The IRS has announced a new audit initiative targeting the personal use of business aircraft. Some businesses took advantage of the Tax Cuts and Jobs Act’s generous bonus depreciation provision to purchase corporate jets in recent years, but the personal use of such aircraft has significant tax implications.

If your company owns or is contemplating the purchase of an aircraft, you should understand the tax rules, including how to properly allocate flight expenses between business and personal use.

IRS Attention

The tax code generally allows a business deduction for the expenses of maintaining a corporate jet used for business purposes. Relevant expenses include:

• Aircraft depreciation,
• Pilot wages,
• Interest expense,
• Insurance, and
• Hangar fees.

As the IRS noted in its audit rollout announcement, the amount of the deduction for aircraft travel on a business’s tax return can be in the tens of millions of dollars. However, business aircraft often are used for both business and personal reasons by officers, executives, employees, shareholders and partners (and their family members). When a jet also is used for personal travel, the amount of such travel affects the business’s eligibility for certain deductions. In addition, the use of a corporate jet for personal travel usually results in income for the individual using it and can affect the business’s ability to deduct costs related to the personal travel.

The IRS plans to conduct audits of aircraft use by large corporations, large partnerships and high-income taxpayers. The audits will focus on whether the use of jets is properly allocated between business and personal reasons. Initial plans call for “dozens of audits,” but the number could rise in response to the results and as the agency continues hiring additional examiners.

It’s worth noting, too, that the U.S. Department of the Treasury has proposed changes to the tax treatment of corporate jets. The changes would increase the recovery period for depreciating jets from five years to seven years and hike the tax on kerosene used for private jet travel from 21.8 cents per gallon to $1.06 per gallon over a five-year period.

Allocation Methods

The IRS recognizes several methods for allocating costs for the personal use of aircraft. They’re based on either the number of occupied seats or the flight hours. You must use the same method for all aircraft for the entire tax year, but you can change to one of the other authorized methods in a subsequent year.

The occupied seat method calculates the hours or miles of a flight leg and multiplies it by the number of passengers. This total is then allocated between business cost or personal cost after determining the respective purpose of each passenger.

The flight-by-flight method divides the total flight leg hours or miles by the number of passengers. Those hours or miles per passenger are then allocated based on the reason the passenger is on the flight.

Important: The IRS released guidance in 2021 stating that a sole proprietor who owns an aircraft (either directly or indirectly through a disregarded entity) can use the more straightforward primary purpose test to determine whether expenses for the use of the aircraft by the sole proprietor are deductible. Under the test, if the primary purpose for a flight is related to the taxpayer’s business, the flight expenses are generally deductible.

Next Steps

An IRS audit of corporate jet usage will require you to provide comprehensive documentation. At a minimum, for each leg of each flight, you’ll need to produce:

• Complete flight records, including the date, departure and landing destinations, trip hours, miles flown, passenger manifest for every flight leg, and the business purpose, if any, of each passenger on each flight leg,
• A list of “specified individuals” of the company (generally, company owners, officers or directors),
• A list of amounts treated as compensation to employees and specified individuals who aren’t employees (for example, a CEO or owner),
• All direct and indirect aircraft expenses deducted, and
• The method used to calculate business vs. personal flight usage.

You also may need to provide documents related to your purchase of the jet, lease and charter arrangements, and aircraft management agreements.

Even if you aren’t flagged for an audit, the IRS has clarified that corporate jets will receive closer attention, at least for now. This means you’d be wise to review your jet-related deductions from previous tax years for compliance, including proper documentation. You also should establish a formal system to document necessary information going forward.

Fly Right

The allocation of flight expenses between business and personal use is a complex area of tax law — and no time to fly solo. Contact your tax advisor to help steer clear of the potential hazards and chart a course to withstand IRS scrutiny.

What’s the difference between capital gains and losses and ordinary gains and losses? The classification will have a major impact on your federal income tax obligations when you sell assets, such as investments, real estate, intangibles and other holdings. The classification of assets is generally straightforward, but the issue can be unclear in some situations. Here’s what you need to know if you plan to sell assets.

2 Categories of Gains and Losses

For federal income tax purposes, gains and losses can be classified as either:

1. Capital. These gains and losses result from selling capital assets, which are generally defined as property other than:

• Inventory, meaning property held primarily for sale to customers in the ordinary course of the taxpayer’s business,
• Business receivables,
• Business real and depreciable property, including rental real estate, and
• Certain intangible assets, such as copyrights and letters or memoranda held by the taxpayer for whom they were prepared or produced. (See “Beware of Unfavorable Treatment for Sales of Self-Created Intangible Assets,” below.)

Literary, musical and artistic compositions are also generally excluded from the definition of a capital asset. However, under an exception, taxpayers can elect to treat musical compositions or copyrights in musical works as capital assets.

Sales of certain business assets (such as real estate) can result in net Section 1231 gains that are generally treated the same as long-term capital gains (LTCGs) under the federal income tax rules.  

2. Ordinary. Ordinary gains and losses can result from selling certain other types of assets. Sales of certain business assets can result in net Sec. 1231 losses that are generally treated as ordinary losses under the tax rules.

Tax Rate Differential on Gains

The major reason it’s important to distinguish capital gains from ordinary gains is the difference in the applicable tax rates. Under current federal income tax rules, net LTCGs recognized by individual taxpayers are taxed at much lower rates than ordinary gains. Currently, the maximum individual federal rate on net LTCGs is 20%, while the maximum individual rate on ordinary gains is 37%. If the 3.8% net investment income tax (NIIT) applies, the maximum rates are 23.8% and 40.8%, respectively.

Here are the current income levels at which the maximum federal income tax rate kicks in for net LTCGs:

2024 Taxable Income Thresholds for Maximum 20% Rate on Net LTCGs

If your taxable income, including any capital gains, is below the applicable threshold, you won’t pay more than 15% on any net LTCG. 

Note: The maximum individual federal income tax rate on nonrecaptured Section 1250 gains is 25% (28.8% if the 3.8% NIIT applies). Sec. 1250 gains are long-term gains attributable to straight-line real estate depreciation deductions.

For comparison, here are the current income levels at which the maximum federal income tax rate kicks in for ordinary gains:

2024 Taxable Income Thresholds for Maximum 37% Rate on Ordinary Gains

The federal income tax rate on ordinary gains can easily exceed the 15% rate that most individuals will pay on net LTCGs. Here’s a look at when the 22% rate on ordinary gains kicks in for different types of filers:

2024 Taxable Income Thresholds for 22% Rate on Ordinary Gains

At higher income levels, the rates on ordinary gains are 24%, 32% and 35%, before hitting the maximum 37% rate. At higher income levels, ordinary gains also can be hit with the 3.8% NIIT.

Net short-term capital gains recognized by individual taxpayers are taxed at the ordinary income rates. They also may be subject to the 3.8% NIIT at higher income levels. Whenever possible, you should hold appreciated capital assets for more than one year to qualify for the much-lower LTCG tax rates.

Deductibility of Losses

It’s also important to distinguish between capital losses and ordinary losses. In general, ordinary losses are currently deductible for federal income tax purposes (unless another set of rules, such as the passive loss rules or the at-risk rules, prevents that favorable outcome).

In contrast, an individual taxpayer’s deductions for net capital losses are limited to only $3,000 ($1,500 for married individuals who file separately). Any excess net capital loss above the currently deductible amount is carried forward to the following tax year and is subject to the same limitation.

How to Classify Business Real Estate  

Preferential tax rates apply to only net LTCGs and net Sec. 1231 gains from dispositions of eligible assets. Property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s business is specifically excluded from this favorable treatment. Such assets are classified as inventory under the tax rules.

In determining whether real property is inventory, the U.S. Tax Court has identified the following five relevant factors:

1. The nature of the property’s acquisition,
2. The frequency and continuity of the taxpayer’s property sales,
3. The nature and the extent of the taxpayer’s business,
4. The taxpayer’s sales activities related to the property, and
5. The extent and substantiality of the transaction in question.

Other factors that courts might consider when determining whether real property is inventory include:

• The nature and purpose of the property’s acquisition,
• The duration of the ownership,
• The extent and nature of the taxpayer’s efforts to sell the property,
• The frequency and substantiality of the sales,
• The extent of subdividing, developing and advertising to increase sales,
• The use of a business office for the property’s sale,
•  The character and degree of control the taxpayer has over any representative selling the property, and
• The time and effort the taxpayer habitually has devoted to property sales.

No factor (or combination of factors) is controlling. However, the frequency and substantiality of sales is often critical. That’s because the presence of frequent sales generally contradicts any contention that the property is being held for investment, rather than for sale to customers.

Important: Taxpayers have the burden of proving that they fall on the right side of these factors. Under the law, if they fail to meet that burden of proof, the IRS wins the argument. 

What’s Right for Your Situation?  

It’s almost always better to be able to characterize a taxable profit as a capital gain, rather than an ordinary gain. On the other hand, it’s almost always better to be able to characterize a taxable loss as an ordinary loss, rather than a capital loss. Before you sell a major asset, consult your tax advisor to determine how to handle your transaction under current tax law.    

Using a noncompete agreement or a noncompete clause in an employment contract has been a standard business practice for years. The Federal Trade Commission (FTC) estimates that about 30 million American workers — almost one out of every five — are subject to agreements restricting their rights upon termination of employment. But now the FTC has issued a final rule banning most noncompetes nationwide.

The new 570-page final rule takes into account comments to the initial rule proposed by the FTC in 2023. It’s scheduled to go into effect 120 days after being published in the Federal Register, which ends up in September 2024. But we may not have heard the final word on this issue. (See “Business Groups Take the FTC to Court,” below.)

Why Employers Require Noncompetes

Typically, an employer requires employees to sign noncompete agreements as a condition of employment or upon termination of employment. Noncompetes are designed to protect the business interests of the employer, guard against disclosure of trade secrets or prevent competitors from poaching customers or clients.

A noncompete will generally limit employment activities in the same field for a specified period. For instance, an executive who signs a noncompete may be prohibited from joining another company in the same industry or profession or starting up a similar new company in the same geographic area for at least three years.

However, if agreements are overly restrictive, they may not be enforceable. Essentially, the restrictions must be reasonable under the circumstances. In the past, the enforceability of noncompetes has often been challenged in the courts. And some states (such as California) ban noncompetes for employees altogether.

Nevertheless, most workers are inclined to accept noncompete agreements at their face value. The agreements may impose conditions that effectively force them to stay longer at a job than they would like or leave for a lower-paying job or one that’s not as personally rewarding. Or they may feel compelled to locate to a different part of the country. In some cases, they may even leave the workforce.

FTC Steps In

In April 2024, the FTC addressed this issue head-on by imposing a nationwide ban on noncompete agreements for most employees and independent contractors. When the FTC initially proposed the rule in January 2023, it received 26,000 public comment letters. While 25,000 comments supported the proposed crackdown on noncompete agreements, a sizable segment of the business community has strongly objected to the change.

Ultimately, the FTC decided to go ahead with the ban, with certain modifications. The agency determined that noncompetes unfairly deter competition. The final rule defines a noncompete as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker” from either taking a different job or operating a business after the end of employment.

Under the final rule, the vast majority of existing noncompetes will no longer be enforceable after the effective date. However, existing agreements signed by “senior” executives — who represent less than 7.5% of the workforce — may still be enforced. And employers can’t enforce new noncompetes with employees, regardless of whether the worker is a senior executive.

For these purposes, senior executives are defined as workers who earn more than $151,164 annually and are in a policymaking position. A “policymaking position” means that the person has final authority to make policy decisions that control significant aspects of a business entity or common enterprise, but not someone whose role is limited to advising or influencing such decisions.

Exceptions to the Rule

There are a few limited exceptions to the ban as follows:

• The final rule doesn’t apply to nonprofit organizations and industries that aren’t covered by the Federal Trade Commission Act, such as banks and other financial institutions, common transportation carriers, air carriers, and any individual or business subject to the Packers and Stockyards Act.
• The final rule doesn’t apply in connection with the bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
• The final rule doesn’t apply where a cause of action related to a noncompete accrued prior to the effective date.
• The final rule also provides that it’s not an unfair method of competition for a person to enforce or attempt to enforce a noncompete when they have a good-faith basis to believe that the final rule is inapplicable.

Employers must provide notice to employees with existing agreements that they won’t be enforcing those agreements. However, to streamline matters, the final rule eliminates a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. The final rule also includes some model language that employers can use to notify workers about the change.

Potential Upsides for Workers

The FTC foresees numerous positive results for the workforce from its new final rule. It’s estimated that the rule will:

• Lead to the creation of roughly 8,500 new businesses every year,
• Increase average earnings for workers by $524 per year,
• Lower health care costs by up to $194 billion over the next decade, and
• Increase the number of new patent applications by 17,000 to 29,000 annually due to more innovation.

Once the final rule takes effect, suspected violations of the ban can be reported to the FTC’s Bureau of Competition by emailing noncompete@ftc.gov.

Options for Employers

Despite the ban against noncompetes, employers will still have some options for protecting their business interests. This includes trade secret laws and nondisclosure agreements (NDAs) that cover proprietary information. It’s estimated that more than 95% of the workers with noncompetes have already signed an NDA. These NDAs remain in effect regardless of the ban on noncompetes.

Next Steps

Both employers and employees should take note of the new rules relating to noncompete agreements and take necessary actions to comply with the changes — unless business groups succeed in their current legal efforts to modify or overturn the rule. For more information, contact your legal and financial advisors.

In April 2024, the U.S. Department of Labor (DOL) issued a new final rule that’s slated to expand the number of workers who are eligible for overtime pay under the federal Fair Labor Standards Act (FLSA). It’s expected to affect four million workers. The rule, which dramatically increases the salary threshold for so-called exempt workers, is scheduled to take effect on July 1, 2024. Employers may need to take prompt action to remain in compliance.

Higher Salary Requirements

The FLSA generally requires employers to pay nonexempt workers at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. But bona fide executive, administrative and professional employees are exempt.

The exemption applies when:

• An employee is paid a salary,
• The salary equals or exceeds a minimum salary threshold, currently $684 per week, or $35,568 per year, and
• The employee primarily performs executive, administrative or professional duties, as described below.

The final rule leaves the first and third prongs of the test intact, but it will increase the minimum salary threshold in a two-step process. On July 1, 2024, most salaried workers who earn less than $844 per week, or $43,888 per year, will become eligible for overtime pay. Six months later, on January 1, 2025, the standard threshold will increase further to $1,128 per week, or $58,656 per year.

The new rule also raises the threshold for highly compensated employees (HCEs). HCEs do office or nonmanual work and regularly perform one of the primary duties required for the executive, administrative and professional exemptions.

HCEs currently are exempt if they’re paid annual compensation (including incentive payments and nondiscretionary bonuses) of at least $107,432 per year. Under the final rule, the threshold goes up to $132,964 per year on July 1, 2024. On January 1, 2025, the annual threshold rises to $151,164 per year (excluding nondiscretionary bonuses or incentive payments).

Important: Nondiscretionary bonuses and incentive payments paid on an annual or more frequent basis can be applied to account for up to 10% of the standard salary threshold.

Employer Options

In some ways, the latest final rule resembles a 2016 Obama-era final rule that sought to increase the salary threshold. That law was blocked by a court days before it was scheduled to take effect in 2017, and the Trump administration didn’t appeal the ruling. The odds are good that this version also will face legal challenges. But employers should begin strategizing now for how they’ll respond when and if the rule kicks in.

The first step is to identify the on-the-fence employees who are exempt under the current thresholds but won’t be under the first or second increase. Employers have several alternatives for how to approach such employees. For example, they might:

• Increase the salary to the new salary threshold,
• Leave the salary at the current rate and pay overtime when necessary,
• Reduce or eliminate overtime hours, or
• Reduce the amount of pay allocated to an employee’s base salary to offset newly required overtime pay.

A single sweeping approach isn’t necessary. Employers can take a combination of these approaches, such as increasing one employee’s salary over the new threshold and eliminating work beyond 40 hours for another employee.

Whatever the choice, additional adjustments will likely be necessary. For example, the addition of overtime pay or salary increases will affect a company’s budget. And formerly exempt employees who will become nonexempt may require some training on how to track time and limit work hours. Employers also will need to explain the reason for the change to these employees, who might feel like they’re being demoted.

Duties Requirements

Remember that meeting or beating the salary threshold alone doesn’t make an employee exempt from overtime pay requirements. Employers should review their exempt employees’ actual primary job duties against the applicable duties test. “Primary duty” means the principal, main, major or most important duty that the employee performs.

For the executive exemption, the employee’s primary duty must be managing the business or one of its departments or subdivisions. The employee also must “customarily and regularly” direct the work of at least two full-time or full-time-equivalent employees and have some authority or input on the hiring, firing, advancement, promotion or other change of status of other employees.

Exempt administrative employees must primarily perform office or nonmanual work directly related to the management or general business operations of the employer or its customers. This must include the exercise of discretion and independent judgment on matters of significance.

“Learned professionals” must primarily perform work that requires advanced knowledge in a field of science or learning that’s usually acquired through a prolonged course of specialized academic training. For the “creative professional” exemption, the employee’s primary duty must be performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor, such as music, writing, acting and graphic arts.

Stay Tuned As noted, litigation could bring the new salary thresholds to a halt, temporarily or permanently. Employers should continue to monitor developments, so they’re not caught off guard and out of compliance.

The rules for deducting depreciation expenses on vehicles used for business purposes have been liberalized under current tax law, but they remain complicated. In addition, annual inflation adjustments make allowable depreciation deductions moving targets. (See “First-Year Depreciation Deductions under the TCJA,” below.) Here’s how to calculate depreciation deductions for cars, SUVs, pickups and vans used in your business.

2 Methods for Deducting Business Vehicle Expenses

Business owners must choose between the following two methods for claiming allowable business-use vehicle deductions:

1. Cents-per-mile method. For 2024, the standard mileage rate is 67 cents per business mile for 2024 (up from 65.5 cents for 2023). This rate is meant to cover all business vehicle expenses, such as gas, maintenance, repairs, tires and insurance.

Important: A depreciation allowance is also built into the standard rate.

2. Actual expense method. Depreciation calculations come into play only if you choose this method. As the name suggests, the more time-consuming actual expense method tracks all vehicle-related costs based on the amount you actually paid. Depreciation is a noncash expense, so it requires specific calculations under the tax rules.

You can add actual expenses for parking and fees if you use the standard mileage rate. But your deductions will usually be higher under the actual expense method than under the cents-per-mile method. If you choose to use the actual expense method, the rules for calculating depreciation write-offs vary depending on the type of vehicle you’re using in your business. 

Rules for Depreciating Passenger Autos

For a passenger auto that’s used over 50% for business, you generally must make a depreciation calculation for each year until the vehicle is fully depreciated. Passenger auto means a vehicle that’s intended for use on public roads and that has a gross vehicle weight rating (GVWR) of 6,000 pounds or less. In addition to cars, this definition captures quite a few SUVs and pickups. You can usually find the GVWR on a label on the inside edge of the driver-side door where the hinges meet the frame.

According to the general rule for depreciating passenger autos used for business, you can write off the business-use portion of the cost over six years. However, for relatively expensive passenger autos used over 50% for business, allowable depreciation deductions are subject to annual ceilings under the so-called “luxury” auto depreciation limits. If you claim first-year bonus depreciation for a new or used passenger auto used over 50% for business, the maximum first-year luxury auto depreciation allowance is increased by $8,000. However, to claim first-year bonus depreciation for a used vehicle, it must be new to you.

The maximum luxury auto depreciation deductions for a passenger auto placed in service in 2024 are as follows:

• $20,400 for year 1 if bonus depreciation is claimed ($12,400 if bonus depreciation isn’t claimed),
• $19,800 for year 2,
• $11,900 for year 3, and
• $7,160 for year 4 and thereafter until the vehicle is fully depreciated.

For passenger autos placed in service in 2024, the luxury auto depreciation limits only affect vehicles that cost $70,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn’t claimed, the luxury auto depreciation limits only affect vehicles that cost $62,000 or more.

If you haven’t yet completed your 2023 tax return (because you filed an extension), you might be interested in reviewing last year’s inflation-adjusted limits. The maximum luxury auto depreciation deductions for a luxury passenger auto placed in service in 2023 are as follows:

• $20,200 for year 1 if bonus depreciation is claimed ($12,200 if bonus depreciation isn’t claimed),
• $19,500 for year 2,
• $11,700 for year 3, and
• $6,960 for year 4 and thereafter until the vehicle is fully depreciated.

For passenger autos placed in service in 2023, the luxury auto depreciation limits only affect vehicles that cost $69,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn’t claimed, the luxury auto depreciation limits only affect vehicles that cost $61,000 or more.

Important: The luxury auto depreciation ceilings are proportionately reduced for any nonbusiness use. For instance, if your business-use percentage is 60%, the ceilings are 60% of the amounts listed above. 

Less-expensive vehicles used over 50% for business are depreciated over six years as follows:

• 20% of the business-use portion of the cost in year 1,
• 32% in year 2,
• 19.2% in year 3,
• 11.52% in year 4,
• 11.52% in year 5, and
• 5.76% in year 6.

If a nonluxury vehicle is used 50% or less for business, you must use the slower straight-line method to calculate your depreciation deductions.

Rules for Depreciating Heavy Vehicles

Much more favorable depreciation rules apply to heavy SUVs, pickups and vans that are used over 50% for business. These vehicles are classified as transportation equipment for federal income tax purposes. Heavy means a vehicle with a GVWR above 6,000 pounds. Quite a few SUV and pickup models pass this test.

Section 179 deductions. Because heavy SUVs, pickups and vans are considered transportation equipment, many small and medium-sized businesses can deduct most or all of the business-use portion of their cost in the first year they’re placed in service under the Sec. 179 deduction.  For tax years beginning in 2024, the inflation-adjusted maximum Sec. 179 deduction is $1.22 million (up from $1.16 million for tax years beginning in 2023).

However, the inflation-adjusted limit on Sec. 179 deductions for heavy SUVs with GVWRs between 6,001 and 14,000 pounds is $30,500 for tax years beginning in 2024 (up from $28,900 for tax years beginning in 2023). These limits don’t apply to heavy vehicles that aren’t classified as SUVs, including:

• Vehicles designed to seat more than nine passengers behind the driver’s seat. For example, many shuttle vans qualify for this exception.
• Vehicles equipped with a cargo area that’s not readily accessible directly from the passenger compartment and that’s at least six feet in interior length. The cargo area can be open or designed to be open but enclosed by a cap. For example, many pickups with full-size cargo beds qualify for this exception. Some quad cabs and extended cabs with shorter cargo beds may not.
• Vehicles with 1) an integral enclosure that fully encloses the driver’s compartment and load carrying device, 2) no seating behind the driver’s seat, and 3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. For example, many delivery vans qualify for this exception.

Vehicles with GVWRs above 6,000 pounds that fall under the preceding non-SUV exceptions are eligible for the full Sec. 179 deduction privilege. That means the business portion of the cost of many heavy non-SUVs can often be fully written off in the first year they’re placed in service under the Sec. 179 deduction privilege.

Bonus depreciation. Heavy SUVs, pickups and vans, which are considered transportation equipment, are also eligible for first-year bonus depreciation deductions. The first-year bonus depreciation deduction was reduced to only 60% for heavy vehicles placed in service in calendar year 2024. (It was 80% in calendar year 2023.) To be eligible for first-year bonus depreciation, a used vehicle must be new to the taxpayer.

Sec. 179 Deduction vs. Bonus Depreciation

While the current rules for Sec. 179 deductions are generous, watch out for the following restrictions:

• The business taxable income limitation,
• The Sec. 179 deduction phaseout rule,
• The limited Sec. 179 deduction for SUVs, and
• Sec. 179 deduction limitation rules for vehicles owned by pass-through entities, including limited liability companies (LLCs), partnerships and S corporations.

These Sec. 179 limitations are beyond the scope of this article. Your tax advisor can provide additional details.

On the other hand, first-year bonus depreciation deductions aren’t subject to any complicated limitations. But for heavy vehicles placed in service in 2024 and 2023, the bonus depreciation percentages are only 60% and 80%, respectively.

In general, you should write off as much as possible of the business-use portion of your heavy vehicle’s cost under your allowable Sec. 179 deduction. Then, claim first-year bonus depreciation for the remainder of the business-use portion of the cost.   

To illustrate, suppose Leona buys a heavy SUV for $80,000 in 2024. She uses it 100% in her single-member LLC that’s treated as a sole proprietorship for tax purposes. How much of the vehicle’s cost can Leona deduct on her personal tax return?

She can deduct the first $30,500 of the SUV’s cost in 2024, under the limited Sec. 179 deduction for heavy SUVs. She also can claim a first-year bonus depreciation deduction in 2024 equal to 60% of the remaining cost of $49,500 ($80,000 minus $30,500). Her bonus depreciation for the year would be $29,700 (60% times $49,500). So, for 2024, her total depreciation write-off for the vehicle would be $60,200 ($30,500 plus $29,700).

How much can Leona deduct if the heavy vehicle is a long-bed pickup that’s not classified as an SUV?  If we assume that none of the Sec. 179 deduction limitations apply to Leona, she can deduct the entire $80,000 on her 2024 tax return, thanks to the Sec. 179 deduction privilege.

Get It Right

The federal income tax rules for calculating depreciation for vehicles used in your business can be complex. If you have questions or want more information, contact your tax advisor.

Weather emergencies take many forms and, depending on your location, you’re likely more vulnerable to some forms than others. These disasters — such as hurricanes, tornadoes, floods and wildfires — pose major risks to businesses. In fact, the Federal Emergency Management Agency (FEMA) estimates that about 25% of companies don’t reopen after a major disaster strikes. Of those that survive, many continue to incur significant losses and struggle to stay afloat in the aftermath.

Having a comprehensive plan in place before an emergency happens can reduce the risk of closure and help your business recover faster. FEMA suggests the following five-step process for protecting your business from natural disasters.

1. Program Management

This step requires management to 1) think broadly about the goals of a disaster plan and 2) determine who needs to be involved in creating, managing and executing the plan. Your goals may be straightforward. For example, you’ll no doubt want to physically protect everyone on-site, minimize physical damage to assets and get back to business as soon as possible. But a sound plan should be more granular.

For example, how quickly do you need to resume operations to avoid long-term harm to the viability of your business? A disaster recovery plan with the goal of resuming operations within a day (or even a few hours) will look very different from a plan with the goal of getting up and running again in a week or two.

Also, your goal may include mitigating potential legal liability related to a weather disaster. If so, you’ll need to obtain an attorney’s advice when putting your plan together. Similarly, if your plan will involve managing the financial risks of a weather-related emergency, consider adding an insurance professional to your planning team for policy recommendations and periodic coverage review. 

2. Plan Creation

The next step involves assembling the plan itself. Begin by cataloging the kinds of risks you face so that you can address and prioritize them. Some examples are:

• Physical injury to employees and customers,
• Business operations interruption (with resulting loss of revenue), and
• Damage to or destruction of equipment, inventory, supplies, vital business records and your actual place of business.

Your plan may include:

• Identifying roles for employees with skills and knowledge to respond to various weather emergency scenarios,
• Formulating an evacuation plan,
• Defining your needs for various kinds of safety equipment, such as first aid kits, fire extinguishers and sprinkler systems,
• Safeguarding in advance, with remote digital and perhaps physical copies, vital business records and documents, as well as software, login credentials and passwords,
• Creating a communication plan that details how to relay messages to employees and customers concerning your business’s status and recovery expectations,
• Maintaining an inventory of key equipment that would need to be replaced promptly and suppliers for those items,
• Developing contingency plans for maintaining operations with a skeleton staff at a remote location, and
• Establishing HR policies regarding compensation of nonexempt employees who are unable to work until the business has recovered.

An effective weather emergency plan needs to be comprehensive. But it shouldn’t be so detailed that it becomes overwhelming and difficult to comply with and update. 

3. Plan Implementation

Elements of your plan will require specific actions to put it in place. Examples include:

• Informing your staff about what will need to be done,
• Assigning roles and responsibilities for implementing the plan to specific employees and training them as necessary,
• Acquiring needed equipment, and
• Buying appropriate insurance coverage.

When reviewing potential risks, you also might discover that a weather emergency reveals a need for additional emergency exits. If so, follow through by creating those exits.

4. Testing and Exercises

There’s a reason schools have fire drills and armies hold military exercises. Practice makes perfect — or at least better. The true strength of your weather emergency plan will lie in your company’s ability to execute it should a real emergency occur.  

Although a priority, quickly getting people to safety shouldn’t be the only thing you test for. Also use periodic testing to determine whether the other safeguards you put in place, such as safety equipment and backup storage for vital business records, are fully operational.

5. Program Improvement

Ideally, it won’t take an actual weather emergency to determine whether your plan is sound and comprehensive. Some weaknesses may be exposed during testing, but others may not. And, as time goes by, changes to your workforce, operations or physical space may reduce the efficacy of your plan.

Thus, along with conducting regular tests, fully review your weather emergency plan at least once each year to ensure it still provides all the protection you need. Ask everyone involved with the plan to share thoughts on how to improve it. Discuss suggestions and act on those you deem prudent.

Peace of Mind

Even if your business never sustains serious damage in a weather emergency, having a sound weather emergency plan in place may reduce the costs of some types of business insurance. Even if that’s not the case, the plan should provide peace of mind, allowing you to focus on day-to-day business operations and growth. Contact your financial and legal advisors for more information.

Starting in 2024, employers can offer their nonhighly compensated employees the option to participate in emergency savings accounts that are linked to their company defined contribution retirement plan accounts. This option was introduced in the SECURE 2.0 Act. Defined contribution plans include 401(k) plans. Employees can then make contributions out of their salary to fund their emergency savings accounts. Here’s what you should know.

The Basics

Emergency savings account contributions go into a special type of designated Roth account, which means they’re “after tax” contributions that don’t reduce your taxable salary. The cap for your emergency savings account balance is $2,500 (with periodic inflation adjustments after 2024) or a lower cap set by the plan, if applicable.

You can then take federal-income-tax-free withdrawals as often as once a month for emergency-related expenses. However, you don’t need to provide proof of an emergency to take withdrawals. That means you can withdraw money from the account at your discretion, to pay for whatever you wish, without any drama.

If the account balance falls below the applicable cap, you can make additional contributions until you reach the cap again. If you leave the company, you can cash out your emergency savings account balance.

Important: Your company plan must maintain separate records of transactions for your emergency savings account, including contributions.  

Employers can automatically enroll employees into such an account with automatic contributions limited to 3% of salary. However, you can opt out of the deal if you wish or elect to make contributions at a different rate. 

Matching Contributions

If your company makes matching contributions to the defined contribution plan account that’s linked to your emergency savings account, your contributions to your emergency account can be matched. Matching contributions will go into the regular defined contribution plan account that’s linked to your emergency account, rather than into the emergency savings account itself.

However, your contributions plus any company matching contributions can’t cause the $2,500 cap to be exceeded. Your company may also establish a lower cap, so be sure to review your plan documents.   

Plans can either include or exclude emergency savings account earnings in applying the applicable account cap limitation. For example, if your company plan has a $2,500 cap, earnings credited to the account that cause the account balance to exceed $2,500 wouldn’t constitute a violation of the $2,500 cap rule — if the plan so provides.

Investment Guidelines 

ERISA rules require that emergency savings account balances must be held in one of the following:

• Cash,
• An interest-bearing deposit account, or
• An investment product designed to “maintain over the term of the investment the dollar value equal to the amount invested in the product and preserve principal and provide a reasonable rate of return, consistent with the need for liquidity.”

The overall objectives of the ERISA rules are to: 1) preserve capital and 2) maintain liquidity. This provides employees with immediate access to funds to respond to unexpected financial needs.

For More Information

The IRS and U.S. Department of Labor have supplied frequently asked questions and answers to help explain how these new emergency savings accounts work. The information in this article is consistent with the FAQs and answers. If your company offers the emergency savings account option, you must be supplied with full details to allow you to make an informed decision on whether to participate in the deal.