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BUSINESS TAXPLANNINGTAX | ASSURANCE | ADVISORY2024 YEAR-ENDdmjps.com | 888.873.2545
Business Tax Planning Leer As we near the end of 2024, it's me to focus on year-end tax planning. This year has brought significant changes to tax laws and regulaons that could impact your business. To help you navigate these complexies, we've outlined key insights and praccal ps. While this informaon provides a solid foundaon, it's important to remember that every business is unique. To opmize your tax strategy, we recommend consulng with a tax professional for personalized advice. Clients work with us because we build relaonships dedicated to providing exceponal results and soluons. As a U.S Top 200 accounng and business advisory firm, DMJPS offers deep knowledge and industry-focused soluons. DMJPS is commied to helping you and your business succeed. Our team is here to provide guidance customized to your specific needs and goals. If you have any quesons or would like to discuss any of these strategies in more detail, please reach out—we're here to support you to Be Greater. Our Office Locaons: • GREENSBORO • ASHEVILLE • BOONE • DURHAM • MARION • SANFORD • WILMINGTON 888.873.2545 | connect@dmjps.com | dmjps.com
hps://dmjps.com/ Page 2 of 39 Table of Contents In addion to the bookmarks, the topics below are clickable links for easy navigaon. 2024 Tax Law Updates & Highlights .......................................................................................................... 3 W-2s & 1099s .......................................................................................................................................... 15 Reasonable Compensaon ..................................................................................................................... 16 Year-end Bonuses .................................................................................................................................... 17 179 Deducon & Bonus Depreciaon ..................................................................................................... 18 Business Property Tax Lisng .................................................................................................................. 21 Meals & Entertainment ........................................................................................................................... 21 Per Diem .................................................................................................................................................. 22 Mileage ................................................................................................................................................... 23 Unreimbursed Employee Business Expenses .......................................................................................... 24 Qualified Business Income (QBI) ............................................................................................................. 25 Research & Experimental Expenditures .................................................................................................. 26 Net Operang Loss (NOL) ........................................................................................................................ 27 Bad Debts & Worthless Stock.................................................................................................................. 29 Hobby Losses........................................................................................................................................... 30 Choice of Enty ....................................................................................................................................... 31 Employing Family Members .................................................................................................................... 33 Buying/Selling A Business ....................................................................................................................... 34 Small Business Taxpayer .......................................................................................................................... 35 Rerement .............................................................................................................................................. 36 CLOSING COMMENTS ............................................................................................................................. 39
hps://dmjps.com/ Jump to Table of Contents Page 3 of 39 2024 Tax Law Updates & Highlights 2024 Elecon Brings Potenal Tax Changes for Businesses The results of the 2024 elecon have set the stage for significant potenal updates to tax policies that businesses can incorporate into their planning. Legislave priories include extending provisions of the Tax Cuts and Jobs Act (TCJA) and introducing new measures to smulate economic growth. Key changes being discussed include further reducons in the corporate tax rate, the return of 100% bonus depreciaon, adjustments to interest deducon limits, and expanded incenves for renewable energy and U.S.-based manufacturing. Businesses with deferred gains in Opportunity Zones or substanal research and development costs should also take note of new opportunies to opmize their tax strategies. The following provides a summary of potenal changes and specific steps businesses can take to prepare. Planning Suggesons Corporate Tax Rate • What May Change: The corporate tax rate may decrease further, potenally to 15%, with incenves aimed at encouraging U.S.-based manufacturing. • What You Can Do: If your business manufactures products, consider whether moving some operaons to the U.S. or expanding domesc producon could lower your overall tax bill. For businesses with both U.S. and internaonal operaons, it may be worth reviewing where your profits are earned and exploring whether shiing more acvies to the U.S. could help you save under a lower tax rate. Bonus Depreciaon • What May Change: Full (100%) bonus depreciaon may return for capital investments, allowing businesses to immediately deduct the cost of items like equipment, vehicles, or machinery in the year of purchase, starng in 2025. • What You Can Do: If you’re planning to buy large assets, consider deferring those purchases unl 2025. For example, if you’re replacing machinery or expanding your fleet, ming those purchases to align with the return of full bonus depreciaon could provide significant tax savings.
hps://dmjps.com/ Jump to Table of Contents Page 4 of 39 Secon 199A Deducon (Qualified Business Income Deducon) • What May Change: The 20% deducon for qualified pass-through business income is expected to connue. • What You Can Do: If you’re a business owner, your taxable income and how you pay yourself (wages vs. business profits) can affect how much of this deducon you receive. For example, if your business is very profitable, reducing the salary you take as wages (and leaving more as profits) could increase your deducon. However, wages sll need to be reasonable for tax purposes, so it’s worth reviewing how much you’re paying yourself and how it impacts your total tax savings. Interest Deducon Limitaons (Secon 163(j)) • What May Change: Rules liming how much interest you can deduct on business loans may be adjusted, potenally providing relief for capital-intensive businesses. However, with today’s high interest rates, it’s essenal to review your debt strategy to reduce costs and maximize tax benefits. • What You Can Do: Start by evaluang your exisng loans. If you’re carrying debt with interest rates above 7-8%, refinancing to secure lower fixed rates can help reduce costs. Consolidang mulple loans into a single facility could also simplify payments and administrave tasks. For businesses that own high-value assets, a sale-leaseback arrangement—where you sell an asset like a building, vehicle, or equipment and lease it back—may free up cash flow without incurring addional debt or interest expenses. When planning future purchases, consider whether leasing or outright purchasing aligns beer with your financial strategy. Leasing can lower upfront costs and avoid high-interest borrowing, while outright purchases may posion your business to take advantage of ancipated changes to bonus depreciaon rules in 2025. Structuring financing carefully for large projects, such as building upgrades, can also ensure that more of your interest remains deducble under current and future tax rules. Opportunity Zones • What May Change: Deferred capital gains invested in Opportunity Zones must be recognized as taxable income by December 31, 2026. Taxes on these gains will be due by April 15, 2027, unless extended by legislaon. • What You Can Do: To prepare, determine the deferred gain amount that will become taxable in 2026. If your business has assets that have lost value—such as older equipment, underperforming property, or investments—selling them early in 2026 could generate losses to offset the taxable gain and reduce your tax liability. If losses aren’t an opon, consider seng aside funds now as part of your year-end cash flow planning to ensure the business can handle the tax payment without disrupon. Alternavely, if your Opportunity Zone
hps://dmjps.com/ Jump to Table of Contents Page 5 of 39 investment has appreciated significantly, selling part of it in 2026 could provide liquidity to cover the taxes while sll retaining the investment’s benefits. Green Energy Credits • What May Change: Expanded tax credits for renewable energy investments like solar panels, efficient lighng, and HVAC systems are being proposed. • What You Can Do: If you’ve been considering upgrades to make your facilies more energy-efficient, plan these improvements for 2025. For example, installing solar panels or replacing an outdated HVAC system could reduce your long-term energy costs while qualifying for significant tax credits. R&D Expensing • What May Change: Immediate expensing of research and development (R&D) costs may return, replacing the current rule requiring these costs to be spread out over several years. • What You Can Do: If you’re developing new products, processes, or technologies, consider delaying major R&D spending unl 2025 to take advantage of immediate expensing. Keep detailed records of all R&D-related expenses to ensure compliance and maximize your tax savings. Tariffs • What May Change: New tariffs may increase the cost of imporng goods from certain countries. • What You Can Do: If you rely on imported materials or goods, explore locking in pricing with long-term supplier contracts before tariffs are implemented. Alternavely, research domesc suppliers or alternaves to avoid potenal cost increases and supply chain disrupons. Tax Relief for North Carolina Residents Affected by Hurricane Helene and Hurricane Debby In September 2024, Hurricane Helene caused significant destrucon in western North Carolina, while Hurricane Debby impacted the eastern part of the state. In response, the IRS and the North Carolina Department of Revenue implemented broad tax relief measures to support affected individuals and businesses across all North Carolina counes. These provisions, aimed at easing the tax burden during recovery, offer extended deadlines and penalty waivers for various filings and payments. Extended Filing Deadlines If you extended your 2023 tax return, typically due by October 15, 2024, you now have unl May 1, 2025, to file without penales. This extension applies to individual, corporate, S-corporaon, and partnership returns. It also includes the 4th quarter 2024 esmated tax payment, originally due on January 15, 2025. However, it excludes 2025 quarterly esmated payments, which remain due as scheduled.
hps://dmjps.com/ Jump to Table of Contents Page 6 of 39 Penalty Relief Penales for late filings and payments are waived if completed by May 1, 2025, covering all due dates aer September 25, 2024. This consolidated relief window also extends deadlines previously set for February 3, 2025, under Hurricane Debby provisions, ensuring consistent relief statewide. This relief extends to federal penales for taxpayers in NC, SC, GA, AL, and parts of FL, TN, and VA. In general, these states have similar relief on state obligaons. Deducng Disaster Losses in Federally Declared Areas For tax years through 2025, personal casualty losses are deducble only if ed to a federally declared disaster, such as Hurricane Helene or Debby. Taxpayers may choose to claim these disaster-related losses either in the year they occurred or on the prior year’s return (the “preceding year disaster loss deducon” – in this case, 2023), which can oen result in faster refunds. • Deducon Requirements: Currently, losses from Hurricanes Helene and Debby are subject to a $100 per-casualty floor and the 10% of AGI limitaon. Addionally, these deducons are available only to taxpayers who itemize. If Congress designates these hurricanes as qualified disasters, the per-casualty floor would increase to $500, the 10% AGI limitaon would be waived, and the deducon would be available to those taking the standard deducon. • Deadline for Preceding Year Claims: If you choose to deduct a 2024 loss on your 2023 return, file an amended or original return by October 15, 2025. Addional Support for Businesses and Non-Casualty Losses Losses related to business property or profit-seeking transacons may qualify as deducble disaster losses without personal casualty loss limitaons, providing flexibility in claiming disaster relief. Rerement Plan Withdrawals and Other Relief Special provisions allow withdrawals up to $22,000 from rerement accounts without early withdrawal penales, with opons to spread the income over three years or repay within that me to avoid taxes. Addionally, FEMA declaraons allow for other assistance, including FEMA grants and tax-exempt purchases using FEMA or Red Cross-issued debit cards. These comprehensive relief measures ensure that residents and businesses impacted by the recent hurricanes have flexibility in focusing on recovery while accessing significant tax benefits. If you need guidance in navigang these provisions or ensuring compliance, please reach out to our office for assistance.
hps://dmjps.com/ Jump to Table of Contents Page 7 of 39 The Corporate Transparency Act Effecve January 1, 2024, the Corporate Transparency Act (CTA) introduces new federal reporng requirements aimed at enhancing transparency and combang illicit acvies such as money laundering and tax evasion. Here's what your business needs to know: Who Is Required to Report • Affected Enes: The CTA applies to most corporaons, limited liability companies (LLCs), and similar enes created or registered to do business in the United States. • Exempons: Certain enes are exempt, including: o Large operang companies: To qualify for this exempon, a company must meet all three of the following criteria: More than 20 full-me U.S. employees. Over $5 million in gross receipts or sales in the previous year. A physical office within the United States. o Publicly traded companies. o Banks, credit unions, and other regulated financial instuons. o Tax-exempt enes, such as nonprofits. What Informaon Must Be Reported • Beneficial Owners: Individuals who, directly or indirectly, own or control 25% or more of the company or exercise substanal control over it. • Required Details: For each beneficial owner, the following informaon must be provided: o Full legal name. o Date of birth. o Residenal or business address. o A unique idenfying number from an acceptable idenficaon document (e.g., passport or driver's license). Reporng Deadlines • Exisng Enes (formed before January 1, 2024): Must file their inial report by January 1, 2025.
hps://dmjps.com/ Jump to Table of Contents Page 8 of 39 • New Enes (formed on or aer January 1, 2024): Must file within 30 days of formaon or registraon. Enes in areas affected by Hurricane Helene may qualify for a filing extension under disaster relief provisions. Penales for Non-Compliance • Failure to comply with the CTA can result in civil penales of up to $500 per day and criminal penales including fines up to $10,000 and/or imprisonment for up to two years. Next Steps for Your Business 1. Determine Applicability: Assess whether your business is subject to the CTA's reporng requirements or qualifies for an exempon. 2. Gather Informaon: Collect the necessary details for all beneficial owners as defined by the CTA. 3. Prepare to File: Ensure readiness to submit the required informaon to the Financial Crimes Enforcement Network (FinCEN) within the specified deadlines. For more detailed informaon, please refer to the FinCEN website: Click here Federal Renewable Energy Tax Credits for Businesses Federal tax credits can help businesses reduce costs when invesng in renewable energy systems. These credits, extended under the Inflaon Reducon Act, support a variety of energy technologies, including solar, wind, geothermal, and combined heat and power systems. Here’s an overview of the two main credit opons and how they apply across these technologies. Investment Tax Credit (ITC) The ITC allows businesses to claim a one-me credit for up to 30% of the cost of eligible renewable energy systems. • What It Covers: The ITC can be applied to solar, wind, geothermal, fuel cells, and combined heat and power (CHP) systems. It also covers storage devices, such as baeries with a capacity of more than 5 kilowa-hours (kWh), which can be added alongside other renewable systems. • How It Works: The ITC directly reduces your tax bill based on eligible costs, which include equipment, installaon, and storage. Important Note: While we can provide general informaon about the CTA, we recommend consulng with a legal professional to ensure full compliance with these new requirements.
hps://dmjps.com/ Jump to Table of Contents Page 9 of 39 • Requirements: Projects under 1 megawa (MW) automacally qualify for the full 30% credit. For larger projects, meeng certain wage and training standards is necessary to secure the full rate. • Timing: This 30% credit rate is available through 2032. The rate will decrease aer that, so starng projects sooner can lock in the highest benefit. Producon Tax Credit (PTC) The PTC offers an alternave based on how much electricity the system generates, providing long-term benefits. • What It Covers: The PTC applies to electricity generated by systems like wind, biomass, geothermal, and certain hydropower projects. • How It Works: The credit is earned over me, based on each kilowa-hour (kWh) produced by the system and sold, and applies for the first 10 years of the system’s operaon. This can be beneficial for high-output systems. • Requirements: For projects that are 1 MW or more, wage and training standards must be met to qualify for the full credit amount. Wage and Training Standards For larger projects (1 MW or more), wage and training requirements apply to receive the full ITC or PTC rate: • Prevailing Wage: Workers must be paid at least the local prevailing wage, set by the U.S. Department of Labor. • Apprenceship Requirement: A percentage of the labor hours must be completed by apprences from registered programs, generally 12.5% to 15%, with specific raos of apprences to skilled workers. Projects under 1 MW do not have to meet these requirements to qualify for the full credit. Steps to Take 1. Choose the Best Fit: The ITC provides upfront savings, while the PTC offers benefits based on energy output. Your choice will depend on the project size and your energy goals. 2. Prepare for Requirements: For larger projects, meeng wage and apprenceship standards ensures access to the full credit amount. 3. Document Everything: Detailed records of costs, labor compliance, and project specifics are essenal for claiming these credits. These renewable energy tax credits offer valuable ways to reduce costs and support energy efficiency for your business, providing incenves through 2033.
hps://dmjps.com/ Jump to Table of Contents Page 10 of 39 SECURE Act 2.0 The SECURE 2.0 Act of 2022 introduces significant enhancements to rerement savings plans, many of which directly impact business owners and rerement plan administrators. As 2024 draws to a close, here are the most relevant provisions that business owners should consider for planning, compliance, and maximizing tax benefits. Key Changes Affecng Business Rerement Plans: Automac Enrollment for New Plans (Effecve 2025) Starng in 2025, new 401(k) and 403(b) plans must automacally enroll eligible employees with a contribuon rate of 3% to 10%, increasing by 1% annually unl it reaches 10% to 15%. This automac enrollment provision can help drive higher parcipaon rates among employees. • Exempons: Small businesses with 10 or fewer employees, newly established businesses (under three years old), church plans, and government plans are exempt from this requirement. Matching Contribuons for Student Loan Payments (Effecve 2024) Employers can now match qualified student loan payments as if they were regular employee contribuons to rerement plans, including 401(k), 403(b), and SIMPLE IRA plans. This allows employees who are focusing on student debt repayment to sll benefit from employer contribuons, potenally making your business more aracve to younger talent. Increased Start-Up Credit for Small Employer Rerement Plans The SECURE 2.0 Act raises the rerement plan start-up credit to 100% of plan start-up costs for small businesses with up to 50 employees, up from the previous 50%. This credit also includes an extra amount for employer contribuons, capped at $1,000 per employee, encouraging small businesses to establish and contribute to rerement plans. New Tax Credit for Military Spouse Employees To encourage the hiring of military spouses, businesses with up to 100 employees may qualify for a tax credit if they include military spouses in defined contribuon rerement plans. The tax credit includes: • Parcipaon Credit: A $200 credit for each eligible military spouse employee who parcipates in the rerement plan. • Matching Contribuon Credit: A dollar-for-dollar match on the first $300 of contribuons made for military spouse employees, up to a $500 credit.
hps://dmjps.com/ Jump to Table of Contents Page 11 of 39 This tax credit is available for up to three years per eligible military spouse, making it an aracve incenve for employers who hire from this community. Enhancements to Catch-Up Contribuons: Increased Catch-Up Contribuons for Employees Ages 60-63 (Effecve 2025) Beginning in 2025, employees aged 60-63 will have higher catch-up contribuon limits. For most rerement plans, the new limit will be the greater of $10,000 or 150% of the standard catch-up amount, allowing older employees to save more as they approach rerement. The actual 2025 amounts are an age 50+ catch-up of $7,500 for 401(k) plans and $3,500 for SIMPLE plans. But new for age 60-63, these amounts are $11,250 for 401(k) plans and $5,250 for SIMPLE plans. Mandatory Roth Treatment for High Earners (Effecve 2026) Employees with wages over $145,000 will need to treat all catch-up contribuons as Roth (aer-tax) contribuons starng in 2026. This means high earners’ contribuons will be included in taxable income, an important consideraon for payroll planning. Simplified Parcipaon for Long-Term, Part-Time Employees (Effecve 2025) Starng in 2025, 401(k) and ERISA-governed 403(b) plans will need to allow employees who work at least 500 hours per year for two consecuve years to parcipate in the rerement plan. Previously, the threshold was three consecuve years. Service prior to 2021 is not counted, simplifying record-keeping. Enhanced Error Correcon and Plan Management: The SECURE 2.0 Act includes provisions to make plan management easier for business owners and administrators • Expanded Error Correcon Opons: The Employee Plans Compliance Resoluon System (EPCRS) now allows more types of errors to be corrected through self-correcon, making it easier for employers to address administrave mistakes without involving the IRS. • Rerement Savings "Lost and Found" Database: A naonal online database is being created to help employees locate “lost” rerement accounts, making it easier for employers to support former employees in locang unclaimed benefits.
hps://dmjps.com/ Jump to Table of Contents Page 12 of 39 Employee Retenon Credit (ERC) Employee Retenon Credit (ERC) Update for 2024 The IRS has resumed processing Employee Retenon Credit (ERC) claims following a temporary pause on new filings between September 14, 2023, and January 31, 2024. As the IRS works through pending claims with added scruny, businesses with legimate claims should expect extended processing mes of 180 days or more, parcularly for those requiring addional review. What to Expect for Pending ERC Claims Pending claims submied before the moratorium are being reviewed with heightened IRS diligence. While the IRS aims to ensure that all eligible claims are processed fairly, extended review mes reflect the agency’s commitment to verifying claim accuracy and compliance with ERC program requirements. Voluntary Disclosure and Withdrawal Programs The Voluntary Disclosure Program, available unl November 22, 2024, provides businesses with the opon to review and, if needed, repay 85% of any ERC claims for which they were not eligible. This program allows businesses to make adjustments without incurring penales or interest and is a helpful measure for those who may have uncertaines around eligibility standards. The IRS is also offering a withdrawal program for those who determine their claim was invalid and who have not yet received or deposited a refund. Clarifying ERC Eligibility and Compliance To support accurate filings, the IRS offers resources such as a queson and answer guide and an eligibility chart, accessible at irs.gov/coronavirus/employee-retenon-credit. These tools are available to help businesses confirm compliance with eligibility requirements and ensure claims meet IRS guidelines. Moving Forward As the IRS works to ensure the integrity of the ERC program, businesses awaing ERC payments should focus on claim accuracy and avoid filing based on generalized advice from third-party promoters. Reviewing ERC claims carefully and ensuring compliance will help protect business finances and uphold the integrity of the ERC program. Sales & Use Tax (Wayfair) In 2018, a significant change in tax law occurred with the South Dakota v. Wayfair decision by the U.S. Supreme Court. This ruling changed the way sales and use taxes are applied to businesses selling products or services across state lines, allowing states to tax businesses based on their economic acvity in the state, rather than requiring a physical presence.
hps://dmjps.com/ Jump to Table of Contents Page 13 of 39 The impact of this decision has been considerable. Before Wayfair, many businesses avoided paying sales and use tax in states where they did not have a physical presence. However, since the ruling, every state with a sales and use tax has implemented laws to tax remote sellers based on their economic presence in the state. While this has increased state revenues, it has also created complexity for businesses. Business now need to navigate various state and local sales and use tax laws, as well as determine if they have exceeded the thresholds for tax collecon in each state. Planning Strategies and Consideraons • Nexus Study: Conduct a detailed analysis of your business operaons to idenfy your nexus footprint. For example, having an office, employees, or exceeding a sales threshold in a state can create a tax obligaon due to the economic presence in that state. • Tracking: Maintain precise records of all your sales and transacons across the country by locaon, monitoring them on a monthly basis. This data is crucial to determine when your business surpasses the tax collecon thresholds set by any state. • Automated Services: Implement automated tools and soware soluons to simplify the management of tax rates, exempons, and compliance requirements. Companies like Avalara, Vertex, and TaxJar provide excellent soluons for managing sales and use tax complexies, saving you me and minimizing potenal errors in tax calculaons and filings. • Business Structure Review: Examine your business and enty structures to ensure they are opmized for minimizing tax obligaons. You may need to adjust your operaon or distribuon methods, or explore other legal structures to reduce your tax burden. • State and Local Tax Laws: Develop a comprehensive understanding of the state and local sales and use tax laws applicable to your business. It's crucial to know the taxability of your products and services, as well as any applicable exempons, to prevent over or underpayment of taxes. Pass-Through Enty Tax (PTET) In 2024, North Carolina introduced important updates to its Pass-Through Enty Tax (PTET), a valuable tax-planning tool for certain businesses. Federal and state laws allow eligible businesses, including partnerships, LLCs, and S corporaons, to pay and deduct state taxes at the business level. This can help business owners avoid the $10,000 federal cap on state and local tax (SALT) deducons on individual returns, potenally reducing their total federal tax bill. Here’s what’s changed and why it maers for your business. Key Updates for 2024 1. Broader Eligibility for PTET: More types of businesses can now elect PTET. Previously, PTET was limited to partnerships owned solely by individuals, estates, trusts, or certain tax-exempt
hps://dmjps.com/ Jump to Table of Contents Page 14 of 39 organizaons. Now, partnerships with more complex ownership, including those with other partnerships or S corporaons as owners, are eligible. This change means that more businesses can take advantage of PTET’s tax benefits. 2. Rules for Nonresident Owners in Mul-Tiered Partnerships: For partnerships that have out-of-state owners holding interests through other partnerships or corporaons, North Carolina now requires certain withholding steps to ensure that nonresident tax obligaons are met. These new rules allow more complex business structures to qualify for PTET while keeping nonresident partners in compliance with state tax requirements. 3. Tax Credits for Payments to Other States: North Carolina residents in partnerships or S corporaons that don’t elect PTET can sll claim a credit on their individual tax returns for similar taxes paid to other states. For businesses that do elect PTET, these credits are applied at the business level. This approach helps prevent double taxaon, making PTET more efficient for North Carolina owners with mulstate tax obligaons. 4. North Carolina-Sourced Income Only: Starng with the 2023 tax year, PTET is calculated based solely on income sourced from North Carolina. This clarificaon ensures that only North Carolina-based income is factored into PTET calculaons, making it easier to manage tax obligaons for mulstate businesses. Steps to Take Before Year-End If PTET could benefit your business, here are some important steps to consider before December 31: • Evaluate PTET’s Fit for Your Business: We can help you determine whether PTET could reduce your federal tax bill, especially if the SALT deducon cap affects you. • Make PTET Payments by Year-End: PTET payments must be completed by December 31 to qualify for a 2024 deducon. This deadline is essenal, even for businesses that usually count expenses when they’re billed (accrual basis). • Ensure Compliance for Out-of-State Owners: For businesses with nonresident owners, we’ll confirm that all withholding requirements are met, so you maximize your tax benefits. PTET Consideraons in Other States For businesses outside North Carolina, PTET rules vary by state. Generally, PTET provides an opportunity for businesses to pay state taxes at the enty level, potenally avoiding the SALT deducon limit on individual returns. Since each state’s rules are unique, we’re here to help you navigate eligibility requirements and deadlines specific to your locaon.
hps://dmjps.com/ Jump to Table of Contents Page 15 of 39 W-2s & 1099s As the year concludes, it's essenal to prepare for tax reporng obligaons, parcularly concerning Forms W-2 and 1099. Recent changes in IRS regulaons may affect your filing processes and deadlines. Key Updates for 2024 1. Lower Electronic Filing Threshold Starng in 2024, the IRS has reduced the electronic filing threshold for informaon returns. Previously, businesses filing 250 or more informaon returns were required to file electronically. This threshold has now been lowered to 10 returns. Therefore, if you file 10 or more Forms W-2 or 1099, you must submit them electronically unless you obtain a waiver from the IRS. 2. Filing Deadlines o Forms W-2: Employers must furnish Forms W-2 to employees and file them with the Social Security Administraon (SSA) by January 31, 2025. This deadline applies to both paper and electronic filings. o Forms 1099-NEC: For nonemployee compensaon reported on Form 1099-NEC, the deadline to furnish the form to recipients and file with the IRS is also January 31, 2025. This applies to both paper and electronic filings. Acon Items • Review Vendor Informaon: Ensure you have a completed Form W-9 from each vendor to verify their taxpayer idenficaon number (TIN) and eligibility for 1099 reporng. • Assess Filing Volume: Determine the number of informaon returns you need to file. If it meets or exceeds the 10-return threshold, prepare to file electronically. • Plan for Timely Filing: Mark your calendar with the January 31, 2025, deadline for both W-2 and 1099-NEC forms to avoid potenal penales. Penales for Non-Compliance The IRS imposes penales for failing to file correct informaon returns or furnish correct payee statements. These penales have increased and are subject to inflaon adjustments. Timely and accurate filings are crucial to avoid these addional costs.
hps://dmjps.com/ Jump to Table of Contents Page 16 of 39 Backup Withholding If a payee fails to provide a valid TIN, or if the IRS nofies you that the payee is subject to backup withholding, you are required to withhold tax at a rate of 24%. All payments subject to backup withholding must be reported on a 1099 form, regardless of the amount. Legal Services Reporng Payments of $600 or more for legal services must be reported on a 1099 form, regardless of the recipient's corporate status. By staying informed of these updates and preparing accordingly, you can ensure compliance and avoid unnecessary penales. If you have any quesons or need assistance with your year-end tax reporng, please contact us. Reasonable Compensaon Corporaons are required to pay reasonable salaries to shareholder-employees for the services they provide. Failing to do so may result in the corporaon having to jusfy its reasons, such as being in a startup phase with profits retained for growth, or facing cash-flow difficules. It is important to note that these reasons should be well-documented. However, be mindful that the IRS is likely to scrunize any jusficaon if the corporaon is distribung profits but not paying shareholder-employee wages. Establishing That Compensaon Is Reasonable: To Prove that Compensaon is Reasonable, it must meet two criteria • Intent Test: The payment should be for services rendered. • Amount Test: The payment amount should be reasonable relave to the services performed. Consideraons for Reasonable Compensaon Include • The corporaon's financial condion and character. • The shareholder's role, dues, and hours worked. • The compensaon policy of the corporaon for all employees and the shareholder's individual salary history. • Comparisons with similarly situated employees in other companies. • Whether an independent investor would see a reasonable return on investment aer considering the shareholder’s compensaon. Visit the IRS website here to access the chart containing the due dates for 2024 Forms in 2025.
hps://dmjps.com/ Jump to Table of Contents Page 17 of 39 Avoiding Payroll Taxes and Social Security Benefit Reducon While shareholders might seek to minimize wages to avoid FICA and other payroll taxes (since S corporaon pass-through income is not subject to these taxes), this approach should be taken with cauon. Inadequate wages might be recharacterized from distribuons, thus subjecng them to employment taxes. Reasonable Compensaon and QBI Deducon Reasonable compensaon impacts the qualified business income (QBI) deducon. Compensaon paid to shareholder-employees is not included in QBI to the owner, but it is a deducon to the business in compung QBI. Thus, S corporaons should carefully analyze shareholder-employee compensaon to maximize the impact on the QBI deducon while adhering to reasonable compensaon guidelines. Seng and Supporng Reasonable Compensaon To support the reasonableness of compensaon, consider ulizing industry salary surveys, job search websites, and other credible sources to establish a salary range that aligns with the shareholder-employee’s role and responsibilies. It’s crucial to document the compensaon decision and any changes made throughout the year in the corporate minutes. Health, Dental, and Accident Insurance Premiums For shareholders with more than 2% ownership, health and accident insurance premiums paid by the corporaon are deducble and must be included in their wages on their W-2. Year-end Bonuses When evaluang the fiscal landscape of your business, it's imperave to understand how employee bonuses can be leveraged for tax deducons. Many business owners grapple with quesons about the ming and method of deducng bonuses paid to employees. In this segment, we'll unpack this topic to guide you in making informed decisions that align with your business objecves and tax compliance requirements. When Can Bonuses Be Deducted? For employers using the accrual accounng method, bonuses can be deducted in the tax year when: • The obligaon to pay the bonus is established, and liability is fixed. • The bonus amount can be determined with reasonable accuracy. • The economic performance concerning the liability has occurred.
hps://dmjps.com/ Jump to Table of Contents Page 18 of 39 Deducng Bonuses for a Group of Employees It is possible to accrue the liability for bonuses even if the individual recipients or the exact amounts payable to each employee have not been idenfied by the year's end. However, this is condional on the following: • Employees must have performed the necessary services during the tax year. • Employees must sll be employed by the company on the date the bonuses are paid aer the year's end. Handling Changes in Bonus Treatment Should you decide to alter the way you treat bonuses for tax purposes, it is imperave to comply with the specific tax codes and regulaons, including obtaining consent for any changes in accounng methods. Conngent Bonuses If a bonus is conngent upon specific criteria (e.g., employees must sll be employed by the company on the date bonuses are paid), then the liability may not be fixed at the end of the tax year. In this case, the bonus cannot be accrued unless the conngency is sasfied. IRS Rulings Various IRS rulings have underscored that the all-events test must be sasfied for a bonus to be deducble. In other words, the employer's liability must be fixed, and the bonus amount must be determinable with reasonable accuracy. If the employer retains the right to modify or eliminate bonuses, the liability is not fixed unl the bonuses are paid out. Planning Strategies and Consideraons • Documentaon: Ensure all bonus policies and recipient details are thoroughly documented, especially if there are condions aached to the bonuses. • Timing: Pay close aenon to the ming of the bonuses to opmize tax deducons. • Owners: Special rules apply to the deducon of accrued bonuses to owners. 179 Deducon & Bonus Depreciaon The end of the year is a pivotal moment for businesses to reflect on their financial performance and make strategic decisions to maximize tax savings while minimizing liabilies. With ever-evolving tax laws and regulaons, it is imperave to stay informed and proacve to leverage available tax benefits effecvely. One of the most significant areas to focus on during this season
hps://dmjps.com/ Jump to Table of Contents Page 19 of 39 is understanding and maximizing the benefits offered by the Secon 179 deducon and bonus depreciaon for capital purchases. Secon 179 of the Internal Revenue Code allows businesses to expense the full purchase price of qualifying equipment and/or soware purchased during the tax year. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly expanded the scope of this deducon, originally increasing the limit from $510,000 to $1 million, with a phase-out beginning at $2.5 million. For the tax year 2024, inflaon adjustments have further raised these limits: the deducon limit for 2024 stands at $1,220,000, and the phase-out threshold starts at $3,050,000. This means that businesses can take advantage of the Secon 179 deducon as long as they spend less than $4,270,000 on qualifying property. Furthermore, bonus depreciaon is a valuable tax-saving provision that enables businesses to claim addional depreciaon deducons for qualifying business property, supplemenng the standard depreciaon allowances. Before the Tax Cuts and Jobs Act (TCJA), this benefit was primarily limited to new equipment. However, under current tax law, bonus depreciaon has been expanded to encompass both new and used equipment, without the requirement for "first use" by the purchasing business. In the year 2024, businesses can claim bonus depreciaon at a rate of 60%, which represents a reducon from the 80% rate offered in 2023. The intricacies of these tax benefits become more evident when we consider the applicaon of Secon 179 and bonus depreciaon together. Typically, IRS rules require businesses to use Secon 179 first, followed by bonus depreciaon. This strategic combinaon can result in significant tax advantages, especially for businesses that have made substanal capital purchases during the tax year. However, it's important to remember that not all taxpayers may benefit from Secon 179 on its own. Key Points • The Secon 179 deducon limit for 2024 is $1,220,000, and the phase-out threshold is $3,050,000. • Bonus Depreciaon in 2024 permits an 60% deducon for qualifying business property, which encompasses used equipment. This benefit applies whether the equipment is new to the taxpayer's business or new to the world. • Certain property, such as improvements to nonresidenal real property (e.g., roofs, HVAC systems, fire protecon, alarms, and security systems), is eligible for the Secon 179 deducon but not bonus depreciaon. • Vehicles have different Secon 179 deducon limits based on their weight, with "heavy" vehicles eligible for a higher deducon limit.
hps://dmjps.com/ Jump to Table of Contents Page 20 of 39 • The full Secon 179 tax deducon can only be taken for vehicles used 100% for business purposes, but a paral deducon may be available for vehicles used more than 50% for business. Planning Strategies and Consideraons • Evaluate Capital Purchases: Review the necessity and benefits of potenal capital purchases within the context of your business operaons. It is important to ensure that any acquisions align strategically with your business needs and objecves, rather than just providing tax benefits. Timing is also crucial due to the requirement that property be placed in service by the end of the tax year. • Opmize Secon 179 and Bonus Depreciaon: Leverage the relaonship between Secon 179 and bonus depreciaon to maximize your tax savings. Apply the Secon 179 deducon first, followed by bonus depreciaon, to ensure you receive the maximum possible deducon. • Awareness of Phase-out Limits: Be mindful of the phase-out limits for Secon 179 and the decreased percentage available for bonus depreciaon. Bonus depreciaon will begin to phase out over the next four years: o 2024: 60% Bonus Depreciaon Allowed o 2025: 40% Bonus Depreciaon Allowed o 2026: 20% Bonus Depreciaon Allowed • Cash Flow Planning: When you deduct a large purchase, it can significantly reduce your tax bill for the year. However, it's important to think about how this will affect your business's cashflow in the future. A reduced tax bill might mean less money set aside for future expenses. It's like buying something on sale now and needing to budget carefully later because you spent the savings. • Vehicle Deducons: Meculously review the specific rules and limits when deducng vehicles under Secon 179. Consider factors such as the vehicle's weight and business use percentage to opmize your tax savings. • Integraon with Tax Credits: Explore opportunies to strategically ulize Secon 179 and bonus depreciaon in conjuncon with any applicable business tax credits, such as the R&D tax credit or energy-efficient credits, to opmize your overall tax posion. • Energy Efficiency Incenves: If your business is making energy-efficient purchases, research available tax incenves or credits to maximize your tax savings. Ensure these purchases qualify for both Secon 179 deducons and any addional energy-related tax incenves.
hps://dmjps.com/ Jump to Table of Contents Page 21 of 39 • Documentaon and Record-keeping: Maintain meculous records of all your capital purchases, their business use percentage, and any associated costs. Proper documentaon is vital to ensure compliance and accuracy when claiming Secon 179 deducons, bonus depreciaon, and any related tax credits. • Note that scaling back or reversing the phase-out of bonus depreciaon was a key provision in a tax measure that passed the House overwhelmingly in 2024. Nevertheless, the bill was stymied in the Senate. Restoring full bonus depreciaon might be included in post-elecon tax legislaon. Business Property Tax Lisng In North Carolina, businesses may be required to annually list their tangible personal property, including machinery, equipment, furniture and fixtures used in business operaons in the county(s) in which they do business. The lisng period typically starts on January 1st and ends on December 31st, with a final submission date of January 31st. Late lisngs can incur a 10% penalty. It's important to note that the extension date for filing can vary by county. Requirements to Complete Business Property Tax Lisng • Detailed Inventory: A list of all business property with descripons, quanes, and locaons. • Purchase Informaon: Dates and costs associated with the acquision of each property item. • Year in Service: The year each property item was first used for business operaons. • Supplies: A list and value of all supplies on hand as of the lisng date. • Leased Equipment: Informaon on leased equipment, including lease terms and the lessor's name. • Expensed Assets: Details of assets that were expensed for federal tax purposes but are sll required to be listed as "expensed" in the tax lisng. Meals & Entertainment Meals and entertainment deducons in 2024 follow established IRS guidelines, providing a 50% deducon for most business-related meals, with some events fully deducble. Here’s a breakdown of deducble and non-deducble expenses to help your business plan effecvely. Deducbility in 2024: 50% Deducble • Business meals with clients or employees • Meals during work-related meengs in the office • Meals provided for the convenience of the employer, such as a cafeteria on the business premises
hps://dmjps.com/ Jump to Table of Contents Page 22 of 39 • Snacks available in the office • Meals during business travel • Meals during conferences or seminars 100% Deducble • Recreaonal events solely for employee morale, such as a company picnic • Promoons aimed at improving public goodwill towards the business • Charity events sponsored by the business • Necessary business meals that are essenal to the operaon • Meals provided for the convenience of employees, such as lunch during a meeng that runs through typical lunch hours • Meals that are included as part of an employee's taxable compensaon • Meals sold to clients as part of the business operaon • Dues to civic or business organizaons Not Deducble • Entertainment costs, such as concert or sports ckets • Rentals of entertainment facilies like a party venue • Membership dues for clubs and organizaons that are entertainment in nature, such as a country club Planning Strategies and Consideraons • Documentaon: Maintain clear records and keep receipts for meals that cost more than $75. • Separaon: Ask for itemized receipts to clearly separate food costs from any entertainment expenses. • Approved Entertainment: Some entertainment expenses, like company holiday pares or award trips, may be deducble under specific condions. Per Diem Starng from October 1, 2024, the IRS has new, simplified rates to reimburse employees for lodging, meals, and other small expenses when they travel for work. Via this method, collecon of every receipt is not required.
hps://dmjps.com/ Jump to Table of Contents Page 23 of 39 Key Details What You’re Paying For: Amount You Can Give Meals & small expenses for travel in the US $80 per day Meals & small expenses for travel outside the US $86 per day Small expenses (both in and outside the US) $5 per day Travel to expensive places in the US $319 per day Travel to other places in the US $225 per day Meals for travel to expensive places in the US $86 per day Meals for travel to other places in the US $74 per day Also, some places are considered more expensive to travel to than others. These new rates and rules are in effect for any travel expenses paid out on or aer October 1, 2024. For a comprehensive list of these areas and further details, refer to IRS Noce 2024-68. Mileage The Internal Revenue Service (IRS) has announced the oponal standard mileage rates for 2024, effecve January 1, 2024. These rates are essenal for calculang deducble costs associated with the use of a vehicle for business, charitable, medical, or moving purposes. 2024 Standard Mileage Rates • 67 cents per mile for business use, reflecng an increase of 1.5 cents from the 2023 rate. • 21 cents per mile for medical or moving purposes for qualified acve-duty members of the Armed Forces, a decrease of 1 cent from 2023. • 14 cents per mile for service to charitable organizaons, which remains unchanged from 2023. Please note that these rates are applicable to all vehicle types, including electric, hybrid-electric, gasoline, and diesel-powered automobiles.
hps://dmjps.com/ Jump to Table of Contents Page 24 of 39 Planning Strategies and Consideraons • Opon to Calculate Actual Costs: Taxpayers have the choice to calculate the actual costs of using their vehicle rather than using the standard mileage rates. • First-Year Rule: If opng for the standard mileage rate, it is generally required to choose this method in the first year the car is available for business use. In subsequent years, you have the opon to switch between the standard mileage rate or actual expenses. • Leased Vehicles: For leased vehicles, if you choose the standard mileage rate, it must be used for the enre lease period, including renewals. • Tax Cuts and Jobs Act Implicaons: Under the Tax Cuts and Jobs Act, miscellaneous itemized deducons for unreimbursed employee travel expenses are not allowed. See next secon for further discussion. • Deducon for Moving Expenses: Taxpayers cannot claim a deducon for moving expenses unless they are members of the Armed Forces on acve duty and moving under orders to a permanent change of staon. • 2025 Mileage Rate: As of the wring of this leer, the Internal Revenue Service has not yet released the standard mileage rates for 2025. Historically, the IRS updates and releases the new rates in December for the upcoming year, so we ancipate the 2025 mileage rates will be made available in December of 2024. Unreimbursed Employee Business Expenses Under current tax law (TCJA), unreimbursed employee business expenses are not deducble for most employees on federal returns unl at least 2026. Only a few groups, such as certain qualified educators, performing arsts, Armed Forces reservists, and fee-based government officials, may claim these deducons. However, some states allow these deducons on state returns, so it's essenal to confirm state-specific rules. Eligibility for Deducon To be deducble, unreimbursed employee business expenses must meet the following criteria: • Incurred during the tax year; • For the trade or business of being an employee; and • Ordinary and necessary for that trade or business. Limitaons It is important to note that only unreimbursed business expenses are deducble. If an employee can be reimbursed by their employer but chooses not to seek reimbursement, they cannot deduct the expense.
hps://dmjps.com/ Jump to Table of Contents Page 25 of 39 Burden of Proof Taxpayers typically bear the burden of proof during IRS audits. However, this burden can shi to the IRS if the taxpayer provides credible evidence, meets substanaon requirements, maintains necessary records, and cooperates with the IRS during the audit process. Substanaon Taxpayers must substanate their deducons with adequate records. Some expenses, such as travel, gis, and those related to listed property, have stricter proof requirements. Planning Strategies and Consideraons • Understand Employer Reimbursement Policies: Be knowledgeable about your employer’s reimbursement policies and acvely seek reimbursement for eligible expenses. • Maintain Records: Keep detailed and organized records of your expenses, as they will be crucial in the event of an audit. Qualified Business Income (QBI) The Qualified Business Income (QBI) deducon under Code Sec. 199A is a significant aspect of tax planning for pass-through enes, such as sole proprietorships, partnerships, limited liability companies, and S corporaons. This deducon allows these businesses to deduct up to 20% of their business income from a qualified trade or business. However, it is crucial to note that the deducon cannot exceed 20% of the excess of your taxable income over your net capital gain for the tax year. It's important to be aware that this deducon, along with other key provisions of the Tax Cuts and Jobs Act of 2017, is currently set to sunset on December 31, 2025. If these provisions are not extended or modified by new legislaon, the rules for pass-through enes and their tax planning strategies could change materially. Key Points: Wage and Investment Limits • The QBI deducon is subject to specific wage and investment limits, which are the greater of: o 50% of the W-2 wages with respect to the qualified trade or business (W-2 wage limit), or o The sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately aer acquision, of all "qualified property."
hps://dmjps.com/ Jump to Table of Contents Page 26 of 39 - Importantly, if your taxable income is below $190,000 in 2024 ($380,000 for married individuals filing jointly), these limits do not apply. Planning Strategies and Consideraons Income Thresholds and Tradional Planning Techniques: Lower Your Income to Benefit More • If you're close to earning $190,000 (or $380,000 if you're married), think about ways you can lower your income. • This could include pung more money into your rerement account, using a Health Savings Account (HSA), or giving to charity. Look at Your Business Structure • Somemes, rearranging how your business is set up, like changing debt arrangements or the way you lease or sell property between your businesses, can increase your QBI deducon. • But be careful! These changes must be real and praccal, not just a way to get a bigger tax break. The IRS pays close aenon to these kinds of changes. Research & Experimental Expenditures In 2024, the treatment of Research and Experimental (R&E) expenditures under Secon 174 of the Internal Revenue Code remains consistent with the changes implemented by the Tax Cuts and Jobs Act (TCJA). Specifically, businesses are required to capitalize and amorze R&E expenses over five years for domesc research and 15 years for foreign research. This includes soware development costs, which must also be capitalized and amorzed over the applicable period. Key Points • Soware Development Costs: These are treated as specified R&E expenditures and must be capitalized and amorzed over the appropriate period. It's crucial to disnguish between soware development costs and soware acquision costs. The laer can be depreciated over 36 months and is eligible for bonus depreciaon. Planning Strategies and Consideraons • Accurate Tracking of Expenses: With the changes brought by the TCJA, diligently track R&E expenses to separate them from regular business expenses. • Review of Esmated Tax Calculaons: Discuss the tax impact and potenal planning opportunies with us. This includes reviewing esmated tax calculaons to determine addional cash needs to cover federal and state tax liabilies.
hps://dmjps.com/ Jump to Table of Contents Page 27 of 39 • Cash Flow Management: Consider opons like reducing other expenses, accelerang collecon of accounts receivable, or exploring borrowing opons if facing cash flow issues. • Internaonal R&E Acvies: Explore relocang overseas research acvies to the U.S. to benefit from a shorter five-year amorzaon period. • Soware Development vs. Acquision: Consider acquiring soware, which can be depreciated over 36 months and is eligible for bonus depreciaon, as opposed to a longer amorzaon period for soware development • Accounng Method Change: A change in accounng method is required to start capitalizing and amorzing R&E expenses. IRS consent is needed, and a modified Secon 481(a) adjustment may be required if the change was not made in the first taxable year aer 2021. It's important to note that while the fundamental requirements have not changed, the IRS has issued guidance to clarify certain aspects of these rules. For instance, Noce 2024-12 and Revenue Procedure 2024-9 provide addional details on the treatment of R&E expenditures and the procedures for changing accounng methods. Net Operang Loss (NOL) A NOL occurs when a business’s deducons exceed its gross income, allowing taxpayers to use the loss to reduce taxable income in another year through a deducon. The NOL deducon consists of carryovers and, in some cases, carrybacks. Regarding the periods for carrybacks and carryforwards • For losses arising in tax years beginning aer 2020, no carryback is allowed, except for specific farm and property and casualty insurance company losses, which may be carried back two years. • For losses arising in tax years beginning aer 2017, NOLs can be carried forward indefinitely, except property and casualty insurance company losses, which have a 20-year limit. For tax years beginning aer 2020, the NOL deducon is subject to an 80%-of-taxable-income limitaon. This means the NOL deducon is calculated by summing the total NOLs from tax years before 2018 carried into the current tax year and the smaller of the total NOLs from tax years aer 2017 carried into the current tax year or 80% of the taxable income minus any NOLs carried from before 2018. It's worth nong that Net Operang Losses incurred before 2018 are not subject to the 80% limitaon, meaning they can be used to offset 100% of taxable income.
hps://dmjps.com/ Jump to Table of Contents Page 28 of 39 Planning Strategies and Consideraons • Enty Type and Loss Ulizaon: o Direct Ulizaon: C Corporaons and individuals operang as sole proprietors (Schedule C) can use NOLs directly to offset their income. o Indirect Ulizaon: S Corporaons, Partnerships, and LLCs (when taxed as partnerships) pass losses to their shareholders or members, who can then use their share of the losses indirectly to offset other income on their personal tax returns, subject to various limitaons. • Timing of Income and Expenses: Consider the ming of income and expenses to maximize the benefit of a Net Operang Loss. This is parcularly important if you ancipate higher income in future years. • Ulizing Carrybacks and Carryforwards: Analyze the opons of carryforward and carryback to determine the most beneficial way to apply NOLs. Note that for losses arising in tax years beginning aer 2020, carrybacks are generally not allowed, except for specific cases. • Basis Limitaons and At-Risk Rules: For indirect ulizaon of NOLs (S Corporaons, Partnerships, and LLCs), be mindful of basis limitaons and at-risk rules that can affect the deducbility of losses. Further Explanaon • Basis: Think of "basis" as your personal investment in your business or how much skin you have in the game. If your business loses money, you can only use those losses to lower your tax bill up to the amount of your investment. If your business loses more money than you put in, you can't use those extra losses unl you put more money into the business or it starts making money. • At-Risk: The "at-risk" rules are like a safety net. They make sure that you can only claim losses up to the amount you could actually lose. This includes the money you've put into the business and any loans you're liable for. If you're not personally liable for paying back business loans (maybe the business itself is responsible for the loan), you can't use that money to count against your losses. In essence, these rules make sure you're not claiming losses which exceed what you've actually risked or invested in your business.
hps://dmjps.com/ Jump to Table of Contents Page 29 of 39 Bad Debts & Worthless Stock Managing bad debts and worthless stock is an integral aspect of year-end tax planning for your business. These losses can significantly impact your tax liability, so it's important to understand how to properly account for them in your tax returns. Bad Debts: Deducble Bad Debts • Corporaons can deduct all bad debts against ordinary income. • For individuals and other non-corporate taxpayers, business bad debts are also deducble against ordinary income. • Nonbusiness bad debts held by individuals and non-corporate taxpayers are deducble as short-term capital losses. Wholly Worthless vs. Partly Worthless Debts • Both business and nonbusiness debts are deducble when wholly worthless. • However, only business debts are deducble when partly worthless. • The deducble amount for a wholly worthless debt is its adjusted basis for determining loss on a sale or exchange, not its face value. Disnguishing Between Business and Nonbusiness Bad Debts • It's crucial to differenate between business and nonbusiness bad debts, as business bad debts result in ordinary losses, while nonbusiness bad debts result in short-term capital losses. • Business bad debts can originate from credit sales, loans to suppliers, clients, employees, and distributors, or payments made as a guarantor. Proof of Worthlessness • To claim a bad debt deducon, the worthlessness of a debt must be established through idenfiable events such as the cessaon of the debtor's business, bankruptcy, or legal judgments. Worthless Stock • If you own stock in a corporaon that becomes worthless during the tax year, you may be able to deduct the stock's loss as a capital loss, provided you meet certain criteria. • The loss deducon for worthless stock is treated as though the stock were sold or exchanged on the last day of the tax year. • The loss will be either long-term or short-term, depending on how long you held the stock.
hps://dmjps.com/ Jump to Table of Contents Page 30 of 39 Planning Strategies and Consideraons • Keep an Eye on Money Owed to You: Watch your accounts receivable (the money customers owe you) and try to collect overdue payments quickly to avoid having to deal with bad debts. • Document Everything: If you think a debt won't be paid back, make sure you have records and documents to prove it, just in case the IRS asks quesons later. • Check Your Investments: Look at your stock investments to see if any have become worthless. If they have, you might be able to deduct the loss to reduce your taxes. • Understand the Rules for Stock Losses: If you've held the worthless stock for a short me, the loss will be considered short-term. If you've held it for a long me, the loss will be long-term. This affects how the loss can be used to offset other gains. • Plan Before Selling Investments: If you're thinking about selling some investments, consider your overall gains and losses to make the best tax decision. Hobby Losses Starng a new business venture can be excing and full of possibilies. However, it's also important to be mindful of the tax implicaons, especially if your business consistently operates at a loss. Understanding the Hobby Loss Rules The IRS may classify your acvity as a hobby rather than a business if your expenses consistently exceed your income. This disncon is crucial for a few reasons: Deducons for Business-Type Expenses • If your acvity is considered a hobby, your ability to claim deducons is limited. You can sll deduct expenses that are typically deducble regardless of profit, like state and local property taxes. • However, you can only deduct costs like rent and adversing up to the amount you made from the hobby. Any extra expenses won't count for tax deducons. How to Avoid the Hobby Loss Rules • Show a profit in at least three out of five consecuve years. • Clearly demonstrate your intenon to make a profit, proving that your venture is not merely a hobby. Note: If you write off a bad debt and later receive payment for it, that money is considered income. You'll need to include it on your tax return for the year you receive the payment.
hps://dmjps.com/ Jump to Table of Contents Page 31 of 39 Proving a Profit-Making Objecve The IRS and courts will consider several factors when determining your profit-making objecve, such as: • How the acvity is managed and conducted. • Your and your advisers' experse in the relevant area. • The me and effort you devote to the enterprise. • Your expectaon of asset appreciaon. • Your history of income or losses. • The amount and frequency of profits. • Your overall financial status. • The degree to which the acvity involves personal pleasure or recreaon. Planning Strategies and Consideraons • Documentaon: Keep comprehensive records of your business operaons, including expenses, income, and me spent on the acvity. This documentaon is vital to prove your profit move. • Business Plan: Create a detailed business plan that outlines your strategy for turning a profit. This can serve as valuable evidence of your intent to operate a profitable business. • Expert Advice: Seek advice from industry experts or consultants to demonstrate that you are taking steps to make your business profitable. • Separate Finances: Keep your business and personal finances separate to clearly disnguish your venture as a business and not a hobby. • Stay Informed: Stay up-to-date with the current tax laws and regulaons related to hobby losses to ensure compliance and avoid penales. Choice of Enty Navigang the complexies of business tax planning, a crucial aspect to consider is the selecon of the appropriate enty for your business. This decision will significantly influence your exposure to liabilies and your tax obligaons, underlining the importance of two predominant factors: the degree of liability protecon and the tax treatment each enty receives under federal and state laws. Liability Protecon • Liability protecon safeguards an owner’s personal assets from liabilies associated with business operaons. This protecon varies by state law, so seeking legal counsel for advice on the degree of protecon offered by different enty types is recommended.
hps://dmjps.com/ Jump to Table of Contents Page 32 of 39 • Various factors may necessitate minimizing exposure to business liabilies, such as incurring debts, having employees whose acons can create liabilies, engaging in hazardous operaons, potenal product liabilies, and exposure to environmental liabilies. • Corporaons, both C and S, offer substanal liability protecon under state law, with differences in tax treatment. Limited Liability Companies (LLCs) provide similar protecon without the need to incorporate. Sole proprietorships and general partnerships offer minimal to no liability protecon. Tax Treatment • The final choice oen boils down to tax treatment under federal and state rules. C Corporaons are subject to potenal double taxaon, while S Corporaons have pass-through taxaon but come with eligibility criteria. Mul-member LLCs are treated as partnerships for federal tax purposes, and single-member LLCs can elect to be taxed as corporaons. General partnerships and sole proprietorships have pass-through taxaon at the partner or owner level, respecvely. • State income tax consideraons are crucial, as unique rules govern different business enes. In some cases, state and local tax rules may be the deciding factor when federal tax rules do not favor one form over another. Corporaons (C and S Corporaons): C Corporaons • Provides robust liability protecon, with clear case laws to support. • Subject to double taxaon: corporate income is taxed, and shareholders are taxed on distribuons. • Possible migaon of double taxaon for qualified small business stock. • Specific tax advantages unique to C corporaon status, such as a 21% tax rate. S Corporaons • Offers similar liability protecon as C Corporaons. • Income is generally taxed at the shareholder level, avoiding double taxaon. • Certain situaons might result in corporate-level taxaon. • Must comply with specific eligibility criteria to aain S corporaon status. • Potenal self-employment tax savings. Note: Be sure to consult with an aorney regarding these structures.
hps://dmjps.com/ Jump to Table of Contents Page 33 of 39 Limited Liability Companies (LLCs) • Provides corporate-style liability protecon without the intricacies of incorporaon. • Owners are referred to as "members,” and income is generally taxed at the member level. • Both mul-member LLCs and single-member LLCs (SMLLCs) are permissible, with the laer specifically providing liability protecon for single-owner businesses. • Federal tax treatment varies; may elect to be taxed as a corporaon. • Self-employment taxes apply for acve members in most industries, rental acvity being an excepon. Sole Proprietorships • Offers no liability protecon, leaving the owner's personal assets at risk. • Simpler tax filing, with the owner being taxed on the business's income. • Net business income is subject to self-employment tax. Partnerships (General Partnerships, Limited Partnerships, and Limited Liability Partnerships): General Partnerships • Lacks liability-liming features, exposing personal assets of the general partner. Limited Partnerships and Limited Liability Partnerships (LLPs) • Varying degrees of liability protecon depending on state laws. • Typically, limited partners have reduced liability compared to general partners. Planning Strategies and Consideraons • Liability Protecon: Opt for adequate insurance, competent employees, well-maintained equipment, and legal advisers as supplementary liability migaon measures. • State Tax Treatment: Conduct a comprehensive analysis to ascertain if your business has nexus in a state and is consequently subject to state income tax. For businesses with mul-state operaons, understand the nexus laws in each state and consider voluntary disclosure of acvies to minimize tax, penalty, and interest exposure. Employing Family Members Leveraging family employment can be an effecve strategy for tax planning, but it's crucial to understand the rules surrounding this approach.
hps://dmjps.com/ Jump to Table of Contents Page 34 of 39 Understanding Family Employment Rules Family businesses oen employ parents, children, and even grandchildren. The IRS generally treats such employment like any other, meaning family members' wages are subject to federal income tax withholding (FITW), social security and Medicare (FICA) taxes, and federal unemployment (FUTA) tax. However, certain exempons may apply for FICA or FUTA taxes, even though FITW sll applies. Note: The definion of a family member, for these rules, encompasses spouses, children (which includes adopted, foster, and stepchildren), and ancestors. Tax Implicaons Based on Business Type: Sole Proprietorship If your family business operates as a sole proprietorship, there are instances where a family member's wages can be exempt from certain taxes: • Children under 18 employed by a parent are FICA-exempt. For FUTA, the age limit is under 21. • A spouse's employment is exempt from FUTA but is subject to FITW and FICA. • A parent employed by their child is FICA-exempt. However, both FITW and FICA apply in all other cases. Corporaons (C or S Corporaon) If your business operates as a C or S corporaon, all family members' wages are subject to FITW, FICA, and FUTA without any exempons, regardless of age or relaonship. Partnership If your business is a partnership, every family member's wages are subject to FICA and FUTA unless the son or daughter exempon applies and only the parents are partners. Buying/Selling A Business When contemplang the sale or acquision of a business, it is crucial to have a comprehensive understanding of the different structures available, along with the corresponding tax, legal, and business consequences they entail. The chosen structure should align with various consideraons, such as the assumpon of liabilies, the post-transacon existence of the enty, tax implicaons, and the valuaon of assets. Below is a breakdown of some advantages and disadvantages of acquiring an exisng business: Advantages • Established products/services
hps://dmjps.com/ Jump to Table of Contents Page 35 of 39 • Exisng goodwill • In-place management team • Available collateral for funding • Reduced start-up me and costs Disadvantages • Challenge in finding the right business • Potenal for negave goodwill • Risk of acquiring underulized, poorly maintained, or outdated assets • Inhering exisng problems • Assumpon of the current business culture From the buyer's perspecve, key concerns include ensuring the business can generate adequate cash flow and service any debt taken on to finance the purchase. This highlights the importance of minimizing tax liabilies and safeguarding against potenal liabilies. Opng for an asset purchase is oen more favorable than a stock purchase, as it limits liability exposure and allows for a stepped-up basis in the assets, which can then be depreciated and amorzed over me. Conversely, the seller likely will priorize minimizing taxes on the sale, safeguarding against post-sale liabilies, and securing payment, especially in scenarios where the payment is not made as a lump sum. The structure of the transacon, whether it be a stock sale or an asset sale, will vary depending on the type of business enty involved (C corporaon, S corporaon, or partnership), each carrying its unique set of tax implicaons. Small Business Taxpayer The Small Business Taxpayer excepon under Code Sec. 448 is a crucial aspect for businesses considering the cash method of accounng, as it can provide significant tax benefits. Eligibility C corporaons, partnerships with a C corporaon as a partner, and S corporaons are eligible for the Small Business Taxpayer excepon, provided they pass the gross receipts test. The gross receipts test requires a business to have average annual gross receipts of $25 million or less for the three-tax-year period ending with the preceding tax year, aer adjusng for inflaon. Small Business Taxpayer Excepon This excepon permits eligible businesses to use the cash method of accounng, which is oen beneficial because it allows income to be recognized when received and deducons to be taken when expenses are paid, potenally resulng in tax savings.
hps://dmjps.com/ Jump to Table of Contents Page 36 of 39 Inflaon Adjustment and Relevance of Past Years The $25 million threshold for the gross receipts test is subject to annual inflaon adjustments. For tax years beginning in 2024, this threshold has been adjusted to $30 million. For tax years beginning in 2023, the threshold was $29 million. For tax years beginning in 2022, the threshold was $27 million. In the case of tax years beginning in 2021, 2020, or 2019, the threshold was $26 million. These thresholds are calculated by mulplying $25 million by the cost-of-living adjustment (COLA) and rounding the result to the nearest mulple of $1 million. Past years are relevant because they set the precedent for the adjusted thresholds, demonstrang the upward trend due to inflaon and helping businesses project their eligibility in the future. Important Consideraons • S corporaons can ulize the cash method of accounng without regard to their gross receipts, as they are exempt from the restricons of Code Sec. 448. • This excepon is not applicable to tax shelters. • Other restricons on the use of the cash method may apply beyond the Code Sec. 448 prohibion. Conclusion Reviewing your business's average annual gross receipts for the past three tax years is essenal in determining eligibility for the Small Business Taxpayer excepon. By taking advantage of this opportunity, your business can potenally realize considerable tax benefits. Rerement With the recent passage of the SECURE Act 2.0, small business owners need to be aware of the significant changes that affect rerement planning. The Act introduces expanded financial incenves and flexibility in rerement plans, providing more opons for small businesses to help their employees save for the future. 401(k) Plans • Contribuon Limits for 2024: o The contribuon limit for employees is $23,000, with an addional catch-up contribuon of $7,500 for those aged 50 and over. Also, new for 2025, a second er of catch-up contribuons apply to those age 60-63. That amount is $11,250 in 2025. o For employer and employee combined, the limit is $69,000 ($76,500 including catch-up contribuons age 50+, $81,250 including catch-up contribuons age 60-63).
hps://dmjps.com/ Jump to Table of Contents Page 37 of 39 • Contribuon Limits for 2025: o The contribuon limit for employees is $23,500, with an addional catch-up contribuon of $7,500 for those aged 50 and over. o For employer and employee combined, the limit is $70,000 ($77,500 including catch-up contribuons). • Consideraons and Compliance with SECURE Act 2.0: o For contribuons made aer December 29, 2022, a 401(k) plan may allow a parcipant to designate some or all matching and nonelecve contribuons as designated Roth contribuons. This applies to the extent the employee is fully vested in the contribuons. Any such matching contribuons will be included in the employee’s wage income for the yea r. o Originally set to require that, for plan years beginning aer December 31, 2023, catch-up contribuons for individuals earning over $145,000 in the previous year be made as Roth contribuons, the IRS has announced a two-year administrave transion period. Therefore, for 2024 and 2025, catch-up contribuons can be made on a pre-tax basis, even for high-wage earners. o Starng in 2025, new 401(k) and 403(b) plans will be required to automacally enroll eligible employees, with a minimum contribuon rate of 3%, increasing annually by 1% unl it reaches at least 10%, but not more than 15%. Exisng plans are generally exempt from this requirement. o Beginning in 2025, long-term, part-me employees who have worked at least 500 hours per year for two consecuve years will be eligible to parcipate in 401(k) plans. SIMPLE IRAs • Contribuon Limits for 2024: o The contribuon limit for employees is $16,000, with an addional $3,500 catch-up contribuon for those aged 50 and over. o Employers must either match employee contribuons up to 3% of their compensaon or make non-elecve contribuons of 2% of the employee's compensaon. • Contribuon Limits for 2025: o The contribuon limit for employees is $16,500, with an addional $3,500 catch-up contribuon for those aged 50 and over, and an addional $5,250 catch-up contribuon for those age 60-63. • Consideraons and Compliance with SECURE Act 2.0: o The SECURE 2.0 Act allows employers to offer the opon to SIMPLE IRA contribuons (from both the employee and employer) as Roth contribuons.
hps://dmjps.com/ Jump to Table of Contents Page 38 of 39 o Employers may contribute an addional amount up to 10% of compensaon or $5,000, whichever is less. o Employers can replace SIMPLE IRAs with safe harbor 401(k) plans mid-year for added flexibility. o Stay informed about the new tax credits available for small businesses that offer SIMPLE IRAs. o Review your employer contribuons in light of the new rules and incenves. o Ensure that your plan complies with the new rules allowing part-me employees to parcipate. SEP IRAs • Contribuon Limits for 2024: o The contribuon limit for SEP IRAs is the lesser of 25% of compensaon or $69,000. • Contribuons Limits for 2025: o The contribuon limit for SEP IRAs is the lesser of 25% of compensaon or $70,000. • Consideraons and Compliance with SECURE Act 2.0: o Beginning in 2023, the SECURE 2.0 Act allows employers to offer the opon to treat SEP IRA contribuons (from both the employee and employer) as Roth contribuons. o Similar to 401(k) plans, beginning in 2025, long-term, part-me employees who have worked at least 500 hours per year for two consecuve years will be eligible to parcipate in SEP IRAs. o Ensure that your SEP IRA complies with the new rules allowing part-me employees to parcipate. o Take advantage of the new tax credits for small businesses that offer SEP IRAs. o Review your employer contribuons and ensure they align with the new incenves and tax credits. It is recommended that you consult with your financial advisor, plan administrator and DMJPS to fully understand how the SECURE Act 2.0 affects your specific situaon and to ensure compliance.
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CLOSING COMMENTS
Thank you for choosing DMJPS! The DMJPS team, located from the North Carolina mountains to the coast, is equipped to handle your tax reporng maers naonwide and internaonally through our CPAmerica network. Weoffer the experse of a larger firm while maintaining the personalized service you value. Proacve updates. With the constant changes in today’s tax law, it is important to maintain a thorough knowledge of the most current developments. We provide clients with proacveupdates, such as monthly newsleers, to keep you up-to-date on current issues affecng industry, personal tax, and accounng news. DMJPS Digest also highlights key consideraons for leaders with arcles and resources. Receive monthly email updates and relevant tax news by joining our mailing list.connect@dmjps.com Our goal is to empower you with knowledge, support, and help every client Be Greater. Don't hesitate to contact us if you have any quesons or need further assistance.
Warm regards, DMJPS PLLC Please note: The informaon in this leer is for general purposes only and doesn't constute personalized tax advice. Every situaon is unique, so we strongly recommend consulng withDMJPS for a comprehensive analysis of your tax picture before making any decisions.