February marks the onset of tax season, and our team is fully prepared to support you during this critical period and beyond. Staying organized and informed on key tax and business issues is essential now more than ever. We are here to offer you the most current insights and guidance to help you manage this busy time effectively. This month’s newsletter shares tips to help you get ready for your tax appointment, explains the latest news on Beneficial Ownership Information reporting updates, insights into disaster loss tax provisions, an exploration of fractional hiring, and more.

TAX SEASON:  Be informed, get prepared, and take control of your tax planning.

Need help organizing your tax documents?  No problem, we've got you covered!  Visit our website to find a user-friendly tax organizer designed to assist with your planning.  You don't have to be a client to use this tool, but if you like what you see, we're currently welcoming new clients.  

TAX SEASON TOOLS - Davidson Fox

March 17th - Business, S-Corps, Partnerships return deadline

April 15th - Individual returns or extension request deadline

Davidson Fox Happenings:

We would like to recognize the work anniversaries for two key individuals in our firm whose exceptional contributions are vital to the smooth operation of our business.  Their support plays a crucial role in both assisting our clients and strenghtening our team.  Please join us in congratulating Michelle Spencer and Yvonne Nowakowski for the incredible impact they've made through their dedication and expertise.  We are truly grateful for everything they do!  Michelle joined us in 2020 and is celebrating her 5-year anniversary with the firm, while Yvonne has been with us since 2016 and is celebrating an impressive 9 years.  If you happen to be in our Binghamton office, you'll be sure to see their smiling faces!

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•  It is time to gather your information for your tax appointment
• Choosing your alternatives
• Sales of property
• Depreciation
• Where to Begin?
• Accuracy Even for Details
• Marital Status Change
• Dependents
• Some Transactions Deserve Special Treatment
• Sales of Stock or Other Property
• Gifted or Inherited Property
• Reinvested Dividends
• Sale of Home
• Purchase of a Home
• Home Energy-Related Expenditures
• Identity Theft
• Car Expenses
• Charitable Donations

You, like most taxpayers, probably dread the task of pulling together your records to prepare for your tax preparation appointment, but the effort usually pays off in the extra tax you might save! When you arrive at your appointment fully prepared, you'll have more time to:

• Consider every possible legal deduction;
  
  
• Evaluate which income reporting and deductions are best suited to your situation;
  
  
• Explore current law changes that affect your tax status;
  
  
• Talk about tax-planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives - The tax law allows a variety of methods of handling income and deductions on your return. Choices when preparing your return often affect not only the current year, but future returns as well. Topics these choices relate to include:

• Sales of property - For the year in which you sell property and arrange the sale so that you receive payments on the sales contract over a period of years, you can sometimes choose between reporting the entire gain on the return for the sale year or over several years as you receive payments from the buyer.
  
  
• Depreciation - When you purchase certain property used for business, generally the cost is written off (depreciated) over several years, but in some cases the cost can be deducted all in one year.

Where to Begin? Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, such as W-2 forms and 1099s reporting interest, dividends or other income, file them right away, before you forget or lose them. Make this a habit, and you'll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include:

• Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully. By design, organizers remind you of transactions you may otherwise miss.)
  
  
• Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you have any special reporting requirements. The penalties for not making and submitting required reports can be severe.
  
  
• If you acquired your health insurance through a government Marketplace you will receive Form 1095-A, issued by the Marketplace that will include information needed to complete your return.
  
  
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships, S Corporations and Trusts). Be sure to take these documents to your appointment, including the instructions for K-1s!
  
  
• Write down questions so you don't forget to ask them at the appointment. Review last year's return. Compare your income on that return to your income in the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven't yet received the current year's 1099-DIV form.
  
  
• Make sure you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them.
  
  
• Compare deductions from last year with your records for this year. Did you forget anything?
  
  
• Collect any other documents and financial papers that you're puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details - To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s) and occupation(s) on last year's return. Note any changes for this year. Although your telephone numbers and e-mail address aren't required on your return, they are always helpful should questions occur during return preparation.

Marital Status Change - If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.

Dependents - If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3 you will not need to supply them again):

1. First and last name
   
   
2. Social security number
   
   
3. Birth date
   
   
4. Number of months living in your home
   
   
5. Their income amount (both taxable and nontaxable). If your dependent is your child over age 18, note how long the child was a full-time student during the year.

For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren't sure), tally the amounts you provided toward their support vs. the amounts they and others provided. This will simplify a final decision.

Some Transactions Deserve Special Treatment - Certain transactions require special treatment on your tax return. It's a good idea to invest a little extra preparation effort when you have had the following transactions:

• Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. In most cases brokers will provide a detailed list of transactions for the year along with the Forms 1099-INT and 1099-DIV they issue. If the sale isn't included on the broker's report, list each sale, and have purchase and sale documents available for each transaction.
  
  Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.
  
  Don't forget to include information and documentation about digital asset transactions, including non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stable coins.This includes (not a complete list) if you:
  
  o   Received digital assets as payment for property you sold or services you provided;
  o   Received digital assets because of a reward or award; and
  o   Sold or exchanged digital assets for other digital assets.
  
  
• Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner's death-date and the property's value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor.
  
  
• Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If the company or fund hasn't tracked this information and provided the details to you, then you will need to have records of each stock purchase made with the reinvested dividends.
  
  
• Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gain, it is good practice to keep a record of them. The exclusion of gain applies only to a primary residence; so keeping a record of improvement to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the closing escrow statement).
  
  
• Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home.
  
  
• Vehicle Purchase: If you purchased a new or used plug-in electric car or fuel-cell car (or cars) this year, you may qualify for a special credit. Please bring to the appointment the purchase statement and the paper copy of the seller's report that the dealer was required to give you. If you transferred the credit to the dealer at the time you purchased the vehicle, you are required to report and reconcile the transaction on your return for the purchase year.
  
  
• Home Energy-Related Expenditures: If you installed a solar-electric system on your home or second home, or made other energy-saving improvements to your home(s), please bring the details of the purchase and manufacturer's credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.
  
  
• Identity Theft: Identity theft is rampant and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen.
  
  
• Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. When claiming a tax deduction for business use of your vehicle, the government requires your total mileage, business miles, and commuting miles for each business use of your car to be reported on your return. So be prepared to have those numbers available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it is included in your W-2.
  
  
• Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount.

Unreceipted cash donations put into a "Christmas kettle," church collection plate, etc., are not deductible. For clothing and household contributions, items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements.

If you have questions about assembling your tax data prior to your appointment, please give this office a call.

 BREAKING NEWS

 On Thursday January 23, 2025, the Supreme Court issued a stay on a nationwide injunction that had previously halted the enforcement of beneficial ownership information (BOI) reporting requirements for businesses.

 The BOI requirements are part of the Corporate Transparency Act (CTA), P.L. 116-283. FinCEN has estimated that 32 million small businesses would be required to file BOI reports.

On Friday morning, January 24,2025 FinCEN provided the following  update:  “On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies are also not liable if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

• Understanding Qualified Disaster Losses
• Claiming a Qualified Disaster Loss
• Election to Claim Loss on Prior Year Amended Return
• Net Operating Loss Deduction
• Insurance Coverage and Reimbursement
• Taxation of FEMA Assistance Payments
• When Disaster Losses Might Result in a Gain
• Involuntary Conversions
• Debris Removal and Demolition Expenses
• Filing Extensions
• Using Retirement Funds for Recovery
• Proving Losses
• Safe Harbor Loss Determinations
• Personal Belongings Losses
• Home Destroyed
• Casualties on Business Property and Inventory Losses

In recent years, wildfires, hurricanes, and other natural disasters have become increasingly frequent and devastating, leaving many individuals and families grappling with the loss of their homes and personal property. For those affected by such disasters, particularly in areas designated as federal disaster zones, understanding the tax implications and available relief options is crucial. This article delves into the various disaster loss tax provisions, including the limitations, claims process, and tax treatments associated with qualified disaster losses. We will explore the intricacies of claiming losses, the election to claim losses on prior year returns, and the tax implications of insurance payments and FEMA assistance.

Understanding Qualified Disaster Losses - A qualified disaster loss refers to a casualty or theft loss of personal-use property, including a personal residence, attributable to a major disaster declared by the President. These losses are subject to specific provisions that allow taxpayers to claim deductions, even if they do not itemize their deductions. The per-event limitations for qualified disaster losses include an increase in the standard deduction and a waiver of the 10% of adjusted gross income (AGI) reduction, although a $500 per casualty threshold applies.

Specifically, each casualty loss must exceed $500 to be deductible. This threshold is in place to prevent taxpayers from claiming deductions for minor losses, ensuring that only significant losses are eligible for tax relief.

Claiming a Qualified Disaster Loss - The loss can be claimed in the year it occurred or, alternatively, on the prior year's return, which if already filed would have to be amended. This flexibility allows taxpayers to potentially receive a quicker tax refund, providing much-needed financial relief.

However, if there is a reasonable prospect of reimbursement, the deduction is deferred until the reimbursement is determined. If the determination cannot be made by the return due date, then an extension can be filed extending the due date until October 15th. If October 15 falls on a holiday or weekend, the due date is the next business day.  

Election to Claim Loss on Prior Year Amended Return - Taxpayers can elect to claim their disaster loss on the prior year's return, and if that return has already been filed, filing it can be amended to claim the disaster loss. This election must be made within six months after the due date of the taxpayer's federal income tax return for the disaster year, without regard to extensions. The election statement should include details of the disaster, the location of the damaged property, and the amount of the loss.

Claiming a disaster loss in the prior year can provide several benefits:

• Quicker Access to Refunds: By claiming the loss on the prior year's tax return, you may receive a tax refund more quickly than if you wait to claim it on the current year's return.
  
  
• Potential for Greater Tax Benefit: Depending on your income and tax situation, claiming the loss in the prior year might result in a larger tax benefit. This is because the tax rates or your income level might have been different, potentially leading to a greater reduction in taxable income.
  
  
• Flexibility in Tax Planning: Electing to claim the loss in the prior year gives you the flexibility to choose the year that provides the most advantageous tax outcome.

Relief for Some Non-Itemizers - Normally taxpayers who aren’t itemizing deductions don’t include Schedule A in their return. However, taxpayers who are not itemizing and who have a net qualified disaster loss are eligible to claim both the qualified disaster loss and the standard deduction.

Net Operating Loss Deduction - A disaster loss Net Operating Loss (NOL) is created when a taxpayer's allowable disaster-related losses exceed their income for the year. These losses are treated as "business" losses for the purpose of computing NOLs. When a disaster loss occurs, taxpayers in the affected area may be eligible to claim these losses as NOLs. This allows them to potentially offset taxable income in other years, by carrying the loss forward to future tax years.

For those familiar with NOLs, at one time an NOL could be carried back some years and then forward. However, per current law NOLs can only be carried forward until used up.

Insurance Coverage and Reimbursement - Insurance coverage plays a critical role in disaster recovery. Proceeds from insurance claims must be considered when calculating the deductible loss. If insurance reimbursement is received for living expenses, it is generally not taxable unless it exceeds the actual expenses incurred.

Taxation of FEMA Assistance Payments - FEMA assistance payments are typically not taxable. These payments are intended to help cover essential needs and expenses not covered by insurance. However, any payments received for expenses that are later reimbursed by insurance must be reported as income.

To apply for FEMA assistance after suffering a disaster loss, you can follow these steps:

• File a Claim with Your Insurance: Before applying for FEMA assistance, you must file a claim with your insurance company. FEMA cannot duplicate benefits for losses covered by insurance.
  
  
• Apply for FEMA Assistance: There are three ways to apply:
  
  
  o    Online: Visit DisasterAssistance.gov to apply online. This is the easiest and fastest method if you have internet access and power.
  
  o    FEMA App: Use the FEMA App on your mobile device to apply.
  
  o    Phone: Call the FEMA Helpline at 1-800-621-3362. The helpline is available every day from 4 a.m. to 10 p.m. Pacific Standard Time. Assistance is available in most languages. If you use a relay service, provide FEMA with the number for that service.

For more information on the types of assistance available, you can visit fema.gov/assistance/individual/program. There is also an accessible video on how to apply available on YouTube titled "FEMA Accessible: Registering for Individual Assistance".

When Disaster Losses Might Result in a Gain - In some cases, insurance proceeds may exceed the adjusted basis of the destroyed property, resulting in a gain. Taxpayers can defer this gain by purchasing replacement property within a specified period, under the involuntary conversion rules of Section 1033.

Involuntary Conversions – IRC Section 1033 allows taxpayers to defer gains from involuntary conversions, such as those resulting from insurance proceeds exceeding the property's basis. To qualify, replacement property must be purchased within a specified timeframe.

This provision helps taxpayers avoid immediate tax liabilities that could arise from such conversions, allowing them to maintain their financial stability while replacing their lost or damaged property.

The general rule under Section 1033 is that taxpayers have two years (four in the case of a disaster) after the close of the first tax year in which any part of the gain is realized to reinvest in similar or related property.

Debris Removal and Demolition Expenses - Debris removal and demolition expenses are generally not deductible in the year of a disaster loss. The treatment of these expenses depends on their nature:

• Demolition Expenses: The costs of demolishing structures are typically not deductible. Instead, these costs are charged to the capital account of the underlying land.
  
  
• Debris Removal Expenses: If the debris removal costs are related to the replacement of part of the property that was damaged, these costs are capitalized and added to the taxpayer's basis in the property.

Filing Extensions – When the President declares a disaster the IRS also provides filing and payment relief for individuals and businesses within the disaster area. These dates are different for each disaster and provided online at the IRS website. As an example, the following are the extended due dates for the 2025 Los Angeles wildfires.  

The Internal Revenue Service announced tax relief for individuals and businesses in southern California affected by wildfires and straight-line winds that began on Jan. 7, 2025.

The tax relief postpones various tax filing and payment deadlines that occurred from Jan. 7, 2025, through Oct. 15, 2025 (postponement period). As a result, affected individuals and businesses will have until Oct. 15, 2025, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the Oct. 15, 2025, deadline will now apply to:

• Individual income tax returns and payments normally due on April 15, 2025.
  
  
• 2024 contributions to IRAs and health savings accounts for eligible taxpayers.
  
  
• 2024 quarterly estimated income tax payments normally due on Jan. 15, 2025, and 2025 estimated tax payments normally due on April 15, June 16 and Sept. 15, 2025.
  
  
• Quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31, 2025.
  
  
• Calendar-year partnership and S corporation returns normally due on March 17, 2025.
  
  
• Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2025.
  
  
• Calendar-year tax-exempt organization returns normally due on May 15, 2025.

In addition, penalties for failing to make payroll and excise tax deposits due on or after Jan. 7, 2025, and before Jan. 22, 2025, will be abated if the deposits are made by Jan. 22, 2025.

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.

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 kinds of 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.

Using Retirement Funds for Recovery – Recent tax legislation includes a provision that allows taxpayers to withdraw up to $22,000 from their retirement funds in the case of federally declared disasters. This provision is designed to provide financial relief to individuals affected by such disasters. The withdrawal:

• Is not subject to the usual 10% early withdrawal penalty that typically applies to distributions taken before the age of 59½,
  
  
• amount can be included in income over a three-year period, and
  
  
• allows taxpayers to repay the distribution to their retirement account within three years to avoid taxation on the withdrawn amount.

Proving Losses - To substantiate a casualty loss, taxpayers must provide documentation such as photographs, receipts, and insurance claims. Accurate records are essential for claiming deductions and defending against potential audits. The IRS provides several safe harbor methods for calculating disaster losses, including:

• Estimated Repair Cost Safe Harbor Method for losses of $20,000 or less - To determine the decrease in the FMV of the personal-use residential real property, the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered in accordance with state or local regulations, may be used, provided the costs to restore the residence to pre-casualty condition are itemized. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the estimate. This safe harbor only applies if the loss is $20,000 or less before applying the per-disaster and, when applicable, percentage of AGI reductions.
  
  
• De Minimis Safe Harbor Method for losses of $5,000 or less - Under the de minimis method, the cost of repairs required to restore the residence to pre-disaster condition may be estimated by the taxpayer. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the estimate. The estimate must be done in good faith, and the individual must maintain records detailing the methodology used for estimating the loss. This safe harbor only applies if the loss is $5,000 or less before applying the per-disaster and, if applicable, percentage of AGI reductions.
  
  
• Insurance Safe Harbor Method for losses covered by insurance - The estimated loss determined in reports prepared by the individual’s homeowners’ or flood insurance company may be used.
  
  
• Contractor Safe Harbor Method based on contractor estimates - The contract price for the repairs specified in a contract prepared by an independent and licensed contractor (or one registered in accordance with state or local regulations) may be used if the contract itemizes the costs to restore the residence to the condition existing prior to the disaster. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the contract price for purposes of this safe harbor. To use the Contractor Safe Harbor Method, the contract must be a binding contract signed by the individual and the contractor.
  
  
• Disaster Loan Appraisal Safe Harbor Method based on loan appraisals - Under this method, to determine the decrease in FMV of the individual’s residence, an appraisal prepared for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government may be used. The appraisal should include the estimated loss the individual sustained because of the damage to or destruction of their residence from the Federally declared disaster.

• De Minimis Safe Harbor Method for losses of $5,000 or less.
  
  
• Replacement Cost Safe Harbor Method for federally declared disasters. This method may be used to determine FMV of most personal belongings located in a disaster area immediately before the disaster to compute the disaster loss. If used, this method must be applied to all eligible personal belongings for which a disaster loss is claimed. This method may not be used for the following: boats, aircraft, mobile homes, trailers, vehicles, and antiques or other assets that maintain or increase in value over time.
  
  
  

  # of Years Owned	Percentage of Replacement Cost to Use
  1	90%
  2	80%
  3	70%
  4	60%
  5	50%
  6	40%
  7	30%
  8	20%
  9+	10%

Under this method, first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the personal belonging was owned, using the percentages in the adjacent Personal Belongings Valuation Table. A personal belonging owned by the individual for nine or more years, will have a pre-disaster FMV of 10% of the current replacement cost.

Home Destroyed - When a home is destroyed in a casualty or disaster the outcome can be quite different than expected by taxpayers. The reason being that their loss is measured from the lesser of the home’s adjusted basis or the fair market value (FMV) at the time of the loss.

The term "basis" refers to the monetary value used to measure a gain or loss on an asset. A property’s basis is not always equal to the original purchase cost and can be adjusted based on various factors such as improvements, depreciation, and casualty losses. There are also different types of basis, including cost basis, adjusted basis, gift basis, and inherited basis, each with specific rules for calculation depending on the circumstances of how the asset was acquired.

Since real property generally appreciates in value, for tax purposes a home that’s destroyed will generally result in a casualty gain as opposed to a casualty loss once insurance payment is considered. However, the gain can be excluded under the home gain exclusion (IRC Sec 121) if the taxpayer(s) qualifies and any remaining gain (up to the basis of a replacement home acquired) can be deferred under the involuntary conversion rules discussed previously. In the case of a disaster loss, that replacement period endsfour years after the close of the first tax year in which any part of the gain is realized. 

This is all best explained by example:   

Example – A wildfire in a disaster area destroys Phil’s home which had an adjusted basis of $125,000. Phil is single and has owned and used the home for over 10 years before it was destroyed. Phil’s insurance company pays Phil $400,000 for the house. A tax loss is different from a financial loss in that a tax loss is measured from the lesser of the home’s adjusted basis or the FMV at the time of the loss. So, in this case Phil does not have a tax loss, he has a gain.

Casualties on Business Property and Inventory Losses - Although this article is primarily devoted to homeowner disaster losses, some homeowners may also own a business within the disaster area:

• business property, casualty losses are deductible against business income. Inventory losses due to a disaster can be claimed as a deduction, reducing both income and self-employment taxes.
  
  
• Losses from Investment Property - Losses from investment property are treated similarly to personal-use property losses. However, the deduction is limited to the lesser of the decrease in fair market value or the adjusted basis of the property.

Navigating the aftermath of a wildfire and the associated tax implications can be overwhelming. However, understanding the available disaster loss provisions and tax treatments can provide significant financial relief. By leveraging these provisions, affected individuals can mitigate the financial impact of their losses and begin the process of rebuilding their lives. It is advisable to consult with this office to ensure all available options are utilized and compliance withIRS regulations is maintained.

• Historical Context of Form 1099-K
• The Evolution of Reporting Thresholds
• Current Reporting Threshold for 2024
• Implications for Recipients of Form 1099-K
• Impact on Tax Reporting
  o   Individuals Selling Personal Items
  o   Self-employed Individuals
  o   Crowdfunding
  
  § No Business Ownership Interest Given
  § Not Taxable Crowdfunding Income
  § Special Considerations
  o  Incorrect 1099-K Forms

The landscape of digital transactions has undergone a significant transformation over the past few decades, prompting the Internal Revenue Service (IRS) to introduce and adapt tax reporting mechanisms to keep pace with the evolving nature of online payments and e-commerce. One such adaptation is the Form 1099-K, "Payment Card and Third Party Network Transactions," a document designed to report payments received through payment card transactions and third-party network transactions (such as payment apps and online marketplaces). This article delves into the history of Form 1099-K, its current reporting threshold for 2024, the implications for recipients, and how it influences tax reporting.

Historical Context of Form 1099-K - Form 1099-K was introduced as part of the Housing and Economic Recovery Act of 2008, with its reporting requirements taking effect in 2011. The form was a response to the growing e-commerce sector and the IRS's need to ensure that income from online transactions was accurately reported. Initially, the form aimed to provide the IRS with a mechanism to track payments processed by third-party networks and payment card companies, thereby reducing the tax gap resulting from underreported income.

The original reporting threshold was set at transactions totaling $20,000 or more and more than 200 transactions within a calendar year. This threshold was intended to capture significant e-commerce activity while excluding smaller, casual sellers from the reporting requirement.

The Evolution of Reporting Thresholds - Over the years, the threshold for reporting on Form 1099-K remained unchanged until Congress, in the American Rescue Plan Act of 2021, significantly lowered it. Starting with transactions in 2022, the threshold was reduced to $600 for the total amount of payments, with no minimum transaction number requirement. This change marked a significant shift in reporting requirements and was designed to capture a broader range of transactions and ensure that income from even small-scale online sales and services was reported to the IRS.

However, recognizing the challenges and concerns raised by this drastic reduction in the reporting threshold, the IRS announced transitional relief measures. For instance, the IRS designated 2022 and 2023 as transition years, allowing time for taxpayers and third-party settlement organizations (TPSOs) to adjust to the new requirements.

Current Reporting Threshold for 2024 - For 2024 the IRS plans to implement a phased approach to the $600 reporting threshold. According to IRS Notice 2023-74, issued on November 22, 2023, the threshold for the 2024 tax year (i.e., the 1099-K forms taxpayers will receive in 2025) is set at $5,000. This interim threshold is part of a gradual implementation strategy designed to ease the transition to the $600 threshold. It reflects the IRS's responsiveness to feedback from taxpayers and industry stakeholders about the challenges associated with the lower threshold. The IRS recently announced the threshold for 2025 will be $2,500 and for all subsequent years it will be $600.

Implications for Recipients of Form 1099-K - Receiving a Form 1099-K means that you have received payments through payment cards or third-party networks that exceed the IRS's reporting threshold. For individuals and businesses engaged in e-commerce, online services, or other digital transactions, this form is crucial for accurate tax reporting. It reports the gross amount of transactions, not accounting for returns, refunds, or fees, which means recipients must carefully account for these factors when reporting their income.

As a result of the lowered reporting threshold the number of taxpayers who will receive Form 1099-K will increase significantly, including small sellers and individuals who engage in occasional online sales. Even those who receive money from family and friends through a third-party network and that’s unrelated to selling products or providing services may receive a Form 1099-K. This change underscores the importance of maintaining meticulous records of online transactions, associated costs, and any related business expenses that can be deducted.

Impact on Tax Reporting - The introduction and subsequent adjustments to Form 1099-K reporting thresholds have profound implications for tax reporting. Taxpayers who receive this form must report the income on their tax returns, considering the gross transactions reported and deducting any relevant business expenses to arrive at their net taxable income.

For many, the receipt of Form 1099-K necessitates a more detailed approach to record-keeping and tax preparation. It may also lead to increased scrutiny from the IRS, as the agency uses the information to identify discrepancies between reported income and the amounts reflected on Form 1099-K.

• Individuals Selling Personal Items - For individuals selling personal items online, receiving a Form 1099-K can be a source of confusion. It's crucial to understand that not all payments reported on Form 1099-K are necessarily taxable income. For instance, if you sell a personal item for less than you paid for it, you're not making a profit, and thus, the sale proceeds are not considered taxable income. However, the receipt of Form 1099-K for such transactions necessitates proper reporting on your tax return to avoid potential issues with the IRS.
  
  
• Self-employed Individuals - If you are a self-employed individual, all business income, including amounts reported on Form 1099-K, should be included in the gross income you report on Schedule C (Profit or Loss from Business) that is part of your individual income tax (1040) filing. Here's how to ensure you're reporting your 1099-K income correctly:
  
  Start by reporting the total gross income your business earned during the tax year on Schedule C. This includes all income from sales, services, and any other business activities, regardless of whether it was received in cash, checks, credit card payments, or through third-party networks.
  
  If you've received a Form 1099-K, the amount reported should already be part of your gross receipts. Ensure that you're not double counting this income. The total on your Schedule C should reflect all your business's gross income, including the transactions reported on Form 1099-K.
  
  
• Reimbursement of Personal Expenses – You may receive a Form 1099-K from a third-party network or payment card that reports money you received from a family member or friend who sent you the money as a gift or as reimbursement for a joint expense. An example is when you pay the rent or household expenses on your home and your roommate reimburses you for their share. While these repayments shouldn’t be reported on Form 1099-K, they still may be. Personal payments included in the 1099-K will need to be reported on your return and then “backed-out”, so you don’t pay tax on the money you received but still satisfy the IRS’ reporting requirement.
  
  Since each payment app or online marketplace has its own processes to determine the nature of payments, you should review the policies of any apps or online marketplaces you use. The person sending you the payment may be able to code the transaction as a personal one to prevent 1099-Ks in future years from being erroneously prepared.
  
  
• Crowdfunding - You may receive a Form 1099-K for money raised through crowdfunding. Depending on the circumstances some money raised through crowdfunding may be taxable to you, and you may be required to report it on your income tax return. However, some money raised may be considered a gift and would not be taxable. Other than gifts, here are some scenarios:
  
  o    No Business Ownership Interest Given - When the fundraiser offers nominal gifts (like products from the business, coffee cups, or T-shirts) in exchange for contributions, the money raised is considered taxable income to the fundraiser. This is because the funds are received in exchange for goods or services and are seen as revenue for the business.
  
  o    Not Taxable Crowdfunding Income - When the fundraiser provides contributors with a partial business ownership, such as stock or a partnership interest, the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment.
  
  o    Special Considerations - Money received through crowdfunding that is structured as a loan that must be repaid, or as gifts made from detached generosity without any quid pro quo, may not be considered taxable income. The classification depends on the specific facts and circumstances of each case.
  
  
• Incorrect 1099-K Forms - If you believe the information on your Form 1099-K is incorrect, contact the issuer immediately to request a corrected form. Don’t contact the IRS as the Service can’t correct the form. Keep copies of any correspondence, as you may need to reference these communications if discrepancies arise during the tax filing process.

If you received a 1099-K and have questions or need assistance with preparing your return, please contact this office.

• The Basics of Section 1031 Exchanges
• Key Requirements
• Limitations Imposed by the Tax Cuts and Jobs Act
• State Considerations
• The Role of a Qualified Intermediary
• Types of 1031 Exchanges
• Boot in 1031 Exchanges
• Time Limits and Identification Rules
• When 1031 Exchanges Are Appropriate
• When 1031 Exchanges Are Not Appropriate

Section 1031 of the Internal Revenue Code, commonly known as a 1031 exchange or like-kind exchange, is a powerful tax-deferral strategy used by real estate investors. This provision allows investors to defer capital gains taxes on the sale of a property by reinvesting the proceeds into a similar property. However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant limitations to this strategy. In this blog, we will explore the intricacies of 1031 exchanges, the impact of TCJA, state considerations, and the mechanics of different types of exchanges.

The Basics of Section 1031 Exchanges - A 1031 exchange allows a taxpayer to defer paying capital gains taxes on an investment property when it is sold, if another similar property is purchased with the profit gained by the sale. This deferral can be a significant financial advantage, allowing investors to leverage their equity into larger or more profitable properties without the immediate tax burden. While sometimes referred to as a “tax-free exchange,” this is an erroneous term since the seller’s capital gain isn’t forgiven, but merely postponed until the property acquired in the exchange is sold in other than another exchange arrangement.

Key Requirements:

• Like-Kind Property: The properties exchanged must be of like-kind, meaning they are of the same nature or character, even if they differ in grade or quality. For real estate, this is broadly interpreted, allowing exchanges between different types of real estate properties. For example, a residential rental can be exchanged for an apartment house, a commercial building or vacant land.
  
  
• Investment or Business Use: Both the relinquished property and the replacement property must be held for investment or productive use in a trade or business.
  
  
• Timing: The replacement property must be identified within 45 days of the sale of the relinquished property, and the exchange must be completed within 180 days.

Limitations Imposed by the Tax Cuts and Jobs Act - The TCJA, enacted in December 2017, brought significant changes to 1031 exchanges. Prior to the TCJA, 1031 exchanges could be used for a variety of property types, including personal property like machinery, equipment, and even intangible assets. However, the TCJA limited 1031 exchanges strictly to real property. Unlike most of the TCJA provisions that expire after 2025 (unless reinstated by Congress), the changes to Sec 1031 exchanges are permanent. Here are a couple of key changes:

• Real Property Only: As of January 1, 2018, 1031 exchanges are limited to real property. This means that exchanges involving personal property, such as vehicles or equipment, no longer qualify for tax deferral under Section 1031.
  
  
• Domestic Limitation: The TCJA also clarified that exchanges must involve properties within the United States. Properties exchanged between domestic and foreign locations do not qualify as like-kind.

State Considerations - While the TCJA applies federally, some states may not conform to these changes. This means that in certain states, taxpayers might still be able to defer taxes on exchanges involving personal property. Another complication may occur when the replacement property is in a different state than the relinquished property. It's crucial for investors to consult with a tax professional familiar with state-specific tax laws to understand how these rules apply in their jurisdiction.

The Role of a Qualified Intermediary - A qualified intermediary (QI), also known as an accommodator, is a crucial component of nearly all 1031 exchanges. The QI facilitates the exchange by holding the proceeds from the sale of the relinquished property and using them to purchase the replacement property. This ensures that the selling taxpayer does not have actual or constructive receipt of the funds, which would disqualify the transaction from 1031 treatment. A QI is required in all delayed exchanges to ensure compliance with IRS regulations. The QI must be an independent third party and cannot be the taxpayer or a related party.

Types of 1031 Exchanges

• Delayed Exchanges – While it is possible to have an exchange that’s simultaneous, i.e., where the properties are exchanged in the same escrow, this type of transaction is very rare. Instead, the most common type of 1031 exchange is the delayed exchange. In this scenario, the taxpayer sells the relinquished property and identifies the replacement property in no more than 45 days and acquires the replacement property within 180 days. The use of a QI is mandatory to hold the proceeds during the interim period.
  
  
• Reverse Exchanges - In a reverse exchange, the replacement property is acquired before the relinquished property is sold. This type of exchange is more complex and requires the QI to hold title to the replacement property until the relinquished property is sold. Reverse exchanges are beneficial in competitive markets where securing the replacement property is a priority.

Boot in 1031 Exchanges - "Boot" refers to any non-like-kind property received in an exchange, such as cash or other non-qualifying property. Receiving boot can trigger a taxable event, as it represents a gain that cannot be deferred. To avoid boot, the value of the replacement property should be equal to or greater than the relinquished property’s value, and all proceeds must be reinvested.

Time Limits and Identification Rules - The IRS imposes strict time limits on 1031 exchanges to ensure compliance:

• 45-Day Identification Period: The taxpayer must identify potential replacement properties within 45 days of selling the relinquished property. The identification must be in writing and submitted to the QI. It is possible to exchange into multiple properties (no more than three or any number of replacement properties, as long as the total fair market value (FMV) of all of the replacement properties isn’t more than 200% of the total FMV of all properties given up). In this case all of the replacement properties must be identified in the 45-day identification period.
  
  
• 180-Day Exchange Period: The entire exchange must be completed within 180 days from the sale of the relinquished property. This includes closing on the replacement property.

When 1031 Exchanges Are Appropriate - 1031 exchanges are most beneficial for investors looking to:

• Upgrade or Diversify: Investors can leverage their equity to acquire larger or more diverse properties without immediate tax consequences.
  
  
• Consolidate or Relocate: Investors can consolidate multiple properties into one or relocate their investments to different geographic areas.
  
  
• Estate Planning: By deferring taxes, investors can potentially pass on a larger estate to heirs, who may benefit from a step-up in basis.

When 1031 Exchanges Are Not Appropriate - While 1031 exchanges offer significant benefits, they may not be suitable in all situations:

• Need for Liquidity: If an investor requires cash from the sale for other purposes, a 1031 exchange may not be feasible.
  
  
• Market Conditions: In a declining market, holding onto a property might be more advantageous than exchanging it.
  
  
• Loss: When a sale results in a loss.
  
  
• Complexity and Costs: The process can be complex and may involve significant fees for QIs and legal services.

Section 1031 exchanges remain a valuable tool for real estate investors, despite the limitations imposed by the TCJA. By understanding the rules and working with experienced professionals, investors can effectively use 1031 exchanges to defer taxes and strategically grow their portfolios. However, it's essential to consider individual circumstances and market conditions to determine if a 1031 exchange is the right strategy.

Due to the complexities of Section 1031 exchanges, and if you are considering an exchange, it is recommended you contact this office for assistance.

• Custodial Parent
• Joint Custody Issues
• Conflicts Between Family Court and the Tax Code
• Tiebreaker Rules
• Impact on Dependent Care Credit
• Child Tax Credit
• Impact on Earned Income Tax Credit (EITC)
• Education Credits
• Form 8332: Impact and Revocation
• Claiming Medical Expenses
• Head of Household Filing Status

When parents go through a separation or divorce, one of the many complex issues they face is determining who gets to claim the children as dependents for tax purposes. This decision can significantly impact the financial situation of both parents, as it affects eligibility for various tax credits and deductions. Understanding the rules and regulations surrounding this issue is crucial for both parties to ensure compliance with tax laws and to maximize potential benefits.

Custodial Parent - The custodial parent is generally the one who has the right to claim the child as a dependent. According to the IRS, the custodial parent is the one with whom the child resides for the greater number of nights during the tax year. This parent is typically entitled to claim the dependency exemption, the child tax credit, and potentially the earned income tax credit (EITC), provided they meet other qualifying criteria.

Joint Custody Issues - In cases of joint custody, where the child spends an equal amount of time with both parents, the situation becomes more complicated. The IRS has established tiebreaker rules to resolve such disputes. If both parents claim the child as a dependent, the IRS will award the exemption to the parent with the higher adjusted gross income (AGI). However, parents can agree to alternate years for claiming the child, which can be a fair solution if both parties are willing to cooperate.

Conflicts Between Family Court and the Tax Code - Family court decisions do not always align with IRS rules. A court may award the dependency exemption to the non-custodial parent, but for tax purposes, the IRS requires the custodial parent to release the claim using Form 8332. This form allows the custodial parent to transfer the right to claim the child as a dependent to the non-custodial parent. It's important to note that the IRS will not honor a court order without the accompanying Form 8332.

Tiebreaker Rules - The IRS tiebreaker rules are designed to resolve conflicts when both parents claim the child as a dependent. These rules prioritize the parent with whom the child lived for the greater number of nights. If the child lived with both parents equally, the parent with the higher AGI is entitled to the claim. These rules ensure a clear resolution in cases where parents cannot agree.

Impact on Dependent Care Credit - The dependent care credit is another area affected by who claims the child as a dependent. This credit is available to the custodial parent who incurs expenses for childcare for children up to age 13 to enable the parent to work or look for work. If the custodial parent releases the dependency exemption to the non-custodial parent, the custodial parent may still claim the dependent care credit, provided they meet the other requirements.

Child Tax Credit - The child tax credit is generally claimed by the custodial parent, as they are the one who typically claims the child as a dependent. However, if the custodial parent releases the dependency exemption using Form 8332, the non-custodial parent can claim the child tax credit. It's important for both parents to understand the implications of transferring this exemption, as it can significantly impact their tax liability.

Impact on Earned Income Tax Credit (EITC) - The EITC is a benefit for low- to moderate-income working individuals and families, particularly those with children. Only the custodial parent can claim the children for purposes of the EITC, as it is based on the child living with the parent for more than half the year. Even if the custodial parent releases the dependency exemption, they retain the right to claim the child for purposes of EITC.

Education Credits - For children of divorced parents, the higher education credits, such as the Lifetime Learning Credit or the American Opportunity Credit, can only be claimed by the parent who claims the child as a dependent on their tax return. This means that the parent who has the right to claim the child's dependency exemption is also the one eligible to claim these education credits, regardless of who paid the education expenses. If the custodial parent releases the dependency exemption to the non-custodial parent, then the non-custodial parent can claim the education credits, provided they meet the other eligibility requirements.

Form 8332: Impact and Revocation - Form 8332 is crucial for transferring the dependency exemption from the custodial to the non-custodial parent. Once signed, it is binding for the specified tax year(s). However, the custodial parent can revoke the release for future years by providing written notice to the non-custodial parent and attaching a copy to their tax return. The Form 8332 can be used for this notice by completing Part III of that form. This revocation does not affect any years for which the exemption has already been released.

Claiming Medical Expenses - Medical expenses for the child can be claimed by the parent who pays them, regardless of who claims the child as a dependent. This means that if the non-custodial parent pays for the child's medical expenses, they can claim those expenses on their tax return, even if they do not claim the child as a dependent.

Head of Household Filing Status - The Head of Household filing status offers several tax advantages, including a higher standard deduction and lower tax rates. To qualify, a parent must pay more than half the cost of maintaining a home, have a qualifying child living with them for more than half the year, and generally be unmarried. The custodial parent typically meets these criteria, but the non-custodial parent cannot claim this status, even if they claim the child as a dependent.

However, divorced parents can both claim Head of Household (HoH) status if each parent individually meets the requirements for this filing status. Specifically, each parent must have provided more than 50% of the costs of maintaining their own household for a dependent relative or dependent child during the tax year. Additionally, the child must have lived with the parent for more than half of the year. If both parents meet these criteria independently, for example when there are two or more children, they can both claim HoH status.

Conclusion

Navigating the complexities of claiming children as dependents after a separation or divorce requires a thorough understanding of IRS rules and regulations. Both parents must communicate and cooperate to ensure that they maximize their tax benefits while remaining compliant with the law. Consulting with a tax professional can provide valuable guidance and help avoid potential pitfalls. By understanding the roles of the custodial parent, joint custody issues, tiebreaker rules, and the implications of Form 8332, parents can make informed decisions that benefit both themselves and their children.

In plain terms, fractional hiring is like bringing in a seasoned expert—minus the pressure and expense of a full-time staffer. You get their specialized skill set on a part-time or project basis. That means you benefit from top-tier expertise while dodging the overhead that comes with a 40-hour-per-week hire.

So if you're a small or mid-sized business looking for big-league skills without the full-time commitment, keep reading. We'll walk you through how fractional hiring works, the pros and cons, and how to decide if it's right for you.

Think of fractional hiring as a pay-as-you-go solution for specialized talent. Instead of bringing on a full-time employee for a role you may only need occasionally, you tap into a professional who can deliver results on a set schedule or for specific projects.

• Fractional Sales Manager: Rather than recruiting a permanent Sales Director, you might hire a sales professional for 15 hours a week to set up your pipeline, manage leads, and coach your team. You get robust sales leadership—without a full-time salary or benefits.

Bottom Line: You only pay for the level of expertise (and hours) you actually need.

Small and mid-sized businesses are embracing fractional hires because it helps them stay competitive without breaking the bank. A few factors driving the trend:

1. Cost Efficiency: Save on base salaries, benefits, and overhead.

2. Targeted Expertise: Tap into high-level skills for niche needs, like launching a new marketing campaign or closing big-ticket sales.

3. Agility: You can easily scale hours up or down depending on your workload.

4. Access to Top Talent: Attract industry veterans who prefer flexible, project-based work and can pass along their big-company experience to smaller teams.

1. Identify the Gap
   Look at your existing team. Are you missing a strong marketing strategist or a sales closer? Figure out where you have the greatest need—or the biggest potential ROI.

2. Scope the Role
   Clarify the responsibilities and the time commitment. Maybe you need a sales pro to handle outreach and negotiations 10 hours a week. Or a marketing guru to run a short-term product launch.

3. Find Your Fractional Expert
   You can tap specialized staffing agencies and professional networks, or go the freelance route. The key is finding someone with the right expertise—and the right availability.

4. Define Deliverables
   Set clear goals and metrics. For instance: "We want 20 new qualified leads per month" or "We need a 30% bump in website conversions."

5. Agree on a Contract
   Outline hours, fees, deliverables, and how you'll measure success. Month-to-month or project-based arrangements offer maximum flexibility.

• Cost Savings: You avoid the cost of a full-time salary package, which often includes benefits like health insurance and retirement contributions.
  
  
• Deep Expertise: You can nab someone with years of specialized experience—like advanced sales training or high-level marketing chops.
  
  
• Speed to Execution: Fractional pros typically start contributing right away, with minimal onboarding required.
  
  
• Scalability: If you need to pivot or ramp up a project, you can adjust the hours or scope with less red tape.

• Limited Availability: Your fractional pro might be balancing multiple clients, so they won't always be at your beck and call.
  
  
• Culture Fit: They're not immersed in your day-to-day operations, which can make it tougher to mesh with internal team dynamics.
  
  
• Onboarding Time: Even experts need a ramp-up period to understand your products, customers, and processes.
  
  
• Continuity Questions: If your fractional hire moves on, you might have to start from scratch to replace them or switch to a full-time option.

Ask yourself:

1. Do I need this expertise year-round, or is it more project-based?

2. Am I comfortable with a part-time or remote team member?

3. What's my main priority—speed, cost, or a specific skill set?

If your answers lean toward "I need high-level help without full-time commitment," fractional hiring may be the solution.

If you're intrigued but still unsure, we're here to help. Our office supports small and mid-sized businesses through the budgeting and growth process—from forecasting how a fractional hire might impact your bottom line to ensuring your finances stay on track—so you can make an informed decision that aligns with your strategic goals.

Thinking about bringing on a fractional sales or marketing pro to inject fresh energy into your revenue goals? Wondering if the cost and flexibility outweigh the potential hurdles?Contact our officeto set up a quick, no-pressure chat about how fractional hiring might work for you. 

After all, sometimes the best hire is the one you don't have to keep around full-time.

The Biden administration was a vocal proponent of federal tax credits for electric vehicles, positioning them as a cornerstone of the government’s strategy to combat climate change and transition to cleaner energy. President Biden’s Inflation Reduction Act expanded the program, increasing eligibility criteria to include more EV models like the Tesla Model Y, Chevrolet Bolt EV, and Ford F-150 Lightning. The administration also tied some tax credit benefits to stricter domestic manufacturing requirements, aiming to boost U.S. production of EV batteries and reduce reliance on foreign supply chains. 

In contrast, the Trump campaign has signaled skepticism about the program, echoing previous criticism of federal subsidies for EVs. Trump has argued that the government shouldn’t pick winners and losers in the market and that tax credits unfairly burden taxpayers who don’t benefit directly. However, the new administration has not yet outlined a detailed alternative strategy for addressing rising emissions from transportation, which remains a significant contributor to climate change. 

These differing stances highlight the political and economic complexities surrounding EV tax credits. For consumers considering popular models like the Rivian R1T, Hyundai Ioniq 5, or Lucid Air, the future of these incentives could play a significant role in determining affordability and adoption rates in the coming years.

Final Thoughts: The Road Ahead

Both sides acknowledge that reforms could address some of the program's shortcomings. For instance, adjusting eligibility criteria to better target middle- and low-income households or tying the credits more closely to emissions reductions could enhance their impact.

Daniel Sperling, a transportation expert at UC Davis, has written about the importance of electric vehicle tax credits in promoting sustainable transportation. In a 2023 white paper co-authored with Aditya Ramji and Lewis Fulton, he discusses the potential of feebate systems—where fees on less efficient vehicles fund rebates for zero-emission vehicles—as a revenue-neutral approach to incentivize EV adoption. This suggests that altering existing programs, rather than eliminating them, could make them more effective.

As tax season approaches and EV adoption grows, the future of federal tax credits remains uncertain. Balancing environmental goals, economic equity, and fiscal responsibility is no small task. For now, the EV tax credit debate is a stark reminder of the broader challenges of crafting effective policies in the transition to a sustainable future.

• Combat Zone Issues
• Combat Zone Pay
• Differences Between Enlisted and Commissioned Members
• Combat Zone Claims for Tax Forgiveness
• Combat Zone/Qualified Hazardous Duty Area Extension
• Extension to Pay Tax When Not in a Combat Zone
• Non-Taxable Housing and Family Allowances
• Nontaxable Pay and Allowances
• Military Base Realignment and Closure Benefits
• Servicemembers Civil Relief Act of 2003
• State Taxation of Nonresident Military Spouse’s Earned Income
• Home Sale Gain Exclusion
• Tax Treatment of Differential Pay
• Retired Military Disability Compensation
• ROTC Students
• IRA Contribution Deductions

Military service members face unique challenges and opportunities when it comes to taxation. The U.S. tax code provides specific provisions that recognize the sacrifices and circumstances of military life, offering various tax benefits and exemptions. This article delves into the intricacies of military taxation, focusing on combat zone pay, the differences between enlisted and commissioned members, and the treatment of various allowances and benefits. Additionally, we will explore the implications of the Servicemembers Civil Relief Act of 2003 on residence and domicile, as well as the tax treatment of differential pay and retired military disability compensation.

Combat Zone Issues

• Combat Zone Pay - Combat zone pay is a significant aspect of military taxation. For enlisted personnel or warrant officers, combat pay is entirely tax-free, while for commissioned officers, it is excluded up to the highest rate of enlisted pay plus any hostile fire or imminent danger pay received. Despite being tax-free, combat pay is considered "earned income" for several tax purposes, including the Earned Income Tax Credit (EITC), IRA contributions, and the refundable portion of the child tax credit. This classification allows service members to benefit from these tax credits and deductions, enhancing their financial well-being.
  
  
• Differences Between Enlisted and Commissioned Members - The tax treatment of combat pay highlights a key difference between enlisted and commissioned members. While enlisted personnel enjoy a complete tax exemption on combat pay, commissioned officers have a cap on the exclusion. This distinction reflects the varying responsibilities and compensation structures within the military hierarchy.
  
  
• Combat Zone Claims for Tax Forgiveness - Similar to claims for tax forgiveness, Combat Zone Forgiveness applies to service members who are injured or killed in a combat zone. The IRS forgives tax liabilities for the year of death and any earlier year ending on or after the first day of service in the combat zone. This forgiveness extends to penalties and interest, providing comprehensive financial relief. The process for claiming this forgiveness involves notifying the IRS and providing necessary documentation to substantiate the service member's status and circumstances
  
  
• Combat Zone/Qualified Hazardous Duty Area Extension - Service members deployed in combat zones or qualified hazardous duty areas receive automatic extensions for filing tax returns and paying taxes. The extension lasts for 180 days after the last day in the combat zone or qualified hazardous duty area, or after any continuous qualified hospitalization resulting from injuries sustained in these areas. Additionally, the extension period is increased by the number of days remaining in the filing period when the service member entered the combat zone. This provision ensures that military personnel can focus on their duties without worrying about immediate tax deadlines.

Extension to Pay Tax When Not in a Combat Zone - Military service can significantly impact a service member's ability to manage financial obligations, including tax payments. The IRS provides an extension for paying income taxes for service members whose ability to pay is materially affected by military service. To qualify, the service member must notify the IRS in writing, providing details such as their name, Social Security number, monthly income before and during military service, military rank, and dates of service. If approved, the service member can delay tax payments for up to 180 days after their military service ends. This extension does not apply to Social Security and Medicare taxes but offers relief from penalties and interest on income tax payments during the deferral period.

Qualified Reservist Distribution Early Withdrawal Exemption - Reservists called to active duty often face financial challenges, especially if their military pay is less than their civilian income. To alleviate some of these financial burdens, the IRS allows qualified reservists to take early distributions from their retirement plans without incurring the usual 10% early withdrawal penalty, which generally affects individuals under age 59½. This exemption applies to reservists called to active duty for more than 179 days or for an indefinite period. The distribution must occur during the active duty period to qualify for the exemption. This provision helps reservists access necessary funds without the additional financial penalty typically associated with early retirement withdrawals.

Reservists Travel Expenses - Members of the US Armed Forces Reserves can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform their reserve duties. Included are all unreimbursed expenses from the time the reservist leaves home until the time they return home.

Non-Taxable Housing and Family Allowances - Military service members receive various allowances to support their living and family needs. These allowances are generally non-taxable, providing significant financial relief. The Basic Allowance for Housing (BAH) and other housing-related allowances are not included in gross income, yet service members can still deduct mortgage interest and property taxes as itemized deductions. This provision allows military families to benefit from homeownership tax advantages without the burden of additional taxable income.

Nontaxable Pay and Allowances - In addition to housing allowances, military personnel receive several other non-taxable benefits:

• Special Pay: Includes compensation for active service in combat zones or hazardous duty areas.
  
  
• Living Allowances: Cover basic housing and cost-of-living expenses abroad.
  
  
• Family Allowances: Support educational expenses for dependents, emergencies, and evacuation.
  
  
• Death Allowances: Provide burial services and travel expenses for dependents.
  
  
• Moving Allowances: Cover relocation and temporary lodging expenses.
  
  
• Travel Allowances: Include transportation for military personnel and dependents.
  
  
• State Benefit Payments: Exclude bonuses paid by states for service in combat zones.
  
  
• n-Kind Military Benefits: Include legal assistance, medical care, and commissary discounts.

These allowances and benefits are designed to alleviate the financial burdens associated with military service, ensuring that service members and their families are adequately supported.

Military Base Realignment and Closure Benefits - The closure or realignment of military bases can have significant financial implications for service members and their families. To mitigate these impacts, the IRS provides certain benefits related to home sales and relocation expenses. For instance, service members may exclude certain payments received under the Homeowners Assistance Program (HAP) from their taxable income. This exclusion applies to payments made to offset losses from the sale of a home due to base closure or realignment. Additionally, service members may qualify for deductions related to otherwise reasonable and unreimbursed moving expenses, provided they meet specific criteria regarding distance and timing.

Servicemembers Civil Relief Act of 2003 - The Servicemembers Civil Relief Act (SCRA) of 2003 provides critical protections for military personnel regarding residence and domicile. Under the SCRA, service members can maintain their legal residence in one state while being stationed in another, preventing double taxation and simplifying state tax obligations. This provision is particularly beneficial for those who frequently relocate due to military assignments.

State Taxation of Nonresident Military Spouse’s Earned Income - The Military Spouses Residency Relief Act (MSRRA) extends similar protections to military spouses, allowing them to retain their state of residence for tax purposes. This means that a nonresident military spouse's earned income is not subject to state taxation in the state where they are stationed, provided they meet certain criteria. This provision helps reduce the tax burden on military families and supports financial stability.

Home Sale Gain Exclusion - Members of the U.S. military enjoy special provisions regarding the home sale gain exclusion, which can be particularly beneficial given the nature of their service. Under Code Sec. 121, taxpayers can exclude gain of up to $250,000 ($500,000 if filing a joint return with their spouse) on a home sale if they have owned and used the home as their principal residence for two of the five years preceding the sale. However, military personnel who do not meet this two-out-of-five-year requirement due to a move to a new permanent duty station may still qualify for a reduced maximum exclusion amount. Additionally, military members can suspend the five-year test period for ownership and use during any period they serve on qualified official extended duty. This suspension can last up to 10 years, allowing them to meet the two-year use test even if they did not live in the home for the required period due to military service. This provision ensures that military members can benefit from the home sale gain exclusion despite frequent relocations and extended absences due to duty requirements.

Tax Treatment of Differential Pay - Differential pay refers to the compensation paid by civilian employers to service members who are called to active duty. This pay is intended to make up the difference between military and civilian salaries. For tax purposes, differential pay is considered taxable income and must be reported on the service member's tax return. Understanding the tax implications of differential pay is essential for service members transitioning between military and civilian employment.

Retired Military Disability Compensation - Retired military disability compensation is another critical aspect of military taxation. Disability payments made by the Department of Veterans Affairs (VA) are tax-free, distinguishing them from retirement payments, which are taxable. This distinction is crucial for retired service members to understand, as it affects their overall tax liability and financial planning.

ROTC Students - Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

IRA Contribution Deductions – Deducting contributions to traditional IRAs may be limited or not allowed when an individual or their spouse was covered by a retirement plan maintained by their employer, and depending on the individual’s (or couple’s) income. Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan, and may find that their traditional IRA contributions are limited or phased out. For those with excludable combat zone pay, for purposes of IRA contributions, their compensation includes nontaxable combat zone pay when figuring the limits on contributions, and on deductions for contributions, to IRAs.

The taxation of military service members is a complex but essential aspect of financial planning for those in uniform. By understanding the nuances of combat zone pay, non-taxable allowances, and the implications of the Servicemembers Civil Relief Act, military personnel can optimize their tax benefits and ensure financial stability. Additionally, recognizing the tax treatment of differential pay and retired military disability compensation is vital for making informed financial decisions. As military service members navigate their unique tax landscape, staying informed and seeking professional advice can help them maximize their benefits and secure their financial future.

Then came the news that Employer.com would acquire Bench, stirring up more questions such as “Is my data really safe?”

Bench’s abrupt shutdown was more than a public relations nightmare for the brand (and its subsequent buyer). It was a major wake-up call for anyone who has ever typed “cheap online bookkeeping” into Google.

Sure, Bench had been a big name in the DIY bookkeeping space for a while. But the cautionary tale here is crystal clear: the bargain-basement providers—where you have no idea who’s actually handling your finances—might not offer the solid financial foundation you thought they did.

Technology isn’t the bad guy here – in fact, tech products are making it easier than ever for tax and accounting professionals to deliver the high-value services they want to provide, and that ultimately help clients like you. AI and automation are game-changers, helping to reduce tedious tasks and allow humans to focus on strategic thinking. That’s a huge win.

But here’s the thing: if AI is the engine of your finances, you still need a driver who knows how to steer. It’s kind of like trying to win the Indianapolis 500 with Mario from Mario Kart, instead of Mario Andretti. That is because a tool—no matter how powerful—can only do what it’s told.

For instance:

• AI can sort data in seconds
  
  
• AI can auto-categorize expenses
  
  
• AI can generate reports you barely need to glance at

Ever tried to negotiate with the IRS with just a chatbot? Did you get anywhere? Exactly.

• We see nuances: A human accountant reads between the lines. We can spot hidden deductions or signals that your business is about to explode—or implode.
  
  
• We speak human: Your finances may benumbers, but your livelihood is people. You need someone who speaks your language, not just “Balance Sheet 101.”
  
  
• We adapt: Economic and regulatory changes are constant. What worked a year ago might be irrelevant today. An experienced pro has their finger on the pulse.

That’s exactly what Bench’s former customers thought. Until it wasn’t.

They believed they could hand over their bookkeeping to a semi-automated system—and walk away. But when Bench imploded, the question everyone asked was: Who do I even call?

Some business owners think, “I can’t afford a high-quality accountant.” But let’s flip that around:

• How much money are you losing with patchy books?
  
  
• How many tax benefits are you missing out on because the software didn’t prompt you correctly?
  
  
• How many sleep-deprived nights did you waste worrying about inaccurate numbers?

When you invest in a proper accounting expert, you’re not just paying for someone to do your books. You’re buying peace of mind and confidence to make bigger moves in your business.

Here’s the truth: AI isn’t the villain. It’s an incredibly powerful sidekick – the Robin to your Batman, if you will. Imagine being able to offload all that repetitive data entry so your advisor can dive into high-level strategy.

But that only works when you pair AI with a trusted human partner. If Bench’s story taught us anything, it’s this:

• Make sure you know who is behind the technology.
  
  
• Choose expertise over a rock-bottom price tag.
  
  
• Keep an actual human in your corner—someone who’s been there and gets your specific financial challenges.

If you’re rethinking your relationship with your current bookkeeping platform—good. This is your chance to break free from the “cheaper is better” trap and put your money where it actually counts: in building a partnership with a real-life expert.

Ready to talk specifics? Let’s discuss how we can integrate the best AI tools and real human smarts to keep your books pristine, your taxes optimized, and your business on a solid footing.

Want to know how a qualified tax and accounting pro can bring clarity and confidence to your finances—while still leveraging the best of AI? Reach out to our firm for real advice. It’s time to invest in your business’s financial future without getting blindsided by the next “cheap solution” meltdown.

For tax and accounting professionals, budgeting goes beyond tracking income and expenses—it's about planning for seasonal revenue fluctuations, managing client acquisition costs, and preparing for growth. With the new year upon us, it's the perfect time to evaluate your 2024 performance and set updated financial benchmarks for 2025.

• Forecast Revenue and Expenses: Understand where your money is coming from and where it's going.
  
  
• Plan for Tax Season Costs: Budget for marketing efforts, temporary staffing, or software upgrades.
  
  
• Track Progress: Monitor your financial health year-round and adjust strategies as needed.

The QuickBooks Budgeting tool simplifies the process of creating and managing budgets for businesses in any industry. Here's how to get started:

For accountants and tax professionals, income often spikes during tax season but slows in off-peak months. Use your QuickBooks budget to anticipate these cycles and maintain cash flow stability.

• Segment Revenue by Month: Predict income based on previous tax seasons, client renewals, and new leads.
  
  
• Account for Client Retention Costs: Budget for tools and strategies that keep clients engaged year-round, like email newsletters or check-ins during quiet months.

Once your budget is in place, QuickBooks helps you stay on track with automated alerts and easy-to-read dashboards.

• Set Alerts for Budget Thresholds:
  
  ○     Enable notifications to warn you when spending in a specific category approaches its limit.
  
  ○     This feature is especially useful for controlling marketing expenses during tax season when you might feel compelled to spend more money to appeal to new prospects.
  
  
• Track Progress Monthly:
  
  ○     Use QuickBooks reports to compare your actual performance against your budget.
  
  ○     Adjust spending or reallocate funds to meet your targets more effectively.

Bonus Pro Tip: Budget for Practice Growth

If you're planning to grow your practice in 2025, your budget should reflect that. Consider allocating funds for:

• Marketing Campaigns: Digital ads or local networking events to attract new clients.
  
  
• Technology Upgrades: Invest in software or tools that enhance efficiency, such as AI-driven tax research tools.
  
  
• Hiring Support: Budget for part-time staff or contractors during tax season.

QuickBooks' Budgeting feature is not just a financial tool—it's a roadmap for running a thriving practice in 2025. Thanks to your accounting software, you can set realistic goals and achieve them this year.

If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10.  Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

February 18 - Last Date to Claim Exemption from Withholding

If you are an employee who claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Weekends & Holidays:

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

• All payments reported on Form 1099-B.
• All payments reported on Form 1099-S.
• Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 10 of Form 1099-MISC.

Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2024, but didn't give you Form W-4 (or Form W-4 (sp), its Spanish version) to continue the ex-emption this year.

February 28 - All Businesses 

File information returns (for example, certain Forms 1099) for certain payments you made during 2024. These payments are described under All Businesses under January 31, earlier. However, Form 1099-NEC reporting nonemployee compensation must be filed by January 31. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, which form to use, and extensions of time to file.

If you file Forms 1097, 1098, 1099 (except a Form 1099-NEC reporting nonemployee compensation), 3921, 3922, or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms generally remains January 31.

February 28 - Payers of Gambling Winnings

File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2024. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.

February 28 - Informational Returns Filing Due

File government copies of information returns (Forms 1099) and transmittal Forms 1096 for certain payments you made during 2023, other than the 1099-NECs that were due January 31. There are different 1099 forms for different types of payments.

If you’re an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you’re filing any of these forms with the IRS electronically, your due date for filing them will be extended to  March 31. See the Instructions for Forms 1094-B and 1095-B, and the Instructions for Forms 1094-C and 1095-C for more information about the information reporting requirements.

February 28 - Large Food and Beverage Establishment Employers

File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.

Weekends & Holidays:

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