With year-end approaching it’s a great time to take stock of your personal and business financial and tax situation to make changes. With the ever-changing tax landscape, it’s also a great opportunity to look at tax changes and opportunities for reducing your taxes.
Entity Beneficial Ownership Reporting
A US District Court has now enjoined the Treasury from enforcing the Corporate Transparency Act with a preliminary injunction. Treasury has appealed the temporary injunction. This injunction gives entities at least a delay in the reporting requirements. However, the requirements could be reinstated at any time. Owners of legal entities will need to decide whether to proceed with filing their reports or to delay filing pending a possible reinstatement of the rules. WhippleWood is not able to provide filing these reports as one of our services. You should check with your lawyer to discuss getting the filings made.
Expiration of 2017 Tax Act Changes
There are numerous provisions of the 2017 Tax Act that are set to expire on January 1, 2026. With Donald Trump taking office in January, the chances of these provisions being extended have gone up. However, it is difficult to predict which of these provisions will be extended and which will expire.
Individual Tax Issues
Many people have income that varies greatly by year. In those cases, it often makes sense to time income and deductions in a way that levels out the tax rate that is charged on the income. If you have income that is variable by year, we may be able to help you plan your taxes to make use of the lower tax rates more evenly.
The lifetime exclusion from gift and estate tax is scheduled to be cut in half on January 1, 2026. This limit is also indexed for inflation. For 2025, this exemption is $13.99 million per person. If there were no further inflation adjustments until 2026, the limit will drop to $6.995 million. Anyone who expects their estate to eventually be more than $6.995 million (or double that for a married couple), should begin planning now to minimize the estate tax for their heirs. People who have done estate tax planning in prior years should revisit their plan and see if it needs to be updated because of changes in the limit over the years. The higher gift tax limit might be extended by Congress. However, anyone who waits for those changes to do their estate tax planning may not have enough time to complete the implementation of their estate tax plan before the limit is cut in half.
Business Issues
Employee Retention Credit (ERC) Claims
The IRS has resumed processing ERC claims. However, our experience is that they are acting very slowly in addressing the outstanding claims. Unfortunately, there is little that a taxpayer can do to expedite the process. If you have an outstanding ERC claim and you have a severe hardship, you can request the Taxpayer Advocate to expedite your refund. WhippleWood can help with filing a request with the Taxpayer Advocate if these rules apply to you.
GAAP Accounting Changes
If your business issues financial statements in accordance with generally accepted accounting principles (“GAAP”), there are numerous recent changes to consider. Those changes include revenue recognition and accounting for leases. These changes could have a material impact on your financial statements. Many businesses have had issues with their loan covenants because of these changes. If you would like to discuss these changes on their potential impact on your business, please call Ron Bass at 303-551-8009.
Depreciation
Bonus depreciation began phasing out in 2023. If your business has plans to purchase software or equipment, it might make sense to purchase the assets before year end. For example, if a business purchases a piece of equipment for $20,000 on December 31, that business can take bonus depreciation of $12,000 on the asset against 2024 taxable income. However, if they delay the purchase until January 2, they would receive an $8,000 bonus depreciation deduction in 2025 with the remainder of the depreciation spread over future years. Bonus depreciation is further reduced in later years.
We often work with clients to maximize the tax rate that applies to the depreciation deductions by making elections to choose which years the business receives the depreciation. If the owners’ tax rates change from year to year, it often makes sense to time the deductions to be in years when the taxpayer is paying at a higher tax rate. We can work with you to maximize the value of the tax deductions for the purchases of buildings and equipment.
Elections for State Taxes
Most states (including Colorado) now allow a partnership or S corporation to elect to pay the state tax on behalf of its owners. The advantage is that the taxes imposed at the business level are not subject to the $10,000 federal cap on deducting tax payments. There are often drawbacks to making the election that might make it more advantageous to forego the election. If you operate a business in a partnership or S corporation, discuss which election you should make for your situation.
Filing Income Taxes and Sales & Use Taxes in Multiple States
There have been rapid changes in the requirements to file and pay taxes in states other than your main place of business. If you have sales to other states, employees in other states, or inventory (such as in an Amazon warehouse) in other states, you may be required to pay income and/or sales and use taxes in those states. Even having independent contractors in other states can sometimes create filing requirements. If you are required to file a return and don’t, the statute of limitations never ends on those taxes. Instead, penalties and interest continually accrue until you pay the tax. For sales taxes, you can also change the tax from being a tax on your customer to a tax on your business. WhippleWood can help you determine which states might have filing requirements for your business.
Potential Gain Exclusion on the Sale of Your Business
There has been a great deal of activity in the last couple of years with business owners restructuring their business to qualify for what is call a “1202 Gain Exclusion.” If the business is held in a C corporation for at least five years, then the owner can sell the stock and exclude up to the greater of ten times the initial investment in the C Corporation or $10 million in gain. If you are working toward selling your business for a substantial gain at least five years down the road, we may be able to help you restructure your business so that you qualify for this tax benefit. Please keep in mind that Congress can change the benefits from this exclusion at any time.
1031 Exchanges for Real Estate
1031 exchanges allow you to defer the taxes on selling real estate that is held for investment or business use and have long been a popular way to reduce taxes. Delaware Statutory Trusts (DSTs) have become a very popular vehicle for 1031 exchanges in the last few of years. DSTs allow you to trade your real estate into a passive real estate investment that doesn’t require any of your time to manage. They are also handy as a backup when you need to identify the replacement real estate after the sale of your property. That way, if the deal for your replacement property falls through, you can still defer the gain. If you are interested in using a DST to defer gain on a real estate sale, call us and we can help you through the process. Make sure you discuss whether or not an investment in a DST is appropriate for you with your investment advisor.
Forms W-2 and 1099
W-2s and 1099s must be issued and filed with the IRS by January 31. Some fringe benefits including personal use of company vehicles must be included in wages. It is important to review the W-2 information in early December to avoid costly payroll re-runs before sending out W-2s. See Appendix III for a summary of year-end payroll issues to address and share the information with your payroll person. You should get a W-9 form from each 1099 vendor and maintain a file of them. See Appendix III for more detail on payroll issues and Appendix IV for 1099 issues. If you would like WhippleWood CPAs to prepare the 1099 forms for your business, please provide the required information to our office by January 13, 2025.
Treatment of workers as independent contractors instead of employees has come under increasing scrutiny in recent years. See Appendix I for more details about when workers must be treated as employees.
Please see below for additional detail. If you have any questions about Forms W-2, 1099, or other tax matters feel free to call us. We would be happy to help you.
Calendar of Important Filing Dates
- January 15, 2025: Fourth Quarter 2024 Estimated Payments Due
- January 31, 2025: Form W-2 2024 Filing Deadline
- January 31, 2025: Form 1099-INT 2024 Filing Deadline
- January 31, 2025: Form 1099-NEC 2024 Filing Deadline
- January 31, 2025: Form 1099-MISC 2024 Filing Deadline
- March 15, 2025: S Corporation Return Filing Deadline (2024 Form 1120-S)
- March 15, 2025: Partnership Return for Calendar Year Partnerships Filing Deadline (2024 Form 1065)
- April 15, 2025: Individual Returns Filing Deadline (2024 Form 1040)
- April 15, 2025: C Corporation for Calendar Year Corporations Filing Deadline (2024 Form 1120)
- May 15, 2025: Not for Profit for Calendar Year Filing Deadline (2024 Form 990)
Appendix I – Independent Contractors
Treatment of workers as independent contractors has come under increasing scrutiny in recent years. In addition, many states have made changes to their definitions of employees in recent years. Many workers who would have been properly treated as independent contractors in earlier years are now properly treated as employees for state law purposes. Although the federal rules have not changed significantly, treating workers as employees for state purposes but independent contractor for federal purposes is administratively difficult.
If a company improperly treats an employee as an independent contractor, there can be significant employment tax penalties. In addition, not reporting the employees can cause significant other problems.
In today’s economy, many businesses receive services from individuals who work out of their homes in other states. If those service providers are deemed to be employees by that state, it creates a physical presence in the state that meets all nexus standards. Now that the company has nexus in that state, it has the following obligations:
- With an employee in the state, the company is treated as doing business in the state. If the business is formed as a corporation, LLC, or other limited liability form of entity, the entity must register with the Secretary of State as a foreign entity.
- The physical presence causes sales tax nexus. The company has a responsibility to collect sales taxes from any sales of taxable items into that state.
- The physical presence causes income tax nexus. The company must file income tax returns in the state.
- The company is responsible for payroll taxes in the state including state income tax withholding and unemployment taxes.
- The company is responsible for worker’s compensation coverage for the employee.
If your business makes use of individuals who are treated as independent contractors, you should speak with us to help you determine your exposure and best course of action.
Appendix II – W-2 Reporting
2024 Form W-2
The following list contains items that are important to remember when filing Forms W-2 for 2024. Several items may require adjustments to Forms W-2 prior to year-end in order to accurately report fringe benefits. Your payroll company may send you a year-end package regarding certain adjustments; however, unless specifically instructed to, your payroll company may not include these adjustments for the appropriate items listed below. We can assist with any adjustments or questions you may have.
Federal and State Withholding
- It is important to ensure that withholding amounts are accurate to avoid the need to prepare corrected Forms W-2
- Fringe Benefits
- Any fringe benefit provided to an employee is taxable and must be included in the employee’s pay unless it is specifically excluded under the law. Taxable fringe benefits are reported in Box 1 of Form W-2 as wages, tips and other compensation, and if applicable, in Boxes 3 and 5 as Social Security and Medicare wages.
Personal Usage of Company-Owned Vehicle
- If you are operating your business as a corporation and are deducting a vehicle loan payment, lease payment or any vehicle expenses (i.e., gas, lube, wash, etc.), you need to adjust for any personal use of the vehicle by either of the following:
- Report the personal usage in Box 1 of Form W-2. This option will subject the amount to Social Security taxes; or
- Write a personal check to the company to reimburse for personal usage. This option does not subject the reimbursement to Social Security taxes.
- If company vehicles are provided to employees for any business, the above adjustments must be made. The Social Security tax issue is the same as those listed above. Using the first method, the Social Security tax will be paid by the employee and matched by employer. Using the second method, Social Security tax does not need to be paid.
Health & Accident Insurance Premiums
- Health and accident premiums paid by an S-Corporation for a more than 2% shareholder-employee are deductible by the S-Corporation. However, the premiums must be included as wages subject to income tax but not Social Security tax. This amount is deductible on your personal return.
- The Patient Protection and Affordable Care Act requires employers to report the aggregate reportable cost of applicable employer-sponsored coverage under an employer-sponsored group health plan on Form W-2.
- An employer who was required to file fewer than 250 Forms W-2 for the tax year will be exempt from this reporting requirement.
- The aggregate reportable cost generally includes both the portion of the cost paid by the employer and the portion paid by the employee, regardless of whether the employee paid through pretax or after-tax contributions.
- Contributions to Archer MSAs and HSAs are excluded.
- Contributions to a health FSA are also excluded, but to the extent the amount exceeds the employee’s salary reduction contributions for the year, it is included in the aggregate reportable cost.
Limit on Health Flexible Spending Arrangement
- For 2024 contributions to a health flexible spending arrangement are limited to $3,200 not including any amounts carried over from the prior year.
Additional Medicare Tax
- Medicare wages in excess of $200,000 (single) and $250,000 (married filing jointly) are now subject to a 0.9% additional Medicare tax. Wages up to $168,600 are still taxed at 1.45% for both the employee and employer. Wages over $200,000 are taxed to the employee at 2.35%. This additional tax applies only to the employee and not the employer.
W-2 Input
- With the January 31st due date of the W-2s, it is very important to get the payroll information updated in your payroll system. To avoid needing to pay your payroll processor for amended returns, you must make sure these inputs are handled by the payroll processor’s deadline. Following is a list of some items that you should review to make sure they are properly input:
- S Corporation owner payroll updates.
- Fringe benefits including those listed above.
- Bonuses and gift cards or gift certificates.
- 3rd party sick pay.
- Manual payroll checks.
- Group term life insurance.
- Checks that need to be voided.
Appendix III – 1099 Reporting
2024 Form 1099
Forms 1099 are required for business payments made to an individual, LLC, attorney or unincorporated business under the following situations:
- 1099-NEC: Payments of $600 or more made to an attorney(s) during the year (Note: The exemption from issuing Forms 1099-NEC reporting payments to corporations does not apply to payments for legal services);
- 1099- NEC: Payments of $600 or more for services (including parts and materials used to perform the service) during the year;
- 1099- NEC: Payments of $600 or more for nonemployee compensation, including fees, commissions, prizes, awards for services performed as a nonemployee and other forms of compensation for services performed for your trade or business by an individual who is not your employee;
- 1099- MISC: Payments of $600 or more for rents during the year. This includes payments made for rental of machinery.
- 1099- MISC: Payments of $600 or more for medical and health care payments during the year (Note: The exemption from issuing Form 1099-MISC to a corporation does not apply to payments made for medical or health care services provided by corporations, including professional corporations. However, payments made to tax-exempt hospitals are not required to be reported);
- 1099- MISC: Payments and other remuneration made to directors, including payments made after retirement; and
- 1099-INT: Payments of $10 or more for interest during the year.
- Note that 1099s are not required for purchasing merchandise for resale.
- 1099 reporting isn’t necessary for amounts charged to credit cards. However, it is required for other forms of payment.
The Following Information is Necessary to Prepare Form 1099:
- Full name of company and/or individual. If reporting to an individual, both the first and last name is needed;
- Tax identification number (Federal EIN, or SSN). If reporting to an LLC with a social security number, use the format XXX-XX-XXXX;
- Address for each recipient; and
- Total amount paid to each recipient.
Please note, you should request and retain a Form W-9 for each Form 1099 recipient. Form W-9 provides the information needed to accurately complete the Form 1099. Otherwise, you may have additional withholding responsibilities.
If you would like WhippleWood CPAs to prepare the Form 1099’s for your business, please provide the required information to our office by January 12, 2025. Please note that the Form 1099 must be postmarked to the recipients and the IRS no later than January 31, 2025.
1099 B Notices
You may receive correspondence from the IRS notifying you that some TINs reported on your 1099s do not match up with the name shown on the 1099 according to the IRS records. If you receive this correspondence you must send a “B Notice” to the payee and provide a copy of that B Notice to the IRS. The IRS will assess a penalty of $50 per item if the notices are not sent. This penalty applies even if you have no future payments to that recipient. Contact us if you have any questions on these notices.