February 12, 2025

Hobby-Related Loss Deductions Are Disallowed, but Don’t Give Up Hope

Filed under: Uncategorized — Amanda Perry @ 3:38 pm

Let’s say you have an unincorporated sideline activity that you think of as a business, including an activity involving horses. If you have a net loss (deductible expenses exceed revenue) on that activity and you think you can deduct that loss on your personal federal income tax return, think again!

In IRS audits and in court cases involving money-losing sidelines, the tax agency frequently argues the activities are hobbies, rather than businesses. Be aware that the federal income tax rules for hobby losses aren’t in your favor. It can be difficult to prove an activity is a bonafide business. And now, due to a change included in the Tax Cuts and Jobs Act (TCJA), the rules are even less favorable for 2018 to 2025.

But don’t give up hope on claiming losses. If you can show a profit motive for your sideline activity, you can deduct the losses. And history shows that the IRS loses about as many court cases on this issue as it wins. Here’s what you need to know about the TCJA change for hobby losses and what to do if you have a money-losing sideline activity.

Basic Rules

If you operate an unincorporated for-profit business that generates a net tax loss for the year, you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill. On the other hand, the tax results aren’t good if your money-losing sideline activity must be treated as a not-for-profit hobby.

Before the TCJA, you could potentially deduct hobby-related expenses up to the amount of income from the activity. However, you had to treat those expenses as miscellaneous itemized deductions that could be written off only to the extent they exceeded 2% of adjusted gross income (AGI). And, if you were subject to the alternative minimum tax (AMT) for the year, your otherwise-allowable hobby deductions were disallowed under the AMT rules.

TCJA effect: For 2018 to 2025, the TCJA eliminates write-offs for the miscellaneous itemized deductions that had been subject to the 2%-of-AGI threshold. This wipes out deductions from hobby activities.

So, under the new law, hobby-related deductions are disallowed for regular tax purposes as well as for AMT purposes. Expect IRS auditors to focus even more attention on taxpayers with money-losing sideline activities. That means it’s now more important than ever to establish that a money-losing activity is a for-profit business that has simply hasn’t yet become profitable. We’ll explain more about how to do that below.

The next step is to determine if your money-losing sideline activity is a hobby or a business.

Safe-Harbor Rules

Fortunately, there are two safe-harbor rules for determining if you have a for-profit business.

1. An activity is presumed to be a for-profit business if it produces positive taxable income (revenues exceed deductions) for at least three out of every five years. Losses from the other years can be deducted because they are business losses as opposed to hobby losses.

2. A horse racing, breeding, training, or showing activity is presumed to be a for-profit business if it produces positive taxable income in two out of every seven years.

Taxpayers who can plan ahead to qualify for these safe-harbor rules can deduct their losses in unprofitable years.

Intent to Make Profit

Even if you can’t qualify for one of the safe-harbor rules, you still may able to treat the activity as a for-profit business and rightfully deduct the losses. Basically, you must demonstrate an honest intent to make a profit. Factors that can prove (or disprove) such intent include:

Some Good News

Being able to claim business status is helpful for deducting losses. Hobby status is not, especially under the TCJA.

The good news is that, over the years, the U.S. Tax Court has concluded that several pleasurable activities could be classified as for-profit businesses rather than hobbies, based on evaluating the factors listed in this article. So, there’s often reason for hope.

That said, hobby loss deductions have been a hot issue for the IRS, and the new tax law adds fuel to the fire. So, it’s important for you to be on the correct side of as many of the factors as possible. Your tax advisor can help you create documentation to prove that that you are, in fact, on the right side.

Comments (0)

February 7, 2025

President Trump’s tax plan: What proposals are being discussed in Washington?

Filed under: Uncategorized — Amanda Perry @ 3:17 pm

President Trump and the Republican Congress plan to act swiftly to make broad changes to the United States — including its federal tax system. Congress is already working on legislation that would extend and expand provisions of the sweeping Tax Cuts and Jobs Act (TCJA), as well as incorporate some of Trump’s tax-related campaign promises.

To that end, GOP lawmakers in the U.S. House of Representatives have compiled a 50-page document that identifies potential avenues they may take, as well as how much these tax and other fiscal changes would cost or save. Here’s a preview of potential changes that might be on the horizon.

Big plans

The TCJA is the signature tax legislation from Trump’s first term in office, and it cut income tax rates for many taxpayers. Some provisions — including the majority affecting individuals — are slated to expire at the end of 2025. The nonpartisan Congressional Budget Office estimates that extending the temporary TCJA provisions would cost $4.6 trillion over 10 years. For context, the federal debt currently rings in at more than $35 trillion, and the budget deficit is $711 billion.

In addition to supporting the continuation of the TCJA, the president has pushed to reduce the 21% corporate tax rate to 20% or 15%, with the goal of generating growth. He also supports eliminating the 15% corporate alternative minimum tax imposed by the Inflation Reduction Act (IRA), signed into law during the previous administration. It applies only to the largest C corporations.

Regarding tax cuts for individuals beyond TCJA extensions, Trump has expressed that he’s in favor of:

Finally, he wants to cut IRS funding, which would reduce expenditures but also reduce revenues. Without offsets, these plans would drive up the deficit significantly.

Possible offsets

The House GOP document outlines numerous possibilities beyond just spending reductions to pay for these tax cuts. For example, tariffs — a major plank in Trump’s campaign platform — may play a role.

The GOP document suggests a 10% across-the-board import tariff. Trump, however, has discussed and imposed various tariff amounts, depending on the exporting country. The 25% tariffs on Canadian and Mexican products, which were imposed earlier, have been paused until March 4. An additional 10% tariff on Chinese imports took effect on February 4.

In addition, Trump said tariffs on goods from other countries, including the 27-member European Union, could happen soon. While he maintains that those countries will pay the tariffs, it’s generally the U.S. importer of record that’s responsible for paying tariffs. Economists generally agree that at least part of the cost would then be passed on to consumers.

The House GOP document also examines generating savings through changes to various tax breaks. Here are some of the options:

The mortgage interest deduction. Suggestions include eliminating the deduction or lowering the current $750,000 limit to $500,000.

Head of household status. The document looks at eliminating this status, which provides a higher standard deduction and certain other tax benefits to unmarried taxpayers with children compared to single filers.

The child and dependent care tax credit. The document considers eliminating the credit for qualified child and dependent care expenses.

Renewable energy tax credits. The IRA created or expanded various tax credits encouraging renewable energy use, including tax credits for electric vehicles and residential clean energy improvements, such as solar panels and heat pumps. The GOP has proposed changes ranging from a full repeal of the IRA to more limited deductions.

Employer-provided benefits. Revenue could be raised by eliminating taxable income exclusions for transportation benefits and on-site gyms.

Health insurance subsidies. Premium tax credits are currently available for households with income above 400% of the federal poverty line (the amounts phase out as income increases). Revenue could be raised by limiting such subsidies to the “most needy Americans.”

Education-related breaks are also being assessed. The House GOP document looks at how much revenue could be generated by eliminating credits for qualified education expenses, the deduction for student loan interest and federal income-driven repayment plans. The GOP is also weighing the elimination of interest subsidies for federal loans while borrowers are still in school and imposing taxes on scholarships and fellowships, which currently are exempt.

The hurdles

Republican lawmakers plan on passing tax legislation using the reconciliation process, which requires only a simple majority in both houses of Congress. However, the GOP holds the majority in the House by only three votes.

That gives potential holdouts within their own caucus a lot of leverage. For example, deficit hawks might oppose certain proposals, while centrist members may prove reluctant to eliminate popular tax breaks and programs.

Republican representatives of all stripes are likely to oppose moves that would hurt industries in their districts, such as the reduction or elimination of certain clean energy incentives. And, of course, lobbyists will make their voices heard.

Stay tuned

The GOP hopes to enact tax legislation within President Trump’s first 100 days in office, but that may be challenging. We’ll keep you apprised of important developments.

Comments (0)

February 4, 2025

Ready, Set, File: 8 Tax Deductions You Might Not Know About

Filed under: Uncategorized — Amanda Perry @ 3:26 pm

Years ago, many taxpayers itemized deductions instead of claiming the standard deduction. But fewer taxpayers are itemizing today due to a bevy of changes in the Tax Cuts and Jobs Act (TCJA). The TJCA provisions that increased the standard deduction and limited or suspended certain itemized deductions are currently scheduled to expire after 2025. However, these provisions will likely be extended (or possibly expanded) now that Republicans control Congress and the White House.  

In the meantime, if you expect to itemize deductions on your 2024 federal tax return or are close to the cutoff between itemizing or claiming the standard deduction, you should consider steps to maximize your deductions. Here are eight personal deductions that may fall through the cracks if you don’t make your tax preparer aware of your ability to claim them:

1. Charitable Travel

If you incur travel expenses on behalf of a qualified charitable organization, you can generally deduct your unreimbursed out-of-pocket costs. For example, if you fly to a meeting to represent a charity, you can deduct the following costs:

Suppose you drive your personal vehicle for charity-related travel. In that case, you can write off your actual expense attributable to the charitable travel, supported by records, or use a simplified “standard rate.” The standard rate is statutorily set (and not indexed for inflation) at only 14 cents per mile (plus related tolls and parking fees).

2. Casualty Losses

Although the TCJA suspended the rules for personal casualty and theft loss deductions for 2018 through 2025, you can still deduct losses for unreimbursed damages in a federally designated disaster area. But the full amount of the loss isn’t deductible for federal income tax purposes under the regular rules.

To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must:

AGI includes all taxable income items and is reduced by certain deductions, such as the ones for student loan interest, health savings account contributions, and deductible contributions to IRAs and self-employed retirement plans. You can potentially claim an itemized deduction for the remaining loss after these subtractions.

These are the rules for personal casualty losses. Business casualty losses generally offer more favorable tax deduction terms compared to personal casualty losses, as they’re not subject to the same limitations.

Important: If you incur a disaster-area loss, you can elect to claim the loss on the tax return for the year before the year of the event to obtain faster tax relief. Therefore, you may deduct a loss suffered in early 2025 on your 2024 return that’s due by April 15, 2025.

3. Student Loan Interest

Generally, you can’t deduct any personal interest paid during the year for such items as credit card debt or car loans. But you may write off up to $2,500 of student loan interest as an above-the-line adjustment on your personal return whether you itemize or not.

This deduction is available only to the person legally obligated to repay the loan. Examples of qualified expenses include:

However, the deduction is phased out based on modified adjusted gross income (MAGI), and the amounts aren’t that high. For 2024, the phaseout begins at $75,000 for single filers and $155,000 for married couples who file jointly.

4. State Sales Tax

The TCJA caps the annual deduction for state and local tax (SALT) payments at $10,000 for 2018 through 2025. Accordingly, many taxpayers residing in states with high property or income tax rates may lose some tax benefit from their SALT payments.

The SALT deduction covers the following items:

If you live somewhere with low or no state income tax, you might opt to deduct state sales tax, rather than state income tax. The state sales tax deduction equals:

It often makes sense to retain your sales tax receipts for the year to determine which method will provide the higher SALT deduction.

5. Medical Expense Deductions

If you itemize, your deduction for unreimbursed medical expenses is limited to the excess above 7.5% of your AGI. Depending on your situation, this is a difficult — but not impossible — tax hurdle to clear. Make sure to add up all your qualified expenses, including amounts you paid for a relative you support. For instance, if you pay an aide to care for an elderly parent who qualifies as your dependent, the cost counts toward the medical deduction, even if the caretaker isn’t a licensed professional.

Annual medical expenses can add up, especially if you’re older, have a serious medical condition or support several dependents. Examples of some commonly encountered costs that count as medical expenses for itemized deduction purposes are:

Transportation to receive medical care also may be included at a rate of 21 cents per mile for 2024 and 2025.

6. Home Improvements

Under the TCJA, you currently can deduct mortgage interest on the first $750,000 of acquisition debt, down from $1 million under prior law. The TCJA also suspends any deduction for mortgage interest paid on home equity debt for 2018 through 2025. Previously, you could deduct interest on the first $100,000 of home equity debt. 

Acquisition debt refers to loan proceeds used to “buy, build or substantially improve” a qualified residence. Thus, if you took out a home equity loan in 2024 to, say, install an in-ground pool at your home, the interest may qualify as deductible acquisition debt interest (if it’s within applicable limits).      

7. Points Paid on a Home Mortgage

If you acquired a home last year, you may have paid the lender one or more “points” for a more favorable interest rate. Each point is equal to 1% of the mortgage principal. For example, two points on a $500,000 loan is $10,000 (2% of $500,000). Points are generally deductible as acquisition debt.

However, if you refinance an existing acquisition debt instead of taking out a new loan, you must amortize points paid on the refinanced mortgage over the life of the loan. So, if you paid $10,000 in points to refinance a 10-year loan in 2024, you can deduct only $1,000 per year for the 2024 through 2033 tax years.

8. Jury Duty Deductions

In some cases, an employer may pay an employee’s regular salary or offer leave pay while he or she is on jury duty but then require the employee to turn over any payments received from the courts. As usual, the salary is taxable to the employee and jury-duty payments to the employer are deductible.

But the amount you give to your employer is reported as an adjustment to income on your tax return. In addition, any reimbursements received for transportation, parking fees and meals are tax-exempt. (If you’re not employed or don’t turn over jury duty payments to an employer, the amount earned from jury duty is taxable income and must be reported on your tax return.)

Maximize Your Deductions

The IRS began accepting 2024 federal income tax returns on January 27, 2025, and the deadline to file or extend your 2024 return is April 15, 2025. Contact your tax advisor to discuss strategies to minimize your tax burden by claiming all the deductions you’re entitled to under the law.

Comments (0)

January 29, 2025

Checklist for Tax Preparation

Filed under: Uncategorized — Amanda Perry @ 4:50 pm

Whether you’re filing your taxes on your own or with professional assistance, having the right
documents ready is crucial. Below is a detailed guide to help you gather everything you need for
a smooth filing process:

Personal Information

Details for Dependents

Income Documents

For Employees

For Those Receiving Unemployment

For The Self-Employed

Rental Income

Retirement Income

Investment and Cryptocurrency Income

Other Income Sources

Deductions and Credits

Estimated Federal and State Tax Payments

For Homeowners

Charitable Giving

Medical and Health Expenses

Education-Related Expenses

Childcare Costs

State, Local, and Sales Taxs

Retirement and Savings Contributions

Disaster Relief

This checklist is designed to help you gather all necessary information and documents, reducing the risk of errors or missed deductions. If you have any questions or need assistance, contact your tax advisor for guidance.

Comments (0)

January 24, 2025

Exciting News!

Filed under: Uncategorized — Amanda Perry @ 2:52 pm

We are thrilled to announce a well-deserved promotion for one of our valued BHCB team members!

Kimberly Stofko has been promoted to Manager. Kim joined our firm in 2021 and is a proud graduate of Stonehill College in Massachusetts.

Please join us in congratulating Kim on this outstanding achievement!

Comments (0)

January 21, 2025

Can I Claim the QBI Deduction for My Small Business?

Filed under: Uncategorized — Amanda Perry @ 3:08 pm

The qualified business income (QBI) deduction was a centerpiece of the Tax Cuts and Jobs Act, which went into effect in 2018. Through 2025, the write-off is available to eligible individuals.

The QBI deduction can be up to 20% of:

Pass-through businesses report their federal income tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction, when allowed, is then written off at the owner level, and it can potentially be a big tax-saver.

Deduction Basics

QBI means qualified income and gains from an eligible business reduced by related deductions and losses. According to the IRS, QBI from a business is reduced by:

  1. The allocable deduction for a contribution to a self-employed retirement plan,
  2. The allocable deduction for 50% of your self-employment tax bill, and
  3. The allocable deduction for self-employed health insurance premiums.

Income from the business of being an employee doesn’t count as QBI. The same is true of guaranteed payments received by a partner or an LLC member treated as a partner for tax purposes for services rendered to a partnership or LLC (often called partner salaries). Salary collected by an S corporation shareholder-employee does not count as QBI, nor does salary collected by a C corporation shareholder-employee.

On your Form 1040, the QBI deduction doesn’t reduce adjusted gross income (AGI). In effect, it’s treated the same as an allowable itemized deduction.

Unfortunately, the QBI deduction also doesn’t reduce your net earnings from self-employment for purposes of the self-employment tax nor does it reduce your net investment income for purposes of the 3.8% net investment income tax (NIIT) that can hit higher-income individuals.

Deduction Limitations

At higher income levels, unfavorable QBI deduction limitations come into play.

For 2025, the limitations begin to phase in when taxable income (calculated before any QBI deduction) exceeds $197,300 ($383,900 if you’re a married joint filer). For 2024, the limitations are fully phased in once taxable income exceeds $247,300 ($484,600 for married joint filers).

For 2024, the limitation thresholds were $191,950 and $383,900, respectively. For 2024, the limitations were fully phased-in once taxable income exceeded $241,950 or $483,900, respectively.

If your income exceeds the applicable phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the tax year and properly allocable to QBI or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on the UBIA of qualified property is intended to benefit capital-intensive businesses like manufacturing or hotel operations. Qualified property means depreciable tangible property (including real estate) that’s owned by a qualified business and used by that business for the production of QBI. The UBIA of qualified property generally equals its original cost when it was first put to use in your business.

Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain amount (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

Unfavorable Rules for Specified Service Trades or Businesses

If your operation is a specified service trade or business (SSTB), QBI deductions begin to be phased out when your taxable income (calculated before any QBI deduction) exceeds the applicable threshold. See the right-hand box for what counts as an SSTB.

For 2025, the phase-out begins when your taxable income (calculated before any QBI deduction) exceeds $197,300 ($494,600 if you’re a married joint filer). For 2025, phase-out is complete if your taxable income exceeds $247,300 ($494,600 for married joint filers).

For 2024, the phase-out begins when your taxable income exceeds $191,950 and $383,900, respectively. For 2024, phase-out is complete if your taxable income exceeds $241,950 or $483,900, respectively.

Bottom Line: If your taxable income exceeds the applicable complete phase-out number, you’re not allowed to claim any QBI deduction based on income from any SSTB.

Aggregating Businesses

Aggregating businesses can allow an individual with taxable income high enough to be affected by the limitations based on W-2 wages and the UBIA of qualified property to claim a bigger QBI deduction than if the businesses were considered separately.

For example, say you are a high-income individual who owns an interest in one business with lots of QBI but little or no W-2 wages and an interest in a second business with minimal QBI but lots of W-2 wages. Aggregating the two businesses can result in a healthy QBI deduction while keeping them separate could result in a lower deduction or maybe no deduction. However, you must pass tests set forth in IRS regulations to be allowed to aggregate businesses.

Key Point: You can’t aggregate a SSTB with any other business, including another SSTB.

Scheduled to Disappear

As the tax law reads right now, the QBI deduction is essentially a use-it-or-lose-it deal, because it’s scheduled to expire after 2025. Congress could extend it, but you shouldn’t plan on that happening. The QBI deduction rules are explained in detail in IRS regulations that are lengthy and complex.  Your tax professional can advise you on how to get the best QBI deduction results and the best overall federal tax results in your specific circumstances.

Comments (0)

January 14, 2025

Social Media Isn’t a Trusted Source for Tax Advice

Filed under: Uncategorized — Amanda Perry @ 3:33 pm

These days, many people turn to social media for news, restaurant and product reviews, and other information. However, tax advice is one thing you generally shouldn’t get through sites such as Facebook, TikTok, Instagram and X (formerly known as Twitter).

The IRS has issued repeated warnings over the past year about inaccurate advice and outright scams circulating on such platforms by people without the proper credentials. Here are some recent bogus claims that businesses and individuals have fallen for, putting them at risk of costly civil and criminal penalties, interest, and fees.

Self-Employment Tax Credits

To be clear, there’s no “self-employment tax credit” under current tax law. But that hasn’t stopped nefarious promoters from marketing it on social media as a way for self-employed people to receive large payments for losses incurred during the pandemic. Their posts wrongly suggest that many people qualify for payments of up to $32,000.

The claims stem from a more limited tax break known as the sick leave and family leave credit. This legitimate credit generally was available to self-employed people who would’ve been eligible to receive the temporarily expanded qualified sick or family leave wages if they’d worked for an employer. However, the IRS has received tax returns from taxpayers claiming the credit based on income earned as employees, not as self-employed individuals.

Moreover, the credit applies only to narrow COVID-related circumstances in 2020 and 2021. Eligible taxpayers must have had one of various technical reasons that prohibited them from working during the covered period. For example, they must have needed to care for someone subject to a quarantine or isolation order.

Misuse of Forms

The IRS has identified multiple filing season hashtags on social media and posts involving the use of legitimate tax forms for the wrong reasons. One scheme, for example, relies on Form W-2, “Wage and Tax Statement.”

The scheme encourages people to use tax software to manually complete the form with false information and then file it electronically. Scammers suggest taxpayers include large income and withholding figures, along with fake employer names, to obtain substantial refunds based on the falsified withholding amounts.

Schedule H (Form 1040), “Household Employment Taxes,” is another subject of trickery. Misleading social media posts advise people to invent fictitious household employees and use the form to claim refunds based on false sick and family medical leave wages they never paid.

Social media users also may see “wildly inaccurate claims” regarding Form 8944, “Preparer e-file Hardship Waiver Request.” For example, some posts indicate taxpayers can use it to receive refunds, even if taxpayers have balances due. However, the form is only for tax professionals who need waivers to file tax returns on paper instead of electronically. It’s not a form that the average taxpayer should use.

Fuel Tax Credit

The fuel tax credit is legitimate, but it’s available only for off-highway business and farming use, which puts it outside most taxpayers’ use. The IRS is seeing a growing number of fictitious claims for the credit on Form 4136, “Credit for Federal Tax Paid on Fuels.”

According to the IRS, unscrupulous promoters or tax return preparers mislead taxpayers about deductions for fuel use and create fake documents or receipts for fuel. They often charge high fees for filing false claims. Taxpayers should be aware that the IRS has intensified its scrutiny of fuel tax credit claims, and those claiming it improperly are at risk of compliance action by the agency.

Employee Retention Tax Credit

Perhaps the most successfully promoted misuse of a tax break has centered around the Employee Retention Tax Credit (ERTC). This refundable credit generally was intended to help employers that continued to pay their employees when they were shut down during the pandemic or suffered major drops in gross receipts in 2020 and 2021. Eligible employers could potentially qualify for $26,000 in refunds per employee.

Scammers jumped on social media to promote far-fetched schemes, charging hefty fees to help employers claim the ERTC, regardless of whether they were eligible. Many weren’t, due to the strict requirements.

The IRS received a flood of invalid claims, resulting in an almost year-long moratorium on the processing of new claims. After reviewing about 1 million filings, the IRS announced it would deny tens of thousands of erroneous claims. Its review of 2020 claims found more than 22,000 improper claims, resulting in $572 million in assessments against employers.

The good news is that the IRS is providing employers with some avenues for relief, including a withdrawal program. For a limited time (through November 22, 2024), the IRS provided a Voluntary Disclosure Program to some taxpayers. If you’re uncertain about the legitimacy of an ERTC claim your business previously filed, contact your tax advisor to assess your options.

Reach Out for Trusted Advice

The IRS regularly urges taxpayers to consult with an experienced, reputable tax professional before filing claims based on social media posts from untrusted sources. At the very least, remember that if a tax strategy seems too good to be true, it probably isn’t legitimate.

Comments (0)

January 8, 2025

Federal Tax News for Individuals

Filed under: Uncategorized — Amanda Perry @ 3:06 pm

Taxes can affect your passport

Seriously delinquent tax debt (SDTD) could put your passport at risk (unless an exception applies). SDTD is a legally enforceable, unpaid federal tax assessment. In 2024, this debt must exceed $62,000, with a lien filed and other remedies exhausted. In 2025, the threshold will rise to $64,000. These debts include U.S. individual income taxes, trust fund recovery penalties, business taxes for which the taxpayer is personally liable and other civil penalties. If the IRS notifies the U.S. State Dept. that you have SDTD, your passport may be denied, revoked or limited. Click here for the details, including the conditions required to reverse a certification.

Protect your identity this tax season

The IRS’s IP PIN program, which is intended to help prevent tax identity theft, is being put to new use this tax season. In the past, the IRS rejected e-filed returns that claimed dependents already claimed on another return. The rejected returns were required to be refiled on paper. But now in 2025, taxpayers can e-file with “duplicate dependents” so long as they also provide a valid IP PIN.

You can obtain an IP PIN here. Assuming other issues that might trigger a rejection don’t exist, the IRS will accept a refiled return with an IP PIN. This change is expected to benefit filers claiming tax credits such as the Child Tax Credit.

Get a jump on your 2024 tax return

If you’d like to get an early start on your 2024 federal tax return, here’s how. You can create or access an IRS Online Account (click here) to review your historical tax records, request a personal identification number and view any new tax information. Contact us for your tax preparation appointment at your convenience. Then start gathering tax records, including relevant receipts and invoices. You’ll want to give these records to us when we prepare your return and we’ll use them to claim deductions and credits. 

As a new year of earnings begins, visit the IRS Tax Withholding Estimator (click here) to help ensure your employer is withholding the appropriate amount. You may need to submit an updated Form W-4. Contact us with any questions.

Helping someone with tuition?

It’s a new year, and for many, that means the start of another school year, complete with tuition bills. Consider the tax implications if you’re considering helping a grandchild or other student with their college expenses. If the amount you give exceeds the annual gift tax exclusion, you might owe gift tax on the excess. In 2025, this exclusion is $19,000 per recipient or $38,000 for married donors who split gifts (up from $18,000 and $36,000, respectively, in 2024). 

To avoid tax implications, you can pay tuition directly to the school, which qualifies for an unlimited gift tax exclusion. This exclusion applies only to tuition, not to room, board, books or supplies.

Beware bad tax advice on social media

Despite IRS warnings, many taxpayers continue to be duped by bad online tax advice. The tax agency and its Security Summit partners are renewing alerts about false social media claims “that promise to magically enrich taxpayers.” In particular, taxpayers are warned about claiming credits, including a nonexistent “Self Employment Tax Credit” and the Fuel Tax Credit that’s real but only applies in rare situations. Some social media scammers try to fleece taxpayers by demanding fees for their dubious advice. But many post false information online simply for views and clicks. Taxpayers are encouraged to ignore unsolicited advice and work only with trusted tax professionals.

Comments (0)

January 7, 2025

In Memoriam of Lawrence A. Sax

Filed under: Uncategorized — Amanda Perry @ 2:42 pm

We are deeply saddened to announce the passing of our esteemed colleague, Lawrence “Larry” Sax, at the age of 95. Larry dedicated an extraordinary 66 years of his career to Beers, Hamerman, Cohen & Burger, PC, where his professionalism, integrity, and leadership set a standard of excellence.

Larry’s distinguished career began after graduating from NYU in 1951 and earning his CPA license in Connecticut in 1954. From 1951 to 1953, he served in the U.S. Army’s Audit Agency, demonstrating his commitment to precision and accountability. A founding partner of Schwartz and Sax, CPAs in 1959, Larry’s vision and leadership guided the firm through decades of growth, evolving into Cohen, Burger, Schwartz and Sax in 1999 and ultimately becoming Beers, Hamerman, Cohen & Burger.

Larry’s dedication to the accounting profession was reflected in his 70-year membership in the Connecticut Society of CPAs, where he served on the Board of Governors for three years, as well as his nearly 70-year affiliation with the American Institute of Accountants. His contributions to the field were both enduring and impactful, leaving a legacy that will continue to guide future generations of professionals.

We extend our deepest condolences to Larry’s family and to all who had the privilege of working alongside him. His commitment to excellence and his profound impact on the firm and the profession will not be forgotten.

Comments (0)

January 6, 2025

2025 Tax Outlook for Businesses and Their Owners

Filed under: Uncategorized — Amanda Perry @ 2:12 pm

The Republicans will soon control the White House and both chambers of Congress, which will likely open the door for major tax legislation next year. Here are some thoughts on how this power shift could affect the taxes of small businesses and their owners.

Extension of TCJA Provisions

The Tax Cuts and Jobs Act (TCJA), which generally became effective in 2018, included many important federal income tax provisions that affect small businesses and their owners. Some are scheduled to expire at the end of 2025, while others are permanent. Republicans are expected to extend many of the expiring provisions, including:

Individual tax rates on business income.

The TCJA retained seven tax rate brackets as under pre-TCJA law, but five rates are lower than they were before. These rates generally apply to an individual taxpayer’s:

For 2025, the tax rates for ordinary income are as follows:

2025 Federal Tax Rates on Ordinary Income and Short-Term Capital Gains

Tax RatesSingle Married Joint FilersHead of Household
10%$0 – $11,925$0 – $23,850$0 – $17,000
12%$11,926 – $48,475$23,851 – $96,950$17,001 – $64,850
22%$48,476 – $103,350$96,951 – $206,700$64,851 – $103,350
24%$103,351 – $197,300$206,701 – $394,600$103,351 – $197,300
32%$197,301 – $250,525$394,601 – $501,050$197,301 – $250,500
35%$250,526 – $626,350$501,051 – $751,600$250,501 – $626,350
37%$626,351 and up$751,601 and up$626,351 and up

In 2026, the rates and bracket edges that were in place for 2017 (with cumulative inflation adjustments) are scheduled to return unless future legislation is enacted to change that outcome. When the Republicans take control of Congress in 2025, the TCJA rates for individuals will probably be extended — and the top rate will likely stay at the current 37%.

QBI deduction.

Before the TCJA, net taxable income from sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or partnerships for tax purposes, and S corporations was passed through to the owners and taxed at owners’ standard federal income tax rates. The TCJA established a new deduction based on a noncorporate owner’s qualified business income (QBI) from these businesses. This tax break is available to individuals, estates and trusts.

Under current law, a deduction of up to 20% of QBI may be available. However, it’s subject to limitations that may apply at higher income levels. The QBI deduction isn’t allowed in calculating a noncorporate business owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction, though you’re not required to itemize to benefit.

The QBI deduction is scheduled to expire after 2025, absent congressional action. However, the Republican-controlled Congress will likely extend this tax break — or they might liberalize it or make it permanent.

First-year depreciation tax breaks.

For qualified property, the TCJA initially increased the first-year bonus depreciation percentage to 100% for eligible assets. After 2022, first-year bonus depreciation is still available, but the bonus depreciation percentages are reduced as follows:

First-year bonus depreciation is scheduled to vanish after 2026 without congressional action. However, there’s a good chance the new Congress will extend or revive it. President-Elect Donald Trump has even proposed returning to 100% first-year bonus depreciation for qualifying capital investments.

In addition, Trump has floated the idea of doubling the ceiling on the Section 179 expensing deduction for small businesses’ qualifying investments in equipment. The TCJA permanently capped the deduction at $1 million, adjusted annually for inflation ($1.22 million in 2024 and $1.25 million in 2025). The deduction is subject to a phaseout when the cost of qualifying asset additions exceeds $2.5 million, adjusted annually for inflation ($3.05 million in 2024 and $3.13 million in 2025).  

C Corporation Tax Rate

The TCJA permanently established a flat 21% corporate rate for C corporations, which also applies to personal service corporations (PSCs). Before the TCJA, C corporations paid graduated federal income tax rates of 15%, 25%, 34% and 35% on taxable income. When taxable income exceeded $10 million, the effective tax rate was a flat 35%. PSCs paid a flat 35% rate on all taxable income.

Trump campaigned to lower the corporate tax rate from 21% to 15% for corporations that make their products in America. However, it’s currently unclear whether he has congressional support for this proposal.  

R&E Expenditures

Starting in 2022, the TCJA brought a significant permanent change to the tax treatment of research and experimentation (R&E) costs under Internal Revenue Code Section 174. Under current law, businesses no longer have the option to deduct so-called “specified R&E expenses” (those paid or incurred during the tax year). Instead, they must amortize these costs over five years if incurred in the United States, or 15 years if incurred outside the country. Amortization continues even if the underlying property is disposed of, retired or abandoned during the applicable period. In addition, software development costs now must be treated as Sec. 174 expenses.

Making matters even more complicated is a provision requiring that the amortization period begin at the midpoint of the tax year in which the expenditures are incurred or paid. As a result, taxpayers can deduct only 10% of expenses in the first year and 20% of expenses in years two through five, with the remaining 10% deducted in year six.

R&E expenditures generally include research and development (R&D) costs in the experimental or laboratory sense. Applicable costs also include those incurred in efforts intended to discover information that would eliminate uncertainty about the development or improvement of a product, including salaries.

Important:

Sec. 174 defines R&E expenditures more broadly than R&D expenses are defined for Sec. 41 R&D tax credit purposes. So, costs not covered by the credit may still be considered R&E expenditures. That means Sec. 174 may apply to a business regardless of whether it claims the credit.

Before the TCJA went into effect, a business could either:

Software development costs could be expensed immediately. They could also be amortized over five years from the date of completion or amortized over three years from the date the software was placed in service.

The new Congress may try to restore the option to deduct R&E costs. Bipartisan support exists for this change because this TCJA provision has adversely affected many small businesses.

Specifically, the provision has caused many companies — particularly those in the life sciences and technology sectors — to report taxable income, even if they incur losses. In January 2024, the House passed the Tax Relief for American Families and Workers Act (H.R. 7024) by a vote of 357-70. Among other things, the bill would have temporarily restored the previous Sec. 174 immediate expensing option through 2025 on a retroactive basis for domestic R&E expenses. The Senate never voted on the bill. It’s likely that the new Congress will revisit the issue.

Additional Tax Proposals

On the campaign trail, President-Elect Trump proposed various tax law changes that could affect employers’ payroll tax obligations if enacted. Examples include:

However, Trump didn’t provide any details on possible rules and restrictions. If these changes are enacted, employers presumably wouldn’t have to pay federal payroll taxes on any tax-free payments.

In addition, Trump generally doesn’t support the various “green” energy tax subsidies implemented over the last few years, including the tax credit for “clean” commercial vehicles. In fact, he’s promised to dismantle the Inflation Reduction Act (IRA), including cutting unspent funds allocated for the law’s tax incentives for clean energy projects. However, Republicans from districts and states with significant clean energy projects planned or underway may push back on a full repeal of the IRA. As a compromise, Congress might propose retaining some of the IRA tax credits or restricting them through tighter eligibility requirements.

Finally, the president-elect has repeatedly pledged to impose a baseline tariff on imported goods. In his latest proposal, he stated that he would impose a 25% tariff on products from Canada and Mexico and additional tariffs on imports from China. During the campaign, he made several other proposals. Trump routinely claims that the exporting countries will bear the cost of the tariffs. However, U.S. companies that buy imported goods pay the tariffs and will likely pass them along to their customers. Some major U.S. companies and the National Retail Federation have already warned that Trump’s tariff proposals would increase product prices.

Wait and See

It’s currently unclear whether Republicans will be able to deliver on their campaign promises. But, with the looming expiration date of many TCJA provisions, 2025 is certain to be a landmark year for federal tax legislation. Contact your tax advisor to stay atop the latest developments and devise tax planning strategies for your business to optimize your tax outcome.  

Comments (0)
Older Posts »

Swiftly adapting, consistently leading.

If you like what you’ve seen so far, we’d love to hear from you! Reach out to us today and discover how we can work together to achieve your financial goals. Our team is excited to connect with you and provide the exceptional service and expertise that sets BHCB apart.

Email
info@bhcbcpa.com
Become A Client