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Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. Some states don’t follow the Federal limits when it comes to these deductions. For example, WI and MN do not follow federal bonus depreciation, thus if you use it to reduce your Federal income, you will have a state adjustment to conform with your state tax law. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 Deduction Basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction.

Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.

The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus Depreciation Basics

Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. Bonus Depreciation

The current Sec. 179 deduction rules are generous, but there are several limitations:

• The phase-out rule mentioned above
• A business taxable income limitation that disallows deductions that would result in an overall business taxable loss
• A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds
• Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage Tax Breaks

As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have.

Podcast

Navigating New Labor Laws: 5 Key Differences Between Employees and Independent Contractors

Today on Tax Insights, Jeff dives into the new Department of Labor laws, exploring the 5 distinctions between employees and independent contractors. Join us as we navigate through these regulations, deciphering the criteria that define the nature of work relationships, and unraveling the complexities of these laws. Let’s tune in.

President Biden has released his proposed budget for the 2025 fiscal year, including numerous tax provisions affecting both businesses and individual taxpayers. While most of these provisions have little chance of coming to fruition while the U.S. House of Representatives remains controlled by the Republican Party, they might gain new life depending on the outcome of the November elections. Here’s an overview of the major tax proposals included in the budget.

Business Tax Provisions

The budget proposal includes many changes that could affect businesses’ tax outlook, several of which Biden has previously endorsed. Among the most notable:

Corporate Tax Rates. Under this proposal, the tax rate for C corporations would increase from 21% to 28% — still below the 35% rate that was in effect before the Tax Cuts and Jobs Act (TCJA). The effective global intangible low-taxed income (GILTI) rate would increase to 14%, and additional proposed changes would further increase the effective GILTI rate to 21%. The corporate alternative minimum tax rate would go up to 21%, from 15%.

Executive Compensation. Biden proposes extending the current limitation on the deductibility of compensation in excess of $1 million for certain executives in publicly owned C corporations to privately held C corporations. A new aggregation rule would treat all members of a controlled group as a single employer for purposes of determining covered executives.

Excess Business Loss (EBL) Limitation. Under the TCJA, non-corporate taxpayers can apply their business losses to offset only business-related income or gain, plus there’s an inflation-adjusted threshold (for 2024, $305,000 or $610,000 if filing jointly). The proposal would make this limitation permanent and treat EBLs carried forward from the prior year as current-year business losses rather than as net operating loss deductions.

Stock Buyback Excise Tax. The Inflation Reduction Act (IRA) created a 1% excise tax on the fair market value when corporations repurchase their stock to reduce the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%. It also would extend the tax to the acquisition of an applicable foreign corporation by certain affiliates of the corporation.

Like-Kind Exchanges. Owners of certain real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for joint filers) each year for real property like-kind exchanges. (Other types of assets wouldn’t be eligible.) Excess like-kind gains would be recognized in the year the taxpayer transfers the real property.

Individual Tax Provisions

Biden continues to promise that he won’t raise taxes on filers earning less than $400,000 annually but opposes extending tax cuts for those making more than that amount. Among other things, his budget proposal would affect:

Tax Rates. The proposal would return the top individual marginal income tax rate for single filers earning more than $400,000 ($450,000 for joint filers) to the pre-TCJA rate of 39.6%.

Net Investment Income Tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment tax. The budget also would increase both the additional Medicare tax rate (on earnings above $400,000) and the NIIT rate (on investment income above $400,000) to 5%.

Capital Gains Taxes. Individuals with taxable income exceeding $1 million would see capital gains taxed at ordinary income rates, up from the current highest capital gains rate of 20%. Also, unrealized gains at death would be taxed, subject to a $5 million exemption ($10 million for married couples).

Child Tax Credit (CTC). The proposal would boost the maximum per-child credit — to $3,600 for qualifying children under age six and $3,000 for all other qualifying children — and increase the maximum age to 17, through 2025. It also would implement an advance monthly payment program, establish a “presumptive eligibility” concept and permanently make the CTC fully refundable.

Premium Tax Credits (PTCs). Biden would make permanent the IRA’s expansion of health insurance subsidies to taxpayers with household income above 400% of the federal poverty line, as well as the reduction in the amount of household income that must be contributed to qualify for PTCs.

Gift and Estate Taxes. The proposal would close several gift and estate tax loopholes that help the wealthy reduce their taxes. For example, certain transfers would be subject to a new annual gift tax exclusion, whereby a donor’s transfers that exceed a total of $50,000 in a year would be taxable regardless of whether the total gifts to each individual recipient didn’t exceed the annual gift exclusion amount ($18,000 per recipient in 2024).

Tax Changes Are Coming One Way or Another

Even if none of these provisions are enacted as proposed, new legislation addressing taxes is likely in the next year or two. Indeed, absent congressional action, many significant TCJA provisions are scheduled to expire after 2025. Extensive tax debates and negotiations will likely soon take center stage. Turn to us for the latest developments.

If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses.

However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Fair Market Value

Here are some examples of an exchange of services:

• A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising.
• An electrical contractor does repair work for a dentist in exchange for dental services.

In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

In addition, if services are exchanged for property, income is realized. For example:

• If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.
• If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Joining a Club

Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.

Tax Reporting

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Exchanging Without Exchanging Money

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information.

9 Tax Considerations If You’re Starting a Business as a Sole Proprietor

When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations.

PODCAST: Tax Filing: When to DIY Your Taxes and When to Call in the Pros

Join us today on Tax Insights as Jeff explores the nuances of personal tax management, weighing the convenience of software solutions against the expertise of professionals. From TurboTax to CPA consultations, we’ll unravel the complexities to help you make informed financial decisions. Let’s dive in!

Independent Contractor vs. Employee Status: The DOL Issues New Final Rule

The U.S. Department of Labor’s (DOL’s) test for determining whether a worker should be classified as an independent contractor or an employee for purposes of the federal Fair Labor Standards Act (FLSA) has been revised several times over the past decade.