Business tax expenses

Is It Possible to Turn Business Losses into Tax Savings?

Ken Botwinick, CPA | 05/13/2025

Is It Possible to Turn Business Losses into Tax Savings?

Even the most financially sound businesses can experience challenging years. Whether due to market shifts, rising expenses, or unexpected events, downturns happen. But here’s the silver lining: under the federal tax code, certain business losses may be used strategically to reduce taxable income in future years. This approach, known as the Net Operating Loss (NOL) deduction, can offer significant tax relief when properly applied.

What Is a Net Operating Loss (NOL)?

A Net Operating Loss occurs when a business’s allowable tax deductions exceed its taxable income in a given year. NOLs are designed to help businesses with fluctuating income—allowing them to “smooth out” the tax burden across years by applying losses from unprofitable periods to offset income in profitable ones.

This deduction is particularly helpful for businesses that experience growth cycles, seasonal trends, or economic downturns.

Who Can Use an NOL to Reduce Taxes?

You may be eligible for an NOL deduction if your total deductions surpass your income for the year. These losses must generally be tied to:

Business operations (e.g., losses reported on Schedule C or F, or pass-through losses from partnerships or S corporations on Schedule K-1)
Federally declared disaster-related losses, such as casualty or theft
Rental property losses (Schedule E)

However, not all losses count when calculating an NOL. The following items are generally excluded:

Capital losses that exceed capital gains
Gains from the sale of qualified small business stock that are excluded from income
Nonbusiness deductions that exceed nonbusiness income
The NOL deduction from a previous year
Section 199A Qualified Business Income deduction

Eligible filers include individuals and C corporations. While partnerships and S corporations themselves can’t claim an NOL, their partners or shareholders can potentially use their share of the loss on their individual tax returns.

Key Changes to NOL Rules Under the TCJA

The Tax Cuts and Jobs Act (TCJA) brought significant reforms to how net operating losses can be used. Here are the major updates:

No more carrybacks (except for specific farming losses): You can no longer apply NOLs to previous tax years.
Unlimited carryforwards: You can carry unused losses forward indefinitely.
80% cap: NOLs can only offset up to 80% of your taxable income in a future year.

If your NOL is larger than your taxable income in a particular year, the remaining amount becomes a carryover and can be used in future years. It’s important to apply NOLs in the order they were incurred.

What Is the Excess Business Loss Limitation?

Beginning in 2021, the TCJA introduced the Excess Business Loss (EBL) limitation for noncorporate taxpayers, including partners and S corporation shareholders. This rule applies after accounting for other loss limitations such as basis, at-risk, and passive activity rules.

Under this provision, only a portion of your business loss can offset income. For the 2025 tax year, the threshold is:

$313,000 for individuals
$626,000 for joint filers

Any losses beyond this threshold become NOL carryforwards—again subject to the 80% limitation in the years they’re used. This reduces the immediate tax benefit of those losses.

Note: The Inflation Reduction Act extended the EBL limitation through 2028. Originally, it was set to expire after 2026.

Why Strategic Tax Planning Matters

Understanding and utilizing the NOL deduction properly requires careful attention to detail. Coordinating it with other credits, deductions, and loss limitations is critical to ensure you’re maximizing your tax benefits.

Smart tax planning can make a significant difference. Applying your business losses the right way could save you thousands—or more—over time.

Let’s Build a Tax Strategy Around Your Losses

If your business has experienced a loss year, you don’t have to let it go to waste. We can help you determine if you’re eligible for an NOL deduction and develop a strategy that aligns with your short- and long-term goals.

Contact us today to explore how you can turn business losses into a powerful tax-saving tool.

Choosing the Right Business Entity: Is an S Corporation the Best Fit for Your Startup?

Ken Botwinick, CPA | 03/20/2025

Are you launching a business and wondering whether an S corporation (S corp) is the best structure for you? If you’re starting with partners, selecting the right business entity is crucial for liability protection, tax benefits, and long-term growth. An S corporation offers several advantages over partnerships and C corporations, making it a popular choice among entrepreneurs.

Key Advantages of an S Corporation

1. Limited Liability Protection

One of the biggest benefits of forming an S corporation is that shareholders are not personally responsible for the company’s debts or liabilities. However, to maintain this protection, it’s essential to:

Properly fund the corporation to support its operations.
Keep business and personal finances separate.
Comply with state regulations, such as filing articles of incorporation, adopting corporate bylaws, electing a board of directors, and holding required meetings.

Failing to follow these formalities can expose shareholders to personal liability.

2. Tax Benefits for Business Losses

New businesses often face financial losses in the early stages. If you choose an S corp over a C corporation, you can take advantage of pass-through taxation. This means shareholders can deduct their portion of business losses on their personal tax returns—up to their stock basis and any loans they provided to the company. If losses exceed this basis, they can be carried forward for future deductions when the basis allows.

3. Profit Taxation and Self-Employment Taxes

When your S corporation begins turning a profit, the income is taxed at the shareholder level, whether or not distributions are made. This can be advantageous because:

Unlike self-employed business owners, S corp shareholders are not subject to self-employment taxes on their share of the company’s income.
Only wages paid to shareholders as employees are subject to Social Security and Medicare taxes.
If the business income qualifies as Qualified Business Income (QBI), shareholders may be eligible for a 20% tax deduction under current tax laws.

Note: The QBI deduction is scheduled to expire after 2025 unless Congress extends it, but potential legislative extensions are currently under discussion.

4. Fringe Benefits Considerations

If you’re planning to offer benefits such as health and life insurance, it’s important to know that while the company can deduct these expenses, they are taxable to any shareholder owning more than 2% of the corporation. This differs from C corporations, where such benefits can be tax-free.

Maintaining S Corporation Status

To preserve your S corporation’s tax advantages and status, you must follow strict ownership rules:

Shares cannot be transferred to ineligible shareholders (such as corporations, partnerships, or nonresident aliens).
The corporation cannot have more than 100 shareholders.
It’s advisable to have each shareholder sign an agreement restricting transfers that could inadvertently terminate the S corp election.

Failing to adhere to these guidelines can result in the business losing its S corp status and being taxed as a regular corporation.

Making the Right Choice for Your Business

Choosing the right business structure impacts your tax obligations, liability protection, and operational flexibility. If you’re unsure whether an S corporation is the best fit for your business, consult with a professional. We can help you evaluate your options and ensure a smooth setup for your new venture.

Contact us today to discuss your business entity selection and start your journey toward success!

How to Navigate the Business Interest Expense Deduction Limit in 2025

Ken Botwinick, CPA | 03/10/2025

Understanding Section 163(j) and Strategic Tax Planning

Before the Tax Cuts and Jobs Act (TCJA), businesses could deduct most interest expenses related to their operations. However, with the introduction of Section 163(j), the IRS imposed new limitations on business interest expense deductions, significantly impacting companies with substantial financing costs.

As 2025 approaches, business owners must proactively manage these limitations to optimize their tax benefits. Fortunately, strategic tax planning can help mitigate the impact of these restrictions.

Breaking Down Section 163(j): How the Deduction Limit Works

Unless your company qualifies for an exemption, the maximum business interest deduction is limited to:

30% of Adjusted Taxable Income (ATI)
Business interest income, if applicable
Floor plan financing interest, if applicable

If your business does not have significant business interest income or floor plan financing, the deduction limit generally equates to 30% of ATI.

What Counts as Adjusted Taxable Income (ATI)?

ATI represents taxable income, excluding:

Nonbusiness income, gains, deductions, or losses
Business interest income and expense
Net operating loss deductions
The 20% qualified business income (QBI) deduction for pass-through entities

Initially, ATI was calculated without factoring in depreciation, amortization, or depletion. However, as of 2022, these expenses are deducted, reducing ATI and thereby limiting deductible interest further.

How to Work Around the Business Interest Deduction Limit

While the Sec. 163(j) limitation remains in effect, businesses can implement strategies to manage its impact.

1. Determine If Your Business Qualifies for an Exemption

Certain small businesses are exempt from the deduction limit. Your business may qualify if its average annual gross receipts over the last three years fall below a specified threshold (adjusted annually for inflation). However, businesses classified as tax shelters do not qualify for this exemption.

Additionally, related businesses under common ownership must aggregate their gross receipts to prevent larger corporations from circumventing the limit by splitting into smaller entities.

2. Opt Out (If Eligible) – But Weigh the Costs

Certain real estate and farming businesses can opt out of the Sec. 163(j) limitation. Eligible real estate businesses include those engaged in:

Property development, redevelopment, and construction
Rental property operations and leasing
Real estate management and brokerage

However, opting out comes with a trade-off: businesses must switch to longer depreciation periods for certain property, reducing immediate tax benefits. Weighing the long-term tax savings of unlimited interest deductions against reduced depreciation deductions is crucial before making this election.

3. Capitalize Interest Expense to Reduce the Tax Impact

Interest that is capitalized is not subject to the Sec. 163(j) deduction limit. Businesses may capitalize interest costs related to acquiring or producing property as part of their asset’s cost basis.

Interest capitalized to equipment or fixed assets can be recovered over time via depreciation.
Interest capitalized to inventory can be deducted as part of the cost of goods sold (COGS), effectively reducing taxable income.

By leveraging capitalization strategies, businesses can shift their interest expense into a tax-deductible category that is not constrained by Sec. 163(j).

4. Reduce Interest Expenses Proactively

Reducing reliance on debt financing can minimize the impact of the interest deduction limit. Businesses can explore options such as:

Shifting to equity financing instead of debt
Paying down high-interest loans when possible
Generating interest income by extending credit terms to customers

By lowering overall interest expenses or increasing interest income, businesses can strategically navigate Sec. 163(j) limitations.

Stay Ahead with Proactive Tax Planning

Unlike other provisions of the TCJA set to expire in 2025, the business interest expense deduction limit remains in effect unless Congress intervenes. To safeguard your company’s financial health, planning ahead is essential.

If your business is affected by the Sec. 163(j) limitation, our tax experts can help you explore the best strategies to optimize your deductions. Contact us today to discuss how to minimize your tax burden and keep your business financially strong.

Unlocking Home Office Tax Savings: A Complete Guide for Business Owners

Ken Botwinick, CPA | 02/27/2025

Running a business from home comes with significant perks, including tax deductions that can help reduce your taxable income. However, to claim these deductions, you must comply with IRS rules and choose the right method to maximize your savings while minimizing audit risks.

Below, we’ll break down everything business owners need to know about home office tax deductions, including qualification requirements, deductible expenses, and the differences between the actual expense and simplified methods.

Who Qualifies for the Home Office Deduction?

To be eligible for home office deductions, a portion of your home must be used regularly and exclusively as your primary place of business. This means:

✅ Your home office should be your main workspace where you conduct business activities.
✅ If you operate a business elsewhere but still use your home office for administrative or management tasks, you may still qualify.

Even if your home isn’t your primary business location, you could still be eligible for deductions if:

You physically meet with clients, customers, or patients at your home for business purposes.
You use a designated storage area in your home (or a separate structure like a garage) exclusively for business operations.

What Home Office Expenses Can You Deduct?

Business owners who qualify for home office deductions can deduct actual expenses related to maintaining their home office. These may include:

🔹 Direct Expenses: Costs specific to the home office, such as painting, flooring, or repairs in that space.
🔹 Indirect Expenses: A percentage of mortgage interest, rent, property taxes, utilities, maintenance, homeowners insurance, and repairs.
🔹 Security Systems: If the security system is essential to your business.
🔹 Depreciation: If you own your home, depreciation on the portion used for business can be deducted.

Since tracking actual expenses can be time-consuming, maintaining well-organized records is essential to maximize deductions and ensure compliance.

The Simplified Method: A Hassle-Free Alternative

For those who prefer an easier approach, the IRS offers a simplified home office deduction method:

✔️ Deduct $5 per square foot of home office space.
✔️ The maximum deduction is $1,500 (for up to 300 square feet).

While the simplified method requires less paperwork, it may not provide the biggest deduction—especially for larger home offices. Business owners with higher expenses may benefit more from the actual expense method.

Can You Switch Between Deduction Methods?

Yes! The IRS allows business owners to choose a different deduction method each year. For example:

Use the actual expense method for 2024 if you have significant home office expenses.
Switch to the simplified method in 2025 if you prefer an easier calculation.
Revert to the actual expense method in 2026 if expenses increase.

This flexibility ensures you can maximize tax savings year after year.

What Happens If You Sell Your Home?

If you sell your home at a profit after claiming home office deductions, tax implications may arise. Some of the depreciation you claimed may be subject to recapture, meaning you could owe taxes on that amount. Consulting a tax professional can help you navigate these potential tax consequences.

Additionally, home office deductions are limited based on your business income. If your deductions exceed the allowable limit, you may be able to carry forward the unused portion to future tax years.

Do Employees Qualify for Home Office Deductions?

No. Due to the Tax Cuts and Jobs Act (TCJA), employees working from home cannot claim home office deductions through at least 2025. This applies even if their employer requires them to work remotely and does not provide office space. Only self-employed business owners, freelancers, and independent contractors can take advantage of this tax break.

Get Expert Guidance on Home Office Tax Deductions

Home office tax deductions can lead to substantial savings for business owners—but they must be claimed correctly to avoid IRS issues. Understanding the eligibility rules, expense tracking, and deduction methods is key to maximizing your tax benefits.

Need help determining whether you qualify or which method is right for you? Contact us today for expert tax guidance and ensure you’re optimizing your home office deductions!

Q&A Below:

What are the main benefits of claiming a home office tax deduction?
Claiming a home office tax deduction can significantly reduce your taxable income, lowering your overall tax liability. By deducting eligible expenses, you can improve your business’s cash flow. Additionally, using the actual expense method may provide higher deductions for larger home offices, offering even more savings.

How can I ensure my home office qualifies for the deduction?
To qualify for a home office deduction, the space must be used regularly and exclusively for business purposes. It should be your principal place of business, or you must meet with clients or use part of your home for business-related storage. Keeping detailed records of how you use the space can help ensure compliance with IRS requirements and reduce audit risks.

Is the simplified method or actual expense method better for home office deductions?
The choice between the simplified and actual expense methods depends on your specific situation. The simplified method offers an easy $5-per-square-foot deduction (up to $1,500), but the actual expense method may result in larger deductions if you have significant expenses. Evaluating both methods each tax year can help you maximize your deduction.

Are there tax implications if I sell my home after claiming home office deductions?
Yes, selling a home where you’ve claimed home office deductions may trigger tax implications, particularly with depreciation recapture. When you sell at a profit, the portion of the gain related to depreciation previously claimed might be taxable. Consulting with a tax professional can help you navigate these complexities and avoid surprises at tax time.

Understanding Excess Business Losses for 2024: What Every Business Owner Should Know

Ken Botwinick, CPA | 02/24/2025

If you’re an individual taxpayer dealing with substantial business losses, you might be affected by federal tax rules designed to limit deductions. Navigating these rules can be challenging, but understanding how they apply can help you make smarter financial decisions for the 2024 tax year. Here’s what you need to know about excess business losses and how they might impact your tax situation.

What is an Excess Business Loss?

An excess business loss occurs when your aggregate business losses surpass a set threshold defined by the IRS. For 2024, the thresholds are:

$305,000 for single filers
$610,000 for married couples filing jointly

If your losses exceed these limits, the excess amount cannot be deducted in the current year. Instead, it is carried forward as a Net Operating Loss (NOL) to future tax years.

Passive Activity Loss (PAL) Rules

Before addressing excess business losses, you need to clear another hurdle: the Passive Activity Loss (PAL) rules. These rules apply if you aren’t actively involved in your business operations or if the income stems from rental activities. Under PAL rules:

Passive losses can only be deducted if you have passive income from other sources.
Disallowed losses are carried forward and can be deducted when you dispose of the related business or property.

How Does the Excess Business Loss Rule Work?

Even if you clear the PAL rules, the excess business loss disallowance rule might still apply. Here’s how:

Losses beyond the allowable threshold must be carried forward as an NOL.
You can only use NOL carryovers to offset up to 80% of your taxable income in the carryover year.
NOLs can no longer be carried back to prior tax years but can be carried forward indefinitely.

Real-World Examples of Excess Business Losses

Example 1: Partial Deduction for Business Losses

David operates a sole proprietorship focused on artificial intelligence development. In 2024:

He incurs a $400,000 business loss.
His income from other sources totals $500,000.

Since the individual threshold is $305,000, David can only deduct up to that amount in 2024. The remaining $95,000 becomes an NOL and carries forward to the next tax year.

Example 2: No Impact from Excess Business Loss Disallowance

Nora and Ned are married, filing jointly, with the following financial details:

Nora incurs a $350,000 loss from rental real estate.
Ned runs a business that incurs a $150,000 loss.
They have $600,000 in other income.

Their combined losses total $500,000, which is under the $610,000 threshold for married joint filers in 2024. They can fully deduct their losses against their other income with no carryover required.

How Excess Business Losses Impact Partnerships, LLCs, and S Corporations

For pass-through entities like partnerships, LLCs, and S corporations, the excess business loss rule applies at the individual owner level. Each owner’s share of the entity’s income, deductions, and losses is reflected on their personal tax return (Form 1040). This means:

Each partner or shareholder calculates their own business loss deduction limits.
Excess losses are carried forward as an NOL individually, not at the business entity level.

Best Strategies to Handle Excess Business Losses

Managing business losses can be complex, but there are strategies to minimize their impact:

Monitor Your Business Activities: Actively participate in your business to avoid PAL limitations.
Strategic Timing: Consider delaying or accelerating income and deductions to minimize excess losses.
Utilize NOL Carryforwards: Plan for future years by using NOLs effectively to offset taxable income.

Need Help Managing Your Business Losses?

Excess business loss rules can significantly affect your tax liability if not managed properly. Whether you’re dealing with sole proprietorships, partnerships, or rental properties, having a clear strategy is essential.

Contact us today for personalized tax advice to ensure you’re maximizing deductions while staying compliant with current IRS rules.

Tip Tax Rules: What Employers Need to Know in 2024

Ken Botwinick, CPA | 02/17/2025

For businesses in industries where tipping is a significant part of employee compensation—such as restaurants, hotels, and salons—understanding tax compliance is crucial. Employers must adhere to IRS guidelines for reporting, withholding, and paying taxes on tipped income to avoid penalties.

Below, we answer common questions about tip taxation, employer responsibilities, and potential legislative changes that could impact how tips are taxed in the future.

Are Tips Tax-Free? Debunking the Myth

During his campaign, former President Donald Trump proposed eliminating taxes on tips, sparking discussions among service workers and business owners. However, no legislation has been passed to exempt tips from taxation. Until any new laws are enacted, employers must continue following IRS regulations regarding tipped income.

How Does the IRS Define Tips?

The IRS categorizes tips into two types:

Cash Tips: These include money received directly from customers, credit or debit card tips distributed by the employer, and tips received through tip-sharing arrangements. Employees are required to report cash tips to their employer.
Noncash Tips: These are items of value, such as event tickets, gift cards, or other goods received from customers. Employees do not need to report noncash tips to their employer, but they must include them in their personal tax returns.

To qualify as a tip rather than a service charge, a payment must meet four criteria:

The customer voluntarily gives the payment.
The customer has full discretion over the amount.
The payment isn’t dictated by employer policy or negotiated.
The customer generally decides who receives the tip.

Direct vs. Indirect Tips

Direct Tips: These go straight from the customer to the employee (e.g., waitstaff, bartenders, hairstylists).
Indirect Tips: These are received by employees who do not typically receive tips but may get a share through tip pooling (e.g., bussers, cooks, service bartenders).

Recordkeeping Requirements for Tipped Employees

Employees must keep a daily record of their cash tips using Form 4070A (Employee’s Daily Record of Tips) found in IRS Publication 1244. They should also maintain records of noncash tips, even though noncash tips do not need to be reported to employers.

How Should Employees Report Tips to Employers?

Employees must report cash tips to their employer by the 10th of the following month. While the IRS doesn’t require a specific form, a valid tip report should include:

Employee’s full name, address, Social Security number, and signature.
Employer’s name and address.
The period covered by the report.
Total tips received during that period.

Important Exception: If an employee earns less than $20 in tips per month, they are not required to report them to their employer, but they must still report them on their tax return.

Employer Responsibilities for Tip Reporting

Employers must comply with IRS requirements, including:

✔️ Issuing W-2 Forms: Employers must include reported tips on employees’ W-2s.
✔️ Withholding Taxes: Federal income tax, Social Security, and Medicare taxes must be withheld based on reported tip income.
✔️ Paying Employer Taxes: Employers must pay their share of Social Security and Medicare taxes on total wages, including tips.
✔️ Filing Tax Forms: Businesses must report tip income using Form 941 (Employer’s Quarterly Federal Tax Return).
✔️ Depositing Withheld Taxes: Taxes must be deposited following federal tax deposit schedules.

Additional Reporting for Large Food and Beverage Establishments

If a business is classified as a “large food or beverage establishment” (one that customarily employs more than 10 tipped employees), it must file:

Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) to report total receipts and tips received.

What Is the Tip Tax Credit?

Businesses in the food and beverage industry may qualify for a federal tip tax credit, which allows them to claim a credit for the employer-paid Social Security and Medicare taxes on employees’ tip income. This valuable tax break can help offset labor costs.

Stay Compliant with Tip Tax Laws

Operating a business with tipped employees requires more than just excellent service—it demands strict compliance with IRS regulations, accurate recordkeeping, and staying informed about potential legislative changes.

While discussions about eliminating tip taxation have circulated, no laws have changed yet. Until then, employers should continue following IRS guidelines to avoid penalties.

If you need guidance on tip reporting, tax credits, or employer responsibilities, contact our team today for expert tax compliance advice.

2025 Business Tax Updates: Key Limits and Deductions You Need to Know

Ken Botwinick, CPA | 02/07/2025

Each year, tax-related limits for businesses are adjusted based on inflation. While 2025 brings increases to many tax deductions and limits, the pace of these changes has slowed due to easing inflation. Understanding these updates can help business owners optimize their tax strategies and maximize deductions.

Key 2025 Business Tax Deduction Increases Compared to 2024

Section 179 Expensing Deductions

Maximum deduction: $1.25 million (up from $1.22 million in 2024)
Phaseout threshold: $3.13 million (up from $3.05 million)
Heavy vehicle expensing limit: $31,300 (up from $30,500)

Standard Mileage Rate for Business Driving

2025 rate: 70 cents per mile (up from 67 cents per mile in 2024)

Qualified Business Income (QBI) Deduction Phaseout Limits (Sec. 199A)

Married filing jointly: Begins at $394,600 (up from $383,900)
Other filers: Begins at $197,300 (up from $191,950)

2025 Retirement Plan Contribution Limits vs. 2024

Maximizing retirement contributions is a tax-efficient way to plan for the future. Here are the key updates:

401(k) Contribution Limits

Employee contributions: $23,500 (up from $23,000)
Catch-up contributions (age 50+): $7,500 (unchanged)
New catch-up contributions for those aged 60-63: $11,250 (not available in 2024)

SIMPLE IRA Contribution Limits

Employee contributions: $16,500 (up from $16,000)
Catch-up contributions (age 50+): $3,500 (unchanged)
New catch-up contributions for those aged 60-63: $5,250 (not available in 2024)

Other Retirement Plan Limits

Total employer/employee contributions to defined contribution plans: $70,000 (up from $69,000)
Maximum compensation for plan contributions: $350,000 (up from $345,000)
Annual benefit limit for defined benefit plans: $280,000 (up from $275,000)
Highly compensated employee threshold: $160,000 (up from $155,000)
Key employee threshold: $230,000 (up from $220,000)

Social Security Tax Changes for 2025

Wage cap for Social Security tax: $176,100 (up from $168,600 in 2024)

Other Employee Benefit Updates for 2025

Qualified Transportation Fringe Benefits

Employee income exclusion: $325 per month (up from $315)

Health Savings Accounts (HSA)

Individual coverage contribution limit: $4,300 (up from $4,150)
Family coverage contribution limit: $8,550 (up from $8,300)
Catch-up contribution (age 55+): $1,000 (unchanged)

Flexible Spending Accounts (FSA)

Health care FSA contribution limit: $3,300 (up from $3,200)
Health care FSA rollover limit: $660 (up from $640)
Dependent care FSA limit: $5,000 (unchanged)

Potential Business Tax Policy Changes in 2025

While these tax updates are already in place, additional changes may be on the horizon. With a new administration and Republican control in Congress, several tax policy proposals could impact businesses in 2025, including:

A lower corporate tax rate (currently at 21%)
The elimination of taxes on overtime pay, tips, and Social Security benefits

Staying up to date on these potential changes is crucial for tax planning. Consulting a tax professional can help ensure your business is prepared to take full advantage of available deductions and credits.

Need Tax Planning Assistance for 2025?

Understanding tax updates is essential for maximizing deductions and minimizing liabilities. If you have questions about how these changes affect your business, contact us today for expert tax guidance!

Mastering the Tax Treatment of Intangible Assets: A Complete Guide

Ken Botwinick, CPA | 12/23/2024

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:

Acquiring or creating intangible assets.
Enhancing an existing intangible asset.
Creating a “future benefit” specified in IRS guidance.
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.

Maximize Your Small Business Tax Savings with Local Transportation Deductions

Michael Emr | 12/16/2024

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:

The Standard Mileage Rate: In 2024, the rate is 67 cents per mile, plus tolls and parking.
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.

How HSAs Can Benefit Small Businesses and Employees in 2025

Ken Botwinick, CPA | 12/11/2024

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!

Business Website Expenses: Managing Them for Tax Benefits

Ken Botwinick, CPA | 08/01/2024

Understanding Tax Treatment for Business Website Expenses

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

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

Tax Treatment of Hardware vs. Software

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

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

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

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

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

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

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

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

Need Assistance?

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