,950 or $483,900, respectively.
  • Calculation of Limitations: If taxable income exceeds the fully-phased-in threshold, the QBI deduction is limited to the greater of 1) 50% of W-2 wages allocated to QBI or 2) a combination of wages and 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
  • Qualified Property Consideration: The UBIA of qualified property, which includes depreciable tangible property used to generate QBI, generally equals its original cost when placed in service.
  • Impact on SSTBs: Specified service trade or businesses (SSTBs) face stricter rules, with phaseouts beginning at lower income thresholds and complete phaseouts at higher thresholds, potentially disqualifying income from SSTBs from the QBI deduction.
  • Additional Considerations: Aggregating multiple businesses for the deduction may optimize benefits, particularly for businesses approaching the income limitations. Furthermore, decisions regarding depreciation deductions, such as Section 179 and bonus depreciation, can affect QBI and overall taxable income.
  • Use It or Lose It: With the QBI deduction set to expire after 2025, businesses are advised to maximize utilization of this tax benefit for the 2024 and 2025 tax years to benefit from potential tax savings.

For expert guidance on navigating the complexities of the QBI deduction and strategizing for optimal tax outcomes, please reach out to us. We are here to assist you in maximizing your QBI deduction and achieving your tax planning goals.

© 2024

Q&A:

What is qualified business income (QBI)?

Qualified business income refers to income generated by an eligible business, which is then reduced by specific deductions. These deductions include contributions to a self-employed retirement plan, 50% of self-employment tax, and self-employed health insurance premiums.

What are some qualified business income (QBI) limitations?

Qualified business income limitations encompass several factors:

  • Specified Service Trade or Business (SSTB) Limitation: Certain professional services (e.g., health, law, accounting, consulting) may face restrictions on QBI deductions based on income thresholds.
  • W-2 Wage and Capital Limitations: Businesses with higher incomes may have their QBI deduction limited by the W-2 wages paid by the business and the unadjusted basis of qualified property held by the business.
  • Overall QBI Deduction Limitation: The QBI deduction is subject to an overall limitation based on taxable income levels and can be further restricted for certain SSTBs once income thresholds are exceeded.

Why should I maximize my qualified business income (QBI) deductions now rather than later?

The QBI deduction is currently set to expire after 2025. While there is a possibility of extension by Congress, this is uncertain. Therefore, maximizing your QBI deductions now allows you to take advantage of potential tax savings before the deduction is scheduled to disappear.

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Better Tax Break When Applying The Research Credit Against Payroll Taxes

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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.

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

  • Eligible small businesses ($50 million or less in gross receipts for the three prior tax years) may claim the credit against alternative minimum tax (AMT) liability.
  • The credit can be used by certain smaller startup businesses against their Social Security payroll and Medicare tax liability.

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:

  • Have gross receipts for the election year of less than $5 million, and
  • Be no more than five years past the period for which it had no receipts (the start-up period).

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

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Tax-Wise Ways To Take Cash From Your Corporation While Avoiding Dividend Treatment

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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

Q&A

How can I withdraw cash from my corporation without it being treated as a dividend?

Some alternative methods that can allow you to withdraw cash from your corporation while avoiding dividend treatment include paying yourself a reasonable salary, obtaining the equivalent of a cash withdrawal in fringe benefits, structuring cash contributions to the corporation as debt so that the subsequent repayment to you from the corporation can be treated as debt repayment rather than a dividend, withdrawing cash as a loan, and selling property to the corporation.

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Taking Your Spouse On A Business Trip? Can You Write Off The Costs?

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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

 

Q&A below:

How do I know if my spouse qualifies for business travel cost deductions when accompanying me on a business trip?

If your spouse accompanies you on a business trip, you generally cannot deduct their expenses unless they are also an employee of the company and their presence on the trip is necessary for business purposes. 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. Your spouse’s presence must be necessary (i.e. caring for a medical condition that you have in order to enable you to travel for business)–not simply “helpful” (i.e. typing up notes from a meeting)–in order for his or her travel costs to be deductible.

If my spouse accompanies me on a business trip but does not meet the requirements for business travel deductions, can I still deduct costs from the trip?

Even if your spouse’s travel doesn’t satisfy the requirements, 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. Additionally, 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.

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What’s The Best Accounting Method Route For Business Tax Purposes?

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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:

  • Simplified inventory accounting,
  • An exemption from the uniform capitalization rules, and
  • An exemption from the business interest deduction limit.

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

Q&As

What are the main differences between the cash and accrual accounting methods?

The main differences between the cash and accrual accounting methods lie in how income and expenses are recorded and recognized. Under the cash accounting method, revenue is recognized when cash is received from customers, and expenses are recognized when cash is paid to suppliers or other parties. This method focuses on actual cash inflows and outflows. On the other hand, the accrual accounting method records revenue when it is earned, regardless of when payment is received, and expenses are recorded when they are incurred, regardless of when payment is made. This method matches revenues with their associated expenses, providing a more accurate picture of a company’s financial performance.

 

Which accounting method—cash or accrual basis—provides better tax advantages for businesses?

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. 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.

 

What types of businesses are eligible to use the cash method for tax purposes?

Generally, businesses with average annual gross receipts of $30 million or less for the three-year period ending before the 2024 tax year are eligible to use the cash method. 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.

 

Can my business switch between the cash and accrual method?

Yes, businesses can switch between the cash and accrual method of accounting. However, it is important to note that once a business chooses a method for tax purposes, it generally must obtain permission from the IRS to change methods. The IRS has specific rules and procedures for changing accounting methods, and businesses should consult with a tax professional or accountant to ensure compliance with these regulations. Additionally, switching between methods may have implications for financial reporting and may require adjustments to be made to prior period financial statements. It is recommended to carefully consider the benefits and drawbacks of each method before making a decision to switch.

 

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Update On IRS Efforts To Combat Questionable Employee Retention Tax Credit claims

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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:

1. Voluntary Disclosure Program. Under this program, businesses can “pay back the money they received after filing ERTC claims in error,” the IRS explained. The deadline for applying is March 22, 2024. If the IRS accepts a business into the program, the employer will need to repay only 80% of the credit money it received. If the IRS paid interest on the employer’s ERTC, the employer doesn’t need to repay that interest and the IRS won’t charge penalties or interest on the repaid amounts.

The IRS chose the 80% repayment amount because many of the ERTC promoters charged a percentage fee that they collected at the time (or in advance) of the payment, so the recipients never received the full credit amount.

Employers that are unable to repay the required 80% may be considered for an installment agreement on a case-by-case basis, pending submission and review of an IRS form that requires disclosing a significant amount of financial information.

To be eligible for this program, the employer must provide the IRS with the name, address and phone number of anyone who advised or assisted them with their claims, and details about the services provided.

2. Special Withdrawal Program. If a business has a pending claim for which it has eligibility concerns, it can withdraw the claim. This program is also available to businesses that were paid money from the IRS for claims but haven’t cashed or deposited the refund checks. The tax agency reported that more than $167 million from pending applications had been withdrawn through mid-January.\

 

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

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Tax-Favored Qualified Small Business Corporation Status Could Help You Thrive

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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:

  • Eligibility. The gain exclusion break isn’t available for QSBC shares owned by another C corporation. However, QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible.
  • Holding period. To be eligible for the 100% stock sale gain exclusion deal, you must hold your QSBC shares for over five years. For shares that haven’t yet been issued, the 100% gain exclusion break will only be available for sales that occur sometime in 2029 or beyond.
  • Acquisition of shares. You must acquire the shares after August 10, 1993, and they generally must be acquired upon original issuance by the corporation or by gift or inheritance.
  • Businesses that aren’t eligible. The corporation must actively conduct a qualified business. Qualified businesses don’t include those rendering services in the fields of health; law; engineering; architecture; accounting; actuarial science; performing arts; consulting; athletics; financial services; brokerage services; businesses where the principal asset is the reputation or skill of employees; banking; insurance; leasing; financing; investing; farming; production or extraction of oil, natural gas, or other minerals for which percentage depletion deductions are allowed; or the operation of a hotel, motel, restaurant, or similar business.
  • Asset limits. The corporation’s gross assets can’t exceed $50 million immediately after your shares are issued. If after the stock is issued, the corporation grows and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

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

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Does Your Business Have Employees Who Get Tips? You May Qualify For a Tax Credit

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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:

  • Withhold and remit the employee’s share of FICA taxes, and
  • Pay the employer’s share of those taxes.

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

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Defer A Current Tax Bill With A Like-Kind Exchange

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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

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The Standard Business Mileage Rate Will Be Going Up Slightly In 2024

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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

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2024 Q1 Tax Calendar: Key Deadlines For Businesses And Other Employers

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Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have questions about filing requirements, contact us. We can ensure you’re meeting all applicable deadlines.

January 16 (The usual deadline of January 15 is a federal holiday)

  • Pay the final installment of 2023 estimated tax.
  • Farmers and fishermen: Pay estimated tax for 2023. If you don’t pay your estimated tax by January 16, you must file your 2023 return and pay all tax due by March 1, 2024, to avoid an estimated tax penalty.

January 31

  • File 2023 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2023 Forms 1099-NEC, “Nonemployee Compensation,” to recipients of income from your business, where required, and file them with the IRS.
  • Provide copies of 2023 Forms 1099-MISC, “Miscellaneous Information,” reporting certain types of payments to recipients.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2023. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2023. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2023 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.

February 15

  • Give annual information statements to recipients of certain payments you made during 2023. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments:
    • All payments reported on Form 1099-B.
    • All payments reported on Form 1099-S.
    • Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 10 of Form 1099-MISC.

February 28

  • File 2023 Forms 1099-MISC with the IRS if you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

  • If a calendar-year partnership or S corporation, file or extend your 2023 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2023 contributions to pension and profit-sharing plans.

© 2023

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Gifts, Parties, and Tax Benefits: A Guide to Grateful Celebrations

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

Employee gifts

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

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

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

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

Customer gifts

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

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

A holiday party

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

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

Holiday cards

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

Boost morale with festive gestures

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

© 2023

 

Q&A below:

 

How can employers determine if a noncash gift qualifies as a "de minimis" fringe benefit?

Employers can determine if a noncash gift qualifies as a "de minimis" fringe benefit by considering its value and frequency. The IRS considers a de minimis fringe benefit to be one that has a low value and is provided infrequently. While there is no specific cutoff for the value of a de minimis gift, noncash gifts with a value of $75 or less are generally considered de minimis. In addition, gifts that are given sporadically or on special occasions—in this case, for the holidays—are more likely to qualify as de minimis.

 

What are some differences between cash and non-cash gifts to employees from a tax perspective?

Cash gifts to employees are typically considered taxable income and must be reported on the employee's W-2 form. The employer is responsible for withholding the appropriate amount of federal income tax, Social Security tax, and Medicare tax from the cash gift. Non-cash gifts, on the other hand, may be treated differently for tax purposes. If a non-cash gift is considered a de minimis fringe benefit (i.e. small in value and given infrequently), it may be excluded from the employee's taxable income. Both cash and non-cash gifts are generally deductible for the employer, limited to $25 per employee but not limited when gifting to a corporation as long as it is considered “reasonable”.

 

Are holiday parties tax-deductible?

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

 

Are holiday cards sent to customers and clients tax-deductible?

If you use the cards to promote your business, you can likely deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.

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Key 2024 Inflation-Adjusted Tax Parameters For Small Businesses And Their Owners

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

Rates and brackets

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

Here are the 2024 inflation adjusted bracket thresholds.

  • 10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
  • Beginning of 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
  • Beginning of 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
  • Beginning of 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
  • Beginning of 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
  • Beginning of 35% bracket: $243,726 for singles, $487,451 for married joint filers and $243,701 for heads of household; and
  • Beginning of 37% bracket: $609,351 for singles, $731,201 for married joint filers and $609,351 for heads of household.

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

Section 1231 gains and qualified dividends

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

  • 0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers and $0 to $63,000 for heads of household;
  • Beginning of 15% bracket: $47,026 for singles, $94,051 for joint filers, $63,001 for heads of household; and
  • Beginning of 20% bracket: $518,901 for singles, $583,751 for married joint filers and $551,351 for heads of household.

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

Self-employment tax

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

Section 179 deductions

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

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

Just the beginning

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

© 2023

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A Cost Segregation Study May Cut Taxes And Boost Cash Flow

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

Depreciation basics

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

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

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

Identifying and substantiating costs

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

Speedier depreciation tax breaks

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

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

Making favorable depreciation changes

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

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

© 2023

Q&As below:

How does a cost segregation study help in maximizing tax savings for businesses?

A cost segregation study is a strategic tax planning tool that helps businesses maximize tax savings by accelerating the depreciation deductions for certain assets. The study involves identifying and reclassifying assets into shorter recovery periods, which allows businesses to take larger depreciation deductions in earlier years. By front-loading these deductions, businesses can reduce their taxable income and lower their overall tax liability. This can result in significant tax savings and improved cash flow for businesses.

What types of mistakes do businesses frequently make when allocating building costs between real and personal property?

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

How does The Tax Cuts and Jobs Act (TCJA) enhance the benefits of a cost segregation study?

The Tax Cuts and Jobs Act (TCJA) permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds. In addition, the TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. Finally, the law temporarily increased first-year bonus depreciation from 50% to 100% in 2022, 80% in 2023 and 60% in 2024. After that, it will continue to decrease until it is 0% in 2027, unless Congress acts.

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New Per Diem Business Travel Rates Kicked In On October 1

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

Basics of the method

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

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

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

Reduced recordkeeping

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

The FY2024 rates

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

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

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

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

© 2023

Q&As

What is the “high-low” per diem method for business travel expenses?

Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business deductions.

How can the new IRS per diem rates benefit businesses and their traveling employees?

The new IRS per diem rates can benefit businesses and their traveling employees in several ways. Firstly, these rates provide a standardized and simplified method for reimbursing employees for their travel expenses. This helps businesses streamline their expense management processes and ensures that employees are fairly compensated for their out-of-pocket expenses. Additionally, the per diem rates set by the IRS are often higher than actual expenses incurred by employees. This means that employees can receive a tax-free reimbursement for their travel expenses, while businesses can potentially save on payroll taxes. Finally, using per diem rates can help eliminate the need for employees to keep detailed receipts and track individual expenses. This not only saves time and effort but also reduces the risk of errors or fraud in expense reporting.

What are the new per diem business travel rates that came into effect on October 1?

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

Are there any limitations or restrictions on utilizing the IRS special per diem rates?

Yes, there are certain limitations and restrictions on utilizing the IRS special per diem rates. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.

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Choosing a Business Entity: Which Way To Go?

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

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

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

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

More to take into account

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

  • If most of the business profits will be distributed to the owners, it may be preferable to operate the business as a pass-through entity rather than a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
  • If the value of the assets is likely to appreciate, it’s generally preferable to conduct business as a pass-through entity to avoid a corporate tax when the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
  • If the business is a pass-through entity, an owner’s basis in his or her interest in the entity is stepped-up by the entity income that’s allocated to the owner. That can result in less taxable gain for the owner when his or her interests in the entity are sold.
  • If the business is expected to incur tax losses for a while, you may want to structure it as a pass-through entity so you can deduct the losses against other income. Conversely, if you have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation, since it’ll be able to offset future income with the losses.
  • If the owner of a business is subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.

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

© 2023

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The Social Security Wage Base For Employees And Self-Employed People Is Increasing In 2024

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The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $168,600 for 2024 (up from $160,200 for 2023). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basic details

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2024, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2023).

2024 updates

For 2024, an employee will pay:

  • 6.2% Social Security tax on the first $168,600 of wages (6.2% x $168,600 makes the maximum tax $10,453.20), plus
  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
  • 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).

For 2024, the self-employment tax imposed on self-employed people will be:

  • 12.4% Social Security tax on the first $168,600 of self-employment income, for a maximum tax of $20,906.40 (12.4% x $168,600), plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
  • 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

Employees with more than one employer

You may have questions if an employee who works for your business has a second job. That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

We’re here to help

Do you have questions about payroll tax filing or payments? Contact us. We’ll help ensure you stay in compliance.

© 2023

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Business Automobiles: How The Tax Depreciation Rules Work

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Do you use an automobile in your trade or business? If so, you may question how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.

Depreciation is built into the cents-per-mile rate

First, be aware that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (65.5 cents per business mile driven for 2023), a depreciation allowance is built into the rate.

If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.

For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually. For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.

Reminder: Under the Tax Cuts and Jobs Act, bonus depreciation is being phased down to zero in 2027, unless Congress acts to extend it. For 2023, the deduction is 80% of eligible property and for 2024, it’s scheduled to go down to 60%.

Heavy SUVs, pickups and vans

Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.

What matters is the after-tax cost

What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.

The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.

© 2023

 

Q&As

 

What is the difference between using the actual expense method and standard mileage rate when calculating depreciation for a passenger auto?

Under the actual expense method, you calculate depreciation by tracking and deducting the actual expenses incurred for the vehicle, such as fuel, repairs, maintenance, insurance, and depreciation. This method requires you to keep detailed records of all expenses related to the vehicle. On the other hand, the standard mileage rate method allows you to deduct a set amount per mile driven for business purposes. The IRS sets this rate each year. For 2023, the standard mileage rate is 65.5 cents per mile. When it comes to depreciation specifically, under the actual expense method, you can deduct the actual depreciation expense of your vehicle based on its cost and useful life. With the standard mileage rate method, depreciation is already factored into the mileage rate. So when you claim deductions using the standard mileage rate, you cannot separately deduct depreciation expenses. It’s important to note that once you choose a method for calculating depreciation (either actual expense or standard mileage rate), you generally must continue using that same method for as long as you use that vehicle for business purposes.

 

How do I choose whether to use the actual expense method or standard mileage rate when calculating depreciation for my passenger auto?

To decide which method is best for you, you should consider factors such as your annual mileage, the age and condition of your vehicle, and whether you have high or low expenses related to operating your car for business purposes. It may be helpful to consult with a tax professional who can assess your specific situation and provide guidance on which method will result in the most favorable tax outcome for you.

 

Why do heavy SUVs have favorable depreciation rules?

Heavy SUVs have favorable depreciation rules because they are classified as “light trucks” for tax purposes. The tax code allows businesses to deduct a larger portion of the cost of heavy SUVs in the year that they are purchased, rather than spreading out the deduction over several years. This is known as bonus depreciation or Section 179 expensing. The rationale behind this favorable treatment is to encourage businesses to invest in vehicles that are used for business purposes, such as transporting goods or employees, by providing a financial incentive in the form of accelerated depreciation. It is worth noting that these rules apply specifically to vehicles that are used for business purposes at least 50% of the time.

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How IRS Auditors Learn About Your Business Industry

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

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

Issues unique to certain taxpayers

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

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

Updates and revisions

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

  • Entertainment Audit Technique Guide (March 2023), which covers income and expenses for performers, producers, directors, technicians and others in the film and recording industries, as well as in live performances;
  • Capitalization of Tangible Property Audit Technique Guide (September 2022), which addresses potential tax issues involved in capital expenditures and dispositions of property.
  • Oil and Gas Audit Technique Guide (February 2023), which explains the complex tax issues involved in the exploration, development and production of crude oil and natural gas;
  • Cost Segregation Audit Technique Guide (June 2022), which provides IRS examiners with an understanding of why and how cost segregation studies are performed in order for businesses to claim refunds related to depreciation deductions.
  • Attorneys Audit Technique Guide (January 2022), which covers issues including retainers, contingent fees, client trust accounts, travel expenses and more;
  • Child Care Provider Audit Technique Guide (January 2022), which enables IRS examiners to audit businesses that provide care in homes or day care centers; and
  • Retail Audit Technique Guide (March 2021), which details tax issues unique to businesses that purchase items from a supplier or wholesaler and resell them at a profit.

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

© 2023

Q&As

How can I learn about what IRS auditors are looking for in my specific business industry?

The IRS uses Audit Techniques Guides (ATGs) when researching tax laws and regulations specific to an industry. ATGs are available to the public on the IRS website.

What are Audit Techniques Guides (ATGs)?

Audit Techniques Guides (ATGs) are publications created by the Internal Revenue Service (IRS) to provide guidance and insights into specific industries or tax-related issues. These guides are designed to assist IRS examiners in understanding the unique characteristics and potential tax issues associated with different industries or types of transactions. ATGs cover a wide range of topics, including but not limited to the construction industry, retail industry, cash-intensive businesses, and passive activity losses. These guides provide valuable information on common practices, accounting methods, industry trends, and potential areas of noncompliance that examiners should be aware of during an audit. It is important to note that ATGs are not official IRS pronouncements or regulations but rather educational resources that offer insight into how the IRS may approach certain tax issues during examinations.

How do IRS auditors use Audit Techniques Guides (ATGs)?

IRS auditors use Audit Techniques Guides (ATGs) as a resource to assist them in conducting audits. These guides provide detailed information on specific industries or areas of tax law and offer insights into common issues, potential audit risks, and examination techniques. By using ATGs, auditors can gain a deeper understanding of the industry-specific practices and transactions they are examining, allowing them to identify potential areas of non-compliance and conduct more thorough audits. The ATGs serve as a tool to ensure consistency in the examination process and help auditors make informed decisions based on relevant industry practices and applicable tax laws.

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What Types Of Expenses Can’t Be Written Off By Your Business?

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

Basic definitions

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

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

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

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

Examples of taxpayers who lost deductions in court

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

  1. A married couple owned an engineering firm. For two tax years, they claimed depreciation of $76,264 on three vehicles, but didn’t provide required details including each vehicle’s ownership, cost and useful life. They claimed $34,197 in mileage deductions and provided receipts and mileage logs, but the U.S. Tax Court found they didn’t show any related business purposes. The court also found the mileage claimed included commuting costs, which can’t be written off. The court disallowed these deductions and assessed taxes and penalties. (TC Memo 2023-39)
  2. The Tax Court ruled that a married couple wasn’t entitled to business tax deductions because the husband’s consulting company failed to show that it was engaged in a trade or business. In fact, invoices produced by the consulting company predated its incorporation. And the court ruled that even if the expenses were legitimate, they weren’t properly substantiated. (TC Memo 2023-80)
  3. A physician specializing in gene therapy had multiple legal issues and deducted legal expenses of $360,295 for two years on joint Schedule C business tax returns. The Tax Court found that most of the legal fees were to defend the husband against personal conduct issues. The court denied the deduction for personal legal expenses but allowed a deduction for $13,000 for business-related legal expenses. (TC Memo 2023-42)

Proceed with caution

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

© 2023

Q&A

How do you know if a business expense is considered “ordinary”?

An expense is considered “ordinary” if it is common and accepted in the industry or trade in which the business operates. This means that the expense must be typical and customary for businesses in that particular industry. It should not be excessive or unusual compared to what other businesses in the same industry would typically incur. Determining if an expense is ordinary often requires professional judgment and knowledge of industry standards and practices. In general, expenses that are necessary for the day-to-day operations of a business and directly related to generating revenue are more likely to be considered ordinary. It is important to consult with a professional accountant or tax advisor for specific guidance on classifying expenses as ordinary for your particular business.

How do you know if a business expense is considered “necessary”?

A necessary expense is one that is helpful and appropriate for your business. To determine if a particular expense is necessary, you should consider whether it directly relates to your business operations, contributes to the generation of income, or helps you maintain or improve your business’s efficiency and productivity. It’s important to note that in order for an expense to be deductible, it must be both ordinary and necessary.

When determining whether to deduct an expense for your business, are there any other factors to consider in addition to whether the expense is ordinary and necessary?

When determining whether to deduct an expense for your business, there are a few other factors to consider in addition to whether the expense is ordinary and necessary. These factors include substantiation (having proper documentation to support the business purpose of the expense), reasonableness (in relation to the nature of your business and industry standards, treating excessively lavish expenses with caution and additional consideration), a direct connection to your business activities and income/operations, proportional use (only deducting the portion that is used for business purposes if the expense has both business and personal use), and compliance with tax laws (ensuring that the expense meets all applicable tax laws and regulations, including any specific rules or limitations related to certain types of expenses).

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2023 Q4 Tax Calendar: Key Deadlines For Businesses And Other Employers

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

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

Monday, October 2

  • The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 16

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2022 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2022 to certain employer-sponsored retirement plans.
    • Establish and contribute to a SEP for 2022, if an automatic six-month extension was filed.

Tuesday, October 31

  • Report income tax withholding and FICA taxes for third quarter 2023 (Form 941) and pay any tax due. (See exception below under “November 13.”)

Monday, November 13

  • Report income tax withholding and FICA taxes for third quarter 2023 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Friday, December 15

  • If a calendar-year C corporation, pay the fourth installment of 2023 estimated income taxes.

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

© 2023

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It’s Important To Understand How Taxes Factor Into M&A Transactions

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

Stocks vs. assets

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

1. Stock (or ownership interest) sale. A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Asset sale. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

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

Buyer vs. seller preferences

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

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

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

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

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

Professional advice is critical

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

© 2023

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Update On Depreciating Business Assets

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

Section 179 deductions

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

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

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

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

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

Deduction for heavy SUVs

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

First-year bonus depreciation has been cut

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

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

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

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

Passenger auto limitations

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

  • $12,200 for Year 1 ($20,200 if bonus depreciation is claimed),
  • $19,500 for Year 2,
  • $11,700 for Year 3, and
  • $6,960 for Year 4 and thereafter until fully depreciated.

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

Advantage for heavy vehicles

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

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

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

© 2023

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Divorcing Business Owners Should Pay Attention To The Tax Consequences

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

Transferring property tax-free

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

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

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

  • A year after the date the marriage ends, or
  • Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Additional future tax issues

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

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

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

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

Avoid surprises by planning ahead

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

© 2023

Q&As

How can business owners minimize the tax implications of a divorce settlement?

Business owners can minimize the tax implications of a divorce settlement by structuring the settlement as a property division rather than as alimony or spousal support, utilizing qualified domestic relations orders (QDROs) to help divide retirement accounts between spouses without incurring taxes or penalties, and considering the timing of asset transfers. It is important to consult with a professional who can provide personalized advice based on your specific circumstances.

How can business owners ensure they are properly valuing their businesses during divorce proceedings to avoid tax complications?

Business owners can ensure they are properly valuing their businesses during divorce proceedings by hiring a professional appraiser, providing accurate and up-to-date financial information, considering all assets and liabilities associated with the business including intellectual property, inventory, equipment, debts, and outstanding loans, and consulting with tax and legal professionals.

What are some of the potential tax consequences that business owners should be aware of when going through a divorce?

When going through a divorce, business owners should be aware of potential tax consequences including entity structure changes, the requirement for the spouse who ends up with an appreciated asset to recognize the taxable gain when selling the asset, and more. It is important to consult with a tax professional to minimize the adverse tax consequences of settling your divorce.

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Receive More Than $10,000 In Cash At Your Business? Here’s What You Must Do

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

The requirements

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

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

The definition of “cash” and “cash equivalents”

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

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

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

The reasons for reporting

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

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

Forms can be sent electronically

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

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

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

Record retention

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

Contact us with any questions or for assistance.

© 2023

 

Q&As

 

How do businesses typically track and document cash transactions to ensure compliance with IRS reporting regulations?

Businesses typically track and document cash transactions to ensure compliance with IRS reporting regulations by using methods such as cash registers, point-of-sale (POS) systems, manual logs and journals, daily bank deposits of cash receipts, and regular reconciliations of cash registers or POS systems with actual cash on hand. All of these methods help maintain accurate records of cash sales, which in turn aids in accurate filing of Form 8300.

What types of businesses typically receive large amounts of cash or cash equivalents?

Businesses that typically receive large amounts of cash or cash equivalents are those that deal with high-volume sales or transactions. Some examples include retail businesses, restaurants and bars, casinos, hotels and resorts, street vendors, car washes, and laundromats. It is important for these types of businesses to have proper systems in place to handle and account for large amounts of cash to ensure accuracy and security.

 

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Use An S Corporation To Mitigate Federal Employment Tax Bills

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

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

The S corp advantage

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

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

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

Strategy: Become an S corporation

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

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

Potential negative side effect

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

Other implications

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

© 2023

FAQs

What is the process for becoming an S corporation?

To become an S corporation, you must first form a regular corporation by filing the necessary documents with your state’s Secretary of State or similar agency. Once the corporation is formed, you can elect S corporation status by filing Form 2553 with the IRS. This form must be filed within a certain timeframe after the corporation is formed or at the beginning of the tax year in which you want S corporation status to take effect.

Are there any specific eligibility requirements for businesses to qualify as an S corporation?

There are a number of general requirements that must be met to qualify as an S corporation. These include being a domestic corporation, having only allowable shareholders (which generally means individuals, estates, certain trusts, and tax-exempt organizations), having no more than 100 shareholders, and having only one class of stock. Additionally, shareholders must be U.S. citizens or residents and the corporation cannot be an ineligible corporation (such as certain financial institutions or insurance companies).

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Starting A Business? How Expenses Will Be Treated On Your Tax Return

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

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

Handling expenses

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

1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.

2. Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

3. No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Rules to qualify

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

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

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

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

Decision to be made

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

© 2023

FAQs

Are there any tax benefits or credits available for new businesses or startups?

Yes, there are several tax benefits and credits available for new businesses or startups. New businesses can deduct certain expenses, such as office supplies, equipment purchases, and business-related travel. Startups that engage in qualified research activities may also be eligible for a tax credit to offset their R&D expenses. Additionally, hiring certain employees, such as veterans or individuals from targeted groups, may qualify your business for tax credits. Many states and local jurisdictions also offer specific tax incentives to attract new businesses or encourage local economic development. It’s important to consult with a tax professional or accountant to ensure you are aware of all the available benefits and credits that apply to your specific situation.

What is one important piece of advice regarding handling start-up costs and expenses when starting a business?

It’s important to maintain accurate and detailed records of all your business expenses. This includes keeping receipts, invoices, and other relevant documents. Good record-keeping will not only help you identify deductible expenses but also provide evidence in case of an audit.

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Experience The Benefits Of Working With A Dental CPA

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By Kenneth Botwinick, CPA

Having real-time guidance from a certified public accountant (CPA) who specializes in the dental industry is extremely valuable. If you approach your local CPA and inquire about making a significant purchase like acquiring a CBCT or a new Panorex, they might respond with confusion, asking, “what’s a CBCT?” Similarly, if you ask a non-specialized CPA about the appropriate time to consider dropping a PPO insurance plan, they may reply with uncertainty, saying “what’s a PPO?” or “How would I know?”

When presenting yourself as a professional in the field of accounting, it is crucial to have a deep understanding of the specific industry you cater to. At Botwinick & Company LLC, we are experts in dental practice accounting and have been for nearly thirty years. We successfully guided our dental clients through the worst of COVID times. Through skillful guidance and real-time open communication, we assisted and steered our clients through the PPP programs, the EIDL loans, the HRSA/HHS grants and their reporting requirements, and the employee retention credits (“ERCs”). For each of these programs, they learned about it from us first and then relied on our team to make sure their practice received all the stimulus grants they were lawfully entitled to.

However, beyond the special needs of the last several years, we as dental-specific accountants have been relied upon to provide business counsel relevant to the dental industry. It is knowledge that has been attained and refined through decades of working in the industry, attending relevant dental practice management training programs, and helping our clients from their first days of practice owners until their passing of the office keys on to the new practice owner.

If you are beginning to realize that your current CPA does not understand your business or industry, we encourage you to reach out for a no-obligation, complimentary consultation with one of our dental-specific accountants. This is the perfect opportunity to experience the advantages of working with “New Jersey’s most reliable Dental CPAs.”

How can a dental-industry-specific CPA help with tax planning and preparation?

There are a number of unique tax considerations for dental practices involving depreciation of equipment, qualified business income (QBI) deductions, employee benefits, sales tax on ancillary dental products, and self-employment taxes depending on the practice’s organizational structure. It’s always a good idea to consult with a tax professional who is familiar with the specific tax considerations for dental practices to ensure compliance and optimize your tax strategy.

What are some specific financial challenges that dental practices face, and how can a dental-specific accountant help address them?

Dental practices face several specific financial challenges, including managing cash flow, handling insurance reimbursements, tracking expenses and revenue, and understanding tax implications. A dental-specific accountant can help address these challenges by providing expertise in dental industry accounting practices and regulations. They can assist with financial planning, budgeting, and forecasting to ensure the practice is financially stable. They can also help with optimizing insurance billing processes, identifying opportunities for cost savings and efficiency improvements, ensuring tax compliance, and designing financial strategies that are aligned with the dental practice’s unique needs.

About the author: Kenneth Botwinick, CPA, is a partner with Botwinick & Company, LLC and has been with the firm for more than 25 years. Ken specializes in providing accounting, tax, and business consulting services to dental and medical practices. He established the firm’s dental-focused accounting practice and is a sought-after lecturer at dental continuing education programs. Ken has his “finger on the pulse of the dental industry,” and with comprehensive experience in ownership transitions, he assists clients in the healthcare industry to reach their professional and financial aspirations and goals.

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Advantages And Disadvantages Of Claiming Big First-Year Real Estate Depreciation Deductions

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

Qualified improvement property

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

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

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

Mind the limitations

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

First-year bonus depreciation for QIP

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

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

Consider depreciating QIP over time

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

1. Lower-taxed gain when property is sold

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

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

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

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

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

© 2023

 

FAQs

What are some potential tax consequences of taking large depreciation deductions in the first year of owning a property?

Taking large depreciation deductions in the first year of owning a property can have both immediate and long-term tax consequences. While it may reduce your taxable income for that year, it can also decrease your basis in the property, which may lead to higher capital gains taxes when you sell the property. Additionally, if you take a large depreciation deduction in the first year and then sell the property soon after, you may be subject to recapture taxes on the amount of depreciation claimed.

How do you determine the amount of depreciation to claim in the first year for a new property?

The amount of depreciation to claim in the first year for a new property is determined by using the Modified Accelerated Cost Recovery System (MACRS) established by the IRS. The MACRS system assigns a recovery period and depreciation method to each property based on its classification. For example, residential rental properties are typically assigned a 27.5-year recovery period and use the straight-line depreciation method. To calculate the first year’s depreciation, you would take the depreciable basis of the property (the original cost minus land value) and divide it by the assigned recovery period. The resulting amount is then multiplied by a percentage based on the chosen depreciation method and prorated for the portion of the year that the property was in service. It is recommended to consult with a tax professional or accountant for specific guidance on your individual situation.

What are some of the limitations of the first-year Section 179 depreciation deduction?

While the Section 179 depreciation deduction can provide significant tax savings for eligible businesses, there are some limitations to be aware of. Firstly, the maximum amount that can be deducted under Section 179 is subject to an annual limit ($1.16 million for qualifying assets placed in service in 2023), which is adjusted for inflation each year. Additionally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. Finally, there are limitations based on the total amount of qualifying property purchased during the year—if it exceeds a certain threshold in a given year, the Section 179 deduction may be reduced or eliminated entirely.

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2023 Q3 Tax Calendar: Key Deadlines For Businesses And Other Employers

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

July 31 

  • Report income tax withholding and FICA taxes for second quarter 2023 (Form 941) and pay any tax due. (See the exception below, under “August 10.”)
  • File a 2022 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10 

  • Report income tax withholding and FICA taxes for second quarter 2023 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

  • If a calendar-year C corporation, pay the third installment of 2023 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2022 income tax return (Form 1120-S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2022 to certain employer-sponsored retirement plans.

© 2023

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Keep These DOs And DON’Ts In Mind When Deducting Business Meal And Vehicle Expenses

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

Facts of the case

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

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

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

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

Stay on the right track

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

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

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

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

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

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

© 2023

Q&As

What are some common mistakes that people make when claiming deductions for business meals or auto expenses?

Some common mistakes people make when claiming deductions for business meals or auto expenses include failing to keep accurate records of the expenses, claiming personal expenses as business expenses, and failing to meet the IRS requirements for deducting these expenses.

How do I keep accurate records of my business meals and auto expenses to comply with IRS requirements?

To help meet IRS substantiation requirements for business meal and auto expenses, include the date, amount, location, and purpose of the expense. For auto expenses, you should maintain a logbook that tracks your mileage and includes details such as the date, starting and ending locations, purpose of the trip, and total miles driven. It may also be helpful to keep receipts or other documentation to support your expenses.

Why does claiming deductions for business meals or auto expenses attract IRS attention?

Deducting business meal or auto expenses can attract IRS attention because these expenses are often over-reported or inaccurately reported. The IRS has specific rules and limitations for deducting these expenses, and if they are not properly documented or supported, it can trigger an audit. Additionally, some taxpayers may try to deduct personal expenses as business expenses, which is a red flag for the IRS. It is important to keep accurate records and follow all IRS guidelines when deducting business meal or auto expenses to avoid any potential issues with the IRS.

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If You’re Hiring Independent Contractors, Make Sure They’re Properly Handled

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

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

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

No One Definition

Who’s an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.

Note: Section 530 doesn’t apply to certain types of workers.

You Can Ask The IRS But Think Twice

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

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.

It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.

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

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

How do I determine if someone is an employee or an independent contractor?

There is no uniform definition of the term “employee,” but the IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Various other factors, including the worker’s level of autonomy and independence and the nature of the work being performed, are also considered. The IRS provides guidance on this issue, including a set of criteria known as the “Common Law Rules,” which help employers determine whether a worker is an employee or an independent contractor.

What is the risk of asking the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee?

Asking the IRS to rule on worker classification may trigger an audit and potential tax liabilities for the employer. The IRS may also require back payment of employment taxes, penalties, and interest. The IRS has a history of classifying workers as employees rather than independent contractors. Businesses should consult with us before filing Form SS-8 to avoid these issues.

What are some tax-related differences between employees and independent contractors?

There are several tax-related differences between employees and independent contractors. For example, businesses are obligated to withhold taxes from employees’ paychecks. For independent contractors, businesses are only required to issue form 1099-NEC (if compensation for the year was $600 or more) and are not obligated to withhold taxes.

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

© 2023

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Use The Tax Code To Make Business Losses Less Painful

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

Qualifying for a deduction

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

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

  • Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
  • Casualty and theft losses from a federally declared disaster, or
  • Rental property (Schedule E).

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

  • Capital losses that exceed capital gains,
  • The exclusion for gains from the sale or exchange of qualified small business stock,
  • Nonbusiness deductions that exceed nonbusiness income,
  • The NOL deduction itself, and
  • The Section 199A qualified business income deduction.

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

Limitations

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

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

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

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

Excess business losses

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

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

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

Planning ahead

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

FAQS

How do I know if I qualify for a NOL deduction?

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income, as long as the deductions are related to your business, rental property, or casualty/theft losses from a federally declared disaster.

What are some limitations to the NOL deduction?

The following are a few limitations to the NOL deduction: the amount of NOL that can be deducted in a given year is limited to 80% of taxable income, NOLs can only be carried back for two years and carried forward for up to 20 years, and certain types of income—such as capital gains and dividends—may not be offset by NOLs.

What is the “excess business loss” NOL limitation?

The excess business loss limitation limits the amount of business losses that can be deducted from other sources of income, such as wages or investment income. The limitation applies to non-corporate taxpayers, such as sole proprietors and partners in partnerships. For 2023, the threshold is $289,000 ($578,000 if married filing jointly).

© 2023

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Education Benefits Help Attract, Retain And Motivate Your Employees

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One popular fringe benefit is an education assistance program that allows employees to continue learning and perhaps earn a degree with financial assistance from their employers. One way to attract, retain and motivate employees is to provide education fringe benefits so that team members can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by individuals pursuing programs leading to a business, medical, law or other advanced academic or professional degrees.

More requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying the $5,250 exclusion, an employer can satisfy an employee’s educational expenses on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

  • Maintain or improve skills required for the employee’s then-current job, or
  • Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Assistance with student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Starting next year, employers can help more. Under the SECURE 2.0 law, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers. This will take effect in 2024.

Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.

© 2023
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4 Ways Corporate Business Owners Can Help Ensure Their Compensation Is “Reasonable”

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If you’re the owner of an incorporated business, you know there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Therefore, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Steps to help protect yourself

There’s no simple way to determine what’s reasonable. If the IRS audits your tax return, it will examine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise, and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are four steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation:

  1. Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
  2. In the minutes of your corporation’s board of directors’ meetings, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
  3. Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by the IRS.
  4. If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. Contact us if you have questions or concerns about your situation.

© 2023

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Take Advantage Of The Rehabilitation Tax Credit When Altering Or Adding To Business Space

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

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

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

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

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

  • Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
  • Eliminated the 10% rehabilitation credit for pre-1936 buildings

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

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

© 2023

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Retirement Saving Options For Your Small Business: Keep It Simple

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

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

SEP involves easy setup

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

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

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

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

SIMPLE Plans

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

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

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

© 2023

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The Tax Advantages Of Hiring Your Child This Summer

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

Here are four tax advantages.

1. Shifting business earnings

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

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

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

2. Claiming income tax withholding exemption

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

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

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

3. Saving Social Security tax

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

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

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

4. Saving for retirement

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

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

© 2023

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2023 Q2 Tax Calendar: Key Deadlines For Businesses And Employers

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

April 18

  • If you’re a calendar-year corporation, file a 2022 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
  • For corporations pay the first installment of 2023 estimated income taxes.
  • For individuals, file a 2022 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due.
  • For individuals, pay the first installment of 2023 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES).

May 1

  • Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941) and pay any tax due.

May 10

  • Employers report income tax withholding and FICA taxes for the first quarter of 2023 (Form 941), if they deposited on time and fully paid all of the associated taxes due.

June 15

  • Corporations pay the second installment of 2023 estimated income taxes.

© 2023

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Do You Run A Business From Home? You May Be Able To Deduct Home Office Expenses

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

How to qualify

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

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

  1. You physically meet with patients, clients or customers on your premises, or
  2. You use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

Expenses you can deduct

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

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
  • Depreciation.

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

The simpler method

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

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

Changing methods 

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

What if I sell the home?

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

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

Different rules for employees

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

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

© 2023

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Protect The “Ordinary And Necessary” Advertising Expenses Of Your Business

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

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

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

  • Reasonable advertising expenses that are directly related to the business activities.
  • An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
  • The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

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

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

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

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

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

Keep meticulous records

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

© 2023

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Buying A New Business Vehicle? A Heavy SUV Is A Tax-Smart Choice

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

Depreciation rules

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

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

  • $20,200 for the first tax year in its recovery period (2023 for calendar-year taxpayers);
  • $19,500 for the second tax year;
  • $11,700 for the third tax year; and
  • $6,960 for each succeeding tax year.

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

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

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

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

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

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

© 2023

FAQs

How do tax depreciation rules differ for business-use vehicles versus personal-use vehicles?

The depreciation caps for business-use vehicles are lower than those for personal-use vehicles. This means it will take longer to fully depreciate a business-use vehicle than a personal-use vehicle.

What is the tax advantage of purchasing a heavy SUV rather than a lighter business vehicle?

A heavy, business-use SUV is a tax-smart choice compared to a lighter business vehicle because the annual depreciation caps that apply to lighter business vehicles do not apply to vehicles rated over 6,000 pounds. The result is that in most cases, you’ll be able to write off a majority of the cost of a new SUV used entirely for business purposes by utilizing bonus and regular depreciation in the year you place it into service.

What are the requirements for a heavy SUV to qualify for the expensing election?

In order for a heavy SUV to qualify for the expensing election, it must be rated over 6,000 pounds and must be used for business-related activities more than 50% of the time.

Are there any tax expensing limits for heavy SUVs?

Yes. The inflation-adjusted limit for heavy SUVs is $28,900 for SUVs placed in service in 2023. There’s also an aggregate dollar limit for all assets elected to be expensed in the year that would apply. Following the expensing election, you would then depreciate the remainder of the cost under the usual rules without regard to general annual caps.

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Have Employees Who Receive Tips? Here Are The Tax Implications

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

Tip definition

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

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

  1. The customer voluntarily makes the payment,
  2. The customer has the unrestricted right to determine the amount,
  3. The payment isn’t negotiated with, or dictated by, employer policy, and
  4. The customer generally has the right to determine who receives the payment.

 

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

Daily tip records

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

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

Reporting to employers

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

  • The employee’s name, address, Social Security number and signature,
  • The employer’s name and address,
  • The month or period covered, and
  • Total tips received during the period.

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

Employer requirements

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

  • Keep their employees’ tip reports.
  • Withhold taxes, including income taxes and the employee’s share of Social Security tax and Medicare tax, based on employees’ wages and reported tip income.
  • Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income.
  • Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return.
  • Deposit withheld taxes in accordance with federal tax deposit requirements.

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

What qualifies as a tip for tax purposes?

For tax purposes, a payment qualifies as a tip if the customer voluntarily makes the payment, the customer has unrestricted right to determine the amount, the payment isn’t negotiated with or dictated by employee policy, and the customer has the right to determine who receives the payment.

How should tipped workers keep track of their tips?

Tipped workers should use Form 4070A, Employee’s Daily Record of Tips, to keep track of their cash tips.

When should employees report tips to employers?

Employees must report tips to employers by the 10th of the month following the month they were received.

What is the difference between a direct tip and an indirect tip?

A direct tip is received directly from the customer (including as part of a tip pool), while an indirect tip occurs when an employee who doesn’t normally receive a tip receives one (i.e. a cook in a restaurant).

Tip tax credit

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

© 2023

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Many Tax Limits Affecting Businesses Have Increased For 2023

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

Social Security tax

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

Deductions

  • Section 179 expensing:
    • Limit: $1.16 million (up from $1.08 million)
    • Phaseout: $2.89 million (up from $2.7 million)
  • Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
    • Married filing jointly: $364,200 (up from $340,100)
    • Other filers: $182,100 (up from $170,050)

Retirement plans

  • Employee contributions to 401(k) plans: $22,500 (up from $20,500)
  • Catch-up contributions to 401(k) plans: $7,500 (up from $6,500)
  • Employee contributions to SIMPLEs: $15,500 (up from $14,000)
  • Catch-up contributions to SIMPLEs: $3,500 (up from $3,000)
  • Combined employer/employee contributions to defined contribution plans (not including catch-ups): $66,000 (up from $61,000)
  • Maximum compensation used to determine contributions: $330,000 (up from $305,000)
  • Annual benefit for defined benefit plans: $265,000 (up from $245,000)
  • Compensation defining a highly compensated employee: $150,000 (up from $135,000)
  • Compensation defining a “key” employee: $215,000 (up from $200,000)

Other employee benefits

  • Qualified transportation fringe-benefits employee income exclusion: $300 per month (up from $280)
  • Health Savings Account contributions:
    • Individual coverage: $3,850 (up from $3,650)
    • Family coverage: $7,750 (up from $7,300)
    • Catch-up contribution: $1,000 (no change)
  • Flexible Spending Account contributions:
    • Health care: $3,050 (up from $2,850)
    • Dependent care: $5,000 (no change)

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

© 2023

 

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Forms W-2 And 1099-NEC Are Due To Be Filed Soon

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

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

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

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

Independent contractors

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

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

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

You made a payment to someone who isn’t your employee,
You made a payment for services in the course of your trade or business,
You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
You made payments to a recipient of at least $600 during the year.
Your business may also have to file a Form 1099-MISC for each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services and more.

We can help

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

© 2023

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Dental Practice Acquisition – Financial Due Dilligence

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Are You Ready To Buy A Dental Practice?

You’ve taken the time to refine your clinical skills since dental school graduation.  You’ve registered with the top regional dental practice brokers. You’ve asked for help from anyone who might be able to help you locate an existing practice to buy, including practice brokers, dental equipment sales and repair representatives and your peers.

Now, what appears to be the ideal dental practice to buy presents itself.  But is it an ideal practice? Most importantly, is it an ideal practice for you? Is it a growing practice or one on the decline?

Before you throw up your arms and scream for help, here are some steps to take to ensure success.

The First Thing To Do Is To Build Your Advisory Team Quickly.

An even better idea is to compile a team of dental-specific professionals even before you find that ideal practice to be better prepared to outpace a competing suitor. Having a dental-specific CPA and a dental-specific attorney is half the battle of completing a successful practice acquisition. In addition, securing a dental-specific loan specialist at a bank will also give you an advantage.

The Most Vital Step In A Dental Practice Acquisition Is The Due Diligence Process.

Verifying the accuracy of the representations of the practice seller and the broker and evaluating the true value of the practice to you as the buyer is crucial. A CPA specializing in dental practices can be a huge asset in evaluating the merits of the contemplated practice and forecasting your success in that office as its new practice owner.

Though the merits of the practice can and should be discussed with the Dental CPA prior to making an offer, we recommend that you begin the due diligence step once a Non-Binding Letter of Intent is signed. By this time, you should have already visited the office, met with the practice owner, and arrived at the basic terms of the sale, including the purchase price and a mutually workable closing date timeframe. Often, the office staff is unaware that the dental practice is for sale, so confidentiality and discretion in discussions with third parties are imperative.

When performing due diligence on a dental practice acquisition, what top items do we look at?

Practice Collections

Show me the money!

Some due diligence procedures should include reviewing dental practice tax returns filed for the last three to four years. Additional steps should also include reviewing bank statements and comparing deposits for the year to the tax returns and financial statements provided, keeping an eye out for unusual non-recurring deposits and items.

Practice Expenses

Mind the store!

What does this practice cost to operate, and what can you reasonably expect to earn? Certain costs are variable, and certain expenses are fixed. Focus on analyzing the costs that will be difficult to manage. An expensive lease can hinder profitability, locking the practice for a fixed term. A bad lease might be a non-starter and kill the deal before further acquisition efforts are made. Employee costs can easily become overwhelming in a long-held practice. Be mindful of hourly wages or salaries and employee benefits. What the seller might be able to afford to pay staff may not be what a new practice owner can afford, along with a bank note to pay. Employees do not take kindly to a reduction of pay or benefits in a transition.  You’re not looking for a mutiny on Day One!

Remaining Terms of The Office Lease

Pack your bags!

How many years remain on the lease? Do you feel like moving next year? If there are less than three years remaining on the lease or a new lease can’t be negotiated prior to closing, you may need to pass on this practice.  Typically, the banks will not lend with insufficient lease terms. Check all terms of the lease and the afforded rights for it to be

assigned to an acquiring practice owner.

Insurance Plans are Accepted, and Office Fee Schedules

$50 cleaning? I don’t think so!

Don’t laugh. We have seen it. It is very important to review the insurance plans accepted. When a hygienist can cost more than $60 per hour with payroll taxes and benefits, make sure you’re not losing money with every patient you see. A careful review of the fee schedules for the accepted top three plans should be performed. Many older dentists fear dropping certain underpaying plans and have continued to build a larger patient base on sub-par paying plans, even as other local providers have dropped the plans.

Associate Contracts

Whose goodwill are you buying?

When a practice employs a dental associate, the patient-doctor relationship sometimes transfers to the dental associate. A review of the associate’s employment contract is vital to protect the asset you are purchasing. Be aware that in the absence of a non-compete agreement between the associate and the practice, nothing can prevent the associate from opening nearby and taking the patients from the practice you want to purchase.

Procedures Currently Performed In-Office and Procedures Referred Out

Opportunities lost or found?

A careful review of the production report by the procedure is crucial in determining if you have discovered a huge opportunity or are purchasing a practice you can’t or choose not to replicate. In other words, if you are not comfortable placing implants and the practice’s collections include a large percentage of implant placement cases, this may not be the practice for you. Immediately, there will be a reduction in collections. Conversely, if the practice is not currently placing implants or refers out all endodontic work and you are skilled at such procedures, you have just discovered a huge opportunity to grow the practice.

As a CPA firm specializing in the dental industry, our dental accountants are skilled at guiding our clients to successful practice acquisitions. Equally as important, we continue to provide industry-specific accounting guidance post-transaction to set our clients up for a rewarding ownership experience. Often referred to as “New Jersey’s most trusted dental accountants,” we strive and succeed to live up to our stellar reputation continuously.  

 

 

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Employers Should Be Wary Of ERC Claims That Are Too Good To Be True

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

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

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

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

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

ERC Basics

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

  • Continued paying employees while they were shut down due to the COVID-19 pandemic, or
  • Had significant declines in gross receipts from March 13, 2020, to September 30, 2021 (or December 31, 2021 for certain startup businesses).

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

To be eligible for the ERC, employers must have:

  • Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
  • Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
  • Qualified as a recovery startup business for the third or fourth quarters of 2021.

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

How to Proceed

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

© 2023

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The Standard Business Mileage Rate Is Going Up In 2023

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Although the national price of gas is a bit lower than it was a year ago, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2023. The IRS recently announced that the 2023 cents-per-mile rate for the business use of a car, van, pickup or panel truck is 65.5 cents. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

In 2022, the business cents-per-mile rate for the second half of the year (July 1 – December 31) was 62.5 cents per mile, and for the first half of the year (January 1 – June 30), it was 58.5 cents per mile.

How rate calculations are done

The 3-cent increase from the 2022 midyear rate is somewhat surprising because gas prices are currently lower than they have been. On December 29, 2022, the national average price of a gallon of regular gas was $3.15, compared with $3.52 a month earlier and $3.28 a year earlier, according to AAA Gas Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.

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, including gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear, as it did in 2022.

Standard rate versus actual expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, 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 beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal 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 do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The standard rate can’t always be used

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends 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 vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2023 — or claiming 2022 expenses on your 2022 income tax return.

© 2023

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2023 Q1 Tax Calendar: Key Deadlines For Businesses And Other Employers

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

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

  • Pay the final installment of 2022 estimated tax.
  • Farmers and fishermen: Pay estimated tax for 2022. If you don’t pay your estimated tax by January 17, you must file your 2022 return and pay all tax due by March 1, 2023, to avoid an estimated tax penalty.

January 31

  • File 2022 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2022 Forms 1099-NEC, “Nonemployee Compensation,” to recipients of income from your business where required.
  • File 2022 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7, with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2022. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2022. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2022 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 15

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

  • All payments reported on Form 1099-B.
  • All payments reported on Form 1099-S.
  • Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 10 of Form 1099-MISC.

February 28

  • File 2022 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 15

  • If a calendar-year partnership or S corporation, file or extend your 2022 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2022 contributions to pension and profit-sharing plans.

© 2022

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Do You Qualify For The QBI Deduction? And Can You Do Anything By Year-End To Help Qualify?

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

The QBI deduction is:

  • Available to owners of sole proprietorships, single-member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
  • Intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
  • Taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
  • Available regardless of whether you itemize deductions or take the standard deduction.

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

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

Year-end planning tip

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

© 2022

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Choosing A Business Entity? Here Are The Pros And Cons Of A C Corporation

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If you’re launching a new business venture, you’re probably wondering which form of business is most suitable. Here is a summary of the major advantages and disadvantages of doing business as a C corporation.

A C corporation allows the business to be treated and taxed as a separate entity from you as the principal owner. A properly structured corporation can protect you from the debts of the business yet enable you to control both day-to-day operations and corporate acts such as redemptions, acquisitions and even liquidations. In addition, the corporate tax rate is currently 21%, which is lower than the highest noncorporate tax rate.

Following formalities

In order to ensure that a corporation is treated as a separate entity, it’s important to observe various formalities required by your state. These include:

  • Filing articles of incorporation,
  • Adopting bylaws,
  • Electing a board of directors,
  • Holding organizational meetings, and
  • Keeping minutes of meetings.

Complying with these requirements and maintaining an adequate capital structure will ensure that you don’t inadvertently risk personal liability for the debts of the business.

Potential disadvantages

Since the corporation is taxed as a separate entity, all items of income, credit, loss and deduction are computed at the entity level in arriving at corporate taxable income or loss. One potential disadvantage to a C corporation for a new business is that losses are trapped at the entity level and thus generally cannot be deducted by the owners. However, if you expect to generate profits in year one, this might not be a problem.

Another potential drawback to a C corporation is that its earnings can be subject to double tax — once at the corporate level and again when distributed to you. However, since most of the corporate earnings will be attributable to your efforts as an employee, the risk of double taxation is minimal since the corporation can deduct all reasonable salary that it pays to you.

Providing benefits, raising capital

A C corporation can also be used to provide fringe benefits and fund qualified pension plans on a tax-favored basis. Subject to certain limits, the corporation can deduct the cost of a variety of benefits such as health insurance and group life insurance without adverse tax consequences to you. Similarly, contributions to qualified pension plans are usually deductible but aren’t currently taxable to you.

A C corporation also gives you considerable flexibility in raising capital from outside investors. A C corporation can have multiple classes of stock — each with different rights and preferences that can be tailored to fit your needs and those of potential investors. Also, if you decide to raise capital through debt, interest paid by the corporation is deductible.

Although the C corporation form of business might seem appropriate for you at this time, you may in the future be able to change from a C corporation to an S corporation, if S status is more appropriate at that time. This change will ordinarily be tax-free, except that built-in gain on the corporate assets may be subject to tax if the assets are disposed of by the corporation within 10 years of the change.

The optimum choice

This is only a brief overview. Contact us if you have questions or would like to explore the best choice of entity for your business.

© 2022

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Is Your Business Closing? Here Are Your Final Tax Responsibilities

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Businesses shut down for many reasons. Some of the reasons that businesses shutter their doors:

  • An owner retirement,
  • A lease expiration,
  • Staffing shortages,
  • Partner conflicts, and
  • Increased supply costs.

If you’ve decided to close your business, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

For example, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Duties involving workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

More tax issues to consider

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

© 2022

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Computer Software Costs: How Does Your Business Deduct Them?

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

Software you buy

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

  • Non-customized software available to the general public under a nonexclusive license, or
  • Acquired from a contractor who is at economic risk should the software not perform.

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

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

Software that’s leased

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

Software that’s developed

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

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

We can help

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

© 2022

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2023 Limits For Businesses That Have HSAs — Or Want To Establish Them

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No one needs to remind business owners that the cost of employee health care benefits keeps increasing. One way to provide some of these benefits is through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:

  • Contributions that participants make to an HSA are deductible, within limits.
  • Contributions that employers make aren’t taxed to participants.
  • Earnings on the funds in an HSA aren’t taxed, so the money can accumulate tax-free year after year.
  • Distributions from HSAs to cover qualified medical expenses aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Eligibility and 2023 contribution limits

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022).

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 of up to $1,000 (unchanged from the 2022 amount).

Employer contributions

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Making withdrawals

HSA withdrawals (or distributions) can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you have questions or would like to discuss offering HSAs to your employees.

© 2022

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Inflation Means You And Your Employees Can Save More For Retirement In 2023

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How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.

401(k) plans

The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.

SEP plans and defined contribution plans

The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).

SIMPLE plans

Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.

Other plan limits

The IRS also announced that in 2023:

  • The limitation on the annual benefit under a defined benefit plan will increase from $245,000 to $265,000. For a participant who separated from service before January 1, 2023, the participant’s limitation under a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted through 2022, by 1.0833.
  • The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $200,000 to $215,000.
  • The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $1,230,000 to $1,330,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $245,000 to $265,000.
  • The limitation used in the definition of “highly compensated employee” will increase from $135,000 to $150,000.

IRA contributions

The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.

Plan ahead

Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.

© 2022

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Employers: In 2023, The Social Security Wage Base Is Going Up

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The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basics about Social Security

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for the Old Age, Survivors and Disability Insurance program, which is commonly known as Social Security. The other is for the Hospital Insurance program, which is commonly known as Medicare.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).

2023 updates

For 2023, an employee will pay:

  • 6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus
  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
  • 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2023, the self-employment tax imposed on self-employed people is:

  • 12.4% Social Security tax on the first $160,200 of self-employment income, for a maximum tax of $19,864.80 (12.4% of $160,200), plus
  • 2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
  • 3.8% (2.9% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

Employees with more than one employer

What happens if one of your employees works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

Looking forward

Contact us if you have questions about 2023 payroll tax filing or payments. We can help ensure you stay in compliance.

© 2022

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Providing Fringe Benefits To Employees With No Tax Strings Attached

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

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

  1. A no-additional-cost benefit. This involves a service provided to employees that doesn’t impose any substantial additional cost on the employer. These services often occur in industries with excess capacity. For example, a hotel might allow employees to stay in vacant rooms or a golf course may allow employees to play during slow times.
  2. A de minimis fringe benefit. This includes property or a service, provided infrequently by an employer to employees, with a value so small that accounting for it is unreasonable or administratively impracticable. Examples are coffee, the personal use of a copier or meals provided occasionally to employees working overtime.

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

Court case provides lessons

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

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

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

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

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

© 2022

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What Local Transportation Costs Can Your Business Deduct?

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

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

Costs of traveling to your work location

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

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

Costs of traveling from work location to other sites

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

Recordkeeping

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

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

Your deduction can be computed using:

  1. A standard mileage rate (58.5¢ per business mile driven between Jan. 1 and June 30, 2022, and 62.5¢ per business mile driven between July 1 and Dec. 31, 2022) plus tolls and parking, or
  2. Actual expenses (including depreciation, subject to limitations) for the portion of car use allocable to the business. For this method, you’ll need to keep track of all costs for gas, repairs and maintenance, insurance, interest on a car loan and any other car-related costs.

 

Employees versus self-employed

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

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

© 2022

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Worried About An IRS Audit? Prepare In Advance

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

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

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

Audit targets

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

  • Significant inconsistencies between tax returns filed in the past and your most current return,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

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

If you receive a letter

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

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

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

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

  • Understand what the IRS is disputing (it’s not always clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most effective manner.

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

© 2022

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Work Opportunity Tax Credit Provides Help To Employers

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In today’s tough job market and economy, the Work Opportunity Tax Credit (WOTC) may help employers. Many business owners are hiring and should be aware that the WOTC is available to employers that hire workers from targeted groups who face significant barriers to employment. The credit is worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). It’s generally limited to eligible employees who begin work for the employer before January 1, 2026.

The IRS recently issued some updated information on the pre-screening and certification processes. To satisfy a requirement to pre-screen a job applicant, a pre-screening notice must be completed by the job applicant and the employer on or before the day a job offer is made. This is done by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit.

Which new hires qualify?

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

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

 

Other rules and requirements

There are a number of requirements to qualify for the credit. For example, there’s a minimum requirement that each employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit of $9,000 over two years.

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

A beneficial credit

In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be beneficial. Contact us with questions or for more information about your situation.

© 2022

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Businesses may receive notices about information returns that don’t match IRS records

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The IRS has begun mailing notices to businesses, financial institutions and other payers that filed certain returns with information that doesn’t match the agency’s records.

These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name or have a combination of both.

Each notice has a list of persons who received payments from the business with identified TIN issues.

If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees.

Which returns are involved?

Businesses, financial institutions and other payers are required to file with the IRS various information returns reporting certain payments they make to independent contractors, customers and others. These information returns include:

  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions,
  • Form 1099-DIV, Dividends and Distributions,
  • Form 1099-INT, Interest Income,
  • Form 1099-K, Payment Card and Third-Party Network Transactions,
  • Form 1099-MISC, Miscellaneous Income,
  • Form 1099-NEC, Nonemployee Compensation, and
  • Form W-2G, Certain Gambling Winnings.
  • Do you have backup withholding responsibilities?

The CP2100 and CP2100A notices also inform recipients that they’re responsible for backup withholding. Payments reported on the information returns listed above are subject to backup withholding if:

  • The payer doesn’t have the payee’s TIN when making payments that are required to be reported.
  • The individual receiving payments doesn’t certify his or her TIN as required.
  • The IRS notifies the payer that the individual receiving payments furnished an incorrect TIN.
  • The IRS notifies the payer that the individual receiving payments didn’t report all interest and dividends on his or her tax return.
  • Do you have to report payments to independent contractors?

By January first of the following year, payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report certain payments made to recipients. If the following four conditions are met, you must generally report payments as nonemployee compensation:

  • You made a payment to someone who isn’t your employee,
  • You made a payment for services in the course of your trade or business,
  • You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
  • You made payments to a recipient of at least $600 during the year.
  • Contact us if you receive a CP2100 or CP2100A notice from the IRS or if you have questions about filing Form 1099-NEC. We can help you stay in compliance with all rules.
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