Think About Year-End Tax Planning for Your Small Business

Think-About-Year-End-Tax-Planning-for-Your-Small-Business

With most of 2024 in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. 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.

As you think about year-end tax planning for your small business, here are some other ideas that may help you save tax dollars if you act soon.

QBI Deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20 percent 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 of 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 to increase the deduction by increasing W-2 wages before the year’s end. The rules are complex, so consult us before acting.

Weigh 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 of their outlays for machinery and equipment. What’s more, 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 percent bonus first-year depreciation deduction for qualified improvement property as well as 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.

We Can Customize Your Plan

These are just some of the strategies you can apply to year-end tax planning for your small business that may help you in the long run. In addition, it’s important to stay informed about any 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 recent elections could result in new or repealed tax breaks. Our team at Ramsay & Associates is here to help. Contact us to customize a plan that works for you.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Tax Tips When Buying the Assets of a Business

Tax-Tips-When-Buying-the-Assets-of-a-Business

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

  1. Buy the assets of the business, or
  2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC.

Here, we’ll focus on the former. Keep reading to learn useful tax tips when buying the assets of a business.

Asset Purchase Tax Basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, and software and intangibles like customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset Purchase Results with a Pass-Through Entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes, or an S corporation. In those cases, post-acquisition gains, losses, and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset Purchase Results with a C Corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21 percent.

A Tax-Smart Purchase Price Allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

  • Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
  • Assets that can be depreciated relatively quickly (such as furniture and equipment), and
  • Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan Ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. The tax professionals at Ramsay & Associates can help you get the former instead of the latter. Getting your advisor involved early, preferably during the negotiation phase, is beneficial. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Taking Your Spouse on a Business Trip? Can You Write Off the Costs?

Taking-Your-Spouse-on-a-Business-Trip-Can-You-Write-Off-the-Costs

A recent report shows that post-pandemic global business travel is going strong. The market reached $665.3 billion in 2022 and is estimated to hit $928.4 billion by 2030, according to a report from Research and Markets. If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips. Let’s look at what you can and cannot write off when taking your spouse on a business trip.

If Your Spouse is an Employee

The rules for deducting a spouse’s travel costs are very restrictive. First, to qualify for the deduction, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if their presence has a bona fide business purpose, unless the spouse is an employee of your business. This requirement prevents tax deductibility in most cases.

If your spouse is your employee, you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t enough for their presence to be “helpful” to your business pursuits — it must be necessary.

In most cases, a spouse’s participation in social functions, for example as a host, isn’t enough to establish a business purpose. That is, if their purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for their presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.

If your spouse’s travel satisfies these requirements, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

If Your Spouse Isn’t an Employee

Even if your spouse’s travel doesn’t satisfy the requirements, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50 percent of your travel costs to your spouse. You need only allocate any additional costs you incur for them. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid when traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.

And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse aren’t deductible.

We Can Answer Your Questions

You want to maximize all the tax breaks you can claim for your small business. So, if you’re taking your spouse on a business trip, the tax professionals at Ramsay & Associates can help iron out the details. Contact us if you have questions or need assistance with this or other tax-related issues.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

If Your Employees Get Tips, You May Qualify for a Tip Tax Credit

If-Your-Employees-Get-Tips-You-May-Qualify-for-a-Tip-Tax-Credit

Are gratuities routine in your industry? If you own a business in which your employees are tipped for providing customers with food and beverages, we have good news. You may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income. Keep reading to learn about this tip tax credit and how to claim it, should you choose to do so.

Credit Fundamentals

The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesn’t matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, they’re treated as if you paid them to your employees.

As you know, your employees are required to report their tips to you. You must:

  • Withhold and remit the employee’s share of FICA taxes, and
  • Pay the employer’s share of those taxes.

How to Claim the Credit

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

Let’s Look at an Example

Hypothetically, let’s say a server works at your restaurant and is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips, which she reports to you.

The server’s $2.13-an-hour rate is below the $5.15 rate by $3.02 per hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the server’s employer, you pay FICA taxes at the rate of 7.65 percent for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65 percent.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect to not take the credit, in which case you can claim the deduction.

Get the Credit You Deserve

If your business pays FICA taxes on tip income paid to your employees, this tip tax credit may be valuable to you. Other rules may apply. The tax professionals at Ramsay & Associates can help determine the best course of action for your business. Contact us with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Increase to the Standard Business Mileage Rate

Increase-to-the-Standard-Business-Mileage-Rate

The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup, or panel truck will be 67 cents (up from 65.5 cents for 2023). Keep reading to learn more about this increase to the standard business mileage rate and what it means for your tax deductions and expenses.

The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.

Standard Rate vs. Tracking Expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses, and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date, and the destination.

The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.

Rate Calculation

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs, and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.

Cents-Per-Mile Rate Not Always Allowed

There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

Contact Us with Questions

As you can see, there are many factors to consider in deciding whether to use the standard business mileage rate to deduct company vehicle expenses. If you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return — we can help. Contact the experienced tax professionals at Ramsay & Associates to learn more and get more information as it pertains to your specific situation.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.