2024 Vehicle Mileage Rates

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The IRS has issued the 2024 optional cents-per-mile rates used to calculate the tax-deductible costs of operating a vehicle:

Effective Jan. 1, 2024, the standard mileage rate for the business use of a car (including vans, pickups, and panel trucks) is 67 cents per mile. (This is up from 65.5 cents per mile for 2023.)

The 2024 rate for medical or eligible moving purposes is 21 cents per mile. (For 2023, the rate was 22 cents per mile.)

For charitable driving, the 2024 rate is 14 cents per mile (unchanged from 2023).

Note that these rates apply to electric and hybrid-electric automobiles as well as gasoline and diesel-powered vehicles. Contact the office for more information.

408-252-1800

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Did You Get Married in 2023?

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Your filing status options for your 2023 income tax return depend on your marital status on Dec. 31. The married-filing-jointly status is typically the most beneficial way for married taxpayers to file, but it’s a good idea to take a “what-if” look at the married filing separately status.

For example, if one spouse has high medical expenses and a relatively lower adjusted gross income (AGI), filing separately may allow that spouse to exceed the 7.5% of AGI floor for the medical expense deduction and deduct some medical expenses that wouldn’t be deductible if the couple filed jointly.

What about your income tax rate?

Fortunately, through 2025 the Tax Cuts and Jobs Act eliminated the tax-bracket marriage penalty for all but the top bracket. But middle-bracket newlyweds may be at greater risk of becoming subject to the 0.9% additional Medicare tax and the 3.8% net investment income tax than they were as singles. Why? The thresholds for these taxes for married taxpayers aren’t that much higher than for singles ($250,000 vs. $200,000, respectively).

For instance, two singles who each have an income of $150,000 wouldn’t be subject to these taxes. But if they marry, their combined $300,000 income would likely cause them to become subject to one or both taxes (depending on the mix of earned vs. investment income). Filing separately wouldn’t help because the threshold is $125,000 for separate filers.

Did your name change?

The name on a person’s tax return must match what is on file at the Social Security Administration. If it doesn’t, it could delay any tax refund. So be sure to report your name change to the Social Security Administration before you file your return.

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One Reason to File Your 2023 Tax Return Early

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The 2023 individual income tax return filing season will open soon. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year. Why? You may be able to protect yourself from tax identity theft.

In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. Then when you file your return, you’ll hear from the IRS that the return is being rejected because someone has already filed a return with the same Social Security number.

While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can be difficult to straighten out and can significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected, not yours.

If you have questions or would like an appointment to prepare your return and ensure you take advantage of all of the breaks available to you, please contact the office.

408-252-1800

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Appraisals Aren’t Just for Businesses

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Whether you’re in the process of making a retirement or estate plan or you intend to donate property to charity, you’ll need to know the value of your assets. For many hard-to-value items, such as closely held business interests, real estate, art and collectibles, an appraisal may be necessary.

Retirement and Estate Planning

To enjoy a comfortable retirement, you’ll need to calculate the income that can support your lifestyle when you’re no longer working. This means understanding the value of the assets you own. Once you have this information, you may decide to move your retirement date up or back.

Knowing the value of your assets is also necessary to assess whether you’ll potentially be subject to gift and estate taxes. It also allows you to identify strategies for minimizing or eliminating those taxes. In addition, without appraisals of hard-to-value assets, it’s nearly impossible to divide your overall property equally among your children (if that’s your wish).

Appraisals may also be necessary to avoid running afoul of tax basis consistency rules. The rules are intended to prevent heirs from arguing that estate property was undervalued, which would raise their basis for income tax purposes. According to these rules, the income tax basis of inherited property equals the property’s fair market value as finally determined for estate tax purposes. Appraisals can help ensure that your heirs receive the basis they deserve.

Gifts and Charitable Giving

The IRS has an unlimited amount of time to challenge the value of gifts for gift and estate tax purposes, unless they’re “adequately disclosed,” which generally binds the IRS to a three-year statute of limitations. A qualified professional appraisal with a timely filed gift tax return is the best way to disclose the value of a gift of a hard-to-value asset.

Charitable gifts of property valued at more than $5,000 (other than publicly traded securities) must be substantiated with a qualified appraisal by a qualified appraiser. This means that the appraiser meets certain education and experience requirements.

Know What You Have

Without appraisals of your hard-to-value assets, it’s difficult to develop a realistic financial plan, to create an estate plan that will achieve your desired results and to avoid unwelcome tax liabilities. Asset values can fluctuate dramatically over time, so make sure you get updated appraisals periodically.

408-252-1800

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Sec. 179 Expensing and Bonus Depreciation: Beware of Pitfalls

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If eligible, you can elect to use Section 179 expensing or bonus depreciation to deduct a large portion of the cost (and in some cases the full cost) of eligible property in the year it’s placed in service. Alternatively, you may follow regular depreciation rules and spread deductions over several years or decades, depending on how the asset is classified under the tax code.

While taking current deductions can significantly lower your company’s taxable income, it isn’t always the smartest move.

Sec. 179 and Bonus Depreciation 101

Section 179 expensing may allow you to currently deduct the full cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, and qualified improvement property (QIP). An annual expensing limit applies ($1.16 million for 2023 and $1.22 million for 2024), which begins to phase out dollar for dollar when asset acquisitions for the year exceed the applicable threshold ($2.89 million for 2023 and $3.05 million for 2024). You can claim the election only to offset net income, not to reduce it below zero to create a net operating loss.

First-year bonus depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software and water utility property. Under the TCJA, through 2026, the definition has been expanded to include used property and qualified film, television and live theatrical productions. In addition, QIP is now eligible for bonus depreciation. For 2023, bonus depreciation was 80%. It drops to 60% for 2024, to 40% for 2025 and to 20% for 2026. After that, it will be eliminated, unless Congress acts to extend it.

When to Consider Forgoing These Breaks

Here are two examples when it may be preferable to forgo Sec. 179 expensing and bonus depreciation.

You’re planning to sell QIP. If you claim Sec. 179 expense or bonus depreciation on QIP and sell the building soon, this current write-off may be a tax trap. That’s because your gain on the sale up to the amount of Sec. 179 or bonus depreciation deductions you’ve claimed will be treated as “recaptured” depreciation that’s taxable at ordinary-income tax rates, up to 37%. But if you deduct the cost of QIP under regular depreciation rules (generally, over 15 years) and sell the building, any long-term gain attributable to the deductions will be taxable at a top rate of 25%.

You’re eligible for the qualified business income (QBI) deduction. This deduction allows eligible business owners to deduct up to 20% of their QBI from certain pass-through entities, such as partnerships, limited liability companies and sole proprietorships. The deduction can’t exceed 20% of an owner’s taxable income, excluding net capital gains. (Other restrictions apply.)

Claiming Sec. 179 or bonus depreciation deductions reduces your taxable income, which may deprive you of an opportunity to maximize the QBI deduction. Because the QBI deduction is scheduled to expire after 2025, taking full advantage of it while you can will generally make sense.

Timing Is Everything

Keep in mind that only the timing of deductions is affected by the strategy you choose. You’ll still have an opportunity to write off the full cost of eligible assets if you forgo Sec. 179 expensing and bonus depreciation; it will just be over a longer time period. Contact the office for help analyzing your company’s overall tax benefit picture and determining the optimal strategy.

408-252-1800

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The Advantages of LLC Structure for a Small Business

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If you operate your small business as a sole proprietorship, you may have thought about forming a limited liability company (LLC) to protect your assets. Or maybe you’re launching a new business and want to know the options for setting it up. Here are the basics of operating as an LLC and why it might be a good choice for your business.

An LLC is a bit of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide owners with the best of both worlds.

Protect Your Personal Assets

Like the shareholders of a corporation, the owners of an LLC (called “members” rather than “shareholders” or “partners”) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are generally protected from the entity’s creditors.

This protection is much greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing their businesses, can have personal liability.

Enjoy Partnership Tax Benefits

The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of benefits to owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they flow through to the owners, are reported on the owners’ individual returns and are taxed only once.

To the extent the income passed through to you is qualified business income (QBI), you’ll be eligible to take the Section 199A QBI deduction, subject to various limitations. However, keep in mind that this deduction is temporary. It’s available only through 2025, unless Congress acts to extend it.

In addition, because you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have. (Limits on the business loss deduction do apply.)

An LLC that’s taxable as a partnership also can provide special allocations of tax benefits to specific partners. This can be a notable reason for using an LLC over an S corporation (a business structure that provides pass-through tax treatment similar to a partnership). Another reason for using an LLC rather than an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.

Consider All Angles

An LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you may want to consider operating your business as an LLC. Contact the office to discuss in more detail how an LLC might be an appropriate choice for you and any other owners.

408-252-1800

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Increase to California SDI Starting in 2024 – Opt Out May Be Available

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By Michael Sands

Senate Bill 951 became effective on January 1, 2024 and provides for increased short-term disability and Paid Family Leave benefits for covered employees. To pay for these benefits, the bill removes the wage cap for California’s State Disability Insurance tax, making all wages subject to SDI tax beginning in 2024.

For 2023, the SDI rate was 0.9% with a maximum wage base of $153,164.  For 2024, the SDI rate is increased to 1.1% with no maximum wage base. To give you an idea of the potential increase, an employee making a $1,000,000 salary would pay additional SDI tax of $9,622 compared to 2023. An employee making a $500,000 salary would pay additional SDI tax of $4,122 compared to 2023.

For most wage earners, the increase is unavoidable, but sole shareholders of private corporations (including married couples who own 100% of a corporation) who are also officers of the corporation may file an election to opt out of SDI coverage and instead purchase private disability insurance that may cost less.

The exemption is made by filing EDD form DE 459 and goes into effect in the calendar quarter filed. It remains irrevocable for the remainder of the year and at least two succeeding calendar years. Thereafter, it remains in effect until withdrawn, although changes in stock ownership or status as a corporate officer may terminate the exemption.

Shareholders who make the election should be aware that they will no longer qualify to receive SDI benefits (including Paid Family Leave) and should consider obtaining alternative disability insurance coverage. They should also notify their payroll companies that the election has been made and that Form DE9C should be coded with plan code “R” to designate the shareholder (and/or spouse) opt-out.   

If you have any questions or are curious to learn more about this planning opportunity, please contact our office.

408-252-1800

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Self-Directed IRAs Provide Both Flexibility and Risk

Traditional and Roth IRAs can be relatively “safe” retirement-saving vehicles, though, depending on what they’re invested in, they limit your investment choices. For more flexibility in investment choices but also more risk, another option is a self-directed IRA.

Gaining More Control

A self-directed IRA is simply an IRA that provides greater control over investment decisions. Traditional and Roth IRAs typically offer a selection of stocks, bonds and mutual funds. Self-directed IRAs (available at certain financial institutions) offer greater diversification and potentially higher returns by permitting you to select virtually any type of investment, including real estate, closely held stock, limited liability company and partnership interests, loans, precious metals, and commodities (such as lumber, oil and gas).

A self-directed IRA can be a traditional or Roth IRA. The tax-free growth Roth accounts offer makes them powerful estate planning tools.

Navigating Tax Traps

To avoid pitfalls that can lead to unwanted tax consequences, exercise caution when using self-directed IRAs. The most dangerous traps are the prohibited transaction rules. These rules are designed to limit dealings between an IRA and “disqualified persons,” including account holders, certain members of their families, businesses controlled by account holders or their families, and certain IRA advisors or service providers.

Among other things, disqualified persons can’t sell property or lend money to the IRA, buy property from the IRA, provide goods or services to the IRA, guarantee a loan to the IRA, pledge IRA assets as security for a loan, receive compensation from the IRA, or personally use IRA assets.

The penalty for engaging in a prohibited transaction is severe: The IRA is disqualified, and its assets are deemed to have been distributed on the first day of the year in which the transaction took place, subject to income taxes and, potentially, to penalties. This makes it very difficult to manage a business, real estate or other investments held in a self-directed IRA. Unless you’re prepared to accept a purely passive role with respect to the IRA’s assets, this strategy isn’t for you.

Considering the Option

If you’d like to invest in assets such as real estate, precious metals, or other alternative investments, a self-directed IRA may be worth considering. But it’s critical to understand the risks.

Businesses Can Save Taxes by Acquiring and Placing Assets in Service by Year End

Under Section 179 of the Internal Revenue Code, companies can “expense” the full cost of qualifying fixed assets to reduce their taxable income. This means they can deduct the purchase amount currently rather than having to depreciate the asset over many years. Both new and used fixed assets can qualify. The election is available for qualified property placed in service anytime during the tax year.

If you’d like to reduce your 2023 tax liability and are on a calendar tax year, consider acquiring and placing in service qualified assets by Dec. 31, 2023.

For 2023, the maximum overall deduction allowed is $1.16 million (increasing to $1.22 million for 2024). The total asset purchase limit for 2023 is $2.89 million (increasing to $3.05 million for 2024), after which the deduction for the year is reduced dollar-for-dollar until it’s eliminated. You may be able to claim bonus depreciation (80% for 2023, falling to 60% for 2024) on eligible amounts in excess of your Sec. 179 expensing limit.

Education Benefits Help Attract and Retain Employees While Saving Taxes

Your business can attract and retain employees by providing education benefits that enable team members to improve their skills and gain additional knowledge, all on a tax-advantaged basis. Here’s a closer look at some education benefits options.

Educational Assistance Program

One popular fringe benefit that an employer can offer is an educational assistance program that allows employees to continue learning, and perhaps earn a degree, with financial help from the employer. An employee can receive, on a tax-free basis, up to $5,250 each year under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, as well as courses normally taken by individuals pursuing programs leading to a business, medical, law, or other advanced academic or professional degree.

The educational assistance must be provided under a separate written plan that’s publicized to your employees and meets specific conditions. A plan can’t discriminate in favor of highly compensated employees.

In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be claimed by an employee for any amount excluded from the employee’s income as an education assistance benefit.

If you pay more than $5,250 for educational benefits for an employee during the year, that excess amount must be included in the employee’s wages and the employee must generally pay tax on it.

Job-Related Education

In addition to, or instead of applying, the $5,250 exclusion, an employer can fund an employee’s educational expenses on a nontaxable basis if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

  • Maintain or improve skills required for the employee’s then-current job, or
  • Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for his or her employment or other trade or business.

Educational assistance benefits meeting the above “job-related” rules are excludable from employees’ income as working condition fringe benefits.

Assistance with Student Loans

Some employers also offer student loan repayment assistance as a recruitment and retention tool. Starting in 2024, employers can help more.

Under the SECURE 2.0 Act, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.’ The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers.

Tax-Smart Employee Attraction and Retention

In today’s competitive job market, providing education-related assistance can make a difference in attracting and retaining the best employees. Structured properly, these plans can also save taxes for both your business and your employees.