Weekly Tax Brief

Do you have an excess business loss?

Details: Published: 19 February 2025 19 February 2025

If an individual taxpayer has substantial business losses, unfavorable federal income tax rules can potentially come into play. Here’s what you need to know as you assess your 2024 tax situation.

Disallowance rule

The tax rules can get complicated if your business or rental activity throws off a tax loss — and many do during the early years. First, the passive activity loss (PAL) rules may apply if you aren’t very involved in the business or if it’s a rental activity. The PAL rules generally only allow you to deduct passive losses to the extent you have passive income from other sources. However, you can deduct passive losses that have been disallowed in previous years (called suspended PALs) when you sell the activity or property that produced the suspended losses.

If you successfully clear the hurdles imposed by the PAL rules, you face another hurdle: You can’t deduct an excess business loss in the current year. For 2024, an excess business loss is the excess of your aggregate business losses over $305,000 ($610,000 for married joint filers). For 2025, the thresholds are $313,000 and $626,000, respectively. An excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards explained below.

Deducting NOLs

You generally can’t use an NOL carryover, including one from an excess business loss, to shelter more than 80% of your taxable income in the carryover year. Also, NOLs generally can’t be carried back to an earlier tax year. They can only be carried forward and can be carried forward indefinitely. The requirement that an excess business loss must be carried forward as an NOL forces you to wait at least one year to get any tax-saving benefit from it.

Example 1: Taxpayer has a partial deductible business loss

David is unmarried. In 2024, he has an allowable loss of $400,000 from his start-up AI venture that he operates as a sole proprietorship.

Although David has no other income or losses from business activities, he has $500,000 of income from other sources (salary, interest, dividends, capital gains and so forth).

David has an excess business loss for the year of $95,000 (the excess of his $400,000 AI venture loss over the $305,000 excess business loss disallowance threshold for 2024 for an unmarried taxpayer). David can deduct the first $305,000 of his loss against his income from other sources. The $95,000 excess business loss is carried forward to his 2025 tax year and treated as part of an NOL carryover to that year.

Variation: If David’s 2024 business loss is $305,000 or less, he can deduct the entire loss against his income from other sources because he doesn’t have an excess business loss.

Example 2: Taxpayers aren’t affected by the disallowance rule

Nora and Ned are married and file tax returns jointly. In 2024, Nora has an allowable loss of $350,000 from rental real estate properties (after considering the PAL rules).

Ned runs a small business that’s still in the early phase of operations. He runs the business as a single-member LLC that’s treated as a sole proprietorship for tax purposes. For 2024, the business incurs a $150,000 tax loss.

Nora and Ned have no income or losses from other business or rental activities, but they have $600,000 of income from other sources.

They don’t have an excess business loss because their combined losses are $500,000. That amount is below the $610,000 excess business loss disallowance threshold for 2024 for married joint filers. So, they’re unaffected by the disallowance rule. They can use their $500,000 business loss to shelter income from other sources.

Partnerships, LLCs and S corporations

The excess business loss disallowance rule is applied at the owner level for business losses from partnerships, S corporations and LLCs treated as partnerships for tax purposes. Each owner’s allocable share of business income, gain, deduction, or loss from these pass-through entities is taken into account on the owner’s Form 1040 for the tax year that includes the end of the entity’s tax year.

The best way forward

As you can see, business losses can be complex. Contact us if you have questions or want more information about the best strategies for your situation.

Financial relief for families: The benefits of the Child Tax Credit

Details: Published: 17 February 2025 17 February 2025

The Child Tax Credit (CTC) has long been a valuable tax break for families with qualifying children. Whether you’re new to claiming the credit or you’ve benefited from it for years, it’s crucial to stay current on its rules and potential changes. As we approach the expiration of certain provisions within the Tax Cuts and Jobs Act (TCJA) at the end of 2025, here’s what you need to know about the CTC for 2024, 2025 and beyond.

Current state of the credit

Under the TCJA, which took effect in 2018, the CTC was increased from its previous level of $1,000 to $2,000 per qualifying child. The TCJA also made more taxpayers eligible for the credit by raising the income threshold at which the credit begins to phase out.

For both 2024 and 2025, the CTC is $2,000 per child under age 17. Phaseout thresholds in 2024 and 2025 will continue at the levels established by the TCJA:

$200,000 for single filers, and
$400,000 for married couples filing jointly.

Refundable portion

The refundable portion of the credit for 2024 and 2025 is a maximum $1,700 per qualifying child. With a refundable tax credit, you can receive a tax refund even if you don’t owe any tax for the year.

Credit for other dependents

A nonrefundable credit of up to $500 is available for dependents other than those who qualify for the CTC. But certain tax tests for dependency must be met. The credit can be claimed for:

Dependents of any age,
Dependent parents or other qualifying relatives supported by you, and
Dependents living with you who aren’t related.

What’s scheduled after 2025?

If Congress doesn’t act to extend or revise the current provisions of the TCJA, the CTC will revert to the pre-TCJA rules in 2026. That means:

The maximum credit will drop down to $1,000 per qualifying child.
The phaseout thresholds will drop to around $75,000 for single filers and $110,000 for married couples filing jointly (inflation indexing could alter these figures).

In other words, many taxpayers will see their CTC cut in half if the current law sunsets in 2026. Consequently, families could experience a larger federal tax liability starting in 2026 if no new law is enacted.

Proposals in Washington

When it comes to the future of the CTC, there have been various proposals in Washington. During the campaign, Vice President J.D. Vance signaled support for expanding the CTC. While specifics remain unclear, there have also been indications that President Trump favors extending the current $2,000 credit beyond 2025 or even increasing it.

Many Congressional Republicans have voiced support for maintaining the credit at the $2,000 level or making it permanent. However, in a 50-page menu of options prepared by Republicans on the House Budget Committee, there’s a proposal that would require parents and children to have Social Security numbers (SSNs) to claim the CTC. (Currently, only a child needs a valid number.) That would make fewer families eligible for the credit.

Because these proposals haven’t yet been enacted (and may not be), taxpayers should keep an eye on legislative developments.

Claiming the CTC

To claim the CTC, you must include the child’s SSN on your return. The number must have been issued before the due date for filing the return, including extensions. If a qualifying child doesn’t have an SSN, you may currently claim the $500 credit for other dependents for that child.

To claim the $500 credit for other dependents, you’ll need to provide a taxpayer identification number for each non-CTC-qualifying child or dependent, but it can be an Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number or SSN.

Stay tuned

The CTC remains a critical resource for millions of families. For the 2024 and 2025 tax years, you can still benefit from up to $2,000 per qualifying child. The future of the credit after that is uncertain. As always, you can count on us to keep you informed of any changes. Contact us with any questions about your situation.

Questions about taxes and tips? Here are some answers for employers

Details: Published: 11 February 2025 11 February 2025

Businesses in certain industries employ service workers who receive tips as a large part of their compensation. These businesses include restaurants, hotels and salons. Compliance with federal and state tax regulations is vital if your business has employees who receive tips.

Are tips becoming tax-free?

During the campaign, President Trump promised to end taxes on tips. While the proposal created buzz among employees and some business owners, no legislation eliminating taxes on tips has been passed. For now, employers should continue to follow the existing IRS rules until the law changes — if it does. Unless legal changes are enacted, the status quo remains in effect.

With that in mind, here are answers to questions about the current rules.

How are tips defined?

Tips are optional and can be cash or noncash. Cash tips are received directly from customers. They can also be electronically paid tips distributed to employees by employers and tips received from other employees in tip-sharing arrangements. Workers must generally report cash tips to their employers. Noncash tips are items of value other than cash. They can include tickets, passes or other items that employees receive from customers. Workers don’t have to report noncash tips to employers.

Four factors determine whether a payment qualifies as a tip for tax purposes:

The customer voluntarily makes a payment,
The customer has an unrestricted right to determine the amount,
The payment isn’t negotiated with, or dictated by, employer policy, and
The customer generally has a right to determine who receives the payment.

There are more relevant definitions. A direct tip occurs when an employee receives it directly from a customer (even as part of a tip pool). Directly tipped employees include wait staff, bartenders and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees can include bussers, service bartenders, cooks and salon shampooers.

What records need to be kept?

Tipped workers must keep daily records of the cash tips they receive. To do so, they can use Form 4070A, Employee’s Daily Record of Tips. It’s found in IRS Publication 1244.

Workers should also keep records of the dates and values of noncash tips. The IRS doesn’t require workers to report noncash tips to employers, but they must report them on their tax returns.

How must employees report tips to employers?

Employees must report tips to employers by the 10th of the month after the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include the:

Employee’s name, address, Social Security number and signature,
Employer’s name and address,
Month or period covered, and
Total tips received during the period.

Note: If an employee’s monthly tips are less than $20, there’s no requirement to report them to his or her employer. However, they must be included as income on his or her tax return.

Are there other employer requirements?

Yes. Send each employee a Form W-2 that includes reported tips. In addition, employers must:

Keep employees’ tip reports.
Withhold taxes, including income taxes and the employee’s share of Social Security and Medicare taxes, based on employees’ wages and reported tip income.
Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income.
Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return.
Deposit withheld taxes in accordance with federal tax deposit requirements.

In addition, “large” food or beverage establishments must file another annual report. Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, discloses receipts and tips.

What’s the tip tax credit?

Suppose you’re an employer with tipped workers providing food and beverages. In that case, you may qualify for a valuable federal tax credit involving the Social Security and Medicare taxes you pay on employees’ tip income.

How should employers proceed?

Running a business with tipped employees involves more than just providing good service. It requires careful adherence to wage and hour laws, thorough recordkeeping, accurate reporting and an awareness of changing requirements. While President Trump’s pledge to end taxes on tips hasn’t yet materialized into law, stay alert for potential changes. In the meantime, continue meeting all current requirements to ensure compliance. Contact us for guidance about your situation.

Taming the tax tangle if you’re retiring soon

Details: Published: 07 February 2025 07 February 2025

Retirement is often viewed as an opportunity to travel, spend time with family or simply enjoy the fruits of a long career. Yet the transition may bring a tangle of tax considerations. Planning carefully can help you minimize tax bills. Below are four steps to take if you’re approaching retirement, along with the tax implications.

1. Consider your post-career lifestyle

Begin by assessing what retirement might look like for you. For example, will you relocate to a different state or downsize by selling your home? Will you continue to work part-time?

Tax implications: Moving to a state with lower income or property taxes may stretch your retirement savings. If you sell your home and the capital gain exceeds $250,000 ($500,000 for married couples filing jointly), you’ll need to pay tax on the amount over the exclusion limit. And if you work part-time, your earnings could reduce your Social Security benefits (depending on your age) or push you into a higher tax bracket.

2. Assess your income sources

Social Security is a major income component for many retirees, and deciding when to start collecting benefits is crucial. The government will permanently reduce your monthly benefit if you begin collecting before your full retirement age. Conversely, if you delay benefits past your full retirement age (up to age 70), you’ll receive larger monthly payments.

Tax implications: Depending on your total income (including wages, retirement distributions and taxable investment income), up to 85% of your Social Security benefits could be taxable. Proper planning can help you manage taxable income and potentially reduce or avoid higher taxes on benefits.

If you’re fortunate enough to have a pension, find out your payout options. Some pensions offer lump-sum distributions, while others offer monthly annuity payments.

Tax implications: Most pension income is taxable at ordinary income tax rates.

In addition to retirement accounts, you may have savings and investments in brokerage accounts that can supplement your income.

Tax implications: Capital gains and dividends may be taxed differently than ordinary income, potentially at lower rates. Strategic withdrawals from taxable accounts and retirement accounts can help you manage your overall tax liability.

3. Develop a retirement account withdrawal strategy

Once you turn 73, you must take required minimum distributions (RMDs) from most tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Failing to do so can result in hefty penalties.

Tax implications: RMDs are treated as ordinary income for tax purposes. If you don’t need them for living expenses, you might consider a qualified charitable distribution (QCD) to lower your taxable income. With a QCD, funds go directly from your retirement account to a qualified charity. They can count toward your RMD but aren’t included in your taxable income.

Distributions from Roth IRAs and Roth 401(k)s are generally tax-free (if holding-period requirements are met), making them valuable tools for reducing taxes in retirement. If you have traditional and Roth accounts, you might choose to take withdrawals from Roth accounts in years when you want to manage your tax bracket more carefully.

Tax implications: Roth accounts don’t require RMDs during the original owner’s lifetime.

4. Plan for health care expenses

Medical costs can significantly impact retirees. Medicare premiums, hospital visits, prescriptions and potential long-term care are just some of the expenses that can eat into your retirement savings without careful planning.

Tax implications: Health Savings Accounts (HSAs) allow for tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. If you’re retiring soon and have a high-deductible health plan, maximizing HSA contributions can be a smart move. In addition, qualified medical expenses can sometimes be deducted if they exceed a certain percentage of your adjusted gross income (AGI).

Final thoughts

Retirement can span decades, and tax laws frequently change. By combining various withdrawal strategies and staying proactive about tax changes, you can tame the tax tangle. These are only some of the tax issues and implications. Contact us. We can help forecast tax outcomes under different scenarios and advise on strategies that complement your retirement goals.

Many business tax limits have increased in 2025

Details: Published: 05 February 2025 05 February 2025

A variety of tax-related limits that affect businesses are indexed annually based on inflation. Many have increased for 2025, but with inflation cooling, the increases aren’t as great as they have been in the last few years. Here are some amounts that may affect you and your business.

2025 deductions as compared with 2024

Section 179 expensing:
- Limit: $1.25 million (up from $1.22 million)
- Phaseout: $3.13 million (up from $3.05 million)
- Sec. 179 expensing limit for certain heavy vehicles: $31,300 (up from $30,500)
Standard mileage rate for business driving: 70 cents per mile (up from 67 cents)
Income-based phaseouts for certain limits on the Sec. 199A qualified business income deduction begin at:
- Married filing jointly: $394,600 (up from $383,900)
- Other filers: $197,300 (up from $191,950)

Retirement plans in 2025 vs. 2024

Employee contributions to 401(k) plans: $23,500 (up from $23,000)
Catch-up contributions to 401(k) plans: $7,500 (unchanged)
Catch-up contributions to 401(k) plans for those age 60, 61, 62 or 63: $11,250 (not available in 2024)
Employee contributions to SIMPLEs: $16,500 (up from $16,000)
Catch-up contributions to SIMPLEs: $3,500 (unchanged)
Catch-up contributions to SIMPLE plans for those age 60, 61, 62 or 63: $5,250 (not available in 2024)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $70,000 (up from $69,000)
Maximum compensation used to determine contributions: $350,000 (up from $345,000)
Annual benefit for defined benefit plans: $280,000 (up from $275,000)
Compensation defining a highly compensated employee: $160,000 (up from $155,000)
Compensation defining a “key” employee: $230,000 (up from $220,000)

Social Security tax

Cap on amount of employees’ earnings subject to Social Security tax for 2025: $176,100 (up from $168,600 in 2024).

Other employee benefits this year vs. last year

Qualified transportation fringe-benefits employee income exclusion: $325 per month (up from $315)
Health Savings Account contribution limit:
- Individual coverage: $4,300 (up from $4,150)
- Family coverage: $8,550 (up from $8,300)
- Catch-up contribution: $1,000 (unchanged)
Flexible Spending Account contributions:
- Health care: $3,300 (up from $3,200)
- Health care FSA rollover limit (if plan permits): $660 (up from $640)
- Dependent care: $5,000 (unchanged)

Potential upcoming tax changes

These are only some of the tax limits and deductions that may affect your business, and additional rules may apply. But there’s more to keep in mind. With President Trump back in the White House and the Republicans controlling Congress, several tax policy changes have been proposed and could potentially be enacted in 2025. For example, Trump has proposed lowering the corporate tax rate (currently 21%) and eliminating taxes on overtime pay, tips, and Social Security benefits. These and other potential changes could have wide-ranging impacts on businesses and individuals. It’s important to stay informed. Consult with us if you have questions about your situation.

The standard business mileage rate increased in 2025

Details: Published: 22 January 2025 22 January 2025

The nationwide price of gas is slightly higher than it was a year ago and the 2025 optional standard mileage rate used to calculate the deductible cost of operating an automobile for business has also gone up. The IRS recently announced that the 2025 cents-per-mile rate for the business use of a car, van, pickup or panel truck is 70 cents. In 2024, the business cents-per-mile rate was 67 cents per mile. This rate applies to gasoline and diesel-powered vehicles as well as electric and hybrid-electric vehicles.

The process of calculating rates

The 3-cent increase from the 2024 rate goes along with the recent price of gas. On January 17, 2025, the national average price of a gallon of regular gas was $3.11, compared with $3.08 a year earlier, according to AAA Fuel Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.

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, including gas, maintenance, repairs and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

Standard rate or real expenses

Businesses can generally deduct the actual expenses attributable to business use of a vehicle. These include gas, oil, tires, insurance, repairs, 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 beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal 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 do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

When you can’t use the standard rate

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends 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.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2025 — or claiming 2024 expenses on your 2024 income tax return.

Do you have questions about taking IRA withdrawals? We’ve got answers

Details: Published: 16 January 2025 16 January 2025

Once you reach age 73, tax law requires you to begin taking withdrawals — called Required Minimum Distributions (RMDs) — from your traditional IRA, SIMPLE IRA and SEP IRA. Since funds can’t stay in these accounts indefinitely, it’s important to understand the rules behind RMDs, which can be pretty complex. Below, we address some common questions to help you navigate this process.

What are the tax implications if I want to withdraw money before retirement?

If you need to take money out of a traditional IRA before age 59½, distributions are taxable, and you may be subject to a 10% penalty tax. However, there are several ways that you can avoid the 10% penalty tax (but not the regular income tax). They include using the money to pay:

Qualified higher education expenses,
Up to $10,000 of expenses if you’re a first-time homebuyer,
Expenses after you become totally and permanently disabled,
Expenses of up to $5,000 per child for qualified birth or adoption expenses, and
Health insurance premiums while unemployed.

These are only some of the exceptions to the 10% tax allowed before age 59½. The IRS lists them all in this chart.

When am I required to take my first RMD?

For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 73, regardless of whether you’re still employed. The RMD age used to be 72 but the Secure 2.0 Act raised it to 73 starting in 2023.

How do I calculate my RMD?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who’s 10 or more years younger than the owner.

How should I take my RMDs if I have multiple accounts?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You don’t have to take a separate RMD from each IRA.

Can I withdraw more than the RMD?

Yes, you can always withdraw more than the RMD. But you can’t apply excess withdrawals toward future years’ RMDs.

In planning for RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.

Can I take more than one withdrawal in a year to meet my RMD?

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the yearly total minimum amount by December 31 (or April 1 if it is for your first RMD).

What happens if I don’t take an RMD?

If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the amount that should have been paid but wasn’t.

Plan carefully

Contact us to review your traditional IRAs and analyze other retirement planning aspects. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA. Roth IRAs are retirement savings vehicles that operate under a different set of rules than traditional IRAs. Contributions aren’t deductible, but qualified distributions are generally tax-free.

Small business strategy: A heavy vehicle plus a home office equals tax savings

Details: Published: 14 January 2025 14 January 2025

New and used “heavy” SUVs, pickups and vans placed in service in 2025 are potentially eligible for big first-year depreciation write-offs. One requirement is you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you may be able to deduct that percentage of the cost in the first year. The write-off will reduce your federal income tax bill and your self-employment tax bill, if applicable. You might get a state tax income deduction too.

Setting up a business office in your home for this year can also help you collect tax savings. Here’s what you need to know about the benefits of combining these two tax breaks.

First, buy a suitably heavy vehicle

The generous first-year depreciation deal is only available for an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that’s purchased (not leased). First-year depreciation deductions for lighter vehicles are subject to smaller depreciation limits of up to $20,400 in 2024. (The 2025 amount hasn’t come out yet.)

It’s not hard to find attractive vehicles with GVWRs above the 6,000-pound threshold. Examples include the Cadillac Escalade, Jeep Grand Cherokee, Chevy Tahoe, Ford Explorer, Lincoln Navigator, and many full-size pickups. You can usually find the GVWR on a label on the inside edge of the driver’s side door.

Take advantage of generous depreciation deductions

Favorable depreciation rules apply to heavy SUVs, pickups and vans that are used over 50% for business because they’re classified as transportation equipment for federal income tax purposes. Three factors to keep in mind:

First-year Section 179 deductions. Many businesses can write off most or all of the business-use portion of a heavy vehicle’s cost in year 1 under the Section 179 deduction privilege. The maximum Sec. 179 deduction for tax years beginning in 2024 is $1.25 million.
Limited Sec. 179 deductions for heavy SUVs. There’s a limit on Sec. 179 deductions for heavy SUVs with GVWRs between 6,001 and 14,000 pounds. For tax years beginning in 2025, the limit is $31,300.
First-year bonus depreciation. For heavy vehicles placed in service in 2025, the first-year bonus depreciation percentage is currently 40%, but future legislation may allow a bigger write-off. There are several limitations on Sec. 179 deductions but no limits on 40% bonus depreciation. So, bonus depreciation can help offset the impact of Sec. 179 limitations, if applicable.

Then, qualify for home office deductions

Again, the favorable first-year depreciation rules are only allowed if you use your heavy SUV, pickup, or van over 50% for business.

You’re much more likely to pass the over-50% test if you have an office in your home that qualifies as your principal place of business. Then, all the commuting mileage from your home office to temporary work locations, such as client sites, is considered business mileage. The same is true for mileage between your home office and any other regular place of business, such as another office you keep. This is also the case for mileage between your other regular place of business and temporary work locations.

Bottom line: When your home office qualifies as a principal place of business, you can easily rack up plenty of business miles. That makes passing the over-50%-business-use test for your heavy vehicle much easier.

How do you make your home office your principal place of business? The first way is to conduct most of your income-earning activities there. The second way is to conduct administrative and management chores there. But don’t make substantial use of any other fixed location (like another office) for these chores.

Key points: You must use the home office space regularly and exclusively for business throughout the year. Also, if you’re employed by your own corporation (as opposed to being self-employed), you can’t deduct home office expenses under the current federal income tax rules.

Double tax break

You can potentially claim generous first-year depreciation deductions for heavy business vehicles and also claim home office deductions. The combination can result in major tax savings. Contact us if you have questions or want more information about this strategy.

Drive down your business taxes with local transportation cost deductions

Details: Published: 12 December 2024 12 December 2024

Understanding how to deduct transportation costs could significantly reduce the tax burden on your small business. You and your employees likely incur various local transportation expenses each year, and they have tax implications.

Let’s start by defining “local transportation.” It refers to travel when you aren’t away from your tax home long enough to require sleep or rest. Your tax home is the city or general area in which your main place of business is located. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest to do your work.

Your work location

The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive to get to work and home again are personal and not for business purposes. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone or laptop, performing business-related tasks on the subway).

An exception applies for commuting to a temporary work location outside of the metropolitan area where you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does, in fact, last) for no more than a year.

Work location to other sites

On the other hand, once you get to your work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the cost of traveling between them is deductible.

Recordkeeping

If your deductible trip is by taxi or public transportation, save a receipt or note the expense in a logbook. Record the date, amount spent, destination and business purpose. If you use your own car, note the miles driven instead of the amount spent. Also, note any tolls paid or parking fees, and keep receipts.

You must allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.

Your deduction can be computed using:

The standard mileage rate (for 2024, 67 cents per business mile) plus tolls and parking, or
Actual expenses (including depreciation, subject to limitations) for the portion of car use allocable to the business. For this method, you’ll need to keep track of all costs for gas, repairs and maintenance, insurance, interest on a car loan, and any other car-related costs.

Employees vs. self-employed

From 2018–2025, under the Tax Cuts and Jobs Act, employees can’t deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — including employee business expenses — are suspended (not allowed) for these years. (Self-employed taxpayers can deduct the expenses discussed in this article.) But beginning in 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income. However, with Republican control in Washington, this unfavorable provision may be extended by Congress, and miscellaneous itemized deductions won’t be allowed.

When can you deduct business meals and entertainment?

Details: Published: 26 November 2024 26 November 2024

You’re not alone if you’re confused about the federal tax treatment of business-related meal and entertainment expenses. The rules have changed in recent years. Let’s take a look at what you can deduct in 2024.

Current law

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

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

Allowable food and beverage costs

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

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

Other rules

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

1. The meal isn’t lavish or extravagant under the circumstances.

2. You (as the taxpayer) or an employee is present at the meal.

3. The meal is provided to you or a business associate.

Who are business associates? They’re people with whom you reasonably expect to conduct business — such as established or prospective customers, clients, suppliers, employees or partners.

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

Traveling on business

Per IRS regulations, the general rule is that you can still deduct 50% of the cost of meals while traveling on business. The longstanding rules for substantiating meal expenses still apply. Message: keep receipts.

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

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

100% deductions in certain situations

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

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

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

Bottom line

Business-related meal deductions can be valuable, but the rules can be complex. Contact us if you have questions or want more information.

More Articles ...