A Letter from
Bill Stubbs

Turn A Real Estate Sale Into A Tax-smart Strategy

Selling investment or commercial real estate can result in a substantial tax bill if the property has appreciated significantly. One strategy to help ease your tax burden is an installment sale.

What’s an installment sale?

In an installment sale, the seller gets at least one payment after the tax year in which the sale occurs. So, if you sell investment or commercial real estate, instead of receiving the full purchase price all at once, you get payments over time.

This allows you to defer recognition of gain and spread the tax liability over several years. Installment sales can also help attract more buyers because they won’t have to pay the entire price upfront and obtaining financing might be easier.

2 types of installment sales

There are a couple of ways to set up an installment sale:

1. Traditional. This generally involves the buyer making payments directly to the seller under the terms of a promissory note.

2. Structured. Here, a third-party assignment company or financial institution assists with the transaction and oversees the payment schedule. The third party typically assumes responsibility for future payments to the seller, which may reduce the seller’s risk.

Tax considerations

Gains from real estate held for more than one year are typically taxed at favorable long-term capital gains rates (15% for most taxpayers and 20% for higher-income taxpayers). For 2026, the 20% rate applies when taxable income exceeds $545,500 (singles), $579,600 (heads of household), $613,700 (married couples filing jointly) or $306,850 (married couples filing separately). With the gain spread over multiple years, an installment sale may help keep you below the 20% rate threshold.

Depending on your income level, it might also help prevent you from triggering the 3.8% net investment income tax (NIIT), or at least reduce your NIIT liability. The NIIT applies to net investment income to the extent that modified adjusted gross income exceeds $200,000 (singles and heads of household), $250,000 (joint filers) or $125,000 (separate filers).

However, several tax rules can complicate installment sales. For example, depreciation recapture must be reported as ordinary income in the year of sale, even if payments are received later. Only the remaining gain can be spread out under the installment method. The good news is that if your marginal ordinary rate is 32%, 35% or 37%, depreciation recapture is taxed at only 25%.

Additionally, installment agreements exceeding $5 million may trigger an IRS interest charge on the deferred tax. Special rules apply to related-party sales and may accelerate the remaining tax if the property is resold within two years.

Electing out

Installment reporting is generally automatic if you sell property and receive at least one payment after the tax year of the sale. However, you can choose to elect out of it and report the entire gain in the year of sale.

This might make sense if you expect higher tax rates in future years, have current-year losses or deductions that could offset the gain, or want to accelerate income for financial planning purposes. When you file your tax return for the year of the sale, you can decide whether to elect out.

Moving forward

Installment sales can be complex. If you’re thinking about selling investment or commercial real estate, contact us to determine whether an installment sale makes sense for your situation.

Before You Shred: Know Which Tax Records To Keep

Tax documents can accumulate quickly. While clearing out old files can feel productive, it’s important not to discard anything until you’ve reviewed some record-retention guidelines.

Why good recordkeeping is important

Well-organized records make it easier to prepare accurate tax returns and respond if the IRS requests additional information or examines your return. Documents such as receipts and bank statements should support the income, deductions and credits you report.

Good recordkeeping also helps you monitor financial activity throughout the year. And it can simplify preparing future tax returns or amended returns.

The general rule

Records that support a tax return should generally be kept until the statute of limitations expires for that return. In general, the IRS has three years to assess additional tax after a return is filed. Returns filed before the due date are considered filed on the due date.

This three-year window is why you should keep supporting documentation, such as W-2 and 1099 forms, receipts and charitable contribution records, for at least that long.

Situations that extend the timeframe

Certain circumstances allow the IRS additional time to review a return. For example, the statute of limitations increases to six years if more than 25% of gross income is omitted from a return.

If a taxpayer fails to file a return or files a fraudulent return, there’s no time limit on when the IRS can assess tax.

Additionally, the timeframe for claiming a refund generally extends to three years after filing the return or two years after paying the tax, whichever is later.

Don’t discard these records too soon

Some documents should be retained beyond the typical three-year period because they may affect multiple tax years or support future transactions. These include:

Property and investment records. You should keep records related to property (such as real estate) or investments (such as stocks or bonds) for as long as you own the asset, plus at least three years after it’s sold. When these assets are sold, these records are needed to calculate the basis, gain or loss.

Retirement plan records. Retain retirement and pension documents for as long as the accounts have funds and for at least three years after the accounts are closed or funds are withdrawn. Keep records of nondeductible IRA contributions indefinitely to prove taxes were already paid on those amounts.

Bad debt or worthless securities deductions. Records supporting these claims should generally be kept for seven years from the date the return was due.

Filed tax returns. Proof of filing should be kept for at least as long as the statute of limitations applies to that return; however, it’s a good idea to keep proof longer for your records.

Seek guidance

Don’t guess when it comes to tax records. If you’re unsure whether to keep or discard certain documents, contact us for guidance. We can help you determine appropriate retention periods so you have the documentation you need if questions arise.

What To Know If You Receive An IRS Notice

Notices from the IRS are more common than you may realize. Each year, the IRS mails millions of letters to clarify information, confirm changes or request additional documentation. Receiving a notice may seem intimidating, but most notices can be addressed quickly with the right information and guidance.

5 common IRS notices explained

Each IRS notice includes a reference number, such as CP49 or CP14. It identifies the issue and helps determine the appropriate response. Below is an overview of the most common types of notices and what to do if one arrives in your mailbox.

1. CP12 (including CP12, CP12E, CP12F, CP12G, CP12N and CP12U), refund adjustment. A CP12 is sent when the IRS corrects a math error or similar issue on your tax return. The correction may increase or decrease your expected refund. If you agree with the change, no response is required. If you disagree, call the IRS at the toll-free number shown on the notice by the date indicated.

2. CP14, balance due. This notice informs you that you owe taxes. Address the notice promptly. You can pay in full, explore installment options or seek assistance if you believe the notice is incorrect. Ignoring it can result in interest charges, penalties and collection actions.

3. CP49, refund applied to a debt. This notice explains that your refund was used to pay all or part of an outstanding tax liability. Review how the refund was applied. Disputes are generally handled with the agency that received the funds, not the IRS. On a joint return, a spouse who is not responsible for the debt may be able to recover his or her share of the refund by filing Form 8379, "Injured Spouse Allocation."

4. CP2000 series, proposed changes to your return. This notice is issued when the IRS compares your tax return to information reported by third parties, such as employers or financial institutions, and finds a mismatch. It is not a bill; it is a proposal to adjust your return. Read the notice carefully and respond by the deadline listed. Follow the instructions, include any required documentation and note whether you agree or disagree. If no response is received, additional notices or a bill may follow.

5. Letter 4883C, identity verification. When the IRS suspects possible identity theft, it may pause processing your return until your identity is confirmed. Call the Taxpayer Protection Program hotline as directed in the letter. Have the tax return referenced in the letter, a prior-year return (if available), and supporting documents, such as Form W-2, Form 1099 and Schedule C, ready. If you did not file the return listed in the notice, contact the IRS immediately because this may indicate identity theft.

Speaking of fraud, remember that the IRS will never email, text or call demanding payment. Legitimate notices always come by mail.

How we can help

IRS notices can be confusing, especially when calculations or supporting documents are involved. If you receive a notice, we can review it, help confirm whether it is accurate, explain your options and communicate with the IRS on your behalf. Contact us for guidance.

The IRS Criteria For Distinguishing Hobbies From Businesses

Turning a favorite pastime into income can be rewarding, but it raises an important tax question: Is the activity a hobby or a business? The answer matters because different tax rules apply to each.

All income must be reported on your tax return, regardless of whether it is from a hobby or a business. But related expenses (and losses) are deductible only if the activity is a business.

What the IRS looks at

The IRS distinguishes a hobby from a business based on several factors. It weighs all the facts and circumstances, and no single factor is more important than another.

One factor the IRS considers is whether you conduct the activity in a businesslike manner. This includes maintaining complete and accurate records, tracking income and expenses and taking steps to improve operations. The time and effort you devote is important, especially when they demonstrate an attempt to make the activity profitable rather than purely recreational.

Your financial situation is also considered. If you rely on the activity's income to support yourself, the activity is more likely to be viewed as a business. If other earnings primarily fund the activity, it may be treated as a hobby. Personal motives, such as pursuing the activity mainly for enjoyment or relaxation, can weigh against business classification.

Profit history and future potential are also key. The IRS considers whether losses you have experienced are typical for a start-up (assuming you began the activity relatively recently) or caused by factors outside your control. If so, the IRS may view your activity as a business. Experience and success in similar activities can further support business status. Additionally, the expectation of future profit from the appreciation of assets used in the activity can indicate a business motive.

Tax treatment of related expenses

Historically, taxpayers with hobby income could generally deduct certain related expenses as miscellaneous itemized deductions, subject to a 2% adjusted gross income (AGI) floor. The Tax Cuts and Jobs Act suspended these deductions for tax years 2018 through 2025. The One Big Beautiful Bill Act, signed into law in July of 2025, made that suspension permanent. This means that if the activity is a hobby, you cannot deduct expenses associated with it. However, you must still report all income from your hobby.

If the activity is considered a business, you can deduct related expenses. If the business activity results in a loss, you can deduct the loss from your other income in the same tax year, subject to various limits.

Seek professional guidance

The line between a hobby and a business is not always clear. If you earn income from a side activity or are considering turning a passion into a profitable venture, contact us for guidance. We can help you evaluate your situation and understand the tax implications.

What’s New For Retirement Catch-up Contributions In 2026

Beginning in 2026, a significant change to retirement plan catch-up contributions takes effect. Part of the 2022 Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, the change affects higher-income taxpayers age 50 and older who contribute to certain types of employer-sponsored retirement plans.

Catch-up contribution basics

For years, taxpayers age 50 or older have been able to make catch-up contributions to certain employer-sponsored retirement plans, up to annual inflation-adjusted limits. For 2026, eligible individuals can contribute an additional $8,000 above the $24,500 regular 401(k), 403(b) or 457(b) plan limit, for a total of $32,500.

Under SECURE 2.0, beginning in 2025, participants age 60 to 63 can make up to $11,250 in catch-up contributions to these plans, bringing the maximum to $35,750 for 2026.

Before 2026, employees could make catch-up contributions pretax to traditional plans or, if their employer offered the option, after-tax to Roth plans. Pretax contributions reduce taxable income for the year contributed, but distributions are generally taxable. Roth contributions don’t reduce current-year taxable income, but distributions are generally tax-free.

Mandatory Roth treatment for high earners

SECURE 2.0 requires that, beginning in 2026, any catch-up contributions made by higher-income participants to 401(k), 403(b) or 457(b) plans be designated as Roth contributions.

The Roth requirement was originally scheduled to take effect for 2024. In 2023, the IRS extended the effective date to January 1, 2026.

For 2026, the Roth requirement applies to participants whose 2025 Social Security wages from the employer exceeded $150,000 as reflected in Box 3 of Form W-2, "Wage and Tax Statement." The $150,000 threshold will be adjusted annually for inflation.

Are you affected?

Plans that didn’t offer a Roth option in 2025 had to either add one for 2026 or eliminate higher-income participants’ ability to make catch-up contributions. So if the Roth requirement applies to you and your retirement plan doesn’t offer a Roth option, you won’t be able to make catch-up contributions in 2026.

Check with your employer about your options. It may have implemented a "deemed election" approach for employees subject to the new rules. This automatically treats catch-up contributions as Roth unless the employee opts out of catch-up contributions.

Also, keep in mind that making Roth catch-up contributions instead of traditional ones (or not making catch-up contributions) will increase your taxable income for 2026. This may reduce or eliminate the tax benefits of breaks that are subject to phaseouts, floors or other income-based limits and even push you into a higher tax bracket.

Professional guidance can help

If you’re affected, you should review your retirement and tax strategies in light of the changes. Professional guidance can help improve outcomes. Contact us with any questions.

Businesses Regain Immediate Deduction For R&E Expenses

If your business conducts research or product development, a significant tax law change could unlock meaningful tax savings. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reinstated the ability to immediately deduct domestic research and experimental (R&E) expenses.

This change reversed a key provision of the Tax Cuts and Jobs Act (TCJA) that required businesses to capitalize and amortize domestic R&E expenses over five years and foreign R&E expenses over 15 years. As a result, you may have new tax-saving opportunities as you prepare your 2025 tax return and plan for 2026.

What the change means for your 2025 filing

Beginning with eligible 2025 expenses, businesses can once again deduct U.S.-based R&E costs in full in the year they’re incurred. This can significantly reduce taxable income and improve cash flow.

The law also provides flexibility for prior-year R&E expenses. You can potentially accelerate deductions that previously you would have had to spread over multiple years.

Strategies to maximize R&E tax benefits

Businesses should consider the following when assessing R&E expenditures:

Amend returns for prior years. Small businesses (generally those with average annual gross receipts of $31 million or less over the past three years) may be able to apply the rule retroactively. If eligible, you can file amended returns for 2022, 2023 and/or 2024 to claim immediate deductions for domestic R&E expenses previously amortized and, potentially, receive a tax refund for those years. You must file the amended return(s) by July 4, 2026.

More quickly claim remaining deductions. Businesses of any size that capitalized and began amortizing R&E expenses in 2022, 2023 and/or 2024 can accelerate their deductions for the remaining unamortized balance. You can deduct it entirely on your 2025 return or split it ratably between your 2025 and 2026 returns, rather than continuing amortization over the original five-year period.

Bring research activities back onshore. The immediate deduction makes domestic research activities significantly more attractive from a tax perspective. While under prior law, U.S.-based R&E already benefited from shorter amortization periods, the difference between an immediate deduction and a 15-year amortization schedule for foreign research further strengthens the incentive to locate R&E activities in the United States.

Consider the research credit. A tax deduction reduces your taxable income, while a tax credit reduces your tax bill dollar-for-dollar and is generally more valuable. You may be eligible for the credit for "increasing research activities," but fewer types of expenses qualify for the credit than for the R&E deduction. While you can benefit from both, you can’t receive a double tax benefit for the same costs.

Turn to us for guidance

The return of the immediate deduction for R&E expenses can bring meaningful planning opportunities for businesses. We’re here to help you determine what applies to your situation, uncover potential refunds or deductions and move forward with confidence.

Unlock Bigger Deductions On Rental Real Estate

Many rental property owners are surprised to learn that federal tax law often restricts their ability to deduct losses, treating most rental activities as passive unless specific requirements are met. But if you can qualify for the real estate professional exception, you may be able to turn otherwise suspended losses into immediate tax savings.

The real estate professional advantage

For federal tax purposes, rental real estate losses are usually treated as passive, meaning they can be deducted only against passive income, such as profits from other rental properties. If you don’t have enough passive income, your unused losses are suspended and carried forward. Those suspended losses can be deducted later, once you have sufficient passive income or when you sell the property that generated them.

However, there’s a big exception for real estate professionals. If you qualify, a rental real estate loss potentially can be classified as a nonpassive loss.

To be eligible for the real estate professional exception:

• You must spend more than 750 hours during the year delivering personal services in real estate activities in which you materially participate, and
• Those hours must be more than half the time you spend delivering personal services (in other words, working) during the year.

The next step to being able to claim a nonpassive loss is determining if you have one or more rental properties in which you materially participate. Generally, you need to pass one of the following to meet the material participation test for a rental real estate activity:

1. Spend more than 500 hours on the activity during the year.

2. Spend more than 100 hours on the activity during the year and make sure no other individual spends more time than you.

3. Make sure the time you spend on the activity during the year constitutes substantially all the time spent by all individuals.

There are other ways to meet the material participation test, but these three are typically the easiest. Note, also, that participation by your spouse is included for material participation purposes, although it’s not included for the real estate professional test.

If you qualify as a real estate professional and meet the material participation test for a property, losses from the property are treated as nonpassive losses that you can generally deduct in the current year.

Don’t meet the requirements?

If you don’t meet the real estate professional rules, you may still deduct certain rental losses currently through limited exceptions:

Small landlord exception. If you own at least 10% of the property and actively participate, you may be able to treat up to $25,000 of losses as nonpassive. (Properties owned via limited partnerships don’t qualify.) This exception begins to phase out when adjusted gross income (AGI) exceeds $100,000. It’s eliminated when AGI reaches $150,000.

Seven-day rental rule. If the average rental period is seven days or less, the activity is treated as a business, not real estate. Passing a material participation test makes losses nonpassive.

30-day rental with services. If the average rental period is 30 days or less and significant personal services are provided, the activity is also considered to be a business. Losses may be treated as nonpassive if a material participation test is met.

Make the most of your tax benefits

With proper documentation and knowledge of available exceptions, you can better position yourself to reduce your tax liability. Professional guidance can assist. Contact us today.

Estate Planning For 2026 And Beyond

Until recently, much tax uncertainty surrounded estate planning. The Tax Cuts and Jobs Act doubled the federal gift and estate tax exemption to an inflation-adjusted $10 million, but only for 2018 through 2025. Fortunately for those with larger estates, in 2025, legislation was signed into law that increases the exemption to $15 million for 2026, with annual inflation adjustments going forward and no expiration date. This provides more estate planning certainty, but not complete certainty. Lawmakers could still reduce the exemption in the future.

If your estate is large, transferring assets to loved ones or trusts sooner rather than later may be beneficial. It can lock in tax savings should the exemption be reduced in the future.

Building in flexibility

What if you’re not currently ready to transfer significant amounts of wealth to the next generation? There are techniques you can use to take advantage of the higher exemption amount while retaining some flexibility to access your wealth. Here are two ways to build flexibility into your estate plan:

Spousal lifetime access trust (SLAT). If you’re married, a SLAT can be an effective tool for removing wealth from your estate while retaining access to it. A SLAT is an irrevocable trust, established for the benefit of your children or other heirs, that permits the trustee to make distributions to your spouse if needed, indirectly benefiting you as well.

So long as you don’t serve as trustee, the assets will be excluded from your estate and, if the trust is designed properly, from your spouse’s estate as well. For this technique to work, you must fund the trust with your separate property, not marital or community property.

Keep in mind that if your spouse dies, you’ll lose the safety net provided by a SLAT. To reduce that risk, many couples create two SLATs and name each other as beneficiaries. The arrangement must be planned carefully to avoid running afoul of the “reciprocal trust doctrine,” which could cause the arrangement to be unwound and the tax benefits erased.

Special power of appointment trust (SPAT). A SPAT is an irrevocable trust in which you grant a special power of appointment to a spouse or trusted friend. This person has the power to direct the trustee to make distributions to you.

Not only are the trust assets removed from your estate (and shielded from gift taxes by the current exemption), but so long as you’re neither a trustee nor a beneficiary, the assets will enjoy protection against creditors’ claims.

Balancing tax savings with control

Many other estate planning strategies are available to minimize gift and estate taxes as well as other taxes, such as income taxes, while maintaining your own financial security. Contact us to discuss what’s appropriate for your particular situation and goals.

Can You Claim A Tax Deduction For Tips Or Overtime Income?

If you received tips or overtime pay in 2025, you may be eligible for a new deduction when you file your income tax return. Both deductions can be claimed whether or not you itemize deductions. But various rules and limits apply. Also be aware that such income may still be fully taxable for state and local income tax purposes. And federal payroll taxes still apply to tips and overtime income you deduct for federal income tax purposes.

Deducting tips

Eligible taxpayers can deduct up to $25,000 of annual qualified tips income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly). It’s completely phased out when MAGI reaches $400,000 ($550,000 for joint filers).

Qualified tips can be paid by customers in cash or with credit cards or given to workers through tip-sharing arrangements. The tips deduction is available if you receive qualified tips in an occupation that’s designated by the IRS as one where tips are customary. Some examples of eligible occupation categories are beverage and food service, hospitality and guest services, personal appearance and wellness, and transportation and delivery.

The tips deduction is allowed for both employees and self-employed individuals. However, those who work in certain trades or businesses (such as health, law, accounting, financial services, investment management) are ineligible.

Deducting overtime

Eligible taxpayers can deduct up to $12,500 of qualified overtime income ($25,000 for joint filers). The deduction begins to phase out when MAGI exceeds $150,000 ($300,000 for joint filers). It’s completely phased out when MAGI reaches $275,000 ($550,000 for joint filers).

Qualified overtime income is overtime compensation mandated under Section 7 of the Fair Labor Standards Act. It requires time-and-a-half overtime pay except for certain exempt workers. Only the extra “half” constitutes qualified overtime income and thus is deductible.

Qualified overtime income doesn’t include overtime premiums that aren’t required by Sec. 7, such as those required under state laws or pursuant to union-negotiated collective bargaining agreements.

Reporting requirements

Under the OBBBA, qualified tips income must be reported on Form W-2, Form 1099-NEC or another specified information return or statement furnished to both the worker and the IRS. And qualified overtime income must be reported to workers on Form W-2 or another specified information return or statement furnished to both the worker and the IRS.

However, the IRS announced that for the 2025 tax year, there will be no OBBBA-related changes to federal information returns such as Form W-2, Forms 1099 and Form 941. The IRS is providing transition relief for the 2025 tax year and will update forms for the 2026 tax year.

We can help you determine your eligibility for one or both of these deductions.

Businesses: Act Soon To Take Advantage Of Clean Energy Tax Incentives

While legislation signed into law in 2025 extends or enhances many tax breaks for businesses, it ends some clean energy tax incentives. Fortunately, your business may still benefit from certain clean energy breaks if it acts in the first half of 2026.

Make building improvements

The Section 179D deduction allows owners of new or existing commercial buildings to immediately deduct the cost of certain energy-efficient improvements rather than depreciate them over the 39-year period that typically applies. The deduction is available as long as construction begins by June 30, 2026.

The Sec. 179D deduction is available for new construction as well as additions to or renovations of commercial buildings of any size. (Multifamily residential rental buildings that are at least four stories above grade also qualify.) Eligible improvements include depreciable property installed as part of a building’s interior lighting system, HVAC and hot water systems, or the building envelope.

To be eligible, an improvement must be part of a plan designed to reduce annual energy and power costs by at least 25% relative to applicable industry standards, as certified by an independent contractor or licensed engineer. The base deduction is calculated using a sliding scale, ranging for 2026 from 59 cents per square foot for improvements that achieve 25% energy savings to $1.19 per square foot for improvements that achieve 50% energy savings.

Projects that meet specific prevailing wage and apprenticeship requirements are eligible for bonus deductions. Such deductions for 2026 range from $2.97 per square foot for improvements that achieve 25% energy savings to $5.94 per square foot for improvements that achieve 50% energy savings.

Look at vehicle-related breaks

The Section 45W Qualified Commercial Clean Vehicle Credit is available only for vehicles that were acquired on or before September 30, 2025. If your business acquired one or more eligible vehicles before that date, you may be able to claim the credit on your 2025 tax return.

And you still have time to install alternative fuel vehicle refueling property and claim a Section 30C tax credit for 2026. The credit is available for property placed in service by June 30, 2026. Property that stores or dispenses clean-burning fuel or recharges electric vehicles is eligible. The credit is worth up to $100,000 per item (each charging port, fuel dispenser or storage property).

Don’t wait

Other clean energy breaks that might still be available to you if you act soon include the clean energy investment and production credits and the advanced manufacturing production credit. Contact us for more information about clean-energy tax breaks and how your business might benefit.

How Does The New Tax Deduction For Car Loan Interest Work?

Generally, except for home mortgage interest, personal interest expense isn't deductible for federal income tax purposes. With the passage of the legislation commonly known as the One Big Beautiful Bill Act (OBBBA), another exception has been added. That is, you might be able to deduct your car loan interest. But various rules and limits apply.

The specifics

The OBBBA allows eligible individuals, including those who don’t itemize deductions, to deduct some or all the interest on a car loan they take out to purchase a qualifying passenger vehicle. The maximum car loan interest you can deduct is $10,000 per year for 2025 through 2028.

But the deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married couples filing jointly. For an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000, and for married joint filers, the phaseout is complete when MAGI reaches $250,000.

Another limit is that only certain vehicles qualify for the deduction:

• The vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds,
• The vehicle must have been manufactured primarily for use on public streets, roads and highways,
• The vehicle must be new, and
• The “final assembly” of the vehicle must have occurred in the United States.

You must report the vehicle identification number (VIN) on your tax return. A car assembled in the United States has a special VIN to signify that it's American-made.

Loan-related requirements

The loan must be taken out after 2024 and must be a first lien secured by a vehicle used for personal purposes. If an original qualified car loan is refinanced, the new loan will be a qualified loan for purposes of the deduction as long as: 1) the new loan is secured by a first lien on the eligible vehicle, and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.

Also be aware that interest on loans from certain related parties doesn’t qualify. And lease financing isn’t eligible.

To claim the deduction, you’ll need to substantiate how much interest you paid during the year. For that, your car loan lender must file an information return with the IRS specifying the amount. (Transitional relief is available for 2025.)

Final thoughts

The new deduction for auto loan interest can make buying a car less expensive. But you need to consider the eligibility requirements. First, is your income below the phaseout threshold? Second, have you checked that the car you’re considering will qualify?

Also, don’t make a decision based solely on the ability to qualify for the tax deduction. In some cases, buying a used or foreign vehicle or leasing a vehicle might make more sense, even if you won’t be able to claim a tax deduction.

Finally, keep in mind that the deduction will expire after 2028 unless Congress acts to extend it. Have questions about the deduction? Contact us.

NOL Deductions Can Ease The Pain Of Business Losses

For income tax purposes, a business loss generally occurs when a business’s deductions for the year exceed its revenue. Any business, whether new or established, can face losses. Fortunately, the net operating loss (NOL) deduction can turn the pain of a loss this year into tax savings for next year and, perhaps, beyond.

How to qualify

Tax inequities can exist between businesses with stable income and those with fluctuating income. The NOL deduction helps address those inequities. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

For a business to qualify for the NOL deduction, the loss generally must be caused by deductions related to your business (Schedule C and F losses or Schedule K-1 losses from partnerships or S corporations), casualty and theft losses from a federally declared disaster, or rental property (Schedule E).

Determination of an NOL generally doesn't include:

• Capital losses in excess of capital gains,
• Exclusion for gains from the sale or exchange of qualified small business stock,
• Nonbusiness deductions in excess of nonbusiness income,
• The NOL deduction, and
• The Section 199A qualified business income deduction.

Individuals and C corporations are eligible for the NOL deduction. While partnerships and S corporations generally aren't eligible, their partners and shareholders can claim individual NOLs based on their separate shares of business income and deductions.

Limits apply

NOL deductions can’t offset more than 80% of taxable income for the year. Any excess NOLs can be carried forward indefinitely.

Suppose your NOL carryforward is more than your taxable income for the year you carry it to. If so, you may have an NOL carryover. That's the excess of the NOL deduction over your modified taxable income for the carry-forward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

“Excess” business losses

Under the Tax Cuts and Jobs Act (TCJA), an excess business loss limitation went into effect in 2021. That limitation applies at the partner or shareholder level, for partnerships or S corporations, after applying the outside basis, at-risk and passive activity loss limitations.

Under the excess business loss rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus other income (such as salary, self-employment income, interest, dividends and capital gains) up to an inflation-adjusted threshold. For 2025, that threshold is $313,000, or $626,000 for married couples filing jointly. For 2026, the limit is reduced to $256,000 and $512,000, respectively. Any “excess” losses are carried forward and treated as NOLs.

Under the TCJA, the excess business loss limitation had been scheduled to expire after December 31, 2026. However, the Inflation Reduction Act extended it through 2028, and 2025 legislation has made it permanent.

Next steps

When it comes to business losses, the rules are complex, especially the interaction between NOLs and other potential tax breaks. Contact us for help charting your best path forward.

Bonus Depreciation And Other Year-end Tax-saving Tools For Businesses

As this year comes to a close, business owners seeking to reduce their taxes for 2025 have a variety of opportunities. Here’s a look at two tax-saving tools: bonus depreciation and retirement plan contributions.

Assets eligible for bonus depreciation

First-year bonus depreciation has been given new life under the legislation commonly known as the “One Big Beautiful Bill Act” (OBBBA). It had been scheduled to be only 40% for 2025 (60% for certain long-production assets) and to vanish after 2026. The OBBBA permanently reinstates 100% bonus depreciation for eligible assets acquired and placed in service after January 19, 2025. Acquiring eligible assets and placing them in service by Dec. 31, 2025, could significantly reduce your 2025 tax liability.

Eligible assets include most depreciable personal property, such as:

• Equipment,
• Computer hardware and peripherals,
• Certain vehicles, and
• Commercially available software.

Also eligible is qualified improvement property (QIP), defined as improvements to the interior of a nonresidential building that was already placed in service. QIP doesn’t include costs to change the building’s internal structural framework (such as enlargement). These costs must generally be depreciated over 39 years.

Unlike Section 179 expensing, which is limited to $2.5 million for 2025 (up from $1.25 million before the OBBBA) and subject to a phaseout, the amount of bonus depreciation a taxpayer can claim is generally unlimited. But there are other tax consequences to consider.

Beware of the excess business loss rule

Individual taxpayers who have losses as a sole proprietor or as an owner of a pass-through entity (partnerships, S corporations and, generally, limited liability companies) may inadvertently trigger the excess business loss rule when they claim bonus depreciation. The excess business loss rule allows business losses to offset income from other sources (such as salary, self-employment income, interest, dividends and capital gains) only up to an annual limit. Amounts above that limit are excess business losses. For 2025, this is the excess of aggregate business losses over $313,000 ($626,000 for married couples filing jointly).

Excess business losses can’t be deducted in the current year and must be carried forward to the following tax year. Such losses can then be deducted under the rules for net operating loss carryforwards. As a result, an individual taxpayer's 100% first-year bonus depreciation deduction can effectively be limited by the excess business loss rule.

Save taxes by saving for retirement

Tax-favored retirement plans can provide significant savings for small business owners, both by building retirement security and by reducing taxes. Contributions are tax-deductible (or pre-tax, if you’re contributing as an employee).

One of the simplest options is a Simplified Employee Pension (SEP) IRA. If you’re self-employed, you can contribute up to 20% of your net income to a SEP IRA, with a cap of $70,000 for the 2025 tax year. If your own corporation employs you, the contribution limit is 25% of your salary, also capped at $70,000. The tax savings can be substantial.

Other options include 401(k)s, SIMPLE IRAs and defined benefit plans. Depending on your age and income, some of these options might allow you to make even larger contributions. Ask your tax advisor for details.

Wrapping it up

The permanent restoration of 100% first-year bonus depreciation creates tax-saving opportunities for taxpayers while they expand their business potential. And a tax-favored retirement plan is beneficial for you, your business and your employees. Every business is different, so it’s essential to consult a tax professional. Contact the office for help tailoring your tax strategies for 2025 and beyond.

5 Smart Tips For Individual Year-end Tax Planning

Even during the last two months of the year, you can take steps to reduce your 2025 tax liability. Here are five practical strategies to consider.

1. Use bunching to maximize deductions

If your itemized deductions are close to the standard deduction, consider a “bunching” strategy. This means timing certain payments (such as mortgage interest, state and local taxes, charitable gifts and medical expenses) so that they push you above the standard deduction in one year. The following year, you can take the standard deduction and, to the extent possible, defer paying deductible expenses to the following year. This alternating approach helps you capture deductions that might otherwise be lost.

2. Balance gains and losses

If you have investments in taxable accounts, keep an eye on both realized and unrealized gains and losses. Selling appreciated securities held for more than a year ensures they're taxed at your lower long-term capital gains rate (typically 15% or 20%, plus the 3.8% net investment income tax at higher income levels), rather than your higher, ordinary-income rate (which may be as much as 37%). But selling investments at a loss can offset gains. If losses exceed gains, up to $3,000 can offset ordinary income, with the remainder carried forward. This flexibility can reduce taxes this year and in future years.

3. Gift appreciated assets to loved ones

If you want to support family members while cutting your tax bill, consider giving appreciated investments to adult children or other relatives in lower tax brackets. They can sell the assets at a lower capital gains rate, possibly even 0%. Just be cautious about the “kiddie tax,” which generally applies to children under age 19 (24 if they’re a full-time student), and potential gift tax implications.

4. Give wisely to charities

Instead of donating cash, consider giving highly appreciated stock or mutual fund shares that you’ve held more than one year. You avoid owing capital gains tax and can deduct the full fair market value if you itemize. Alternatively, selling investments at a loss and donating the proceeds allows you to claim both the capital loss and the charitable deduction. With some tax rules set to tighten in 2026, making larger gifts before year-end could be especially advantageous. (But if you don’t itemize, you can look forward to the limited charitable deduction that will be available to nonitemizers beginning in 2026.)

5. Use your IRA for donations

For those age 70½ or older, making charitable donations directly from an IRA, called “qualified charitable distributions” (QCDs), offers unique advantages. You can donate up to $108,000 in 2025 directly to qualified charities, keeping those amounts out of your taxable income. This strategy reduces adjusted gross income, which may help preserve eligibility for other tax breaks.

Final thought

The best tax strategies depend on your personal situation. Timing, income level and future expectations all matter. Before taking action, contact the office to tailor these approaches to your needs.

Enhanced SALT Tax Break Will Help Many Homeowners

The One Big Beautiful Bill Act (OBBBA), enacted on July 4, will allow more taxpayers to fully deduct their state and local tax (SALT) expenses (including property tax). Here are the details.

SALT deduction expanded

Under the Tax Cuts and Jobs Act, the itemized deduction for state and local tax (SALT) was limited to $10,000 ($5,000 for married individuals who file separately) beginning in 2018.

This limitation negatively affected taxpayers living in locations with high state income tax rates and those who pay high property taxes because:

• They live in a high-property-tax jurisdiction,
• They live in a location with high property values,
• They own an expensive home, or
• They own both a primary residence and one or more vacation homes.

Under the OBBBA, for 2025 through 2029, the SALT deduction limit increases from $10,000 to $40,000 (or $20,000 for separate filers) with 1% annual inflation adjustments. So, for 2026, the cap will be $40,400 ($20,200 for separate filers).

But unless Congress takes further action, the SALT deduction limit is scheduled to revert to the prior-law limit of $10,000 ($5,000 for separate filers) in 2030.

Note: Several states have established SALT deduction workarounds for pass-through entities. These workarounds aren’t addressed or limited by the OBBBA.

Smaller benefit for some taxpayers

Under the OBBBA, for 2025, the higher SALT limit begins to be reduced for taxpayers with modified adjusted gross income (MAGI) over $500,000 ($250,000 for separate filers). These thresholds will also be increased by 1% annually for 2026 through 2029.

When a taxpayer’s MAGI exceeds the applicable threshold, the otherwise allowable SALT deduction limitation is reduced by 30% of MAGI above the threshold, but not below $10,000 ($5,000 for separate filers). Here’s an example: Greg and Tina are a married couple who file jointly and live in a high-tax state. For 2025, their combined SALT expenses are $60,000. Their MAGI is $550,000 for 2025, which is $50,000 above the applicable threshold. Therefore, their SALT deduction for 2025 is limited to $25,000 [$40,000 minus (30% times $50,000)].

Because of the 30% reduction, the expanded SALT deduction doesn't benefit taxpayers with MAGI at or above $600,000 ($300,000 for separate filers).

Deducting state and local income vs. sales tax

The SALT deduction continues to be available for property taxes plus the total state and local income taxes or the total of all sales taxes. Choosing to deduct sales taxes is a helpful option if you owe little or nothing for state and local income taxes or you made a major purchase that causes your sales tax to exceed your state and local income tax.

If you opt to deduct sales tax, you don’t have to save all of your receipts for the year and manually calculate your sales tax; you can use the IRS Sales Tax Calculator to determine the amount of sales tax you can claim. (It includes the ability to add actual sales tax paid on certain big-ticket items, such as a car.)

Start planning now

If you have high SALT expenses, to get the maximum benefit from the increased deduction limit, you need to plan carefully between now and year end. For example, you may want to take steps to keep your MAGI under the reduction threshold. Or you might want to accelerate property tax payments into 2025. Contact the office for help determining the right strategy for your specific situation.

2 Important Changes For Business Under The New Tax Law

The One Big Beautiful Bill Act (OBBBA) introduces a range of tax changes that will impact businesses. Many provisions set to expire this year are now being extended or made permanent. Below is a snapshot of two important changes to help you with tax planning in the fourth quarter of 2025 and going forward.

How the deduction for R&E expenses has changed

Under the Tax Cuts and Jobs Act (TCJA), businesses had to amortize deductions for Section 174 research and experimentation (R&E) costs over five years for expenses incurred in the United States or 15 years for those incurred abroad. This provision used a mid-year rule that effectively stretched write-offs over six years. The OBBBA changes that by permanently allowing full, immediate deductions for domestic R&E expenses starting in the 2025 tax year. Foreign R&E expenses will still be amortized over 15 years.

In addition, the OBBBA lets “small businesses, (in 2025, those with average annual gross receipts of $31 million or less for the past three years) claim R&E deductions retroactively to 2022. A business of any size with domestic R&E costs from 2022 to 2024 can choose to speed up the remaining deductions for those years over a one- or two-year period.

How the business interest deduction has changed

Generally, the TCJA limited business interest deductions to 30% of the taxpayer's adjusted taxable income (ATI) for the year. Before the OBBBA, ATI generally referred to earnings before interest and taxes. For tax years beginning after December 31, 2024, the OBBBA increases the cap on the business interest deduction by excluding depreciation, amortization and depletion when calculating ATI. This change typically increases ATI, allowing taxpayers to deduct more business interest expense.

But it’s important to note that, in 2025, taxpayers with average annual gross receipts for the last three years that don’t exceed $31 million are exempt from the interest deduction limitation.

Rethink tax planning

For business owners, the OBBBA helps resolve tax planning uncertainty. Keep in mind, these are just two of the key changes for businesses in this tax legislation.

Contact the office to discuss the full range of tax provisions covered by the new law. We can help you optimize any extended or new provisions that are relevant to your situation and reduce your tax obligations for 2025 and beyond.

Before A Weather Emergency Closes Your Business, Make A Plan

It’s hurricane season, which is just one of several weather emergencies companies may face, depending on location. Tornadoes, floods and wildfires also pose serious threats. According to the Federal Emergency Management Agency (FEMA), about 25% of businesses never reopen after a major disaster. And many that do reopen struggle to recover.

To lower the risk of closure and improve your chances of a strong recovery, establish a comprehensive emergency plan before disaster strikes. FEMA recommends the following multi-step approach to help safeguard your business.

Set goals and assign responsibility

Start by carefully defining the goals of your disaster plan and identifying who’ll create, manage and execute it. Your priorities will likely include:

• Protecting employees and customers,
• Minimizing damage to assets, and
• Resuming operations as quickly as possible.

For legal and financial risk management, consider adding an attorney and an insurance professional to your team.

Craft your plan

Begin by identifying and prioritizing the risks your business may face. These will likely include physical injuries to employees or customers. Also important to consider are business interruption, revenue loss and damage to property, equipment, inventory or vital records.

Your plan should address:

Employee roles. Assign responsibilities to staff with relevant skills for different weather emergencies.

Evacuation procedures. Develop clear evacuation routes and protocols.

Safety equipment. Define needs for items such as first aid kits, fire extinguishers and sprinkler systems.

Data protection. Secure vital records and documents by means such as remote backups and physical copies.

Communication strategy. Establish how you’ll keep employees and customers updated as to status and recovery timeline.

Inventory and supplier list. Keep a current list of critical equipment and replacement suppliers.

Operational continuity. Create contingency plans to run essential functions remotely with a minimal team.

HR and payroll policies. Set guidelines for compensating nonexempt employees who can't work during downtime.

Keep your plan thorough but manageable to ensure it’s practical, updatable and easy to follow.

Put the plan to work

To implement your plan, inform employees of their roles, assign responsibilities and provide any necessary training. Ensure that all essential emergency equipment is readily available and that your insurance coverage is sufficient to meet your needs.

Identify possible infrastructure gaps and address them promptly to ensure safety. An example would be inadequate emergency exits.

Do run throughs

Regular practice strengthens preparedness. Conduct drills to ensure safe evacuation procedures are clear and compelling. Verify that safety equipment, data backups, and other safeguards function as intended.

Be proactive. Don’t wait for a real emergency to discover weaknesses.

Monitoring and tweaking

With a solid plan in place, relax, but not too much. Review and update your plan at least annually to reflect changes in staff, operations or layout.

Incorporate feedback from various sources, such as test results, employee input and new risks you’ve discovered or lessons learned. Adapting and refining your plan regularly will maintain its effectiveness and help keep your assets, especially your human assets, safe over time.

Assurance

Your business may never be directly impacted by a severe weather event. But having a solid emergency preparedness plan can still offer tangible benefits, such as lowering certain business insurance costs. More importantly, it brings peace of mind that allows you to stay focused on running and growing your business, rather than worrying about the possibilities. Contact the office for guidance tailored to your situation.

3 Family-friendly Tax Benefits In The One, Big, Beautiful Bill Act

The One, Big, Beautiful Bill Act (OBBBA) brings a wide range of tax changes, with several key updates designed to support families. Among the many provisions, here are three with the potential to lower your tax bill.

1. Boosted Child Tax Credit with a new rule

Beginning in 2025, the Child Tax Credit (CTC) increases to $2,200 per qualifying child under age 17 (up from $2,000). It will be adjusted annually for inflation starting in 2026. The refundable portion (the part you can receive even if you owe no tax) is locked in at $1,700 for 2025 and will also adjust for inflation moving forward.

The modified adjusted gross income (MAGI) thresholds for the phaseout of the CTC remain unchanged and permanent at:

• $200,000 for single and head of household taxpayers
• $400,000 for married couples filing jointly

Beginning in 2025, you must include valid Social Security numbers (SSNs) for both the child and the taxpayer claiming the credit. For joint filers, at least one spouse must have an SSN to qualify.

2. The $500 Credit for Other Dependents lives on

Previously set to expire after 2025, the $500 Credit for Other Dependents (COD) is now permanent. The nonrefundable COD applies to dependents who don’t qualify for the child tax credit, such as college-aged children or elderly parents. The dependent must be a U.S. citizen, national or resident alien and must have a valid Social Security number or Individual Taxpayer Identification number.

The income-based phaseouts are the same as those for the CTC.

3. Adoption credit gets a refundable benefit

For 2025, the maximum credit is $17,280 per adoption. But the credit phases out at higher MAGI levels than the CTC and COD:

• Begins phasing out at $259,190.
• Fully phases out at $299,190.

These amounts apply to all filing statuses.

Under the OBBBA up to $5,000 of the credit is now refundable, offering more immediate financial help to some adoptive parents. The nonrefundable portion can be carried forward; the refundable portion cannot.

Your tax advisor can offer more information about the tax side of adoption.

Questions?

These are just three highlights from the OBBBA’s roughly 870 pages of tax updates. Some families stand to benefit, but as always, contact the office to make the most of what’s available to you.

Should You Be Making Estimated Payments?

If your federal tax withholding isn’t enough to cover your total tax liability, you may need to make estimated tax payments. This typically applies if you earn income from sources such as interest, dividends, self-employment, capital gains, or other taxable income. The following rules explain how to make these payments without incurring an underpayment penalty.

How much to pay and when

Individuals subject to estimated tax requirements generally must pay 25% of a “required annual payment” by April 15, June 15 and September 15 of the tax year and January 15 of the following year to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.

So the third installment for 2025 is due on Monday, September 15. Payments are made using Form 1040-ES and may be made electronically or on paper.

Who must pay

The general rule is that you may have to pay estimated tax for 2025 if both of these conditions apply:

1. You expect to owe at least $1,000 for 2025, after subtracting your withholding and tax credits, and

2. You expect your withholding and tax credits to be less than the smaller of: 90% of your 2025 tax liability or 100% of your 2024 tax liability (110% if your 2024 adjusted gross income was more than $150,000, or $75,000 if you’re married filing separately in 2025).

Calculating payments

If you do have to pay estimated taxes, calculating them requires projecting total income, deductions, credits and withholding for the year. After determining the required annual payment, divide that number by four and make four equal payments by the due dates.

But you may be able to use the annualized income method to make smaller payments during part of the year. This method is helpful to people whose income flow isn’t uniform over the year, perhaps because the business is seasonal.

For example, suppose your income comes exclusively from a business operated in a resort area during June, July and August. In that case, you may not have to make an estimated payment, or as large a payment, for the first two installments, and then you’ll need to “catch-up” when you make the third installment payment.

For more information

If you have questions about the estimated tax rules and how they apply to you, contact the office.

The Quirky Math Of Partnership Income

When it comes to taxation, partners in a business may find the math a bit puzzling. You may discover that the amount of partnership income you’re taxed on is more than the amount that was distributed to you. That’s a quirk of taxation that lies in the way partnerships and partners are taxed.

Pass-through taxation

Partnerships aren’t subject to income tax at the entity level. Instead, each partner is taxed on the earnings of the partnership, even if the profits aren’t distributed.

Similarly, if a partnership incurs a loss, it’s passed through to the partners. (However, various rules may prevent partners from currently using their shares of the partnership’s losses to offset other income.)

Filing responsibilities

A partnership must file an information return, IRS Form 1065, “U.S. Return of Partnership Income.” On this form, the partnership separately identifies income, deductions, credits and other items.

This allows partners to properly treat items that are subject to limits or other rules that could affect their treatment at the partner level. Examples of items that may require special treatment include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner receives a Schedule K-1, showing their share of partnership items for the tax year.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the money if they have sufficient basis. Instead, partners reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain.

Heads up!

Understanding the ins and outs of partnership taxation can help you avoid surprises come tax time. If you’re unsure how these rules apply to your specific situation, especially with complex items such as losses or special allocations, don’t hesitate to reach out. Contact the office for help with the math and with whatever other questions you may have.

You May Owe The “Nanny Tax” Even Without A Nanny

Don’t let the name “nanny tax” fool you. It’s a tax that applies to the wages of a variety of types of household help you hire, such as a nanny, gardener or housekeeper. Hiring extra help can ease the burden of home-related tasks, especially in the summer when the kids are home or the garden needs attention. Unless the worker is an independent contractor, you may be liable for federal payroll tax and other taxes (including state tax obligations).

Where the line is drawn in 2025

In 2025, you must withhold and pay Social Security and Medicare (FICA) taxes if your household worker earns cash wages of $2,800 or more (excluding the value of food and lodging). If you reach that threshold, all the wages (not just the excess) are subject to FICA taxes.

However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time, student babysitter, there’s no FICA tax liability.

Both the employer and the household worker must pay FICA tax. As the employer, you’re responsible for withholding your worker’s FICA share from his or her wages. You’re also responsible for paying a matching amount. Specifically, you each pay 6.2% for Social Security, for a total of 12.4%. For Medicare, you each pay 1.45%, for a total of 2.9%.

You can choose to pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. But they are treated as additional income to the worker for federal tax purposes. So you must include them as wages when you provide the worker’s W-2 form for the year.

You also generally must pay federal unemployment (FUTA) tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

You aren’t required to withhold federal income taxes from a household worker’s pay. But you can choose to withhold if the worker requests it. In that case, have them fill out a Form W-4.

How to pay the tax due

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from your wages, rather than by making an annual lump-sum payment.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your individual income tax return on Schedule H.

When you report the taxes on your return, include your Employer Identification Number (EIN), which isn’t the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you are able to include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. Note, however, that keeping the reporting separate may be preferred from a record-keeping perspective.

What records to keep and for how long

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amount of wages paid, taxes withheld and copies of forms filed.

Contact the office with any questions about compliance.

Closing A Business? Here’s How To Stay On Top Of Your Tax Duties

Businesses close for various reasons. Perhaps you’re ready to embark on a welcome change such as retirement or launching a new venture. Or maybe it just no longer makes financial sense to continue operating your current business. Whatever the reason, closing your business is a significant milestone, and part of wrapping things up means taking care of a few tax responsibilities.

Final income tax returns

You’ll need to file a final income tax return and other required forms for your last year of operation. The specific forms you'll file depend on your business structure:

Sole proprietorships: File Schedule C, Profit or Loss from Business, with your individual return for the year you close. You may also need to report self-employment tax.

Partnerships: File Form 1065, U.S. Return of Partnership Income, and report capital gains/losses on Schedule D. Mark the return and each Schedule K-1 as “final.”

All corporations: File Form 966, Corporate Dissolution or Liquidation, if you adopt a resolution to dissolve the corporation or liquidate stock.

C corporations: File Form 1120, U.S. Corporation Income Tax Return, for the closing year and report capital gains/losses on Schedule D. Check the “final return” box.

S corporations: File Form 1120-S, U.S. Income Tax Return for an S Corporation, for the year of closure and report gains/losses on Schedule D. Mark the return and each Schedule K-1 as “final.”

Regardless of business structure, additional forms may be required if you sell the business, report the sale of business property or record asset acquisitions.

Final payments to all workers

If you have employees, you must pay them whatever final wages and compensation are owed, make final federal tax deposits and report employment taxes. Don’t neglect to withhold all income, Social Security and Medicare taxes due and pay these taxes over to the IRS. Overlooking that requirement can result in full personal liability for what’s known as the Trust Fund Recovery Penalty. That’s an outcome to avoid.

Did you pay any independent contractors at least $600 during the calendar year you’re closing your business? If so, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

More loose ends to be tied

If your business has an employee retirement plan, it’s essential to properly terminate it and distribute any remaining benefits. That process comes with its own checklist, including specific notice, funding and filing requirements. The same is true for employee benefit accounts such as Flexible Spending Accounts, Health Savings Accounts and other programs for your employees.

There are additional complex tax matters that may come into play, such as cancellation of debt, using up net operating losses, unlocking passive activity losses, depreciation recapture and even bankruptcy-related considerations. Addressing them can feel overwhelming, but you don’t have to do it alone. Contact the office for help.

Don’t forget about your business records. Depending on the type of records, there are specific rules for how long to retain them. When everything is squared away, you’ll also need to close your IRS business account. Note that while the Employer Identification Number itself is permanent, after receiving confirmation that the business has closed, and verifying that there are no outstanding taxes or other issues the IRS will make the account inactive.

What else?

If your business is unable to pay all the taxes it owes, there are payment options available. To learn about these options, to ask about specific record retention rules, or for any other issues, contact the office.

Choosing The Optimal Accounting Method For Tax Savings

The accounting method your business uses to report income for tax purposes, either cash or accrual, can significantly impact your tax bill. While the cash method can offer tax-saving opportunities, the accrual method may in some cases be more appropriate or even required. So review your current method to help ensure you’re using the best method for your business.

Who can use cash accounting?

The Tax Cuts and Jobs Act made the cash method more accessible to businesses than in the past and simplified the associated requirements. In 2025, a “small business” is defined as one with average annual gross receipts of $31 million or less over the prior three years. This higher threshold allows more businesses to take advantage of the cash method, along with associated benefits such as:

• Simplified inventory accounting,
• Exemption from the uniform capitalization rules, and
• Exemption from the business interest deduction limitation.

Legislation has been proposed that would further increase the gross receipts threshold for eligible manufacturers. Contact the office for the latest information.

Some businesses are eligible for cash accounting even if their gross receipts exceed the threshold. This includes S corporations, partnerships without C corporation partners, farming businesses, and certain personal service corporations. But tax shelters of any size are ineligible for the cash method.

Why does the method matter?

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when 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 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 in recognizing 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.

Is this change worthwhile?

Even if your business would save taxes by changing its accounting method, be mindful of other possible consequences. 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. So, using cash accounting for tax purposes would mean keeping two sets of books, which can be burdensome.

Also, before you make a change, you’ll need consent from the IRS.

What should you do?

Evaluating accounting methods can be complex. Contact the office for help weighing all the relevant factors and choosing the best accounting method for your company.

Invest In Your Kids’ Or Grandkids’ Future With Help From The Tax Code

If you’re thinking about helping a child or grandchild pay for school, you’re not alone, and you’re not without help. While families have always saved for education, Section 529 plans have made it easier and more tax-efficient.

Tax advantages

With a 529 plan, your contributions grow tax-deferred, and no taxes are due when the money is used for qualified education expenses. These include postsecondary school expenses such as tuition, mandatory fees, books, supplies, computer equipment, software, internet service and, generally, room and board (for students enrolled at least half-time). Contributions aren’t deductible for federal purposes, but many states offer tax breaks or matching grants for contributions.

Contributions to a 529 plan may be shielded from gift tax by the annual gift tax exclusion, which for 2025 is $19,000 per recipient ($38,000 for joint gifts by a married couple). You can even choose to front-load five years’ worth of annual exclusion gifts into a 529 plan contribution in a single year. For instance, you and your spouse can contribute up to $190,000 per recipient in 2025, exempt from gift tax. Any excess contributions can potentially be made gift-tax-free under the federal gift and estate tax exemption ($13.99 million in 2025).

529 plans gain flexibility

Before the Tax Cuts and Jobs Act (TCJA), the tax exclusion for qualified expenses was strictly limited to postsecondary education. The TCJA expanded this tax break to $10,000 of tuition per year at an elementary or secondary public, private, or religious school.

More recently, thanks to the SECURE Act, you may use up to $10,000 in a 529 plan to repay the beneficiary’s student loans, plus another $10,000 to repay student loans held by the beneficiary’s siblings. It also allows 529 funds to pay for apprenticeships (for example, classroom instruction at a community college).

In addition, under SECURE 2.0, from 2024 forward, up to $35,000 (lifetime limit) in unused 529 plan funds can be rolled into a Roth IRA for the beneficiary, subject to various rules.

Also, changing how financial aid is calculated on the Free Application for Federal Student Aid (FAFSA) form may help grandchildren. Gifts from grandparents to 529 accounts no longer affect the allowable aid.

Finally, legislation has been proposed that would allow tax-free 529 plan distributions for even more types of education-related expenses. Contact the office for the latest information.

Build security for future generations

Given the high costs of higher education and many private elementary and secondary schools, planning is more important than ever. A 529 plan can be a powerful, tax-efficient tool to help you save for education expenses. Contact the office with questions about 529 plans.

The High Cost Of Worker Misclassification: Tax Implications And Risks

The consequences of misclassifying an employee as an independent contractor can be costly. You could be liable for back taxes (including the employee’s shares of unpaid payroll and income taxes), penalties and interest. There may be serious nontax consequences as well.

How important is this?

Businesses must withhold federal and state income taxes and the employee’s share of Social Security and Medicare taxes from employee wages. They must also pay the employer’s portion of Social Security, Medicare and unemployment taxes for employees. Generally, none of these obligations apply to the business for workers who are independent contractors.

Misclassifying an employee as an independent contractor can result in liability for unpaid payroll taxes, penalties and interest. You may also owe the employee’s share of taxes.

Beyond taxes, misclassification can mean liability for minimum wages, overtime pay, benefits, workers’ compensation, and state disability insurance. Ensuring proper classification helps avoid costly legal and financial consequences.

What factors should you consider?

Determining the correct classification requires reviewing the key factors that the IRS evaluates. No single factor is conclusive; all must be taken into account.

Here are the three categories of factors the IRS assesses:

1. Behavior control. Who controls what work is done and how it’s performed? A higher degree of control suggests the worker is likely an employee. It’s important to consider how much training and education the business provides a worker to do the job.

2. Financial control. Who controls the economic aspects, such as how the worker is paid and how expenses are reimbursed? Independent contractors generally have financial risk. They may work for flat fees and work for more than one business.

3. Type of relationship. Workers hired for an indefinite period and performing core business functions are more likely to be employees.

Labeling a worker as an independent contractor in a written contract doesn't make it so. However, it may serve as evidence in a dispute between parties.

How does remote work affect classification?

It’s tempting to think that if a person works for you remotely, he or she automatically qualifies as an independent contractor. Not so fast! Even if the individual chooses to work remotely, the classification is still subject to scrutiny.

The key considerations are the same as for on-site workers, such as whether you, as the business owner, have the right to control the details of the worker’s services and how they’re performed.

Worried you’ll make a mistake?

Don’t underestimate the importance of this issue. The consequences of misclassification can indeed be severe. Using a reasonable basis for classifying workers may relieve penalties and employment taxes.

You can ask the IRS to weigh in by filing Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Before you do this, contact the office and ask for a review of the details.

Beyond federal taxes

Even if you’re confident in your classification of workers for federal tax purposes, it’s essential to consider how they’re treated under state taxation and federal and state wage and hour regulations. Classifying workers as employees in some cases and independent contractors in others can create significant administrative challenges, so evaluate their status comprehensively before making a final decision. Don’t risk a mistake. Answers to your questions are a phone call away.

Your Return Is Filed! 3 Things To Keep In Mind Post-filing

Most people feel some relief after filing their income tax returns each year. But even if you’ve successfully filed your 2024 return, you may still have questions. Here are three common ones.

1. What’s the status of your refund?

You can learn the status of your tax refund using an IRS online tool. Go to irs.gov and click on “Get Your Refund Status.”

You’ll need your Social Security number, filing status and refund amount.

2. What if you forgot to report something?

In general, you can file an amended tax return and claim a refund within three years after you filed your original return or within two years of the date you paid the tax, whichever is later. So, if you filed your 2024 tax return on April 15, 2025 (the due date for 2024 returns), and barring any changes in the rules, you’ll generally have until April 18, 2028 (because April 15 is a Saturday and April 17 is a holiday in Washington, DC) to amend your return.

However, there are a few situations when you’re allowed more time to file an amended return. One example is claiming a bad debt deduction. Generally, you may amend your tax return to claim a bad debt for seven years from the tax return’s due date for the year the debt became worthless.

3. How long must you keep tax records?

Retain tax records as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after filing, meaning most 2021 tax year records can now be discarded if you filed by the April deadline in 2022. If you filed an extension, keep records from the extended due date for three years.

The statute extends to six years for substantial underreporting (over 25% of gross income). There’s no time limit if you never filed or filed fraudulently. So, keep actual tax returns indefinitely to prove legitimate filing.

Retirement account records should be kept until the account is depleted, plus three (or six) years. Real estate and investment records should be kept for as long as you own the asset, plus at least three years after selling, or six years to be extra cautious.

Being diligent with recordkeeping can help you avoid IRS issues down the line.

Still have questions?

Contact the office for help finding answers about your refund, filing an amended return or record retention.

Tax Season Cleanup: Which Records Can You Toss?

If you’ve filed your 2024 tax return, you may be eager to do some spring cleaning, starting with tax-related paper and digital clutter. The documentation needed to support a tax return may include receipts, bank and investment account statements, K-1s, W-2s, and 1099s. How long must you save these records? Three years is the general rule. But don’t be hasty: Failure to keep a paper trail for the information reported on a tax return could lead to problems if the IRS audits it.

The basics

Generally, the IRS’s statute of limitations for auditing a tax return is three years from the return’s due date or the filing date, whichever is later. However, some tax issues are still subject to scrutiny after three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or fraud is suspected, there’s no limit on when the IRS can launch an inquiry.

It’s a good idea to keep copies of your tax returns indefinitely as proof of filing. Supporting records, such as canceled checks, charitable contribution receipts, mortgage interest payments, and retirement plan contributions, generally should be kept until the three-year statute of limitations expires. These documents may also be helpful if you need to amend a return.

So, which records can you throw away now? Based on the three-year rule, in late April 2025, you’ll generally be able to discard most records associated with your 2021 return if you filed it by the April 2022 due date. Extended 2021 returns could still be vulnerable to audit until October 2025. But if you want extra protection, keep supporting records for six years.

Records to keep longer

You need to hang on to some tax-related records beyond the statute of limitations. For example:

• Retain W-2 forms until you begin receiving Social Security benefits. That may seem long, but if questions arise regarding your work record or earnings for a particular year, you’ll need your W-2 forms to help provide the required documentation.
• Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
• Hang on to records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.
• Retain records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses, until they have no effect, plus seven years.
• Keep records that support deductions for bad debts or worthless securities that could result in refunds for seven years because you have up to seven years to claim them.

Feel free to contact the office if you’re unsure about a specific document.

Retention times may vary

Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition of lending money, approving a purchase or otherwise doing business with you. Contact the office with questions or concerns about tax-related recordkeeping.

Payroll Fraud Threats Inside And Outside Your Company

Payroll fraud schemes can be costly. According to a 2024 Association of Certified Fraud Examiners (ACFE) study, the median loss generated by payroll fraud incidents is $50,000. It’s essential to know the payroll schemes making the rounds and how to prevent them or at least catch them before they go on very long.

Common threats

Here are brief descriptions of some common payroll fraud threats:

Ghost employees. Perpetrators add made-up employees to the payroll. The wages of these “ghost employees” are deposited in accounts controlled by the fraudsters.

Excessive payments. Here, employees receive overtime pay by inflating their work hours.

Payroll diversion. Cybercriminals use phishing emails to trick employees into providing sensitive information, such as bank login credentials. This becomes a form of payroll fraud when they divert payroll direct deposits to accounts they control. Crooks might also target employers by sending them fake emails from “employees” requesting changes to their direct deposit instructions.

Expense reimbursement fraud. Employees receiving expense reimbursements might inflate their expenses, submit multiple receipts for the same expense, or claim nonexistent expenses. When perpetrated by employees, this is related to payroll fraud because reimbursements are often added to paychecks.

6 strategies for preventing or uncovering payroll fraud

Preventing payroll fraud and uncovering it quickly, if it still occurs, requires strong internal controls. Here are six strategies to strengthen your defenses:

1. Require two or more employees to make payroll changes, such as pay rates or adding or removing employees.

2. Flag excessive or unusual pay rates, hours, or expenses using exception reporting.

3. Closely monitor employee expense reimbursement requests. Notify employees when discrepancies are found and require corrections.

4. Regularly conduct payroll audits to detect anomalies.

5. Audit automatic payroll withdrawals to confirm proper transfers are made.

6. Allow changes to direct deposits only via email confirmation, requiring employee approval before processing. For example, ask the employee to verify that he or she requested the change.

In addition to employing fraud prevention strategies, educate employees about payroll schemes, phishing attacks, and the importance of not sharing sensitive information via email. According to the 2024 ACFE study, the median fraud loss for victim organizations that provided fraud training to executives, managers and employees was roughly half the loss reported by organizations without training programs.

Payroll fraud is widespread

Payroll fraud can threaten businesses of all sizes and industries. Your organization can mitigate the risk by understanding the forms of payroll fraud and implementing robust internal controls, frequent audits and employee training.

Could You Be Hit With The Trust Fund Recovery Penalty?

If you own or manage a business with employees, you could be personally responsible for paying a harsh tax penalty. It’s called the Trust Fund Recovery Penalty (TFRP). It applies to the mishandling of Social Security and income taxes that must be withheld from employees’ wages.

These taxes are government property employers collect and hold in “trust” for the government until payment. If the funds aren’t properly handled, the IRS can impose a TFRP equal to 100% of the unpaid taxes on each responsible party. Consequently, the penalty amounts can be significant.

A penalty with a long reach

The TFRP is among the more dangerous tax penalties not only because it’s large but also because it applies to many actions and people involved in a business, and historically the IRS has aggressively enforced it. Here are some questions and answers to help avoid incurring the penalty:

What actions are penalized? The TFRP applies to willful failures to collect or truthfully account for and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who’s at risk? The IRS can impose the 100% penalty on anyone “responsible” for collecting and paying taxes. This includes corporate officers, directors, shareholders, partners and employees with such duties. Even voluntary board members of tax-exempt organizations may be liable under certain circumstances. Sometimes, responsibility has been extended to family members close to the business, attorneys and accountants.

How is responsibility determined? Responsibility depends on status, duty and authority. Anyone with the power to ensure taxes are paid can be held liable. Multiple people within a business can be deemed responsible, and each is at risk of a full penalty. If you know unpaid payroll taxes exist and have the authority to pay them but prioritize other payments instead, you could be deemed a responsible person.

While a taxpayer held liable may sue others for contribution, this must occur after paying the penalty in full. Such lawsuits are entirely separate from the IRS’s collection process.

Definition of “willful”

Willful actions don’t require intent to evade taxes. The IRS defines “willfully” as knowingly prioritizing other expenses over withheld taxes. For example, bending to pressure to pay other bills instead of taxes is considered willful behavior.

Delegating actual tax responsibilities is no defense. Failing to deal with tax tasks can also be deemed willful.

“Borrowing” is never an option

Under pressure, it may be tempting to “borrow” from a tax withholding fund to pay an urgent expense. But don’t do it. The importance of paying all funds withheld from employee paychecks over to the government can’t be understated. Failure to pay can result in multiple people owing the hefty 100% TFRP, including people who didn’t realize they were considered responsible. Contact the office with any questions.

It May Not Be Too Late To Reduce Your 2024 Taxes

If you’re preparing to file your 2024 federal income tax return and your tax bill is higher than you’d expected or your tax refund is smaller than you’d hoped, there might still be an opportunity to change it. If you qualify, you can make a deductible contribution to a traditional IRA until the filing date of April 15, 2025, and benefit from the tax savings on your 2024 return.

Who’s eligible?

You can make a deductible contribution to a traditional IRA if:

• You (and your spouse if you’re married) aren’t an active participant in an employer-sponsored retirement plan, or
• You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary by filing status.

For 2024, if you’re married, filing jointly and covered by an employer plan, your deductible IRA contribution phases out over $123,000 to $143,000 of MAGI. For single filers or those filing as head of household, this phaseout range is $77,000 to $87,000. It’s only $0 to $10,000 if you’re married and filing separately. If you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with MAGI between $230,000 and $240,000.

Deductible IRA contributions reduce your current tax liability, and earnings within the IRA are tax-deferred. However, every dollar you take out will be taxed in full (and subject to a 10% penalty before age 59½, unless an exception applies).

Roth IRA holders may also contribute to their accounts until April 15, though these contributions aren’t tax deductible, and some income-based limits apply. Withdrawals from a Roth IRA are tax-free if the account has been open for at least five years and you’re 59½ or older. Certain withdrawals are tax-free before age 59½ or within the first five years.

How much can you contribute?

If eligible, an individual can make a deductible traditional IRA contribution of up to $7,000 for 2024. The contribution limit is $8,000 for those age 50 and up by December 31, 2024. If you’re a small business owner, you can establish and contribute to a Simplified Employee Pension (SEP) plan up until the due date for your return, including extensions. For 2024, the maximum SEP contribution is $69,000.

Contact the office for more information about IRAs or SEPs, as well as additional strategies to reduce your 2024 taxes. During your tax preparation appointment, you can also ask how to save the maximum tax-advantaged amount for retirement.

Updated Guide To Robust Depreciation Write-offs For Your Business

Tax-saving benefits are generally available when your business puts newly acquired qualifying assets into service. Under Section 179 of the tax code, companies can take substantial depreciation deductions, subject to various limits adjusted annually for inflation.

Another potential write-off is for first-year bonus depreciation. Like the Sec. 179 deduction, bonus depreciation is subject to limits that change annually. But the limits are going down rather than up. And under the Tax Cuts and Jobs Act, bonus depreciation is scheduled to disappear after 2026.

Basics you need to know

Most tangible depreciable assets, such as equipment, furniture and fixtures, computer hardware, and some software, qualify for the Sec. 179 deduction in the year you purchase and place them in service. Vehicles also qualify, but they are subject to additional limitations.

For tax years beginning in 2025, the Sec. 179 deduction maxes out at $1.25 million and begins to phase out when total qualifying assets exceed $3.13 million (up from $1.22 million and $3.05 million, respectively, for 2024).

For qualifying assets placed in service in 2025, first-year bonus depreciation drops to 40% (from 60% in 2024). This figure is scheduled to drop to 20% for 2026 and to be eliminated in 2027. However, Congress may restore it to 100% before then.

How income affects your deduction

Under tax law, a Sec. 179 deduction can’t result in an overall business taxable loss. So, the deduction is limited to your net aggregate taxable income from all your companies. This includes wages and other compensation, your net business income, net proceeds from selling business assets, and possibly net rental income.

If the business income limitation reduces your Sec. 179 deduction, you can carry forward the disallowed amount or use first-year bonus depreciation. Unlike Sec. 179, bonus depreciation isn’t subject to dollar limits or phaseouts. (See “Sec. 179, first-year bonus depreciation or both?” for an example.)

Combining two strategies

You may still be undecided about which tax-saving strategy to use for assets you purchased and placed in service in 2024. Here’s an example that combines two methods:

In 2024, a calendar-tax-year C corporation purchased and placed $500,000 of assets in service that qualify for the Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to $300,000, which can be claimed on the corporation’s federal income tax return.

The company can deduct 60% of the remaining $200,000 using first-year bonus depreciation ($500,000 minus $300,000). So, the write-offs for the year include 1) a Sec. 179 deduction of $300,000 and 2) $120,000 of bonus depreciation (60% of $200,000). Thus, the company achieves $420,000 in write-offs on its 2024 tax return, leaving only $80,000 to depreciate in future tax years. (Note: If the business income limitation didn’t apply, the company could have written off the entire amount under the Sec. 179 deduction rules because its asset additions were below the phaseout threshold.)

Don’t go it alone

Depending on the details, you may have a robust depreciation deduction for 2024 and possibly depreciation to carry forward in 2025. However, maximizing the benefits of both depreciation methods can be complex. And it might adversely affect your company’s eligibility for certain other deductions, such as the Section 199A qualified business income deduction for eligible pass-through businesses. So, don’t go it alone. Contact the office for help devising the optimal tax strategy for your business and staying atop the latest tax law developments.

Don’t Move … Until You’ve Considered The Tax Implications

With so many people working remotely, it’s become more common to think about moving to another state, perhaps for better weather, to be closer to family or to reduce living expenses. Retirees also look at out-of-state moves for many of the same reasons. If you’re thinking about such a move, consider taxes before packing up your things.

There’s more to consider than income tax

Moving to a state with no personal income tax may seem like a no-brainer, but you must consider all taxes that can potentially apply to residents. In addition to income taxes, these may include property taxes, sales taxes, and estate or inheritance taxes.

If the states you’re considering have an income tax, look at the types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. Some states offer tax breaks for pension payments, retirement plan distributions and Social Security benefits.

Ready, set, home!

If you move permanently to a new state and want to escape taxes in the state you came from, it’s essential to establish a legal domicile in the new location. Generally, your domicile is your fixed and permanent principal residence and where you plan to return, even after periods of living elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established a domicile in a new state but didn’t successfully terminate the domicile in an old one. Additionally, if you die without clearly establishing domicile in one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

The simplest and most obvious way to establish domicile is to buy or lease a home in a new state and sell your previous home (or rent it out at market rates to an unrelated party). Then, change your mailing address on insurance policies and other essential documents. Also, get a driver’s license in the new state and register your vehicle there. Take these steps as soon as possible after moving.

Check it out before you decide

Don’t move to another state without first looking into the tax consequences. If one of your prime motivators for the move is to save taxes, research whether the grass is greener in the other state by factoring in more than just income taxes. Contact the office for help avoiding unpleasant surprises.

Unlocking The Potential Benefits Of ESOPs

Wouldn’t it be great if your employees worked as if they owned part of the company? An employee stock ownership plan (ESOP) could make that a reality.

Under an ESOP, employee participants gain partial ownership of the business through a retirement savings arrangement. Meanwhile, the company and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and, potentially, a smoother path for succession planning.

ESOP basics

To implement an ESOP, your business establishes a trust fund and either:

• The company contributes shares of stock or money to buy the stock (an “unleveraged” ESOP) to the ESOP, or
• The ESOP borrows funds to initially buy the stock and then the company contributes cash to the ESOP to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often tied to their compensation. The business must formally adopt the plan and submit plan documents and certain forms to the IRS.

The tax effects

Among the most significant benefits of an ESOP is that employer contributions to qualified retirement plans such as ESOPs are typically tax-deductible. However, employer contributions to all defined contribution plans, including ESOPs, are generally capped at 25% of covered payroll. One exception applies: C corporations with leveraged ESOPs can deduct contributions used to pay interest on the ESOP loan. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, provided the dividends are reasonable. Additionally, dividends voluntarily reinvested by employees in company stock in the ESOP are usually also deductible for the business. (Employees, however, should consider the tax implications for their individual situations.)

Another potential benefit arises for shareholders in some closely held C corporations; they can sell stock to the ESOP and defer federal income taxes on any gains from the sale. Several stipulations apply, including that the ESOP must own at least 30% of the company’s stock immediately after the sale. Also, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic corporations within a set period.

Finally, when a business owner is ready to retire or leave the company for another reason, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares. Alternatively, the ESOP can borrow money to buy the shares.

Risks to consider

The tax implications of an ESOP differ for entity types other than C corporations, and these should be carefully evaluated before implementing an ESOP for another entity type. While an ESOP offers many potential benefits, it also presents risks, such as the complexity of setup and, in some situations, a strain on cash flow.

ESOPs typically involve high initial costs plus ongoing costs that grow with the plan's size. Additionally, ESOPs can be burdensome to administer. Because they’re considered a type of retirement plan, they’re heavily regulated by federal and state governments. Compliance will require hiring various professionals, including a trustee.

Choosing the right fit

Is your company a good candidate for an ESOP? It’s essential to sort through the details with an experienced advisor. Contact the office for guidance.

4 Key Tax Questions About 2025 Taxes

Right now, you may be more focused on what you might owe (or receive as a refund) when you file your 2024 tax return in April than on tax planning for the new year. However, as you work through your annual tax filing, it’s a good idea to familiarize yourself with amounts that may have changed for 2025 due to inflation adjustments.

Here are five commonly asked questions (and answers) about 2025 tax figures:

1. How much money can I contribute to an IRA? If eligible, you can contribute up to $7,000 to a traditional or Roth IRA (but only up to 100% of your earned income, if less). If you’re age 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts are the same as for 2024.)

2. What’s the maximum I can contribute to a 401(k) plan through my job? The amount you can contribute is up to $23,500 to a 401(k) or 403(b) plan (up from $23,000 in 2024). Those 50 or older can add a $7,500 catch-up contribution (unchanged from 2024). New in 2025, employees ages 60 through 63 can make enhanced catch-up contributions of up to $11,250 (including the $7,500 standard catch-up).

3. How much must I earn not to pay Social Security on my entire salary? The Social Security tax wage base rises to $176,100, from $168,600 for 2024. You don’t owe Social Security tax on amounts earned above this threshold. (Medicare tax must be paid on all amounts earned.)

4. How much can I give one person without requiring a gift tax return? The annual gift tax excludes $19,000 (up from $18,000 in 2024).

These are only some of the tax figures that may apply to you. Contact the office for more information.

Feeling Charitable? Be Sure You Can Substantiate Your Gifts

As the end of the year approaches, many people give more thought to supporting charities they favor. To avoid losing valuable charitable deductions if you itemize, you’ll need specific documentation, depending on the type and size of your gift. Here’s a breakdown of the rules:

Cash gifts under $250. A canceled check, bank statement or credit card statement will do. Or ask the charity for a receipt or “other reliable written record” that provides the organization’s name, the date and the amount of the gift.

Cash gifts of $250 or more. You’ll need a contemporaneous written acknowledgment from the charity stating the amount of the gift. That means you received the acknowledgment before the earlier of your tax return due date (including extensions) or the date you file your return. If you make multiple separate gifts to the same charity of less than $250 each (monthly contributions, for example) that total $250 or more for the year, you can still follow the substantiation rules for cash gifts under $250.

Noncash gifts under $250. Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more. Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts, plus a description of the property.

Noncash gifts of more than $500: In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it. Also, file Form 8283.

Noncash gifts of more than $5,000 ($10,000 for closely held stock). In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art). In addition to the above, include a copy of the signed appraisal, not just a summary, with your return.

Finally, if you received anything in exchange for your donation, such as a book for making an online donation or food and drink at a fundraising event, ask the charity for the fair market value of the item(s). You’ll need to subtract it from your charitable deduction.

Saving taxes isn’t the primary motivator for charitable donations, but it may affect the amount you can afford to give. Substantiate your donations to ensure you receive the deductions you deserve.

Unlocking Tax Savings: The Benefits Of A Cost Segregation Study

A cost segregation study allows a business property owner to accelerate depreciation deductions. That, in turn, enables the owner to reduce current taxable income and increase cash flow.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. It then allows the personal property to be reclassified for tax purposes and deducted over a much shorter depreciation period. This strategy has been consistently upheld in the courts.

Fundamentals of depreciation

Business buildings generally have a 39-year depreciation period. Typically, companies depreciate a building’s structural components (such as walls, windows, HVAC systems, plumbing and wiring) along with the building. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for accelerated depreciation, usually over five or seven years.

Often, businesses allocate all, or most, of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may, in fact, be personal property. Examples include removable wall and floor coverings, removable partitions, awnings, canopies, window treatments and signs.

Shine a light on outdoor savings

Rules for outdoor lighting, parking lots, landscaping and fencing are tricky but can still lead to current tax deductions in certain situations. These expenditures are generally treated as capital improvements, subject to the 15-year depreciation rule. For instance, if you replace your business lighting to upgrade it or provide greater security at night, it qualifies as a deductible capital improvement. Similarly, landscaping projects designed to boost your curb appeal or provide environmental benefits are considered capital improvements.

On the other hand, routine maintenance (such as the costs of mowing and watering the lawn surrounding your business building) typically fall into the category of deductible business expenses, just like minor repairs.

Worth checking out

Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.

And, under the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study may be even greater than they were years ago because of enhancements to certain depreciation-related tax breaks.

Contact the office for further details.

Year-end Tax Planning Strategies For Businesses

Now is a good time to consider year-end strategies to help reduce your business’s 2024 income taxes. The effectiveness of a particular action depends on the circumstances of your business. Here are several possibilities.

Defer income, accelerate deductions

A tried-and-true tactic for tax minimization is to defer income to next year and accelerate deductible expenses into this year. For example, a business that follows the cash method of accounting can defer income by postponing invoices until late in the year or accelerate deductions by paying certain expenses this year.

Businesses that use the accrual method have less flexibility in timing, but there are still actions you can take. For example, you can deduct year-end bonuses accrued this year even if you don’t pay them until next year (no later than March 15, 2025). You might also be able to defer until next year income from certain advance payments, including licensing fees, subscriptions and membership dues, depending on how the payments were recorded.

Deferring income and accelerating deductions may not suit every business. The opposite approach is sometimes more beneficial, such as if you anticipate being in a higher tax bracket next year.

Purchase assets by year end

One effective way to generate tax deductions is to buy equipment, machinery and other fixed assets. Ordinarily, these assets are capitalized and depreciated over several years, but there are ways to deduct more of these asset costs immediately. For example, in 2024, under Section 179 you can deduct $1.22 million in qualifying tangible property and certain computer software costs, subject to phaseout when expenditures exceed $3.05 million in 2024.

Similarly, under bonus depreciation, you can deduct up to 60% of the cost of eligible tangible property, including most equipment and machinery, plus off-the-shelf computer software and certain improvements to nonresidential building interiors placed in service in 2024. Unless Congress takes action to increase the bonus deduction limit, it will drop to 40% in 2025, to 20% in 2026 and to 0% in 2027.

Set up a retirement plan

Establishing a retirement plan is an effective way to generate tax benefits. It can also improve employee recruitment and retention efforts.

Certain employers are entitled to tax credits for starting a new plan. Whether you started a new plan or already had one in place, depending on the type of plan, you may be able to take 2024 deductions for contributions made after year end. Some plans, including simplified employee pensions, can be adopted and funded after year end but deducted for this year.

Write off bad debts

Review your receivables to determine whether any bona fide business debts have become worthless or uncollectible. If so, you may be able to reduce 2024 taxes by claiming a bad debt deduction.

You must show you’ve taken reasonable steps to collect the debt and that there’s no realistic expectation of payment (such as if the debtor is in bankruptcy). You must also show that the debt was charged off this year.

Finally, the receivable must have been previously included in taxable income. Thus, an accrual-basis business can deduct an eligible bad debt if it’s already accrued the receivable, but a cash-basis business can’t.

See the big picture

Whichever year-end tax strategies you explore, consider how they interact with other tax code provisions. Contact the office for help determining the best combination of year-end planning strategies for your business.

Year-end Tax Planning Moves For Individuals

During the holiday season, income taxes probably aren’t top of mind for most taxpayers. But along with the festivities, it’s a good time to consider tax strategies that may reduce this year’s taxes, and possibly future years’ taxes as well. Here are three tax planning moves that might trim the fat off your 2024 taxes.

1. Donate stock to charities

If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with a revamping of your taxable investment portfolio. Here are some tax-smart principles to follow:

Sell underperforming stocks and donate the proceeds. Stocks worth less than they cost can be sold at a tax-saving capital loss. You can then donate the sales proceeds to charity and claim a charitable deduction.

Donate appreciated stocks. If you’ve held a stock for over a year and donate it to charity, you can claim a deduction for its market value while avoiding capital gains tax you’d owe if you sold it. Stocks held for less than a year can also be donated, but the deduction is limited to cost basis.

2. Prepay higher education bills

If you paid higher education expenses for you, your spouse or a dependent, you may qualify you for one of the following credits:

The American Opportunity credit. This credit is equal to 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000, for the first four years of postsecondary education in pursuit of a degree or recognized credential. The maximum annual credit is $2,500 per qualified student.

The Lifetime Learning credit. This credit is equal to 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per tax return.

For 2024, both credits phase out if your modified adjusted gross income (MAGI) is between:

• $80,000 and $90,000 for unmarried people, or
• $160,000 and $180,000 for married couples filing jointly.

Various other restrictions also apply. If you’re eligible for either credit and your 2024 expenses don’t already exceed the applicable limit, consider prepaying college tuition for academic periods from January through March 2025.

If your credit will be partially or fully phased out because of your MAGI for 2024, consider whether there’s anything you could do to reduce your MAGI so you could maximize your 2024 education credit. (Reducing your MAGI could also increase the benefit of certain other tax breaks.)

3. Consider a Roth conversion

If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that this will generate a current tax cost. Why? Because a conversion is considered a taxable liquidation, followed by a nondeductible contribution to a Roth account. However, post-Roth conversion, all qualified withdrawals from the account will be federal-income-tax-free. Qualified withdrawals occur after:

• The Roth account has been open for over five years, and
• You’ve reached age 59½, become disabled, or passed away (withdrawals made to a beneficiary).

A Roth conversion makes it possible to avoid potentially higher future tax rates, because you’ve already paid the tax.

For more ideas

Federal tax law may be uncertain for the next year or so because many of the Tax Cuts and Jobs Act provisions are scheduled to expire at the end of 2025 but could be extended. There also could be other tax law changes as a result of the election. Contact the office to discuss tax planning moves that may work for you.

Boost Morale And Save Taxes With Achievement Awards

Some small businesses struggle with employee morale for a variety of reasons, one of which may be economic uncertainty. If you want to boost employees’ spirits without a big financial outlay, an achievement awards program is a relatively low-cost fringe benefit that may be a win-win addition.

Under such an initiative, you can hand out awards at an appointed time, such as a year-end ceremony or holiday party. And, as long as you follow the rules, the awards will be tax-deductible for your company and tax-free for recipient employees.

Fulfilling the requirements

To qualify for favorable tax treatment, achievement awards must be granted to employees for either promoting safety in the workplace or length of service. The award can’t be disguised compensation or a payoff for closing a big deal. In addition, they must be tangible items, ranging from a gold watch or a smartphone to a plaque or a trophy. Examples of awards that would violate the rules are gift certificates, vacations, or tickets to sporting events or concerts.

Additional requirements apply to each type of award:

1. Safety awards. These can’t go to managers, administrators, clerical workers or other professional employees. Also, safety awards won’t qualify for favorable tax treatment if the company grants them to more than 10% of eligible employees in the same year.

2. Length-of-service awards. To receive such an award, an employee must have worked for the business for at least five years. In addition, the employee can’t have received a length-of-service award within the last five years.

Also keep in mind that the award must be part of a “meaningful presentation.” That doesn’t mean you have to host a gala awards dinner at the Ritz, but the award should be marked by a ceremony befitting the occasion.

Nonqualified vs. qualified

There are limits on an award’s value depending on whether the achievement awards program is nonqualified or qualified. For a nonqualified program, the annual maximum award is $400. For a qualified program the maximum is $1,600 (including nonqualified awards). Any excess above these amounts is nondeductible for the employer and taxable to the employee. If an employee receives multiple awards in one year, these figures apply to the total, not to each individual award.

To establish a qualified program, and therefore benefit from the higher limit, you must meet two additional requirements. First, awards must be granted under a written plan and the plan must be open to all eligible employees without favoritism. Second, the program must not discriminate in favor of highly compensated employees as to eligibility or benefits. For 2024, the salary threshold for a highly compensated employee is $155,000.

Awards of nominal value are generally not taxable. These are small, infrequent gifts such as a coffee mug, a t-shirt or an occasional meal.

Explore the idea

If an achievement awards program makes sense for your company, be sure that these requirements are met. Otherwise, you and your employees could suffer negative tax consequences. Contact the office for guidance in setting up a program that checks all the boxes.

When Is Employer-paid Life Insurance Taxable?

If the fringe benefits of your job include employer-paid group term life insurance, a portion of the premiums for the coverage may be taxable. And that could result in undesirable income tax consequences for you.

The cost of the first $50,000 of group term life insurance paid by your employer is excluded from taxable income. But the employer-paid cost of coverage over $50,000 is taxable to you and included in the taxable wages reported on your Form W-2, even if you never actually receive any benefits from it. That’s called “phantom income.”

Have you reviewed your W-2?

If you’re receiving employer-paid group term life insurance coverage in excess of $50,000, check your W-2 to see the impact on your taxable wages. If there’s a dollar amount in Box 12 (with code “C”), that’s the amount your employer paid to provide you with group term life insurance over $50,000, minus any amount that you paid for the coverage. You’re responsible for any taxes due on the amount in Box 12, including employment tax.

The amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2. It’s the amount in Box 1 that’s reported on your tax return.

What are your options?

If the tax cost seems too high for the benefit you’re getting, ask your employer if they have a “carve-out” plan, which allows certain employees to opt out of the group coverage. If there’s no such option, ask your employer if they’d be willing to create one.

Carve-out plans vary, but one option is for your employer to continue to provide $50,000 of group-term coverage at no cost to you. Your employer could then provide you with an individual permanent policy for the balance of the coverage. Or it could pay you a cash bonus representing the amount it would have spent for the excess coverage, and you could use that money to pay premiums for an individual policy. There would still be tax consequences, but the tax liability might be smaller and the coverage might better meet your needs.

We can help

You may have other tax questions about life insurance. Feel free to contact the office for answers.

Are You Aware Of The Business Credits And Other Tax Benefits Available?

It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.

1. Statutory incentives

Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.

State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.

The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

2. Discretionary incentives

Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.

To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

3. Sales tax exemptions

States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

• Retailers for the purpose of resale,
• Manufacturers of equipment, raw materials or components used in the manufacturing process,
• Specific tax-exempt entities, and
• Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to sellers that they have a resale or exemption certificate.

Don’t miss these opportunities

Every year, a vast amount of tax credits and incentives go unclaimed because businesses are unaware of them or mistakenly believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.

Home Sale: Failure To Plan May Raise Your Tax Bill

As the saying goes, there’s nothing certain in life except for death and taxes. But when it comes to selling your home, proactive tax planning can help you reduce your federal income tax bill.

A costly mistake to avoid

Let’s say Tom is a soon-to-be-married homeowner looking to sell his principal residence. If certain tests are met, an unmarried individual may exclude up to $250,000 of taxable gain.

Just before the wedding, Tom sells the home he purchased 20 years earlier. The home has appreciated by $500,000. He and his future wife, Stacy, plan to move into her much smaller fixer-upper after the wedding.

As an unmarried taxpayer, Tom can exclude $250,000 of gain, leaving $250,000 subject to federal capital gains tax, the 3.8% net investment income tax, and any applicable state income tax.

Instead, suppose Tom and Stacy had sought tax planning advice first. Their advisor would have explained that married couples may exclude up to $500,000 of gain if they satisfy the ownership and residency requirements, including living in the home as their principal residence for at least two years.

Rather than selling before the wedding, they could have continued living in Tom’s home for two years after marriage. Doing so would have allowed them to exclude the full $500,000 gain and avoid the resulting federal tax. Stacy could have sold her smaller home beforehand, likely using her own $250,000 exclusion.

Slow down and seek advice

Proactive tax planning is often well worth the effort, especially when significant assets are involved or tax laws may change. Even when a transaction seems straightforward, professional guidance can prevent expensive mistakes. Contact the office to determine the best tax strategy for your situation.

Tax Considerations When Choosing A Business Entity

Are you in the process of starting a business or contemplating changing your business entity? If so, you’ll need to decide how to organize your company. Should you operate as a C corporation or as a pass-through entity such as a partnership, limited liability company (LLC) or S corporation? Among the important factors to consider are the potential tax consequences.

Tax treatment basics

Currently, the corporate federal income tax is a flat 21% rate and individual federal income tax rates begin at 10% and go up to 37%. With a pass-through entity, income the business passes through to the owners is taxed at individual rates, which currently range from 10% to 37%. So, the overall rate, if you choose to organize as a C corporation, may be lower than if you operate the business as a pass-through entity.

But the difference in rates can be alleviated by the qualified business income (QBI) deduction, which is available to eligible pass-through entity owners who are individuals, and some estates and trusts.

The QBI deduction will expire Dec. 31, 2025, unless Congress acts to extend it. The 21% corporate rate is permanent, but Congress could still change it by passing new legislation.

More to consider

There are other tax-related factors you should take into account. For example:

Will most of the business profits be distributed to the owners? If so, it may be preferable to operate as a pass-through entity because C corporation shareholders will be taxed on dividend distributions from the corporation (double taxation). Owners of a pass-through entity will be taxed only once on business income, at the personal level.

Does the business own assets that are likely to appreciate? If so, it may be better to operate as a pass-through entity because the owner’s basis is stepped up by an owner’s interest in the entity. That can result in less taxable gain for the owner when his or her interests in the entity are sold.

Is the business expected to incur tax losses for a while? If so, you may want to structure it as a pass-through entity, so that you can deduct the losses against other income. Conversely, if you have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable to organize as a C corporation, because it’ll be able to offset future income with the losses.

Is the business owner subject to the alternative minimum tax (AMT)? If so, it might be better to organize as a C corporation, because only the very largest corporations are subject to corporate AMT. AMT rates on individuals are 26% or 28%.

Contemplate the issues

Clearly, many factors are involved in determining which entity type is best for your business. This covers only a few of them. Contact the office to talk over the details in light of your situation.

A Tax Break For Educators

Teachers who are getting ready for a new school year often pay for some of their classroom supplies out-of-pocket. They may be able to get some of that cost back by taking advantage of a special tax break for educators.

History of the deduction

Before 2018, employees who had unreimbursed out-of-pocket expenses could potentially deduct them if they were ordinary and necessary to the “business” of being an employee. A teacher’s out-of-pocket classroom expenses could qualify and be claimed as a miscellaneous deduction, subject to a 2% of adjusted gross income (AGI) floor. That meant that only taxpayers who itemized deductions could enjoy a tax benefit, and then only to the extent that their eligible expenses exceeded the 2% floor.

For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) has suspended miscellaneous itemized deductions subject to the 2% of AGI floor. Fortunately, qualifying educators can still deduct some unreimbursed out-of-pocket classroom costs using the educator expense deduction.

Back in 2002, Congress created this above-the-line deduction, which means the deduction is subtracted from your gross income to determine your AGI. It can be claimed even if you don’t itemize deductions.

For 2024, qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $300 of qualified expenses. (This limit will rise in $50 increments in future years, based on inflation adjustments.) Two eligible married educators who file a joint tax return can deduct up to $600 of unreimbursed expenses, limited to $300 each.

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment, related software, services, and other equipment and materials used in classrooms. The cost of certain professional development courses may also be deductible. However, homeschooling supplies and nonathletic supplies for health or physical education courses aren’t eligible.

Head of the tax class

Some additional rules apply to this deduction. If you’re an educator or you know one who might benefit from this tax break, feel free to contact the office for more details.

Independent Contractors: Classify Carefully

Many businesses use independent contractors to help keep their costs down and provide flexibility for short-term needs. But the question of whether a worker is an employee or an independent contractor is complex. Be careful that your independent contractors are properly classified for federal tax and employment tax purposes, because if the IRS reclassifies them as employees, it can be an expensive mistake.

Differing obligations

If a worker is an employee, your company must withhold federal income tax and the employee’s share of Social Security and Medicare taxes, pay the employer’s share of Social Security and Medicare taxes, and pay federal unemployment tax. State tax obligations may also apply. A business generally must also provide that worker with fringe benefits if it makes them available to other employees.

However, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more). The contractor is responsible for paying self-employment tax and, generally, making estimated tax payments for income tax purposes in relation to the amount paid.

Key factors

Who’s an “employee?” Unfortunately, there’s no one definition of the term. The IRS and courts have generally ruled that one of the key factors that determines the difference between an employee and a contractor is the right to control and direct the person in the jobs they’re performing, even if that control isn’t exercised. The issue of control is evaluated by asking several questions, including:

• Who sets the worker’s schedule?
• Are the worker’s activities subject to supervision?
• Is the work technical in nature?
• Is the worker free to work for others?

Another important factor is whether the worker has the opportunity for profit or loss based on his or her managerial skills. That is, can the worker apply independent judgment and business acumen to affect the success or failure of the work being performed? If there’s a lack of such opportunity, that’s one indication of employee status.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors. Be aware, Section 530 doesn’t apply to certain types of workers.

Think carefully before asking the IRS

You can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

So, before you file Form SS-8, contact the office for a consultation. Filing this form may alert the IRS that your business has worker classification issues, and it may unintentionally trigger an employment tax audit. It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.

Workers who want an official determination of their status can also file Form SS-8. Dissatisfied workers you’ve treated as independent contractors may do so because they feel entitled to employee benefits and want to eliminate their self-employment tax liabilities. If a worker files Form SS-8, the IRS will notify the business with a letter that identifies the worker and includes a blank Form SS-8. The business will be asked to complete and return the form to the IRS, which will render a classification decision.

Need more help?

Worker classification is complex. In addition to what’s been discussed here, there are differing rules that apply for labor law purposes, which can impact minimum wage and overtime pay requirements. If you have questions, contact the office to assist you in ensuring that your workers are properly classified.

Renting To Family Members

As rents continue to rise in many areas, you may decide to help your financially challenged family members by renting a property to them at a discount. But this can lead to the loss of significant tax deductions. Here’s a look at the tax treatment that applies when you rent to unrelated parties and how the rules change when you rent to relatives.

Business vs. personal

If you use real estate strictly for business purposes, that is, as a rental property, you must report the income and can deduct mortgage interest, property taxes, utilities, depreciation, maintenance and other expenses. You may claim a loss (subject to limitations) if your expenses exceed your rental income.

Suppose you use a property as a personal residence (such as your primary residence or a vacation home) and rent it out for fewer than 15 days per year. In that case, you don’t need to report the rental income, but you can’t deduct related expenses. If you itemize, you can still claim personal deductions, to the extent allowable, for mortgage interest and property taxes.

Suppose instead that you rent out the residence for 15 or more days per year. In that case, it’s treated as a mixed-use property. You must report the rental income and allocate your expenses between the property’s personal and business uses. You generally can claim the personal use portion as itemized deductions. The business use portion of these and other expenses are deductible as rental expenses, but they can’t create a loss. Disallowed deductions may be carried forward to future years.

Family matters

Renting property to family members means you risk losing the ability to deduct rental expenses. That’s because use by family members is considered personal use, even if your relative pays rent, unless two requirements are met. The family member:

1. Uses the property as a principal residence, and

2. Pays fair market rent (not discounted).

If these requirements aren’t met, then you must report the rental income (if you rented the property for 15 days or more per year). But related expenses won’t be deductible.

If you want to avoid losing valuable tax benefits, set the rent at or above fair market value and document fair market rent with comparable local rental rates. If you give family members financial gifts to help with the rent, the IRS will likely view this as discounted rent.

Know what you’re getting into

Helping family members with housing expenses is a nice thing to do. But be aware of the tax consequences of renting to relatives. Contact the office for assistance with these decisions.

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

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

Basic definitions

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

A necessary expense is one that’s helpful or appropriate. For example, a car dealership may purchase an automatic defibrillator. It may not be necessary for the business operation, but it might be helpful if an employee or customer suffers a heart attack. It’s possible for an ordinary expense to be unnecessary. But to be deductible, an expense must be ordinary and necessary.

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

How the courts may view expenses

The deductibility of some expenses is clear, while others are more complicated. Not surprisingly, the IRS and courts don’t always agree with taxpayers about what is ordinary and necessary. To illustrate, here are three recent U.S. Tax Court cases in which specific taxpayer deductions were disallowed:

1. A married couple owned an engineering firm. For two tax years, they claimed depreciation of $76,264 on three vehicles, but didn’t provide required details, including each vehicle’s ownership, cost and useful life. They claimed $34,197 in mileage deductions and provided receipts and mileage logs, but the court found they didn’t show related business purposes. The court also found the mileage claimed included commuting costs, which can’t be written off. The court disallowed these deductions and assessed taxes and penalties. (TC Memo 2023-39)

2. The court ruled that a married couple wasn’t entitled to business tax deductions because the husband’s consulting company failed to show that it was engaged in a trade or business. In fact, invoices produced by the consulting company predated its incorporation. And the court ruled that even if the expenses were legitimate, they weren’t properly substantiated. (TC Memo 2023-80)

3. A physician specializing in gene therapy deducted legal expenses of $360,295 for two years on Schedule C of his joint tax returns. The court found that most of the legal fees were to defend the husband against personal conduct issues. The court denied the deduction for personal legal expenses but allowed a deduction for $13,000 for business-related legal expenses. (TC Memo 2023-42)

These cases and others should show the importance of maintaining careful, detailed records. Make sure that only business costs are claimed.

Proceed with caution!

If an expense seems like it’s not normal in your industry or could be considered personal or extravagant, proceed with caution. Contact the office with questions about deductibility and proper documentation.

Sending The Kids To Day Camp May Bring A Tax Break

Among the many challenges of parenthood is childcare for kids when school lets out. Babysitters are one option, or you might consider sending them to a day camp. There’s no one-size-fits-all answer, but if you do choose a day camp, you could be eligible for a tax break. (Unfortunately, overnight camps don’t qualify.)

Dollar-for-dollar savings

Day camp can be a qualified expense under the child and dependent care tax credit. The credit is worth 20% to 35% of the qualifying costs, subject to an income cap. The maximum amount of expenses that can be claimed is $3,000 for one qualifying child or $6,000 for two or more children, multiplied by the percentage that applies to your income level.

For those qualifying for the 35% rate with maximum expenses of $3,000, the credit equals $1,050, or $2,100 for two children with expenses of at least $6,000. The applicable credit percentage drops as adjusted gross income (AGI) rises. When AGI exceeds $43,000, the percentage is 20% of qualified expenses, subject to the $3,000 or $6,000 limit.

Tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar, that is, $1 of tax credit saves $1 of taxes. This is compared to deductions, which simply reduce the amount of income subject to tax. So, if you’re in the 24% tax bracket, a $1 deduction saves you only $0.24 of taxes.

Qualifying for the credit

Only dependents under age 13 generally qualify. However, the credit may also be claimed for expenses paid to care for a dependent relative, such as an in-law or parent, who is incapable of self-care. Eligible care costs are those incurred while you work or look for work.

Expenses paid from, or reimbursed by, an employer-sponsored Flexible Spending Account can’t be used to claim the credit. The same is true for a dependent care assistance program.

Determining eligibility

Additional rules apply to this credit. Contact the office if you have questions about your eligibility for the credit and the exceptions.

The Advantages Of Hiring Your Minor Children For Summer Jobs

If you’re a small-business owner and you hire your children this summer, you may be able to secure tax breaks and other nontax benefits. The kids can gain bona fide on-the-job experience, save for college and learn how to manage money. You may be able to shift some of your high-taxed income into tax-free or low-taxed income, and, depending on the situation, you may realize payroll tax savings. Perhaps best of all, your kids will spend time with you.

A legitimate job and tax savings, too

If you hire your child, you’ll get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill and possibly your self-employment tax bill and your state income tax bill if they apply. However, for the wages to be a deductible business expense, the work performed by the child must be legitimate and the child’s pay must be reasonable.

Let’s say you operate as a sole proprietor in the 37% tax bracket. You hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. She earns $10,000 during 2024 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.

Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to her beginning at a rate of 10%, instead of being taxed at your higher rate.

Reduced payroll taxes

If your business isn’t incorporated and certain conditions are met, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes. Your child must be under age 18 for this to apply (or under age 21 for the federal unemployment tax exemption). Contact the office to learn how this works.

Be aware that there’s no payroll tax exemption for employing your child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Extra time to make your child’s retirement garden grow

An early start on saving for retirement can be key to building wealth. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute the lesser of his or her earned income or $7,000 to a traditional or Roth IRA. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.

What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades.

The importance of accurate records

Hiring your child can be a tax-smart idea. Be sure to keep the same records (such as timesheets and job descriptions) as you would for other employees to substantiate the hours worked and duties performed. Also issue your child a Form W-2. Contact the office with questions about how these rules apply to your situation.

To Get An "Early" Refund, Adjust Your Withholding

If you received a large refund this year, you may want to adjust your withholding. Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there’s a way to begin collecting your 2024 refund now: You can review the amounts you’re having withheld, and any estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.

Choosing to adjust

It’s particularly important to check your withholding and/or estimated tax payments if you have:

• Received an especially large 2023 refund,
• Gotten married, divorced or added a dependent,
• Bought a home, or
• Started or lost a job.

Withholding or estimated tax payment changes might also be warranted if your investment income has changed significantly.

Making a change

You can modify your withholding at any time during the year, or even more than once a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can adjust each time quarterly payments are due.

While reducing your withholding or estimated tax payments will put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the deadline in April 2025.

Getting help

One reason to consider adjusting your withholding is the passage of any new tax legislation. For example, several years ago when the Tax Cuts and Jobs Act was enacted, the IRS needed to revise withholding tables to account for the increased standard deductions, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining your withholding or estimated tax payments for the rest of the year, please contact the office.

Tax Records: What Can You Toss And What Should You Keep?

Generally, the IRS has three years to audit a tax return, from the later of the due date of the return or the date you file. You can also file an amended return within this time frame if you overlooked something.

Here’s what you need to know about keeping financial records involved in your tax returns.

Federal tax records

Despite the three-year guideline, many tax advisors recommend retaining copies of your finished tax returns indefinitely to prove that you filed. Even if you don’t keep returns indefinitely, at least keep them for six years after the returns are due or filed, whichever is later.

It’s a good idea to keep the records that support items on your individual tax returns until the three-year statute of limitations runs out. Examples of supporting records include canceled checks, charitable contributions receipts, and documents showing your mortgage interest payments and retirement plan contributions. These documents may also support an amended tax return if you find you overlooked something.

So which records can you throw away today? Generally, based on the three-year rule, you’ll soon be able to throw out most records associated with your 2020 return if you filed by the due date (which was extended to May 17, 2021, due to the pandemic). Extended 2020 returns could still be vulnerable to audit until October 15, 2024.

Also, some tax issues are still subject to scrutiny after the three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or if fraud is suspected, there’s no limit of time for the IRS to launch an inquiry.

Certain records that support figures that may affect multiple years, such as carryovers of charitable deductions, should be saved until the deductions no longer have effect. Also, don’t toss out records that support deductions for bad debts or worthless securities that could result in refund claims. You have up to seven years to claim them.

State tax records

The previous guidelines are geared toward complying with federal tax obligations. Contact the office for information regarding your state’s statute of limitations.

Plus, states generally have the right to resolve their own issues related to federal tax returns that have been audited. So, hold on to records related to an IRS audit for a year after it’s completed.

Real estate records

Retain real estate records for as long as you own a property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, home improvements, relevant insurance claims and refinancing documents.

These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support rental property or home office deductions.

Investment account statements

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. Records should include dates, quantities, prices, dividend reinvestment and related expenses. Keep these records for as long as you own the investments plus additional time until the statute of limitations for the relevant tax returns expires.

The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. It’s even more important to retain records of all transactions relating to Roth IRAs, in case you’re ever questioned.

Purge with caution

Old tax records take up space and could lead to stolen identities if not properly disposed of. But purging too soon may leave you without a defense if the IRS has questions. When in doubt, hang on to records a little longer than you think is necessary. Contact the office with questions.

4 Ways Corporate Business Owners Can Help Ensure Compensation Is “Reasonable”

If you own a C corporation, you know there’s a tax advantage to taking money out as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but it can’t deduct dividend payments. Therefore, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the recipient employee.

However, the amount of money you can take out of the corporation this way is limited. Under tax law, only compensation deemed to be reasonable can be deducted. Any unreasonable portion isn’t deductible and may be taxed as if it were a dividend paid to a shareholder.

Steps to help protect yourself

There’s no simple way to determine what’s reasonable. If the IRS audits your tax return, it will examine the amount that companies in similar industries would pay for comparable services under comparable circumstances. Factors considered include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are steps you can take to make it more likely that the compensation you earn will be considered “reasonable” and therefore deductible by your corporation. For example, you can:

1. Keep compensation in line with what similar businesses are paying their executives. Be sure to retain whatever evidence you find about what others are paying.

2. Contemporaneously document the reasons for compensation paid in the minutes of your corporation’s board of directors. For example, if compensation is being increased in the current year to make up for earlier years when it was low, be sure the minutes reflect this. Cite any executive compensation or industry studies that back up your compensation amounts.

3. Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This can look like a disguised dividend and will probably be treated as such by the IRS.

4. Pay at least some dividends if the business is profitable. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

Keep in mind that the IRS is generally very interested in unreasonable compensation payments made to anyone “related” to a corporation, which may include not only a shareholder-employee but also a member of a shareholder’s family.

Plan ahead

The challenges are many, but you can avoid some problems by planning ahead. Contact the office if you have questions or concerns about your situation.

Retirement Saving Options For Your Small Business

If you’re looking for a retirement plan for yourself and your employees but worried about the financial commitment and administrative burdens involved, there are some options to consider. One possibility is a Simplified Employee Pension (SEP). This plan, which comes with relative ease of administration and the discretion to make or not make annual contributions, is especially attractive for small businesses.

There’s still time to see tax savings on your 2023 tax return by establishing and contributing to a 2023 SEP, right up to the extended due date of the return. For example, if you’re a sole proprietor who extends your 2023 Form 1040 to October 15, 2024, you have until that date to establish a SEP and make the initial contribution, which you can then deduct on your 2023 return.

SEP involves easy setup

You can set up a SEP easily using the IRS model SEP, Form 5305-SEP. This form, which doesn’t have to be filed with the IRS, satisfies the SEP requirements. You can opt for an individually designed SEP instead, depending on your needs.

As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement.

The maximum deductible contribution that you can make to a SEP-IRA, and that can be excluded from taxable income, is the lesser of: 1) 25% of compensation, or 2) $69,000 for 2024 (up from $66,000 for 2023) per employee. Note, however, that if you, as the business owner, don’t receive a W-2 from the business (for instance, you’re an unincorporated sole proprietor), the calculation for the contribution to be made on behalf of yourself varies slightly. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA.

Your employees control their individual SEP-IRAs and the investments in them as well as the tax-deferred earnings. However, they can’t contribute.

There are other requirements you’ll have to meet to be eligible to establish and make contributions to a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified retirement and profit-sharing plans.

SEPs don’t require the detailed records that traditional plans must maintain. Also, there are no annual reports to file with the IRS, and the recordkeeping that is required can be done by a trustee of the SEP-IRA, usually a bank or mutual fund.

Another option: SIMPLEs

If your business has 100 or fewer employees, you may want to consider a Savings Incentive Match Plan for Employees (SIMPLE). An advantage is that employees can also contribute. A disadvantage is that you, as the employer, are required to make certain annual contributions. Also, a SIMPLE has more limitations on when it can be set up and when it can be contributed to than a SEP.

You establish a SIMPLE IRA for each eligible employee, generally making matching contributions based on amounts elected by participating employees under a qualified salary reduction arrangement. The SIMPLE is also subject to much less stringent requirements than traditional qualified retirement plans.

Another option: An employer can adopt a SIMPLE 401(k) plan, with similar features to a SIMPLE IRA. It’s not subject to the otherwise complex nondiscrimination rules that apply to regular 401(k) plans.

For 2024, SIMPLE employee deferrals are limited to $16,000 (up from $15,500 for 2023). Additional $3,500 catch-up contributions are also allowed for employees ages 50 and older.

More information

Additional rules and limits apply to both SEPs and SIMPLEs. Contact us for more information. We can also provide information about any other aspect of your retirement planning.

Have You Recently Reviewed Your Life Insurance Needs?

At one time, life insurance played a much larger part in an estate plan than it does now. Why? Families would often use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $13.61 million for 2024, far fewer families currently are affected by estate tax.

However, life insurance remains a powerful tool to help provide for your loved ones in the event of your death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.

Reasons to reevaluate

In addition to watching for changes to the estate tax exemption amount, consider reevaluating your insurance coverage if you’re:

• Buying a home or paying off a mortgage,
• Getting married or divorced,
• Having children,
• Approaching retirement, or
• Facing health issues.

The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away. The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you have kids, your current and future obligations are likely to increase significantly for expenses related not only to providing for their needs on a day-to-day basis but also potentially for childcare and college tuition.

As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.

On the other hand, your health care expenses may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income from retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.

Periodic reassessment a must

There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically, especially when your life circumstances change. Also keep in mind that, absent Congressional action, the gift and estate tax exemption will drop to an inflation-adjusted $5 million in 2026. We can help you assess whether you have an adequate amount of life insurance coverage.

Traveling For Business In 2024? What’s Deductible?

If you and your employees will be traveling for business this year, there are many factors to keep in mind. Under the tax law, certain requirements for out-of-town business travel within the United States must be met before you can claim a deduction. The rules apply if the business conducted reasonably requires an overnight stay.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025. Self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules that come into play

The actual costs of travel, for example, plane fare and cabs to the airport, are generally deductible for out-of-town business trips. You’re also allowed to deduct the cost of lodging. And a percentage of your meals is deductible even if the meals aren’t connected to a business conversation or other business function. For 2024, the law allows a 50% deduction for business meals.

No deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that generally means “unreasonable.” Also, personal entertainment costs on trips aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Mixing business with pleasure

Some allocations may be required if the trip is a combined business/pleasure trip; for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging and so on incurred during the business days are deductible, not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself, for example, plane fare, if the trip is primarily for business purposes, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each, though this isn’t the sole factor.

Suppose a trip isn’t for the actual conduct of business but is for the purpose of attending a convention or seminar. The IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise, so retain all material helpful in establishing the business or professional nature of this travel.

Also, personal expenses you incur at home related to the trip aren’t deductible. This might include costs such as boarding a pet while you’re away.

Is your spouse joining you?

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of yours or of your company. If that isn’t the case, then even if there’s a bona fide business purpose for having your spouse make the trip, you probably won’t be able to fully deduct his or her travel costs, though you can deduct some costs.

Specifically, the restrictions apply only to additional costs incurred by having your non-employee spouse travel with you. For example, the expense of a hotel room or for traveling by car would likely be fully deductible since the cost to rent the room or to travel alone or with another person would be the same, even in a rented car.

Before you hit the road

Contact the office with any questions you may have about travel deductions to help you stay in the right lane.

Tracking Down Donation Substantiation

If you’re like many Americans, your mailbox may have been filling up in recent weeks with letters from your favorite charities acknowledging your 2023 donations. But what happens if you haven’t received such a letter for a contribution? Can you still claim a deduction on your 2023 income tax return for the gift? It depends.

What’s required

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation if it’s cash. If the donation is property, the acknowledgment must describe the property, but the charity isn’t required to provide a value. The donor must determine the property’s value.

“Contemporaneous” means the earlier of the date you file your tax return or the extended due date of your return. So, if you donated 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 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 sufficient to support your donation. 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, listing the value of the item you received.

Itemized Deductions or Standard?

You may remember that in recent tax years, 2020 and 2021, there was a special provision of tax law that allowed taxpayers who take the standard deduction on their tax returns to claim a limited deduction.

Many people don’t realize that this provision wasn’t reauthorized for subsequent years. Since the tax break has expired, it’s no longer available to nonitemizers. So, to deduct your charitable donations, you must opt to itemize deductions on your tax return, rather than taking the standard deduction.

Ask questions

If you aren’t sure about some of your donations, contact the office for answers to your questions and help determining whether you have sufficient substantiation for the donations you hope to deduct on your 2023 return. It’s also important to have the substantiation you’ll need for charitable gifts you’re planning this year to ensure you can enjoy the desired deductions when you file your 2024 tax return.

Sec. 179 Expensing And Bonus Depreciation: Beware Of Pitfalls

If eligible, you can elect to use Section 179 expensing or bonus depreciation to deduct a large portion of the cost, and in some cases the full cost, of eligible property in the year it’s placed in service. Alternatively, you may follow regular depreciation rules and spread deductions over several years or decades, depending on how the asset is classified under the tax code.

While taking current deductions can significantly lower your company’s taxable income, it isn’t always the smartest move.

Sec. 179 and bonus depreciation 101

Section 179 expensing may allow you to currently deduct the full cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software and qualified improvement property (QIP). An annual expensing limit applies ($1.16 million for 2023 and $1.22 million for 2024), which begins to phase out dollar for dollar when asset acquisitions for the year exceed the applicable threshold ($2.89 million for 2023 and $3.05 million for 2024). You can claim the election only to offset net income, not to reduce it below zero to create a net operating loss.

First-year bonus depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software and water utility property. Under the Tax Cuts and Jobs Act, through 2026, the definition has been expanded to include used property and qualified film, television and live theatrical productions. In addition, QIP is now eligible for bonus depreciation. For 2023, bonus depreciation was 80%. It drops to 60% for 2024, to 40% for 2025 and to 20% for 2026. After that, it will be eliminated unless Congress acts to extend it.

When to consider forgoing these breaks

Here are two examples when it may be preferable to forgo Sec. 179 expensing and bonus depreciation:

1. You’re planning to sell QIP. If you claim Sec. 179 expense or bonus depreciation on QIP and sell the building soon, this current write-off may be a tax trap. That’s because your gain on the sale up to the amount of Sec. 179 or bonus depreciation deductions you’ve claimed will be treated as “recaptured” depreciation that’s taxable at ordinary income tax rates, up to 37%. But if you deduct the cost of QIP under regular depreciation rules (generally over 15 years) and sell the building, any long-term gain attributable to the deductions will be taxable at a top rate of 25%.

2. You’re eligible for the qualified business income (QBI) deduction. This deduction allows eligible business owners to deduct up to 20% of their QBI from certain pass-through entities, such as partnerships, limited liability companies and sole proprietorships. The deduction can’t exceed 20% of an owner’s taxable income, excluding net capital gains. Other restrictions apply.

Claiming Sec. 179 or bonus depreciation deductions reduces your taxable income, which may deprive you of an opportunity to maximize the QBI deduction. Because the QBI deduction is scheduled to expire after 2025, taking full advantage of it while you can generally will make sense.

Timing is everything

Keep in mind that only the timing of deductions is affected by the strategy you choose. You’ll still have an opportunity to write off the full cost of eligible assets if you forgo Sec. 179 expensing and bonus depreciation; it will just be over a longer time period. Your tax advisor can analyze your company’s overall tax benefit picture and help you determine the optimal strategy.

Appraisals Aren’t Just For Businesses

Whether you’re in the process of making a retirement or estate plan or you intend to donate property to charity, you’ll need to know the value of your assets. For many hard-to-value items, such as closely held business interests, real estate, art and collectibles, an appraisal may be necessary.

Retirement and estate planning

To enjoy a comfortable retirement, you’ll need to calculate the income that can support your lifestyle when you’re no longer working. This means understanding the value of the assets you own. Once you have this information, you may decide to move your retirement date up or back.

Knowing the value of your assets is also necessary to assess whether you’ll potentially be subject to gift and estate taxes. It also allows you to identify strategies for minimizing or eliminating those taxes. In addition, without appraisals of hard-to-value assets, it’s nearly impossible to divide your overall property equally among your children if that’s your wish.

Appraisals may also be necessary to avoid running afoul of tax basis consistency rules. The rules are intended to prevent heirs from arguing that estate property was undervalued, which would raise their basis for income tax purposes. According to these rules, the income tax basis of inherited property equals the property’s fair market value as finally determined for estate tax purposes. Appraisals can help ensure that your heirs receive the basis they deserve.

Gifts and charitable giving

The IRS has an unlimited amount of time to challenge the value of gifts for gift and estate tax purposes unless they’re “adequately disclosed,” which generally binds the IRS to a three-year statute of limitations. A qualified professional appraisal with a timely filed gift tax return is the best way to disclose the value of a gift of a hard-to-value asset.

Charitable gifts of property valued at more than $5,000, other than publicly traded securities, must be substantiated with a qualified appraisal by a qualified appraiser. This means that the appraiser meets certain education and experience requirements.

Know what you have

Without appraisals of your hard-to-value assets, it’s difficult to develop a realistic financial plan, create an estate plan that will achieve your desired results and avoid unwelcome tax liabilities. Asset values can fluctuate dramatically over time, so make sure you get updated appraisals periodically.

Use The Tax Code To Make Business Losses Less Painful

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

Eligibility for the NOL deduction depends on having deductions for the tax year that exceed your income. The loss generally must be caused by deductions related to your:

• Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
• Casualty and theft losses from a federally declared disaster, or
• Rental property (Schedule E).

The following generally aren’t part of the NOL determination:

• Capital losses that exceed capital gains,
• The exclusion for gains from the sale or exchange of qualified small business stock,
• Nonbusiness deductions that exceed nonbusiness income,
• The NOL deduction itself, and
• The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can calculate individual NOLs using their separate shares of business income and deductions.

Limitations

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back NOLs for two years and carry them forward 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits NOL deductions to 80% of taxable income for the year and eliminates the carryback of NOLs, except for certain farming losses. However, it does allow NOLs to be carried forward indefinitely.

If your NOL carryforward is more than your taxable income for the year you carry it to, you may have an NOL carryover. That’s the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

A limit on excess business losses

The TCJA also established an “excess business loss” limitation, effective beginning in 2021. For partnerships or S corporations, this limitation applies at the partner or shareholder level, after applying the outside basis, at-risk and passive activity loss limitations.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000, or $578,000 if married filing jointly. Remaining losses are treated as a net operating loss (NOL) carryforward to the next tax year. That is, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning ahead

The tax rules regarding business losses are complex, especially the interaction between NOLs and other potential tax breaks. We can help you chart the best course forward.

Consider The Flexibility Of A Self-directed IRA

Traditional and Roth IRAs can be relatively “safe” retirement-saving vehicles, though, depending on what they’re invested in, they limit your investment choices. For more flexibility in investment choices, but also more risk, another option is a self-directed IRA.

Gaining more control

A self-directed IRA is simply an IRA that provides greater control over investment decisions. Traditional and Roth IRAs typically offer a selection of stocks, bonds and mutual funds. Self-directed IRAs, available at certain financial institutions, offer greater diversification and potentially higher returns by permitting you to select virtually any type of investment, including real estate, closely held stock, limited liability company and partnership interests, loans, precious metals, and commodities such as lumber, oil and gas.

A self-directed IRA can be a traditional or Roth IRA, a Simplified Employee Pension plan, or a Savings Incentive Match Plan for Employees. Other possibilities include a self-directed individual 401(k) plan, Health Savings Account or Coverdell Education Savings Account. The tax-free growth these accounts offer makes them powerful estate planning tools.

Navigating tax traps

To avoid pitfalls that can lead to unwanted tax consequences, exercise caution when using self-directed IRAs. The most dangerous traps are the prohibited transaction rules. These rules are designed to limit dealings between an IRA and “disqualified persons,” including account holders, certain members of their families, businesses controlled by account holders or their families, and certain IRA advisors or service providers.

Among other things, disqualified persons can’t sell property or lend money to the IRA, buy property from the IRA, provide goods or services to the IRA, guarantee a loan to the IRA, pledge IRA assets as security for a loan, receive compensation from the IRA, or personally use IRA assets.

The penalty for engaging in a prohibited transaction is severe: The IRA is disqualified and its assets are deemed to have been distributed on the first day of the year in which the transaction took place, subject to income taxes and potentially to penalties. This makes it very difficult to manage a business, real estate or other investments held in a self-directed IRA. Unless you’re prepared to accept a purely passive role with respect to the IRA’s assets, this strategy isn’t for you.

Considering the option

If you’d like to invest in assets such as precious metals, energy or other alternative investments, a self-directed IRA may be worth considering. But it’s critical to understand the risks.

How To Be Ready To Secure A Business Bad Debt Deduction On Your 2023 Tax Return

Is your business having trouble collecting payments from clients or vendors? You might be able to claim a bad debt deduction on your tax return. But if you hope to take the deduction on your 2023 return, you’ll have to get busy, because you must be able to show that you’ve made a “reasonable” effort to collect the debt.

Requirements

First, a cash-basis taxpayer may claim a business bad debt deduction only if the amount that’s owed was previously included in gross income. Second, a business must establish that the debt is legitimate and can’t be recovered from the debtor. To this end, as mentioned, you must make a reasonable effort to collect the amount that’s due.

This doesn’t necessarily mean you have to file a lawsuit against the debtor. But you can’t just make a single phone call either. Give it your best shot. You might actually be able to collect the debt. But if you can’t, you’ll have put yourself in a position to potentially claim a bad debt deduction.

Partially or totally worthless

Often, the specific charge-off method, also called the direct write-off method, is used for writing off bad debts. In this case, you can deduct business bad debts that became either partially or totally worthless during the year.

For tax purposes, partially and totally worthless are defined as follows:

Partially worthless. The deduction is limited to the amount charged off on your books. You don’t have to charge off and deduct your partially worthless debts annually, so you can postpone this to a later year. However, you can’t deduct any part of a debt after the year it becomes totally worthless.

Totally worthless. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was partially worthless.

Note that you don’t have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. But if you don’t record a charge-off and the IRS later rules the debt is only partially worthless, you won’t be allowed a deduction for the debt in that tax year. A deduction of a partially worthless bad debt is limited to the amount actually charged off.

Time is short

If you haven’t started your collection efforts yet but hope to claim a business bad debt deduction for 2023, time is short. Spring into action now. For instance, you might start collection efforts through phone and email contacts. If that doesn’t work, you may want to follow up with a series of letters or even hire a collection agency. Finally, if all else fails, ask your tax advisor about the prospects of claiming a business bad debt deduction on your 2023 return.

Is Disability Income Taxable?

If you may be eligible for disability income should you become disabled, it’s important to know whether that income will be taxable. As is often the case with tax questions, the answer is “it depends.”

Key factor

The key factor is who paid it. If your employer will directly pay the disability income to you, it will be taxable to you as ordinary salary and wages would be. Taxable benefits are also subject to federal income tax withholding, though, depending on the disability plan, disability benefits sometimes aren’t subject to Social Security tax.

Frequently, the payments aren’t made by an employer but by an insurer under a policy providing disability coverage or under an arrangement having the effect of accident or health insurance. In such cases, the tax treatment depends on who paid for the coverage. If your employer paid for it, the disability income will be taxed to you, as if paid directly to you by the employer. But if you paid for the policy, the payments you receive under it won’t be taxable.

Even if your employer arranges for the coverage, in other words, it’s a policy made available to you at work, the benefits won’t be taxed to you as long as you paid the premiums. For these purposes, if the premiums were paid by your employer but the amount paid was included as part of your taxable income from work, the premiums will also be treated as paid by you and the benefits won’t be taxable.

Two examples

For simplicity, let’s say your salary is $1,000 a week ($52,000 a year). Under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they won’t be taxable income to you.

Now, let’s look at an example with the same facts as above, except that the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, you include only $52,000 in income as your wages for the year because the insurance is treated as paid for by your employer. So, if you become disabled and receive benefits, they will be taxable income to you.

Note: There are special rules in the case of a permanent loss, or loss of the use, of a part or function of the body, or a permanent disfigurement.

How much coverage is needed?

In deciding how much disability coverage you need to protect yourself and your family, take tax treatment into consideration. If you’re buying the policy, you need to replace only your after-tax, take-home income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes.

If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out personally.

Any questions?

This discussion doesn’t cover the tax treatment of Social Security disability benefits, which may be taxed under different rules. Contact us to discuss this further or if you have questions about regular disability income.

Do You Run A Business From Home?

The pandemic changed the landscape of work for a lot of people, including the numerous business owners who began running their businesses from their homes. Many are still working from their home offices, whether full-time or on a hybrid basis. If you’re self-employed and run your business from home, or perform certain functions there, you might be able to claim deductions for home office expenses against your business income.

How to qualify

In general, self-employed taxpayers qualify for home office deductions if part of their home is used “regularly and exclusively” as the principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

1. You physically meet with patients, clients or customers on your premises, or

2. You use a storage area in your home, or a separate free-standing structure such as a garage, exclusively and regularly for business.

Keep in mind the requirement that the space be used exclusively for business. For example, if your home office is also a guest bedroom, you can’t deduct the entire space as a home office expense. But if you use the desk area of the room exclusively for business, you can deduct that portion of the room, as long as you otherwise qualify.

Expenses you can deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

• Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
• A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
• Depreciation.

But keeping track of actual expenses can take time, and it requires organized recordkeeping.

The simpler method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to $1,500.

The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So tracking your actual expenses can be worth it.

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might have chosen the actual expense method when you filed your 2022 return, but then use the simplified method when you file your 2023 return next year, and the following year switch back to the actual expense method. The choice is yours.

More considerations

The amount of your deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But eligible home office expenses that can’t be deducted because of these limitations can be carried forward and may be able to be deducted in later years.

Also be aware that, if you sell a home on which you claimed home office deductions, there may be tax implications. Contact us for more information.

A valuable deduction

You might be wondering why only business owners and the self-employed have been addressed here. Unfortunately, the Tax Cuts and Jobs Act suspended home office deductions from 2018 through 2025 for employees, even if you’re currently working from home because your employer doesn’t provide office space.

But the home office deduction can be valuable to those who’re eligible for it. We can help you determine if you’re eligible and the best method for claiming the deduction in your situation.

The Deductibility Of Medical Expenses

Individual taxpayers may be able to claim medical expense deductions on their tax returns. However, the rules can be challenging, and qualifying can be difficult.

5 key points

Here are five points to keep in mind:

1. You must itemize to claim the deduction and have a lot of expenses. The medical expense deduction can be claimed only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income. If your total itemized deductions in 2023 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into this year may allow you to exceed the 7.5% floor and benefit from the deduction.

2. Health insurance premiums may help. These can total thousands of dollars a year. You may be able to deduct the portion of the premiums that you pay for employer-provided health coverage, but only if they aren’t taken out of your paycheck pre-tax. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.

3. Transportation counts. The cost of getting to and from medical appointments counts as a medical expense. This includes taxis, public transportation or using your own vehicle. Vehicle costs can be calculated at 22 cents a mile for miles driven in 2023, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as gas and oil, that directly relate to your medical transportation.

4. Controllable costs are key. These include the costs of glasses, hearing aids, dental work, mental health counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses generally aren’t eligible. Prescription drugs, including insulin, qualify, but over-the-counter medications and supplements such as aspirin and vitamins don’t. The services of therapists and nurses can qualify if they relate to medical conditions.

5. Don’t overlook smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. The cost of diet food isn’t deductible.

Still unsure?

IRS Publication 502, Medical and Dental Expenses, provides complete details on this topic. Or contact us with questions.

An “Innocent Spouse” May Be Able To Escape Tax Liability

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. That means the IRS can pursue either spouse to collect the entire tax, not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest.

In some cases, however, one spouse may be eligible for “innocent spouse relief.” This generally occurs when one spouse was unaware of a tax understatement that was attributable to the other spouse.

Qualifying for relief

To qualify for innocent spouse relief, you must show not only that you didn’t know about the understatement, but also that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax.

Innocent spouse relief is available even if you’re still married and living with your spouse. In addition, if you’re widowed, divorced, legally separated or have lived apart for at least one year, you may be able to limit liability for any tax deficiency on a joint return.

Election to limit liability

If you make the innocent spouse relief election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items or had reason to know when you signed the return, unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

An “injured” spouse

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse.

In these cases, an injured spouse has had all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt such as a student loan owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.

Moving on

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met.

Even if you’re not in need of any such relief now, as you file tax returns in the future, be mindful of “joint and several liability.” Generally, filing a joint tax return results in lower taxes for a married couple. But if you want to ensure that you’re responsible only for your own tax, filing separate returns might be a better choice for you, even if your marriage is intact. Contact us with any questions or concerns.

Plan Ahead For Health Savings Accounts In 2024

The IRS has released guidance that includes the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs). HSAs allow taxpayers to save money for health care expenses in a tax-advantaged way. But contributions can be made only if the taxpayer has a high-deductible health plan (HDHP).

Employers that offer HDHPs can also offer HSAs as a way for employees to fund the high deductibles and other medical expenses pre-tax from their paychecks. Employer contributions are optional. Individuals with an HDHP who don’t have an employer-provided HSA, such as the self-employed, can set up their own HSA and make tax-deductible contributions to it.

What are the benefits?

The benefits of HSAs include the following:

• Contributions are made on a pretax or tax-deductible basis.
• Funds can be withdrawn tax-free to pay for a variety of medical expenses, such as doctor visits, prescriptions, and long-term care insurance premiums, up to applicable limits.
• HSAs have no “use-it-or-lose-it” requirement. The full unused account balance can carry over from year to year, with no time limit on when it must be used.
• HSAs are “portable,” meaning the account stays with the employee even if he or she changes jobs or leaves the workforce.

As noted earlier, to be eligible to contribute, an individual must be covered under an HDHP, as defined below. Participants in an HSA cannot be enrolled in Medicare or have other health coverage, though there are exceptions, which include dental, vision, long-term care, accident and specific disease insurance.

The annual HSA contribution limitation as well as the annual HDHP minimum deductible and maximum out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There’s an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024, the same as for 2023.

HDHP defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage, up from $1,500 and $3,000, respectively, in 2023. In addition, annual out-of-pocket expenses, including deductibles, co-payments and other amounts but not premiums, won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage, up from $7,500 and $15,000, respectively, in 2023.

Questions?

HSAs can be beneficial to both employers and individual taxpayers. Contact your employee benefits and tax advisors if you have questions about HSAs.

Determining The Right Time To Transfer Wealth To Your Heirs

To gift or not to gift? It’s a deceptively complex question. The temporary doubling of the gift and estate tax exemption (to an inflation-adjusted $12.92 million in 2023) is viewed by many as a “use it or lose it” proposition. In other words, if you have a large estate, you should make gifts now to take advantage of the high exemption before it sunsets at the end of 2025 (or sooner if lawmakers decide to reduce it earlier).

But giving away wealth now isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate.

Lifetime gifts vs. bequests at death

The primary advantage of making lifetime gifts is that, by removing assets from your estate, you shield future appreciation from estate taxes. But there’s a tradeoff: The recipient receives a “carryover” tax basis, meaning that the recipient assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains tax on the difference.

An asset transferred at death, however, receives a “stepped-up” basis equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift now or by bequest later?

The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon, meaning how long you expect the recipient to hold the asset after receiving it.

3 examples

Let’s look at some examples. To keep things simple, we’ll always assume that you and your heirs are subject to tax on capital gains at a rate of 23.8%, the top capital gains rate of 20% plus the 3.8% rate on net investment income, and that the gift and estate tax rate is 40% of amounts in excess of the applicable exemption.

Example #1. You have $8 million in publicly traded securities with a $3 million basis and $3 million in other assets. You haven’t used any of your exemption amount. If you give the securities to your son, who sells them immediately for $8 million, he’ll owe $1.19 million in capital gains taxes [23.8% × ($8 million - $3 million)].

Suppose, instead, that you hold the securities for life, that the inflation-adjusted exemption in the year you die is $14 million, that the securities’ value has grown to $11 million, and that your other assets have grown to $4 million. If your son inherits the securities, he’ll receive a stepped-up basis of $11 million and can sell them tax-free. Your estate will be subject to estate taxes of $400,000 [40% × ($15 million - $14 million exemption)]. In this scenario, holding the securities is the better strategy from a tax perspective.

Example #2. Same facts as in the first example, except that your son plans to hold the securities for life rather than sell them. In this scenario, gifting the securities now is the better strategy because, by holding them, your son avoids capital gains taxes and there’s no estate tax because the future appreciation on the securities is removed from your estate.

Example #3. Again, the same facts as in the first example, except that when you die the exemption has dropped to $8 million, so your estate is subject to estate taxes of $2.8 million [40% × ($15 million - $8 million exemption)]. In this scenario, gifting the securities now results in a substantially lower tax bill, even if your son sells them immediately.

These three examples are highly simplified to illustrate the decision-making process. In the real world, many other factors may affect the overall economics, including an asset’s income-earning potential, the applicability of state income and estate taxes, and potential changes in capital gains and gift and estate tax rates.

Dealing with uncertainty

Determining whether to hold or gift assets is challenging because the best course of action may depend on future events. Work with your tax and estate planning advisors to monitor legislative developments and adjust your estate plan accordingly. And consider tools for building flexibility into your plan to soften the blow of future tax changes.

A Possible Tax Quirk Of Being A Business Partner

If you’re a partner in a business, you may have encountered a situation that gave you pause. In any given year, you may have been taxed on more partnership income than was distributed to you. The cause of this quirk of taxation lies in the way partnerships and partners are taxed.

Partnership taxation up close

Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the earnings of the partnership, even if the earnings aren’t distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. However, various rules may prevent partners from currently using their shares of the partnership’s loss to offset other income.

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065, “U.S. Return of Partnership Income.” On this form, the partnership separately identifies income, deductions, credits and other items. This is so partners can properly treat items that are subject to limits or other rules that could affect their treatment at the partner level. Examples of items that may require special treatment include capital gains and losses, interest expense on investment debts, and charitable contributions.

Each partner gets a Schedule K-1 showing his or her share of partnership items for the year just ended.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest, which varies depending on how the interest was acquired, is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners reduce their basis by the distribution amount. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain.

Questions?

While the pass-through taxation of partnerships offers many advantages, it also has some quirks that can be confusing. Contact us with whatever questions you may have.

Family Businesses Must Beware of Fraud

Family businesses make up a huge percentage of companies in the United States and produce much of the country’s gross domestic product. Often defined as companies that are majority owned by a single family with two or more family members involved in their management, family businesses can be a significant source of wealth. However, they may also potentially face higher fraud risks.

Major obstacles involved

Why might family businesses be more vulnerable to fraud than other companies? For one thing, prevention efforts can be hampered by loyalty and affection. One of the biggest obstacles to fraud prevention is simply acknowledging that someone in the family could be capable of initiating or overlooking unethical or illegal activities.

But like any other business, family enterprises should include internal controls that make fraud difficult to perpetrate. It may be awkward to exercise authority over members of one’s own family, but someone needs to take charge if or when issues arise. Sometimes family businesses need to hit the reset button and reestablish a hierarchy and process of authority while moving forward with the enterprise.

Advantage of independent advice

Of course, the person in charge potentially could be the one defrauding the company. That’s why independent auditors and legal advisors are critical. Your family business should look outside its immediate circles of relatives and friends and retain professional advisors who can be objective when assessing the company. Audited financial statements from independent accountants protect the business and its stakeholders.

If your company is large enough to have a board of directors, it should include at least one outsider who’s strong enough to tell you things you may not want to hear. In some extreme cases, members of all-family boards have been known to work together to bilk their companies. This becomes much more difficult when collusion requires the assistance of an outsider.

Punishing the perpetrator

Another factor that makes preventing fraud in family businesses hard is how they tend to handle fraud incidents. Even when legal action is an option, families rarely can bring themselves to pursue action against one of their own. Sometimes families choose to save the fraudster from public scandal or punishment rather than maintain ethical professional standards. Many fraud perpetrators know that.

If you discover a family member is committing fraud, consult with a trusted attorney or accountant. An advisor may want to explain to the perpetrator the illegality and possible consequences of the fraudulent actions. If such interventions don’t work, however, you and other family members may have no choice but to seek prosecution.

Avoid blind trust

There are plenty of advantages to working with family members, but you also need to watch for pitfalls. To maintain high ethical standards and prevent fraud, rely on professional advisors and nonfamily officers to provide perspective and objective advice. Contact us for help with internal controls.

Are Scholarships Taxable?

If your child has been awarded a scholarship, that’s cause for celebration. For some students, a scholarship means the difference between going to the college of their choice and starting at community college, or even not going at all. But be aware that scholarships may bring tax consequences.

Generally, but not always

Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

However, subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that the student performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend a student receives for required teaching, research or other services is taxable, even if the student uses the money for tuition or related expenses.

What if you, or a family member, is fortunate enough to be an employee of an educational institution that provides reduced or free tuition to employees and their families? Such a reduction in tuition isn’t included in the employee’s income or subject to tax.

Returns and recordkeeping

If a scholarship is tax-free and the student has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax.

The student should receive a Form W-2, “Wage and Tax Statement,” showing the amount of these wages and the amount of tax withheld. But any portion of the award that’s taxable must be reported even if no Form W-2 is received.

Basic rules

These are just a few of the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new school year, best wishes for your child’s success. Please contact us if you wish to discuss this or any other tax matter.

Is It A Good Time For A Roth Conversion?

The volatility in the stock market may have caused the value of your retirement account to decrease. But if you have a traditional IRA invested in stocks, a decline may provide a valuable opportunity by allowing you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional vs. Roth

Here are some key differences between these two types of accounts:

Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you, or your spouse, participate in a qualified retirement plan, such as a 401(k). Funds in the account grow tax-deferred.

However, you generally must pay income tax on withdrawals. You’ll also face a penalty if you withdraw funds before age 59½, unless you qualify for an exception. And you may face an even larger penalty if you don’t take your required minimum distributions (RMDs) after you reach age 73, up from 72 for 2022 and going up to age 75 if you don’t reach age 73 before Jan. 1, 2033.

Roth IRA. Roth IRA contributions aren’t deductible. But withdrawals, including earnings, are tax-free as long as you are age 59½ or older and the account has been open at least five years. Plus, you’re allowed to withdraw contributions at any time tax- and penalty-free. In addition, you won’t be subject to RMDs.

If you won’t need the money for retirement, you can let the entire Roth IRA balance continue to grow tax-free for the benefit of your heirs. Beneficiaries generally will be required to take distributions, but the distributions will be tax-free. There could be estate tax consequences at your death if you have a very large estate.

However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. But you’ll have to pay income tax on the amount converted.

Conversion considerations

If you’ve been considering a Roth conversion and your traditional IRA has lost value, converting now instead of waiting could minimize your tax hit. You’ll also avoid tax on future appreciation if the value of your account goes back up.

Before converting, take time to think through the details. Here are two key issues to consider:

1. Money to pay the tax bill. If you don’t have the cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds, eroding your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

2. When you plan to retire. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and will start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

Stretch out the tax bill

If the idea of paying the tax bite related to converting from a traditional IRA to a Roth IRA is daunting or simply unaffordable, consider a gradual conversion. It’s not an all-or-nothing process, so you can stretch out the tax bill over time, depending on how long you expect to wait to retire.

Suppose you have $100,000 in a traditional IRA. You could, for example, convert that in five steps: $20,000 per year for five years. We can estimate what the tax bite will be at varying steps.

Right for you?

There are also other issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss whether a conversion is right for you.

The Tax Obligations If Your Business Closes Its Doors

Sadly, many businesses have been forced to shut down recently due to economic challenges. If this is your situation, we can help you meet the various tax responsibilities that go with closing a business.

Tax returns

Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements:

Sole proprietorships. Your tax preparer will need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return, Form 1040, for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. The “final return” box must be checked, and the same must be done on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”

All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C corporations. Form 1120, “U.S. Corporate Income Tax Return,” must be filed for the year you close, with the “final return” box checked.

S corporations. Form 1120-S, “U.S. Income Tax Return for an S Corporation,” must be filed for the year of closing. The “final return” box must be checked on this form as well as on Schedule K-1.

All businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and contract workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income tax, Social Security tax and Medicare tax can result in full personal liability for what’s known as the “Trust Fund Recovery Penalty.”

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other tax issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notices, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to Flexible Spending Accounts, Health Savings Accounts and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture and possible bankruptcy issues.

We can also advise you on the length of time you need to keep business records. In addition, you’ll need to cancel your Employer Identification Number and close your IRS business account.

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

3 Things To Know After Filing Your Tax Return

Most people feel a sense of relief after filing their income tax returns each year. But even if you’ve successfully filed your 2022 return with the IRS, there may still be some issues to bear in mind. Here are three important things to know:

1. You can check on your refund. 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.” You’ll need your Social Security number, filing status and the exact refund amount.

2. You can file an amended return if you forgot to report something. In general, you can file an amended tax return 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, if you file your 2022 tax return on April 18, 2023 (the due date for 2022 returns), you’d typically have until April 18, 2026, to file an amended return.

However, there are a few situations 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.

3. You can throw out some tax records. You should keep 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.

That means you can probably dispose of most tax-related records for the 2019 tax year and earlier years. (If you filed an extension for your 2019 return, hold on to your records until at least three years from when you filed the extended return.)

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

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

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 so you can prove your tax basis, plus at least three years after you sell it and report the sale on your tax return. (You may want to keep these records for six years if to be extra safe.)

Always available

Contact us if you have further questions about your refund, filing an amended return or record retention. We’re here all year!

Business Bartering Is Taxable

During these times of high inflation, many cash-challenged businesses have bartered for goods and services instead of paying dollars for them. If your company gets involved in such transactions, remember that the fair market value of goods that you receive is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

A couple of examples

Let’s say a computer consultant agrees to exchange services with an advertising agency. Both parties will be taxed on the fair market value of the services received. This is the amount they’d normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless contrary evidence exists.

In addition, if services are exchanged for property, income is realized. Say a construction company does work for a retail business in exchange for unsold inventory. The contractor will incur income equal to the inventory’s fair market value.

Barter exchanges

Many businesses join barter clubs that facilitate these transactions. Generally, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. If you participate in a barter club, however, you may be taxed on the value of credit units at the time they’re added to your account — even if you don’t redeem them for actual goods and services until a later year.

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that they received from exchanges during the previous year. The IRS will also receive this information.

If you join a barter club, expect to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income.

Potentially beneficial

So long as you’re aware of the federal and state tax consequences, business bartering transactions may be beneficial. Contact us if you need assistance or would like more information.