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

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

Legendary singer Aretha Franklin died more than six years ago. However, it wasn’t until last year that a Michigan judge ruled a handwritten document discovered under her couch cushions was a valid will. This case illustrates the dangers of a so-called “holographic” will. It’s one where the entire document is handwritten and signed without the presence of a lawyer or witnesses.

Facts of the case

Initially, Franklin’s family thought she had no will. In that situation, her estate would have been divided equally among her four sons under the laws of intestate succession. A few months after she died, however, the family discovered two handwritten “wills” in her home.

The first, dated 2010 and found in a locked cabinet, was signed on each page and notarized. The second, dated 2014, was found in a spiral notebook under her couch cushions and was signed only on the last page. The two documents had conflicting provisions regarding the distribution of her homes, cars, bank accounts, music royalties and other assets, leading to a fight in court among her heirs. Ultimately, a jury found that the 2014 handwritten document should serve as her will.

Holographic wills can cause unexpected outcomes

Michigan, like many states, permits holographic wills. These wills, which don’t need to be witnessed like formal wills, must be signed and dated by the testator and the material portions must be in the testator’s handwriting. In addition, there must be evidence (from the language of the document itself or from elsewhere) that the testator intended the document to be his or her last will and testament.

Holographic wills can be quick, cheap and easy, but they can come at a cost. Absent the advice of counsel and the formalities of traditional wills, handwritten wills tend to invite challenges and interfamily conflict. In addition, because an attorney doesn’t prepare them, holographic wills tend to be less thorough and often contain ambiguous language.

If you need a will, contact your estate planning attorney for help. Having your will drafted by a professional can give you peace of mind knowing that your assets will be divided as you intended.

© 2024

Fraud is a pernicious problem for companies of all shapes and sizes. One broad type of crime that seems to be thriving as of late is invoice fraud.

In the second quarter of 2024, accounts payable software provider Medius released the results of a survey of 1,533 senior finance executives in the United States and United Kingdom. Respondents reported that their teams had seen, on average, 13 cases of attempted invoice fraud and nine cases of successful invoice fraud in the preceding 12 months. The average per-incident loss in the United States was $133,000 — which adds up to about $1.2 million annually.

Typical schemes

Invoice fraud can be perpetrated in various ways. Among the most common varieties is fraudulent billing. In billing schemes, a real or fake vendor sends an invoice for goods or services that the business never received — and may not have ordered in the first place.

Overbilling schemes are similar. Your company may have received goods it ordered, but the vendor’s invoice is higher than agreed upon. Duplicate billing, on the other hand, is where a fraud perpetrator sends you the same invoice more than once, even though you’ve already paid.

Employees sometimes commit invoice fraud as well. This can happen when a manager approves payments for personal purchases. In other cases, a manager might create fictitious vendors, issue invoices from the fake vendors and approve the invoices for payment.

Such schemes generally are more successful when employees collude. For example, one perpetrator might work in receiving and the other in accounts payable. Or a receiving worker might collude with a vendor or other outside party.

Best practices

The good news is there are some best practices that businesses can follow to discourage would-be perpetrators and catch those who try to commit invoice fraud. These include:

Know with whom you’re doing business. Verify the identity of any new supplier or vendor before working with that entity. Research its ownership, operating history, registered address and customer reviews. Also, ask for references so you can contact other companies that can vouch for its legitimacy.

Follow a thorough approval process. Establish a firm “no rubber stamp” policy for invoices. Train accounts payable staff to review them for red flags, such as unexpected changes in the amounts due or unusual payment terms. Manual alterations to an invoice should require additional scrutiny, as should the first several invoices from new vendors.

Instruct employees to contact an issuing vendor if anything seems strange or inaccurate about its invoice. In cases where the response lacks credibility or raises additional concerns, your business should decline to pay until the matter is resolved.

Implement additional antifraud controls as well. For instance, before approving payment, accounts payable staff should confirm with your receiving department that goods were delivered and check invoices against previous ones from the same vendor to ensure there are no discrepancies. Also, you may want to require more than one person to approve certain invoices for payment — such as those at or above a specified amount.

Leverage technology. Automating your accounts payable process can help prevent and detect invoice fraud. And, as you might expect, artificial intelligence (AI) is having an impact here.

One AI-driven technology called optical character recognition (OCR) can scan and read invoices to verify that line items and charged amounts match those vendors quoted you per your company’s financial records. OCR minimizes employee intervention, hinders collusion and makes diverting payments to personal accounts harder.

Decisive action

As the aforementioned survey indicates, invoice fraud is likely widespread. Be sure to put policies and procedures in place to prevent it as well as to respond swiftly and decisively if you suspect wrongdoing. Our firm can help you assess your accounts payable processes for efficiency, completeness and security.

© 2024

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.

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

If you’re taking your first steps on your estate planning journey, congratulations! No one likes to contemplate his or her mortality, but having a plan in place can provide you and your loved ones peace of mind should you unexpectedly become incapacitated or die. Here are five basic pitfalls you’ll want to avoid:

Pitfall #1: not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them to be components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.

Pitfall #2: failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.

Pitfall #3: not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated, which will expose them to public inspection and subject them to delays. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.

Pitfall #4: mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, you should review these designations periodically. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Pitfall #5: not reviewing your plan on a regular basis. It’s critical to consider an estate plan as a “living” entity that must be nourished and sustained. Don’t allow it to gather dust in a safe deposit box or file cabinet. Consider the impact of major life events such as births, deaths, marriages, divorces, and job changes or relocations, just to name a few.

To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can help ensure that you’ve covered all the estate planning bases.

© 2024

Electric vehicles (EVs) have become increasingly popular. According to Kelley Blue Book estimates, the EV share of the vehicle market in the U.S. was 7.6% in 2023, up from 5.9% in 2022. To incentivize the purchase of EVs, there’s a federal tax credit of up to $7,500 for eligible vehicles.

The tax break for EVs and fuel cell vehicles is called the Clean Vehicle Tax Credit. The current version of the credit was created under the Inflation Reduction Act. Here are answers to some frequently asked questions.

Which vehicles qualify for the credit?

To qualify for the full $7,500, there are several requirements. For example:

• The vehicle must be a new plug-in electric or fuel cell vehicle.
• It must have a battery capacity of at least seven kilowatt hours.
• It must meet critical mineral and battery component requirements for vehicles placed in service on or after April 18, 2023. (If the vehicle meets only one of the two requirements, the buyer is eligible for a $3,750 credit.)
• The vehicle must undergo final assembly in North America and have a gross vehicle weight rating of less than 14,000 pounds.
• It must be purchased for personal use (not for resale) and must be primarily used in the United States.

Are the most expensive EVs eligible for the credit?

No. The vehicle’s manufacturer suggested retail price (MSRP) can’t exceed:

• $80,000 for vans, sport utility vehicles and pickup trucks, and
• $55,000 for other vehicles.

Are there income limits for the buyer?

Yes. To qualify for the new vehicle credit, your modified adjusted gross income (MAGI) can’t exceed $300,000 for married couples filing jointly, $225,000 for taxpayers filing as heads of households or $150,000 for other filers.

How is the credit claimed?

There are two ways. When we prepare your tax return, we’ll file Form 8936 with it. Alternatively, beginning in 2024, you can choose to transfer the credit to an eligible dealer when you buy a vehicle, which will effectively reduce the vehicle’s purchase price by the credit amount. If you don’t transfer the credit, it’s “nonrefundable” so you can’t get back more on the credit than you owe in taxes. And you can’t apply any excess credit to future tax years.

Does a used EV qualify for a tax credit?

Yes, but it’s not worth as much as the credit for new vehicle and the income limits are lower. Beginning January 1, 2023, if you buy a qualified used EV or fuel cell vehicle from a licensed dealer for $25,000 or less, you may be eligible for a credit of up to $4,000. Your MAGI can’t exceed $150,000 for married couples filing jointly, $112,500 for taxpayers filing as heads of households or $75,000 for other filers.

Check before you buy

If you’re interested in purchasing an EV, the tax credit can be a powerful incentive. But before you buy, make sure you meet all the eligibility requirements so you’re not disappointed. Many taxpayers and vehicles don’t qualify. Contact us for assistance.

© 2024

With Labor Day 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.

Here are some other ideas that may help you save tax dollars if you 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 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 increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to 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% 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 some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. 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 the presidential and congressional elections could result in new or repealed tax breaks.

© 2024