Turning a favorite pastime into income can be rewarding, but it raises an important tax question: Is the activity a hobby or a business? The answer matters because different tax rules apply to each.
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A recent survey found that 45% of small businesses reported growth, but 78% wanted to grow. This January 2026 data from Intuit QuickBooks Small Business Insights suggests that many small businesses are struggling to achieve their expansion goals.
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Are you a business owner or self-employed? Do you drive for business purposes? If so, you’ll be happy to know that the IRS’s standard mileage rate for business driving in 2026 is 72.5 cents per mile (up from 70 cents in 2025). Meanwhile, medical and moving mileage rates are 20.5 cents per mile, while the charitable rate is 14 cents.
You can choose to deduct eligible vehicle expenses based on business use under the actual expense method or by applying the standard mileage rate, which simplifies recordkeeping. Bear in mind, however, that the IRS requires documentation in either case. Contact the office for help determining which approach delivers the greater tax benefit for your situation.
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The One Big Beautiful Bill Act (OBBBA) introduces a range of tax changes that will impact businesses. Many provisions set to expire this year are now being extended or made permanent. Below is a snapshot of two important changes to help you with tax planning in the fourth quarter of 2025 and going forward.
Under the Tax Cuts and Jobs Act (TCJA), businesses had to amortize deductions for Section 174 research and experimentation (R&E) costs over five years for expenses incurred in the United States or 15 years for those incurred abroad. This provision used a mid-year rule that effectively stretched write-offs over six years. The OBBBA changes that by permanently allowing full, immediate deductions for domestic R&E expenses starting in the 2025 tax year. Foreign R&E expenses will still be amortized over 15 years.
In addition, the OBBBA lets “small businesses” (in 2025, those with average annual gross receipts of $31 million or less for the past three years) claim R&E deductions retroactively to 2022. A business of any size with domestic R&E costs from 2022 to 2024 can choose to speed up the remaining deductions for those years over a one- or two-year period.
Generally, the TCJA limited business interest deductions to 30% of the taxpayer’s adjusted taxable income (ATI) for the year. Before the OBBBA, ATI generally referred to earnings before interest and taxes. For tax years beginning after December 31, 2024, the OBBBA increases the cap on the business interest deduction by excluding depreciation, amortization and depletion when calculating ATI. This change typically increases ATI, allowing taxpayers to deduct more business interest expense.
But it’s important to note that, in 2025, taxpayers with average annual gross receipts for the last three years that don’t exceed $31 million are exempt from the interest deduction limitation.
For business owners, the OBBBA helps resolve tax planning uncertainty. Keep in mind, these are just two of the key changes for businesses in this tax legislation.
Contact the office to discuss the full range of tax provisions covered by the new law. We can help you optimize any extended or new provisions that are relevant to your situation and reduce your tax obligations for 2025 and beyond.
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To help ensure small businesses take advantage of all potential tax breaks, the IRS Taxpayer Advocate Service summarizes the types of tax…
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The consequences of misclassifying an employee as an independent contractor can be costly. You could be liable for back taxes (including the employee’s shares of unpaid payroll and income taxes), penalties and interest. There may be serious nontax consequences as well.
Businesses must withhold federal and state income taxes and the employee’s share of Social Security and Medicare taxes from employee wages. They must also pay the employer’s portion of Social Security, Medicare and unemployment taxes for employees. Generally, none of these obligations apply to the business for workers who are independent contractors.
Misclassifying an employee as an independent contractor can result in liability for unpaid payroll taxes, penalties and interest. You may also owe the employee’s share of taxes.
Beyond taxes, misclassification can mean liability for minimum wages, overtime pay, benefits, workers’ compensation, and state disability insurance. Ensuring proper classification helps avoid costly legal and financial consequences.
Determining the correct classification requires reviewing the key factors that the IRS evaluates. No single factor is conclusive; all must be taken into account.
Here are the three categories of factors the IRS assesses:
Who controls what work is done and how it’s performed? A higher degree of control suggests the worker is likely an employee. It’s important to consider how much training and education the business provides a worker to do the job.
Who controls the economic aspects, such as how the worker is paid and how expenses are reimbursed? Independent contractors generally have financial risk. They may work for flat fees and work for more than one business.
Workers hired for an indefinite period and performing core business functions are more likely to be employees.
Labeling a worker as an independent contractor in a written contract doesn’t make it so. However, it may serve as evidence in a dispute between parties.
It’s tempting to think that if a person works for you remotely, he or she automatically qualifies as an independent contractor. Not so fast! Even if the individual chooses to work remotely, the classification is still subject to scrutiny.
The key considerations are the same as for on-site workers, such as whether you, as the business owner, have the right to control the details of the worker’s services and how they’re performed.
Don’t underestimate the importance of this issue. The consequences of misclassification can indeed be severe. Using a reasonable basis for classifying workers may relieve penalties and employment taxes.
You can ask the IRS to weigh in by filing Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Before you do this, contact the office and ask for a review of the details.
Even if you’re confident in your classification of workers for federal tax purposes, it’s essential to consider how they’re treated under state taxation and federal and state wage and hour regulations. Classifying workers as employees in some cases and independent contractors in others can create significant administrative challenges, so evaluate their status comprehensively before making a final decision. Don’t risk a mistake. Answers to your questions are a phone call away.
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by Natalie Nguyen
Depreciation is a key concept in accounting and finance, reflecting how an asset loses value over time due to factors like wear and tear, aging, or obsolescence. But did you know that depreciation also has significant tax implications? In this blog post, we’ll explore these tax aspects and their impact on businesses.
Depreciation is the process of allocating the cost of a tangible asset over its useful life. It shows how companies account for the gradual loss of value in their assets.
For businesses, depreciation is considered an expense. Even though it’s a non-cash expense, it helps reduce taxable income. The IRS allows businesses to deduct this calculated depreciation from their corporate income taxes, which can significantly lower their tax liability and boost after-tax profits.
Bonus depreciation is a tax incentive that lets businesses accelerate deductions on “qualified property” in addition to regular depreciation when these assets are first put into use. This incentive encourages businesses to invest in new equipment.
Initially introduced through the Job Creation and Worker Assistance Act in 2002, this provision allowed businesses to deduct an extra 30% of the cost of eligible assets beyond the standard depreciation expense. In 2017, the Tax Cuts and Jobs Act increased the bonus depreciation rate to 100%. This rate started phasing out at the end of 2022, decreasing by 20% each year (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026), with the provision set to expire by the end of 2026.
Eligible property for bonus depreciation includes depreciable assets with a useful life of 20 years or less, such as vehicles, furniture, manufacturing equipment, and heavy machinery. “Qualified improvement property” is also eligible for bonus depreciation.
Unfortunately, California does not conform to the federal bonus depreciation provision. While businesses can realize significant initial year tax savings at the federal level, they may find more tax savings at the state level in later years due to this lack of conformity.
As bonus depreciation phases out, small businesses can still leverage initial-year expensing through Section 179 of the Internal Revenue Code. Under Section 179, businesses can deduct the full purchase price of qualifying equipment bought or financed within the tax year, subject to certain limits and phase-outs. For the 2024 tax year, the federal deduction limit under Section 179 is set at $1,220,000, with a phase-out threshold starting at $3,050,000. For example, if a company purchases $1,000,000 in qualifying equipment before the end of 2024, it can deduct the entire amount from its gross income. However, if the purchase price reaches $1,500,000, it becomes subject to phase-out. Purchases exceeding $3,050,000 do not qualify for additional deductions and are handled using the standard depreciation method.
In California, the state conforms to Section 179 but caps the maximum deduction at $25,000 per year, phasing out completely when the total purchase price for the year exceeds $200,000.
Since depreciation reduces taxable income, it also reduces the taxes a company owes, leading to a higher net income. However, it’s important to note that because depreciation is a non-cash expense, it doesn’t impact the company’s cash flow.
Understanding the tax implications of depreciation is crucial for businesses, as it can lead to significant tax savings and influence decisions regarding asset acquisition and disposal.
Photo Attribution:
MobiusDaXter, CC BY-SA 3.0, https://creativecommons.org/licenses/by-sa/3.0, via Wikimedia Commons
Some small businesses struggle with employee morale for a variety of reasons, one of which may be economic uncertainty. If you want to boost employees’ spirits without a big financial outlay, an achievement awards program is a relatively low-cost fringe benefit that may be a win-win addition.
Under such an initiative, you can hand out awards at an appointed time, such as a year-end ceremony or holiday party. And, as long as you follow the rules, the awards will be tax-deductible for your company and tax-free for recipient employees.
To qualify for favorable tax treatment, achievement awards must be granted to employees for either promoting safety in the workplace or length of service. The award can’t be disguised compensation or a payoff for closing a big deal. In addition, they must be tangible items, ranging from a gold watch or a smartphone to a plaque or a trophy. Examples of awards that would violate the rules are gift certificates, vacations, or tickets to sporting events or concerts.
Additional requirements apply to each type of award:
1. Safety awards. These can’t go to managers, administrators, clerical workers or other professional employees. Also, safety awards won’t qualify for favorable tax treatment if the company grants them to more than 10% of eligible employees in the same year.
2. Length-of-service awards. To receive such an award, an employee must have worked for the business for at least five years. In addition, the employee can’t have received a length-of-service award within the last five years.
Also keep in mind that the award must be part of a “meaningful presentation.” That doesn’t mean you have to host a gala awards dinner at the Ritz, but the award should be marked by a ceremony befitting the occasion.
There are limits on an award’s value depending on whether the achievement awards program is nonqualified or qualified. For a nonqualified program, the annual maximum award is $400. For a qualified program the maximum is $1,600 (including nonqualified awards). Any excess above these amounts is nondeductible for the employer and taxable to the employee. If an employee receives multiple awards in one year, these figures apply to the total, not to each individual award.
To establish a qualified program, and therefore benefit from the higher limit, you must meet two additional requirements. First, awards must be granted under a written plan and the plan must be open to all eligible employees without favoritism. Second, the program must not discriminate in favor of highly compensated employees as to eligibility or benefits. For 2024, the salary threshold for a highly compensated employee is $155,000.
Awards of nominal value are generally not taxable. These are small, infrequent gifts such as a coffee mug, a t-shirt or an occasional meal.
If an achievement awards program makes sense for your company, be sure that these requirements are met. Otherwise, you and your employees could suffer negative tax consequences. Contact the office for guidance in setting up a program that checks all the boxes.
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Thanks to the Tax Cuts and Jobs Act, sole proprietors and owners of pass-through entities, such as partnerships, S corporations and, generally, limited liability companies, may be able to claim tax deductions based on their qualified business income (QBI deduction) and certain other income.
This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels. However, some tax planning strategies can increase or decrease your allowable QBI deduction for 2024. So if you’re eligible for this deduction, it’s important to consider the impact other year-end strategies will have on it before executing them. Also keep in mind that this deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.
Contact the office for help optimizing your overall tax results.
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While the use of paper checks has greatly diminished, thieves still view them as a source for stealing revenue. In fact, the Financial Crimes Enforcement Network warns that many thieves are returning to old-fashioned financial theft like check kiting. That’s one reason why the U.S. Postal Service urges us to not send checks through the mail, where they may be vulnerable.
“Check kiting” is a type of check fraud to be aware of. It relies on “float time.” That’s the period of delay between when a check is deposited in a bank and when the bank collects the related funds. In recent years, float time has narrowed, but it hasn’t disappeared. Unethical employees can use float time to falsely inflate an account balance, allowing checks that would otherwise bounce to clear. This type of crime usually involves multiple banks or multiple accounts in the same bank.
Here are five strategies you can implement to keep people from using your company’s accounts for fraudulent activity, including check kiting.
1. Educate employees about bank fraud. Teach them to recognize fraudulent transactions and related red flags. Workers who are aware of suspicious activities can bolster management’s commitment to preventing fraud.
2. Rotate key accounting roles. Segregate accounting duties. By rotating tasks among staffers, if possible, you can help uncover ongoing schemes and limit opportunities to steal.
3. Reconcile bank accounts daily. Make sure someone trustworthy, who isn’t involved in issuing payments, reconciles every company bank account.
4. Maintain control of paper checks. Store blank checks in a locked cabinet or safe and periodically inventory the blank check stock. Also limit who’s allowed to order new checks.
5. Go digital. The most effective way to prevent check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments.
The bottom line is, it’s a mistake to assume that check fraud is too old-fashioned to attract the attention of thieves.
Vigilance in your banking processes can help thwart it. For help tightening your internal controls, contact the office.
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