Author: KraftCPAs

Internal and external audits are both essential for ensuring your company’s financial health and providing a robust framework for accountability and transparency. And both can be effective antifraud controls.

Business owners should understand how these types of audits differ to ensure they leverage both functions effectively to reinforce their companies’ internal controls and build trust with stakeholders. Here’s an overview of six fundamental differences.

1. Purpose

The purpose of an internal audit is to assess and improve a company’s internal controls, risk management, and governance processes. Some companies have an internal audit department, while others outsource this function to external audit firms. Internal auditors — whether in-house or outsourced — work as an extension of the company’s management to ensure that internal processes align with organizational objectives and mitigate risk.

External audits must always be performed by an independent CPA firm. Their primary purpose is to provide an opinion on the accuracy and fairness of the company’s financial statements on the reporting date. An external audit aims to assure stakeholders — such as lenders, investors and regulators — that the financial statements are free from material misstatement and comply with Generally Accepted Accounting Principles (GAAP) or another relevant framework.

2. Scope

Internal audits can cover a broad range of topics. For example, auditors can evaluate operations, internal controls, company- or industry-specific risks, and compliance with laws and regulations. The scope can be tailored to the company’s needs and may change as new risks or business areas emerge. Outsourcing this function can be cost-effective for smaller organizations that don’t require a full-time internal audit department.

External audits are standardized, focusing solely on the financial statements and related disclosures. External auditors perform testing on account balances and transactions, evaluate financial reporting controls, and assess compliance with GAAP or other relevant frameworks. Auditors follow strict regulatory guidelines, such as Generally Accepted Auditing Standards set forth by the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board standards.

3. Independence

Internal auditors work under the direction of the company’s audit committee or management. Outsourced internal audit teams are also considered part of the organization’s internal audit function, which means they may not be entirely independent of the organization. While internal auditors usually provide recommendations directly to the company, they can remain objective if they report directly to the board or audit committee.

On the other hand, external auditors must maintain strict independence from the companies they audit to ensure objectivity and compliance with professional standards. They can’t have financial interests in the company or perform services that could create actual or perceived conflicts of interest. Independence is crucial for external auditors to provide an unbiased opinion that stakeholders can trust.

4. Methods

Internal auditors use a risk-based, continuous-improvement approach, focusing on specific areas of concern. Internal auditors may use internal control models — such as the Committee of Sponsoring Organizations of the Treadway Commission framework — to assess the company’s processes, identify potential risks, evaluate controls, and make recommendations for improvement. Their role tends to be more consultative.

External auditors follow standardized methods to gather sufficient evidence to form an opinion on the financial statements’ fairness and compliance. After assessing the company’s risks, external auditors may perform substantive procedures, analytical reviews, and sampling techniques to detect material misstatements. They verify the accuracy of accounts by conducting tests, reviewing source documents, and confirming account balances with third parties.

5. Deliverables

Internal auditors typically report directly to management and the audit committee. They provide detailed recommendations and management action plans based on their findings, areas of risk, and control weaknesses. Internal audit reports aren’t usually distributed to outside stakeholders; instead, they’re intended to guide internal improvements and decision-making.

External auditors issue an audit opinion on the organization’s financial statements. The audit opinion is a letter that serves as the front page of the company’s financials. The following types of opinions may be issued, depending on the audit findings:

Unqualified. A clean “unqualified” opinion is the most common and desirable. The auditor states that the financial statements fairly present the company’s financial condition, position, and operations.

Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP but are otherwise fairly presented. Qualified opinions also may be given if management limits the scope of certain audit procedures.

Adverse. An adverse opinion letter outlines material exceptions to GAAP that affect the financial statements as a whole. It indicates that the financial statements aren’t presented fairly.

Disclaimer. A disclaimer of opinion happens when an auditor gives up in the middle of an audit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status, and concerns about dishonest management practices.

Public companies file reports with the Securities and Exchange Commission, which are available to the public. Many private companies share audited financial statements with lenders, franchisors, private equity investors, and other stakeholders.

6. Frequency

Internal audit procedures are performed throughout the year, typically following an annual audit plan approved by management or the audit committee. Internal auditors may evaluate different areas on a rotating or as-needed basis as risks evolve or emerge.

External audits are typically performed at year-end. However, public companies and larger private organizations may also be required to issue audited financial statements on a quarterly basis. For an added measure of assurance, some companies have auditors conduct periodic “surprise” audits or agreed-upon procedures engagements that target high-risk accounts or areas of concern identified during year-end audit procedures.

How audits fight fraud

Internal and external audits are some of the most common and effective antifraud controls, according to “Occupational Fraud 2024: A Report to the Nations,” published by the Association of Certified Fraud Examiners (ACFE). The study found that 84% of the respondents had audited financial statements and 80% had internal audits.

It also reported that losses incurred by victim organizations that had their financial statements audited by outside accounting firms were 52% less than those without audited financial statements. Additionally, the median duration of fraud schemes was cut in half with the use of external audits. The time it took for victim organizations with audited financials to discover fraud schemes was 12 months, compared to 24 months for those without.

Likewise, internal audits reduced fraud losses by 43% and the duration of fraud schemes by 50%. However, internal auditors detected 14% of fraud schemes in the 2024 study (compared to only 3% for external auditors). And whistleblowers initially reported fraud suspicions to the internal audit department in 14% of the cases (compared to only 1% for external auditors).

© 2024 KraftCPAs PLLC

Although inflation rates have come down since peaking in 2022, some tax amounts will still increase for 2025. The IRS recently announced next year’s inflation-adjusted amounts for several provisions.

Here are the highlights:

Standard deduction. What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2025, the standard deduction will increase to $15,000 for single taxpayers, $30,000 for married couples filing jointly, and $22,500 for heads of household. This is up from the 2024 amounts of $14,600 for single taxpayers, $29,200 for married couples filing jointly, and $21,900 for heads of household.

The highest tax rate. For 2025, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $626,350 ($751,600 for married taxpayers filing jointly). This is up from 2024, when the 37% rate affects single taxpayers and heads of households with income exceeding $609,350 ($731,200 for married couples filing jointly).

Retirement plans. Some retirement plan limits will increase for 2025. That means you may have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2025, individuals can contribute up to $23,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $23,000 in 2024. The general catch-up contribution limit for employees age 50 and over who participate in these plans will be $7,500 in 2025 (unchanged from 2024).

However, under the SECURE 2.0 law, specific 401(k) participants can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are age 60, 61, 62, or 63 will be $11,250.

Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are age 60, 61, 62, or 63 can contribute up to $34,750.

The annual contribution limit for those with IRA accounts will remain at $7,000 for 2025. The IRA catch-up contribution for those age 50 and up also remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs). These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored FSA, you can contribute more in 2025. The annual contribution amount will rise to $3,300 (up from $3,200 in 2024). FSA funds must be used by year-end unless an employer elects to allow a 2 1/2-month carryover grace period. For 2025, the amount that can be carried over to the following year will rise to $660 (up from $640 for 2024).

Taxable gifts. You can make annual gifts up to the federal gift tax exclusion amount each year. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2025, the first $19,000 of gifts to as many recipients as you’d like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. This is up from $18,000 in 2024.

© 2024 KraftCPAs PLLC

The future of the Corporate Transparency Act (CTA) – which would have affected an estimated 32 million businesses across the U.S. – is uncertain after a preliminary injunction was issued to prevent its enforcement.

The U.S. District Court for the Eastern District of Texas ruled on December 3 that portions of the CTA overstepped constitutional boundaries and that such corporate regulations should be determined at a state level. The court also said that the CTA would place an excessive burden on businesses by requiring them to disclose beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). The cost to businesses to comply with the rules in the first year alone was estimated to be more than $22 billion.

The CTA was passed in 2021 in a bipartisan effort to curb illicit financial activity. Businesses were allowed to voluntarily comply with the new BOI rules starting January 1, 2024, and millions of BOI reports have already been submitted. Mandatory compliance was to start in January 2025.

With the injunction in place, businesses that had not filed BOI information are no longer required to do so. Businesses that already filed aren’t required to take further action.

It’s widely expected that the decision will be appealed, but it’s not clear what approach will be taken when a new administration begins in January.

© 2024 KraftCPAs PLLC

It’s still unknown how the tax landscape will change in the coming years under a new presidential administration. The good news is that businesses have several avenues to explore to trim their federal tax liability for 2024.

Pass-through entity tax deduction

About three dozen states offer some form of the pass-through entity (PTE) tax deduction on the individual tax returns of owners of pass-through entities, such as partnerships, S corporations, and limited liability companies. These deductions are intended to bypass the Tax Cuts and Jobs Act’s $10,000 limit on the state and local taxes (SALT) deduction.

Details vary by state, but if available, PTE tax deductions typically allow an entity to pay a mandatory or elective entity-level state tax on its income and claim a business expense deduction for the full amount. In turn, partners, shareholders, or members receive a full or partial tax credit, deduction, or exclusion on their individual tax returns, without eating into their limited SALT deduction.

Qualified business income deduction

The qualified business income (QBI) deduction allows owners of pass-through entities, including sole proprietors, to deduct up to 20% of their QBI. The deduction is set to expire in 2026, at which point income would be taxed at owners’ individual income tax rates. However, with Republicans in control of the White House, the Senate and the House of Representatives beginning in 2025, tax experts don’t expect the deduction to expire.

To make the most of the QBI deduction for 2024, consider increasing your W-2 deductions or purchasing qualified property. You also can avoid applicable income limits on the deduction through timing tactics.

Income and expense timing

Timing the receipt of income and payment of expenses can cut your taxes by reducing your taxable income. For example, if you expect to be in the same or a lower income tax bracket next year and use the cash method of accounting, consider delaying your customer billing to push payment into 2025. Accrual method businesses can delay shipments or services until early January for the same effect. Similarly, you could pre-pay bills and other liabilities due in 2025.

Bonuses often make a prime candidate for careful timing. A closely held C corporation might want to reduce its income by paying bonuses before year-end. This applies to cash-method pass-through businesses, too. Accrual method businesses generally can deduct bonuses in 2024 if they’re paid to nonrelatives within 2½ months after the end of the tax year.

Asset purchases 

There’s still time to make asset purchases and place them into service before year-end. You can then deduct a big chunk of the purchase price, if not the entire amount, for 2024.

The Section 179 expensing election allows 100% expensing of eligible assets in the year they’re placed in service. Eligible assets include new and used machinery, equipment, certain vehicles, and off-the-shelf computer software. You also can immediately expense qualified improvement property (QIP). This includes interior improvements to your facilities and certain improvements to your roof, HVAC, and fire protection and security systems.

Under Sec. 179, in 2024, the maximum amount you can deduct is $1.22 million. The deduction begins phasing out on a dollar-per-dollar basis when qualifying purchases exceed $3.05 million. The amount is also limited to the taxable income from your business activity, though you can carry forward unused amounts or apply bonus depreciation to the excess.

For this year, bonus depreciation allows you to deduct 60% of the purchase price of tangible property with a Modified Accelerated Cost Recovery System period of no more than 20 years (such as computer systems, office furniture, and QIP). The allowable first-year deduction will drop by 20% per subsequent year, zeroing out in 2027, absent congressional action. Bonus depreciation isn’t subject to a taxable income limit, so it can create net operating losses (NOLs). Under the TCJA, NOLs can be carried forward and are subject to an 80% limitation.

Keep in mind that depreciation-related deductions can reduce QBI deductions, making a cost-benefit analysis vital.

Research credit

The research credit (often referred to as the ‘research and development,’ ‘R&D,’ or ‘research and experimentation’ credit) is a frequently overlooked opportunity. Many businesses mistakenly assume they’re ineligible, but it’s not just for technology companies or industries known for innovation and experimentation — or for companies that show a profit. It may be worth investigating whether your business has engaged in qualified research this year or in previous years.

The credit generally equals the sum of 20% of the excess of a business’s qualified research expenses for the tax year over a base amount. The Inflation Reduction Act made the research credit even more valuable for qualified small businesses. It doubled the credit amount such businesses can apply against their payroll taxes, from $250,000 to $500,000.

© 2024 KraftCPAs PLLC

A federal district court judge has struck down the Biden administration’s new rule regarding the salary threshold for determining whether certain employees are exempt from federal overtime pay requirements.

With a Republican administration poised to take control of the U.S. Department of Labor (DOL), the court’s decision may be the death knell for the rule. Here’s what it means for employers.

The rejected overtime rule

The first phase of the rule took effect for most employers in July 2024 and affects executive, administrative, and professional (EAP) employees. Under the Fair Labor Standards Act (FLSA), nonexempt workers are entitled to overtime pay at 1.5 times their regular pay rate for hours worked per week that exceed 40. EAP employees are exempt from the overtime requirement if they satisfy three tests:

Salary basis test. An employee is paid a predetermined and fixed salary that isn’t subject to reduction due to variations in the quality or quantity of his or her work.

Salary level test. The salary isn’t less than a specific amount or threshold.

Duties test. An employee primarily performs executive, administrative or professional duties.

The new rule focused on the salary level test and increased the threshold in two steps. The first step occurred on July 1, 2024, when most salaried workers earning less than $844 per week or $43,888 per year became eligible for overtime (up from $684 per week or $35,568 per year). The second step was scheduled to kick in on January 1, 2025, when the salary threshold would have increased to $1,128 per week or $58,656 per year.

In addition, the rule raised the total compensation requirement for highly compensated employees (HCEs), who are subject to a more relaxed duties test than employees earning less. HCEs need only “customarily and regularly” perform at least one of the duties of an exempt EAP employee instead of primarily performing such duties.

As of July 1, 2024, this less restrictive test applied to HCEs who perform office or nonmanual work and earn total compensation (including bonuses, commissions and certain benefits) of at least $132,964 per year (up from $107,432). It would have risen to $151,164 on January 1, 2025.

The rule also established a mechanism to update the salary thresholds every three years, based on current earnings data from the most recent available four quarters of data from the U.S. Bureau of Labor Statistics. However, the DOL could temporarily delay a scheduled update when warranted by unforeseen economic or other conditions.

The court’s ruling

In June 2024, the U.S. District Court for the Eastern District of Texas temporarily blocked the rule as far as its application to the State of Texas as an employer — so on an extremely limited basis — while it considered the state’s underlying legal challenge to the rules (State of Texas v. U.S. Department of Labor). Multiple business groups joined Texas and asked the court to vacate the rule entirely.

On November 15, 2024, the court did just that. It found that the new rule exceeded the DOL’s authority to define terms because the EAP exemption requires that an employee’s status turn on duties, not salary — and the new rule impermissibly made salary predominate over duties. The court also found the automatic updating mechanism exceeded the DOL’s authority.

Notably, the court cited the U.S. Supreme Court’s recent decision overturning the doctrine known as “Chevron deference.” Under the doctrine, which had been in effect for decades, courts deferred to “permissible” agency interpretations of the laws they administer. The high court’s ruling empowers courts to reject agency rules more easily.

Response from employers

As a result of the court’s ruling, the salary thresholds for EAP employees and HCEs return to their earlier levels: $684 per week or $35,568 per year for the former and $107,432 for the latter. On its face, that’s good news for employers. However, many businesses have started making moves in response to the new rule. For example, employers may have reclassified some employees as nonexempt, increased salaries to retain exempt status for others, or reduced salaries to offset new overtime pay.

Now what?

The DOL could appeal the ruling, which could make employers reluctant to institute any immediate changes. An appeal would be heard by the conservative Fifth Circuit Court of Appeals, which has repeatedly ruled against the Biden administration.

The best predictor of what’s to come may be the treatment of a similar DOL rule issued by President Obama’s administration. A court invalidated that rule in November 2016 in a decision that was appealed while Obama was still in office. The DOL under President Trump’s first administration withdrew the appeal and issued the revised and less expansive rule that took effect in 2019.

Regardless, bear in mind that exempt employees also must satisfy the applicable duties test, whatever the salary threshold. An employee whose salary exceeds the threshold but doesn’t primarily engage in the applicable duties isn’t exempt from the overtime requirements.

Potential pushback ahead

Employers that roll back changes in status or salary increases that were implemented in anticipation of the new rule could soon face questions from employees — and their legal advisors — about whether their duties warrant an exemption. Regardless of potential employee litigation, rollbacks now must be weighed against the impact on employee morale in a competitive job market.

© 2024 KraftCPAs PLLC

The options are running out if you still want to reduce your 2024 tax bill – but it’s not all bad news. Here are a few tax-related strategies to consider before the year ends.

Bunching itemized deductions

For 2024, the standard deduction is $29,200 for married couples filing jointly, $14,600 for single filers, and $21,900 for heads of households. “Bunching” various itemized deductions into the same tax year can offer a pathway to generating itemized deductions that exceed the standard deduction.

For example, you can claim an itemized deduction for medical and dental expenses that are greater than 7.5% of your adjusted gross income (AGI). Suppose you’re planning to have a procedure in January that will come with significant costs not covered by insurance. In that case, you may want to schedule it before year end if it’ll push you over the standard deduction when combined with other itemized deductions.

Making charitable contributions

Charitable contributions can be a useful vehicle for bunching. Donating appreciated assets can be especially lucrative. You avoid capital gains tax on the appreciation and, if applicable, the net investment income tax (NIIT).

Another attractive option for taxpayers age 70½ or older is making a qualified charitable distribution (QCD) from a retirement account that has required minimum distributions (RMDs). For 2024, eligible taxpayers can contribute as much as $105,000 (adjusted annually for inflation) to qualified charities. This removes the distribution from taxable income and counts as an RMD. It doesn’t, however, qualify for the charitable deduction. You can also make a one-time QCD of $53,000 in 2024 (adjusted annually for inflation) through a charitable remainder trust or a charitable gift annuity.

Leveraging maximum contribution limits

Maximizing contributions to your retirement and healthcare-related accounts can reduce your taxable income now and grow funds you can tap later. The 2024 maximum contributions are:

• $23,000 ($30,500 if age 50 or older) for 401(k) plans
• $7,000 ($8,000 if age 50 or older) for traditional IRAs
• $4,150 for individual coverage and $8,300 for family coverage, plus an extra $1,000 catch-up contribution for those age 55 or older for Health Savings Accounts

Also keep in mind that, beginning in 2024, contributing to 529 plans is more appealing because you can transfer unused amounts to a beneficiary’s Roth IRA (subject to certain limits and requirements).

Harvesting losses

Although the stock market clocked record highs this year, you might find some losers in your portfolio. These are investments now valued below your cost basis. By selling them before year-end, you can offset capital gains. Losses that are greater than your gains for the year can offset up to $3,000 of ordinary income, with any balance carried forward.

Just remember the “wash rule.” It prohibits deducting a loss if you buy a “substantially similar” investment within 30 days — before or after — the sale date.

Converting an IRA to a Roth IRA

Roth IRA conversions are always worth considering. The usual downside is that you must pay income tax on the amount you transfer from a traditional IRA to a Roth. If you expect your income tax rate to increase in 2026, the tax hit could be less now than down the road.

Regardless, the converted funds will grow tax-free in the Roth, and you can take qualified distributions without incurring tax after you’ve had the account for five years. Moreover, unlike other retirement accounts, Roth IRAs carry no RMD obligations.

In addition, Roth accounts allow tax- and penalty-free withdrawals at any time for certain milestone expenses. For example, you can take a distribution for a first-time home purchase (up to $10,000), qualified birth or adoption expenses (up to $5,000 per child) or qualified higher education expenses (no limit).

Timing your income and expenses

The general timing strategy is to defer income into 2025 and accelerate deductible expenses into 2024, assuming you won’t be in a higher tax bracket next year. This strategy can reduce your taxable income and possibly help boost tax benefits that can be reduced based on your income, such as IRA contributions and student loan deductions.

If you’ll likely land in a higher tax bracket soon, you may want to flip the general strategy. You can accelerate income into 2024 by, for example, realizing deferred compensation and capital gains, executing a Roth conversion, or exercising stock options.

© 2024 KraftCPAs PLLC

As a business owner, you may travel to visit customers, attend conferences, check on vendors, and for other purposes. Understanding which travel expenses are tax deductible can significantly affect your bottom line. Properly managing travel costs can help ensure compliance and maximize your tax savings.

Your tax home

Eligible taxpayers can deduct the ordinary and necessary expenses of business travel when away from their “tax homes.” Ordinary means common and accepted in the industry. Necessary means helpful and appropriate for the business. Expenses aren’t deductible if they’re for personal purposes, lavish, or extravagant. That doesn’t mean you can’t fly first class or stay in luxury hotels. But you’ll need to show that expenses were reasonable.

Your tax home isn’t necessarily where you maintain your family home. Instead, it refers to the city or general area where your principal place of business is located. (Special rules apply to taxpayers with several places of business or no regular place of business.)

Generally, you’re considered to be traveling away from home if your duties require you to be away from your tax home for substantially longer than an ordinary day’s work and you need to get sleep or rest to meet work demands. This includes temporary work assignments. However, you aren’t permitted to deduct travel expenses in connection with an indefinite work assignment (more than a year) or one that’s realistically expected to last more than a year.

Deductible expenses

Assuming you meet these requirements, common deductible business travel expenses include:

• Air, train, or bus fare to the destination, plus baggage fees
• Car rental expenses or the cost of using your vehicle, plus tolls and parking
• Transportation while at the destination, such as taxis or rideshares between the airport and hotel, and to and from work locations
• Lodging
• Tips paid to hotel or restaurant workers
• Dry cleaning and laundry

Meal expenses are generally 50% deductible. This includes meals eaten alone. It also includes meals with others if they’re provided to business contacts, serve an ordinary and necessary business purpose, and aren’t lavish or extravagant.

Claiming deductions

Self-employed people can deduct travel expenses on Schedule C. Employees currently aren’t permitted to deduct unreimbursed business expenses, including travel expenses.

However, businesses may deduct employees’ travel expenses to the extent they provide advances or reimbursements or pay the expenses directly. Advances or reimbursements are excluded from wages (and aren’t subject to income or payroll taxes) if they’re made according to an “accountable plan.” In this case, the expenses must have a business purpose, and employees must substantiate expenses and pay back any excess advances or reimbursements.

Mixing business and pleasure

If you take a trip within the US. primarily for business but also take some time for personal activities, you’re still permitted to deduct the total cost of airfare or other transportation to and from the destination. However, lodging and meals are only deductible for the business portion of your trip. Generally, a trip is primarily for business if you spend more time on business activities than on personal activities.

Recordkeeping

To deduct business travel expenses, you must substantiate them with adequate records — receipts, canceled checks, and bills — that show the amount, date, place, and nature of each expense. Receipts aren’t required for non-lodging expenses less than $75, but these expenses must still be documented in an expense report. Keep in mind that an employer may have its own substantiation policies that are stricter than the IRS requirements.

If you use your car or a company car for business travel, you can deduct your actual costs or the standard mileage rate.

For lodging, meals, and incidental expenses (M&IE) — such as small fees or tips — employers can use the alternative per-diem method to simplify expense tracking. Self-employed individuals can use this method for M&IE, but not for lodging.

Under this method, taxpayers use the federal lodging and M&IE per-diem rates for the travel destination to determine reimbursement or deduction amounts. This avoids the need to keep receipts to substantiate actual costs. However, it’s still necessary to document the time, place, and nature of expenses.

There’s also an optional high-low substantiation method that allows a taxpayer to use two per-diem rates for business travel: one for designated high-cost localities and a lower rate for other localities.

© 2024 KraftCPAs PLLC

You’ll be allowed to contribute more to your 401(k) and other retirement plans next year, but because of lower inflation and cost-of-living adjustments, the increases aren’t as big as in recent years.

The new numbers were announced by the IRS in Notice 2024-80.

401(k) plans

The 2025 contribution limit for employees who participate in 401(k) plans will increase to $23,500 (up from $23,000 in 2024). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees age 50 or over who participate in 401(k) plans and the other plans mentioned above will remain $7,500 (the same as in 2024). However, under the SECURE 2.0 law, specific individuals can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are 60, 61, 62 or 63 will be $11,250.

Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are 60, 61, 62 or 63 can contribute up to $34,750.

SEP and defined contribution plans

The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase to $70,000 in 2025, up from $69,000 this year. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will remain $750 in 2025.

SIMPLE plans

The deferral limit to a SIMPLE plan will increase to $16,500 in 2025 (up from $16,000 in 2024). The catch-up contribution limit for employees who are 50 or over and participate in SIMPLE plans will remain $3,500. However, SIMPLE catch-up contributions for employees who are 60, 61, 62 or 63 will be higher under a change made by SECURE 2.0. Beginning in 2025, they will be $5,250.

Therefore, participants in SIMPLE plans who are 50 or older can contribute $20,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $21,750.

Other plan limits

The IRS also announced that in 2025:

• The limitation on the annual benefit under a defined benefit plan will increase from $275,000 to $280,000.
• The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $220,000 to $230,000.
• The limitation used in the definition of “highly compensated employee” will increase from $155,000 to $160,000.

IRA contributions

The 2025 limit on annual contributions to an individual IRA will remain $7,000 (the same as 2024). The IRA catch-up contribution limit for individuals 50 or older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.

© 2024 KraftCPAs PLLC

The outcome of the November 5 election is likely to significantly impact taxes. Many provisions in President-elect Donald Trump’s signature tax legislation from his first time in the White House, the Tax Cuts and Jobs Act (TCJA), are scheduled to expire at the end of 2025. Now, there’s a better chance that most provisions will be extended.

This is especially true after Republicans won back a majority in the U.S. Senate. As of November 7, Republicans have 52 seats with a few seats yet to be called, so their majority could grow. The balance of power in the U.S. House of Representatives remains up in the air, with quite a few seats yet to be called.

In addition to the TCJA, the former and future president has suggested many other tax law changes during his campaign. Here’s a brief overview of some potential tax law changes:

Expiring provisions of the TCJA. Examples of expiring provisions include lower individual tax rates, an increased standard deduction, and a higher gift and estate tax exemption. The president-elect would like to make the TCJA’s individual and estate tax cuts permanent. He’s also indicated that he’s open to revisiting the TCJA’s $10,000 limit on the state and local tax deduction.

Business taxation. Trump has proposed decreasing the corporate tax rate from its current 21% to 20% (or even lower for companies making products in America). He’d also like to expand the Section 174 deduction for research and development expenditures.

Individual taxable income. The president-elect has proposed eliminating income and payroll taxes on tips for restaurant and hospitality workers, and excluding overtime pay and Social Security benefits from taxation.

Housing incentives. Trump has alluded to possible tax incentives for first-time homebuyers but without specifics. The Republican platform calls for reducing mortgage rates by slashing inflation, cutting regulations and opening parts of federal lands to new home construction.

Tariffs. The president-elect has called for higher tariffs on imports, suggesting a baseline tariff of 10%, with a 60% tariff on imports from China. In speeches, he’s  also proposed a 100% tariff on certain imported cars.

Which extensions and proposals will come to fruition will depend on a variety of factors, including the control of Congress. The U.S. House and Senate must approve tax bills before the president can sign them into law.

© 2024 KraftCPAs PLLC

Presidential campaigning usually leads to promises of tax cuts that are big on savings but sometimes light on details. This year’s presidential race is no different.

Here’s a breakdown of some of the most notable tax-related proposals of former President Donald Trump and Vice President Kamala Harris as Election Day nears.

Expiring provisions of the TCJA

Many of the provisions in the Tax Cuts and Jobs Act are scheduled to expire after 2025, including the lower marginal tax rates, increased standard deduction, and higher gift and estate tax exemption. Trump would like to make the individual and estate tax cuts permanent and cut taxes further but hasn’t provided any specifics.

As a senator, Harris voted against the TCJA but recently said she won’t increase taxes on individuals making less than $400,000 a year. This means that she would need to extend some of the TCJA’s tax breaks. She has endorsed President Biden’s 2025 budget proposal, which would return the top individual marginal income tax rate for single filers earning more than $400,000 a year ($450,000 for joint filers) to the pre-TCJA rate of 39.6%.

Harris has also proposed increasing the net investment income tax rate and the additional Medicare tax rate to reach 5% on income above $400,000 a year.

Business taxation

Trump has proposed to decrease the corporate tax rate from its current 21% to 20% (or even lower for companies making products in America). In addition, he says he’d like to eliminate the 15% corporate alternative minimum tax (CAMT) established by the Inflation Reduction Act. On the other hand, Harris proposes raising the corporate tax rate to 28% — still below the pre-TCJA rate of 35%. She has also proposed to increase the CAMT to 21%.

In addition, Harris has proposed to quadruple the 1% excise tax on the fair market value when corporations repurchase their stock, to reduce the difference in the tax treatment of buybacks and dividends. She would block businesses from deducting the compensation of employees who make more than $1 million, too.

In another proposal, Harris said she’d like to increase the current $5,000 deduction for small business startup expenses to $50,000. The proposal would allow new businesses to allocate the deduction over a period of years or claim the full deduction if they’re profitable.

Individual taxable income

Trump has proposed to eliminate income and payroll taxes on tips for restaurant and hospitality workers. Harris has proposed exempting tips from income taxes. But some experts argue that such policies might prompt employers to reduce tipped workers’ wages, among other negative effects. Harris’s proposal also includes provisions to prevent wealthy individuals from restructuring their compensation to avoid taxation — by, for example, classifying bonuses as tips.

Trump recently proposed excluding overtime pay from taxation. Experts have similarly said this would be vulnerable to abuse. For example, a salaried CEO could be reclassified as hourly to qualify for overtime, with a base pay cut but a dramatic pay increase from overtime hours.

In another proposal, Trump said he would like to exclude Social Security benefits from taxation.

Child Tax Credit

Trump’s running mate, Senator J.D. Vance, has proposed a $5,000-per-child Child Tax Credit (CTC). However, it’s unclear if Trump endorses the proposal. Of note, Senate Republicans recently voted against a bill that would expand the CTC.

Harris has proposed boosting the maximum CTC from $2,000 to $3,600 for each qualifying child under age six, and $3,000 each for all other qualifying children. She would increase the credit to $6,000 for the first year of life. Harris also favors expanding the Earned Income Tax Credit and premium tax credits that subsidize health insurance.

Capital gains

Harris proposes taxing unrealized capital gains (appreciation on assets owned but not yet sold) for the wealthiest taxpayers. Individuals with a net worth exceeding $100 million would face a tax of at least 25% on their income and their unrealized capital gains.

Harris is also calling for individuals with taxable income exceeding $1 million to have their capital gains taxed at ordinary income rates, rather than the current highest long-term capital gains rate of 20%. Unrealized gains at death also would be taxed, subject to a $5 million exemption ($10 million for married couples) and certain other exemptions.

Housing incentives

Trump has alluded to possible tax incentives for first-time homebuyers but without any specifics. The GOP platform calls for reducing mortgage rates by slashing inflation, cutting regulations and opening parts of federal lands to new home construction.

Harris proposes new tax incentives intended to address housing concerns. Among the proposals, she would like to provide up to $25,000 in down-payment assistance to families that have paid their rent on time for two years. She’s also proposed more generous support for first-generation homeowners. In addition, she proposes a tax incentive for homebuilders that build starter homes for first-time homebuyers.

Tariffs

Trump repeatedly has called for higher tariffs on U.S. imports. He would impose a baseline tariff of 10%, with a 60% tariff on imports from China. (In speeches, he’s proposed a 100% tariff on certain imported cars.)

Trump has also suggested eliminating income taxes completely and replacing that revenue through tariffs. Critics argue that this would effectively impose a large tax increase (in the form of higher prices) on tens of millions of Americans who earn too little to pay federal income taxes.

What does it mean?

Nonpartisan economics researchers project that Trump’s tax and spending proposals would increase the federal deficit by $5.8 trillion over the next decade, compared to $1.2 trillion for Harris’s proposals. That assumes, of course, that all the proposals come to fruition, which depends on factors beyond just who ends up in the White House.

Any tax legislation would face intense scrutiny by the House and Senate – which also are up for grabs between Democrats and Republicans – before ever reaching the president’s desk.

© 2024 KraftCPAs PLLC

Businesses that haven’t filed initial beneficial ownership information (BOI) are quickly running out of time as January deadlines approach.

The new BOI rules are part of the Corporate Transparency Act, a bipartisan effort enacted in 2021 to curb illicit finances. The law requires more than 32 million U.S. businesses to report ownership information to the Financial Crimes Enforcement Network (FinCEN).

Under the law, beneficial owners are considered to be individuals who own or control at least 25% of a company or have substantial control over the company. Although some U.S. businesses may qualify for exemptions, most businesses that were formed by filing with a secretary of state or similar office will be subject to BOI filing requirements.

The deadline to file for most companies is January 2025, and more specifically:

• A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report.
• A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective.
• A reporting company created or registered on or after January 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.

Filing is free, and BOI forms and extensive resources are available online at fincen.gov/boi.

FinCEN has reported receiving millions of BOI reports since opening the filing process January 1, 2024.

© 2024 KraftCPAs PLLC