Category: Article

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

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $176,100 for 2025 (up from $168,600 for 2024). Wages and self-employment income above this amount aren’t subject to Social Security tax.

If your business has employees, you might need to budget for additional payroll costs, especially if you have many high earners.

Social Security basics

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers. One is for Old Age, Survivors and Disability Insurance (commonly known as the Social Security tax), and the other is for Hospital Insurance, which is commonly known as the Medicare tax.

A maximum amount of compensation is subject to the Social Security tax, but there’s no maximum for Medicare tax. For 2025, the FICA tax rate for employers will be 7.65% — that’s 6.2% for Social Security, plus 1.45% for Medicare (the same as in 2024).

Updates for 2025

For 2025, an employee will pay three different taxes, which are:

• 6.2% Social Security tax on the first $176,100 of wages (6.2% × $176,100 makes the maximum tax $10,918.20)
• 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns)
• 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages over $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns)

For 2025, the self-employment tax imposed on self-employed people will be:

• 12.4% Social Security tax on the first $176,100 of self-employment income, for a maximum tax of $21,836.40 (12.4% × $176,100)
• 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately)
• 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income over $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

History of the wage base

When the government introduced the Social Security payroll tax in 1937, the wage base was $3,000. It remained that amount through 1950. As the U.S. economy grew and wages began to rise, the wage base was adjusted to ensure that the Social Security system continued to collect sufficient revenue. By 1980, it had risen to $25,900. Twenty years later it had increased to $76,200, and by 2020, it was $137,700. Inflation and wage growth were key factors in these adjustments.

Employees with more than one employer

Business owners often get questions from employees who work for more than one business, meaning that those employees would have taxes withheld from two different employers. Each employer still must withhold Social Security taxes from an employee’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. However, the employees will get a credit on their tax returns for any excess money withheld.

© 2024 KraftCPAs PLLC

Natural disasters lead to significant losses every year throughout the United States, including Tennessee. A variety of tax breaks, however, can help taxpayers recover some of those financial losses, but certain steps are required.

Understanding the casualty loss deduction

A casualty loss can result from the damage, destruction, or loss of property due to any sudden, unexpected, or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes, and volcanic eruptions. Normal wear and tear or progressive deterioration of property doesn’t constitute a deductible casualty loss. For example, drought generally doesn’t qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal-use or business-use items. Generally, you can deduct casualty losses related to your home, household items, and personal vehicles if they’re caused by a federally declared disaster. Under current law, that’s defined as a disaster in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are deductible in the year of the loss, usually the year of the casualty event. If your loss stems from a federally declared disaster, you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

Factoring in reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. You also must reduce the loss by any salvage value.

Reimbursement also could lead to capital gains tax liability. When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You’ll need to include that gain as income unless you’re eligible to postpone reporting the gain.

You may be able to postpone the reporting obligation if you purchase property that’s similar in service or use to the destroyed property within the specified replacement period. You can also postpone if you buy a controlling interest (at least 80%) in a corporation owning similar property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. This is the only way you can deduct personal-use property casualty losses incurred in locations not declared disaster areas.

Calculating casualty loss

For personal-use property, or business-use or income-producing property that isn’t destroyed, your casualty loss is the lesser of:

• The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation)
• The drop in fair market value (FMV) of the property because of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty)

For business-use or income-producing property that’s destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure each loss separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property, including improvements such as landscaping, is treated as one item. The loss is the smaller of the decline in FMV of the whole property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you can deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you’ve subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. If two or more taxpayers have losses from the same casualty, the $100 rule applies separately to each taxpayer.

But that’s not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income after you’ve applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

Keeping necessary records

Documentation is critical to claim a casualty loss deduction. You’ll need to show:

• That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage
• The type of casualty and when it occurred
• That the loss was a direct result of the casualty
• Whether a claim for reimbursement with a reasonable expectation of recovery exists

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Qualifying for IRS relief

This year, the IRS has granted tax relief to taxpayers affected by numerous natural disasters. For example, Hurricane Helene relief was recently granted to the entire states of Alabama, Georgia, North Carolina, and South Carolina, and parts of Florida, Tennessee, and Virginia. The relief typically extends filing and other deadlines. The IRS may provide additional relief to Hurricane Milton victims.

Be aware that you can be an affected taxpayer even if you don’t live in a federally declared disaster area. If you need to access records to meet a filing or payment deadline postponed during the applicable relief period, but those records are located in a covered disaster area, then you are considered to be affected. For example, if you don’t live in a disaster area but your tax preparer does and is unable to pay or file on your behalf, you likely qualify for filing and payment relief.

© 2024 KraftCPAs PLLC

 

Medical schools don’t usually teach accounting and bookkeeping skills, even though financial proficiency is essential to running a thriving medical practice.

Today’s patient billings continue to rise due to growth in healthcare spending. But profits are being driven down by other factors, such as increased operating costs, reduced Medicare and Medicaid reimbursements, and pressure from insurers for patients to seek low-cost alternatives. Here’s how professional accounting and bookkeeping services can help support your practice’s financial health.

Bookkeeping vs. accounting

Managing the books and records for a doctor’s office requires a different skill set than caring for patients. Key bookkeeping tasks include handling:

• Billings and collections
• Payroll and operating expenses
• Equipment purchases
• Account reconciliations

A key accounting task is the preparation of monthly and year-end financial statements, including balance sheets, income statements and statements of cash flows. These reports tell physician-owners, lenders and other stakeholders how the practice has performed. They’re especially handy when filing taxes, applying for loans or merging with another practice.

Accounting challenges

Managing these kinds of administrative chores are a leading reason doctors experience burnout, according to workforce data compiled by the Advisory Board. The shortage of skilled accountants doesn’t help matters, because it may be hard for doctors to find qualified workers to help them with these tasks.

Some turn to external specialists for financial guidance. Outside accounting firms can advise a medical practice on how to maximize profits, manage patient and third-party billings, distribute profits among its physician-owners, and make informed investment decisions to help it grow and adapt to changes in the healthcare industry. The use of an outsourced accounting service allows physician-owners to dial up or down the level of service as their needs change. It also gives them confidence that transactions will be recorded in the appropriate accounts with detailed, accurate descriptions.

Smaller practices may use the same system of accounting for book and tax purposes to simplify recordkeeping. However, as a practice grows, it may issue financial statements that comply with U.S. Generally Accepted Accounting Principles. Your accountant can help figure out what’s appropriate for your practice.

Interim reporting

Financial statements provide insight into historical results. However, if you want real-time data to regularly monitor performance, you should consider using weekly or monthly “flash” reports to keep your finger on the pulse of your practice’s performance. Flash reports are typically no longer than one page and highlight key metrics, such as:

• Composition of patient billings (including office visits and medical services, lab fees, medical supplies and equipment, medications and immunizations, and medical records requests)
• Patient billings by physician
• Collections and write-offs
• Average time spent with patients by physician/practitioner
• Average wait time for scheduled patient visits
• Available cash balances

Flash reports can be customized based on what matters most to your practice. Some even present data in easy-to-read graphs, rather than just providing numerical figures.

Monitoring key metrics on a regular basis can help you control costs and identify operating inefficiencies. It can also alert you when there’s a need to tap into a line of credit to temporarily cover operating expenses while you’re waiting to receive payments from patients and third-party payors.

Long-term planning

Thriving practices continuously search for ways to add long-term value. For instance, buying new equipment or technology can help expand the treatments your practice offers, improve efficiency, and increase patient volume. Likewise, investing in updated accounting software can improve the ease and accuracy of financial reporting and the timeliness of billing and reimbursements. Updated systems also may offer more sophisticated security measures to protect sensitive patient personal and billing information against cyberattacks.

However, these types of investments can be costly, so it’s important to carefully evaluate the costs and benefits (including any potential tax breaks), rather than rely on gut instinct. In some cases, it might make sense to lease certain items instead of buying them — or to partner with a third-party provider.

Forecasting is another way accountants can help your practice prepare for the future. Forward-looking financial reports address whether you’ll have the space, equipment, and staffing to meet expected demand. They can also help you identify competitive threats and growth opportunities based on the needs of your patient population.

It’s also important for physician-owners to plan for retirement and other departures from the practice. Buy-sell agreements can facilitate buyouts if a physician retires, dies, or otherwise leaves the practice. Well-thought-out plans can help maximize the return on investment for the departing owner, reduce disputes between physician-owners, and facilitate business continuity for those who continue to operate the practice.

© 2024 KraftCPAs PLLC

Falling interest rates have created renewed excitement in the real estate market, and potential homebuyers are once again exploring new home options.

If you’re in the process of buying a home, or you just bought one, you may have wondered if you can deduct mortgage points paid on your behalf by the seller. The answer is “yes” – but subject to significant limitations.

Basics of points

Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points may be deductible if you itemize deductions and are usually the buyer’s obligation. However, a seller sometimes sweetens a deal by agreeing to pay the points on the buyer’s mortgage loan.

In most cases, points that a buyer pays are a deductible interest expense. And seller-paid points may also be deductible.

Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points to close the sale.

You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if — and when — you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion of up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.

Important limits

Some important limitations exist on the rule allowing a deduction for seller-paid points. The rule doesn’t apply to points that are:

• Allocated to the part of a mortgage above $750,000 ($375,000 for marrieds filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025)
• On a loan used to improve (rather than buy) a home
• On a loan used to buy a vacation or second home, investment property or business property
• Paid on a refinancing, or home equity loan or line of credit

Tax aspects of the transaction

Consult a tax planning expert to determine whether the points in your home purchase are deductible, as well as to discuss other crucial tax aspects of your transaction.

© 2024 KraftCPAs PLLC

When drafting partnership and LLC operating agreements, various tax issues must be addressed. This is also true of multi-member LLCs that are treated as partnerships for tax purposes. Here are some critical issues to include in your agreement so your business remains in compliance with federal tax law.

Identify and describe guaranteed payments to partners

For income tax purposes, a guaranteed payment is one made by a partnership that’s: 1) to the partner acting in the capacity of a partner, 2) in exchange for services performed for the partnership or for the use of capital by the partnership, and 3) not dependent on partnership income.

Because special income tax rules apply to guaranteed payments, they should be identified and described in a partnership agreement. For instance:

• The partnership generally deducts guaranteed payments under its accounting method at the time they’re paid or accrued.
• If an individual partner receives a guaranteed payment, it’s treated as ordinary income — currently subject to a maximum income tax rate of 37%. The recipient partner must recognize a guaranteed payment as income in the partner’s tax year that includes the end of the partnership tax year in which the partnership deducted the payment. This is true even if the partner doesn’t receive the payment until after the end of his or her tax year.

Account for the tax basis from partnership liabilities

Under the partnership income taxation regime, a partner receives additional tax basis in his or her partnership interest from that partner’s share of the entity’s liabilities. This is a significant tax advantage because it allows a partner to deduct passed-through losses in excess of the partner’s actual investment in the partnership interest (subject to various income tax limitations such as the passive loss rules).

Different rules apply to recourse and nonrecourse liabilities to determine a partner’s share of the entity’s liabilities. Provisions in the partnership agreement can affect the classification of partnership liabilities as recourse or nonrecourse. It’s important to take this fact into account when drafting a partnership agreement.

Clarify how payments to retired partners are classified

Special income tax rules also apply to payments made in liquidation of a retired partner’s interest in a partnership. This includes any partner who exited the partnership for any reason.

In general, payments made in exchange for the retired partner’s share of partnership property are treated as ordinary partnership distributions. To the extent these payments exceed the partner’s tax basis in the partnership interest, the excess triggers taxable gain for the recipient partner.

All other payments made in liquidating a retired partner’s interest are either:

• Guaranteed payments if the amounts don’t depend on partnership income.
• Ordinary distributive shares of partnership income if the amounts do depend on partnership income. These payments are generally subject to self-employment tax.

The partnership agreement should clarify how payments to retired partners are classified so the proper tax rules can be applied by both the partnership and recipient retired partners.

Consider other partnership agreement provisions

Since your partnership may have multiple partners, multiple issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues even if you don’t expect them to arise. For instance, you may want to include:

• A partnership interest buy-sell agreement to cover partner exits.
• A noncompete agreement.
• How the partnership will handle the divorce, bankruptcy, or death of a partner. For instance, will the partnership buy out an interest that’s acquired by a partner’s ex-spouse in a divorce proceeding or inherited after a partner’s death? If so, how will the buyout payments be calculated and when will they be paid?

Be sure tax issues are fully addressed when putting together a partnership deal to avoid potential IRS setbacks later.

© 2024 KraftCPAs PLLC

In June 2024, the IRS released final regulations addressing the prevailing wage and apprenticeship (PWA) requirements for increased clean energy tax deduction or credit amounts. These tax breaks were made available under the Inflation Reduction Act (IRA). Satisfying the requirements can quintuple the total amount of tax benefit potentially available.

To claim the enhanced tax treatment, however, both general contractors and subcontractors on eligible jobs must follow the PWA requirements. So construction business owners and their leadership teams should familiarize themselves with the new regulations if they intend to compete for qualifying projects.

General requirements

The IRA provides for a five-fold increase in the amount of certain clean energy incentives, including the:

• Investment tax credit
• Production tax credit
• Energy-efficient commercial buildings deduction
• Renewable energy production tax credit
• Renewable energy property investment tax credit

The incentives are triggered by the construction, alteration, or repair of certain clean energy facilities or properties, projects, or equipment.

To qualify, taxpayers generally must pay laborers and mechanics employed on such projects at or above the prevailing wage rates set by the U.S. Department of Labor (DOL). They also need to employ sufficient apprentices from a registered apprentice program. And, as mentioned, they must ensure that all contractors and subcontractors comply with the PWA requirements.

The IRA imposes substantial penalties for noncompliance.

Additional highlights

At more than 300 pages, the final regulations cover a lot of ground and include important revisions and clarifications.

For example, they state that the apprentice requirements apply only for the construction of an energy project — not to alteration or repair work after a facility is placed in service. The prevailing wage requirements don’t apply to routinely scheduled maintenance work that’s generally required to keep the energy project in its current condition so it can continue to be used. However, the requirements do apply to repair work.

The final regulations also include revisions on the timing for prevailing wage determinations. Under the final regulations, the determination should be made when the contract for construction is executed by the taxpayer and contractor. If there’s no contract, the determination is made when construction starts — activities that may previously have been treated as “preliminary activities” not subject to prevailing wage requirements could now be subject to them.

Supplemental wage determinations must be made no more than 90 days before a contract is executed between the taxpayer and contractor. They’re effective for 180 days from the date of issue. If the supplemental determination isn’t incorporated into the contract or the construction already underway within that time, a new supplemental wage determination must be requested.

In addition, revisions were made regarding the “good faith effort” exception to the apprenticeship requirements. To qualify, requests must be made electronically or by registered mail to a registered apprenticeship program in the applicable geographic area at least 45 days before the qualified apprentice is to begin work.

Requests are valid for 365 days, as opposed to 120 days under the proposed regulations. If no registered apprentice program operates in the area of the energy project, the exception will apply as long as the taxpayer contacts the DOL or state apprenticeship agency for assistance in finding qualified apprentices.

Records are crucial

It’s worth noting that the final regulations include extensive recordkeeping requirements and provide that the records for a given project can be maintained by the taxpayer, its contractor, or a third party. Although taxpayers are ultimately responsible for ensuring compliance with the documentation requirements, contractors should read up on them in case an owner expects the construction company involved to maintain records.

Also note that the final regulations generally apply to qualified facilities that began construction and were placed in service after June 25, 2024.

With such a hefty potential increase in tax benefits on the line, it’s not surprising that the IRS plans to keep a close eye out for noncompliance with the PWA requirements. The agency has described enforcing the requirements as a “top priority.”

© 2024 KraftCPAs PLLC

Appraisal professionals typically consider three approaches when valuing a business —cost, market, and income approaches — ultimately relying on one or two depending on the nature of the business and other factors.

So, it’s no wonder that financial statements are an important piece of the business valuation process, and having accurate and updated financial statements can provide valuable insight into the fair market value of the business.

Cost approach leverages the balance sheet

Under U.S. Generally Accepted Accounting Principles (GAAP), a company’s balance sheet reports its assets and liabilities generally based on the lower of historical cost or market values. This is a logical starting point for the cost (or asset) approach to valuing a business.

Under this technique, value is derived from the combined fair market value of the business’s net assets minus any liabilities. This approach is particularly useful when valuing holding companies, asset-intensive companies, and distressed entities that aren’t worth more than their net tangible value.

The cost approach includes the book value and adjusted net asset value methods. The former calculates value using the data in the company’s accounting records. Its flaws include the failure to account for unrecorded intangibles and its reliance on historical costs, rather than current market values. The adjusted net asset value method converts book values to fair market values and accounts for all intangibles and liabilities (recorded and unrecorded).

Market approach relies on the balance sheet and income statement

The market approach bases the value of a business on sales of comparable businesses or business interests. Under this approach, the valuator identifies recent, arm’s-length transactions involving similar public or private businesses and then develops pricing multiples typically based on items reported on the balance sheet or income statement.

A pricing multiple is developed by dividing the sales prices of comparable companies by an economic variable (for example, book value or pre-tax earnings). Then, the pricing multiple is applied to the same economic variable as reported on the subject company’s financial statements.

The two main methods that fall under the market approach are:

Guideline public company method. This technique considers the market prices of comparable (or “guideline”) public company stocks.

Guideline transaction (or merger and acquisition) method. Here, the expert calculates pricing multiples based on real-world transactions involving entire comparable companies or operating units that have been sold.

When applying these methods, valuators may need to adjust the subject company’s economic variables for certain items.

Income approach turns to the statement of cash flows

Under the income approach, future expected economic benefits (generally, net cash flows) are converted into a present value. Most business owners understand that profits don’t necessarily equate with net cash flows — and cash is king when valuing a business. Equity investors are less interested in profits reported on the income statement than they are in the amount and timing of net cash flow that’s available to recoup their investment after funding business operations, paying taxes, making necessary capital investments and servicing debt.

There are two main methods that fall under the income approach:

Capitalization of earnings method. Here, estimated future economic benefits from a single representative period are capitalized using an appropriate rate of return. This method is most appropriate for companies with stable earnings or cash flow.

Discounted cash flow method. Under this technique, the valuator accounts for projected cash flows over a discrete period (say, three or five years) and a terminal value at the end of the discrete period. All future cash flows (including the terminal value) are then discounted to present value using a discount rate instead of a capitalization rate.

When applying the income approach, a valuator will consider making appropriate adjustments to the subject company’s cash flows to reflect the economic benefits investors could expect to receive in the future.

Excess earnings method blends the cost and income approaches

The excess earnings method is a lesser-known valuation technique, but it still may be used in certain situations, particularly when valuing small professional practices. This method was originally developed to compensate distilleries and breweries for loss of business value during the Prohibition era. However, to date, there’s no reliable source of market data to support comparable returns on net assets or capitalization rates for excess earnings. So, valuators generally refrain from using it as a sole method of valuation, unless a particular court has shown a preference for this technique. In addition, IRS Revenue Ruling 68-609 suggests that the excess earnings method be used only if there are no other appropriate methods.

This method derives value from the sum of adjusted net assets from the balance sheet and capitalized “excess” earnings from the income statement. The second component represents the extra earnings that the company has achieved beyond the return that comparable businesses earn on a similar set of net assets.

Essentially, capitalized excess earnings are intended to estimate the value of the business’s goodwill. It’s usually calculated using a technique like the capitalization of earnings method — that is, excess earnings are divided by an appropriate capitalization rate.

Common financial statement adjustments

Historical financial results are a helpful starting point for valuing a business. However, valuators must consider making the following three categories of adjustments to reflect the economic benefits that a future investor could expect to receive.

Nonrecurring items. The first category of adjustments accounts for any unusual or nonrecurring items, such as revenue from a one-time project or legal expenses associated with a pending lawsuit. These items aren’t expected to continue in the future and thus have no effect on the price hypothetical buyers would pay for the business.

Discretionary spending. Fair market value is often based on the future economic benefits that a hypothetical prospective buyer could generate from the business’s operations. These adjustments are designed to bring a company’s expenses in line with industry norms. Discretionary costs that commonly require adjustment include owners’ compensation and related-party transactions. These adjustments are especially important when valuing a controlling interest in a business.

Accounting norms. Valuators evaluate the company’s accounting methods. Adjustments may be needed to align the business’s financial reporting practices with comparable companies that are used to benchmark performance, gauge risk and return, and calculate pricing multiples. Examples of accounting method differences include reporting for inventory, pension reserves, depreciation, income taxes and cost capitalization vs. expensing policies. Small businesses also may use cash- or tax-basis reporting, rather than conforming to U.S. Generally Accepted Accounting Principles.

After a valuator makes a preliminary estimate of a company’s value, he or she considers additional fine-tuning. Common last-minute adjustments may include nonoperating assets, contingent or unrecorded assets and liabilities, and excess working capital (compared with the company’s normal operating needs). In some situations, it also may be appropriate to take discounts for lack of control and marketability associated with a business interest.

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With just a little over three months left in 2024, now’s the time for small business owners to take steps that could help lower taxes this year and next year.

For starters, the strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

Here are other ideas that may help you save tax dollars – but you’ll have to act soon.

Estimated taxes

Make sure you make the last two estimated tax payments to avoid penalties. The third-quarter payment for 2024 is due on September 16, 2024, and the fourth-quarter payment is due on January 15, 2025.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business such as law, health, or consulting, the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property such as machinery and equipment held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all the QBI deduction or be subject to a smaller deduction phaseout by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end.

Cash vs. accrual accounting

More small businesses can use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must – among other requirements – satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early, or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property – other than buildings – including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, and security systems.

The high-dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all their outlays for machinery and equipment. Also, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

Bonus depreciation

For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

Upcoming tax law changes

These are just a few year-end strategies that may help you save on taxes, but it’s important to stay informed about potential changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.

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