Factoring the QBI Deduction into Tax Planning for Your Business

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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.

408-252-1800

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The “Nanny Tax” Must Be Paid for Nannies and Other Household Employees

If you employ a household worker who isn’t an independent contractor, you may be required to pay employment taxes on the worker’s cash wages. This is commonly referred to as the “nanny tax.”

In 2024, when a household employee’s cash wages reach at least $2,700, you must pay the employer share of Social Security (6.2%) and Medicare (1.45%) taxes and withhold the employee share of these taxes (also 6.2% and 1.45%, respectively). You aren’t required to withhold federal income tax, but you must pay federal unemployment tax on wages of $1,000 or more. This tax is assessed only on the first $7,000 of wages paid.

To pay these obligations, increase your quarterly estimated tax payments or increase withholding from your wages. Additional requirements will apply when you file your tax return for the year. Contact the office with questions.

408-252-1800

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To Get an “Early” Refund, Adjust Your Withholding

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If you received a large refund this year, you may want to adjust your withholding. Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there’s a way to begin collecting your 2024 refund now: You can review the amounts you’re having withheld — and any estimated tax payments you’re making — and adjust them to keep more money in your pocket during the year.

Choosing to Adjust

It’s particularly important to check your withholding and/or estimated tax payments if you have:

  • Received an especially large 2023 refund,
  • Gotten married, divorced or added a dependent,
  • Bought a home, or
  • Started or lost a job.

Withholding or estimated tax payment changes might also be warranted if your investment income has changed significantly.

Making a Change

You can modify your withholding at any time during the year, or even more than once a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can adjust each time quarterly payments are due.

While reducing your withholding or estimated tax payments will put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the deadline in April 2025.

Getting Help

One reason to consider adjusting your withholding is the passage of any new tax legislation. For example, several years ago when the Tax Cuts and Jobs Act was enacted, the IRS needed to revise withholding tables to account for the increased standard deductions, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining your withholding or estimated tax payments for the rest of the year, please contact the office.

408-252-1800

 

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Discovering a Mistake After Your Tax Return Is Filed

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Did you file your 2023 tax return and then realize you’d made a mistake? Perhaps you completed your return yourself and made an error in math or neglected to include a schedule that should’ve been attached. Or maybe you recently remembered some large, potentially deductible, charitable donations you’d made in early 2023 that you’d forgotten to tell your tax professional about. Now you may be wondering if you need to file an amended return.

Taxpayers usually don’t need to file amended returns for certain issues. For example, the IRS will correct any math errors while processing tax returns and notify the taxpayers. And if a form or schedule is missing, the tax agency will send a letter requesting it. Certain other changes, however, require an amended return to be filed. They include: a change of filing status, missing income, incorrect deductions or credits, and an inaccurate tax liability. Contact the office for help filing an amended return.

408-252-1800

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Is Your Business Closing? Here Are Your Final Tax Responsibilities

Businesses shut down for many reasons. Examples include an owner’s retirement, a lease expiration, staffing shortages, partner conflicts and increased supply costs. If you’ve decided to close your business, you might need assistance with some steps in the process, including handling various tax obligations.

Tax Return and Forms

A final income tax return and related forms must be filed for the year of closing. The correct return to file depends on the type of business.

Here’s a rundown of the requirements.

Sole proprietorships:

You must file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year of closing. You may also need to report self-employment tax.

Partnerships:

A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year of closing and report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, etc.”

All corporations:

Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C corporations:

File Form 1120, “U.S. Corporate Income Tax Return,” for the year of closing. Report capital gains and losses on Schedule D. Indicate this is the final return.

S corporations:

File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All businesses:

If you sell your business, other forms may need to be filed to report the sales.

Worker-Related Duties

Businesses with employees must pay the final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit all employment taxes due can result in severe penalties.

Generally, payments of $600 or more to contractors during the calendar year of closure must be reported on Form 1099-NEC, “Nonemployee Compensation.”

More Tax Issues to Consider

The list of tax issues related to closing a business is long and often complex, and you may need to be guided through the steps. For example, a business that has an employee retirement plan will need to terminate the plan and distribute the benefits to participants. Flexible Spending Accounts and Health Savings Accounts must also be terminated.

There may be debt cancellation issues to wrestle with. Other possibilities include dealing with net operating losses, passive activity losses, depreciation recapture and possible bankruptcy issues.

You need to be aware of how long to retain business records. And finally, you may need to know how to navigate payment options if your business is unable to pay the remaining taxes owed.

Closing a business typically brings up a lot of questions. Contact the office for answers.

408-252-1800

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Hiring? How to Benefit from the Work Opportunity Tax Credit

If you’re a business owner or manager who is seeking to hire, you should be aware of the details of a valuable tax credit for hiring individuals from one or more targeted groups. Employers can qualify for the Work Opportunity Tax Credit (WOTC), which is worth as much as $2,400 for most eligible employees (higher or lower for certain employees). The credit is limited to eligible employees who begin work for an employer before January 1, 2026.

Who is Eligible?

Generally, an employer is eligible for the WOTC only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

To claim the WOTC, an employer must first get certification that the person hired is a member of one of the targeted groups above. An employer can do so by submitting Form 8850, Pre-Screening Notice and Certification Request for the WOTC, to their state agency within 28 days after the eligible worker begins work.

You Must Meet Certain Requirements

There are several requirements to qualify for the credit. For example, each employee must have completed a specific number of hours of service for the employer. Also, the credit isn’t available for employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for first-year wages generally is $2,400 per employee. But it’s $4,000 for long-term family assistance recipients, and it’s $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

An eligible employer claims the WOTC on its federal income tax return. The credit value is limited to the business’s income tax liability.

A Valuable Credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be worthwhile. Contact the office with questions or for more information about your situation.

408-252-1800

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A Strategy to Raise Your Medical Expense Deduction

With a little planning, you may be able to boost your itemized medical expense deduction when you file your 2024 tax return next year. Only eligible expenses exceeding 7.5% of your adjusted gross income are deductible. It’s not an easy hurdle to clear, short of a major medical disaster, which, of course, you want to avoid. But you can use a strategy called “bunching” medical expenses to exceed the 7.5% threshold.

Say, for example, that you’ve already scheduled surgery that will involve out-of-pocket expenses but you still fall short of the deductible threshold. Think about scheduling elective procedures, such as dental work or Lasik surgery, and making qualified purchases [Topic no. 502, Medical and dental expenses | Internal Revenue Service (irs.gov)] that will push you over the threshold for the year.

Remember, only the expenses over that amount and that aren’t covered by insurance or paid through a tax-advantaged account will be deductible. Contact the office for help running the numbers.

408-252-1800

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