With May’s warmer days on the horizon and tax season now in the rear-view mirror, our team remains focused on guiding you through the next phase of your financial year. Staying organized and informed on key tax and business matters is just as important after filing deadlines pass. This month we’ll take a closer look at leveraging a mid-year review when times feel uncertain, how installment sales can create win-win deals for property sellers and buyers, the special tax breaks available to childcare providers, the hidden costs of tax-time penalties, and more—insights designed to keep you proactive and protected.

As tax season has come to a close, we're proud to reflect on a successful and rewarding start to 2025.  Thanks to the dedication, expertise, and teamwork of our staff, we were able to serve our clients with efficiency, accuracy, and care.  From navigating new regulations to meeting tight deadlines, our team rose to the occasion with professionalism and a positive spirit.  We're grateful for the trust our clients placed in us, and we look forward to building on this momentum in the months ahead!

DID YOU FILE AN EXTENSION? - No need to wait until the extension deadline to send us your information.  Do so with ease via our secure website portal here: Davidson Fox Secure File Transfer

Davidson Fox April Recap:

April was a whirlwind, but we made it through!  From attending the Chenango River Theatre Gala to savoring food flown in from The Masters in Georgia, conquering the April 15th deadline, celebrating Easter, and capping it off with our tax season party - it was a month packed with accomplishments and celebration!

Upcoming DFC Activities:

With May flowers blooming, we're gearing up for a busy season of events - from the Mothers and Babies Fashion Gala and the Bridge Run to our role as a Connect Over Lunch sponsor, plus the Goodwill Theatre's Stardust Gala, and the Chamber Annual Dinner, just to name a few!

MAY 1st - Mothers & Babies Fashion Gala at the DoubleTree, 5:30pm - 7:30pm.  Davidson Fox is the dessert sponsor for the event and our Firm Liaison, Kelly Grace, will be walking the runway.  

MAY 4th - Bridge Run will take place on Sunday, May 4th at various times in the morning including multiple races to choose from.  Join us after the race at Victory Village with your race bibs, sponsored by Davidson Fox, for a free drink from Beer Tree!  There will be live music, beer for sale, and snacks - even if you don't run, come in for the fun.  Pictures below from the Press Conference held on Wednesday, April 30th, gearing up for the event.  More pictures to come in our June newsletter!

MAY 8th - Connect Over Lunch is a popular networking event that takes place on the second Thursday of each month at various locations throughout the community.  Davidson Fox is the May sponsor and we are excited to be hosting at House of Reardon.  There is still time to get your tickets!

MAY 10th - Goodwill Theatre Stardust Gala featuring the Jersey Tenors at 6:00pm at the DoubleTree, Downtown Binghamton.  Davidson Fox is proud to support this evening of cocktails, dinner, and dessert.  Join in on the fun with their silent auction, VIP Reception, and meet & greet with the Jersey Tenors.  An event you won't want to miss!

MAY 15th - 61st GBCC Annual Dinner & Meeting at the DoubleTree starting at 5:30pm.  Dinner and program will begin at 6:45pm where we recognize key-individuals who make a positive impact on our community.

Thank you for giving us the opportunity to serve you.  We appreciate your business and the confidence you have placed in us. Please reach out to our team should you need further assistance. Davidson Fox Team

Should you find yourself at a crossroads in your financial journey or have pressing questions about the topics covered, please don't hesitate to reach out. We're here to guide you toward informed decisions that align with your financial goals.

And remember, our services extend to your colleagues, family, and friends. Should they require assistance, we're just a phone call away. We remain committed to identifying every opportunity to ensure our client's prosperity. Your kind reviews and referrals are invaluable to us.

Why a Mid-Year Review Isn't "Nice to Have"—It's "Gotta Have"

Think of it like this: Ignoring a mid-year review is like navigating with a paper map in the age of GPS. You might get where you're going, but you'll burn a lot more fuel (read: money) and make a few wrong turns along the way.

Seriously, pausing in June/July lets you:

• Course-correct, fast. See those tariffs creeping up? Renegotiate contracts before your margins are roadkill.
  
  
• Sniff out hidden cash leaks. Maybe your shipping costs are higher than a giraffe's eyebrows. Time to investigate!
  
  
• Prep for tax law curveballs.

Trump-Era Tax Plans: The Elephant in the Room (and How to Dance Around It)

Okay, let's address the 800-pound gorilla: potential tax law changes under a new administration. While crystal balls are still on backorder, rumors alone can wreak havoc on your SMB's planning.

Here's how a mid-year review transforms you from sitting duck to savvy strategist:

• Scenario Planning, STAT! What happens if the corporate tax rate does shift? We can model the impact now and adjust your Q3/Q4 strategies accordingly.
  
  
• Accelerate or Defer? That Is the Question. Big equipment purchase on the horizon? A review helps you decide if pulling the trigger before year-end (or strategically delaying) could save you serious dough, given potential changes to depreciation rules.
  
  
• Unleash Hidden Deductions. With tax laws potentially in flux, we'll comb through every possible deduction you might be missing. Think of it as finding spare change in your business's couch cushions... only it adds up to thousands.

Real-World Win: From Struggling Cafe to Thriving Hub

Remember that local café teetering on the brink thanks to surprise tariffs? They didn’t just survive; they thrived because of a killer mid-year review. By swapping suppliers and revamping the menu around high-profit items, they turned a potential disaster into a competitive advantage. This isn’t luck; it’s proactive financial savvy.

Economic Uncertainty: Not a Buzzword, a Battlefield

Global what-now? Supply chain disruptions, fluctuating demand, currency exchange rates doing the tango... it's a chaotic landscape out there. A mid-year review is your armored vehicle, letting you:

• Spot the potholes before you hit them. Is one market tanking? Reallocate resources now instead of waiting for the whole year to go south.
  
  
• Discover new gold mines. That boutique retailer that lost sales? They uncovered a more profitable customer base by being agile and data-driven.

Ready to Turn Uncertainty into Your Competitive Edge?

We're not about waiting for the sky to fall. We're about building you an umbrella... and a weather forecasting system to boot.

A mid-year review isn’t just about crunching numbers. It's about:

• Future-proofing your business.
  
  
• Seizing opportunities others miss.
  
  
• Sleeping soundly at night, knowing you're prepared for anything.

Whether it’s tax law twists, tariff tantrums, or just plain old economic weirdness, we're here to guide you every step of the way.

Contact us today for a mid-year review. Let’s make uncertainty your secret weapon for growth.

• Receive Payments Over Time
• Understanding Installment Sales
• Variations of Installment Sales
• The Role of Collateral
• Realization of Ordinary and Capital Gains Income
• Pros and Cons from the Seller's Perspective
• Pros and Cons from the Buyer's Perspective
• Example of an Installment Sale
• Consider The Risks and Complexities

When selling a property, one of the options available to sellers is the installment sale. This method allows the seller to receive payments over time rather than a lump sum at the time of sale. This approach can be beneficial for both the seller and the buyer, offering flexibility and potential tax advantages. However, it also involves complexities, particularly regarding the need for collateral as security and the realization of ordinary and capital gains. This article explores the nuances of installment sales, including their variations, pros and cons, and provides an illustrative example.

Understanding Installment Sales - An installment sale is a financial arrangement where the seller allows the buyer to pay for the property over a period of time. This is particularly useful when the buyer cannot afford to pay the full purchase price upfront. The seller, in turn, benefits from a steady income stream and potential tax advantages.

Variations of Installment Sales:

• Standard Installment Sale: This is the most common form, where the buyer makes regular payments over a specified period. The seller retains a lien on the property until the full purchase price is paid.
  
  
• Land Contract: Also known as a contract for deed, this variation allows the buyer to take possession of the property while the seller retains legal title until the full payment is made.
  
  
• Lease Option: This involves leasing the property with an option to purchase. Part of the lease payments may be credited towards the purchase price.
  
  
• Seller Financing: The seller acts as the lender, providing a loan to the buyer for the purchase. This can be structured as an installment sale with interest.

The Role of Collateral - Collateral is a critical component of installment sales, serving as security for the seller. It ensures that if the buyer defaults on payments, the seller can reclaim the property or other assets. Typically, the property being sold acts as the collateral. However, additional collateral may be required depending on the buyer's creditworthiness and the terms of the sale.

Realization of Ordinary and Capital Gains Income - In an installment sale, the seller realizes gains over time as payments are received. This can be advantageous for tax purposes, as it spreads the tax liability over several years. However as with any sale, whether an installment sale or not, the gains are sometimes categorized into ordinary income and capital gains.

• Ordinary Income: Generally, ordinary income comes from the recapture of depreciation or other deductions previously taken. This ordinary income is taxable in the year of the sale. Note: The depreciation recaptured for a real estate property does not recapture as ordinary income.
  
  
• Capital Gains: The remaining gain, if any, may be treated as a capital gain or a section 1231 gain, depending on the type of property and if held by the seller for at least a year and a day before the sale. The advantage of long-term capital gains is that the gain may be taxed at rates lower than the rates that apply to the seller's other (ordinary) income.  
  
  
• Interest Payments: Interest is taxed at the seller's ordinary income tax rate.

Pros and Cons from the Seller's Perspective

Pros:

• Tax Benefits: Spreading the gain over several years can reduce the seller's tax burden in any single year.
  
  
• Steady Income Stream: Provides a predictable cash flow, which can be beneficial for retirement planning or reinvestment.
  
  
• Increased Buyer Pool: Attracts buyers who may not qualify for traditional financing.

Cons:

• Risk of Default: The buyer may default on payments, requiring the seller to reclaim and resell the property.
  
  
• Delayed Full Payment: The seller does not receive the full sale price upfront, which may be a disadvantage if immediate funds are needed, such as to pay off the seller's mortgage.
  
  
• Complexity: Requires careful structuring and legal documentation to protect the seller's interests. To qualify as an installment sale for tax purposes, the seller must receive at least one payment after the year of the sale, and needs to make an election to use the installment method on their tax return for the sale year. Once made, the election can be revoked only with the consent of the IRS.

Pros and Cons from the Buyer's Perspective

Pros:

• Easier Financing: Provides an alternative to traditional bank financing, which may be difficult to obtain.
  
  
• Flexible Terms: Allows for negotiation of payment terms that suit the buyer's financial situation.
  
  
• Immediate Possession: The buyer can take possession of the property while paying for it over time.

Cons:

• Higher Interest Rates: Seller financing may come with higher interest rates compared to traditional loans.
  
  
• Risk of Repossession: Failure to meet payment obligations can result in losing the property and any equity built.
  
  
• Limited Property Rights: In some variations, the buyer may not have full legal title until the final payment is made.

Example of an Installment Sale

Consider a scenario where a seller, Jane, decides to sell her vacation home valued at $300,000. Jane has owned the property for 8 years and the current mortgage balance is $100,000. She enters into an installment sale agreement with a buyer, John, who agrees to pay $30,000 upfront and the remaining $270,000 over ten years with an interest rate of 5%.

• Yearly Payment Calculation: John will make annual payments of approximately $34,500, which includes both principal and interest.
  
  
• Tax Implications for Jane: Each year, Jane will report the interest portion of the payment as ordinary income and the principal portion of the gain as capital gain. This spreads her tax liability over the ten-year period.
  
  
• Collateral: The vacation home serves as collateral. If John defaults, Jane can reclaim the property.
  
  
• Pros for Jane: She benefits from a steady income stream and reduced immediate tax liability.
  
  
• Cons for Jane: She faces the risk of John defaulting and the complexity of managing the installment sale. She'll need to find other sources of income with which to pay off her $100,000 mortgage.
  
  
• Pros for John: He gains immediate possession of the property and avoids the need for traditional financing.
  
  
• Cons for John: He pays a higher interest rate and risks losing the property if he defaults.

Installment sales offer a flexible and potentially beneficial way to sell property, particularly when traditional financing is not feasible. They provide tax advantages and a steady income stream for sellers while offering buyers an alternative path to property ownership. However, both parties must carefully consider the risks and complexities involved, particularly the need for collateral and the implications of ordinary and capital gains. By understanding these factors, sellers and buyers can make informed decisions that align with their financial goals.

If you would like to explore how an installment transaction might fit into selling your business, rental, home or other property please contact this office for an appointment.  

And just like you wouldn't leave last year's mismatched socks sitting in your drawer, you shouldn't let old subscriptions, bloated expenses, or outdated processes keep piling up in your books.

Because here's the truth:

Small financial leaks turn into big problems over time.
But the good news? You can plug those leaks with a bit of spring cleaning. And it doesn't require a full financial overhaul—just a few focused tweaks that can free up cash and sharpen your operations fast.

Let's walk through it together.

 1. Audit Your Subscriptions (Yes, All of Them)

That software you signed up for during COVID? The design tool you thought you'd use? The double-billed Zoom accounts?
They're all eating into your margins.

Go line-by-line through your credit card statements and flag:

• Duplicate tools
  
  
• Trials that never got canceled
  
  
• Apps your team hasn't touched in 3+ months

Then cut them loose. It's one of the fastest ways to reclaim hidden cash. 

Prices have gone up, but that doesn't mean you have to just accept it.
Call your vendors. Ask about loyalty pricing. Bundle services. Request bulk discounts.
You'd be surprised how often you can shave off 5—15% just by asking the right questions.

Pro tip: If you've been a reliable client, you have leverage. Use it.

3. Update Your Financial Systems

If you're still using spreadsheets to manage cash flow or entering receipts manually...
It's time to upgrade.

Modern cloud-based systems can:

• Track expenses in real time
  
  
• Forecast cash flow with clarity
  
  
• Sync with your bank and payroll in seconds

Investing in the right tools now saves you hours later—and gives you better insight into where your money is going. 

When was the last time you raised your rates?
If it's been over a year, your profit margin might be quietly shrinking behind the scenes.

Run the numbers:

• Are you still profitable after cost increases?
  
  
• Are your competitors charging more?
  
  
• Could you offer value-based packages instead of hourly rates?

A small adjustment here could unlock a big bump in revenue—with no added workload. 

Whether you have employees or contractors, spring is a great time to check:

• Are the roles and tasks still aligned with your goals?
  
  
• Are you paying for work that no longer needs to be done?
  
  
• Could automation or smarter processes reduce time spent?

Sometimes, trimming costs doesn't mean letting go of people—it means redefining what needs to get done and how. 

Unpaid invoices? That's your money sitting in someone else's account.

• Set up clear payment reminders.
  
  
• Add late fees.
  
  
• Offer early payment discounts.
  
  
• And if clients are chronically late, consider a retainer or an upfront model.

Don't be afraid to chase what you're owed—it's part of doing business. 

Yes, you could do all of this yourself. But should you?

The fastest way to spot inefficiencies, uncover savings, and set yourself up for stronger cash flow is to have a second set of (expert) eyes on your numbers.

That's where we come in.

Let's Tidy Up Those Finances—Together

Spring is the season of renewal—and your business finances deserve a refresh too.

Whether you're drowning in subscriptions, stuck with outdated systems, or just want someone to walk you through a smart, streamlined plan for the months ahead, we're here for that.

Contact our office today to schedule your spring financial check-up.
We'll help you clean house, cut waste, and build a more profitable path forward.

You've been told for years to put money into retirement accounts, defer taxes, and wait for the golden years. But wait... no one told you?

Retirement might be your highest-taxed phase yet.

Seriously.
Between Social Security income, Required Minimum Distributions (RMDs), capital gains, Medicare premium adjustments, and even state taxes... it can feel like a financial ambush.

Let's break down why this happens—and what you can do now to soften the blow.

If you've saved in a traditional IRA or 401(k), you've been enjoying tax deferral for years. But the IRS eventually wants their cut.

That's where RMDs come in.
Once you hit age 73, you're forced to take money out of your retirement accounts—and those withdrawals are taxed as ordinary income.

Why it matters:

• Your RMD could bump you into a higher tax bracket.
  
  
• It could trigger higher Medicare premiums (thanks, IRMAA).
  
  
• It might even impact how much of your Social Security is taxed.

What to do now:
Consider Roth conversions in your 60s to reduce your future RMDs. Yes, you'll pay tax now, but it could save you significantly down the road.

Up to 85% of your Social Security benefits could be taxable depending on your total income—including investment income, part-time work, and yes, those RMDs.

Here's the trap:
You think you're getting $3,000/month from Social Security.
But add in just a few thousand from another source, and suddenly, a big chunk of that is taxable.

Solution:
Work with an advisor who can map out income sources before you trigger your benefits. Sometimes, waiting a year or two—or rebalancing your withdrawal strategy—can dramatically reduce taxes.

This one stings.
You file your taxes, enjoy a good year, and then boom—two years later, your Medicare premiums go up.

That's IRMAA (Income-Related Monthly Adjustment Amount).
If your income exceeds certain thresholds, you'll pay more for Medicare Part B and D—even if the bump was from a one-time event like a Roth conversion or asset sale.

Proactive planning = lower premiums.
A well-timed income strategy can keep you just under IRMAA thresholds. And in some cases, you can file an appeal based on a "life-changing event" like retirement or loss of income.

Selling your long-held investments? Downsizing your home?
These capital gains could push your income higher than expected—and cause a domino effect with taxes, Medicare, and Social Security.

Even if you're "living off savings," your tax return may tell a different story.

Pro tip:
There's a 0% capital gains bracket for certain income ranges. With the right strategy, you can sell appreciated assets without triggering taxes—but timing is everything.

Not all states treat retirees the same.
Some tax Social Security, some don't. Some offer pension exemptions, others tax everything.

If you're thinking about relocating in retirement, don't just compare housing costs. Compare tax policies. And if you're staying put? Learn how your current state impacts your bottom line.

A tough but important truth: Losing a spouse in retirement often means going from "Married Filing Jointly" to "Single."

Which means:

• Lower standard deductions
  
  
• Tighter income thresholds
  
  
• Bigger tax bills on the same income

If you're newly widowed or preparing for that reality, it's worth building a multi-year tax strategy now—not later.

The retirement tax landscape is not DIY-friendly.
Rules change. Thresholds shift. And one wrong move (or missed opportunity) can cost you thousands.

But with the right guide, you can:

• Smooth out income across years
  
  
• Reduce your lifetime tax bill
  
  
• Maximize your Social Security and Medicare benefits
  
  
• And keep more of the money you worked so hard to earn

You planned for retirement.
Now it's time to plan for retirement taxes.

We're here to help you make smart, proactive decisions that reduce surprises, minimize your tax burden, and give you the peace of mind to enjoy the years ahead.

Contact our office today to schedule a retirement tax check-up.
You've done the saving—now let's make sure you keep more of it.

• Understanding Penalties in the Tax Context
• General Rule: Penalties Are Not Deductible
• Business Expenses and Penalties
• Itemized Deductions and Penalties
• Exceptions and Considerations
• Planning and Compliance

When managing finances, both individuals and businesses often seek ways to minimize their tax liabilities through deductions. However, not all expenses qualify as tax deductions, and penalties are a particularly tricky area. This article explores whether penalties can be deducted as business expenses or itemized deductions, providing clarity on a topic that often confuses taxpayers.

Understanding Penalties in the Tax Context - Penalties can arise from various situations, such as late payment of taxes, non-compliance with regulations, or breaches of contractual obligations. These penalties are generally imposed by governmental bodies or contractual partners and are intended to enforce compliance or compensate for damages.

General Rule: Penalties Are Not Deductible - The Internal Revenue Service (IRS) has clear guidelines regarding the deductibility of penalties. According to IRS rules, penalties paid to the government for violating laws are not deductible as business expenses or itemized deductions. This rule is based on the principle that allowing deductions for penalties would undermine their purpose as a deterrent against unlawful behavior.

Business Expenses and Penalties - For businesses, the IRS allows deductions for "ordinary and necessary" expenses incurred in the course of operating a business. However, penalties do not fall under this category. The IRS explicitly states that fines and penalties paid to a government for the violation of any law are not deductible. This includes penalties for late tax payments, violations of environmental regulations, and other infractions.

For example, if a company is fined for failing to comply with safety regulations, the fine cannot be deducted as a business expense. The rationale is that allowing such deductions would effectively subsidize non-compliance, which is contrary to public policy.

Itemized Deductions and Penalties - Itemized deductions are expenses that individuals can claim to reduce their taxable income. These deductions are listed on Schedule A of Form 1040 and include expenses such as mortgage interest, up to $10,000 of state and local taxes, and charitable contributions. However, penalties do not qualify as itemized deductions.

The IRS does not allow individuals to deduct penalties paid for personal infractions, such as traffic fines or penalties for late payment of personal taxes. Just like with business expenses, the principle is to avoid encouraging behavior that leads to penalties.

Exceptions and Considerations - While the general rule is that penalties are not deductible, there are some nuances and exceptions worth noting:

1. Compensatory Damages: If a payment is made to compensate for actual damages rather than as a penalty, it may be deductible. For instance, if a business pays damages to a customer for breach of contract, this payment might be deductible as a business expense, provided it is not classified as a penalty.
   
   
2. Legal Fees: Legal fees incurred in defending against a penalty may be deductible as a business expense if they are ordinary and necessary expenses related to the business. However, the penalty is not deductible.
   
   
3. Interest on Penalties: While penalties themselves are not deductible, interest paid on penalties may be deductible in certain circumstances. For example, interest on a tax deficiency may be deductible as a business expense if it relates to business income.
   
   
4. State and Local Tax Penalties: Some states may have different rules regarding the deductibility of penalties. It is essential to consult state tax regulations for guidance specific to state and local taxes.

Planning and Compliance - Given the non-deductibility of penalties, businesses and individuals should prioritize compliance to avoid incurring penalties in the first place. Here are some strategies to consider:

• Timely Tax Payments: Ensure that taxes are paid on time to avoid late payment penalties. Setting up reminders or automatic payments can help manage deadlines effectively.
  
  
• Regulatory Compliance: Stay informed about relevant regulations and ensure compliance to avoid penalties. This may involve regular training for employees and audits of business practices.
  
  
• Recordkeeping: Maintain accurate and detailed records of all transactions and communications. Good recordkeeping can help defend against unjust penalties and support claims for deductions where applicable.

Conclusion

In summary, penalties are generally not deductible as business expenses or itemized deductions. This rule aligns with the public policy objective of discouraging non-compliance and unlawful behavior. While there are some exceptions and nuances, the overarching principle is clear: penalties are not intended to be subsidized through tax deductions.

For businesses and individuals, the best approach is to focus on compliance and proactive management of tax obligations. By doing so, they can minimize the risk of penalties and ensure that they are taking full advantage of legitimate deductions available to them.

If you have questions please contact this office.

• Choosing the Right Business Entity
• General Overview of Common Business Structures
• Sole Proprietorships
• Partnerships
• Limited Liability Companies (LLCs)
• C Corporations
• S Corporations

 Choosing the right business entity is a critical decision for entrepreneurs and business owners. The type of entity you select can have significant implications for liability, taxation, and the overall management of your business. In this article, we will explore the pros and cons of various business entities, including sole proprietorships, partnerships, limited partnerships, limited liability companies (LLCs), C corporations, and S corporations which are the most common business structures. We will also discuss liability issues, self-employment taxes, owner limitations, taxation, formation, and dissolution for each entity type.

The business structure one chooses influences everything from day-to-day operations to taxes and how much of their personal assets are at risk. One should choose a business structure that provides the right balance of legal protections and benefits.

* Further information about B corporations and B- corporations not included in this material.

Compare general traits of these business structures, but remember that ownership rules, liability, taxes and filing requirements for each business structure can vary by state. The following material is a general overview of these business structures and it is best practice to consult with your legal counsel and this office before making a final decision.

Sole Proprietorship – A business is automatically considered to be a sole proprietorship if it is not registered as any other kind of business. Thus, the sole proprietor’s business assets and liabilities are not separate from personal assets and liabilities. As a result, sole proprietors can be held personally liable for the debts and obligations of the business. A sole proprietor may also find it difficult to raise money since banks are hesitant to lend to sole proprietorships.

NOTE: If the business owner is the sole member of a domestic limited liability company (LLC) and elects to treat the LLC as a corporation, then it is not a sole proprietorship.

• Pros:
  
  o    Simplicity and Cost-Effectiveness: Sole proprietorships are the simplest and least expensive business entities to establish. They require minimal paperwork and are easy to manage.
  
  o    Complete Control: A sole proprietor has full control over all business decisions and operations.
  
  o    Tax Benefits: Income and expenses are reported on the individual’s personal tax return, simplifying the tax process. The sole proprietor may also qualify for certain tax deductions available to small businesses.
  
  
• Cons:
  
  o    Unlimited Liability: Sole proprietors are personally liable for all business debts and obligations, which means personal assets are at risk if the business incurs debt or is sued.
  
  o    Limited Growth Potential: Raising capital can be challenging, as a sole proprietorship cannot sell stock or bring in partners.
  
  o    Self-Employment Taxes: Sole proprietors are responsible for paying self-employment taxes, which cover Social Security and Medicare contributions.
  
  
• Formation and Dissolution:
  
  o    Formation: Establishing a sole proprietorship is straightforward, often requiring only a business license or permit.
  
  o    Dissolution: Dissolving a sole proprietorship is equally simple, involving the cessation of business activities and settling any outstanding debts.

• Limited Partnerships (LP): Which have one general partner with unlimited liability. The other partners have limited liability and generally have limited control over the business.
  
  Partnerships are pass-though entities, meaning the partnership does not pay taxes. Instead, income, losses, credits and other tax issues are passed through to the partners in proportion to their partnership ownership and reported on their individual returns.
  
  
• Limited Liability Partnerships (LLP): A limited liability partnership is also a pass-through entity. The only difference is all the partners have limited liability from debts of the partnership, and the actions of other partners. 
  
  
• Pros:
  
  o    Shared Responsibility: Partnerships allow for shared management and financial responsibility, which can ease the burden on individual partners.
  
  o    Flexibility: Partnerships can be structured to suit the needs of the partners, with varying levels of involvement and profit-sharing.
  
  o    Tax Advantages: Partnerships are pass-through entities, meaning profits and losses are reported on the partners' personal tax returns, avoiding double taxation.
  
  
• Cons:
  
  o    Joint Liability: In a general partnership, each partner is personally liable for the debts and obligations of the business, including those incurred by other partners.
  
  o    Potential for Conflict: Disagreements between partners can arise, potentially leading to business disruption.
  
  o    Self-Employment Taxes: Partners who aren’t limited partners must pay self-employment taxes on their share of the profits.
  
  
• Formation and Dissolution:
  
  o    Formation: Partnerships are formed through a partnership agreement, which outlines the terms of the partnership, including profit-sharing and management responsibilities.
  
  o    Dissolution: Dissolving a partnership requires settling debts, distributing assets, and notifying relevant authorities.

Limited Liability Company (LLC) -A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and those considering an LLC should check with the state before starting a Limited Liability Company. A business must register with the state and pay LLC fees to become an LLC.

Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner. Generally, banks and insurance companies cannot be an LLC, and generally there are special rules for foreign LLCs.

• Pros:
  
  o    Limited Liability: LLC owners, known as members, are protected from personal liability for business debts and obligations.
  
  o    Flexible Taxation: LLCs can choose to be taxed as a sole proprietorship, partnership, or corporation, providing flexibility in tax planning.
  
  o    Operational Flexibility: LLCs have fewer formalities and regulations compared to corporations, allowing for flexible management structures.
  
  
• Cons:
  
  o    Regulations: LLCs are subject to varying state laws, which can complicate operations if the business operates in multiple states.
  
  o    Self-Employment Taxes: Members may be subject to self-employment taxes on their share of the profits.
  
  o    Cost: Forming and maintaining an LLC can be more expensive than a sole proprietorship or partnership due to state filing fees and annual reports.
  
  
• Formation and Dissolution:
  
  o    Formation: LLCs are formed by filing articles of organization with the state and creating an operating agreement.
  
  o    Dissolution: Dissolving an LLC involves filing dissolution documents with the state and settling any outstanding obligations.

C Corporation - A corporation is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and held legally liable.

Corporations provide strong protection to its owners from personal liability, but the cost to form a corporation is higher than other structures.

Unlike sole proprietors, partnerships, and LLCs that are pass-through entities, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice. This happens when the corporation distributes profits to its shareholders in the form of dividends which are taxable to shareholders on their personal tax returns.

Corporations have a separate life from its shareholders. Corporate ownership is in the form corporate stock which can be purchased and sold without disturbing the corporation.

Ownership in the form of stock gives corporations the advantage of being able to raise capital through the sale of stock, and employee stock options can be a benefit in attracting employees.

• Pros:
  
  o    Limited Liability: Shareholders are protected from personal liability for corporate debts and obligations.
  
  o    Unlimited Growth Potential: C corporations can raise capital by issuing stock, making them attractive to investors.
  
  o    Tax Advantages: Corporations can benefit from various tax deductions and credits not available to other entities.
  
  
• Cons:
  
  o    Double Taxation: C corporations face double taxation, where profits are taxed at the corporate level and again as dividends to shareholders.
  
  o    Complexity and Cost: Corporations require more formalities, including a board of directors, bylaws, and regular meetings, which can be costly and time-consuming.
  
  o    Regulatory Requirements: Corporations are subject to stringent regulatory requirements and reporting obligations.
  
  
• Formation and Dissolution:
  
  o    Formation: C corporations are formed by filing articles of incorporation with the state and creating corporate bylaws.
  
  o    Dissolution: Dissolving a corporation involves a formal process of liquidating assets, settling debts, and filing dissolution documents with the state.

S Corporation -S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
  
  
• Have only allowable shareholders
  
  o  May be individuals, certain trusts, and estates and
  
  o  May not be partnerships, corporations or non-resident alien shareholders
  
  
• Have no more than 100 shareholders
  
  
• Have only one class of stock
  
  
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations)

To become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders.

• Pros:
  
  o    Limited Liability: Like C corporations, S corporation shareholders are protected from personal liability.
  
  o    Pass-Through Taxation: S corporations avoid double taxation by allowing income, deductions, and credits to pass through to shareholders' personal tax returns.
  
  o    Tax Savings on Self-Employment: Shareholders can receive a salary and dividends, potentially reducing self-employment taxes.
  
  
• Cons:
  
  o    Ownership Restrictions: S corporations are limited to 100 shareholders, and all must be U.S. citizens or residents.
  
  o    Complex Formation and Maintenance: S corporations require adherence to strict IRS requirements and ongoing compliance with corporate formalities.
  
  o    Limited Flexibility in Profit Sharing: Profits and losses must be distributed according to share ownership, limiting flexibility in profit-sharing arrangements.
  
  
• Formation and Dissolution:
  
  o    Formation: S corporations are formed by filing articles of incorporation and electing S corporation status with the IRS.
  
  o    Dissolution: Dissolving an S corporation involves liquidating assets, settling debts, and filing dissolution documents with the state and IRS.

Choosing the right business entity is a crucial decision that can impact your business's success and your personal financial security. Each entity type offers distinct advantages and disadvantages, and the best choice depends on your specific business goals, risk tolerance, and financial situation. It's essential to consult with legal and financial professionals to ensure you select the entity that aligns with your long-term objectives and provides the most benefits for your business. It most likely is appropriate to consult with this office to go over other relevant issues before making the choice.

• What is FinCEN Form 114 (FBAR)?
• Who Must File the FBAR?
• FBAR Reporting Threshold
• Common Exceptions
• Penalties for Noncompliance with FBAR Reporting
• Civil Penalties
• Criminal Penalties
• Statute of Limitations
• The Overlap with Form 8938 Reporting Requirements
• What is Form 8938?
• Assets Subject to Form 8938 Reporting
• Understand the Applicable Thresholds
• Record Retention and Documentation 

In today’s globalized financial landscape, U.S. taxpayers are increasingly engaged with foreign financial institutions—whether through direct ownership, joint accounts with relatives, or even through the income from a rental property in a foreign country deposited in foreign banks. Compliance with the reporting requirements for foreign financial assets and accounts is not optional. Taxpayers must abide by the rigorous requirements set forth by the Financial Crimes Enforcement Network (FinCEN) for the Foreign Bank Account Report (FBARand by the IRS for the Statement of Specified Foreign Financial Assets under the Foreign Account Tax Compliance Act (FATCA). This article will provide a deep dive into what these forms are, who is required to file them, the reporting thresholds, the overlapping instances where both forms apply, and the severe consequences associated with noncompliance.

What is FinCEN Form 114 (FBAR)?

FinCEN Form 114, commonly known as the FBAR, is a report that must be filed by U.S. persons who have a financial interest in or signature authority over foreign financial accounts if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. This includes bank accounts, securities accounts, brokerage accounts, and various other entities maintained outside the United States. This form is filed directly with FinCEN and not with the person’s income tax return.

Who Must File the FBAR?

U.S. taxpayers—ranging from individuals and corporations to partnerships and trusts—are subject to FBAR requirements if they have:

• Financial Interest: Direct ownership or beneficial interest in a foreign account.
  
  
• Signature Authority: The ability to control the disposition of assets within a foreign financial account, even if the account is not in one’s name.

The breadth of the requirement means that even accounts that might not seem immediately obvious as “owned” by the taxpayer might be reportable. For instance:

• Foreign Accounts Held by Relatives: It is common in some cultures for relatives living abroad to include the name of a U.S. relative on a foreign financial account. Although the U.S. person might not consider it “their” account, having signature authority or a financial interest – even indirectly – could trigger an FBAR filing obligation.
  
  
• Rental Property Income Deposits: If a U.S. person owns rental property in a foreign country and the rents are deposited into a local bank account, that account must be disclosed if it exceeds the $10,000 threshold.
  
  
• Online Gambling Accounts: Many taxpayers do not realize that when they participate in online gambling through foreign online casinos, the account is maintained in a foreign jurisdiction and must be reported.
  
  
• Inherited Accounts: Inheritance can also create an FBAR reporting requirement. Even if funds are later transferred to a U.S. account, the foreign account may need to be reported for the period where the balance exceeded the threshold.

These examples illustrate that the definition of a “foreign financial account” extends well beyond the typical checking or savings account held overseas.

Reporting Threshold

The primary trigger for FBAR filing is that the aggregate value of all specified foreign accounts exceeds $10,000 at any point during the calendar year. It is important to note that:

• The threshold is not on a per-account basis, but encompasses all foreign accounts.
  
  
• Even if just one foreign account exceeds the $10,000 threshold, or if a combination of accounts together exceeds it, the filing requirement will be activated.

Common Exceptions

While the scope of the FBAR is broad, there are some notable exceptions:

• Foreign Branches of U.S. Financial Institutions: An account at a branch of a foreign bank physically located in the United States is not considered a foreign financial account.
  
  
• Accounts of Certain U.S. Military Banking Facilities: Financial accounts maintained on U.S. military installations located outside the U.S. are also exempt.
  
  
• Joint Accounts Filed by Spouses: Under specific conditions, if spouses jointly own a foreign financial account, one spouse may not be required to file a separate FBAR. However, the account must be properly reported by the primary filer, and Form 114a (record of authorization) should be completed by the non-filing spouse and retained by the FBAR filer. Understanding these exceptions is vital for accurate reporting, as mistakenly excluding an account can result in understatement of a taxpayer’s filing obligations.

Penalties for Noncompliance with FBAR Reporting

The penalties for failing to comply with FBAR filing requirements are not merely administrative fines—they can be “draconian” in nature, especially when willful violations are involved.

Civil Penalties

If you fail to file an FBAR when required:

• Civil penalties can range up to $10,000 per violation if the noncompliance is non-willful (the $10,000 is inflation-adjusted and effective January 17, 2025 is $16,536).
  
  
• For willful violations—where the taxpayer intentionally disregards the filing requirement—the penalty can be as severe as the greater of $100,000 (inflation-adjusted to $165,353 as of January 17, 2025) or 50% of the account balance at the time of the violation.

Criminal Penalties

Willful noncompliance can also lead to criminal charges. In cases where intentional wrongdoing is proven, criminal penalties and potential imprisonment become a real risk. The seriousness of these penalties underscores the importance of understanding and meeting all FBAR filing obligations.

Statute of Limitations

It is also important to note that the statute of limitations for FBAR-related issues can extend for several years. This means that even if the violation took place in a previous tax year, the IRS and FinCEN can pursue enforcement actions well after the fact, especially if the violation is discovered as part of a comprehensive audit or an investigation into willful noncompliance.

The Overlap with Form 8938 Reporting Requirements

In addition to the FBAR, U.S. taxpayers may also be subject to reporting requirements under IRS Form 8938,Statement of Specified Foreign Financial Assets, a part of FATCA. While both the FBAR and Form 8938 have similar objectives—bringing transparency to foreign financial assets—they have distinct requirements and definitions.

What is Form 8938?

Form 8938 is used to report certain foreign financial assets if the total value of those assets exceeds specified thresholds. The reporting thresholds vary depending on the taxpayer’s filing status and whether they reside in the United States or abroad. Unlike the FBAR—which is filed with FinCEN—Form 8938 is included with the taxpayer’s annual income tax return.

Assets Subject to Form 8938 Reporting

Reportable assets under Form 8938 include, but are not limited to:

• Foreign Bank Accounts: This includes not just checking and savings accounts but also financial accounts with insurance companies and other foreign institutions.
  
  
• Foreign Stocks and Securities: Directly held investments in stocks, bonds, and other securities issued by foreign entities.
  
  
• Foreign Partnership Interests and Foreign Mutual Funds: Interests in partnerships or mutual funds that invest in foreign assets.
  
  
• Other Foreign Financial Instruments: This category also extends to certain financial instruments that provide exposure to foreign markets.

Many assets reported on Form 8938 are also subject to FBAR requirements. However, the key differences are:

• Thresholds: The threshold amounts differ between the two reporting mechanisms.
  
  
• Definitions: The definition of “foreign financial assets” under FATCA does not always mirror the definition of “foreign financial accounts” under the FBAR rule. Taxpayers need to assess their situation using both sets of definitions.

Penalties for Failing to File Form 8938

The IRS imposes substantial penalties for failing to file Form 8938 if required:

• Failure to file may result in penalties beginning at $10,000*, with additional penalties accruing if the failure continues beyond 90 days after the IRS issues a notice of noncompliance.
  
  
• In cases of continued noncompliance, the penalty can be increased to a maximum of $50,000* for individuals and even higher amounts for organizations.
  
  
• These penalties are imposed in addition to any penalties that may be assessed under the FBAR requirements.

*Not subject to inflation adjustment

When Do FBAR and Form 8938 Overlap?

Given that both the FBAR and Form 8938 are designed to capture a taxpayer’s foreign financial interests, it is not uncommon for certain accounts and assets to be subject to both reporting requirements. For example:

• Foreign Bank Accounts: If a U.S. taxpayer holds one or more foreign bank accounts that together exceed the $10,000 threshold for FBAR reporting, they may also need to report these accounts on Form 8938 if the aggregate value surpasses the applicable FATCA threshold.
  
  
• Foreign Investment Assets: Many investments reported under Form 8938—such as foreign stocks, bonds, or mutual funds—may also be included on FBAR filings if they meet the criteria for foreign financial accounts.

Taxpayers must conduct a careful review of all their foreign asset holdings to ensure that they are not inadvertently missing a reporting requirement. It is crucial to understand both definitions and thresholds to avoid the double jeopardy of penalties.

Best Practices for Compliance

Given the overlapping and intricate nature of these reporting requirements, here are some best practices for tax preparers and taxpayers alike:

Comprehensive Asset Review

• Document All Foreign Accounts: Keep detailed records of all foreign financial accounts, including bank statements, account opening documentation, and periodic statements showing the maximum balance during the year.
  
  
• Review Third-Party Relationships: If a taxpayer’s name is on a relative’s foreign account or an account held by a business partner, verify the degree of their financial interest or signature authority.

Understand the Applicable Thresholds

• FBAR Reporting: Be clear that the $10,000 threshold applies to the aggregate of all foreign financial accounts during any point during the year. It is imperative to monitor high-turnover accounts and any foreign currency fluctuations that may impact the value.
  
  
• Form 8938 Reporting: Understand the specific thresholds for individual taxpayers versus married taxpayers filing jointly, and whether the taxpayer resides in the United States or abroad, as these factors significantly affect the requirements.

• Consult Expert Guidance: When in doubt, consult with a tax professional who is knowledgeable with the FBAR and Form 8938 reporting requirements and can ensure that all reporting requirements are met timely and accurately.

Record Retention and Documentation

• Maintain Long-Term Records: Both the IRS and FinCEN require that records supporting FBAR and Form 8938 filings be maintained for a period of at least five years. Proper documentation can serve as a defense in case of disputes or audits.
  
  
• Prepare for Extended Statutes of Limitations: Since the statute of limitations on these types of reporting issues can extend several years, comprehensive recordkeeping is not just best practice—it’s essential.

Conclusion

The reporting requirements for FinCEN Form 114 (FBAR) and Form 8938 constitute one of the most important areas of compliance in today’s tax environment. U.S. persons who have any form of financial interest in, or signature authority over, foreign financial accounts must be vigilant in understanding the $10,000 aggregate threshold for FBAR and the various thresholds imposed by FATCA for Form 8938. Whether it is a seemingly benign family bank account, a rental property income deposit, online gambling winnings, or an inherited account, each instance represents potential exposure to significant penalties if not properly reported.

Traditional thinking says, “Grow first, then worry about profit later.” But waiting until the end of the month—or year—to see if you’ve made any profit is like hoping for rain in a drought. The Profit First approach flips that equation:sales – profit = expenses. By taking profit out of the equation first, you set aside funds that ensure your business stays healthy even in lean times.

This isn’t just accounting jargon—it’s a real mindset shift that puts you in control of your finances rather than letting your spending dictate your future. When you’re forced to inject personal funds into the business on a regular basis, it’s a clear sign that your spending is out of control. Adopting Profit First helps ensure that you’re no longer the ATM for your business or your own backup plan.

Inspired by proven strategies and the behavioral insights behind Profit First, here are some actionable steps and examples to help you create a business that thrives without bleeding your personal savings dry:

Instead of lumping all revenue into one account and then scrambling to cover expenses, split it into dedicated “buckets”:

• Profit Bucket: Allocate a predetermined percentage right off the top. Think of it as paying yourself first.
  
  
• Owner’s Pay: Ensure you’re compensated fairly so you’re not forced to cover gaps with your own funds.
  
  
• Tax Savings: Avoid those nasty surprises by setting aside funds for taxes.
  
  
• Operating Expenses (OpEx): Only spend what remains after securing profit and essential costs.

This method protects your profit and forces discipline in your spending habits. It helps prevent that all-too-common scenario where you end up having to top up your business account from your personal wallet—because every dollar is already accounted for.

If you’re serious about Profit First, automate your money transfers. Every time revenue comes in, have pre-set transfers direct funds to each bucket. Automation removes the temptation and human error from the process, ensuring that you aren’t inadvertently dipping into funds that should be reserved. This is your financial autopilot—a way to keep your business and personal finances separate and secure.

Profit First isn’t about pinching pennies at the expense of growth. Instead, it’s about eliminating wasteful spending. Regularly review your expenses—if an expense isn’t contributing to growth or adding value, cut it out. This practice not only boosts your profit margin but also reduces the need to inject extra personal funds into your business to cover unnecessary costs.

Being profit-first means making room for the future. Consider these examples:

• The Boutique Bakery: Instead of reinvesting every extra penny into immediate upgrades (or fueling an endless caffeine habit), the owner sets aside profit to fund a yearly retreat. The result? A happier, more creative team that bakes up innovative treats—all without the owner having to dip into personal savings.
  
  
• The Tech Startup: Founders allocate a portion of revenue for quarterly hackathons. This fun yet focused initiative keeps the team engaged while sparking fresh ideas that drive the business forward, ensuring that growth isn’t at the cost of personal financial stability.
  
  
• The Local Consultancy: By automating profit allocations, this business avoided the burnout—and the constant need for personal injections of cash. With clear funds for professional development and necessary investments, they improved client service and achieved steady growth.

It’s a delicate balancing act. On one hand, you want to commit fully to your business. On the other hand, overcommitting can lead to burnout and force you to keep reaching into your personal funds. The Profit First method offers a way to balance passion with prudence—invest in growth while still safeguarding your future. It ensures every dollar has a purpose: fueling innovation, securing your personal well-being, or simply being a cushion against unexpected downturns.

At its core, Profit First is about adopting a mindset that prioritizes long-term success over short-term fixes. It’s the difference between letting your business drain your energy—and your personal bank account—and using your business to fuel a rich, fulfilling life. You’re not here to be an endless ATM for your own whims; you’re here to build a legacy that lasts.

If you’re ready to stop living on the financial edge, where you’re forced to continually top up your business from personal funds, and start living profitably, know that you’re not alone. We specialize in helping SMB owners implement systems that make profit a priority. With the right strategies and a little automation, you can transform your business from a cash-eating monster into a money-making machine—without sacrificing your personal financial health.

Ready to take back control? We’re here to help.

Embrace the Profit First mentality. Set up your financial buckets, automate your processes, and eliminate unnecessary spending so that your business funds itself—and your personal finances stay intact. This isn’t just smart accounting; it’s a path to a more balanced, successful life.

With every passing tax season, it's becoming increasingly clear that both athletes and donors need professional guidance to avoid costly missteps.

Since the NCAA's July 2021 changes to allow athletes to earn money from endorsements, social media promotions, autographs, and other NIL-related ventures, many students have taken full advantage. According to On3 NIL valuations, some top-tier athletes in "power conferences" now earn hundreds of thousands—if not millions—of dollars annually.

However, the Internal Revenue Service treats that income like any other: it's taxable.

As Poole College of Management professor Nathan Goldman notes in his article, NIL income can easily lead to significant tax burdens, particularly for students who don't realize they may need to pay quarterly estimated taxes. "It's critical that student-athletes understand they are effectively running small businesses now," Goldman writes. "They need to track income, save for taxes, and understand what qualifies as a deductible expense."

Many athletes fail to:

• Set aside money for federal and state taxes
  
  
• Track expenses (e.g., travel, gear, or training that could be deductible)
  
  
• File quarterly estimates, especially for larger NIL contracts

This is where a tax professional can be invaluable, guiding athletes through compliance and helping them avoid IRS penalties or audits.

It's not just athletes navigating the murky tax waters. The rise of NIL-focused collectives—donor-backed entities that pool funds to compensate athletes—has also created confusion on the donor side.

Early on, some collectives were established as 501(c)(3) nonprofit organizations, which led donors to believe their contributions were tax-deductible. However, in June 2023, the IRS issued guidance in a memorandum that raised red flags: organizations that primarily benefit private individuals (such as student-athletes) do not qualify as charitable under IRS rules.

This guidance had major implications for high-profile NIL collectives like The Foundation (supporting Ohio State University athletes) and Gator Collective (formerly tied to University of Florida athletes), both of which initially operated under nonprofit models. Following the IRS memo, several collectives, such as Spyre Sports Group for the University of Tennessee and Texas One Fund for University of Texas athletes, pivoted to for-profit or hybrid structures to stay compliant and continue operations.

These examples underscore the importance of verifying the tax status of any NIL-focused organization before assuming a donation is deductible. Tax professionals should advise donors to do their due diligence, especially when contributing large sums to collectives affiliated with powerhouse athletic programs like Alabama, USC, or LSU, where NIL activity is often both prominent and heavily scrutinized.

IRS Memo Fallout

This means contributions to most NIL collectives do not qualify for tax deductions unless the organization clearly serves a broad charitable purpose unrelated to athlete compensation. The IRS emphatically stated that "providing benefits to specific individuals—no matter how talented—does not constitute a charitable purpose."

In response, many collectives are now shifting to for-profit structures or reclassifying their missions. Tax professionals serving donors or universities should advise clients to review their giving strategies and confirm the tax status of any NIL organization before assuming a deduction.

State tax implications further complicate the picture. Some states have unique income tax treatments for scholarships, endorsements, or self-employed income—all of which could impact student-athletes differently depending on where they reside or attend school.

For example, California taxes NIL income as self-employment income, subject to state income tax and possibly self-employment tax. Meanwhile, Florida, a state without personal income tax, still requires federal tax compliance and estimated payments.

Cross-border athletes, especially international students on visas, face even more complex withholding and treaty issues—areas where specialized tax help is essential.

For professionals advising athletes, donors, or school-affiliated organizations, the NIL era presents a unique opportunity to offer value:

• Review NIL contracts with a tax lens
  
  
• Educate clients on recordkeeping and estimated taxes
  
  
• Clarify the deductibility (or lack thereof) of collective contributions
  
  
• Evaluate entity structures for clients running NIL businesses or collectives

The NIL landscape is evolving fast, and so is the tax code's response to it. As athletes become entrepreneurs and donors become quasi-investors, the need for proactive, professional tax advice has never been greater.

• Taxpayer Identification Requirements
• Business Use of the Home Deduction
• Meal Deduction
• Business-Use Vehicle Deduction
• Deductible Expenses: Games, Toys, and Field Trips
• Social Security and Medicare Taxes
• Retirement Planning
• Other Applicable Issues

Childcare providers play a crucial role in society by caring for and nurturing young children. Given their significant responsibilities, there are numerous tax benefits designed to support these dedicated professionals. Whether you operate out of your home or a separate facility, understanding these benefits can enhance your financial planning and tax efficiency. This article explores various tax benefits available to childcare providers, including those related to taxpayer IDs, business use of the home, meal deductions, vehicle use, and more.

Taxpayer Identification Requirements

All daycare providers need a taxpayer identification number (TIN) for tax reporting purposes. Generally, providers can use a Social Security Number (SSN) or apply for an Employer Identification Number (EIN). It is crucial because parents paying for childcare will need this information to claim their child and dependent care tax credits. It isadvisable for providers to apply for an Employer Identification Number (EIN) rather than using their Social Security Number (SSN) to avoid identity theft risks.

Failing to provide a taxpayer ID when requested by parents or the IRS can lead to penalties. Therefore, obtaining and maintaining a valid EIN is not only necessary for compliance but also beneficial in protecting your SSN.

Business Use of the Home Deduction

One of the unique deductions available to childcare providers who operate their business in their home is the business use of the home deduction. Unlike many other businesses, daycare providers are allowed to claim a business use of home deduction even if the space used for the daycare is not exclusively used for the business. This special allowance is vital due to the nature of the service provided.

To qualify, providers must:

• Be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
  
  
• Have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. You do not meet this requirement if your application was rejected or your license or other authorization was revoked or has expired.
  
  
• Use the part of the home regularly in the daycare business.
  
  
• Calculate both the space and the time the space is used for daycare.

There are two methods available for the business use of a home. One is the simplified method and other is the regular method. Neither method can exceed the net profit of the business before deducting the business use of the home. Here are the details for both:

• Simplified Method: To figure the amount that can be deducted for a day care business, multiply the area of the home used for day care, not exceeding 300 square feet, by $5. But the result must be prorated for a partial year of use. Thus the maximum deduction is $1,500, which is generally less than if the regular method is used, and the reason this method is rarely used.
  
  Example: On July 20, Jan began using 420 square feet at her home for a qualified business use. Jan continued to use 420 square feet of the home until the end of the year. The average monthly allowable square footage is 125 square feet, which is figured using 300 square feet for each month, August through December, divided by the number ofmonths in the year ((5 x 300)/12), Thus the deduction would be $625 (125 x $5).
  
  
• Regular Method: To find the percentage of time the home was actually used for business, compare the total time used for business to the total time that part of the home can be used for all purposes. Compare the hours of business use in a week with the number of hours in a week, 168. Or, compare the hours of business use for the year with the number of hours in the year generally 8,736 (Add 24 for a leap year). If only used part of the time, prorate the number of hours based on the number of days the home was available for daycare.
  
  Example: Rene used the basement at home to operate a daycare business for children. Her expenses included $500 for painting the basement, home rent $12,400, and home utilities $1,850. Rene figures the business percentage of the basement as follows:
  
  Square footage of the basement = 1,600
  
  Square footage of the home (including the basement) = 3,200
  
  Business Percentage = 1,600/3,200 = 50%
  
  Rene used the basement for daycare an average of 12 hours a day, 5 days a week, for 50 weeks a year. During the other 12 hours a day, the family could use the basement. Rene figures the percentage of time the basement was used for daycare as follows.
  
  Number of hours used for daycare = (12 x 5 x 50) = 3,000
  
  Total number of hours in the year = (24 x 365) = 8,760
  
  Direct Expense Percentage = 3,000/8,760 = 34.25%
  
  Rene can deduct 34.25% of any direct expenses for the basement. However, because Rene’s indirect expenses are for the entire house, Rene can deduct only 17.08% of the indirect expenses. Rene figures the percentage for their indirect expenses as follows:
  
  Business percentage of the basement: 50%
  
  Percentage of time used for daycare: 34.25%
  
  Indirect Expense Percentage = (50 x 34.25%) = 17.12%
  
  Rene’s business use of the home is:
  
  Painting ($500 x 34.25%):                    $   171.25
  
  Rent ($12,400 x 17.12%):                       2,122.88
  
  Renter’s Insurance ($1,500 x 17.12%)         256.80
  
  Utilities ($1,850 x 17.12%):                       316.72
  
  Business Use of Home Deduction:    $2,867.65
  
  If Rene had owned her home, rent would be replaced with mortgage interest, taxes, insurance, and depreciation with the balance of the mortgage interest and taxes being deducted as an itemized deduction, if not taking the standard deduction.

Meal Deduction

Providers can deduct the cost of meals served to children in their care as part of their business expenses. This deduction recognizes the significant role of nutrition in childcare. There are two methods to claim this deduction:

• Actual Cost Method: Requires keeping detailed records and receipts of all meal-related purchases.
  
  
• Simplified Meal Deduction: Offers a standard amount per meal and doesn’t require documented food purchases, thus reducing administrative burdens. Rates vary and providers in Alaska and Hawaii and other U.S. Possessions may claim higher amounts due to differing costs of living.

Business-Use Vehicle Deduction

Childcare providers often use their personal vehicles for work-related tasks, such as transporting children on trips, purchasing supplies, or attending educational workshops. There are two methods to claim deductions for vehicle usage:

• Standard Mileage Rate: Covering the cost per mile traveled for business purposes. The rate is updated annually; for 2025 it is 70¢ per mile (up from 67¢ in 2024).
  
  
• Actual Expense Method: Involves calculating the actual costs incurred, like gas, maintenance, insurance, and factoring in the proportion used for business.

Regardless of the chosen method, maintaining a detailed log of trips, including dates, mileage, and business purposes, is critical.

Deductible Expenses: Games, Toys, and Field Trips

Both games and toys used to enrich the childcare experience are deductible as they are considered essential supplies. Similarly, field trips offer educational and developmental value and thus, expenses incurred for such activities, including entry fees and transportation costs, can be deducted. Also includable are supplies such as paper plates, cups, utensils, soap, napkins, tissue, and the like. Also prorated Internet and TV service? (to keep the children occupied)

Social Security and Medicare Taxes

Self-employed daycare providers must pay self-employment taxes to cover Social Security and Medicare obligations. The rates include 12.4% for Social Security and 2.9% for Medicare.

• Self-Employment Tax Deduction: While these taxes might seem burdensome, half can be deducted from gross income, thus lessening the financial impact. Also to keep in mind is that contributing to these funds is the way a self-employed individual builds an earnings record that will be used for calculating their Social Security benefits when they retire.
  
  
• Additional Medicare Tax: Providers earning above certain thresholds ($200,000 if single, $250,000 for married filing jointly) may owe an additional 0.9% Medicare tax.

Retirement Planning

Planning for retirement is crucial for self-employed individuals like daycare providers. Contributions to simplified employee pension (SEP) plans, solo 401(k)s, or traditional IRAs can be deductible, easing taxable income while ensuring future security. These plans are taxable at retirement, whereas Roth IRA distributions are tax free at retirement but contributions to Roth plans aren’t deductible.

• Traditional IRA - Allows contributions up to $7,000 ($8,000 if age 50 and over).
  
  
• Roth IRA – Same contribution limitation as a Traditional IRA only it is not deductible.
  
  
• SEP IRA - Allows contributions up to 25% of net earnings.
  
  
• Solo 401(k) - Offers benefits for higher contribution limits and potential tax savings.

Other Applicable Issues

In addition to the primary deductions discussed, there are several other areas to consider:

• Advertising Costs: Necessary for marketing services are fully deductible.
  
  
• Continuing Education: Participation in seminars or workshops related to childcare can reduce taxable income.
  
  
• Insurance Premiums: Covering business-related risks and liabilities are deductible.
  
  
• Licensing Fees: Required for compliance and operational legitimacy, these can be deducted annually.
  
  
• Hiring Employees: If the owner of the childcare business hires other people to help out, those individuals will generally be considered employees, and the owner of the business will then have to collect and pay employment taxes and file associated employment tax returns and forms.

Understanding and leveraging these special tax benefits, can significantly reduce the financial burden and enhance the profitability of running a daycare business. Navigating the complexities of tax codes can be challenging. Please contact this office with questions and assistance helping you optimize the tax benefits.

QuickBooks Online offers two primary methods to import bank transactions: connecting your bank account directly or manually uploading transaction files. Here's how to get it done the right way in 2025:

QuickBooks Online can automatically download transactions from many banks.

Steps:

1. Log in to your QuickBooks Online account.
2. Navigate to Transactions > Bank transactions.
   
3. Click on Link account.
4. Search for your bank and follow the prompts to connect.
5. Once connected, QuickBooks will download your recent transactions.

Note: The availability of this feature depends on your bank's compatibility with QuickBooks Online.

If your bank isn't supported or you need to import older transactions, you can upload them manually.

Steps:

• Download your transactions from your bank's website in CSV, QBO, or QFX format.
• Ensure the file is formatted correctly:

• In QuickBooks Online, go to Transactions > Bank transactions.
• Select the account you want to upload transactions into.
• Click on the Link account dropdown and choose Upload from file.
• Follow the prompts to upload and map your file's columns to QuickBooks fields.
• Review the transactions and confirm the import.

Important Tips:

• Ensure your file size does not exceed QuickBooks' limits (typically 350 KB).
• Double-check date formats and remove any day-of-week references (e.g., "Mon", "Tue").
• If you encounter errors, refer to QuickBooks' support resources for troubleshooting.

Keeping your bank transactions up to date in QuickBooks Online is key for accuracy, compliance, and strategic planning. Whether you're connecting accounts directly or uploading data manually, taking the time to get it right now can save you hours (and headaches) down the line.

If you run into issues or need help tailoring the setup for your business or clients, don't hesitate to reach out to this office. Clean books start here.

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

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