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Small Business Health Insurance Tax Credit: What Employers Need To Know In 2025

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When it comes to reducing your company’s tax liability, few tools are as powerful as a tax credit. Unlike deductions, which reduce taxable income, tax credits lower your tax bill dollar for dollar. One credit that often goes overlooked by small business owners is the Small Business Health Care Tax Credit for providing employee health insurance coverage.

At Botwinick & Co., we regularly help business owners determine whether they qualify for this valuable credit and how to maximize its benefits while remaining compliant with current IRS guidelines.

Understanding The Small Business Health Care Tax Credit

Created under the Affordable Care Act (ACA), the Small Business Health Care Tax Credit was designed to encourage smaller employers to offer health insurance to their employees. While the credit has been available for more than a decade, many eligible businesses still fail to claim it, particularly newer companies or those that have only recently begun offering coverage.

If your business recently started providing health insurance, you may still qualify.

Who Qualifies For The Credit?

Eligibility depends on several factors, including the number of full-time equivalent employees (FTEs), average employee wages, and the amount your business contributes toward premiums.

For the 2025 tax year:

  • The maximum credit is up to 50% of employer-paid health insurance premiums.
  • You must contribute at least 50% of the total premium cost (or a benchmark premium).
  • The full credit is available to employers with 10 or fewer FTEs.
  • Average annual wages must be $33,300 or less per employee for the full credit.
  • A partial credit is available for businesses with fewer than 25 FTEs and average annual wages under $66,600.

These wage thresholds are adjusted annually for inflation. For 2026, they increase to $34,100 and $68,200, respectively.

The Two-Year Limitation Rule

One critical detail many business owners miss is that this credit can generally be claimed for only two consecutive tax years. However, credits claimed before 2014 do not count toward this limit.

For example:

  • If you began offering health coverage in 2025, you may claim the credit on your 2025 and 2026 tax returns.
  • If coverage begins in 2026, you may claim the credit for 2026 and 2027.

Proper timing and planning are essential to ensure you do not lose out on one of the two eligible years.

Additional Rules And Considerations

While the credit can significantly reduce your tax bill, it comes with additional compliance requirements. For example, coverage generally must be purchased through the Small Business Health Options Program (SHOP) Marketplace to qualify.

Even if your premiums do not qualify for the credit, they may still be deductible as ordinary and necessary business expenses, subject to standard deduction rules. This means you may still benefit from tax savings even if you do not meet every credit requirement.

Why Proper Planning Matters

Because eligibility is based on employee count, wage levels, and employer contribution percentages, small changes in payroll or staffing can impact the amount of credit you receive. Strategic planning before year-end can make a measurable difference in your tax outcome.

At Botwinick & Co., we help small businesses:

  • Calculate full-time equivalent employees accurately
  • Analyze average wage thresholds
  • Determine optimal premium contribution strategies
  • Coordinate health insurance credits with other available tax credits
  • Plan for future tax years to maximize overall savings

Could Your Business Benefit?

If you are unsure whether your business qualifies for the Small Business Health Care Tax Credit, a proactive review can prevent missed opportunities. Many employers assume they are ineligible without fully analyzing the numbers.

Botwinick & Co. works closely with business owners to assess eligibility, structure compensation strategically, and identify additional credits that may apply to your 2025 return. We can also help you plan ahead for 2026 to ensure you take advantage of every available tax-saving opportunity.

Contact Botwinick & Co. today to review your eligibility and develop a strategic tax plan tailored to your business.

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

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

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

SEP Deadlines That Work in Your Favor

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

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

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

Simple Setup With Minimal Administration

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

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

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

Flexible Contributions With Generous Limits

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

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

For the 2025 tax year, SEP contribution limits are:

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

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

Is a SEP the Right Retirement Strategy for You?

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

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

Frequently Asked Questions

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

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

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

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

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

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

Question: How are SEP contributions taxed?

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

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

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

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

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

Understanding the IRS Standard: “Ordinary and Necessary”

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

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

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

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

When the IRS or Courts Disagree

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

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

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

What Can Your Business Deduct for 2025?

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

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

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

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

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2026 Business Tax Limits and Key Financial Updates Every Company Should Know

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As 2026 begins, business owners and financial leaders need to be aware of several important tax figures that impact deductions, benefits, retirement plans, and overall tax strategy. Understanding these updated limits can help you make smarter planning decisions and avoid surprises at tax time. Below is an overview of the most relevant 2026 business tax thresholds and contribution limits. Keep in mind that specific rules, exceptions, and eligibility requirements may apply depending on your situation.

Depreciation and Business Investment Incentives

Businesses purchasing equipment, technology, or other qualifying assets in 2026 may benefit from the following depreciation-related provisions:

  • Bonus Depreciation: 100%
  • Section 179 Deduction Limit: $2.56 million
  • Section 179 Phase-Out Threshold: $4.09 million

These provisions may provide significant cash-flow advantages for companies investing in expansion, modernization, or capital equipment.

Qualified Retirement Plan Contribution Limits

Helping employees save for retirement remains a strong tax-advantaged strategy. For 2026, the limits include:

  • 401(k), 403(b), and 457 Plan Deferrals: $24,500
  • Catch-Up Contribution (Age 50+): $8,000
  • Additional Catch-Up (Ages 60–63): $3,250
  • SIMPLE IRA Deferrals: $17,000
  • SIMPLE IRA Catch-Up (Age 50+): $4,000
  • Additional SIMPLE Catch-Up (Ages 60–63): $1,250
  • Defined Contribution Plan Limit: $72,000
  • Defined Benefit Plan Annual Benefit Limit: $290,000
  • Highly Compensated Employee Compensation Threshold: $160,000
  • Key Employee (Top-Heavy Plan) Compensation Threshold: $235,000
  • Compensation Trigger for SEP Contributions: $800

These adjustments can impact benefit plan design, nondiscrimination testing, and executive compensation planning.

Health and Fringe Benefit Contribution Limits

Health and wellness benefits continue to offer meaningful tax savings for both employers and employees:

  • Health Savings Account (HSA) Contributions: $4,400 for individual coverage, $8,750 for family coverage
  • Health Flexible Spending Account (FSA) Contributions: $3,400
  • FSA Carryover Allowance: $680
  • Dependent Care FSA Contribution Limit: $7,500
  • Monthly Commuter and Transit Benefit: $340
  • Monthly Qualified Parking Benefit: $340

Some benefit programs may have additional eligibility or plan-specific requirements that businesses should review carefully with their advisors.

Other Key Business-Related Tax Thresholds

  • Section 199A Qualified Business Income Deduction Phase-In Range: $201,750 – $276,750 (double for joint filers)
  • Excess Business Loss Limitation Threshold: $256,000 (double for joint filers)
  • Gross Receipts Threshold for Use of Cash Accounting Method: $32 million

This threshold also affects related rules, including certain interest expense deduction limitations.

Why These 2026 Tax Changes Matter for Your Business

These updated figures can influence:

  • Capital investment decisions
  • Retirement and benefits planning
  • Tax deductions and cash-flow strategy
  • Entity structure and compensation planning
  • Long-term financial projections

Proactive tax planning is essential, especially in a year with evolving thresholds, potential legislative adjustments, and increased IRS enforcement activity.

Plan Ahead for 2026 With Expert Tax Guidance

The right strategy can help your business maximize deductions, reduce tax exposure, and remain compliant with complex IRS rules. The professionals at Botwinick & Co. can help you evaluate how these 2026 tax changes apply to your business and develop a forward-looking plan tailored to your goals.

Contact us today to get started on your 2026 tax planning.

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Major Information Reporting Changes Begin with the 2026 Tax Year

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Businesses that employ workers or engage independent contractors have ongoing federal information reporting responsibilities. While the One Big Beautiful Bill Act (OBBBA) introduces meaningful changes to these requirements, most of the new reporting rules will not take effect until the 2026 tax year. Understanding what applies now—and what’s coming next—is essential for proper planning and compliance.

Below is a clear breakdown of the upcoming reporting changes, how they affect employers and payroll providers, and what businesses should prepare for as the rules evolve.

New Deductions for Tips and Overtime Income

For tax years 2025 through 2028, the OBBBA introduces new deductions for employees who earn qualified tips income or qualified overtime income. These deductions are intended to reduce federal income tax liability for eligible workers—but they are not exclusions from income.

This distinction is important. Even though employees may be entitled to federal income tax deductions, the following still apply:

  • Federal payroll taxes remain in effect
  • Federal income tax withholding rules continue to apply
  • State and local income taxes may still fully tax this income

As a result, employers and payroll processors face new challenges around identifying, tracking, and reporting this income so employees can properly claim their deductions.

No Federal Reporting Changes for the 2025 Tax Year

In August 2025, the IRS confirmed that there would be no OBBBA-related changes to federal payroll and information reporting forms for the 2025 tax year. This means that:

  • Form W-2 remains unchanged for 2025
  • Forms 1099 (including 1099-NEC and 1099-MISC) remain unchanged
  • Form 941 and payroll tax filings are unchanged
  • Federal income tax withholding tables are unchanged

Employers are not required to separately report qualified tips or overtime income for 2025.

Later in November 2025, the IRS issued guidance for employees explaining how they can determine eligibility and calculate their deductions for qualified tips or overtime income—even though employers are not required to provide specific reporting for that year.

Voluntary Reporting Options for Employers in 2025

Although not required, employers and payroll service providers may voluntarily assist employees by reporting qualified tips income for 2025 in Box 14 (“Other”) of Form W-2 or by providing a separate written statement.

Employers that pay overtime should also be prepared to answer employee questions regarding eligibility. In particular, employees must generally qualify as Fair Labor Standards Act (FLSA) employees to claim the overtime deduction.

IRS Identifies Eligible Occupations for Tips Deduction

In September 2025, the IRS released proposed regulations identifying dozens of occupations eligible for the qualified tips income deduction. Each eligible occupation has been assigned a three-digit occupation code that will be used for future information reporting.

The eligible occupations fall into eight primary categories:

  • Beverage and food service
  • Entertainment and events
  • Hospitality and guest services
  • Home services
  • Personal services
  • Personal appearance and wellness
  • Recreation and instruction
  • Transportation and delivery

These classifications will play a key role in employer reporting beginning with the 2026 tax year.

Draft 2026 Form W-2 Reflects New Reporting Requirements

Also in September 2025, the IRS released a draft version of the 2026 Form W-2, which incorporates several new reporting elements required under the OBBBA.

The draft form includes new Box 12 codes for:

  • TA – Employer contributions to Trump accounts
  • TP – Total qualified tips income
  • TT – Total qualified overtime income

In addition, a new Box 14b has been added to report the occupation of employees who receive qualified tips income.

Trump accounts—another OBBBA initiative—will become available in 2026 and are designed to provide tax-advantaged savings opportunities for children. Employer contributions to these accounts will now require formal reporting.

Higher 1099 Reporting Thresholds Starting in 2026

While the OBBBA adds new reporting requirements related to tips and overtime, it also provides meaningful relief for businesses by easing certain information return thresholds.

Historically, businesses have been required to file Forms 1099-MISC and 1099-NEC for payments of $600 or more made during the year.

Effective for payments made after December 31, 2025, the OBBBA increases this reporting threshold to $2,000. The threshold will also be adjusted for inflation for payments made after 2026.

This change affects:

  • Rent payments
  • Royalties
  • Service payments to independent contractors
  • Other reportable fixed or determinable income

The increased threshold will first apply to 2026 payments, which are reported on information returns filed in early 2027.

What Businesses Should Do Now

Although most changes do not take effect until 2026, proactive planning is essential. Employers should:

  • Review payroll and reporting systems for upcoming changes
  • Monitor IRS guidance on qualified tips and overtime income
  • Prepare for new W-2 reporting codes and occupation disclosures
  • Update internal policies and employee communications

Additional IRS guidance is expected, along with final versions of 2026 reporting forms. Staying informed will help prevent compliance issues and unnecessary penalties.

Stay Compliant with Expert Guidance from Botwinick & Company

The information reporting landscape is changing, and the OBBBA introduces both new obligations and new opportunities for businesses. Navigating these changes requires careful attention to IRS guidance, payroll procedures, and tax planning strategies.

Botwinick & Company helps businesses stay compliant, informed, and prepared as tax laws evolve. If you have questions about upcoming reporting requirements or how these changes may impact your business, contact our team today for trusted guidance.

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New OBBBA Law Expands Business Interest Expense Deductions Starting in 2025

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Businesses that pay or accrue interest can generally deduct those expenses for federal tax purposes—but long-standing IRS limitations have often restricted how much interest a company can write off each year. With the introduction of the One Big Beautiful Bill Act (OBBBA), key changes are coming in 2025 that may allow many businesses to claim larger deductions and improve cash flow.

Understanding the Business Interest Expense Limitation

Under current law, the annual deduction for business interest expense is generally capped at 30% of the taxpayer’s adjusted taxable income (ATI). This rule applies to individuals with business income, partnerships, LLCs taxed as partnerships, S corporations, and C corporations. Any interest expense that exceeds the limitation is not lost—it is carried forward to future tax years.

The IRS defines business interest expense as interest paid or accrued on debt properly allocable to a trade or business. For partnerships, LLCs taxed as partnerships, and S corporations, the interest-deduction limitation is applied first at the entity level and then again at the individual owner level. These additional layers of review can make compliance particularly complex.

Importantly, this limitation applies before the passive activity loss (PAL) rules, at-risk rules, and excess business loss rules. However, the limitation is generally applied after tax rules that capitalize, defer, or disallow interest under other federal provisions.

What’s Changing Under the OBBBA?

The new OBBBA legislation significantly broadens what taxpayers can deduct by revising how ATI is calculated and expanding the definition of floor plan financing.

1. ATI Will Be Calculated Using an EBITDA Approach

For tax years beginning in 2025 and beyond, ATI must be computed before depreciation, amortization, and depletion. This aligns ATI more closely with the financial concept of EBITDA—earnings before interest, taxes, depreciation, and amortization.

By increasing ATI, the OBBBA effectively raises the 30% limitation amount, giving many businesses the ability to deduct more of their interest expense each year.

2. Expanded Definition of Floor Plan Financing

Also beginning in 2025, the OBBBA expands the definition of floor plan financing to include loans used to finance:

  • Trailers designed for temporary living quarters
  • Campers intended for recreational or seasonal use
  • Units that can be towed by or attached to motor vehicles

Businesses in these industries may see a meaningful increase in deductible interest expenses as a result.

Exceptions to the Limitation Rules

Some businesses are already exempt from the business interest expense limitation based on size or industry. These exemptions will remain under the OBBBA.

Small Business Exemption

Businesses with average annual gross receipts below a certain threshold are exempt from the interest limitation rules. These thresholds are:

  • $31 million for tax years beginning in 2025
  • $32 million for tax years beginning in 2026

Other Exempt Business Types

  • Electing real property businesses that agree to use longer depreciation periods
  • Electing farming businesses that also agree to slower depreciation
  • Businesses that provide certain public utility services, including electricity, water, gas, steam, and sewage disposal, when rates are set by a qualifying regulatory authority

Real property and farming businesses considering an election to opt out of the limitation must carefully weigh the benefits. While opting out may allow larger interest deductions now, it also requires using longer depreciation schedules—which delays write-offs for certain assets.

How These Changes May Affect Your Business

The revised rules under the OBBBA could provide substantial tax relief for many businesses, particularly capital-intensive industries and companies that rely heavily on financing. However, the interaction between ATI calculations, entity-level rules, owner-level rules, and other federal tax provisions makes the analysis far from straightforward.

Proper planning is key. Evaluating whether your business will benefit may require reviewing projections, entity structure, prior-year carryforwards, and depreciation elections.

Need Guidance? Botwinick & Company Can Help

The business interest expense rules—especially with the upcoming OBBBA changes—are complex and highly situation-specific. Our tax professionals at Botwinick & Company can help you understand how the new law affects your business, evaluate your options, and implement the most tax-efficient strategy.

Contact us today for expert tax planning and guidance tailored to your business.

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Navigating the Tax Implications of a Merger or Acquisition

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Whether you’re selling your business or acquiring another company, the tax structure behind the transaction can significantly influence its success. Understanding how taxes apply to mergers and acquisitions is essential to preserving value, minimizing risk, and ensuring long-term profitability.

Choosing the Right Structure: Asset Sale vs. Stock Sale

From a tax perspective, a merger or acquisition is generally structured as either an asset sale or a stock sale — and the choice makes a major difference in how much tax is paid.

Asset Sale

In an asset sale, the buyer acquires only selected assets of the business. This structure is commonly used when the buyer wants specific divisions, product lines, or intellectual property. It’s also the default method when purchasing a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes.

Stock Sale

If the business is a corporation, partnership, or an LLC taxed as a partnership, a buyer may acquire the seller’s stock or ownership interest directly. The tax outcome depends heavily on whether the business is a C corporation or a pass-through entity such as an S corporation, partnership, or LLC.

How Entity Type Affects Tax Liability

C Corporations

The current flat federal corporate tax rate of 21% makes stock purchases of C corporations more appealing to buyers. Lower corporate taxes mean potentially stronger after-tax earnings and reduced tax on future asset appreciation when sold.

Pass-Through Entities

Businesses structured as S corporations, partnerships, or LLCs generally pass income through to the owner’s individual tax return. Lower individual tax rates and the potential eligibility for the qualified business income (QBI) deduction may provide strong tax advantages to buyers considering these entity types.

In certain transactions, a stock purchase may be treated as an asset purchase using a Section 338 election. Speak with Botwinick & Co. to determine whether this strategy may work for your deal.

Which Party Benefits More? Seller vs. Buyer

Why Sellers Prefer Stock Sales

  • Typically results in lower overall tax liability.
  • Transfers most liabilities to the buyer.
  • May qualify for long-term capital gain treatment.

Why Buyers Prefer Asset Purchases

  • Helps reduce exposure to unknown or undisclosed liabilities.
  • Allows for a step-up in basis on acquired assets.
  • Enables increased depreciation and amortization deductions.
  • May reduce taxable gain when assets are later converted to cash or sold.

Buyers often prioritize cash flow after closing — especially if acquisition financing is involved. A structure that optimizes deductions and minimizes liability is typically best suited to meeting those financial objectives.

Other Factors to Consider

While tax planning is essential, several additional elements can influence the structure of a merger or acquisition, including:

  • Employee benefits and compensation plans
  • Retirement plans and deferred compensation
  • State and local tax obligations
  • Intellectual property valuation
  • Industry-specific compliance requirements

Plan Ahead with Tax Strategy — Not After the Deal Closes

Selling the company you’ve worked hard to build — or stepping into business ownership through acquisition — may be the most important financial decision you’ll ever make. With proper tax planning, you can avoid costly surprises and structure your transaction for maximum benefit.

Botwinick & Co. specializes in tax-smart merger and acquisition strategies for businesses of all sizes. We’ll help you evaluate the tax consequences before negotiations begin to ensure your interests are protected.

Ready to Discuss Your Transaction?

Let our experienced tax advisors guide you through the process. Contact Botwinick & Co. today to get started.

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How the New QPP Tax Deduction Can Benefit Manufacturers

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Manufacturers and production-based businesses may soon benefit from a powerful new tax deduction thanks to the upcoming provisions of the One Big Beautiful Bill Act (OBBBA). This legislation introduces a unique opportunity—allowing **100% first-year depreciation** for nonresidential buildings that qualify as Qualified Production Property (QPP). This is a significant shift from traditional depreciation methods, where buildings must typically be depreciated over 39 years.

Unlike the standard bonus depreciation available for tangible property with a recovery period of 20 years or less, or qualified improvement property with a 15-year recovery period, QPP applies specifically to nonresidential real estate used in production-based activities. If used correctly, this deduction could provide major tax savings for eligible businesses.

What Is Qualified Production Property (QPP)?

The IRS definition of QPP can be complex, but it can be summarized as follows:

  • QPP refers to the portion of a nonresidential building that is used by a taxpayer as an integral part of a qualified production activity.
  • A qualified production activity includes manufacturing, producing, or refining a qualified product.
  • A qualified product is any tangible personal property—excluding food or beverages prepared and sold in the same building (meaning restaurants do not qualify).
  • The activity must result in a substantial transformation of the property being produced.

In simpler terms, QPP generally refers to buildings such as factories and production facilities. However, only the areas directly related to eligible production activities qualify; additional limitations apply.

Eligibility & Placed-in-Service Rules

To qualify for the 100% first-year deduction, QPP must meet specific construction and placed-in-service requirements:

  • Construction must begin after January 19, 2025, and before 2029.
  • The property must be placed in service in the U.S. or a U.S. possession before 2031.
  • The original use of the property must generally begin with the taxpayer.

Exception for Previously Owned Property

A previously used nonresidential building may still qualify if it meets all of the following conditions:

  • Acquired after January 19, 2025, and before 2029.
  • Not used in a qualified production activity between January 1, 2021, and May 12, 2025.
  • Never previously used by the taxpayer.
  • Now used as an integral part of a qualified production activity.
  • Placed in service in the U.S. or a U.S. possession before 2031.

Additionally, if an Act of God (as defined by the IRS) prevents timely completion, the IRS may extend the deadline for placing the property in service.

Important Pitfalls to Watch Out For

While the QPP deduction can be highly valuable, there are several limitations that taxpayers should keep in mind:

1. Leased Property

If you own a building and lease it to another party—even if the tenant uses it for a qualifying production activity—you generally cannot treat it as QPP.

2. Nonqualified Areas of a Building

The deduction only applies to the areas used directly for eligible production activities. The following spaces are not considered QPP:

  • Offices or administrative areas
  • Sales departments
  • Lodging or parking areas
  • Research or engineering spaces
  • Software development zones
  • Any activity not tied to transforming tangible personal property

3. Ordinary Income Recapture

If the property stops being used for a qualified production activity within 10 years of being placed in service, an ordinary income depreciation recapture rule will apply—potentially resulting in unexpected tax liability.

What to Expect Next

Further clarification from the IRS is anticipated regarding implementation, allocation of costs within buildings, and qualification standards. Once the deduction is elected, it typically cannot be revoked without IRS approval, so strategic planning is essential.

Manufacturers, production companies, and industrial businesses should start reviewing their facilities and future expansion plans now to assess QPP eligibility.

Need Guidance? Botwinick Can Help

Determining QPP eligibility requires careful analysis of building usage and cost allocation. Our team at Botwinick & Co. specializes in helping businesses maximize tax benefits while staying fully compliant with evolving regulations.

Contact us today to review your facility and develop a strategy that aligns with the new QPP deduction and other available tax-saving opportunities.

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Maximizing Tax Deductions on Business Gifts: What Every Business Owner Should Know

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Thoughtful business gifts can strengthen relationships with clients, employees, and partners — and in some cases, offer tax advantages. However, the IRS has strict rules governing how much you can deduct, making it essential to plan ahead and keep detailed records. Here’s what you need to know about deducting business gifts under current tax laws.

Understanding the $25 Business Gift Deduction Limit

The IRS generally limits business gift deductions to $25 per person, per year, a cap that’s been unchanged since 1962. While that amount may seem low today, there are several ways to maximize your deductions and ensure compliance.

When You Can Deduct More Than $25

Fortunately, there are exceptions to the $25-per-person rule that can help you write off more of your business gift expenses:

  • Gifts to businesses, not individuals:
    The $25 cap applies only to gifts made directly or indirectly to a specific individual. If you send a gift to a company — such as office equipment or an industry publication — and it benefits the business as a whole, it’s generally fully deductible. However, if the gift primarily benefits a specific employee, the $25 limit still applies.

  • Gifts to married couples:
    If both spouses have a business relationship with you and the gift is meant for both, you can usually deduct up to $50.

  • Incidental costs don’t count toward the limit:
    Expenses for personalization, packaging, shipping, or insurance are fully deductible and don’t reduce your $25 limit.

  • Employee gifts:
    Cash and gift cards are considered taxable compensation and deductible as wages. Noncash, low-cost gifts — such as company-branded items, occasional meals, or holiday gifts — may qualify as de minimis fringe benefits, which are tax-free to employees and deductible for your business.

Entertainment Gifts Under Current Tax Law

The Tax Cuts and Jobs Act (TCJA) eliminated most entertainment expense deductions, including tickets to concerts, sporting events, and similar activities, even if they’re business-related.

However, if you gift tickets to a client and don’t attend the event yourself, you can treat the cost as a business gift deduction, subject to the $25 limit and applicable exceptions.

Additionally, meals provided during entertainment events may still qualify for a 50% deduction if the cost is clearly stated separately on the invoice.

Why Recordkeeping Is Key to Compliance

Good recordkeeping can make the difference between a valid deduction and an IRS adjustment. Be sure to document:

  • A description of the gift

  • The cost and date of purchase

  • The business purpose and relationship of the recipient

Digital records — such as CRM notes, expense reports, or accounting entries — are perfectly acceptable, provided they clearly support your claim. It’s also smart to track gift expenses separately in your books for easy identification during tax preparation.

Make Every Gift Count — Tax-Smart and Appreciated

Business gifts can go a long way in showing appreciation to clients and employees — but understanding the IRS rules helps you avoid costly mistakes and maximize deductions.

If you’re unsure how these rules apply to your business or want to develop a tax-efficient gift-giving strategy, the professionals at Botwinick & Company can help.

Contact us today to review your company’s gift-giving policies and ensure your deductions are handled properly — so you can express appreciation while staying compliant with IRS regulations.

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Act Fast: How Businesses Can Still Claim Clean Energy Tax Breaks Before They Expire

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The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brought sweeping updates to the U.S. tax code — extending, modifying, and in some cases, accelerating the end date for several clean energy incentives that benefit businesses.

While some incentives are being phased out earlier than expected, there’s still time for companies to take advantage of valuable clean energy tax deductions and credits — but only if they act quickly.

Energy-Efficient Building Deduction (Section 179D)

The Section 179D deduction allows commercial building owners to immediately deduct the cost of qualifying energy-efficient improvements rather than depreciating them over the traditional 39-year period.

However, under the OBBBA, this deduction will no longer be available for property that begins construction after June 30, 2026.

Eligible taxpayers include:

  • Commercial building owners
  • Tenants and REITs that make qualifying upgrades
  • Architects, engineers, and designers of government-owned or nonprofit-owned buildings (including schools, religious institutions, and tribal organizations)

This deduction applies to both new construction and renovations of commercial properties — as well as multifamily residential buildings that are four or more stories above ground.

Qualifying improvements may include:

  • Interior lighting systems
  • HVAC and hot water systems
  • The building envelope (such as insulation, windows, and walls)

To qualify, improvements must reduce annual energy and power costs by at least 25% compared to industry standards, verified by a licensed engineer or independent contractor.

Deduction Amounts

  • Base deduction: $0.50 to $1.00 per square foot, depending on energy savings (25% to 50%).
  • Bonus deduction: $2.50 to $5.00 per square foot if projects meet prevailing wage and apprenticeship requirements.

Other Key Clean Energy Tax Credits Impacted by the OBBBA

Alternative Fuel Vehicle Refueling Property Credit (Section 30C)

Businesses can still claim this credit for electric vehicle (EV) charging stations and clean fuel storage equipment placed in service before June 30, 2026.

  • Credit value: Up to $100,000 per qualifying item (each charging port, dispenser, or storage unit)
  • Previously scheduled to expire in 2032, this credit now ends much sooner.

Clean Electricity Investment & Production Credits (Sections 48E and 45Y)

These credits for wind and solar energy projects will no longer apply to facilities placed in service after 2027, unless construction begins before July 4, 2026.

To qualify:

  • Projects must begin by July 4, 2026
  • They must be operational by December 31, 2027

This acceleration creates urgency for developers and investors in renewable energy sectors.

Advanced Manufacturing Production Credit (Section 45X)

The OBBBA also reshapes this credit for manufacturers producing clean energy components.

  • Wind energy components will no longer qualify after 2027.
  • The law adds metallurgical coal (used in steel production) to the list of critical materials.
  • Credits for most other critical materials will phase out from 2031 through 2033, while metallurgical coal credits end after 2029.

Why Businesses Should Act Now

The window to secure these clean energy incentives is closing fast. If your business has been considering solar panels, EV infrastructure, or energy-efficient building upgrades, now is the time to move forward.

Working with an experienced CPA firm like Botwinick & Company ensures you:

  • Identify eligible projects under the latest IRS guidance
  • Maximize available deductions and credits before they expire
  • Comply with prevailing wage and apprenticeship requirements
  • Structure investments to capture the highest possible tax benefits

 

Many of the most valuable clean energy tax incentives are ending years earlier than expected due to the OBBBA’s accelerated phase-outs. Strategic planning can help your business save thousands — or even millions — in tax liability before these opportunities disappear.

Botwinick & Company, CPAs can help you navigate these complex changes, determine your eligibility, and take full advantage of the benefits still available.

📞 Contact us today to discuss how your business can act before time runs out.

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2025–2026 IRS High-Low Per Diem Rates: Simplifying Business Travel Reimbursements

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Managing employee travel expenses can quickly become a hassle — from collecting endless receipts for meals and hotels to ensuring every reimbursement stays IRS-compliant. Fortunately, the IRS “high-low” per diem method streamlines the process. Instead of reimbursing actual costs, businesses can use standardized daily rates based on whether the travel destination is a high-cost or low-cost area.

In IRS Notice 2025-54, the agency released the latest high-low per diem rates effective October 1, 2025, through September 30, 2026. Here’s what business owners and finance teams should know.

How the High-Low Per Diem Method Works

The per diem approach allows companies to pay employees fixed daily amounts for lodging, meals, and incidental expenses rather than reimbursing every individual receipt. Employees only need to record the time, place, and business purpose of their trip.

As long as payments do not exceed the IRS-approved per diem rates, they are non-taxable and excluded from income and payroll tax withholding.

Under this simplified system:

  • High-cost locations receive a higher flat rate established annually by the IRS.
  • All other U.S. destinations are considered low-cost areas.
  • Employers may use the high-low method in place of city-specific per diem rates.

Some locations, such as New York City, Chicago, Boston, and Los Angeles, are designated as high-cost throughout the year, while others qualify as high-cost only during certain seasons — particularly popular resort destinations where lodging rates fluctuate.

If a company covers hotel costs directly, employees may receive the meals-and-incidentals (M&IE) per diem only. There is also a $5 incidental-expenses-only rate for employees who incur no meal costs during a travel day.

New IRS Per Diem Rates for 2025–2026

Beginning October 1, 2025, the IRS has set the following high-low per diem rates for travel within the continental United States (CONUS):

  • High-cost areas: $319 total
    • $233 for lodging
    • $86 for meals & incidentals
  • Low-cost areas: $225 total
    • $151 for lodging
    • $74 for meals & incidentals

Employers must continue using the same reimbursement method for an employee throughout the 2025 calendar year — switching methods mid-year isn’t permitted. Additionally, per diem payments cannot be issued to employees who own 10% or more of the business.

Why Review Your Travel Reimbursement Policy Now

With the new rates in effect, this is the perfect time to re-evaluate your company’s travel reimbursement policy before 2026 begins. Transitioning from an “actual expense” model to a per diem system can:

  • Reduce administrative burden for accounting and HR staff
  • Simplify recordkeeping and minimize audit risk
  • Ensure tax compliance with IRS reporting standards
  • Save employees time while maintaining transparency

Partner with Experts Who Understand IRS Compliance

Implementing the per diem method correctly can lead to significant time savings and fewer compliance headaches. At Botwinick & Co, our team of tax professionals can help your business:

  • Determine which method best fits your needs
  • Set up compliant travel reimbursement policies
  • Maintain proper documentation for IRS audits

If you have questions about the 2025–2026 high-low per diem rates or need help designing efficient reimbursement procedures, contact Botwinick & Co today for expert tax and accounting guidance.

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The Hidden Tax Risks of Personally Guaranteeing Your Corporation’s Loan

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When you’re asked to personally guarantee a loan for your closely held corporation, it may feel like just another step in supporting your business. But before signing, it’s critical to understand the potential tax consequences. Acting as a guarantor, endorser, or indemnitor means that if the corporation defaults, you—not the business—could be responsible for repaying the loan. Without careful tax planning, you may face unexpected and costly surprises.

Business vs. Nonbusiness Bad Debt Deductions

If you’re required to make payments toward the principal or interest on a loan you guaranteed, those payments may be considered a bad debt deduction. The type of deduction depends on your circumstances:

  • Business Bad Debt – Deductible against ordinary income. It can be partially or totally worthless.
  • Nonbusiness Bad Debt – Deductible only as a short-term capital loss and only if it’s completely worthless.

The distinction is important. Business bad debts can provide more favorable tax treatment, while nonbusiness bad debts come with limitations.

Determining If It’s a Business Bad Debt

For your payment to qualify as a business bad debt, the guarantee must be closely tied to your trade or business. For example, if you guaranteed the loan to protect your job, the IRS may consider that motive “closely related” to your trade or business as an employee—provided that protecting your job was the dominant reason.

  • If your salary is greater than your investment in the corporation, that typically shows your motive was to protect your job.
  • If your investment outweighs your salary, the IRS may conclude that your main motive was to protect your investment, making the deduction a nonbusiness bad debt instead.

Proving Your Motive to the IRS

Outside of protecting a job, it can be harder to show that your guarantee is business-related. You may need to demonstrate that the guarantee was tied to your work as a promoter or another trade or business you operate. If your dominant motive was protecting your investment or seeking profit, the IRS will treat it as a nonbusiness bad debt deduction.

Keep in mind: the IRS and courts carefully scrutinize your intent. “Reasonable compensation” doesn’t always mean just a paycheck—it can include protecting employment opportunities or other business interests.

Additional Conditions for Deductibility

Whether classified as business or nonbusiness, a bad debt deduction requires that:

  • You have a legal duty to make the guaranty payment.
  • The guaranty agreement was entered into before the debt became worthless.
  • You received reasonable consideration (not always cash—sometimes protection of your job or business suffices) for agreeing to the guarantee.

Payments you make are generally deductible in the year they’re made. However, if your agreement or state law provides a right of subrogation (meaning you can seek repayment from the corporation), you can’t deduct the bad debt until those rights are deemed worthless.

Protecting Yourself from Tax Traps

The decision to personally guarantee your corporation’s loan shouldn’t be taken lightly. Along with the financial risk, there are complex tax implications that could affect your bottom line.

At Botwinick & Company, we specialize in helping business owners and professionals navigate the tax traps of loan guarantees and other complicated financial matters. With our guidance, you can avoid costly mistakes and secure the best possible outcome for your situation.

✅ Want to avoid unnecessary tax headaches? Contact Botwinick & Company today for expert tax planning and corporate advisory services.

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Tax Court Ruling Highlights the Importance of Strong Recordkeeping for Businesses

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Running a successful business requires more than delivering great products or services. Behind the scenes, meticulous recordkeeping plays a crucial role in financial health, compliance and tax savings. Good records can mean the difference between successfully defending a deduction and losing valuable tax breaks. A recent U.S. Tax Court decision underscores just how important this is.

Why it matters

The IRS requires all businesses — no matter how small — to maintain records that accurately reflect income, expenses, assets and liabilities. Without these records, it’s nearly impossible to:

  • Substantiate tax deductions and credits,
  • Track cash flow and profitability,
  • Prepare accurate financial statements,
  • Monitor the progress of your business,
  • Support decisions for financing, and
  • Demonstrate compliance during an IRS audit.

In short, strong recordkeeping protects your business, both for operational and tax law purposes.

Taxpayer loses deductions due to insufficient records

In one case, a union power‐line worker also had business interests in a storm response partnership, a salon and a rental property. He claimed significant losses and business expenses on his return for the year in question. Among his claimed deductions were partnership losses and expenses for tools, clothing and travel.

In Tax Court Memo 2025-12, the court disallowed substantial deductions because the taxpayer couldn’t properly substantiate them. Some invoices or receipts were missing or didn’t tie clearly to the business purpose.

For example, with vehicle or travel expenses, the court noted the lack of contemporaneous logs and details that distinguished business vs. personal use. For partnership losses, the taxpayer needed to show his basis in the partnership, but couldn’t provide clear documentation of all his capital contributions.

In addition to denying many of the taxpayer’s deductions, the court upheld an accuracy‐related penalty. This is an extra charge (typically 20% of the underpayment) that can be assessed when a taxpayer makes substantial mistakes on a tax return.

This case isn’t unique. Year after year, businesses lose valuable deductions for the same reason: poor recordkeeping.

Six key practices to protect tax breaks

To avoid costly mistakes, businesses should implement a recordkeeping system that’s both practical and compliant. Here are six best practices to consider:

1. Separate business and personal finances. Open a dedicated business checking account and credit card. Mixing personal and business expenses is one of the fastest ways to create confusion — and attract IRS scrutiny.

2. Maintain contemporaneous records. Document expenses when they occur, not months later. For example, keep mileage logs for business driving and note the purpose of each trip.

3. Use accounting software. Modern accounting platforms (like QuickBooks® or industry-specific tools) streamline recordkeeping. They allow you to categorize expenses, generate reports and integrate with bank accounts to minimize errors.

4. Keep source documents. For example, retain purchase and sale invoices, receipts, bank statements, canceled checks, and credit card bills. Scanning or photographing receipts ensures they won’t fade or get lost. Also, keep copies of Forms 1099-MISC and 1099-NEC. There are also specific employment tax records you must keep.

5. Retain records for the right amount of time. Generally, the IRS recommends keeping records for at least three years. That’s the amount of time that the tax agency can audit a tax return. However, some records (such as payroll tax or property records) should be kept longer. The length of time can be extended to six years if the income is underreported by more than 25%. And if no return is filed or fraud is involved, the IRS can conduct an audit for an indefinite amount of time.

6. Establish internal controls. For businesses with employees, internal checks help ensure the accuracy and integrity of records. Examples of these controls include requiring dual signatures for large expenses and segregating duties so that different employees handle authorization, custody of assets and recordkeeping.

Reliable records are vital

The lesson from the Tax Court case described above is clear: Without reliable records, even legitimate deductions can vanish. Don’t let poor documentation cost your business money. We can help your business:

  • Set up a recordkeeping system tailored to your business,
  • Learn which expenses are deductible (and how to document them),
  • Review its books to catch issues before the IRS does, and
  • Manage any IRS challenges to tax deductions.

Contact us to discuss how we can help you establish sound recordkeeping practices and safeguard valuable tax breaks.

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Receive $10,000 in cash at your business? The IRS wants to know about it

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If your business accepts large cash payments, you may need to do more than report income on your tax return. U.S. law requires many businesses to file Form 8300 whenever they receive more than $10,000 in cash in a single transaction or in related transactions. Below we’ll explain who must file, what counts as “cash,” how and when to file, and what penalties apply.

Who must file Form 8300?

Any “person” engaged in a trade or business that receives >$10,000 in cash must file. “Person” is broad—it includes an individual, company, corporation, partnership, association, trust, or estate. IRS+1

What are “related transactions”? Payments from the same payer to the same recipient within a 24-hour period are related. They can also be related beyond 24 hours if you know (or have reason to know) they are part of a series of connected transactions. IRS

Filing deadline: File within 15 days after receiving the cash that triggers reporting. IRS

What counts as “cash” for Form 8300?

  • U.S. and foreign currency (paper money/coins).

  • Cash equivalents: certain cashier’s checks, bank drafts, money orders, and traveler’s checks with a face value of $10,000 or less when used in a designated reporting transaction (e.g., retail sale of a car/boat, collectibles, travel/entertainment) or when you know the customer is attempting to avoid reporting. IRS

Does a single $12,000 cashier’s check count as cash? No—monetary instruments over $10,000 by themselves are not cash for Form 8300. But a $6,000 cashier’s check + $6,000 currency for one sale does count (total >$10,000). IRS

Are wires or personal checks cash? No. Personal checks and bank wires/ACH are not cash for Form 8300. (Financial institutions separately report large currency transactions via FinCEN Currency Transaction Reports.) IRS

What about crypto/digital assets? Although a 2021 law added “digital assets” to the cash definition, the IRS announced transition relief—do not report digital-asset receipts on Form 8300 until regulations are issued (Announcement 2024-4). IRS+1

How to file in 2025 (e-file rules)

  • E-file required if you must e-file other information returns (like W-2s/1099s) or if you file at least 10 information returns (other than Form 8300) during the year. The number of Forms 8300 you file does not count toward that 10-return threshold. IRS

  • File electronically through FinCEN’s BSA E-Filing System; batch e-filing is available and helpful if you submit many forms. Waivers (Form 8508) and a religious exemption exist for e-filing. IRS+1

Penalties for noncompliance (2025)

  • Per-return penalties under IRC §6721 vary by lateness; for 2025, the penalty is up to $330 per form if filed after August 1 or not filed at all; intentional disregard can be $660 per return (general information-return grid). IRS

  • Form 8300 has much steeper “intentional disregard” penalties: the greater of $31,520 or the amount of cash received, capped at $126,000 per failure (no annual cap). IRS

  • Real-world example: In T.C. Memo 2025-38, an Arizona auto dealer lost a reasonable-cause argument and faced $118,140 in penalties for missing hundreds of Forms 8300. Current Federal Tax Developments+1

Recordkeeping & customer notices

  • Keep a copy of every Form 8300 (plus supporting documents and required customer statements) for five years.

  • E-file confirmations don’t satisfy the recordkeeping rule—save/print the actual form and associate the confirmation number with it.

  • You must send a written statement to each person named on the form by January 31 of the year following the cash receipt. IRS+1

Quick compliance checklist

  • ☐ Train staff to spot related transactions and the 24-hour rule. IRS

  • ☐ E-file via BSA E-Filing and set up batch filing if you submit many forms. IRS

  • ☐ File within 15 days of receipt that pushes you over $10,000. IRS

  • ☐ Verify and collect TINs for payers; document attempts if a customer refuses. IRS

  • ☐ Save copies for 5 years; confirmations alone are not enough. IRS

FAQs

Do installment payments trigger Form 8300?
Yes. Add cash installments made within one year of the first payment. When cumulative cash exceeds $10,000, file within 15 days of the payment that crosses the threshold. You must file again if additional cash exceeds another $10,000 within a 12-month period. IRS

Do colleges or contractors have to file?
Yes—colleges/universities and contractors must file Form 8300 when they receive >$10,000 in cash (subject to the standard rules). IRS

If I take a $12,000 wire plus $4,000 cash, do I file?
No, because wires aren’t cash; with only $4,000 currency, the cash portion didn’t exceed $10,000. (But stay alert for combinations with small cashier’s checks/money orders that could push you over.) IRS

Should I report crypto I received in 2025?
Not on Form 8300 at this time. The IRS says businesses don’t need to report digital-asset receipts on Form 8300 until regulations are issued. IRS

 

Need help with Form 8300 compliance? Don’t risk costly penalties or missed deadlines. Our team builds end-to-end cash-reporting programs for businesses like yours—including a one-time compliance checkup, workflow design for the 24-hour/related-transaction rules, staff training and TIN collection best practices, BSA e-filing setup (including batch submissions), recordkeeping templates and customer-statement language, plus remediation and penalty-abatement guidance if you’ve fallen behind. Let’s make compliance simple and stress-free—contact us today to schedule a consultation.

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Understanding Startup Costs and Tax Deductions: A Must-Read for New Business Owners

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According to the U.S. Census Bureau, nearly 447,000 new business applications were filed in May 2025 alone—a strong signal that entrepreneurial spirit in America remains vibrant. If you’re among the growing number of startup founders, it’s important to understand how your early-stage expenses impact your tax situation. The way you manage your startup costs can significantly influence your first-year federal tax liability.

At Botwinick & Co., we work closely with startups and emerging businesses to ensure they make the smartest financial decisions from day one. Here’s what you need to know before filing your taxes.

How Are Startup Costs Treated for Tax Purposes?

If you’re launching a business or in the planning stages, there are three important tax rules to understand:

  • What qualifies as a startup cost?
    Startup costs include expenses incurred during the investigation or creation of a business, before it officially begins operations.

  • How much can you deduct?
    The IRS allows you to deduct up to $5,000 in startup costs and $5,000 in organizational costs in the year your business becomes active. However, this deduction phases out if total costs exceed $50,000. Any remaining costs must be amortized evenly over 180 months (15 years).

  • When can you claim deductions?
    You can’t deduct or amortize these costs until your business is considered “actively conducting business.” This typically means your business is officially operating and generating revenue. The IRS will look at your activity, intent to earn a profit, and involvement to determine eligibility.

Which Expenses Qualify?

To qualify for the limited deduction, startup costs must be:

  • Directly related to the creation or acquisition of a business.

  • Incurred before operations begin, and would otherwise be deductible if the business was already active.

Examples include:

  • Market research for new products or services

  • Travel expenses to meet with potential suppliers or customers

  • Advertising and promotional materials

  • Business consulting and feasibility studies

Organizational expenses are specifically related to setting up a business structure such as a corporation or partnership. These might include:

  • Legal fees for drafting incorporation documents

  • Accounting services for financial setup

  • State filing fees for registering your entity

Why It Matters

The early financial decisions you make as a startup can have long-term tax implications. Properly classifying and tracking your expenses ensures you don’t miss out on valuable deductions.

Get Ahead with Strategic Planning

Launching a business is exciting—but navigating tax regulations can be overwhelming without the right guidance. At Botwinick & Co., we help startups across all industries build a strong financial foundation. From tax planning to financial structuring, our expert CPAs are ready to guide you through each stage of your entrepreneurial journey.

📞 Schedule a consultation today to discuss your business goals and how we can help optimize your tax strategy from the very beginning.

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How to Safeguard Your Business Expense Deductions: Essential DOs and DON’Ts

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If you plan to deduct business meals, vehicle use, or home office expenses, be prepared—the IRS scrutinizes these claims closely. Many taxpayers fail to meet the strict substantiation requirements imposed by the tax code, often due to poor recordkeeping or attempting to recreate records long after the fact. As one recent U.S. Tax Court case (T.C. Memo. 2024-82) highlights, incomplete documentation can easily lead to disallowed deductions and costly consequences.

Real Case Example: Why Documentation Matters

A software consultant learned the hard way that vague records and assumptions don’t fly with the IRS. She claimed substantial deductions for multiple tax years, but the IRS disallowed many of them—and the U.S. Tax Court agreed. Here’s what went wrong:

❌ Business Meals

The taxpayer claimed almost $9,000 in meal expenses in one year, stating they were for “working lunches” with colleagues. However, she only provided bank statements as proof. The court ruled that this failed to establish the business purpose or the relationship of the individuals involved, adding that simply eating lunch during the workday is not automatically a deductible business expense.

❌ Supplies

Over two tax years, she claimed more than $17,000 in supply expenses, including desks, monitors, and office materials. But receipts were dated after the tax years in question and included items like soda machines and gift cards—raising questions about personal use. The kicker? All purchases occurred after she had already closed the business.

❌ Home Office Deductions

She deducted over $21,000 for the business use of her home. But the court found that her main place of work was at clients’ offices—not at home. She also failed to show how much time she actually worked from home or if any portion of the residence was used exclusively for business.

Other disallowed expenses included vehicle use, attorney fees, utilities, and hotel stays—all lacking sufficient proof or clear business relevance.

DOs and DON’Ts for Protecting Your Business Deductions

To help your deductions survive an IRS audit, follow these best practices:

✅ DO: Keep Complete, Contemporaneous Records

  • Document every business meal with the date, amount, location, purpose, and participants’ business relationship.

  • Track mileage with a log showing where, why, and when the travel occurred.

  • For home office deductions, measure and designate the exclusive business-use area and keep utility bills and usage logs.

❌ DON’T: Wait Until Tax Time to Reconstruct Logs

  • Recreating records months later is a red flag for the IRS.

  • Record expenses immediately using a logbook, accounting software, or apps.

  • Employees should submit weekly or monthly expense reports for reimbursement and recordkeeping.

✅ DO: Separate Business and Personal Spending

  • Use dedicated business bank accounts and credit cards.

  • Avoid paying personal bills with business funds, even temporarily.

  • Mixed-use expenses will trigger IRS questions and may lead to disallowance.

❌ DON’T: Assume the IRS Won’t Ask Questions

  • Vehicle, meal, travel, and home office deductions are high-risk audit targets.

  • Be ready to present solid evidence if the IRS comes knocking.

What If Your Records Are Lost?

In rare situations, such as fire, theft, or flood, you may qualify to estimate deductions under the Cohan Rule, which allows reasonable approximations. However, this is a last resort—and you must still prove that the expense was legitimate and related to your business.

Be Prepared, Not Panicked

The key takeaway? Organization is your best defense against IRS scrutiny. Detailed records and a disciplined approach to expense tracking can make all the difference. If you’re unsure whether your deductions are adequately substantiated, speak with a tax professional who can guide you through IRS-compliant recordkeeping and help protect your legitimate deductions. Contact us today to review your documentation, implement better systems, and avoid costly mistakes.

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Big Tax Breaks Ahead? What Business Owners Should Know About the Latest Congressional Proposals

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As tax season planning ramps up, business owners may want to keep a close eye on Capitol Hill. A new legislative proposal — dubbed The One, Big, Beautiful Bill — is currently under debate and could introduce sweeping changes to federal tax law. The bill aims to expand several key tax breaks for businesses, with some provisions applying retroactively.

Although still making its way through Congress, the bill has already captured the attention of small and mid-sized business owners, accountants, and tax advisors across the country. If passed, it could dramatically reshape how businesses manage capital investments, deductions, and compliance.

Here’s a breakdown of five major tax changes under consideration — and how they might impact your business strategy.

1. Bonus Depreciation May Return to 100%

Current Law:
Businesses can currently deduct 40% of the cost of eligible property — such as new or used machinery — in the year it is placed in service. That percentage is expected to drop to 20% in 2026 and phase out entirely by 2027.

Proposed Update:
The bill seeks to retroactively reinstate 100% bonus depreciation for assets acquired after January 19, 2025, and maintain it through 2029.

Why It Matters:
This would allow businesses to deduct the entire cost of qualifying equipment in the first year, significantly improving cash flow. Capital-heavy industries stand to gain the most, especially those investing in growth or upgrades.

2. Section 179 Expensing Limits Could Double

Current Law:
In 2025, businesses can expense up to $1.25 million of qualified purchases, with the deduction starting to phase out at $3.13 million.

Proposed Update:
The bill would raise the Section 179 cap to $2.5 million, with the phaseout starting at $4 million — and both figures indexed for inflation starting in 2026.

Why It Matters:
Doubling the limits gives small businesses greater flexibility to fully expense major purchases. This provision would reduce the need for complex depreciation tracking and incentivize reinvestment in growth.

3. Qualified Business Income Deduction (QBI) Expansion

Current Law:
Eligible owners of pass-through entities — including LLCs, S-corps, sole proprietors, and partnerships — can claim a 20% deduction on qualified business income through 2025, subject to limitations.

Proposed Update:
The bill would make the QBI deduction permanent and increase it to 23% starting in tax year 2026.

Why It Matters:
Making this deduction permanent offers long-term tax planning certainty for small and mid-sized business owners. The increased percentage adds additional tax savings year after year.

4. Research & Experimental (R&E) Expense Deduction Reinstated

Current Law:
Since the Tax Cuts and Jobs Act, domestic R&E expenses must be capitalized and amortized over five years (15 years for foreign research).

Proposed Update:
Businesses would again have the option to fully deduct R&E expenses for costs incurred from 2025 through 2029. The requirement to amortize would be suspended during this time.

Why It Matters:
Startups, tech firms, and R&D-driven businesses could benefit enormously. Expensing these costs upfront boosts liquidity and incentivizes innovation without the burden of delayed deductions.

5. 1099-NEC Filing Threshold Could Increase

Current Law:
Businesses must file Form 1099-NEC for independent contractors paid $600 or more annually.

Proposed Update:
The threshold would rise to $2,000, indexed for inflation beginning in 2025.

Why It Matters:
This change would reduce the number of forms businesses must file, saving time and administrative effort. It’s a welcome relief for businesses working with part-time or short-term freelancers.

What Else Is on the Table?

The bill also includes proposals to:

  • Eliminate federal income tax on eligible tips and overtime

  • Expand employee benefit options

  • Modify rules related to business interest deductions

  • Change Form 1099-K thresholds and requirements

While the legislation narrowly passed in the House, it still awaits Senate approval — and potential revisions. If amended, it would return to the House before heading to the President’s desk.

Next Steps for Business Owners

Though these proposed tax changes appear favorable, business owners should not act prematurely. With the possibility of retroactive rules and evolving details, guidance from a trusted tax advisor is critical.

At Botwinick & Co., our CPAs are closely monitoring developments in Washington. If passed, this bill could represent one of the most impactful business tax packages in years.

📞 Let’s talk strategy before the law changes.
Contact us today to schedule a consultation and make sure your business is prepared for what’s ahead.

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Is It Possible to Turn Business Losses into Tax Savings?

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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.

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

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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!

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How to Navigate the Business Interest Expense Deduction Limit in 2025

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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.

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

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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.

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

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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:

  1. Monitor Your Business Activities: Actively participate in your business to avoid PAL limitations.
  2. Strategic Timing: Consider delaying or accelerating income and deductions to minimize excess losses.
  3. 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.

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Tip Tax Rules: What Employers Need to Know in 2024

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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:

  1. The customer voluntarily gives the payment.
  2. The customer has full discretion over the amount.
  3. The payment isn’t dictated by employer policy or negotiated.
  4. 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.

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

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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!

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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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Business Website Expenses: Managing Them for Tax Benefits

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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.

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