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Archives for September 2024

2024 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in a federally declared disaster area.

Tuesday, October 1

  • The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Tuesday, October 15

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2023 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2023 to certain employer-sponsored retirement plans.

Thursday, October 31

  • Report income tax withholding and FICA taxes for third quarter 2024 (Form 941) and pay any tax due. (See exception below under “November 12.”)

Tuesday, November 12

  • Report income tax withholding and FICA taxes for third quarter 2024 (Form 941), if you deposited on time (and in full) all the associated taxes due.

Monday, December 16

  • If a calendar-year C corporation, pay the fourth installment of 2024 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

© 2024
TopLine Content Marketing Team

Make year-end tax planning moves before it’s too late!

With the arrival of fall, it’s an ideal time to begin implementing strategies that could reduce your tax burden for both this year and next.

One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2024. You may not itemize because of the high 2024 standard deduction amounts ($29,200 for joint filers, $14,600 for singles and married couples filing separately, and $21,900 for heads of household). Also, many itemized deductions have been reduced or suspended under current law.

If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

The benefits of bunching

You may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you can itemize deductions for this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider:

  • Postpone income until 2025 and accelerate deductions into 2024 if doing so enables you to claim larger tax breaks for 2024 that are phased out over various levels of AGI. These include deductible IRA contributions, the Child Tax Credit, education tax credits and student loan interest deductions. Postponing income also may be desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2024 — for example, if you expect to be in a higher tax bracket next year.
  • Contribute as much as you can to your retirement account, such as a 401(k) plan or IRA, which can reduce your taxable income.
  • High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others. As year end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans.
  • Sell investments that are underperforming to offset gains from other assets.
  • If you’re age 73 or older, take required minimum distributions from retirement accounts to avoid penalties.
  • Spend any remaining money in a tax-advantaged flexible spending account before December 31 because the account may have a “use it or lose it” feature.
  • It could be advantageous to arrange with your employer to defer, until early 2025, a bonus that may be coming your way.
  • If you’re age 70½ or older by the end of 2024, consider making 2024 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA and the contribution amount isn’t included in your gross income or deductible on your return.
  • Make gifts sheltered by the annual gift tax exclusion before year end. In 2024, the exclusion applies to gifts of up to $18,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower income tax brackets who aren’t subject to the kiddie tax.

These are just some of the year-end strategies that may help reduce your taxes. Reach out to us to tailor a plan that works best for you.

© 2024
TopLine Content Marketing Team

Cutoffs: When to report revenue and expenses

Timing is critical in financial reporting. Under accrual-basis accounting, the end of the accounting period serves as a “cutoff” for when companies recognize revenue and expenses. However, some companies may be tempted to play timing games, especially at year end, to boost financial results or lower taxes.

Observing the end-of-period cutoffs 

Under U.S. Generally Accepted Accounting Principles (GAAP), revenue should be recognized in the accounting period it’s earned, even if the cash is received in a subsequent period. Likewise, expenses should be recognized in the period they’re incurred, not necessarily when they’re paid. And expenses should be matched with the revenue they generate, so businesses should record expenses in the period they were incurred to earn the corresponding revenue.

However, some companies may interpret the cutoff rules loosely to present their financial results more favorably. For example, suppose a calendar-year car dealer allows a customer to take home a vehicle on December 28, 2024, to test drive for a few days. The sales manager has verbally negotiated a deal with the customer, but the customer still needs to discuss the purchase with his spouse. He plans to return on January 2 to close the deal or return the vehicle and walk away. Under accrual-basis accounting, should the sale be reported in 2024 or 2025? 

Alternatively, consider a calendar-year, accrual-basis retailer that pays January’s rent on December 31, 2024. Rent is due on the first day of the month. Under accrual-basis accounting, can the store deduct an extra month’s rent from this year’s taxable income? 

As tempting as it might be to inflate revenue to impress stakeholders or defer taxable income to lower the current year’s tax bill, the cutoff for a calendar-year, accrual-basis business is December 31. So in both examples, the transaction should be reported in 2025.

Auditing cutoffs

Auditors use several procedures to test for compliance with cutoff rules. For example, to ensure revenue is recorded in the correct accounting period, auditors may review:

  • Shipping documents and customer invoices,
  • Sales transactions near the cutoff date, and
  • Returns and allowances near the cutoff date.

Similarly, to ensure expenses are recorded in the correct accounting period, auditors may inspect contracts and invoices near the cutoff date. They also check that expenses are matched with the revenue they help generate, in accordance with the matching principle. An accrual (a liability) is recorded for expenses incurred in the current period that still need to be paid later. Conversely, prepaid assets represent expenses paid in the current period that will be reported later when they’re used to generate future revenue. Auditors also may perform analytical procedures that compare expenses as a percentage of sales from period to period to identify timing errors and other anomalies.

It’s important to note that updated guidance for reporting revenue went into effect for calendar-year public companies in 2018 and for calendar-year private businesses starting in 2019. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

Although this guidance has been in effect for several years, implementation questions linger, especially among smaller private entities. The guidance requires management to make judgment calls each reporting period about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises and estimating variable consideration. The risk of misstatement and the need for expanded disclosures have caused auditors to focus greater attention on companies’ recognition practices for revenue from long-term contracts. During audit fieldwork, expect detailed questions about your company’s cutoff policies and extensive testing procedures to confirm compliance with the accounting rules.

Now or later?

As year end approaches, you may have questions about the cutoff rules for reporting revenue and expenses. Contact us for answers. We can help you comply with the rules and minimize audit adjustments.

© 2024
TopLine Content Marketing Team

FTC’s ban on noncompete agreements remains in legal limbo for now

Many employers have used noncompete agreements to prevent departing employees from taking valuable information and key customers with them to competitors after they walk out the door. Earlier this year, the U.S. Federal Trade Commission (FTC) appeared to have set the stage for the demise of noncompetes when it announced a final rule that would largely ban their use.

When issued, the rule had an expected effective date of September 4, 2024. However, as of this writing, a recent ruling in a U.S. District Court in Texas has put the final rule in legal limbo.

Agency’s rationale

The final rule would require employers to notify affected employees that existing noncompetes would no longer be enforced as of the rule’s effective date. Also at that time, employers would be prohibited from entering into new noncompetes. The rule includes an exception for existing noncompetes applicable to “senior executives.” It defines these as employees who earn more than $151,164 a year and are in “policy-making positions.”

The FTC’s rationale for creating the rule is that too many U.S. workers have become subject to noncompetes. In fact, the agency contends that the agreements violate Section 5 of the FTC Act, an almost 110-year-old law that regulates unfair competitive methods. In the agency’s view, their predominance is unfairly suppressing wages, hindering innovation and making it more difficult for people to earn a living.

Upon announcing the rule in April, the FTC stated that its research showed 18% of U.S. workers are currently covered by noncompetes. That amounts to nearly one in five workers — or 30 million people. The agency believes that prohibiting the agreements would cause workers’ earnings to rise and more start-up companies to launch. It also asserts there would be a substantial rise in patents issued over the next decade.

Legal decision 

Suffice to say, virtually no one expected the FTC’s final rule on noncompetes to breeze through to widespread compliance after issuance.

Sure enough, on the very day the final rule was announced, a Texas-based tax services and software firm, Ryan LLC, filed suit challenging the rule in the U.S. District Court for the Northern District of Texas. The U.S. Chamber of Commerce and other industry groups then joined the suit on the firm’s side as “plaintiff-intervenors.” Judge Ada Brown first issued a decision in the case, Ryan LLC v. Federal Trade Commission, on July 3, 2024, preliminarily enjoining (striking down) the noncompete ban but only with respect to the case’s plaintiff and plaintiff-intervenors.

However, in a final judgment issued on August 20, 2024, the same judge ruled that, in issuing the final rule, the FTC had exceeded its statutory authority to ban practices related to unfair methods of competition. In her decision, she wrote that the agency “lacks the authority to create substantive rules” and the final rule itself is “unreasonably overbroad without a reasonable explanation.”

Ultimately, the judge’s ruling means the FTC can’t enforce the ban unless it files an appeal and prevails. To that end, FTC spokesperson Victoria Graham said in a statement, “We are seriously considering a potential appeal.” If the agency does opt to file one, it would be decided by the U.S. Court of Appeals for the Fifth Circuit. From there, the case could wind up before the U.S. Supreme Court, which many experts believe would likely benefit opponents of the rule.

Protect your valuables

If your organization uses noncompetes, you’re no doubt aware that the final rule’s original September 4 effective date has come and gone — and the rule’s fate remains uncertain.

Work with your attorney to monitor the Ryan case as well as other ongoing legal challenges. Also, explore how to best protect your intellectual property, customer lists and other valuable information. Although the final rule is in limbo, noncompetes can still be challenged in court by private parties, and even the FTC itself, on a case-by-case basis. Contact us for help measuring, tracking and analyzing all your employment costs.

Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, August 20, 2024 (U.S. Dist. Court for the Northern Dist. of Texas)

© 2024
TopLine Content Marketing Team

Is your home office a tax haven? Here are the rules for deductions

Working from home has become increasingly common. The U.S. Bureau of Labor Statistics (BLS) reports that about one out of five workers conducts business from home for pay. The numbers are even higher in certain occupational groups. About one in three people in management, professional and related occupations works from home.

Your status matters

If you work from a home office, you probably want to know: Can I get a tax deduction for the related expenses? It depends on whether you’re employed or in business for yourself.

Business owners working from home or entrepreneurs with home-based side gigs may qualify for valuable home office deductions. Conversely, employees can’t deduct home office expenses under current federal tax law.

To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:

  • Your principal place of business, or
  • A place where you meet with customers, clients or patients in the ordinary course of business.

In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes.

Notably, “regular and exclusive” use means consistently using a specific, identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.

The reason employees are treated differently

Why don’t people who work remotely from home as employees get tax deductions right now? Previously, people who itemized deductions could claim home office expenses as miscellaneous deductions if the arrangement was for the convenience of their employers.

However, the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements.

Expenses can be direct or indirect

If you qualify, you can write off the total amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home.

Indirect expenses include:

  • Mortgage interest,
  • Property taxes,
  • Utilities (electric, gas and water),
  • Insurance,
  • Exterior repairs and maintenance, and
  • Depreciation or rent under IRS tables.

Note: Mortgage interest and property taxes may already be deductible if you itemize deductions. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal tax return. But you can’t deduct the same amount twice — once as a home office expense and again as a personal deduction.

Figuring the deduction 

Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home.

A simpler method 

Keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction.

The implications of a home sale

Keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home.

If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office after May 6, 1997.

Don’t hesitate to contact us. We can address questions about writing off home office expenses and the tax implications when you sell your home.

© 2024
TopLine Content Marketing Team

Help ensure your partnership or LLC complies with tax law

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: 1) guaranteed payments if the amounts don’t depend on partnership income, or 2) 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, various 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?

Minimize potential liabilities

Tax issues must be addressed when putting together a partnership deal. Contact us to be involved in the process.

© 2024
TopLine Content Marketing Team