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Maximize the QBI deduction before itâs gone
The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, itâs scheduled to disappear. So if youâre eligible, you want to make the most of the deduction while itâs 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 thatâs treated as a sole proprietorship for tax purposes, plus
QBI from a pass-through entity, meaning a partnership, LLC thatâs treated as a partnership for tax purposes or S corporation.
How is QBI defined? Itâs 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 doesnât 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, thatâs 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 canât 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 businessesÂ
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, youâre 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 $1.22Â 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 donât count on it. So, maximizing the deduction for 2024 and 2025 is a worthy goal. We can help.
© 2024
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Tax-wise ways to take cash from your corporation while avoiding dividend treatment
If you want to withdraw cash from your closely held corporation at a low tax cost, the easiest way is to distribute cash as a dividend. However, a dividend distribution isnât tax efficient since itâs taxable to you to the extent of your corporationâs âearnings and profits,â but itâs not deductible by the corporation.
5 different approaches
Thankfully, there are some alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five possible options:
1. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, itâs also taxable to the recipient(s). The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If itâs excessive, the excess will be nondeductible and treated as a corporate distribution.
2. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
3. Capital repayments. To the extent that youâve capitalized the corporation with debt, including amounts that youâve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesnât have an excessively high debt-to-equity ratio. If not, the âdebtâ repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
4. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporationâs receipt of interest income.
5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldnât sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldnât sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the propertyâs value.
Minimize taxes
If youâre interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.
© 2024
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Taking your spouse on a business trip? Are the costs tax deductible?
A recent report shows that post-pandemic global business travel is going strong. The market reached $665.3Â billion in 2022 and is estimated to hit $928.4Â billion by 2030, according to a report from Research and Markets. If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.
Is your spouse an employee?
The rules for deducting a spouseâs travel costs are very restrictive. First of all, to qualify for the deduction, your spouse must be your employee. This means you canât deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose, unless the spouse is an employee of your business. This requirement prevents tax deductibility in most cases.
If your spouse is your employee, you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isnât enough to establish a business purpose. In general, it isnât enough for his or her presence to be âhelpfulâ to your business pursuits â it must be necessary.
In most cases, a spouseâs participation in social functions, for example as a host or hostess, isnât enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if thereâs a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouseâs presence is necessary to care for a serious medical condition that you have.
If your spouseâs travel satisfies these requirements, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.
What if your spouse isnât an employee?
Even if your spouseâs travel doesnât satisfy the requirements, however, you may still be able to deduct a substantial portion of the tripâs costs. This is because the rules donât require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels the cost of a single room isnât that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days youâre staying.
And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse arenât deductible.
Have questions?
You want to maximize all the tax breaks you can claim for your small business. Contact us if you have questions or need assistance with this or other tax-related issues.
© 2024
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Whatâs the best accounting method route for business tax purposes?
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 itâs the most advantageous approach.
Eligibility to use the cash method
âSmall businesses,â 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 $1Â million to $10Â 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 $25Â 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 $30Â million or less (up from $29Â 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 SÂ corporations, partnerships without CÂ 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 theyâre 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 companyâs 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 2Âœ 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, itâs 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, itâs required to use the accrual method for financial reporting purposes. That doesnât mean it canât use the cash method for tax purposes, but it would require maintaining two sets of books.
Changing accounting methods for tax purposes also may require IRS approval. Contact us to learn more about each method.
© 2024
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9 tax considerations if youâre starting a business as a sole proprietor
When launching a small business, many entrepreneurs start out as sole proprietors. If youâre 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, youâre currently eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken âbelow the line,â meaning it reduces taxable income, rather than being taken âabove the lineâ against your gross income. However, you can take the deduction even if you donât 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, theyâll 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 werenât âat risk.â
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 wonât 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 youâre entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because theyâre 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 arenât taken into income until theyâre 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 donât 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.
© 2024
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Update on IRS efforts to combat questionable Employee Retention Tax Credit claims
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 âquestionableâ ERTC claims as some unscrupulous promotors asserted that large tax refunds could easily be obtained â even though there are stringent eligibility requirements. âWe saw aggressive marketing around this credit, and well-intentioned businesses were misled into filing claims,â 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.
Hereâs 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 âpay back the money they received after filing ERTC claims in error,â 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 employerâs ERTC, the employer doesnât need to repay that interest and the IRS wonât 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 havenât cashed or deposited the refund checks. The tax agency reported that more than $167Â million from pending applications had been withdrawn through mid-January.
Much-needed relief
Commissioner Werfel said the disclosure program âprovides a much-needed option for employers who were pulled into these claims and now realize they shouldnât have applied.â
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 didnât exist or didnât have employees on the payroll during the eligibility period, âmeaning the businesses failed to meet the basic criteriaâ for the credit, the IRS stated. Another set of letters will soon be mailed to credit recipients who claimed an erroneous or excessive credit. Theyâll be informed that the IRS will recapture the payments through normal collection procedures.
Thereâs an application form that employers must file to participate in the Voluntary Disclosure Program and procedures that must be followed for the withdrawal program. Other rules apply. Contact us for assistance or with questions.
© 2024
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Should your business offer the new
emergency savings accounts to employees?
As part of the SECURE 2.0 law, thereâs a new benefit option for employees facing emergencies. Itâs 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 âshort-term savings accounts established and maintained within a defined contribution plan.â 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 canât 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 canât 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 âas soon as practicable.â
For the first four withdrawals from an account in a plan year, participants canât 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 isnât highly compensated, but becomes highly compensated as defined under tax law, he or she canât 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 employeeâs taxable income but participants wonât have to pay tax when they make withdrawals.
Proof of an event not necessary
A participant in a PLESA doesnât need to prove that he or she is experiencing an emergency before making a withdrawal from an account. The DOL states that âwithdrawals are made at the discretion of the participant.â
These are just the basic details of PLESAs. Contact us if you have questions about these or other fringe benefits and their tax implications.
© 2024
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Tax-favored Qualified Small Business Corporation status could help you thrive
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 â 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 theyâre 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, youâll have to incorporate the business and issue yourself shares to attain QSBC status.
Important: The act of incorporating a business shouldnât 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 isnât 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 havenât 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 arenât eligible. The corporation must actively conduct a qualified business. Qualified businesses donât 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 corporationâs gross assets canât 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 wonât 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 youâre eligible for the 100% gain exclusion break, the 21% corporate rate could be all the income tax thatâs ever owed to Uncle Sam.
Tax incentives drive the decision
Before concluding that you can operate your business as a QSBC, consult with us. Weâve summarized the most important eligibility rules here, but there are more. The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are two strong incentives for eligible small businesses to operate as QSBCs.
© 2024
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Does your business have employees who get tips? You may qualify for a tax credit
If youâre an employer with a business where tipping is routine when providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employeesâ tip income.
Credit fundamentals
The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesnât matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, theyâre treated as if you paid them to your employees.
As you know, your employees are required to report their tips to you. You must:
Withhold and remit the employeeâs share of FICA taxes, and
Pay the employerâs share of those taxes.
How the credit is claimed
You claim the credit as part of the general business credit. Itâs equal to the employerâs share of FICA taxes paid on tip income in excess of whatâs needed to bring your employeeâs wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you donât have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
Letâs look at an example
Letâs say a server works at your restaurant. She is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips which she reports to you.
The serverâs $2.13-an-hour rate is below the $5.15 rate by $3.02 an hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the serverâs employer, you pay FICA taxes at the rate of 7.65% for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65%.
While the employerâs share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit canât be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you deserve
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.
© 2024
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The standard business mileage rate will be going up slightly in 2024
The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5Â 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 67Â 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 donât apply to other types of business assets.
The cents-per-mile rate is helpful if you donât 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 canât 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 donât comply, reimbursements to employees could be considered taxable wages to them.
Rate calculation
The business cents-per-mile rate is adjusted annually. Itâs 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 thereâs a substantial change in average gas prices, the IRS will change the rate midyear.
Not always allowed
There are cases when you canât use the cents-per-mile rate. In some situations, it depends on how youâve 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 â or claiming 2023 expenses on your 2023 tax return.
© 2023
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Giving gifts and throwing parties can help show gratitude and provide tax breaks
The holiday season is here! During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. Itâs a good time to review the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Employee gifts
Many businesses want to show their employees appreciation during the holiday time. In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business.
But thereâs an exception for noncash gifts that constitute a âde minimisâ fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits arenât included in your employeesâ taxable income yet theyâre still deductible by your business. Unlike gifts to customers, thereâs no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Key point: Cash gifts â as well as cash equivalents, such as gift cards â are included in an employeeâs income and subject to payroll tax withholding regardless of how small they are and infrequently theyâre given.
Customer gifts
If you make gifts to customers or clients, theyâre only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you donât need to include âincidentalâ costs that donât substantially add to the giftâs value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral â such as small items imprinted with your companyâs name and logo â provided theyâre widely distributed and cost less than $4 each.
The $25 limit is for gifts to individuals. Thereâs no set limit on gifts to a company (for example, a gift basket for all of a customerâs team members to share) as long as the cost is âreasonable.â
A holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, thereâs an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipientsâ income) so long as theyâre primarily for the benefit of employees who arenât highly compensated and their families. If customers, and others also attend, a holiday party may be partially deductible.
Holiday cards
Sending holiday cards is a nice way to show customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.
Boost morale with festive gestures
If you have questions about giving holiday gifts to employees or customers or throwing a holiday party, contact us. We can explain the tax implications.
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A company car is a valuable perk but donât forget about taxes
One of the most appreciated fringe benefits for owners and employees of small businesses is the use of a company car. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees driving the cars. (And of course, they enjoy the nontax benefit of using a company car.) Even better, current federal tax rules make the benefit more valuable than it was in the past.
Rolling out the rules
Letâs take a look at how the rules work in a typical situation. For example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers and satellite offices, check on suppliers and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55% for business and 45% for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.
The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45% personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.
Personal use is treated as fringe benefit income. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to personal use. If the corporation finances the car, the interest it pays on the loan is deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
On the other hand, if the owner-employee buys the auto, he or she isnât entitled to any deductions. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.
One other implication: The purchase of the car by the corporation has no effect on the owner-employeeâs credit rating.
Careful recordkeeping is essential
Supplying a vehicle for an ownerâs or key employeeâs business and personal use comes with complications and paperwork. Personal use needs to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. (You may even be able to transfer the vehicle to the employee when youâre ready to dispose of it, but that involves other tax implications.) We can help you stay in compliance with the rules and explain more about this fringe benefit.
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Choosing a Business Entity: Which Way to Go?
If youâre planning to start a business or thinking about changing your business entity, you need to determine what will work best for you. Should you operate as a CÂ corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or SÂ corporation? There are many issues to consider.
Currently, the corporate federal income tax is imposed at a flat 21% rate, while individual federal income tax rates currently begin at 10% and go up to 37%. The difference in rates can be alleviated by the qualified business income (QBI) deduction thatâs available to eligible pass-through entity owners that are individuals, and some estates and trusts.
Individual rate caveats
The QBI deduction is scheduled to end in 2026, unless Congress acts to extend it, while the 21% corporate rate is not scheduled to expire. Also, noncorporate taxpayers with modified adjusted gross incomes above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a CÂ corporation instead of a pass-through entity may reduce the current federal income tax on the businessâs income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporationâs income can be lower than if the business was operated as a pass-through entity.
More to take into account
There are other tax-related factors to take into consideration. For example:
If most of the business profits will be distributed to the owners, it may be preferable to operate the business as a pass-through entity rather than a CÂ corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
If the value of the assets is likely to appreciate, itâs generally preferable to conduct business as a pass-through entity to avoid a corporate tax when the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporationâs shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
If the business is a pass-through entity, an ownerâs basis in his or her interest in the entity is stepped-up by the entity income thatâs allocated to the owner. That can result in less taxable gain for the owner when his or her interests in the entity are sold.
If the business is expected to incur tax losses for a while, you may want to structure it as a pass-through entity so you can deduct the losses against other income. Conversely, if you have insufficient other income or the losses arenât usable (for example, because theyâre limited by the passive loss rules), it may be preferable for the business to be a CÂ corporation, since itâll be able to offset future income with the losses.
If the owner of a business is subject to the alternative minimum tax (AMT), it may be preferable to organize as a CÂ corporation, since corporations arenât subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.
As you can see, there are many factors involved in operating a business as a certain type of entity. This only covers a few of them. For more details about how to proceed in your situation, consult with us.
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Key 2024 inflation-adjusted tax parameters for small businesses and their owners
The IRS recently announced various inflation-adjusted federal income tax amounts. Hereâs a rundown of the amounts that are most likely to affect small businesses and their owners.
Rates and brackets
If you run your business as a sole proprietorship or pass-through business entity (LLC, partnership or S corporation), the businessâs net ordinary income from operations is passed through to you and reported on your personal Form 1040. You then pay the individual federal income tax rates on that income.
10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
Beginning of 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
Beginning of 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
Beginning of 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
Beginning of 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
Beginning of 35% bracket: $243,726 for singles, $487,451 for married joint filers and $243,701 for heads of household; and
Beginning of 37% bracket: $609,351 for singles, $731,201 for married joint filers and $609,351 for heads of household.
Key Point: These thresholds are about 5.4% higher than for 2023. That means that, other things being equal, you can have about 5.4% more ordinary business income next year without owing more to Uncle Sam.
Section 1231 gains and qualified dividends If you run your business as a sole proprietorship or a pass-through entity, and the business sells assets, you may have Section 1231 gains that passed through to you to be included on your personal Form 1040. Sec. 1231 gains are long-term gains from selling business assets that were held for more than one year, and theyâre generally taxed at the same lower federal rates that apply to garden-variety long-term capital gains (LTCGs), such as stock sale gains. Here are the 2024 inflation-adjusted bracket thresholds that will generally apply to Sec. 1231 gains recognized by individual taxpayers.
0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers and $0 to $63,000 for heads of household;
Beginning of 15% bracket: $47,026 for singles, $94,051 for joint filers, $63,001 for heads of household; and
Beginning of 20% bracket: $518,901 for singles, $583,751 for married joint filers and $551,351 for heads of household.
If you run your business as a C corporation, and the company pays you qualified dividends, theyâre taxed at the lower LTCG rates. So, the 2024 rate brackets for qualified dividends paid to individual taxpayers will be the same as above.
Self-employment tax
If you operate your business as a sole proprietorship or as a pass-through entity, you probably have net self-employment (SE) income that must be reported on your personal Form 1040 to calculate your SE tax liability. For 2024, the maximum 15.3% SE tax rate will apply to the first $166,800 of net SE income (up from $160,200 for 2023).
Section 179 deductions
For tax years beginning in 2024, small businesses can potentially write off up to $1,220,000 of qualified asset additions in year one (up from $1,160,000 for 2023). However, the maximum deduction amount begins to be phased out once qualified asset additions exceed $3,050,000 (up from $2,890,000 for 2023). Various limitations apply to Sec. 179 deductions.
Side Note: Under the first-year bonus depreciation break, you can deduct up to 60% of the cost of qualified asset additions placed in service in calendar year 2024. For 2023, you could deduct up to 80%.
Just the beginning
These are only the 2024 inflation-adjusted amounts that are most likely to affect small businesses and their owners. There are others that may potentially apply, including: limits on qualified business income deductions and business loss deductions, income limits on various favorable exceptions such as the right to use cash-method accounting, limits on how much you can contribute to your self-employed or company-sponsored tax-favored retirement account, limits on tax-free transportation allowances for employees, and limits on tax-free adoption assistance for employees. Contact us with questions about your situation.
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There still may be time to reduce your small business 2023 tax bill
In the midst of holiday parties and shopping for gifts, donât forget to consider steps to cut the 2023 tax liability for your business. You still have time to take advantage of a few opportunities.
Time deductions and income
If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2023 and deferring income into 2024 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 â that way, you can claim the deduction for 2023 even though you donât pay the credit card bill until 2024. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2023.
As for deferring income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Buy assets
If youâre thinking about purchasing new or used equipment, machinery or office equipment in the new year, it might be time to act now. Buy the assets and place them in service by December 31, and you can deduct 80% of the cost as bonus depreciation in 2023. This is down from 100% for 2022 and it will drop to 60% for assets placed in service in 2024. Contact us for details on the 80% bonus depreciation break and exactly what types of assets qualify.
Bonus depreciation is also available for certain building improvements.
Fortunately, the first-year Section 179 depreciation deduction will allow many small and medium-sized businesses to write off the entire cost of some or all of their 2023 asset additions on this yearâs federal income tax return. There may also be state tax benefits.
However, keep in mind there are limitations on the deduction. For tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million and a phaseout rule kicks in if you put more than $2.89 million of qualifying assets into service in the year.
Purchase a heavy vehicle
The 80% bonus depreciation deduction may have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. Thatâs because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.
Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturerâs gross vehicle weight rating above 6,000 pounds. You can verify a vehicleâs weight by looking at the manufacturerâs label, which is usually found on the inside edge of the driverâs side door. If youâre considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this yearâs return.
Think through tax-saving strategies
Keep in mind that some of these tactics could adversely impact other aspects of your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.
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Guaranteeing a loan to your corporation? There may be tax implications
Letâs say you decide to, or are asked to, guarantee a loan to your corporation. Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax implications. If your corporation defaults on the loan and youâre required to pay principal or interest under the guarantee agreement, you donât want to be caught unaware.
A business bad debt
If youâre compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If itâs a business bad debt, itâs deductible against ordinary income. A business bad debt can be either totally or partly worthless. If itâs a nonbusiness bad debt, itâs deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if itâs totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, thatâs evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. Youâd have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporationâs loan isnât closely related to your trade or business and youâre required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
More rules
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three requirements:
You have a legal duty to make the guaranty payment (although thereâs no requirement that a legal action be brought against you).
The guaranty agreement was entered into before the debt became worthless.
You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you canât take a bad debt deduction until the rights become partly or totally worthless.
These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. To learn all the implications in your situation, consult with us.
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Receive more than $10,000 in cash at your business? Hereâs what you must do
Does your business receive large amounts of cash or cash equivalents? If so, youâre generally required to report these transactions to the IRS â and not just on your tax return.
The requirements
Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. Who is a âpersonâ? It can be an individual, company, corporation, partnership, association, trust or estate. What are considered ârelated transactionsâ? Any transactions conducted in a 24-hour period. Transactions can also be considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.
In order to complete a Form 8300, youâll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.
The definition of âcashâ and âcash equivalentsâ
For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashierâs checks (sometimes called bank checks), bank drafts, travelerâs checks and money orders.
Money orders and cashierâs checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.
Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashierâs checks, treasurerâs checks and/or bank checks, bank drafts, travelerâs checks and money orders with a face value of more than $10,000 by filing currency transaction reports.
The reasons for reporting
Although many cash transactions are legitimate, the IRS explains that the information reported on Form 8300 âcan help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.â
Failing to comply with the law can result in fines and even jail time. In one case, a Niagara Falls, NY, business owner was convicted of willful failure to file Form 8300 after receiving cash transactions of more than $10,000. In a U.S. District Court, he pled guilty and was recently sentenced to five months home detention, fined $10,000 and he agreed to pay restitution to the IRS. He had received cash rent payments in connection with a building in which he had an ownership interest.
Forms can be sent electronically
Businesses required to file reports of large cash transactions on Forms 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and thereâs no charge for the e-file option. Businesses that file electronically get an automatic confirmation of receipt when they file.
Effective January 1, 2024, you may have to e-file Forms 8300 if youâre required to e-file other information returns, such as 1099 and W-2 forms. You must e-file if youâre required to file at least 10 information returns other than Form 8300 during a calendar year.
The IRS also reminds businesses that they can âbatch fileâ their reports, which is especially helpful to those required to file many forms.
Record retention
You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS. âConfirmation receipts donât meet the recordkeeping requirement,â the tax agency added.
Contact us with any questions or for assistance.
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