The November air will be turning colder, but our commitment to your financial well-being still burns brightly. This month, we bring you timely articles about tax relief for victims of Hurricanes Helene and Milton, tips on how small businesses can prepare for their year-end financial review, community property laws and their impact on beneficial ownership for spouses, tips for late starters to maximize their retirement savings, and more. 

DFC Happenings:

Please join us in welcoming Mara Pratt to the stage!  Mara brings extensive experience in client support and will be joining us as a Client Service Coordinator.  We are confident that she will be a valuable addition to our front office team, and we look forward to her presence in our Binghamton office.

We would like to extend our heartfelt congratulations to Sue Kicsak and Jackie Lane on their work anniversary!  Their hard work and dedication greatly enhance our team, and we wish them continued success in the years to come.

We were a proud sponsor of the Rural Health Network's showcase held at the DoubleTree on October 21st.  We had a great time celebrating a dedicated organization committed to enhancing the well-being of our community.  From left to right: Jocelyn Bailey & Ashley Layton of Visions FCU with Jamie Atkinson & Kelly Grace from Davidson Fox.

Let's give a warm welcome and heartfelt congratulations to Christopher Bunn on his remarkable achievement in the accounting field!  We are incredibly proud of him for successfully passing all four parts of the CPA exam on his journey to becoming a licensed CPA.  Chris joined our team remotely in September, and we're excited to announce that he will be transitioning to our Binghamton office in January.  Way to go, Chris!!!

We had a spooktacular Halloween and hope you did too!  We had a fantastic time playing games, enjoying delicious food, and bonding as a team.  Congrats to our trivia winners - Jackie, Richard, and Mara!  Here's to more fun moments together.

NOVEMBER HAPPENINGS:

We will be visiting Beer Tree Factory on November 7th for the NYCPA Southern Tier Fall Networking event and look forward to connecting with everyone there!

28th Annual Community Thanksgiving Luncheon is on Tuesday, November 19th from 12:00pm - 1:30pm.  Make sure to register for this by November 5th!  

Don't forget to follow us on social media!  We'll keep you up to date on the latest happenings in the accounting world and share news from our team as well.  Stay connected!

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Wishing everyone a safe and joyful Thanksgiving at the end of the month!  Enjoy this special time with your families, and we look forward to reconnecting in December.

Keeping a watchful eye on your tax and accounting strategies is more important than ever as the year progresses. We encourage you to reach out if you're considering any significant financial moves or if you're interested in discussing ways to enhance your financial health.

Our team is on hand to assist you, your colleagues, and your loved ones. We are constantly seeking and leveraging new opportunities to ensure our clients' financial prosperity. We deeply appreciate your feedback and referrals, and we're here to support your needs as the year comes to an end.

• Refundable vs. Non-Refundable
• Credit Carryovers
• Earned Income Tax Credit (EITC)
• Child Tax Credit (CTC)
• American Opportunity Tax Credit (AOTC)
• Lifetime Learning Credit (LLC)
• Saver’s Credit
• Child and Dependent Care Credit
• Adoption Credit
• Residential Clean Energy Credit
• Premium Tax Credit (PTC)
• New Clean Vehicle (Electric Vehicle (EV)) Credit
• Previously Owned Clean Vehicle (EV) Credit
• Credit for the Elderly or Disabled
• Foreign Tax Credit
• General Business Credit

Tax preparers often encounter clients who are confused about the various tax credits available to them. Understanding these credits can significantly impact your tax liability and, in some cases, result in a refund. This article aims to demystify individual tax credits, explain the difference between refundable and non-refundable credits, and discuss credit carryovers. By the end, you should have a clearer understanding of how to leverage these credits to your advantage.

What Are Tax Credits? Tax credits are amounts that reduce the tax you owe on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. There are two main types of tax credits: refundable and non-refundable.

Refundable vs. Non-Refundable Tax Credits

• Refundable Tax Credits: These credits can reduce your tax liability to zero and result in a refund if the credit amount exceeds your tax liability. In other words, if your tax liability is $400 and you have a refundable credit of $1,000, you will receive a $600 refund. This is where many individuals who are not required to file a tax return miss out on substantial refundable tax credits intended for those with low incomes.
  
  
• Non-Refundable Tax Credits: These credits can reduce your tax liability to zero but cannot result in a refund. If your tax liability is $400 and you have a non-refundable credit of $1,000, your tax liability will be reduced to zero, but you will not receive a refund for the remaining $600.

Credit Carryovers - Some non-refundable credits come with carryover provisions, allowing you to apply any unused portion of the credit to future tax years. This can be particularly beneficial if you have a low tax liability in the current year but expect higher liabilities in future years.

Common Individual Tax Credits - Let's delve into some of the most common individual tax credits, indicating whether they are refundable or non-refundable and if they include carryover provisions.

• Earned Income Tax Credit (EITC) - The Earned Income Tax Credit (EITC) is designed to benefit low to moderate-income working individuals and families. The credit amount varies based on your income and the number of qualifying children you have. For the 2024 tax year, the maximum credit is $7,830.
  
  Type: Refundable
  
  
• Child Tax Credit (CTC) - The Child Tax Credit (CTC) provides up to $2,000 per qualifying child under the age of 17. Up to $1,400 of this credit is refundable, meaning you can receive a refund even if you do not owe any tax. The refundable portion is known as the Additional Child Tax Credit (ACTC).
  
  Type: Partially Refundable
  
  
• American Opportunity Tax Credit (AOTC) - The American Opportunity Tax Credit (AOTC) is available for the first four years of post-secondary education. The maximum credit is $2,500 per eligible student, with 40% of the credit (up to $1,000) being refundable. The credit covers tuition, fees, and course materials.
  
  Type: Partially Refundable
  
  
• Lifetime Learning Credit (LLC) - The Lifetime Learning Credit (LLC) provides up to $2,000 per tax return for qualified higher-education expenses. Unlike the AOTC, the LLC is non-refundable, meaning it can reduce your tax liability to zero but will not result in a refund. There is no limit on the number of years you can claim this credit.
  
  Type: Non-Refundable
  
  
• Saver’s Credit - The Saver’s Credit is designed to encourage low to moderate-income individuals to save for retirement. The credit is worth up to $1,000 ($2,000 for married couples filing jointly) and is non-refundable. It can be claimed for contributions to retirement accounts such as IRAs and 401(k)s.
  
  Type: Non-Refundable
  
  
• Child and Dependent Care Credit - The Child and Dependent Care Credit helps offset the cost of childcare or care for a dependent while you work or look for work. The credit is worth up to 35% of qualifying expenses, with a maximum of $3,000 for one qualifying individual or $6,000 for two or more. This credit is non-refundable.
  
  Type: Non-Refundable
  
  
• Adoption Credit - The Adoption Credit provides financial assistance for qualified adoption expenses. For the 2024 tax year, the maximum credit is $16,810 per child. This credit is non-refundable but can be carried forward for up to five years if the credit exceeds your tax liability.
  
  Type: Non-Refundable with Carryover
  
  
• Residential Clean Energy Credit - The Residential Clean Energy Credit is available for the installation of qualified energy-efficient improvements, such as solar panels and solar water heaters. The credit is worth 30% of the cost of the improvements and is non-refundable. Unused portions of the credit can be carried forward to future tax years.
  
  Type: Non-Refundable with Carryover
  
  
• Premium Tax Credit (PTC) - The PTC helps eligible individuals and families cover the cost of premiums for health insurance purchased through a government Health Insurance Marketplace. The credit amount is based on your family income and the cost of the premiums. This credit is refundable, meaning you can receive a refund if the credit exceeds your tax liability.
  
  Type: Refundable
  
  
• New Clean Vehicle Credit - Commonly referred to as the Electric Vehicle (EV) Credit, the New Clean Vehicle Credit is available for the purchase of qualifying all electric,plug-in hybrid, and fuel cell vehicles. Limits apply based your income and the manufacturer’s suggested retail price of the vehicle. The credit amount varies based on the vehicle's battery capacity but can be up to $7,500. In lieu of claiming the credit on your tax return, you may be able to transfer the credit to the dealer at the time of purchase, which could reduce the vehicle’s cost or your downpayment.
  
  Type: Non-Refundable with no carryover
  
  
• Previously Owned Clean Vehicle (EV) Credit - The Previously Owned Clean Vehicle Credit is designed to incentivize the purchase of used electric vehicles. The credit is up to $4,000 or 30% of the vehicle's price, whichever is less. As with the New Clean Vehicle credit, there are caps on the income of the purchaser and the cost of the vehicle, but the amounts are different. This credit is non-refundable with no carryover.
  
  Type: Non-Refundable with no carryover
  
  
• Credit for the Elderly or Disabled - The Credit for the Elderly or Disabled is available to low income individuals who are 65 or older or who are retired on permanent and total disability. The maximum credit is $7,500, but it is non-refundable, meaning it can only reduce your tax liability to zero.
  
  Type: Non-Refundable
  
  
• Foreign Tax Credit - The Foreign Tax Credit is available to individuals who pay taxes to a foreign government on income that is also subject to U.S. tax. This credit is non-refundable but can be carried back one year and forward up to ten years if it exceeds your tax liability.
  
  Type: Non-Refundable with Carryover
  
  
•  General Business Credit - The General Business Credit is a collection of various credits available to businesses, including sole proprietorships, that are passed through to the individual. These credits are non-refundable but can be carried back one year and forward up to twenty years.
  
  Type: Non-Refundable with Carryover

This firm’s goal is to help you navigate the complexities of the tax code and maximize your tax benefits. If you have any questions or need assistance with your tax return, please do not hesitate to contact this office. Together, we can ensure you take full advantage of the tax credits available to you.

Here's how to get your financials in order before the year ends.

The first step in your year-end review is to compile all the necessary financial documents. These include:

• Profit and Loss Statement (P&L): This shows your revenue and expenses over the year, helping you assess your net income.
  
  
• Balance Sheet: This provides a snapshot of your business's financial position at the end of the year, including assets, liabilities, and equity.
  
  
• Cash Flow Statement: Essential for understanding how cash is moving through your business, this document shows the inflow and outflow of cash over the year.

Tip: Use accounting software to pull these reports automatically. This can save hours of manual tracking and ensure accuracy.

Take a close look at your P&L statement to evaluate how your business performed this year. Are your revenues up? What about your expenses? Here are a few questions to guide your analysis:

• Are there any significant fluctuations in revenue or expenses compared to last year?
  
  
• Did any new revenue streams develop, and are they profitable?
  
  
• Are there expenses you could reduce or eliminate to improve profitability?

This step not only gives you a better understanding of your business's health but also helps identify areas where you can cut costs or invest more resources for future growth.

Cash flow is the lifeblood of any business. A thorough review of your cash flow statement will help you see if your business is consistently generating enough cash to cover operating expenses, taxes, and potential reinvestments.

Look for periods where cash flow was tight and consider whether you need to adjust your payment schedules, invoicing policies, or even pricing structure to improve it. This is especially important as you enter a new year, as poor cash flow can stifle growth and lead to stress when it comes to meeting financial obligations.

With tax season on the horizon, it's wise to ensure all your tax-related documents and deductions are in order. Review any significant purchases or expenses that can be claimed as deductions and make sure all invoices and receipts are documented properly.

Now is also a good time to review any tax strategies with our office. Are there opportunities to defer income or accelerate expenses to reduce your taxable income? Making these moves now can save your business money and ensure smoother tax preparation.

Your year-end financial review is also an opportunity to set the stage for future growth. Use the insights you've gained to create a roadmap for the upcoming year. Consider:

• Revenue Projections: Based on this year's performance, set realistic revenue targets for next year.
  
  
• Expense Budgeting: Identify areas where you can cut costs or invest more for business expansion.
  
  
• Growth Opportunities: Whether it's hiring new staff, investing in new technology, or expanding services, now is the time to lay out those plans.

Being organized isn't just about preparing for year-end—it's about creating habits that streamline your financial management throughout the year. Regularly updating your books, keeping receipts organized, and maintaining good communication with our office will save you time and headaches in the long run.

Plus, staying organized ensures that your financial records are always up to date, which can help with cash flow management and allow you to focus on providing expert advice to your customers, rather than worrying about paperwork.

A year-end financial review is more than just closing the books—it's your chance to reflect, reassess, and plan for the future of your business. By staying organized and prepared, you can save time, keep your cash flow healthy, and focus on what really matters: growing your business.

Need Help with Your Year-End Financial Review?

Contact our office today for expert guidance. We'll help you organize your finances, assess your growth potential, and ensure you're ready for the year ahead. Let us handle the details so you can focus on what you do best—running your business.

Start by taking a comprehensive look at your finances. Calculate your net worth by subtracting your liabilities from your assets. Understand where you stand regarding retirement savings, debts, and other financial obligations. This assessment will provide a clear picture of your financial health and help you set realistic goals.

Budgeting is crucial for anyone looking to save more, especially late starters. Track your income and expenses to identify areas where you can cut back. Consider the 50/30/20 rule: allocate 50% of your income to necessities, 30% to discretionary spending, and 20% to savings. This will help you redirect funds towards your retirement savings without drastically altering your lifestyle.

Take full advantage of retirement accounts like 401(k)s and IRAs. If your employer offers a matching contribution, aim to contribute at least enough to receive the full match—it's essentially free money. For 2024, you can contribute up to $23,000 to a 401(k) or $7,000 to an IRA. Maxing out these contributions can significantly boost your savings over time.

If you’re age 50 or older, you’re eligible for catch-up contributions, which allow you to contribute extra amounts to your retirement accounts. For 401(k)s, you can add an additional $7,500, while IRAs allow for an extra $1,000. This is a powerful way to increase your savings as you near retirement.

Investment diversification is essential for managing risk and optimizing growth. As you age, consider adjusting your asset allocation to include a mix of stocks, bonds, and other investments. While you may want to lean towards more conservative investments as retirement approaches, having a portion of your portfolio in growth-oriented assets can help offset inflation and increase your savings over time.

If your current income isn’t sufficient to boost your retirement savings, consider part-time work or side gigs. This can provide extra cash flow that you can funnel directly into your retirement accounts. Freelancing, consulting, or even seasonal work can be excellent ways to earn additional income while allowing you to maintain flexibility.

Reducing or eliminating debt should be a priority, especially high-interest debt like credit cards. The more you can reduce your liabilities, the more you can allocate towards savings. Consider strategies such as the snowball or avalanche method to pay down debt systematically, freeing up more cash for your retirement.

If you own a home, consider leveraging your home equity to boost your retirement savings. Options like a home equity line of credit (HELOC) or a reverse mortgage can provide funds that you can invest in your retirement. However, proceed with caution and consult a financial advisor to ensure you understand the implications.

Understanding Social Security benefits is crucial for retirement planning. If you're behind on savings, your Social Security income may play a larger role in your retirement strategy. Consider factors such as the optimal age to begin receiving benefits and how working longer can affect your benefits. Delaying benefits can lead to higher monthly payouts, which can significantly impact your overall retirement income.

Navigating retirement planning can be complex, especially if you’re a late starter. A financial advisor can help you create a personalized retirement strategy, considering your unique circumstances, risk tolerance, and goals. They can provide valuable insights on investment options, tax strategies, and how to maximize your retirement income.

While starting late may feel daunting, there are numerous strategies available to help you catch up on your retirement savings. By assessing your financial situation, maximizing contributions, and making informed decisions, you can build a more secure financial future. Remember, the sooner you start taking action, the more time your savings have to grow.

Ready to Boost Your Retirement Savings?

Contact our office today to speak with an advisor who can help you create a personalized tax-optimized retirement strategy. Let us guide you toward maximizing your retirement savings and achieving your financial goals.

• Hurricane Helene Affected States.
• Who Qualifies for Relief.
• Filing and Payment Relief
• Relief Start Dates.
• Relief Period Ending Date.
• IRS Address of Record
• Address Outside the Disaster Area
• Additional Tax Relief
• Qualified Disaster Relief Payments

The Internal Revenue Service has announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia.

Taxpayers in these areas now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. Among other things, this includes 2024 individual and business returns normally due during March and April 2025, 2023, individual and corporate returns with valid extensions and quarterly estimated tax payments.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Besides all of Alabama, Georgia, North Carolina and South Carolina, this currently includes 41 counties in Florida, eight counties in Tennessee and six counties and one city in Virginia.

Individuals and households that reside or have a business in any one of these localities qualify for tax relief. The same relief will be available to other states and localities that receive FEMA disaster declarations related to Hurricane Helene. The current list of eligible localities is always available on the Tax relief in disaster situations page on IRS.gov.

Filing and Payment Relief - The tax relief postpones various tax filing and payment deadlines that occurred beginning on:

• Sept. 22, 2024, in Alabama,
• Sept. 23 in Florida,
• Sept. 24 in Georgia,
• Sept. 25 in North Carolina, South Carolina and Virginia, and
• Sept. 26 in Tennessee.

In all these states, the relief period ends on May 1, 2025 (postponement period). As a result, affected individuals and businesses will have until May 1, 2025, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the May 1, 2025, deadline will now apply to:

• Any individual or business that has a 2024 return normally due during March or April 2025.
  
  
• Any individual, business or tax-exempt organization that has a valid extension to file their 2023 federal return. The IRS noted, however, that payments on these returns are not eligible for the extra time because they were due last spring before the hurricane occurred.
  
  
• 2024 quarterly estimated income tax payments normally due on Jan. 15, 2025, and 2025 estimated tax payments normally due on April 15, 2025.
  
  
• Quarterly payroll and excise tax returns normally due on Oct. 31, 2024, and Jan. 31 and April 30, 2025.

In addition, the IRS is also providing penalty relief to businesses that make payroll and excise tax deposits. Relief periods vary by state. Visit the Around the Nation page for details.

The Disaster assistance and emergency relief for individuals and businesses page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period. Among other things, this means that any of these areas that previously received relief following Tropical Storm Debby will now have those deadlines further postponed to May 1, 2025.

IRS Address of Record - The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief.

Address Outside the Disaster Area - It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are in the affected area.

Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Disaster area tax preparers with clients located outside the disaster area can choose to use the Bulk Requests from Practitioners for Disaster Relief option, described on IRS.gov.

Additional Tax Relief - Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year (the 2023 return filed this year). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. For individual taxpayers, this means Oct. 15, 2025. Be sure to write the FEMA declaration number on any return claiming a loss.

Qualified Disaster Relief Payments - Are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details.

Beneficial Ownership Information Reports - Financial Crimes Enforcement Network (FinCEN) announced that certain victims of Hurricane Helene will receive an additional six months to submit beneficial ownership information (BOI) reports (including updates or corrections to prior reports). For details see the FinCEN notice regarding Hurricane Helene.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. Contact this office for details.

The IRS may provide additional disaster relief in the future.

The tax relief is part of a coordinated federal response to the damage caused by this storm and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on how this disaster relief might impact you or your business directly and assistance with your tax preparation needs, please contact this office.

• Hurricane Milton Affected Florida Counties.
• Who Qualifies for Relief.
• Filing and Payment Relief
• Relief Period Ending Date.
• IRS Address of Record
• Address Outside the Disaster Area
• Additional Tax Relief
• Qualified Disaster Relief Payments

The Internal Revenue Service has announced tax relief for individuals and businesses in parts of Florida that were affected by Hurricane Milton that began on Oct. 5, 2024. These taxpayers now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments.

Following the disaster declaration issued by the Federal Emergency Management Agency (FEMA), individuals and households that reside or have a business in Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Madison, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putman, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Taylor, Union, and Volusia counties qualify for tax relief.

Combined with earlier tax relief provided for taxpayers in counties affected by Hurricane Debby and Hurricane Helene, affected taxpayers in all of Florida now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments, including 2024 individual and business returns normally due during March and April 2025 and 2023 individual and corporate returns with valid extensions and quarterly estimated tax payments.

The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Oct. 5, 2024, and before May 1, 2025, are granted additional time to file through May 1, 2025. As a result, affected individuals and businesses will have until May 1, 2025, to file returns and pay any taxes that were originally due during this period.

The May 1, 2025, filing deadline applies to:

• Any individual or business that has a 2024 return normally due during March or April 2025.
  
  
• Any individual, C corporation or tax-exempt organization that has a valid extension to file their calendar-year 2023 federal return. The IRS noted, however, that payments on these returns are not eligible for the extra time because they were due last spring before the hurricane occurred.
  
  
• 2024 quarterly estimated tax payments normally due on Jan. 15, 2025, and 2025 estimated tax payments normally due on April 15, 2025.
  
  
• Quarterly payroll and excise tax returns normally due on Oct. 31, 2024, Jan. 31, 2025, and April 30, 2025.

In addition, penalties on payroll and excise tax deposits due on or after Oct. 5, 2024, and before Oct. 21, 2024, will be abated if the tax deposits were made by Oct. 21, 2024. Localities eligible for this relief are: Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Madison, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putman, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Taylor, Union and Volusia counties.

Deposit penalty relief and other relief was previously provided to taxpayers affected by Debby and Helene. For details, see the Florida page on IRS.gov. The Disaster assistance and emergency relief for individuals and businesses page also has details, as well as information on other returns, payments and tax-related actions qualifying for relief during the postponement period

IRS Address of Record - The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief.

Address Outside the Disaster Area - It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are in the affected area.

Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Disaster area tax preparers with clients located outside the disaster area can choose to use the Bulk Requests from Practitioners for Disaster Relief option, described on IRS.gov.

Additional Tax Relief - Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year (the 2023 return filed this year). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. For individual taxpayers, this means Oct. 15, 2025. Be sure to write the FEMA declaration number on any return claiming a loss.

Qualified Disaster Relief Payments - Are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. Contact this office for details.

Beneficial Ownership Information Reports - Financial Crimes Enforcement Network (FinCEN) announced that certain victims of Hurricane Milton will receive an additional six months to submit beneficial ownership information (BOI) reports (including updates or corrections to prior reports). For details see the FinCEN notice regarding Hurricane Milton. 

The IRS may provide additional disaster relief in the future.

The tax relief is part of a coordinated federal response to the damage caused by this storm and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on how this disaster relief might impact you or your business directly and assistance with your tax preparation needs, please contact this office.

In this article, we'll break down the most common IRS penalties, explain what triggers them, and provide tips on how to contest or mitigate them if necessary.

The IRS imposes a variety of penalties for different types of tax-related mistakes or missed obligations. Some of the most common include:

The late filing penalty is one of the most frequent issues taxpayers encounter. If you fail to file your tax return by the due date (or extended due date), the IRS typically imposes a penalty of 5% of the unpaid taxes for each month your return is late, up to a maximum of 25%. If more than 60 days pass without filing, the minimum penalty is either $435 or 100% of the unpaid tax—whichever is less.

If you file your taxes on time but fail to pay the taxes you owe, the IRS charges a late payment penalty. This penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25%.

Even if you can't pay the full amount, filing your return on time can help reduce additional penalties. You may also qualify for a payment plan, which can prevent the situation from escalating further.

Small business owners and self-employed individuals are required to make quarterly estimated tax payments. If you fail to pay enough taxes throughout the year, the IRS may assess an underpayment penalty. This applies to those who don't have sufficient withholding or don't pay enough in quarterly estimated taxes.

The IRS imposes an accuracy-related penalty when taxpayers understate their income by a significant amount or claim deductions or credits they're not entitled to. This penalty is typically 20% of the underpaid tax. In some cases, the IRS may charge this penalty if they determine that the taxpayer was negligent or didn't have a reasonable basis for their tax position.

For businesses that withhold payroll taxes from employees, failure to deposit those taxes with the IRS can result in significant penalties. The IRS charges a penalty based on how late the deposit is, ranging from 2% to 15% of the unpaid amount.

IRS penalties are typically triggered by mistakes, missed deadlines, or lack of compliance. Some common reasons penalties are imposed include:

• Missing filing deadlines for individual, corporate, or payroll tax returns.
  
  
• Failure to pay the taxes owed by the due date, even if the tax return is filed.
  
  
• Inaccurate reporting of income or expenses on tax returns.
  
  
• Underpaying taxes throughout the year (especially for self-employed individuals).
  
  
• Neglecting payroll tax obligations is a serious concern for small businesses.

Avoiding IRS penalties is all about staying organized, filing on time, and ensuring accuracy in your tax reporting. Here are a few tips to help you avoid penalties:

1. File and Pay on Time: Make it a priority to file your tax return by the due date and pay as much of the tax you owe as possible. Even if you can't pay in full, filing on time will help minimize penalties.
   
   
2. Set Up a Payment Plan: If you can't pay your full tax bill, contact the IRS to arrange a payment plan. This can prevent additional penalties from accumulating.
   
   
3. Accurate Record Keeping: Keep detailed and organized records throughout the year. Accurate records will help ensure you don't miss deductions or make reporting errors that could trigger an accuracy-related penalty.
   
   
4. Pay Estimated Taxes: If you're self-employed or have income not subject to withholding, make sure you pay quarterly estimated taxes. This helps avoid the underpayment penalty.
   
   
5. Stay Compliant with Payroll Taxes: If you run a business, make sure you're depositing payroll taxes on time and following the IRS's requirements for employee withholding.

If you've already been hit with a penalty, all is not lost. The IRS does provide options for contesting or reducing penalties under certain circumstances. Here's how:

• Request a Penalty Abatement: In some cases, you may be eligible for a first-time penalty abatement. This is available if you have a clean filing history and haven't had a penalty in the past three years.
  
  
• Show Reasonable Cause: If you can demonstrate that your failure to file or pay was due to reasonable cause (such as illness, a natural disaster, or an unavoidable absence), the IRS may waive the penalty.
  
  
• Submit an Offer in Compromise: If you're facing significant financial hardship and can't pay your tax bill in full, you may be eligible to settle your tax debt for less than the full amount owed through an Offer in Compromise.
  
  
• Seek Professional Help: Sometimes penalties are the result of more complex tax issues. Working with a tax professional can help you understand your options and develop a strategy for contesting or reducing penalties.

IRS penalties can quickly turn a small tax issue into a large financial burden. The best way to avoid penalties is to stay organized, file on time, and ensure you're paying what you owe. However, if you're already facing penalties, there are ways to contest or reduce them—and we can help.

Need Help with IRS Penalties?
Contact our office today to discuss your situation. As tax experts, we can help you avoid penalties, resolve issues with the IRS, and get your tax obligations back on track. Let us guide you through the process and save you from unnecessary stress and expense.

• Background of the Corporate Transparency Act Reporting Requirement
• Beneficial Ownership
• Community Property Laws and Beneficial Ownership
• Spouses and Beneficial Ownership Reporting
• Implications for Reporting Companies
• Exceptions and Considerations
• Conclusions
• Filing Deadlines

Background - The Corporate Transparency Act (CTA) was enacted as part of a broader effort to combat money laundering, terrorism financing, and other illicit financial activities. Passed by the U.S. Congress in 2021, the CTA mandates that certain business entities disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This legislation aims to enhance corporate transparency by identifying individuals who exercise substantial control over a company or own a significant percentage of its equity interests.

Under the CTA, corporations, limited liability companies (LLCs), and similar entities are required to report detailed information about their beneficial owners, including full legal names, addresses, and identification numbers. The reporting requirements are designed to create a comprehensive database that law enforcement and regulatory agencies can use to prevent and investigate financial crimes.

In the realm of financial regulations and corporate transparency, the concept of beneficial ownership plays a crucial role. The Financial Crimes Enforcement Network (FinCEN) has provided guidance on various aspects of beneficial ownership, including the implications of community property laws on the determination of beneficial owners. One of the key questions addressed in FinCEN's Q&A D.18 is whether a spouse of a beneficial owner is also considered a beneficial owner in a community property state.

Community Property States and Beneficial Ownership

Community property laws are a set of regulations in certain U.S. states that dictate how property acquired during a marriage is owned. In these states, most property acquired by either spouse during the marriage is considered jointly owned by both spouses. This legal framework can significantly impact the determination of beneficial ownership in reporting companies.

According to FinCEN's guidance, whether a spouse is considered a beneficial owner in a community property state depends on the specific consequences of applying the applicable state law. If, under community property law, both spouses are deemed to own or control at least 25 percent of the ownership interests of a reporting company, then both spouses should be reported to FinCEN as beneficial owners unless an exception applies.

Implications for Reporting Companies

For reporting companies, understanding the nuances of community property laws is essential to ensure compliance with FinCEN's reporting requirements. Companies must assess the ownership structure and determine whether community property laws affect the ownership interests of spouses. This assessment involves examining the specific state laws and how they apply to the ownership of the company.

If both spouses are considered beneficial owners due to community property laws, the reporting company must include both individuals in their reports to FinCEN. This requirement ensures transparency and helps prevent the misuse of corporate structures for illicit activities.

Exceptions and Considerations

While community property laws can lead to both spouses being considered beneficial owners, there are exceptions. FinCEN's guidance outlines specific scenarios where individuals may qualify for exceptions from being reported as beneficial owners. Companies should carefully review these exceptions to determine if they apply to their situation.

Conclusions - Determining beneficial ownership in community property states requires a thorough understanding of both state laws and FinCEN reporting requirements. For spouses in these states, the implications of community property laws can lead to both being considered beneficial owners, necessitating careful reporting by companies. When in doubt the safe harbor approach would be to include the spouse as a beneficial owner.

Where it is determined the spouse is a beneficial owner and an initial report has already been filed with FinCEN, the report can be updated on the FinCEN website.

Filing Deadlines - The Corporate Transparency Act sets clear deadlines for entities to comply with its reporting requirements.

• Entities in existence or registered to do business before January 1, 2024, have until January 1, 2025, to file their initial beneficial ownership information report.
  
  
• Entities created or registered during 2024, must file their initial beneficial ownership information report within 90 days of receiving notice of their creation or registration.
  
  
• Entities created or registered after 2024, face a more immediate deadline. These new entities must file their initial beneficial ownership information report within 30 days of receiving notice of their creation or registration.

If you have questions or need assistance, please contact this office. There are substantial penalties for not meeting this reporting requirement.

• Understanding Business Deductions
  o    Meal Deductions
  o   Simplified Meal Deduction Method
  o   Deducting the Business Use of Home
  o    Deducting Toys, Supplies, and Other Expenses
• Additional Considerations
  o    Retirement Plans
  o    Local Business Tax
  o    State Licensing
  o    Liability Insurance

Childcare providers play a crucial role in supporting families and the economy by offering essential services that allow parents to work or pursue education. However, operating a childcare business, whether in a commercial facility or out of one's home, involves navigating a complex landscape of tax rules and regulations. This article delves into the intricacies of tax deductions and issues related to meals, home use, toys, supplies, licensing, retirement, liability and other relevant topics for childcare providers.

Understanding Business Deductions - For childcare providers, understanding what expenses can be deducted when figuring their taxes is vital for financial sustainability and compliance. The IRS allows several deductions that can significantly reduce taxable income for childcare operators. These deductions include expenses directly related to the care and education of children, as well as indirect costs associated with running the business.

Meal Deductions: One of the unique aspects of running a childcare business is the need to provide meals and snacks to the children being cared for. The IRS recognizes this necessity and allows childcare providers to deduct the cost of meals served to the children. Providers have two options for claiming this deduction:

• Using the actual cost of the meals, or
• Opting for a simplified method based on standard rates determined annually by the IRS.

Simplified Meal Deduction Method: The simplified method does not require detailed records of food purchases but instead uses a standard meal and snack rate to calculate the deduction. This rate varies by location, acknowledging the higher cost of living in places like Alaska and Hawaii. It's important to note that while this method simplifies record-keeping, providers who choose it cannot deduct the actual cost of meals if it exceeds the standard rate. Additionally, meals for the provider's own family are not deductible. One cannot switch between the actual and simplified methods during a year but can from one year to another.

The standard meal and snack rates include beverages but not utensils, paper products or storage containers (the cost of which can be separately deducted) may be used for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day.

Deducting Actual Meal Costs: Childcare providers who don’t use the simplified rates will need to keep scrupulous records of the costs associated with providing the meals. For example, retaining grocery store receipts for at least three years and identifying purchases that aren’t 100% for the children under care. In fact, it would be prudent to not commingle personal food purchases with those for the childcare activity.

Deducting the Business Use of Home: Many childcare providers operate out of their homes, creating a unique situation for tax deductions. The IRS allows providers to deduct expenses for the business use of their home, but specific criteria must be met. The space used for childcare must be used regularly for the business, and it must be the principal place of the business. The deduction is limited to the net income of the business.

The general rules for deducting home expenses requires that the home be used regularly and exclusively for the business activity. An exception to the exclusive-use requirement applies for a childcare provider only if the taxpayer has applied for, has been granted, or is exempt from having a license, certification, registration, or approval as a daycare center under applicable state law and has not had such an application rejected or license revoked.

Calculating the deduction involves determining the percentage of the home used and the number of hours for childcare and applying that percentage to various home expenses, such as mortgage interest, property taxes, insurance, utilities, and repairs. Added to these expenses is a deduction for depreciation of the business-use portion of the home. The IRS also offers a simplified option for this deduction: a standard rate of $5 per square foot of the space used for the business with an annual maximum of $1,500, which is generally not appropriate for childcare providers.

However, providers should be aware of the implications of claiming home depreciation. While it can increase the current tax deduction, it may also affect the tax-free status of capital gains when selling the home. Depreciation claimed after May 15, 1997, cannot be excluded from the gain calculation, potentially resulting in a taxable capital gain.

Deducting Toys, Supplies, and Other Expenses: Childcare providers can also deduct the cost of toys, educational materials, supplies, and other expenses directly related to childcare. These items are considered necessary for the operation of the childcare and are fully deductible. It's essential for providers to keep detailed records of these purchases to substantiate their deductions.

Other deductible expenses include advertising, business insurance, licensing fees, and professional development. Essentially, any cost that is ordinary and necessary for running the childcare business can be deducted.

Additional Considerations - Childcare providers must also navigate other tax issues, such as self-employment taxes, employer identification numbers (EINs), and employment taxes if they have employees. Self-employment tax covers Social Security and Medicare taxes for individuals who work for themselves. An EIN is necessary for providers who hire employees and can also be used by the provider instead of a Social Security number for certain tax purposes, offering an additional layer of privacy.

Retirement Plans: Childcare providers can also establish and contribute to retirement plans and IRAs up to the annual limits but not more than the profits from the business.

• For the Solo Entrepreneur:
  
  o   Individual Retirement Arrangements (IRAs): Traditional and Roth IRAs are accessible to anyone with earned income, including the self-employed such as childcare providers. The annual contribution limits are inflation adjusted each year, which for 2024 are $7,000, or $8,000 for those age 50 or older. While contributions to a Traditional IRA may be tax-deductible, Roth IRA contributions are made with after-tax dollars (and no current deduction) which generally allow for tax-free withdrawals in retirement.
  
  o   Solo 401(k): Also known as an Individual 401(k), this plan is tailored for business owners with no employees other than a spouse. It allows for both employee deferral and employer profit-sharing contributions, offering a higher potential contribution limit compared to IRAs. For 2024, the total contribution limit is $69,000 ($76,500 if 50 or older), including both employee and employer contributions.
  
  
• For Those with Employees
  
  o   Simplified Employee Pension (SEP) IRA: A SEP IRA is an attractive option for self-employed individuals and small business owners due to its simplicity and high contribution limits. These individuals can contribute up to 25% of their net earnings from self-employment, with a maximum of $69,000 for 2024. Contributions are tax-deductible, and the plan is flexible, allowing adjustment to contributions annually based on the business's performance.
  
  o   Savings Incentive Match Plan for Employees (SIMPLE) IRA: For those with a small business with fewer than 100 employees, a SIMPLE IRA might be the right choice. It allows employees to make salary deferral contributions, and the employer is required to make either matching contributions up to 3% of the employee's compensation or a fixed 2% non-elective contribution for all eligible employees. The contribution limit for 2024 is $16,000, or $19,500 for those 50 or older.

SEP and SIMPLE IRAs offer flexibility in terms of contributions, which can be particularly beneficial for businesses with fluctuating income.

Solo 401(k)s generally offer higher contribution limits, making them an excellent option for maximizing retirement savings.

Contributions to these plans are typically tax-deductible, lowering taxable income. Roth IRA contributions, while not deductible, offer tax-free growth and withdrawals.

It's important to note the establishment and contribution deadlines for each plan to ensure benefits for the tax year are maximized.

Local Business Tax – Most often there is an applicable local business license requirement which is essentially a business tax. Don’t overlook this requirement as there are usually penalties for non-compliance.

State Licensing – Generally states will have a Childcare Licensing Program to ensure that licensed facilities meet established health and safety standards through monitoring of facilities.

Liability Insurance – Even if your state does not require liability insurance, it is a sound business practice for childcare providers to carry liability insurance.You will be watching after the care of the most precious thing in the lives of your clients: their children. You'll be responsible for the health and safety of those children. There's always a possibility that a child could be injured while on the premises of your childcare business. You should consult with the carrier of your homeowner’s insurance policy to be sure that operating your home business doesn’t run afoul of the policy’s coverage.

You might even consider forming your business as a limited liability company (LLC) or a corporation so the business, not you personally, would be responsible for any liability.

Operating a childcare business involves more than just providing care to children; it requires managing a complex array of tax rules and regulations. By understanding and taking advantage of the available deductions for meals, home use, toys, supplies, and other expenses, providers can reduce their taxable income and ensure compliance with tax laws.

However, given the complexity of tax regulations, providers may benefit from consulting with this office to ensure they are maximizing their deductions and adhering to all applicable rules.

• Gain Exclusion Benefits of Sec 1202 QSBS
• Qualifications for Sec 1202 QSBS
• Limitations of Sec 1202 QSBS
• Holding Period Requirements
• Determining the 5-Year Holding Period
• Investor Exclusion Limits
• Rollover Possibilities
• Active Business Requirement
• AMT Ramifications
• Application to Pass-Through Entities
• Making the Election
• Example of Sec 1202 QSBS Benefits

The Internal Revenue Code (IRC) Section 1202, often referred to as the Qualified Small Business Stock (QSBS) provision, offers a significant tax incentive for investors in small businesses. Enacted in 1993, this provision aims to stimulate investment in small businesses by allowing non-corporate taxpayers to exclude a portion of the gain realized on the sale of QSBS. This article delves into the myriad aspects of Sec 1202, including its benefits, qualifications, limitations, holding periods, investor exclusion limits, rollover possibilities, active business requirements, Alternative Minimum Tax (AMT) ramifications, and application to pass-through entities, and the intricacies of Form 8949 reporting.

• Gain Exclusion Benefits of Sec 1202 QSBS - The primary benefit of Sec 1202 is the potential to exclude up to 100% of the gain from the sale of QSBS, depending on when the stock was issued. This exclusion can significantly reduce the tax burden on investors, making it an attractive option for those looking to invest in small businesses. The exclusion percentages are as follows:
  
  o    50% Exclusion: For stock issued after August 10, 1993, and before February 18, 2009.
  
  o    75% Exclusion: For stock issued after February 17, 2009, and before September 28, 2010.
  
  o    100% Exclusion: For stock issued after September 27, 2010.
  
  
• Qualifications for Sec 1202 QSBS - To qualify for Sec 1202 benefits, the stock must meet several stringent requirements:
  
  o    Eligible Shareholder: The stock must be held by a non-corporate shareholder, such as an individual, trust, or estate. Partnerships and S corporations can also qualify, but additional requirements apply for non-corporate owners of these entities.
  
  o    Original Issuance: The stock must be acquired at its original issuance directly from the company, not from another shareholder. This includes stock received as compensation for services or in exchange for non-cash property.
  
  o    Qualified Small Business: The issuing corporation must be a C corporation with aggregate gross assets not exceeding $50 million at the time of stock issuance.
  
  o    Active Business Requirement: The corporation must use at least 80% of its assets in the active conduct of a qualified trade or business.
  
  
• Limitations of Sec 1202 QSBS - Despite its benefits, Sec 1202 has several limitations:
  
  o    Investor Exclusion Limits: The exclusion cannot exceed the greater of $10 million or 10 times the taxpayer's adjusted basis in the QSBS.
  
  o    State Limitations: Some states do not conform to the federal QSBS exclusion, potentially subjecting the gain to state taxes
  
  o    Excess Buybacks: Excessive buybacks of shares by the issuing corporation can disqualify the stock from QSBS treatment.
  
  
• Holding Period Requirements - To benefit from the Sec 1202 exclusion, the stock must be held for an uninterrupted period of more than five years before it is disposed of. The holding period generally begins on the date the stock was issued. However, if the stock was issued in exchange for non-cash property, the holding period starts on the exchange date. For stock issued from the conversion of debt or the exercise of stock options or warrants, the holding period begins at the conversion or exercise date.
  
  For example, if you acquired QSBS on June 1, 2019, you will need to hold the stock until at least June 2, 2024, to meet the five-year holding requirement. The holding period begins on the date the stock was issued, and any interruptions or breaks in ownership could disqualify the stock from meeting this requirement.
  
  
• “Tack on” to the Holding Period - In certain situations, a shareholder can "tack on" previous holding periods to meet the five-year requirement. This applies if the stock was inherited, received as a gift, or acquired in a distribution from a partnership. For example, if a shareholder inherits QSBS from a decedent who held the stock for three years, the heir only needs to hold the stock for an additional two years to meet the five-year requirement.
  
  
• Investor Exclusion Limits - The exclusion limits under Sec 1202 are designed to prevent excessive tax benefits. The exclusion is capped at the greater of $10 million or 10 times the taxpayer's adjusted basis in the QSBS. This means that investors with a large basis in the stock may be able to exclude more than $10 million of gain. Additionally, spreading sales over multiple years can allow investors to utilize the exclusion in each year.
  
  
• Rollover Possibilities - Sec 1202 allows for the deferral of gain through a rollover to another QSBS within 60 days. This provision enables investors to reinvest in another qualified small business without immediately recognizing the gain, thereby deferring taxes and potentially benefiting from future exclusions.
  
  
• Active Business Requirement - To qualify for Sec 1202, the issuing corporation must meet the active business requirement, which mandates that at least 80% of the corporation's assets be used in the active conduct of a qualified trade or business. Certain businesses, such as those involved in personal services, financial services, and hospitality, are excluded from being considered qualified trades or businesses.
  
  
• AMT Ramifications - The Alternative Minimum Tax (AMT) implications of Sec 1202 depend on the QSBS exclusion percentage:
  
  o    50% and 75% Exclusions: 7% of the excluded gain is treated as a preference item for AMT purposes.
  
  o    100% Exclusion: No AMT preference applies.
  
  
• Application to Pass-Through Entities - Sec 1202 benefits can extend to pass-through entities like partnerships and S corporations, but specific conditions must be met:
  
  o   The stock must be QSBS in the hands of the partnership or S corporation.
  
  o   The partner or shareholder must have been a partner or shareholder from the date the entity acquired the stock through the date of distribution.
  
  o   The partner’s or shareholder's share of the distributed stock cannot exceed their interest in the entity at the time the stock was acquired.
  
  
• Claiming the Exclusion – An individual elects to exclude gain from the sale of QSBS by reporting the sale on IRS Form 8949, Sales and Other Dispositions of Capital Assets, when filing their tax return for the sale year. If not all of the gain qualifies for the exclusion, the remaining gain is not eligible for the regular advantageous long-term capital gains rate. Instead, the excess gain is taxed at a maximum rate of 28%. Should the QSBS exclusion not apply because the stock is sold after being held more than one year but before meeting the required five-year holding period, the entire gain qualifies to be taxed at the regular capital gains rate.
  
  
• Example of Sec 1202 QSBS Benefits

Consider an investor who acquired QSBS in a C corporation for $1 million in 2013 and sold it for $15 million in 2023. Since the stock was held for more than five years and issued after September 27, 2010, the investor can exclude 100% of the $14 million gain from federal taxes, subject to the $10 million exclusion limit. If the investor's basis was higher, say $2 million, the exclusion could be up to $20 million (10 times the basis).

Sec 1202 QSBS offers a powerful tax incentive for investing in small businesses, with the potential to exclude up to 100% of the gain from federal taxes when the stock is sold. However, navigating the complexities of Sec 1202 requires a thorough understanding of its benefits, qualifications, limitations, holding periods, and reporting requirements. By meeting the stringent criteria and leveraging strategic planning opportunities, investors can maximize the tax advantages of QSBS and support the growth of small businesses.

Contact this office for additional information or assistance benefiting from this tax incentive.

• Who is a Household Employee?
• Examples of Household Employees
• Independent Contractors
• Payroll and Withholding Requirements
• Nanny SEPs
• Deductibility of Household Employee Payments
• Penalties for Non-Compliance
• Other Tax Issues

Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, withholding, and tax reporting. This article delves into the intricacies of household employment, including the classification of workers, payroll requirements, tax implications, and the penalties for non-compliance.

Who is a Household Employee? - A household employee is someone who performs domestic services in a private home. This includes nannies, caregivers, housekeepers, gardeners, and other similar roles. The key factor that distinguishes a household employee from an independent contractor is the degree of control the employer has over the work performed. If the employer dictates what work is to be done and how it is to be done, the worker is typically considered an employee.

A worker who performs childcare services in their home generally is not an employee of the parents whose children are cared for. If an agency provides the worker and controls what work is done and how it is done, then the worker is not considered a household employee.

Examples of Household Employees:

• Nannies and babysitters
  
  
• Caregivers for elderly or disabled individuals
  
  
• Housekeepers and maids
  
  
• Gardeners and landscapers (if they work under the homeowner's direction)

Independent Contractors: Independent contractors, on the other hand, operate their own businesses and provide services to the public. They typically supply their own tools, set their own hours, and determine how the work will be completed. They are not treated as household employees and there are no reporting requirements when they work for you in your private home. Examples include:

• Plumbers
  
  
• Gardeners and landscapers (if they don't work under the homeowner's direction)
  
  
• Electricians
  
  
• Pool maintenance workers
  
  
• Freelance landscapers

Payroll and Withholding Requirements - When you hire a household employee, you become an employer and must adhere to specific payroll and withholding requirements. Here are the key steps involved:

• Obtain Employer Identification Numbers (EINs): You need to obtain a federal EIN from the IRS and, in some cases, a state EIN.
  
  
• Form I-9: Both the employer and the employee must complete Form I-9 to verify the employee's eligibility to work in the U.S.
  
  
• Schedule H: Household Employment Taxes - Employers report household employment taxes on Schedule H, which is filed with their federal income tax return (Form 1040). Schedule H covers Social Security and Medicare taxes, FUTA, and any withheld federal income tax.
  
  o    Social Security and Medicare Taxes: You must withhold Social Security and Medicare taxes from your employee's wages and pay the employer's share of these taxes. For 2024, the Social Security tax rate is 6.2% for both the employer and the employee, and the Medicare tax rate is 1.45% each.
  
  o    Federal Unemployment Tax (FUTA): You may also need to pay FUTA tax if you pay your household employee $1,000 or more in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee.
  
  o    Income Tax Withholding: Federal income tax withholding is not required for household employees unless both the employer and the employee agree to it. However, it is advisable to withhold federal income tax to help the employee avoid a large tax bill at the end of the year.
  
  
• State Employment Taxes: State requirements vary, but you may need to pay state unemployment insurance and disability insurance taxes. Contact this office for state reporting requirements.
  
  
• W-2 and W-3 Forms: At the end of the year, you must provide your household employee with a Form W-2, Wage and Tax Statement, and file a copy with the Social Security Administration along with Form W-3, Transmittal of Wage and Tax Statements. These forms are generally due by January 31 following the year you paid the employee.

"Nanny" SEPs - A recent tax law change allows employers of domestic employees to establish a Simplified Employee Pension (SEP) plan to provide retirement benefits for their domestic employees, such as nannies. These plans have come to be termed "Nanny" SEPs, but can be made available to other types of domestic employees.

• Tax Treatment: Contributions made to a SEP are generally tax-deferred for the employee, meaning the employee does not pay taxes on the contributions until they withdraw the funds, typically during retirement.
  
  
• Distribution Rules: Distributions from SEPs are taxed similarly to IRA distributions. Early withdrawal penalties may apply if funds are withdrawn before the employee reaches age 59½.
  
  
• Required Minimum Distributions (RMDs): Employees must start taking required minimum distributions from the SEP once they reach the age of 73 (or 70½ if they reached that age before 2020, or if they attained age 72 during 2020 through 2022).
  
  
• No Loans: Loans are not permitted from SEP plans, as they are considered IRA-based plans.

This provision allows domestic employees to benefit from retirement savings plans like those available to employees in other sectors, promoting financial security for these workers. This is not a requirement but can be a valuable benefit to attract and retain quality household employees.

Deductibility of Household Employee Payments — Payments to household employees, and the employer's associated payroll tax payments, are generally considered personal expenses and are not deductible. However, there are exceptions:

• Medical Expenses: Wages and other amounts paid for nursing services can be included as medical expenses if the services are necessary for medical care. This includes services such as administering medication, bathing, and grooming the patient.
  
  
• Child and Dependent Care Credit: Expenses for household services or care of a qualifying individual that allow the taxpayer to work may qualify for the child and dependent care credit. However, the same expense cannot be used both as a medical expense and for the child and dependent care credit.

Penalties for Non-Compliance - Failing to comply with household employment tax requirements can result in significant penalties:

• Failure to Withhold and Pay Taxes: If you do not withhold and pay Social Security, Medicare, and FUTA taxes, you may be liable for the unpaid taxes, plus interest and penalties.
  
  
• Failure to File Forms: Not filing required forms, such as Form W-2, can result in penalties. For example, the penalty for failing to file a correct Form W-2 by the due date can range from $60 to $330 per form, depending on how late the form is filed.
  
  
• Misclassification of Employees: Misclassifying an employee as an independent contractor to avoid payroll taxes can lead to back taxes, interest, and penalties. The IRS has strict guidelines for determining worker classification, and misclassification can result in significant financial consequences. Some states have different guidelines, often more restrictive than the federal rules.

Other Tax Issues:

• Overtime Pay: Under the Fair Labor Standards Act (FLSA), domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in each week. However, live-in employees are an exception to this rule in most states.
  
  
• Hourly Pay vs. Salary: It is illegal to treat nonexempt employees as if they are salaried. Household employees must be paid on an hourly basis, and any overtime must be compensated accordingly.
  
  
• Separate Payrolls: Business owners must maintain separate payrolls for household employees. Personal funds, not business funds, must be used to pay household workers. Including household employees on a business payroll is not allowable as a business deduction.

Employing household help comes with a set of responsibilities that go beyond simply paying wages. Understanding the classification of workers, adhering to payroll and withholding requirements, and complying with tax reporting obligations are crucial to avoid penalties and ensure legal compliance. Additionally, offering benefits such as Nanny SEPs can help attract and retain quality household employees.

Please contact this office for questions and help meeting federal and state reporting requirements.

• Hobby Loss Rules Overview
• Impact of the Tax Cuts and Jobs Act (TCJA) on Deductions
• Nine Factors to Determine Profit Motive
• Presumptions of Profit Motive
• Election to Delay Determination of Profit Intent
• Sequence of Deductions to the Extent of Income
• Hobby Income and Self-Employment Tax
•  Examples of Hobby vs. Business

When engaging in activities that generate income, it's essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. This article will delve into the hobby loss rules, the impact of the Tax Cuts and Jobs Act (TCJA) on deductions, the nine factors the IRS uses to determine if an activity is engaged in for profit and provides examples of court cases involving profit motive.

Hobby Loss Rules Overview - The IRS uses hobby loss rules to determine whether an activity is a hobby or a business. If an activity is classified as a hobby, the income generated is taxable, but for years 2018 through 2025 the expenses incurred are not deductible. This means you cannot use hobby expenses to offset other income.

Impact of the Tax Cuts and Jobs Act (TCJA) on Deductions - The TCJA, enacted in 2017, brought significant changes to the tax code, including the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor for tax years 2018 through 2025. This suspension means that hobby expenses are not deductible during these years, making the entire income from a hobby taxable.

Nine Factors to Determine Profit Motive - The IRS considers nine factors to determine whether an activity is engaged in for profit. No single factor is decisive; instead, all factors must be considered together:

1. Businesslike Manner: Is the activity carried out in a businesslike manner? This includes maintaining complete and accurate books and records.
   
   
2. Expertise: Does the taxpayer have the necessary expertise or consult with experts to carry out the activity successfully?
   
   
3. Time and Effort: How much time and effort does the taxpayer put into the activity? Significant time and effort may indicate a profit motive.
   
   
4. Expectation of Asset Appreciation: Does the taxpayer expect the assets used in the activity to appreciate in value?
   
   
5. Success in Similar Activities: Has the taxpayer succeeded in similar activities in the past?
   
   
6. History of Income or Losses: What is the history of income or losses from the activity? Consistent losses may indicate a lack of profit motive.
   
   
7. Amount of Occasional Profits: Are there occasional profits, and if so, how substantial are they?
   
   
8. Financial Status: Does the taxpayer have substantial income from other sources? If so, the activity may be more likely to be considered a hobby.
   
   
9. Elements of Personal Pleasure: Does the activity involve elements of personal pleasure or recreation?

Presumptions of Profit Motive - The IRS provides a presumption of profit motive if an activity generates a profit in at least three of the last five consecutive years, including the current year. For activities involving breeding, training, showing, or racing horses, the presumption applies if there is a profit in at least two of the last seven consecutive years.

Election to Delay Determination of Profit Intent - Taxpayers can elect to delay the determination of whether an activity is engaged in for profit by filing Form 5213, "Election to Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit." This election allows taxpayers to defer the determination until the end of the fourth tax year (or sixth tax year for horse-related activities) after the activity begins. This election (1) should not be made unless the taxpayer is being audited by the IRS and the IRS is disallowing their deductions under the hobby loss rules, and (2) cannot be made if the taxpayer has been engaged in the activity for more than five years (seven years for horse-related activities).

Sequence of Deductions to the Extent of Income for years before 2018 and after 2025 (providing Congress allows the TCJA rules to expire) — If an activity is classified as a hobby, deductions are allowed only to the extent of the income generated by the activity. The sequence in which deductions are allowed is as follows:

• Home Mortgage Interest, Taxes, and Casualty Losses: These deductions are allowed first.
  
  
• Deductions That Do Not Reduce Basis: These include expenses such as advertising, insurance, and wages.
  
  
• Deductions That Reduce Basis: These include depreciation and amortization.

Hobby Income and Self-Employment Tax — If income is determined to be hobby income rather than trade or business income after applying the nine factors to determine whether an activity is engaged in for profit, the income is subject to income tax but not self-employment tax. This distinction is crucial because self-employment tax can significantly increase the tax liability for individuals engaged in a trade or business activities.

Court Cases Involving Profit Motive - Several court cases have addressed the issue of profit motive, providing valuable insights into how the IRS and courts determine whether an activity is a hobby or a business.

• Groetzinger v. Commissioner (1987): The Supreme Court held that a full-time gambler who bet solely on his own account was engaged in a trade or business of gambling. This prevented his gambling losses from being tax preference items for the purpose of computing minimum tax.
  
  
• Gajewski v. Commissioner (1983): The court held that a taxpayer who did not hold himself out to others as offering goods or services was not in a trade or business. The taxpayer was a professional gambler who bet solely for his own account, and the denial of his business deductions turned the expenses into Schedule A deductions.
  
  
• Ditunno v. Commissioner (1983): The court ruled that the proper test of whether an individual was carrying on a trade or business required examination of all facts involved. In this case, a full-time gambler was determined to be in a trade or business of gambling, and his gambling losses were business expenses, even though they were not related to offering goods and services.

Examples of Hobby vs. Business - To illustrate the distinction between a hobby and a business, consider the following examples:

• Example 1: The Amateur Photographer — Jane enjoys photography and occasionally sells her photos online. She does not maintain detailed records, consult with experts, or spend significant time on her photography. Jane's activity is likely to be classified as a hobby, and her expenses will not be deductible.
  
  
• Example 2: The Professional Photographer — John is a professional photographer who maintains detailed records, consults with experts, and spends significant time on his photography business. He has a history of generating profits and expects his photography equipment to appreciate in value. John's activity is likely to be classified as a business, and his expenses will be deductible.
  
  
• Example 3: The Horse Breeder — Sarah breeds and trains horses. She has generated profits in two of the last seven years and maintains detailed records. Sarah's activity is likely to be classified as a business, and her expenses will be deductible.

Understanding the hobby loss rules and the impact of the TCJA on deductions is crucial for taxpayers engaged in income-generating activities. By considering the nine factors used by the IRS to determine profit motive, taxpayers can better assess whether their activities are likely to be classified as hobbies or businesses. Additionally, being aware of the sequence in which deductions are allowed, or whether deductions are allowed at all, and the implications for self-employment tax can help taxpayers make informed decisions about their activities. Finally, reviewing court cases involving profit motive provides valuable insights into how the IRS and courts approach these determinations.

If you questions, please contact this office.

Hiring independent contractors is more flexible than bringing on full-time employees, but there are still key rules and tax requirements you must follow. With tools like QuickBooks Online (QBO), managing contractor payments and tax reporting has become much simpler—but you’ll need to make sure you’re setting things up properly from the start.

Before you onboard a contractor, make sure they qualify as an independent contractor rather than an employee. The IRS is strict about this distinction, and misclassifying someone could lead to penalties and back taxes. The general rule is that independent contractors control how they complete their work, while employees are subject to company control over both what work is done and how it’s done.

If you’re unsure about the classification, consult with our office to avoid potential issues. Misclassification remains a major focus of IRS audits, so it’s worth double-checking before you proceed.

Once you’ve determined that your hire is legally an independent contractor, you’ll need to collect the necessary paperwork to create their records in QuickBooks Online. Here’s a step-by-step guide:

1. Collect Form W-9:

• Contractors must complete an IRS Form W-9, which provides their taxpayer identification number (TIN) and verifies their independent contractor status. This is an essential document because it contains the information you’ll use for tax reporting purposes.

• You don’t need to withhold taxes for independent contractors, as they are technically self-employed and, therefore, responsible for paying their own taxes quarterly and filing an IRS Form 1040 each year.

2. Set Them Up as Vendors:

• In QuickBooks Online, go to the Expenses tab, then click on Vendors. Click New Vendo rto open the Vendor Information window, and complete the contractor’s details.

• Make sure you check the box labeled Track payments for 1099, as you’ll need this information for year-end reporting. QuickBooks Online allows you to easily track contractor payments, which will help when it’s time to file IRS Form 1099-NEC (Non-Employee Compensation).

3. Track Transactions:

• The Vendor records you create will show up in the Vendors list within QuickBooks Online. You can access theirTransaction Listand track every payment you make to them.

• For any contractor paid more than $600 in a year, you’ll need to generate a Form 1099-NEC, which QuickBooks can assist with. You’re not required to send this form to corporations or LLCs classified as C or S Corporations.

Paying contractors is a simple process using your QuickBooks Online software. When they send you an invoice, go back to their vendor record, and click the down arrow next to New Transaction. You have multiple payment options available:

1. Bank Transfer (ACH):

• One of the most convenient ways to pay contractors is through ACH, which QuickBooks Online supports. This method offers fast, secure transfers and helps avoid the hassle of writing checks.

2. Check:

• If you prefer, you can still pay contractors by check. Record the payment in QuickBooks Online under their vendor profile so it’s tracked for tax purposes.

3. Credit Card:

• Another option is paying contractors via credit card, which can be recorded directly in QuickBooks Online. This can be useful for managing cash flow or earning credit card rewards.

As you make payments, QuickBooks Online will automatically track them for year-end reporting, simplifying the process when you need to generate Form 1099-NEC.

In recent years, the IRS has been increasing scrutiny of businesses that hire contractors. With an ever-increasing number of individuals working in the gig economy, either full-time or to supplement their income, the IRS considers proper worker classification more important than ever. Failure to file 1099s or misclassifying employees as contractors can result in significant penalties.

QuickBooks Online offers an easy way to stay compliant, making it easy to track payments and generate necessary tax forms. If you’re hiring contractors, make sure to use these tools to manage your obligations.

In 2025 and beyond, the number of people engaging in self-employment and contract work will likely continue to skyrocket. By setting up contractor records properly from day one, your business can avoid IRS scrutiny while maintaining a smooth, long-term working relationship with your contractors. 

QuickBooks Online remains one of the best tools for managing contractor payments and staying compliant with tax reporting requirements. Contact this office if you need any assistance with QBO.

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday. 

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday. 

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations