Tax Briefs

If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000).

Other possibilities

There are more small business retirement plan options, including:

• 401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
• Defined benefit pension plans, and
• SIMPLE-IRAs.

Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older.

Watch the calendar

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.

For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year.

While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that, if your business has employees, you may have to make contributions for them, too.

The tax filing deadline for 2023 tax returns is April 15 this year. If you need more time, you can file for an extension until October 15. In either case, once your 2023 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.

1. Waiting for your refund? You can check on it

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get your refund status” to find out about yours. You’ll need your Social Security number or Individual Taxpayer Identification Number, filing status, and the exact refund amount.

2. Throwing away tax records

You should hold on to tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should keep certain tax-related records longer. For example, keep your actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

3. Filing an amended return if you failed to report something

In general, you can file an amended tax return on Form 1040-X and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2023 tax return that you file on April 15, 2024, you can generally file an amended return until April 15, 2027.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We’re here all year

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time. You can reach us year-round.

The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver.

Deduction basics

The QBI deduction is written off at the owner level. It can be up to 20% of:

• QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus
• QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.

How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.

Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.

Limitations

At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.

If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.

Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

Unfavorable rules for certain businesses

For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.

Other factors

Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.

There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.

Use it or potentially lose it

The QBI deduction is scheduled to disappear after 2025. Congress could extend it, but don’t count on it. So, maximizing the deduction for 2024 and 2025 is a worthy goal. We can help.

Are you dreaming of buying a vacation beach home, lakefront cottage or ski chalet? Or perhaps you’re fortunate enough to already own a vacation home. In either case, you may wonder about the tax implications of renting it out for part of the year.

Count the days

The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged.

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to several rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. You would allocate 75% of your depreciation allowance, interest and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible if the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

Income and expenses

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house personally.

Here’s the test: if you use it personally for the greater of more than 14 days, or 10% of the rental days, you’re using it “too much,” and you can’t claim a loss. In this case, you can still use your deductions to wipe out rental income, but you can’t go beyond that to create a loss. Any unused deductions are carried forward and may be usable in future years.

If you’re limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order:

• Interest and taxes,
• Operating costs, and
• Depreciation.

If you “pass” the personal use test (that is, you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim a loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)

Plan ahead for best results

As you can see, the rules are complex. Contact us if you have questions or would like to plan ahead to maximize deductions in your situation.

Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 deduction basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction.

Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.

The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus depreciation basics

Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. bonus depreciation

The current Sec. 179 deduction rules are generous, but there are several limitations:

• The phase-out rule mentioned above,
• A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
• A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
• Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage tax breaks

As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have.

Did you donate to charity last year? Acknowledgment letters from the charities you gave to may have already shown up in your mailbox. But if you don’t receive such a letter, can you still claim a deduction for the gift on your 2023 income tax return? It depends.

What the law requires

To prove a charitable donation for which you claim a tax deduction, you must comply with IRS substantiation requirements. For a donation of $250 or more, this includes obtaining a contemporaneous written acknowledgment from the charitable organization stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.

“Contemporaneous” means the earlier of:

1. The date you file your tax return, or
2. The extended due date of your return.

Therefore, if you made a donation in 2023 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2023 return. Contact the charity now and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is adequate. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.

No longer a tax break for nonitemizers

Currently, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under previous COVID-19 relief laws, an individual who didn’t itemize deductions could claim a limited federal income tax write-off for cash contributions to IRS-approved charities for the 2020 and 2021 tax years. Unfortunately, the deduction for nonitemizers isn’t available for 2022 or 2023.

More requirements for certain donations

Some types of donations require additional substantiation. For example, if you donate property valued at more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return.

And for donated property with a value of more than $5,000, you generally must obtain a qualified appraisal and attach an appraisal summary to your tax return.

Contact us if you have questions about whether you have the required substantiation for the donations you hope to deduct on your 2023 tax return. We can also advise on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2024 return.

Did you make large gifts to your children, grandchildren or others last year? If so, it’s important to determine if you’re required to file a 2023 gift tax return. In some cases, it might be beneficial to file one — even if it’s not required.

Who must file?

The annual gift tax exclusion has increased in 2024 to $18,000 but was $17,000 for 2023. Generally, you must file a gift tax return for 2023 if, during the tax year, you made gifts:

• That exceeded the $17,000-per-recipient gift tax annual exclusion for 2023 (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $34,000 annual exclusion for 2023,
• That exceeded the $175,000 annual exclusion in 2023 for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($85,000) into 2023,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($12.92 million for 2023). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2023 consisted solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2023 returns, it’s Monday, April 15, 2024 — or Tuesday, October 15, 2024, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2023 gift tax return on IRS Form 709, contact us.

Businesses basically have two accounting methods to figure their taxable income: cash and accrual. Many businesses have a choice of which method to use for tax purposes. The cash method often provides significant tax benefits for eligible businesses, though some may be better off using the accrual method. Thus, it may be prudent for your business to evaluate its method to ensure that it’s the most advantageous approach.

Eligibility to use the cash method

“Small businesses,” as defined by the tax code, are generally eligible to use either cash or accrual accounting for tax purposes. (Some businesses may also be eligible to use various hybrid approaches.) Before the Tax Cuts and Jobs Act (TCJA) took effect, the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured, its industry and factors involving inventory.

The TCJA simplified the small business definition by establishing a single gross receipts threshold. It also increased the threshold to $25 million (adjusted for inflation), expanding the benefits of small business status to more companies. For 2024, a small business is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million for 2023).

In addition to eligibility for the cash accounting method, small businesses can benefit from advantages including:

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

Note: Some businesses are eligible for cash accounting even if their gross receipts are above the threshold, including S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations. Tax shelters are ineligible for the cash method, regardless of size.

Difference between the methods

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when they’re paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating the payment of expenses.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, without regard to the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Switching methods

Even if your business would benefit by switching from the accrual method to the cash method, or vice versa, it’s important to consider the administrative costs involved in a change. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. That doesn’t mean it can’t use the cash method for tax purposes, but it would require maintaining two sets of books.

Changing accounting methods for tax purposes also may require IRS approval. Contact us to learn more about each method.

When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:

1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you’re currently eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction. Be aware that this deduction is only available through 2025, unless Congress acts to extend it.

2. You report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses from activities in which you weren’t “at risk.”

3. You must pay self-employment taxes. For 2024, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $168,600, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. You generally must make quarterly estimated tax payments. For 2024, these are due April 15, June 17, September 16 and January 15, 2025.

5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

6. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable part of certain expenses, including mortgage interest or rent, insurance, utilities, repairs, maintenance and depreciation. You may also be able to deduct travel expenses from a home office to another work location.

7. You should keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

8. You have more responsibilities if you hire employees. For example, you need to get a taxpayer identification number and withhold and pay over payroll taxes.

9. You should consider establishing a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t taken into income until they’re withdrawn. You might consider a SEP plan, which requires minimal paperwork. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Turn to us

Contact us if you want additional information regarding the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements.

The Employee Retention Tax Credit (ERTC) was introduced back when COVID-19 temporarily closed many businesses. The credit provided cash that helped enable struggling businesses to retain employees. Even though the ERTC expired for most employers at the end of the third quarter of 2021, it could still be claimed on amended returns after that.

According to the IRS, it began receiving a deluge of “questionable” ERTC claims as some unscrupulous promotors asserted that large tax refunds could easily be obtained — even though there are stringent eligibility requirements. “We saw aggressive marketing around this credit, and well-intentioned businesses were misled into filing claims,” explained IRS Commissioner Danny Werfel.

Last year, in a series of actions, the IRS began cracking down on potentially fraudulent claims. They began with a moratorium on processing new ERTC claims submitted after September 14, 2023. Despite this, the IRS reports that it still has more than $1 billion in ETRC claims in process and they are receiving additional scrutiny.

Here’s an update of the other compliance efforts that may help your business if it submitted a problematic claim:

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

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

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

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

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

Much-needed relief

Commissioner Werfel said the disclosure program “provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied.”

In addition to the programs described above, the IRS has been sending letters to thousands of taxpayers notifying them their claims have been disallowed. These cases involve entities that didn’t exist or didn’t have employees on the payroll during the eligibility period, “meaning the businesses failed to meet the basic criteria” for the credit, the IRS stated. Another set of letters will soon be mailed to credit recipients who claimed an erroneous or excessive credit. They’ll be informed that the IRS will recapture the payments through normal collection procedures.

There’s an application form that employers must file to participate in the Voluntary Disclosure Program and procedures that must be followed for the withdrawal program. Other rules apply. Contact us for assistance or with questions.

Operating your small business as a Qualified Small Business Corporation (QSBC) could be a tax-wise idea.

Tax-free treatment for eligible stock gains

QSBCs are the same as garden-variety C corporations for tax and legal purposes — except QSBC shareholders are potentially eligible to exclude from federal income tax 100% of their stock sale gains. That translates into a 0% federal income tax rate on QSBC stock sale profits! However, you must meet several requirements set forth in Section 1202 of the Internal Revenue Code, and not all shares meet the tax-law description of QSBC stock. Finally, there are limitations on the amount of QSBC stock sale gain that you can exclude in any one tax year (but they’re unlikely to apply).

Stock acquisition date is key

The 100% federal income tax gain exclusion is only available for sales of QSBC shares that were acquired on or after September 28, 2010.

If you currently operate as a sole proprietorship, single-member LLC treated as a sole proprietorship, partnership or multi-member LLC treated as a partnership, you’ll have to incorporate the business and issue yourself shares to attain QSBC status.

Important: The act of incorporating a business shouldn’t be taken lightly. We can help you evaluate the pros and cons of taking this step.

Here are some more rules and requirements:

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

2017 law sweetened the deal

The Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent, assuming no backtracking by Congress. So, if you own shares in a profitable QSBC and you eventually sell them when you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be all the income tax that’s ever owed to Uncle Sam.

Tax incentives drive the decision

Before concluding that you can operate your business as a QSBC, consult with us. We’ve summarized the most important eligibility rules here, but there are more. The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are two strong incentives for eligible small businesses to operate as QSBCs.

As part of the SECURE 2.0 law, there’s a new benefit option for employees facing emergencies. It’s called a pension-linked emergency savings account (PLESA) and the provision authorizing it became effective for plan years beginning January 1, 2024. The IRS recently released guidance about the accounts (in Notice 2024-22) and the U.S. Department of Labor (DOL) published some frequently asked questions to help employers, plan sponsors, participants and others understand them.

PLESA basics

The DOL defines PLESAs as “short-term savings accounts established and maintained within a defined contribution plan.” Employers with 401(k), 403(b) and 457(b) plans can opt to offer PLESAs to non-highly compensated employees. For 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee.

Here are some more details of this new type of account:

• The portion of the account balance attributable to participant contributions can’t exceed $2,500 (or a lower amount determined by the plan sponsor) in 2024. The $2,500 amount will be adjusted for inflation in future years.
• Employers can offer to enroll eligible participants in these accounts beginning in 2024 or can automatically enroll participants in them.
• The account can’t have a minimum contribution to open or a minimum account balance.
• Participants can make a withdrawal at least once per calendar month, and such withdrawals must be distributed “as soon as practicable.”
• For the first four withdrawals from an account in a plan year, participants can’t be subject to any fees or charges. Subsequent withdrawals may be subject to reasonable fees or charges.
• Contributions must be held as cash, in an interest-bearing deposit account or in an investment product.
• If an employee has a PLESA and isn’t highly compensated, but becomes highly compensated as defined under tax law, he or she can’t make further contributions but retains the right to withdraw the balance.
• Contributions will be made on a Roth basis, meaning they are included in an employee’s taxable income but participants won’t have to pay tax when they make withdrawals.

Proof of an event not necessary

A participant in a PLESA doesn’t need to prove that he or she is experiencing an emergency before making a withdrawal from an account. The DOL states that “withdrawals are made at the discretion of the participant.”

These are just the basic details of PLESAs. Contact us if you have questions about these or other fringe benefits and their tax implications.

The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.

Kiddie tax basics

Perhaps the most important thing to know about this poorly understood provision is that, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, your child is finally kiddie-tax-exempt.

The kiddie tax is only assessed on a child’s (or young adult’s) unearned income. That usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.

Earned income from a job or self-employment is never subject to the kiddie tax.

Calculating the tax

To determine the kiddie tax, first add up the child’s (or young adult’s) net earned income and net unearned income. Then subtract the allowable standard deduction to arrive at the child’s taxable income.

The portion of taxable income that consists of net earned income is taxed at the regular federal income tax rates for single taxpayers.

The portion of taxable income that consists of net unearned income that exceeds the standard deduction ($2,600 for 2024 or $2,500 for 2023) is subject to the kiddie tax and is taxed at the parent’s higher marginal federal income tax rates.

The tax is calculated by completing an IRS form, which is then filed with the child’s Form 1040.

Is calculating and reporting the kiddie tax complicated? It certainly can be. We can handle the task when we prepare your tax return.

Is your child exposed?

Maybe. For 2023, the relevant IRS form must be filed for any child or young adult who:

• Has more than $2,500 of unearned income;
• Is required to file a Form 1040;
• Is under age 18 as of December 31, 2023, or is age 18 and didn’t have earned income in excess of half of his or her support, or is between ages 19 and 23 and a full-time student and didn’t have earned income in excess of half of his or her support;
• Has at least one living parent; and
• Didn’t file a joint return for the year.

For 2024, the same rules apply except the unearned income threshold is raised to $2,600.

Don’t let the tax sneak up on you

The kiddie tax rules are pretty complicated, and the tax can sneak up on the unwary. We can determine if your child is affected and suggest strategies to minimize or avoid the tax. For example, your child could invest in growth stocks that pay no or minimal dividends and hold on to them until a year when the kiddie tax no longer applies. Contact us if you have questions or want more information.

The IRS announced it will open the 2024 income tax return filing season on January 29. That’s when the tax agency will begin accepting and processing 2023 tax year returns.

Here are answers to seven tax season questions we receive at this time of year.

1. What are this year’s deadlines?

The filing deadline to submit 2023 returns or file an extension is Monday, April 15, 2024, for most taxpayers. Taxpayers living in Maine or Massachusetts have until April 17, due to state holidays. If taxpayers reside in a federally declared disaster area, they may have additional time to file.

2. When is my return due if I request an extension?

If you’re requesting an extension, you’ll have until October 15, 2024, to file. Keep in mind that an extension of time to file your return doesn’t grant you any extension of time to pay your taxes. You should estimate and pay any taxes owed by the April 15 deadline to avoid penalties.

3. When should I file?

You may want to wait until close to the deadline (or file for an extension), but there are reasons to file earlier. Doing so provides some protection from tax identity theft.

4. What’s tax identity theft and how does early filing help protect me?

Typically, in a tax identity theft scam, a thief uses another person’s information to file a fake tax return and claim a fraudulent refund early in the filing season.

The legitimate taxpayer discovers the fraud when filing a return. He or she is then told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. The victim should be able to eventually prove that his or her return is the valid one, but it can be time consuming and frustrating to straighten out. It can also delay a refund.

Filing early provides some proactive defense. The reason: If you file first, the tax return filed by a potential thief will be rejected.

5. Are there other benefits to filing early?

Besides providing protection against tax identity theft, another benefit of early filing is you’ll get any refund sooner. According to the IRS, “most refunds will be issued in less than 21 days.” The time may be shorter if you file electronically and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

6. When will my W-2s and 1099s arrive?

To file your tax return, you’ll need all of your Forms W-2 and 1099. January 31, 2024, is the deadline for employers to file 2023 W-2s and, generally, for businesses to file Form 1099s for recipients of any 2023 interest, dividends or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by early February, first contact the entity that should have issued it. If that doesn’t work, ask us how to proceed.

7. When can you prepare my return?

Contact us as soon as possible for a tax preparation appointment. Separate penalties apply for failing to file and pay on time — and they can be quite severe. Even though the IRS isn’t beginning to process returns until January 29, they can be prepared before that. We can help ensure you file an accurate, timely return and receive all the tax breaks to which you’re entitled.

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

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

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

January 31

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

February 15

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

February 28

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

March 15

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

If you’re interested in selling commercial or investment real estate that has appreciated significantly, one way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange. With this transaction, you exchange the property rather than sell it. Although the real estate market has been tough recently in some locations, there are still profitable opportunities (with high resulting tax bills) when the like-kind exchange strategy may be attractive.

A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Asset-for-asset or boot

Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.

If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.

Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”

However, in many cases, the properties aren’t equal in value, so some cash or other property is added to the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.

How it works

For example, let’s say you exchange business property with a basis of $100,000 for a building valued at $120,000, plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000: your original basis in the relinquished property ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The reason is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Unload one property and replace it with another

Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. But you have to make sure to meet all the requirements. Contact us if you have questions or would like to discuss the strategy further.

The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 67 cents (up from 65.5 cents for 2023).

The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.

Standard rate vs. tracking expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.

Rate calculation

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.

Not always allowed

There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct business vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return.

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