Category: Small Business

February 04, 2025 | by Atherton & Associates, LLP

The start of 2025 brings important federal payroll tax and withholding changes that every employer needs to understand. From updates to Social Security wage limits to adjustments in retirement contributions and tax withholding rates, these changes directly impact payroll management and compliance. 

To help you stay ahead, we’ve outlined the most significant federal updates for the new tax year and what they mean for your business.

Social Security Tax Withholding

The Social Security tax wage base has increased to $176,100 for 2025. Both employees and employers will continue to contribute at a rate of 6.2% on wages up to this threshold. This adjustment raises the maximum Social Security tax withheld from wages to $10,918.20 for the year. Medicare tax remains unchanged at 1.45% for both employees and employers, applicable to all wages without a cap. Additionally, an extra 0.9% Medicare tax is imposed on individuals earning over $200,000 annually; employers are not required to match this additional tax. 

Federal Income Tax Withholding

The IRS has released the inflation-adjusted federal income tax brackets for 2025. For single filers, the standard deduction increases to $15,000, while married couples filing jointly see an increase to $30,000. 

Although the marginal tax rates remain unchanged, inflation adjustments have shifted the income thresholds that determine which tax rates apply.

Federal Unemployment Tax Act (FUTA)

The FUTA taxable wage base remains at $7,000 per employee for 2025. The standard FUTA tax rate is 6.0%; however, most employers are eligible for a 5.4% credit for timely state unemployment tax payments, resulting in an effective rate of 0.6%. 

Retirement Contribution Limits

For 2025, the contribution limit for employees participating in 401(k), 403(b), and most 457 plans increases to $23,500. The catch-up contribution limit for employees aged 50 and over remains at $7,500. Notably, under the SECURE 2.0 Act, individuals aged 60 to 63 are eligible for a higher catch-up contribution limit of $11,250. 

Health Flexible Spending Arrangements (FSAs)

The annual contribution limit for health FSAs increases to $3,300 for 2025. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660. 

Additional Considerations

Employers are reminded to obtain updated Forms W-4 from employees to accurately reflect any changes in filing status or personal exemptions. Additionally, the federal minimum wage remains at $7.25 per hour; however, employers should verify if state or local minimum wage rates have changed to ensure compliance. 

Navigating payroll tax changes can be time-consuming, but you don’t have to do it alone. Our team can help you stay compliant in the face of evolving tax regulations. If you have questions about how these 2025 updates affect your business, contact our office today. We’re here to provide the personalized guidance you need to keep your payroll processes running smoothly.

January 28, 2025 | by Atherton & Associates, LLP

If you own a business organized as a pass-through entity, the Qualified Business Income (QBI) deduction offers a valuable opportunity for tax savings. Under the Tax Cuts and Jobs Act, this deduction can allow sole proprietors, partnerships, S corporations, and some LLCs to deduct up to 20% of qualified business income. Unfortunately, as it stands right now, this provision is set to expire at the end of 2025, although some observers believe Congress may consider extending it.

Because there is an uncertain end date, it makes sense to consider strategies that could help you capture a larger benefit while it is available. The following guidance outlines important background information on the QBI deduction, along with strategies to help maximize your potential tax savings. 

QBI basics

Qualified business income is essentially the net pass-through income earned from an eligible enterprise, excluding wages or salaries. 

The QBI deduction is open primarily to non-corporate taxpayers, namely individuals, trusts, and estates, who receive their share of business income from pass-through structures. Businesses that are set up under C corporation status do not qualify.

Complicating this deduction are special rules for certain “specified service trades or businesses” (SSTBs). When you operate in fields such as health, law, accounting, financial services, performing arts, or consulting, there are significant limits or a complete disallowance of this deduction once your total taxable income exceeds specific thresholds. These thresholds vary by filing status and are adjusted annually.

Limitations and phaseouts

One of the primary hurdles with the QBI deduction arises when your taxable income before the deduction exceeds predefined thresholds. If you file jointly, your allowable QBI deduction starts getting phased out once your taxable income crosses a certain line, and for single filers or other filing statuses, there is a different threshold.

If you end up within the “phase-out” range, your ultimate deduction may be reduced. Once your taxable income shoots above the fully phased-out threshold, the deduction is eliminated. 

For instance, in 2024, business owners with taxable income below $191,950 could claim the full deduction. Those with taxable income over $241,950 can’t claim the deduction. If income fell between those two thresholds, the individual could qualify for a partial deduction. The ranges for married filing jointly taxpayers are $383,900 and $483,900, respectively.

W-2 wage and UBIA limitation

For business owners with income that exceeds the threshold, the QBI deduction is limited to the greater of:

• 50% of W-2 wages paid by the business and properly allocated to QBI, or
• 25% of those W-2 wages plus 2.5% of the original cost basis (unadjusted basis immediately after acquisition, or UBIA) of any qualified tangible property used in the business.

UBIA-based limitations help capital-intensive operations like real estate development, manufacturing, or hotels, where significant property investments support production. If you operate in a business with substantial depreciable property, you can potentially preserve a greater portion of the deduction, even when a lack of W-2 wages or high income levels otherwise threaten to limit it.

Rules for SSTBs

If you practice in fields such as health, accounting, financial services, legal services, performing arts, or consulting, you may be part of a Specified Service Trade or Business. SSTBs face additional, more stringent limitations. Once your taxable income exceeds the phaseout range for your filing status, the IRS disallows the QBI deduction for SSTB income altogether.

Strategies to increase your QBI deduction

Aggregate multiple businesses

If you own several pass-through entities, grouping them for QBI purposes can boost your deduction. By making an aggregation election, you can treat separate qualifying businesses as a single entity for purposes of calculating W-2 wages, UBIA of property, and QBI. 

This approach often benefits owners whose different ventures complement each other in terms of wages or capital intensity. For instance, one activity might have high income but a low W-2 payroll, while another might have low overall profit but a sizable payroll. Combining them can boost the total W-2 wage factor, which in turn mitigates the QBI limitations. However, be aware that you generally cannot aggregate an SSTB with a non-SSTB; any attempt to merge them for QBI purposes is disallowed. There are also ownership and business commonality requirements to aggregate multiple entities.

Be strategic with depreciation

Depreciating assets reduces your taxable income but it also lowers QBI. If you’re near a threshold where QBI limits kick in, making certain depreciation elections could preserve a larger deduction. Balancing immediate tax savings with long-term benefits is key here.

On the one hand, you may want a large deduction in the first year to lower your overall tax burden; on the other, you risk decreasing QBI to the point where your 20% deduction shrinks. This is especially tricky if your income hovers near the thresholds that tip you into a W-2 wage limitation zone.

Rather than automatically claiming the maximum possible depreciation in the current year, consider the trade-off. In some instances, spreading out depreciation via the usual MACRS schedule could preserve a more substantial QBI deduction in the year of purchase, and if your tax rates rise in the future, those postponed depreciation deductions could have greater value later. Deciding whether to fully claim, partially claim, or entirely forego bonus depreciation should be done carefully with an eye on optimizing your total tax liability, not just this year.

Optimize retirement contributions

Contributions to self-employed retirement plans reduce taxable income and QBI. While this can shrink your QBI deduction, it might still help if it lowers your income below the phaseout threshold. Be strategic about how much you contribute to ensure you’re getting the best overall tax result.

If your income is on the edge of a QBI threshold, a modest additional retirement account contribution might safely move you below the key figure that triggers QBI limitations. Each situation is unique, and you should weigh the long-term value of retirement savings against the near-term objective of maximizing your QBI deduction. 

It’s worth noting that contributions to a personal IRA generally do not affect QBI since they are not tied directly to the self-employed activity.

Optimize your entity structure

Your choice of business entity can have a big impact on the final QBI calculations. A sole proprietorship might provide simpler bookkeeping, but you could miss out on added W-2 wages if you do not pay yourself a salary as an employee (which is only possible in certain corporate structures like S corporations).

In an S corporation (or an LLC taxed as an S corporation), part of the owner’s earnings can be taken as wages (subject to payroll taxes), and the rest flows through as income that counts toward QBI. However, you are required to pay yourself “reasonable compensation,” which will reduce that QBI portion. Yet paying a salary in an S corporation can also position you to harness the W-2 wage threshold for the QBI limitation. 

If you run both an SSTB and a non-SSTB in a single entity, you might explore whether restructuring them into separate companies is possible and beneficial. Splitting them out could preserve QBI deductions on the non-SSTB revenue stream rather than letting the SSTB label overshadow the entire operation.

Manage taxable income levels strategically

There are numerous tactics to keep taxable income within the QBI-favorable range. Accelerating deductions or deferring revenue from year to year can help you manage your income. If you are nearing an important threshold, it can make sense to push some income into the following tax year or to pull forward some expenses (such as planned repairs or purchases) into this year.

For married individuals whose joint income crosses a crucial line, filing separately might yield a better QBI deduction for the spouse who operates the pass-through entity. Doing so, however, can backfire if it triggers other tax disadvantages, including the loss of certain credits or a reduction in itemized deductions. It’s important to run the numbers carefully. 

Ensuring compliance and avoiding audits

As with all tax matters, accurate recordkeeping is critical. You should maintain meticulous documentation of:

• Business income and expense allocations
• W-2 wage computations and disbursements
• Depreciation schedules, including any elected Section 179 or bonus depreciation
• Basis in qualified property for UBIA calculations
• SSTB qualifications or non-qualifications (ensuring you are categorizing your operations correctly)

Consult with a knowledgeable CPA to confirm that you are on track and maintaining audit-ready documentation. 

Navigating complexity: a balancing act

The QBI deduction can be a game-changer, but the rules are undeniably complex—especially for higher earners or those operating in Specified Service Trades or Businesses. Maximizing the deduction often requires balancing multiple factors, such as income thresholds, W-2 wages, depreciation decisions, and retirement contributions.

A seasoned CPA can help you evaluate your unique circumstances, weigh the trade-offs, and design a strategy that maximizes your deduction while ensuring full compliance with IRS regulations.

Don’t let this opportunity slip by. Contact our office to get the tailored advice you need to optimize your tax savings. Let’s work together to ensure you’re making the right moves now and for the future.

January 28, 2025 | by Atherton & Associates, LLP

For many small business owners, managing payroll taxes can feel like working a complicated puzzle. One wrong piece – a missed deadline, a misclassified worker, a record-keeping slip – and you risk penalties, audits, or employee dissatisfaction. By understanding the common pitfalls and how to avoid them, you can keep payroll taxes from becoming an unnecessary source of stress.

Common payroll tax challenges – and how to avoid them

Worker misclassification

Misclassifying someone as an independent contractor when they should be an employee can create serious tax liabilities. Employees require tax withholding and prompt remittances to the IRS and relevant state agencies, whereas independent contractors handle their own taxes. 

The distinction isn’t always crystal clear, and relying on guesswork can lead to penalties, back taxes, and legal disputes. To avoid trouble, consult the IRS guidelines on classification factors or consider filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to get an official ruling. 

If you’re uncertain, it’s often safer to treat the individual as an employee or seek guidance from a CPA. Ensuring proper classification at the start can save you a world of problems down the road.

Payroll calculation errors

A small miscalculation like applying the wrong withholding rate or overlooking an overtime payment can quickly snowball into expensive corrections and frustrated employees. Manual processes are especially prone to human error, and even outdated software can cause slip-ups if it isn’t regularly updated. 

Streamlining your payroll procedures with reliable payroll software helps ensure accuracy by automating tax calculations and applying the most recent rates. Periodic self-audits, spot-checking a handful of paychecks each month, and double-checking that employees’ withholding certificates are up to date can also go a long way toward maintaining accuracy and avoiding painful back-and-forth with tax authorities.

Late or missed tax payments

With so many demands on your time, it’s easy to let a payroll tax deadline slip by. Unfortunately, the IRS and state agencies don’t forgive these lapses easily, and penalties and interest can accumulate faster than you might expect. 

The simplest solution is to set clear reminders and create a dedicated calendar for tax obligations. Consider putting funds aside in a separate account for taxes as you run payroll, ensuring you’re never caught short when payment is due. Even better, automate as much of the payment process as possible through your payroll provider, reducing the risk that a busy season or unexpected crisis will make you late.

Inadequate record-keeping

Shoddy or incomplete records make it difficult to prove compliance, especially if you’re audited. Missing W-4 forms, disorganized timesheets, or incomplete payroll ledgers complicate the process of resolving disputes and can lead to penalties if you can’t substantiate your filings. 

Commit to a consistent filing system that you maintain throughout the year. Regular internal reviews help ensure everything is where it belongs. Consider scanning paper documents for electronic backup and using payroll software that stores key records securely. When you keep everything organized and easily accessible, audits become less daunting, and day-to-day payroll management runs more smoothly.

Technological challenges and integration issues

Relying on manual methods or outdated tools increases the likelihood of errors and makes routine payroll tasks labor-intensive. You might also struggle if your payroll and accounting systems don’t “talk” to each other, resulting in inconsistent data and time-consuming reconciliation. 

Upgrading to modern payroll software that integrates with your accounting and bookkeeping platforms is well worth the investment. Consider working with IT professionals or consultants to ensure a seamless setup. By embracing technology, you’ll reduce mistakes, speed up processing, and free your team to focus on more strategic tasks.

Keeping up with changing regulations

Payroll tax regulations aren’t carved in stone. Each year, the IRS updates income tax withholding tables, and the Social Security wage base is adjusted to reflect changes in average wages. States may periodically alter their unemployment tax rates, and local jurisdictions can introduce or modify their own payroll-related taxes. In a nutshell, laws evolve regularly, and missing an update can lead to errors. 

Staying informed means regularly checking official sources like the IRS website, subscribing to tax agency newsletters, or joining professional organizations that keep their members abreast of changes. It may also help to assign someone on your team to track these updates and relay important information to the rest of the business. By building a habit of continuous learning, you’ll avoid the panic and penalties that come with being caught off guard.

Consider outsourcing payroll

Managing payroll taxes requires time, expertise, and careful attention to detail. Outsourcing payroll to a professional accounting firm or third-party payroll provider can alleviate these burdens while reducing risks.

Outsourcing ensures that payroll taxes are calculated accurately and submitted on time, protecting your business from costly penalties. These providers stay up-to-date with ever-changing tax regulations, so you don’t have to worry about missing critical updates.

Additionally, an outsourced payroll partner can handle complex issues like worker classification and multistate payroll compliance, giving you confidence that every detail is managed correctly.

Keep your payroll compliance on track

This overview isn’t exhaustive; plenty of unusual scenarios and special rules can still arise. But by understanding the common challenges, staying alert to regulatory changes, using the right tools, and knowing when to call in an expert, you can reduce costly payroll tax errors. Taking action now paves the way for a smoother, more confident tax season and frees you to focus on long-term business growth. If you need guidance or want to ensure your payroll practices are up to par, don’t hesitate to contact our office – we’re here to help.

November 26, 2024 | by Atherton & Associates, LLP

The Pros and Cons of Different Business Entities: A Comprehensive Guide

Choosing the right business structure is one of the most critical decisions entrepreneurs and business owners face. The entity you select will have profound implications on how your business operates, how it is taxed, your personal liability, and your ability to raise capital. With several options available, each with its own advantages and drawbacks, making an informed choice requires careful consideration.

In this comprehensive guide, we’ll explore the various types of business entities, dissecting their pros and cons to help you determine which structure aligns best with your business goals and needs.

Factors to Consider When Choosing a Business Entity

Before diving into the specifics of each business entity, it’s essential to understand the key factors that should influence your decision:

• Liability Protection: The extent to which your personal assets are protected from business liabilities.
• Tax Implications: How the business and its owners are taxed, including opportunities for tax savings or risks of double taxation.
• Management and Control: Who will manage the business, and how decisions will be made.
• Administrative Requirements: The complexity and cost of forming and maintaining the entity, including paperwork and compliance obligations.
• Capital Raising: The entity’s ability to attract investors and raise funds for growth.
• Flexibility: How easily the business can adapt to changes in ownership, management, or strategic direction.
• Future Needs: Long-term goals such as expansion, succession planning, or going public.

Overview of Different Business Entities

Sole Proprietorship

A sole proprietorship is the simplest form of business entity, where an individual operates a business without forming a separate legal entity. It’s an attractive option for solo entrepreneurs starting small businesses.

Pros

• Easy and Inexpensive to Establish: Minimal legal paperwork and costs are required to start operating.
• Complete Control: As the sole owner, you make all decisions and have full control over the business.
• Simplified Tax Filing: Business income and losses are reported on your personal tax return, eliminating the need for a separate business return.

Cons

• Unlimited Personal Liability: You’re personally responsible for all business debts and obligations, putting personal assets like your home at risk.
• Difficulty Raising Capital: Investors and lenders may be hesitant to finance sole proprietorships due to perceived higher risk.
• Lack of Continuity: The business may cease to exist upon the owner’s death or decision to stop operating.
• Limited Tax Deductions: Certain business expenses deductible by corporations may not be available to sole proprietors.

While a sole proprietorship offers simplicity and control, the trade-off is significant personal risk and potential challenges in growing the business beyond a certain point.

Partnerships

Partnerships involve two or more individuals (or entities) joining to conduct business. They share profits, losses, and management responsibilities. There are different types of partnerships, each with unique characteristics.

General Partnership

In a general partnership, all partners share management duties and are personally liable for business debts and obligations.

Pros

• Combined Expertise and Resources: Partners can pool skills, knowledge, and capital, enhancing the business’s potential.
• Pass-Through Taxation: Profits and losses pass through to partners’ personal tax returns, avoiding corporate taxes.
• Relatively Easy Formation: Establishing a general partnership typically requires a partnership agreement but involves fewer formalities than corporations.

Cons

• Unlimited Personal Liability: Each partner is personally liable for the business’s debts and the actions of other partners.
• Potential for Disputes: Differences in vision or management style can lead to conflicts affecting the business.
• Lack of Continuity: The partnership may dissolve if a partner leaves or passes away unless otherwise stipulated in the agreement.
• Difficulty Attracting Investors: Investors may prefer entities that offer ownership shares and limit liability.

Limited Partnership (LP)

An LP includes general and limited partners. General partners manage the business and have unlimited liability, while limited partners contribute capital and have liability limited to their investment.

Pros

• Liability Protection for Limited Partners: Limited partners’ personal assets are protected beyond their investment amount.
• Attracting Passive Investors: The structure is appealing to investors seeking to invest without involving themselves in management.
• Pass-Through Taxation: Similar to general partnerships, avoiding double taxation.

Cons

• Unlimited Liability for General Partners: General partners remain personally liable for business debts and obligations.
• Complex Formation and Compliance: LPs require formal agreements and adherence to state regulations, increasing administrative burdens.
• Limited Control for Limited Partners: Limited partners risk losing liability protection if they take an active role in management.

Limited Liability Partnership (LLP)

An LLP offers all partners limited personal liability, protecting them from certain debts and obligations of the partnership and actions of other partners. It’s often used by professional service firms like law and accounting practices.

Pros

• Limited Personal Liability: Partners are typically not personally liable for malpractice of other partners.
• Flexible Management Structure: All partners can participate in management without increasing personal liability.
• Pass-Through Taxation: Business income passes through to personal tax returns.

Cons

• State Law Variations: LLP regulations differ significantly by state, affecting liability protections and formation processes.
• Potential Restrictions: Some states limit LLPs to certain professions or business types.
• Administrative Complexity: LLPs may have additional filing and reporting requirements.

Partnerships offer the benefit of shared responsibilities and resources but come with risks related to personal liability and potential internal conflicts.

Corporations

Corporations are independent legal entities separate from their owners (shareholders), offering robust liability protection and the ability to raise capital through the sale of stock.

C Corporations

A C corporation is the standard corporation under IRS rules, subject to corporate income tax. It’s suitable for businesses that plan to reinvest profits or seek significant outside investment.

Pros

• Strong Liability Protection: Shareholders are not personally liable for corporate debts and obligations.
• Unlimited Growth Potential: Ability to issue multiple classes of stock and attract unlimited investors.
• Deductible Business Expenses: C corporations can deduct the full cost of employee benefits and other expenses not available to other entities.
• Perpetual Existence: The corporation continues to exist despite changes in ownership.

Cons

• Double Taxation: Corporate profits are taxed at the corporate level, and dividends are taxed again on shareholders’ personal tax returns.
• Complex Formation and Compliance: Incorporation requires significant paperwork, ongoing record-keeping, and adherence to formalities.
• Higher Costs: Legal fees, state filing fees, and ongoing compliance expenses can be substantial.

S Corporations

An S corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes, thus avoiding double taxation.

Pros

• Pass-Through Taxation: Profits and losses pass through to shareholders, preventing double taxation.
• Liability Protection: Similar to C corporations, personal assets are generally protected from business liabilities.
• Attractive to Investors: Offers the credibility of a corporate structure, which can be appealing to some investors.

Cons

• Strict Eligibility Requirements: Limited to 100 shareholders who must be U.S. citizens or residents; can only issue one class of stock.
• Limited Deductible Benefits: Certain employee benefits are not fully deductible for shareholders owning more than 2% of the company.
• Administrative Responsibilities: Must adhere to corporate formalities like holding annual meetings and maintaining records.

Corporations offer significant advantages in liability protection and capital raising but come with increased complexity and potential tax disadvantages.

Limited Liability Company (LLC)

An LLC combines the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership. It’s a popular choice for many businesses due to its adaptability.

Pros

• Limited Liability Protection: Members are generally shielded from personal liability for business debts and claims.
• Flexible Tax Treatment: Can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, offering potential tax advantages.
• Flexible Management Structure: Can be member-managed or manager-managed, providing options for how the business is run.
• Less Compliance Paperwork: Fewer formal requirements compared to corporations, though an operating agreement is highly recommended.

Cons

• Varied Treatment by State: LLC laws and fees vary by state, possibly affecting profitability and operations.
• Self-Employment Taxes: Members may be subject to self-employment taxes on their share of profits, potentially increasing tax burdens.
• Investor Reluctance: Some investors may prefer corporations due to familiarity and ease of transferring shares.
• Complexity in Multi-State Operations: Operating in multiple states can complicate tax and regulatory compliance.

The LLC offers a balance of flexibility and protection, making it suitable for many businesses, though it’s essential to understand specific state laws and tax implications.

Comparing Business Entities

Taxation Differences

The way a business entity is taxed can significantly impact its profitability and the owner’s personal tax burden.

• Sole Proprietorships and Partnerships: Income and losses pass through to owners’ personal tax returns, and taxes are paid at individual rates.
• C Corporations: Subject to corporate tax rates, with potential double taxation when profits are distributed as dividends.
• S Corporations and LLCs: Generally enjoy pass-through taxation, avoiding double taxation, but with specific eligibility requirements (S corporations).

Liability Protection

• Sole Proprietorships and General Partnerships: Owners have unlimited personal liability for business debts and obligations.
• Limited Partnerships: Limited partners have liability protection, but general partners do not.
• LLPs, LLCs, and Corporations: Offer varying degrees of liability protection, generally shielding personal assets from business liabilities.

Management and Control

• Sole Proprietorships: The owner has total control over decisions and operations.
• Partnerships: Management is shared among partners; roles should be defined in a partnership agreement.
• Corporations: Managed by a board of directors and officers; shareholders have limited direct control.
• LLCs: Offer flexibility; management can be structured to fit the owners’ preferences.

Administrative Requirements and Costs

• Sole Proprietorships and General Partnerships: Minimal setup costs and ongoing formalities.
• Limited Partnerships and LLPs: Require formal agreements and state registrations, increasing complexity and costs.
• Corporations: Higher formation costs and ongoing compliance obligations, including annual reports and meetings.
• LLCs: Moderate costs; while less formal than corporations, they still require an operating agreement and may have state filing requirements.

Choosing the Best Form of Ownership for Your Business

Determining the optimal business entity involves evaluating your specific situation against the characteristics of each entity type.

Consider the following steps:

• Assess Your Liability Exposure: If your business involves significant risk, entities offering liability protection may be more suitable.
• Evaluate Tax Implications: Consult with a tax professional to understand how each entity will impact your tax obligations.
• Consider Management Structure: Decide how you want the business to be managed and the level of control you wish to maintain or share.
• Plan for Capital Needs: If raising capital is a priority, structures like corporations may offer advantages in attracting investors.
• Reflect on Future Goals: Your long-term objectives, such as expansion or succession planning, should align with the entity’s capabilities.
• Understand Compliance Requirements: Be prepared for the administrative responsibilities associated with more complex entities.

Remember, there’s no one-size-fits-all answer. Your business’s unique needs and your personal preferences will guide the best choice. Furthermore, as your business grows and evolves, you may need to reevaluate your entity choice.

How Atherton & Associates LLP Can Help

Navigating the complexities of choosing the right business entity is challenging, but you don’t have to do it alone. Atherton & Associates LLP offers comprehensive tax and advisory services to guide you through this critical decision-making process.

Tax Compliance & Planning

Our team assists businesses and individuals in staying compliant with tax laws and regulations. We provide strategic tax planning to help minimize liabilities and maximize potential savings, all while ensuring adherence to ever-changing tax laws.

Entity Choice Consultation

We provide personalized guidance in selecting the most suitable business entity. By analyzing your unique business situation, goals, and potential risks, we suggest the most beneficial entity type—be it a sole proprietorship, partnership, corporation, or LLC.

Estate & Trust Planning

Protecting your assets and planning for the future are paramount. Our specialized estate and trust planning services aim to reduce the potential tax impact on your beneficiaries. We work closely with you to develop a comprehensive plan that aligns with your financial goals, ensuring a seamless transition of wealth to the next generation.

With Atherton & Associates LLP, you’re partnering with experienced professionals dedicated to your business’s success. Our expertise spans various industries, including agriculture, real estate, construction, retail manufacturing, and distribution services. We understand that each client is unique, and we’re committed to providing tailored solutions that meet your specific needs.

Conclusion

Selecting the right business entity is a foundational step that affects every aspect of your business, from daily operations to long-term growth. By thoroughly understanding the pros and cons of each entity type and considering your individual circumstances and goals, you can make an informed decision that positions your business for success.

At Atherton & Associates LLP, we’re here to support you through this process, offering expert advice and services that help you navigate the complexities of business ownership. Whether you’re just starting or looking to reassess your current structure, our team is ready to assist in charting the best path forward for your business.

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Contributors

Jackie Howell, Tax Partner

Email: [email protected]

Jackie Howell has been in public accounting since 2010, with a concentration in tax compliance and planning for individuals, privately held corporations, partnerships, non-profit organizations, and multi-state taxation. Her unique skill set allows her to assist clients across a broad range of industries, including agriculture, real estate, construction, retail manufacturing, and distribution services.

Natalya Mann, Tax Partner

Email: [email protected]

Natalya Mann brings seventeen years of experience as a Certified Public Accountant and business advisor. She specializes in tax compliance, tax planning, business consulting, and strategizing the best solutions for her individual and business clients. Natalya collaborates with clients in healthcare, professional services, real estate, manufacturing, transportation, retail, and agriculture industries.

Craig Schaurer, Tax Partner, Managing Partner

Email: [email protected]

With a career in public accounting since 2006, Craig Schaurer focuses on tax compliance and planning for the agricultural industry, including the entire supply chain from land-owning farmers to commodity processing and distribution. His expertise encompasses entity and individual tax compliance, specialty taxation of Interest Charged Domestic International Sales Corporations (IC-DISCs), and cooperative taxation and consultation.

Rebecca Terpstra, Tax Partner

Email: [email protected]

Rebecca Terpstra specializes in tax planning, consulting, and preparation for individuals and all business entities. She has extensive experience working with large corporations and high-net-worth individuals across various industries, including agriculture, manufacturing, telecommunications, real estate, financial institutions, retail, and healthcare.

Michael Wyatt, Tax Manager

Email: [email protected]

Michael Wyatt has been serving in public accounting since 2019. He specializes in corporate, partnership, and individual taxation, as well as tax planning. Michael provides tax services for clients in the agricultural, real estate, and service industries. He has experience with estate and business succession planning and multi-state taxation, assisting clients through complex transactions.

November 14, 2024 | by RSM US LLP

Now that Republicans have won the House of Representatives, businesses have more clarity about the direction in which the Trump administration and unified Republican Congress will steer tax policy in 2025.

Republicans are expected to quickly pursue legislation that continues policies they implemented in the Tax Cuts and Jobs Act of 2017 (TCJA), which sought to broaden the tax base and lower tax rates for both individuals and businesses. However, the estimated $4.0 trillion cost of extending TCJA provisions, plus interest costs of $600 billion, add uncertainty to tax policy outcomes. Even nonexpiring TCJA provisions and provisions that were not part of TCJA are subject to change.

Here are five key business issues that potential tax changes could affect, as well as corresponding planning considerations to help businesses make smart, timely decisions.

Cash flow, profitability and investment strategy

Potential tax changes: Corporate and individual tax rates

Modified tax rates could affect businesses’ cash flow and liquidity. Trump has proposed decreasing the corporate tax rate from 21% to 20%, and potentially to as low as 15% for companies that manufacture in the United States.

He intends to extend the TCJA provisions for taxation of individuals, which would entail keeping the top individual income tax rate at 37% along with extending the 20% qualified business income deduction available to pass-through businesses.

Policy perspective

Congressional Republicans generally have been supportive of retaining the current tax rate structure. However, several House Republicans have acknowledged a potential need to increase the corporate rate to raise revenue to offset extension of provisions in the TCJA.

Budgetary considerations will also help shape the discussion about extending individual income tax provisions, which would cost an estimated $3.2 trillion, according to the nonpartisan Congressional Budget Office.

Planning consideration: Accounting method review

Prepare now for changes in income tax rates by developing a playbook of tax accounting methods and elections that can change the timing of income and deductions.

Increased tax liabilities could impact cash flow strategies, liquidity and investment strategies for many corporate taxpayers while placing a premium on alternative strategies—such as shifting to domestic manufacturing—that could yield a more favorable tax rate and return on investment.

Capital expenditures and investments

Potential tax change: Bonus depreciation

For qualified assets, 100% accelerated bonus depreciation may return. Currently, the ability to claim a full depreciation deduction is being phased down and will be eliminated for most property placed in service starting in 2027.

Policy perspective

Trump and congressional Republicans support restoring “bonus” cost recovery for capital expenditures that drive infrastructure and business growth. However, restoring full bonus depreciation would cost an estimated $378 billion, an amount that would likely invoke a broader discussion around the need for revenue raisers.

Planning consideration: Capital expenditure and tax depreciation planning

Review planned capital expenditure budgets and determine which projects have the most flexibility for acceleration, deferral or continuing current course. Quickly identifying such projects and associated placed-in-service considerations will likely strengthen tax results in any legislative scenario. When analyzing the effect of any proposed bonus depreciation changes, take care to model the broad impact of the reduction in taxable income.

Debt analysis

Potential tax change: Deduction of business interest expense

The ability of businesses to deduct business-related interest expenses became less favorable in 2022. Generally, this limitation challenges companies that traditionally rely on debt financing. Such companies may also face other complex issues associated with debt refinancings, modifications and restructuring, which could trigger numerous tax issues, such as potential cancellation of debt income.

Policy perspective

There is Republican support for a more favorable deduction limit, but it was not a top priority for either party in negotiations that produced the ill-fated Tax Relief for American Families and Workers Act early in 2024. The cost of more favorable tax treatment will factor heavily in what Congress does.

Planning considerations: Review debt structure and terms

Review existing debt structures, including the need for potential refinancing based on debt maturity. Intercompany debt agreements could be reviewed, as well as intercompany transfer pricing, to accurately capture debt and interest at the correct entity. This could support strategies to minimize tax impacts under current law.

Global footprint, structuring and supply chain

Potential policy changes: U.S. international taxation and trade

Trump has proposed raising revenue through increases in tariffs, which could have profound implications for U.S. importers specifically and the economy in general.

In addition, several U.S. international tax rates are scheduled to increase at the end of 2025, as required by the TCJA: Global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT).

Meanwhile, many U.S. multinationals are operating in countries that have adopted the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework, which is designed to combat profit shifting and base erosion.

Policy perspective

Republicans prefer to maintain the current GILTI, FDII and BEAT rates. Extending the current rules would cost an estimated $141 billion.

They also prefer current U.S. international tax rules and have resisted adopting the OECD’s Pillar Two framework due to their concerns about the global competitiveness of U.S. businesses and a potential loss of tax sovereignty.

Planning considerations: Review global structure and entity type

A shift in income tax rates raises questions for businesses about whether their tax structure is optimal for their business objectives. Reviewing the differences between C corporate taxation and pass-through taxation could identify ways to improve cash flow and other areas of the business.

Businesses should also evaluate how scheduled U.S. international tax rate increases could affect their global footprint, supply chain and economic presence in foreign jurisdictions. A review of corresponding international tax strategies, including transfer pricing and profit allocation, could help businesses identify additional tax savings. While the goal is optimization, these analyses also bring out areas of tax leakage in a global legal structure which would increase a business’ overall global effective tax rate.

To prepare for tariff increases, importers may be able to capitalize on several well-established customs and trade programs.

Innovation and research and development

Potential tax changes: Tax treatment of R&D expenses

Reinstating immediate R&D expensing would reduce the financial burden companies take on when they invest in new products or technologies. The tax treatment of R&D expenses became less favorable beginning in 2022, as required by the TCJA. Companies must capitalize and amortize costs over five years (15 years for R&D conducted abroad.)

Policy perspective

There is bipartisan support for reinstating immediate R&D expensing. But it’s uncertain how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.

In addition, companies are seeing more IRS exam activity around R&D credit issues. IRS funding remains a source of contention between congressional Republicans and Democrats. After Democrats in 2022 committed approximately $46 billion to IRS enforcement as part of $80 billion in funding for the agency through 2031, Republicans rescinded approximately $21 billion through budget legislation. Expect them to try to claw back more.

Planning considerations: Review R&D spending and sourcing plans

Businesses should review their R&D spending plans with an eye on how their approach to innovation might change with more favorable expensing. Focus on:

• Whether it makes financial sense to outsource R&D.
• Differences between conducting R&D domestically or internationally.
• Interplay between the R&D tax credit and R&D expense deductions.

Also, as companies are analyzing their R&D expenditures, it is wise to review prior R&D credit documentation to ensure complete and accurate reporting for R&D tax credit claims and R&D expenses.

The tax policy road ahead

With more than 30 provisions in the TCJA scheduled to expire at the end of 2025, Republican lawmakers have indicated a desire to act quickly on tax legislation after taking office in January. Under Republican majorities in both chambers, the budget reconciliation process would allow the Senate to pass legislation with a simple majority.

However, the estimated cost of tax changes could complicate an agreement between Senate and House Republicans, given continued concerns about the size of the existing federal debt and the continuing annual federal deficits.

In other words, even under a unified Republican government, some complicating factors continue to shroud tax policy outcomes in uncertainty.

Proactive planning will be crucial to navigate tax changes and optimize tax positions. Businesses that work with their tax advisor to monitor legislative proposals and model the effects on cash flows and tax obligations will be best equipped to make smart, timely decisions based on policy outcomes.

We invite you to register to attend our tax policy webcast on Nov. 18. We will discuss:

• Aligning business structure with your current strategy and potential tax changes 
• Income accelerations and deduction deferrals to enhance cash flow 
• Preparing for potential adjustments in your business transition plans for either a family transfer or a sale

October 28, 2024 | by Atherton & Associates, LLP

Navigating the decision to acquire a vehicle for your business isn’t as simple as choosing a color or model. The more critical dilemma often boils down to whether you should lease or buy. As a business owner, this choice transcends just finances, as you will need to consider the tax implications and your long-term plans as well.

You can’t always expense a vehicle

Before we dive into the lease vs. buy considerations, it’s important to understand that you can’t always expense a vehicle. If your vehicle is never used for business purposes, you can’t claim it as a business deduction, regardless of whether you lease or buy. Likewise, if you use a vehicle for personal and business use, your personal use will limit your deductions.

A universal perk, though, is the ability to deduct business mileage, as this applies to both leased and purchased vehicles, as well as those you already own.

Leasing basics

Leasing is akin to having a long-term rental car. While this might lower your monthly payments, there are also strings attached. A lease is a contract, and, like all contracts, any missteps will cost you.

First, most leases have caps on mileage, and exceeding these limits can result in costly penalties. For instance, many leases have a limit of 12,000 – 15,000 miles over the course of the term, so if you plan to cover a lot of ground, a lease may not be practical.

There’s also the matter of wear and tear. Vehicles naturally accrue some light scratches and dings from ordinary use. However, with a lease, there’s a fine line between acceptable wear and what’s deemed excessive. At the end of the term, if the lessor determines that the vehicle has been damaged beyond normal wear and tear, it could result in additional fees.

Regular maintenance may also be bundled into your lease payments, which is often a perk, but where you service your vehicle may be non-negotiable. For some brands, DIY maintenance or visiting your local garage may be off the table. Instead, you could be tethered to authorized dealerships, which may be inconvenient in certain circumstances.

In a nutshell, it’s imperative to scrutinize the fine print on any leasing agreements. Your initial savings can be offset by additional fees if you breach any terms of the agreement.

Preliminary considerations

Leasing and buying a vehicle both present unique considerations.

Leasing: 

• Typically demands a smaller downpayment and lower monthly payments.

• You can upgrade your vehicle more frequently, as most lease terms last 2-3 years.

• At the end of the term, you can simply return the vehicle without worrying about the complexities of a resale.

• Insurance premiums may be more expensive, as full coverage is often required.

• Mileage limits and wear-and-tear clauses can lead to additional fees.

Buying: 

• Every payment brings you closer to owning the vehicle outright.

• You’re free from mileage limits and can customize the vehicle as you see fit.

• You can recover some costs by selling the vehicle later.

• Purchasing often requires a larger down payment and higher monthly payments.

• You’re responsible for all maintenance and repair costs.

Tax deductions

For both buying and leasing, the IRS allows deductions for business use of a vehicle. However, the nature and extent of these deductions vary.

Leasing: straightforward but limited

Leasing’s beauty lies in its simplicity, especially when it comes to deductions. If you use the leased vehicle exclusively for business, you can deduct the lease payments in full. If you occasionally use the vehicle for personal reasons, you can still deduct the business portion of your lease payments – just keep meticulous mileage logs and documentation. For instance, if you drive a total of 10,000 miles in a year, and 7,000 of those are for business purposes, you can claim 70% of your lease payments as a business expense.

Yet, leasing isn’t without limitations. One notable setback is the ineligibility for depreciation deductions, which can be substantial.

Buying: greater deduction potential

When you purchase a vehicle for your business, you’re not just acquiring an asset; you’re potentially unlocking several tax deduction opportunities.

One of the most notable perks of buying is the ability to tap into depreciation deductions. You have the option to claim an upfront 100% depreciation by taking a Section 179 deduction, although you cannot deduct more than your business’s net income for the year. To enjoy this benefit, however, the vehicle’s weight must fall between 6,000 and 14,000 lbs., and it must be used for business purposes more than 50% of the time. If your vehicle does not qualify for the Section 179 deduction, you may still be able to claim bonus depreciation; however, the value of this deduction started phasing out in 2023.

The advantages of purchasing a business vehicle don’t stop at depreciation. If you’ve chosen to finance your vehicle purchase, the interest paid on the loan is also deductible.

For businesses eyeing environmentally-friendly vehicles, you may also be able to claim the Clean Vehicle Tax Credit. For brand-new vehicles, this credit can slash your tax bill by up to $7,500. If you’re considering a used vehicle, you can claim the lesser of $4,000 or 30% of its sale price. However, it’s vital to note that this credit is subject to several limitations, so you’ll need to determine that a vehicle is eligible before claiming the tax credit.

Hybrid approach

A hybrid approach may enable you to experience the best of both worlds. Some businesses find merit in leasing a vehicle at first, then buying it out at the end of the lease term. This approach offers initial flexibility, lower upfront costs, and an eventual asset.

This approach will probably make the most sense if:

• You’re uncertain about a vehicle’s long-term suitability

• Your business travel needs are initially limited, but you project an uptick in business-related travel in the future

• The lower monthly cost of leasing is attractive now, but you plan to own a vehicle as a business asset in the future

Consult with our experts

Deciding whether to lease or buy a vehicle for your business is a significant decision with long-lasting implications. While this article offers a general overview, the optimal choice depends on your specific circumstances, financial situation, and business goals.

For personalized guidance tailored to your unique needs, please contact our office.

October 14, 2024 | by Atherton & Associates, LLP

Starting a business involves a significant amount of planning, research, and preparatory work, which often comes with a price tag. However, when it comes to the tax treatment of these costs, things can get a bit unclear. 

Are these expenses deductible before your business officially launches? And how does it change if your idea never gets off the ground? 

To help answer these questions, let’s take a closer look at the tax rules and a recent court case that sheds light on the subject. 

Section 162: deductibility of business expenses

Section 162 of the Internal Revenue Code (IRC) is key to understanding what business expenses you can deduct. It allows you to write off “ordinary and necessary” expenses related to running your business. But those terms have been the subject of much debate (and litigation). 

In this context, “ordinary” doesn’t necessarily mean frequent or common. An expense can be ordinary even if it only occurs once in a particular taxpayer’s lifetime. Most courts have held that the provision refers to expenses that are normal or customary in a particular trade. Likewise, “necessary” generally implies that a specific expense is appropriate and helpful for a business’s development. 

However, the plain language of Section 162 indicates that businesses must already be up and running for an expense to be deductible. So, what does that mean for costs incurred pre-startup? 

Section 195: deductibility of pre-startup costs

Costs incurred before the official launch of a business might be deductible under Section 195 of the IRC. Congress introduced this provision to help business owners recover these early expenses. For businesses starting in 2024, you can deduct up to $5,000 of pre-startup costs, provided total startup costs are less than $50,000.

Once startup costs exceed $50,000, your first-year deduction is reduced dollar-for-dollar. Any remaining costs beyond the first-year deduction must be amortized over 180 months, starting the month the business begins. 

To qualify as startup costs, expenses must be related to investigating or creating a business and be costs that could generally be deducted if the business were already operating. These can include things like market surveys, advertisements, or salaries for training employees. Capital expenses like buildings, vehicles, and equipment are treated separately for tax purposes. 

Eason v. Commissioner: determining when a business starts

Understanding when a business officially begins operations is necessary for deducting both pre-startup costs and ongoing business expenses. However, the line between preparatory efforts and active operations can be difficult to define. A recent court case highlights this ambiguity. 

In Eason v. Commissioner, Eason spent over $40,000 on real estate investment courses and formed a corporation with the intent to provide real estate guidance. Despite these efforts, the business failed to generate income by the end of the year. Nevertheless, Eason treated the costs as deductible pre-startup expenses on his tax return. 

The IRS denied the deductions, sparking litigation. Their main argument was that Eason’s expenses were not deductible since the business hadn’t truly become operational. Although Eason set up a corporation, attended courses, and printed business cards and other stationery, the court found no evidence that he actually started providing services or generating income by the year-end. Without this evidence, the business couldn’t be considered operational as required under Sections 162 and 195. 

The case illustrates that simply forming a business entity and taking preparatory steps aren’t enough. There must be a real attempt to offer services or generate revenue to meet the IRS’s standards. Even then, the IRS could argue that the business is more of a hobby than a legitimate business if it doesn’t show consistent efforts to operate. 

Things to keep in mind when deducting pre-startup costs

The deductibility of pre-startup costs is a complex area of tax law that requires careful consideration. Here are some practical steps you should keep in mind: 

• Document everything: keep thorough records of all expenses and actions taken to launch the business.

• Know the criteria: some pre-startup costs may be deductible once your business begins, but they must meet specific criteria. 

• Hobby vs. business: be cautious that your venture doesn’t appear more like a hobby, which would limit deductions. 

• Consult a CPA: a CPA can ensure compliance with IRS regulations, help maximize deductions, and strategically balance your costs to align with your long-term business goals. 

Starting a business is challenging, and making the right choices can have a big impact on your tax savings. To ensure you’re maximizing deductions while staying compliant, it’s wise to consult an experienced CPA. If you’d like help navigating business tax laws and making informed decisions that align with your long-term goals, please contact our office.