Author: KraftCPAs

Before the Tax Cuts and Jobs Act (TCJA) became law, businesses could claim a tax deduction for most business-related interest expense. The TCJA created Section 163(j), which generally limits deductions of business interest, with certain exceptions.

If your business has significant interest expense, it’s important to understand the impact of the deduction limit on your tax bill. The good news is there may be ways to soften the tax bite in 2025.

The nuts and bolts

Unless your company is exempt from Sec. 163(j), your maximum business interest deduction for the tax year equals the sum of:

• 30% of your company’s adjusted taxable income (ATI)
• Your company’s business interest income, if any, and
• Your company’s floor plan financing interest, if any

Assuming your company doesn’t have significant business interest income or floor plan financing interest expense, the deduction limitation is roughly equal to 30% of ATI.

Your company’s ATI is its taxable income, excluding:

• Nonbusiness income, gain, deduction, or loss
• Business interest income or expense
• Net operating loss deductions
• The 20% qualified business income deduction for pass-through entities

When Sec. 163(j) became law, ATI was computed without regard to depreciation, amortization or depletion. But for tax years beginning after 2021, those items are subtracted in calculating ATI, shrinking business interest deductions for companies with significant depreciable assets.

Deductions disallowed under Sec. 163(j) may be carried forward indefinitely and treated as business interest expense paid or accrued in future tax years. In subsequent tax years, the carryforward amount is applied as if it were incurred in that year, and the limitation for that year will determine how much of the disallowed interest can be deducted. There are special rules for applying the deduction limit to pass-through entities, such as partnerships, S corporations and limited liability companies that are treated as partnerships for tax purposes.

Small businesses are exempt from the business interest deduction limit. These are businesses whose average annual gross receipts for the preceding three tax years don’t exceed a certain threshold. (There’s an exception if the business is treated as a “tax shelter.”) To prevent larger businesses from splitting themselves into small entities to qualify for the exemption, certain related businesses must aggregate their gross receipts for purposes of the threshold.

Ways to avoid the limit

Some real estate and farming businesses can opt out of the business interest deduction limit and therefore avoid it — or at least reduce its impact. Real estate businesses include those that engage in real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.

Remember that opting out of the interest deduction limit comes at a cost. If you do so, you must reduce depreciation deductions for certain business property by using longer recovery periods. To determine whether opting out will benefit your business, you’ll need to weigh the tax benefit of unlimited interest deductions against the tax cost of lower depreciation deductions.

Another tax-reduction strategy is capitalizing interest expense. Capitalized interest isn’t treated as interest for purposes of the Sec. 163(j) deduction limit. The tax code allows businesses to capitalize certain overhead costs, including interest, related to the acquisition or production of property.

Interest capitalized to equipment or other fixed assets can be recovered over time through depreciation, while interest capitalized to inventory can be deducted as part of the cost of goods sold. You also may be able to mitigate the impact of the deduction limit by reducing your interest expense. For example, you might rely more on equity than debt to finance your business or pay down debts when possible. Or you could generate interest income (for example, by extending credit to customers) to offset some interest expense.

Weigh your options

Unfortunately, the business interest deduction limitation isn’t one of the many provisions of the TCJA scheduled to expire at the end of 2025. But it’s possible Congress could act to repeal the limitation or alleviate its impact.

© 2025 KraftCPAs PLLC

If you’re an individual taxpayer coming off a year of substantial business losses, unfavorable federal income tax rules can potentially come into play and affect your tax filing. Here’s what you need to know as you assess your 2024 tax situation.

Disallowance rule

The tax rules can get complicated if your business or rental activity throws off a tax loss — and many do during the early years of business. First, the passive activity loss (PAL) rules may apply if you aren’t very involved in the business or if it’s a rental activity. The PAL rules generally only allow you to deduct passive losses to the extent you have passive income from other sources. However, you can deduct passive losses that have been disallowed in previous years (called suspended PALs) when you sell the activity or property that produced the suspended losses.

If you successfully clear the hurdles imposed by the PAL rules, then you face another hurdle: You can’t deduct an excess business loss in the current year. For 2024, an excess business loss is the excess of your aggregate business losses over $305,000 ($610,000 for married joint filers). For 2025, the thresholds are $313,000 and $626,000, respectively. An excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards explained below.

Deducting NOLs

You generally can’t use an NOL carryover, including one from an excess business loss, to shelter more than 80% of your taxable income in the carryover year. Also, NOLs generally can’t be carried back to an earlier tax year. They can only be carried forward and can be carried forward indefinitely. The requirement that an excess business loss must be carried forward as an NOL forces you to wait at least one year to get any tax-saving benefit from it.

Example 1: Taxpayer has a partial deductible business loss

David is unmarried. In 2024, he has an allowable loss of $400,000 from his start-up AI venture that he operates as a sole proprietorship.

Although David has no other income or losses from business activities, he has $500,000 of income from other sources (salary, interest, dividends, capital gains and so forth).

David has an excess business loss for the year of $95,000 (the excess of his $400,000 AI venture loss over the $305,000 excess business loss disallowance threshold for 2024 for an unmarried taxpayer). David can deduct the first $305,000 of his loss against his income from other sources. The $95,000 excess business loss is carried forward to his 2025 tax year and treated as part of an NOL carryover to that year.

Variation: If David’s 2024 business loss is $305,000 or less, he can deduct the entire loss against his income from other sources because he doesn’t have an excess business loss.

Example 2: Taxpayers aren’t affected by the disallowance rule

Nora and Ned are married and file tax returns jointly. In 2024, Nora has an allowable loss of $350,000 from rental real estate properties (after considering the PAL rules).

Ned runs a small business that’s still in the early phase of operations. He runs the business as a single-member LLC that’s treated as a sole proprietorship for tax purposes. For 2024, the business incurs a $150,000 tax loss.

Nora and Ned have no income or losses from other business or rental activities, but they have $600,000 of income from other sources.

They don’t have an excess business loss because their combined losses are $500,000. That amount is below the $610,000 excess business loss disallowance threshold for 2024 for married joint filers. So, they’re unaffected by the disallowance rule. They can use their $500,000 business loss to shelter income from other sources.

Partnerships, LLCs, and S corporations

The excess business loss disallowance rule is applied at the owner level for business losses from partnerships, S corporations, and LLCs treated as partnerships for tax purposes. Each owner’s allocable share of business income, gain, deduction, or loss from these pass-through entities is considered on the owner’s Form 1040 for the tax year that includes the end of the entity’s tax year.

© 2025 KraftCPAs PLLC

If you made significant gifts to your children, grandchildren, or other heirs last year, it’s important to determine whether you’re required to file a 2024 gift tax return. And in some cases, even if it’s not required to file one, you may want to do so anyway.

Requirements to file

The annual gift tax exclusion was $18,000 in 2024 (increased to $19,000 in 2025). Generally, you must file a gift tax return for 2024 if, during the tax year, you made gifts:

• that exceeded the $18,000-per-recipient gift tax annual exclusion for 2024 (other than to your U.S. citizen spouse)
• that you wish to split with your spouse to take advantage of your combined $36,000 annual exclusion for 2024
• that exceeded the $185,000 annual exclusion in 2024 for gifts to a noncitizen spouse
• to a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($90,000) into 2024
• of future interests — such as remainder interests in a trust — regardless of the amounts
• of jointly held or community property

You’ll owe gift tax only if an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($13.61 million in 2024). As you can see, some transfers require a return even if you don’t owe tax.

Filing if it’s not required

No gift tax return is required if your gifts for 2024 consisted solely of tax-free gifts because they qualify as any of the following:

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

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

The deadline is April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2024 returns, it’s April 15, 2025. If you file for an extension, it’s October 15, 2025. But keep in mind that if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension.

The U.S. Treasury Department says it will not enforce the Corporate Transparency Act scheduled to go into effect March 21, 2025.

The Treasury’s decision announced this week means that business owners who do not submit beneficial ownership information (BOI) as required by the CTA will not face penalties or fines. The Treasury said it will propose changes to narrow the scope of the rule to apply only to foreign reporting companies.

Businesses originally were required to file BOI corporate transparency reports in January, but multiple legal suits challenged the CTA’s constitutionality. Those ultimately failed, and the rules are still set to go into effect March 21.

The CTA was passed in 2021 with support from Republicans and Democrats in Congress.

© 2025 KraftCPAs PLLC

Revised March 18, 2025, with updated terminology.

Financial reporting is critical for making informed decisions and maintaining stakeholder transparency, but there’s not just one way to do it correctly.

While U.S. Generally Accepted Accounting Principles (GAAP) provide a standardized framework, the rules can be complex and costly for small and medium-sized businesses to implement. An alternative approach — commonly known as Special Purpose Framework (SPF) — offers a simpler and often more cost-effective solution for certain entities that don’t need to achieve full GAAP compliance.

Here’s an overview of alternative accounting methods, including key benefits and drawbacks of SPF reporting.

Basics of SPF

SPFs are still sometimes referred to as Other Comprehensive Bases of Accounting (OCBOA), although the term is used less commonly. Both refer to financial statements prepared using an accounting framework other than GAAP or the International Financial Reporting Standards (IFRS). Examples include:

• Cash-basis accounting, which recognizes revenue and expenses only when cash is received or paid.
• Modified-cash-basis accounting, which blends elements of both cash and accrual accounting.
• Tax-basis accounting, which aligns financial reporting with IRS regulations for simplified tax compliance.
• Regulatory-basis accounting, which follows rules set by a specific government or industry regulatory agency.

These frameworks may be tailored to meet a company’s specific needs and can simplify financial reporting while maintaining clarity for stakeholders. Generally Accepted Auditing Standards (GAAS) permit the use of SPFs for compiled, reviewed, and audited financial statements when GAAP statements aren’t required.

Pros of SPF reporting

The U.S. Securities and Exchange Commission (SEC) requires U.S. publicly traded companies to file GAAP financial statements. However, privately held businesses that aren’t subject to these requirements often find SPF to be a more practical option. SPF eliminates some of the complexities associated with GAAP, making financial statements easier to prepare and understand. Cost savings can be significant, as SPF statements typically require less time and fewer resources, leading to lower accounting fees.

Private companies also have the flexibility to choose an SPF that best suits their operational and stakeholder needs. For instance, cash-basis statements may be more relevant when management’s primary concern is cash flow. Likewise, tax-basis statements may streamline tax preparation by reducing discrepancies between financial statements and federal income tax filings.

Regulatory-basis statements may be appropriate for companies that operate in heavily regulated industries, such as financial institutions, insurance companies, healthcare providers, public utilities, governmental entities, and brokers and dealers. Regulatory guidelines align financial reporting with industry-specific rules and oversight requirements, often prioritizing solvency, rate-setting and compliance over general-purpose financial reporting under GAAP.

Downsides of SPF reporting

While SPFs offer advantages, there are also potential drawbacks. Some lenders and investors may prefer GAAP-compliant statements due to their consistency and comparability. Financial statements prepared under different SPFs can make it difficult to benchmark against industry peers. Stakeholders unfamiliar with SPFs may require additional explanation to understand the financial statements fully. However, some lenders and investors may accept SPF statements if they meet transparency and consistency requirements. Businesses considering SPFs should consult their financial institutions to confirm acceptability before switching accounting methods.

Choosing an alternative accounting method still requires diligence and resources. Although SPF statements require fewer disclosures than GAAP, they must still include sufficient information to ensure transparency and clarity. Additionally, SPF statements must provide footnotes explaining the accounting framework used and key differences from GAAP.

Choosing the right framework

Whether SPF or GAAP is the right choice for a private company depends on several factors, including management preferences, external stakeholder expectations, and regulatory guidelines. GAAP compliance may be necessary if your business is seeking investment or financing. However, SPFs could be a viable alternative if your primary goal is cost-effective and straightforward financial reporting.

© 2025 KraftCPAs PLLC

The construction industry has made great strides in pushing back the outdated perception that it’s rife with corruption. Even with that progress, contractors are still among the hardest hit by the effects of occupational fraud.

As defined by the Association of Certified Fraud Examiners (ACFE), occupational fraud is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

The ACFE’s Occupational Fraud 2024: A Report to the Nations ranked construction No. 4 in the list of median losses by industry. With its median loss of $250,000, construction fared slightly better than mining, wholesale, and manufacturing, which ranked first, second, and third, respectively. The fifth spot was a tie between real estate and government/public administration.

Overall, the report indicated that the average loss for businesses across all industries was $1.7 million per case.

As business owners in any industry know, it’s difficult to stop fraud unless you know where to look. According to the ACFE report, these were most common occupational fraud schemes in the construction industry:

• 52% of cases involved corruption, such as bribery or conflicts of interest.
• 38% involved billing schemes, in which an employee submits invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.
• 25% involved asset misappropriation, in which an employee steals or misuses noncash assets, such as inventory, equipment, or confidential customer information.
• 25% involved fraudulent expense reimbursements, such as submitting fake receipts or presenting documentation for the same expense more than once.
• 23% involved payroll schemes, in which an employee makes false claims for compensation, such as claiming overtime for hours not worked or adding ghost employees to the payroll.

Each of those scenarios pop up throughout every industry in any given year, so construction companies aren’t alone in the battle to minimize occupational fraud. As a business owner, consider each example and whether your existing antifraud measures would be strong enough to prevent a big financial loss.

Rely on internal controls

A strong internal control system is critical to preventing fraud. Common examples include background checks, segregation of duties, dual authorization of sizable payments, and management review of major processes. Per the ACFE report, nearly half of reported fraud cases occurred because of either a lack of internal controls (32%) or an override of existing controls (19%). Another 18% were attributable to a lack of management review.

Historically, the ACFE has recommended a variety of antifraud controls as particularly effective in detecting fraud early and minimizing losses. These include:

• Fraud hotlines (the most common detection method)
• Job rotation or mandatory vacations
• Unscheduled audits
• Proactive data monitoring and analysis
• Clear antifraud policies
• Formal fraud risk assessments
• Antifraud training
• Codes of conduct
• Dedicated fraud departments or functions

Interestingly, in the 2024 ACFE report, web-based reports were the common fraud-reporting mechanism, coming in at 40%. Email was next at 37%, and telephone hotlines came in last at 30%.

Don’t let your guard down

Every company’s risk of occupational fraud differs depending on its size, workforce, and other factors. However, one thing’s for sure: No business in construction, manufacturing, wholesale, or any other industry is immune. Staying vigilant to avoid a fraud situation is usually easier and less costly than dealing with one after it occurs.

© 2025 KraftCPAs PLLC

Beneficial ownership information requirements are back with a new deadline and – so far – nothing in the legal pipeline stands in their way.

After multiple court decisions changed the course of the BOI rules under the Corporate Transparency Act, the latest decision this week lifted a nationwide injunction and clears the way for the law to go into effect. On Wednesday, February 19, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced a March 21, 2025, deadline for companies to meet BOI requirements. FinCEN, the agency tasked with oversight of the law, announced the new deadline in Notice FIN-2025-CTA1 this week.

For the first time in several weeks, there are no legal challenges, active injunctions, or pending appeals that would appear to alter the course of the BOI rule and its new deadline. The U.S. House of Representatives recently approved a bipartisan bill to push the BOI deadline to January 1, 2026, but because the Senate hasn’t yet taken a vote, there’s no indication that it will become law in time to affect the March 21 deadline.

The latest twist in the BOI’s journey came on Monday when a federal district court lifted the final injunction that had put the entire Corporate Transparency Act on hold. The plaintiffs in that case are not expected to appeal.

With the rule again in effect, most companies that were created by filing paperwork with a state agency are required to provide certain information about each of the company’s beneficial owners, including a qualifying ID or driver’s license, legal name, birthdate, and residential address. Failing to do so can lead to a violation of up to $591 each day in addition to criminal penalties.

BOI filings can be submitted at no charge on the FinCEN website, which is updated with the most recent deadlines and changes. The site includes extensive resources to determine whether a business is required to provide the information.

© 2025 KraftCPAs PLLC

The Child Tax Credit (CTC) has been a financial boon for families with qualifying children for several years. But changes could be coming after this year.

As the expiration date approaches for certain provisions within the Tax Cuts and Jobs Act (TCJA), here’s what we might expect for this year and beyond.

Current state of the credit

Under the TCJA, which took effect in 2018, the CTC was increased from its previous level of $1,000 to $2,000 per qualifying child. The TCJA also made more taxpayers eligible for the credit by raising the income threshold at which the credit begins to phase out.

For both 2024 and 2025, the CTC is $2,000 per child under age 17. Phaseout thresholds in 2024 and 2025 will continue at the levels established by the TCJA:

• $200,000 for single filers
• $400,000 for married couples filing jointly

Refundable portion

The refundable portion of the credit for 2024 and 2025 is a maximum $1,700 per qualifying child. With a refundable tax credit, you can receive a tax refund even if you don’t owe any tax for the year.

Credit for other dependents

A nonrefundable credit of up to $500 is available for dependents other than those who qualify for the CTC. But certain tax tests for dependency must be met. The credit can be claimed for:

• Dependents of any age
• Dependent parents or other qualifying relatives supported by you
• Dependents living with you who aren’t related

Claiming the CTC

To claim the CTC, you must include the child’s SSN on your return. The number must have been issued before the due date for filing the return, including extensions. If a qualifying child doesn’t have an SSN, you may currently claim the $500 credit for other dependents for that child.

To claim the $500 credit for other dependents, you’ll need to provide a taxpayer identification number for each non-CTC-qualifying child or dependent, but it can be an Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number, or SSN.

What might happen after 2025

If Congress doesn’t act to extend or revise the current provisions of the TCJA this year, the CTC will revert to the pre-TCJA rules in 2026. That means:

• The maximum credit will drop down to $1,000 per qualifying child.
• The phaseout thresholds will drop to around $75,000 for single filers and $110,000 for married couples filing jointly (inflation indexing could alter these figures).

In other words, many taxpayers will see their CTC cut in half if the current law sunsets in 2026. Families also could experience a larger federal tax liability starting in 2026 if no new law is enacted.

Proposals in Washington

When it comes to the future of the CTC, there have been a few proposals in Washington. During the campaign, Vice President Vance signaled support for expanding the CTC. While specifics are unclear, there have been indications that President Trump favors extending the current $2,000 credit beyond 2025 or even increasing it.

Many Congressional Republicans have voiced support for maintaining the credit at the $2,000 level or making it permanent. However, in a 50-page menu of options prepared by Republicans on the House Budget Committee, there’s a proposal that would require parents and children to have Social Security numbers (SSNs) to claim the CTC. Currently, only a child needs a valid number. That would make fewer families eligible for the credit.

Because these proposals haven’t been – and might never be – passed into law, look for developments over the next few weeks that could impact your next tax bill.

© 2025 KraftCPAs PLLC

Even if you’re still working on your 2024 tax return due in April, your 2025 taxes are taking shape right now.

Several tax amounts have changed for 2025 because of inflation and could impact your return next year. Not all tax figures are adjusted annually, and some amounts only change when Congress passes new laws.

One caveat to tax planning is the situation in Washington, where tax law changes are likely in the coming months. But for now, here are a few common questions and answers – based on what we know so far – for 2025.

 I haven’t been able to itemize deductions on my last few tax returns. Will I qualify for 2025?

Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) eliminated the ability to itemize deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2025, the standard deduction amount is $30,000 for married couples filing jointly (up from $29,200 in 2024). For single filers, the amount is $15,000 (up from $14,600 in 2024) and for heads of households, it’s $22,500 (up from $21,900 in 2024). If the total amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2025.

If I don’t itemize deductions, can I claim charitable deductions on my 2025 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations.

How much can I contribute to an IRA for 2025?

If you’re eligible, you can contribute up to $7,000 a year to a traditional or Roth IRA. If you earn less than $7,000 during the year, you can contribute up to 100% of your earned income. (This is unchanged from 2024.) If you’re 50 or older, you can make an additional $1,000 “catch up” contribution for 2024 and 2025.

I have a 401(k) plan with my employer. How much can I contribute to it?

In 2025, you can contribute up to $23,500 to a 401(k) or 403(b) plan (up from $23,000 in 2024). You can make an additional $7,500 catch-up contribution if you’re age 50 or older for 2024 and 2025. However, there’s something new this year for 401(k) and 403(b) participants of certain ages. Beginning in 2025, those who are age 60, 61, 62 or 63 can make catch-up contributions of up to $11,250.

I occasionally hire someone to clean my house. Am I required to withhold and pay FICA tax on the amounts I pay them?

In 2025, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. who are independent contractors is $2,800 (up from $2,700 in 2024).

How much of my earnings are taxed for Social Security in 2025?

The Social Security tax “wage base” is $176,100 for this year (up from $168,600 in 2024). That means you don’t owe Social Security tax on amounts earned above that. You must pay Medicare tax on all amounts you earn.

How much can I give to one person without triggering a gift tax return in 2025?

The annual gift tax exclusion for 2025 is $19,000 (up from $18,000 in 2024).

How will the changes in Washington affect taxes?

The specifics of any new tax legislation depend on political and economic factors. However, there are likely to be many changes in the next few years. Republicans have signaled that they’d like to extend and possibly make permanent the provisions in the TCJA that expire after 2025. They’ve also discussed raising or eliminating the cap on the state and local tax deduction. Other proposals include expanding the Child Tax Credit and making certain types of income (tips, overtime, and Social Security benefits) tax-free. Some of these tax breaks could become effective for the 2025 tax year.

© 2025 KraftCPAs PLLC

Businesses in certain industries – restaurants, hotels, and salons, for example – typically hire employees who receive tips as a large part of their compensation. That business model, however, triggers a whole new set of tax regulations at the state and federal levels.

The tax-free temptation

During the campaign, President Trump promised to end taxes on tips. The proposal excited employees and some business owners, but so far, legislation to eliminate taxes on tips hasn’t gained much steam in Congress. For now, employers must continue to follow existing IRS rules until — or if — the law changes.

With that in mind, here are answers to questions about the current rules.

What makes a tip

Tips are optional and can be cash or noncash. Cash tips are received directly from customers. They can also be electronically paid tips distributed to employees by employers and tips received from other employees in tip-sharing arrangements. Workers must generally report cash tips to their employers. Noncash tips are items of value other than cash. They can include tickets, passes, or other items that employees receive from customers. Workers don’t have to report noncash tips to employers.

Four factors determine whether a payment qualifies as a tip for tax purposes:

1. The customer voluntarily makes a payment
2. The customer has an unrestricted right to determine the amount
3. The payment isn’t negotiated with, or dictated by, employer policy
4. The customer generally has a right to determine who receives the payment

There are more relevant definitions. A direct tip occurs when an employee receives it directly from a customer (even as part of a tip pool). Directly tipped employees include wait staff, bartenders, and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees can include bussers, service bartenders, cooks, and salon shampooers.

Keeping the right records

Tipped workers must keep daily records of the cash tips they receive. To do so, they can use Form 4070A, Employee’s Daily Record of Tips, found in IRS Publication 1244.

Workers should also keep records of the dates and values of noncash tips. The IRS doesn’t require workers to report noncash tips to employers, but they must report them on their tax returns.

What employers must know

Employees must report tips to employers by the 10th of the month following the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include the:

• Employee’s name, address, Social Security number, and signature
• Employer’s name and address
• Month or period covered
• Total tips received during the period

If an employee’s monthly tips are less than $20, there’s no requirement to report them to his or her employer. However, they still must be included as income on his or her tax return.

Other requirements for employers

A business owner must send each employee a Form W-2 that includes reported tips. In addition, employers must:

• Keep employees’ tip reports
• Withhold taxes, including income taxes and the employee’s share of Social Security and Medicare taxes, based on employees’ wages and reported tip income
• Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income
• Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return
• Deposit withheld taxes in accordance with federal tax deposit requirements

In addition, larger food or beverage establishments must file another annual report. Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, discloses receipts and tips.

There is a potential perk for an employer who hires tipped workers to provide food and beverages: They might qualify for a valuable federal tax credit involving the Social Security and Medicare taxes paid on employees’ tip income.

© 2025 KraftCPAs PLLC

A Republican-led White House, Senate, and House have indicated they plan to act swiftly to make broad changes to the federal tax system. Congress is already working on legislation that would extend and expand provisions of the sweeping Tax Cuts and Jobs Act (TCJA), as well as incorporate some of President Trump’s tax-related campaign promises.

To that end, GOP lawmakers in the U.S. House of Representatives have compiled a 50-page document that identifies potential opportunities, as well as how much these tax and other fiscal changes would cost or save. Here’s a preview of potential changes that might be on the horizon.

Multiple tax cuts

The TCJA is the signature tax legislation from Trump’s first term in office, and it cut income tax rates for many taxpayers. Some provisions — including the majority affecting individuals — are slated to expire at the end of 2025. The nonpartisan Congressional Budget Office estimates that extending the temporary TCJA provisions would cost the government $4.6 trillion in lost tax revenue over 10 years.

In addition to supporting the TCJA, Trump has pushed to reduce the 21% corporate tax rate to 20% or 15%, with the intention of generating growth. He also supports eliminating the 15% corporate alternative minimum tax imposed by the Inflation Reduction Act (IRA), signed into law by President Biden. It applies only to the largest C corporations.

Regarding tax cuts for individuals beyond TCJA extensions, Trump has expressed support for:

• Eliminating the estate tax, which currently applies only to estates worth more than $13.99 million
• Repealing or raising the $10,000 cap on the deduction for state and local taxes
• Creating a deduction for auto loan interest
• Eliminating income taxes on tips, overtime pay, and Social Security benefits

He’s also said he wants to cut IRS funding, which would reduce expenses but also reduce revenues. In all, the tax-cutting plans would significantly drive up the federal deficit.

Possible revenue offsets

The House GOP document outlines numerous options beyond spending reductions to pay for the tax cuts. For example, it lists tariffs — a major plank in Trump’s campaign platform — as a potential boost. While Trump insists that the exporting countries will pay the tariffs, that cost more often is the responsibility of the U.S. importer. Economists largely agree that at least part of the cost of higher tariffs would be passed on to consumers.

The GOP document suggests a 10% across-the-board import tariff. Trump, however, has discussed and imposed varying tariff amounts, depending on the exporting country. The 25% tariffs on Canadian and Mexican products, which were imposed shortly after he began his new term, have been paused until March 4. An additional 10% tariff on Chinese imports took effect on February 4.

In addition, Trump said tariffs on goods from other countries, including the 27-member European Union, could happen soon.

The House GOP document also examines generating savings through eliminating or lowering other tax breaks. Here are some of the options:

The mortgage interest deduction. Suggestions include eliminating the deduction or lowering the current $750,000 limit to $500,000.

Head of household status. The document looks at eliminating this status, which provides a higher standard deduction and certain other tax benefits to unmarried taxpayers with children compared to single filers.

The child and dependent care tax credit. The document considers eliminating the credit for qualified child and dependent care expenses.

Renewable energy tax credits. The IRA created or expanded various tax credits encouraging renewable energy use, including tax credits for electric vehicles and residential clean energy improvements, such as solar panels and heat pumps. The GOP has proposed changes ranging from a full repeal of the IRA to more limited deductions.

Employer-provided benefits. Revenue could be raised by eliminating taxable income exclusions for transportation benefits and on-site gyms.

Health insurance subsidies. Premium tax credits are currently available for households with income above 400% of the federal poverty line. (Those amounts phase out as income increases.)

Revenue could be raised by limiting such subsidies to what the document calls the “most needy Americans.”

Education-related breaks are also being assessed. The House GOP document looks at how much revenue could be generated by eliminating credits for qualified education expenses, the deduction for student loan interest, and federal income-driven repayment plans. The GOP is also weighing the elimination of interest subsidies for federal loans while borrowers are still in school and imposing taxes on scholarships and fellowships, which currently are exempt.

There may be hurdles

Republican lawmakers plan on passing tax legislation using the reconciliation process, which requires only a simple majority in both houses of Congress. However, the GOP holds the majority in the House by only three votes.

That gives potential holdouts within their own caucus a lot of leverage. For example, deficit hawks might oppose certain proposals, while centrist members may prove reluctant to eliminate popular tax breaks and programs.

The GOP hopes to enact tax legislation within President Trump’s first 100 days in office, but that may be challenging as Republican representatives are likely to oppose moves that would hurt industries in their districts, such as the reduction or elimination of certain clean energy incentives.

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The deadline is coming up fast for businesses to submit a slate of annual tax forms.

By January 31, 2025, employers are required to file these items with the federal government and furnish them to employees:

Form W-2, Wage and Tax Statement. Form W-2 shows the wages paid and taxes withheld for the year for each employee. It must be furnished to employees and filed with the Social Security Administration (SSA). The IRS notes that “because employees’ Social Security and Medicare benefits are computed based on information on Form W-2, it’s important to prepare Form W-2 correctly and timely.”

Form W-3, Transmittal of Wage and Tax Statements. Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of Form W-2 to the SSA. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944, or Schedule H for the year) should agree with the amounts reported on Form W-3.

Failing to timely file or include the correct information on either the information return or statement may result in penalties.

Freelancers and independent contractors

The January 31 deadline also applies to Form 1099-NEC, Nonemployee Compensation. This form is furnished to recipients and filed with the IRS to report nonemployee compensation to independent contractors.

If the following four conditions are met, payers must generally complete Form 1099-NEC to report payments as nonemployee compensation:

• You made a payment to someone who isn’t your employee.
• You made a payment for services in the course of your trade or business.
• You made a payment to an individual, partnership, estate, or, in some cases, a corporation.
• You made a payment of at least $600 to a recipient during the year.

Keep in mind that when the IRS requires you to “furnish” a statement to a recipient, it can be done in person, electronically, or by first-class mail to the recipient’s last known address. If forms are mailed, they must be postmarked by January 31.

Your business may also have to furnish a Form 1099-MISC to each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services, and more. The deadline for furnishing Forms 1099-MISC to recipients is January 31, but the deadline for submitting them to the IRS depends on the method of filing. If they’re being filed on paper, the deadline is February 28. If filing them electronically, the deadline is March 31.

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