Category: Article

The on-again, off-again requirement for business owners to file beneficial ownership information (BOI) is on hold one more time.

On December 26, a federal appeals court reinstated a lower court’s injunction that stopped enforcement of a January 13, 2025, BOI filing deadline for many small businesses in the U.S. On December 23, a different panel of judges on the court had lifted the injunction and ordered the BOI requirements to resume.

Under the rule, an estimated 32 million businesses in the U.S. would be required to file the report or face civil or criminal penalties. As the issue continues to drift through the courts, business may voluntarily file BOI reports and avoid potential last-minute scrambles if the injunction is again lifted. At least 6.5 million BOI reports have been filed so far.

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

BOI’s path so far

Under the Corporate Transparency Act (CTA), the BOI reporting requirements went into effect on January 1, 2024. The requirements are intended to help prevent criminals from using businesses for illicit activities, such as money laundering and fraud. The CTA requires most small businesses to provide information about their beneficial owners – or the individuals who ultimately own or control the businesses – to FinCEN.

Under the CTA, the exact deadline for BOI compliance depends on the entity’s date of formation. Reporting companies created or registered before January 1, 2024, have one year to comply by filing initial reports, which means their deadline would be January 1, 2025. Those created or registered on or after January 1, 2024, but before January 1, 2025, have 90 days to file their initial reports upon receipt of their creation or registration documents. Entities created or registered on or after January 1, 2025, have 30 days upon receipt of their creation or registration documents to file initial reports.

District court issues an injunction

On December 3, the U.S. District Court for the Eastern District of Texas issued an order granting a nationwide preliminary injunction that enjoined the CTA (including enforcement of the statute and regulations implementing its BOI reporting requirements) and stayed all deadlines to comply with the CTA’s reporting requirements.

The U.S. Department of Justice, on behalf of the Treasury Department, filed an appeal in the case on December 5.

Fifth Circuit lifts the injunction

On December 23, the U.S. Court of Appeals for the Fifth Circuit issued a ruling to lift the preliminary injunction. FinCEN quickly announced that reporting companies were once again required to provide BOI. However, the January 1 deadline was extended to January 13, 2025, with some exceptions. For example, reporting companies qualifying for disaster relief may have extended deadlines beyond January 13.

Fifth Circuit upholds injunction

On December 26, the same Fifth Circuit court – but consisting of a different panel of judges – reversed its order and placed an injunction on the BOI rules. In its ruling, the court said it needed additional time to consider the merits of the case and issue its final ruling.

© 2024 KraftCPAs PLLC

Intangible assets – including patents, trademarks, copyrights, and goodwill – play a crucial role in business, but the tax treatment of these assets can be complex.

A better understanding of the issues involved can be financially lucrative. Here are a few of the most common questions and answers.

What are intangible assets?

The term “intangibles” covers many items, and determining whether an acquired or created asset or benefit is intangible often isn’t easy. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entities (such as corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments, and agreements.

What are the expenses?

A few expenses you might incur to acquire or create intangibles that are subject to the capitalization rules include amounts paid to:

• Obtain, renew, renegotiate or upgrade business or professional licenses
• Modify certain contract rights (such as a lease agreement)
• Defend or perfect title to intangible property (such as a patent)
• Terminate certain agreements, such as leases of tangible property, exclusive licenses to acquire or use your property, and certain non-competition agreements.

IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it’s paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any business and many ordinary business transactions. Examples of costs that facilitate the acquisition or creation of an intangible include payments to:

• Outside counsel to draft and negotiate a lease agreement
• Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder
• Outside consultants to investigate competitors in preparing a contract bid
• Outside counsel for preparing and filing trademark, copyright, and license applications

Why are intangibles so complex?

IRS regulations require the capitalization of costs to:

• Acquire or create an intangible asset
• Create or enhance a separate, distinct intangible asset
• Create or enhance a “future benefit” identified in IRS guidance as capitalizable
• “Facilitate” the acquisition or creation of an intangible asset

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of either:

• 12 months after the first date on which the taxpayer realizes the right or benefit; or
• the end of the tax year following the tax year in which the payment is made.

Exceptions to the rules

Like most tax rules, these capitalization rules have exceptions. Taxpayers can also make certain elections to capitalize items that aren’t ordinarily required to be capitalized. The examples described above aren’t all-inclusive. Given the length and complexity of the regulations, transactions involving intangibles and related costs should be analyzed by an accountant to determine the tax implications.

© 2024 KraftCPAs PLLC

You’ve worked hard to establish a seasoned, well-oiled internal audit function at your organization – but with changes coming to the standards, now’s the time to make sure you remain compliant.

The new IIA Global Internal Audit Standards (the 2024 Standards) were released on January 9, 2024, and will become effective on January 9, 2025. All quality assessment reviews performed after that date will utilize the new Standards. Because compliance is imperative, your CAE and internal audit function must be up-to-date and functioning prior to the effective date.

There should be a systematic approach to achieving compliance with the new Standards. Broadly, comprehensive assessment and gap analysis, training and development, and continuous monitoring and evaluation should be performed to assist in your preparation for the new Standards becoming effective.

Although not all-inclusive, steps that should be considered include:

• Have conversations with senior management, audit committee members, and board members to discuss these changes and the need for updates in policies and procedures, including their roles, consideration, approval, and support.
• Consider past quality assessment reports, both internal and by third parties, and make sure you have addressed any areas of concern or non-conformance.
• Incorporate updates to your audit operating and policy manuals, processes, and procedures, and get them approved.
• Build out risk assessments, audit plans, and budgets to incorporate the changes.
• Initiate and provide training to employees, senior management, audit committee members, and the board on the changes both broadly for the organization as a whole and within your internal audit function.
• Visit the IIA website and review published materials to determine if you have gaps between the 2017 IPPF and the 2024 Standards. Any gaps must be addressed.

These steps will serve as a starting point in your quest to comply with the new Standards. The new Standards retain a strong focus on five key areas:

• The purpose of internal auditing
• Performing internal audit services
• Managing the internal audit function
• Governance of the internal audit function
• Ethics and professionalism

There are several enhancements to areas such as scope, clarity, emphasis on risk management, communication, reporting, professional competence, and due professional care.

The IIA has provided many tools, articles, training, and supplements to help with the transition to the new Standards. The changes fall into various categories, but we stress the importance of exploring the associated changes in more detail.  Here are some changes to consider that could influence your internal audit function as you move forward:

Known concepts, new definitions

• Professional courage
• Ethical expectations
• Professional skepticism

Still CPE but new conformance

• Core competencies and knowledge, skills, and abilities
• Continuing professional development
• Methodologies, policies, and procedures aligned with the Standards

More IT, data, and information protection

• Information and data access should be least privilege, and establish and follow a methodology

Additional governance, support, and CAE oversight

• Governing of the internal audit function must be discussed with the board and senior management
• Board and senior management support
• CAE’s overall responsibility to facilitate, their qualifications/competencies, and roles and responsibilities of the board and senior management
• External quality assessment every five years; ensuring quality assessor holds a CIA certification
• Establish internal audit strategy including mission, vision, and strategic objectives

Increased documentation and engagement reporting

• Communicating results, findings, and conclusions considered in the totality of the audit plan
• Evaluating the function’s performance
• Ongoing communications, e.g., engagement objectives, scope, and timing
• Evaluating and discussing limitations and changes to objectives and scope
• Documenting relevant information that cannot be obtained as a finding
• Evaluating findings in relation to risk and significance
• Process to resolve disagreements on recommendations and action plans to determine resolution
• Final engagement communications, specify action plan, responsible parties, and implementation date

The updates to the Standards represent a continued focus on accountability, integrity, and excellence in internal auditing practices worldwide. Adherence to the Standards provides many benefits, including enhanced governance and oversight, improved risk management, and increased stakeholder confidence. By embracing the Standards, organizations reaffirm their commitment to these core values and drive sustainable growth and resilience in an ever-evolving environment and world.

In addition to the information mentioned above, CAEs and internal audit functions are advised to monitor and continue to evaluate information released by the IIA regarding the 2024 Standards for more specific guidance.

Jamie Braswell is a senior manager with the risk assurance and advisory services group at KraftCPAs. Reach her at 615-782-4227 or [email protected].

Helpful links

Conformance Readiness Assessment Tool (theiia.org)

Global Internal Audit Standards (theiia.org)

Two-Way Mapping: 2017 IPPF Mandatory Elements to 2024 Global Internal Audit Standards (and Back) (theiia.org)

Benchmark Hub (theiia.org)

Introducing the New Quality Assessment: Aligned to the Global Internal Audit Standards (theiia.org)

Medicare health insurance premiums can add up to big bucks — especially if you’re upper-income, married, and you and your spouse both pay premiums. Do you have a solid understanding of how those premiums affect your taxes?

Premiums for Part B coverage 

Medicare Part B coverage is commonly known as Medicare medical insurance. Part B mainly covers doctors’ visits and outpatient services. Eligible individuals must pay monthly premiums for this benefit. Medicare is generally for people 65 or older. It’s also available earlier to some people with disabilities and those with end-stage renal disease and ALS.

The monthly premium for the current year depends on your modified adjusted gross income (MAGI), as reported on your Form 1040 for two years earlier. MAGI is the adjusted gross income (AGI) number on your Form 1040 plus any tax-exempt interest income.

For 2025, most individuals will pay the base monthly Part B premium of $185 per covered person.

Higher-income individuals must pay a surcharge on top of the base premium. For 2025, a surcharge applies if you:

• filed as an unmarried individual for 2023 and reported MAGI above $106,000 for that year, or;
• filed jointly for 2023 and reported MAGI above $212,000 for that year.

For 2025, Part B monthly premiums, including surcharges if applicable, for each covered individual can be found on this web page.

Part B premiums, including any surcharges, are withheld from your Social Security benefit payments and are shown on the annual Form SSA-1099 sent to you by the Social Security Administration (SSA).

Premiums for Part D drug coverage

Medicare Part D is private prescription drug coverage. Base premiums vary depending on the plan. Higher-income individuals must pay a surcharge on top of the base premium.

For 2025, surcharges apply to those who:

• filed as an unmarried individual for 2023 and reported MAGI above $106,000 for that year, or;
• filed a joint return for 2023 and reported MAGI above $212,000.

You can find the 2025 monthly Part D surcharges for each covered person on this web page.

You pay the base Part D premium, which depends on the private insurance company plan you select, to the insurance company. Any surcharge will be withheld from your Social Security benefit payments and reflected on the annual Form SSA-1099 sent to you by the SSA.

Deducting Medicare premiums

You might be able to combine premiums for Medicare insurance with other qualifying health care expenses to claim an itemized medical expense deduction. Your deduction equals total qualifying expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).

Your 2024 tax return and 2026 Medicare premiums 

Decisions reflected on your 2024 Form 1040 can affect your 2024 MAGI and, in turn, your 2026 Medicare health insurance premiums. This issue is especially relevant if you’re self-employed or an owner of a pass-through business entity (LLC, partnership, or S corporation) because you have more opportunities to micro-manage your 2024 MAGI at tax-filing time. For example, you can choose to make bigger or smaller deductible contributions to a self-employed retirement plan and maximize or minimize depreciation deductions for business assets.

While your 2026 Medicare health insurance premiums may seem to be an issue in the distant future, 2026 will be here before you know it. It’s not too early to plan.

© 2024 KraftCPAs PLLC

If you’re confused about the federal tax treatment of business-related meal and entertainment expenses, you’re not alone. Changes to the tax code have led to a variety of changes to deduction rules. Here’s where they stand for the current tax year.

Current law

The Tax Cuts and Jobs Act eliminated deductions for most business-related entertainment expenses. That means, for example, that you can’t deduct any part of the cost of taking clients out for a round of golf or to a football game.

You can still generally deduct 50% of the cost of food and beverages when they’re business-related or consumed during business-related entertainment.

Allowable food and beverage costs

IRS regulations clarify that food and beverages are all related items whether they’re characterized as meals, snacks, etc. Food and beverage costs include sales tax, delivery fees, and tips.

To be 50% deductible, food and beverages consumed in conjunction with an entertainment activity must either be purchased separately from the entertainment or be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages. You can deduct 50% of the approximate reasonable value if they aren’t purchased separately.

Other rules

Per IRS regulations, no 50% deduction for the cost of business meals is allowed unless:

1. The meal isn’t lavish or extravagant under the circumstances.
2. You (as the taxpayer) or an employee is present at the meal.
3. The meal is provided to you or a business associate.

A “business associate” is an individual with whom you reasonably expect to conduct business — such as established or prospective customers, clients, suppliers, employees, or partners.

IRS regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself — for example, because you’re working late at night.

Traveling on business

Per IRS regulations, the general rule is that you can still deduct 50% of the cost of meals while traveling on business. The longstanding rules for substantiating meal expenses still apply. Don’t forget to keep receipts.

IRS regulations also reiterate the longstanding general rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals accompanying you on business travel. This is also true for spouses and dependents accompanying an officer or employee on a business trip.

The exception is when the expenses would otherwise be deductible. For example, meal expenses for your spouse are deductible if he or she works at your company and accompanies you on a business trip for legitimate business reasons.

100% deductions in certain situations

IRS regulations confirm that some longstanding favorable exceptions for meal and entertainment expenses still apply. For example, your business can deduct 100% of the cost of:

• Food, beverage, and entertainment incurred for recreational, social, or similar activities that are primarily for the benefit of all employees (for example, at a company holiday party)
• Food, beverages, and entertainment available to the public (for example, free food and music you provide at a promotional event open to the public)
• Food, beverages, and entertainment sold to customers for full value
• Amounts that are reported as taxable compensation to recipient employees
• Meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, a customer wins a dinner cruise for 10 valued at $750 at a sales presentation)

In addition, a restaurant or catering business can deduct 100% of the cost of food and beverages purchased to provide meals to paying customers and consumed at the worksite by employees who work in the restaurant or catering business.

© 2024 KraftCPAs PLLC

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