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Tax-savings

Your Retirement Plan Exposes You to a $150,000 Penalty

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Retirement Plan

How would you like to owe the IRS a $150,000 penalty because you failed to file a simple two-page form? It can happen all too easily if you have a solo 401(k) or another self-employed retirement plan.

If you’re self-employed and you have a qualified retirement plan, such as a solo 401(k) for yourself (and your spouse, if applicable), Form 5500-EZ must be filed with the IRS once the assets in the plan exceed $250,000. The form is usually due July 31 each year.

You—the business owner—are the plan administrator or plan sponsor and the one responsible for filing Form 5500-EZ. You can use a third-party administrator to manage your plan, complete Form 5500-EZ, and even file it with the IRS, but you continue to have, in the absence of a rare contractual arrangement, the legal responsibility for a correctly and timely filed 5500-EZ.

Beware. If you fail to file Form 5500-EZ, the potential penalties are substantial: $250 per day, up to a maximum of $150,000 for each unfiled return.

Fortunately, it’s easy to avoid the big penalties. The IRS has an amnesty program called the Late Filer Penalty Relief Program. All you have to do is simultaneously file all the Form 5500-EZs you failed to file and pay a fee. The fee is $500 for each delinquent return, up to a maximum of $1,500 per plan. $1,500 is not free, but it is likely much less than the non-filing penalty.

You won’t qualify for the amnesty program if the IRS has assessed a late filing penalty against you and issued a penalty notice. In this event, your only recourse is to attempt to get the IRS to remove the penalty for reasonable cause. If you’re successful, you won’t have to pay the IRS anything. Grounds for relief include natural disasters, inability to obtain records, serious illness or death, or other reasons showing your failure to file was not due to a lack of ordinary business care and prudence.

You can forgo the amnesty program and make a reasonable cause request if the IRS has not assessed the penalty. If you win reasonable cause relief, you won’t pay the IRS fee. But this is risky. If the IRS denies your reasonable cause request, you’ll no longer qualify for amnesty because the IRS will assess the penalty for the delinquent return(s).

 

Turn Your Corporate Vehicle into a Tax-Smart Asset

If your S or C corporation owns a vehicle that you also use personally, there are important tax rules you need to follow—and smart planning can help you save significantly.

Let’s say you use a corporate vehicle 80 percent for business and 20 percent for personal use. The IRS doesn’t allow “free” personal use. You either

  • include the value as W-2 income, which increases your tax burden; or
  • reimburse the corporation, which often results in lower taxes and no payroll tax implications.

Here’s why this matters: if structured correctly, your corporation can deduct 100 percent of the vehicle’s costs, including depreciation, fuel, insurance, and maintenance—even with some personal use. But there are conditions.

If business use falls below 50 percent, your corporation loses access to accelerated depreciation methods such as Section 179 and bonus depreciation and must use straight-line depreciation instead.

To value your personal use on vehicles that cost more than $61,200, your corporation must use either the IRS’s lease valuation table or a fair-market lease equivalent—plus the actual cost of fuel.

Failing to handle this properly—especially if you wait until after year-end—can create tax headaches, including amended W-2s or non-deductible dividends.

The good news? We can help you get this right. From computing personal use to setting up year-end reimbursements and ensuring full corporate deductions, we’ll make sure your vehicle is a tax asset—not a liability.

 

Personal Vehicle Used for Business Can Produce a Big Surprise Deduction

If you’ve used your personal vehicle for business—whether you’re a sole proprietor or you received mileage reimbursement from your S or C corporation—there may be a valuable tax deduction waiting for you.

When you use the IRS standard mileage rate (or when your corporation uses it to reimburse you), the mileage rate is not just a substitute for gas and maintenance. You’re also claiming “embedded depreciation”—a hidden deduction built into the mileage rate.

Here’s where the surprise comes in: when you sell or trade in that vehicle, you could be eligible for a significant additional deduction tied to that depreciation.

Let’s say you bought a $50,000 vehicle in 2021 and used it 80 percent for business. Over the past 4.5 years, you have accumulated nearly 40,000 business miles and deducted or been reimbursed based on the IRS mileage rate. You then sell the vehicle for $20,000. 

By calculating the business-use portion of the sale and subtracting your embedded depreciation, you might unlock a $12,937 ordinary loss—fully deductible against your other income, under Section 1231 of the tax code.

This isn’t a tax loophole—it’s standard tax law, but it’s often overlooked. And it only applies if your vehicle was

  1. deducted or reimbursed using the standard mileage rate,
  2. used at least partially for business, and
  3. sold or traded in after accumulating depreciation.

Why Landlords Should File Form 1099-NEC

If you own rental property, you may have heard that you’re not required to file Form 1099-NEC for contractors, such as plumbers or handymen. While that’s often true, choosing not to file could be costing you valuable tax savings.

Filing 1099s helps position your rental activity as a trade or business—a critical step if you want to claim the 20 percent Section 199A deduction or deduct repairs under the de minimis safe harbor.

Here’s how it works:

  • Section 199A allows a 20 percent deduction on net rental income—but only if your rental qualifies as a business. Filing 1099s supports that claim, and it can be worthwhile. For example, $20,000 in rental income could mean $4,000 in deductions—saving you nearly $1,000 at a 24 percent tax rate.
  • The de minimis safe harbor allows you to deduct repair and maintenance costs (up to $2,500 per item) immediately rather than depreciating them over several years. But again, this applies only if the tax code treats your rental activity as a business.

The IRS has made clear that failing to file 1099s may weaken your ability to claim these benefits. Fortunately, this is something you can address proactively.

We can help you evaluate your rentals, determine whether you qualify, and handle the necessary filings and documentation. It’s a small step that could lead to decent savings.

 

Life Insurance: You Don’t Have to Die to Collect

Could you use a quick infusion of tax-free cash? Your life insurance policy may provide one. And you don’t have to die to collect.

To access money from your life insurance policy without dying, you must have the right type of policy—a permanent life insurance policy that lasts your entire life, such as whole life, universal life, variable life, or indexed universal life. A cheap term life policy doesn’t provide any lifetime cash benefits.

Permanent life insurance includes a savings component. The insurance company puts a portion of your premiums into a cash value account, and this sum grows over time on a tax-deferred basis.

There are several different ways to tap into your policy’s cash value while you’re still alive:

  • You can make partial withdrawals from your policy’s cash value account. Many insurers cap withdrawals at 75 percent to 90 percent of the total cash value. Withdrawals up to the account’s cost basis (total premiums paid) are tax-free. You pay tax at ordinary rates on withdrawals over your cost basis. You don’t have to repay the withdrawals, but they will reduce the policy’s death benefit if they are not repaid.
  • You can surrender your policy to your insurer, who will pay the total amount of the cash value account, less fees (which can be substantial if the policy is less than 10 to 15 years old). The payment is taxable at ordinary income rates to the extent it exceeds the total premiums paid.
  • You can take out loans from your insurer using your policy’s cash value as collateral. Such loans often have lower interest rates than bank loans, and they are tax-free. Borrowing from your insurer does not affect your policy’s cash value—it will continue to earn interest and grow tax-free. You aren’t required to repay the loan, but if unpaid, it will reduce your policy’s death benefit.

You may be able to sell your policy to a third party, who will then make the premium payments and collect the death benefit when you die. This option is available only to older policyholders (over age 65) or those who are terminally ill or disabled. The sale proceeds for life settlements are taxable to the extent they exceed the premiums paid. But “viatical settlements” (those made by terminally ill or disabled policyholders) are tax-free.

If you have questions, don’t hesitate to contact me.

IRS Makes It Harder to Use the Section 530 Safe Harbor

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It can cost you a bundle if you misclassify a worker as an independent contractor instead of an employee for federal employment tax purposes.

The IRS can make you pay back payroll taxes plus penalties—in some cases, these can equal 40 percent of gross payroll or more. That’s the bad news.

The good news: hiring firms have a “get out of jail free” card—the Section 530 safe harbor. 

If your company qualifies for Section 530 relief, the IRS can’t impose assessments or penalties for worker misclassification, and you may continue to treat the class of workers involved as independent contractors for employment tax purposes. This is so even if you should have classified the workers as employees under the regular IRS common law test.

Sounds great. What’s the catch? The catch is that it can be hard for a hiring firm to qualify for Section 530.

You must satisfy three requirements to qualify for Section 530 relief:

  1. You must have filed all required Form 1099-NEC returns (or other required information returns) for the workers involved.
  2. You must have treated all workers doing substantially similar work consistently as independent contractors.
  3. You must have a reasonable basis for treating the workers as independent contractors, such as a legal case, prior IRS audit, or long-standing practice in the industry.

For the first time in 40 years, the IRS has issued a new revenue procedure updating how it should apply Section 530. Unfortunately, the new procedure can make it harder for hiring firms to qualify for Section 530 relief.

The IRS says that in making its determination of whether a hiring firm has a reasonable basis for classifying its workers as independent contractors, it may consider whether the firm treated the workers involved as employees for non-tax purposes, such as for federal or state labor law or for state unemployment insurance or workers’ compensation insurance coverage. 

This can be problematic for hiring firms because there are various reasons why a firm might treat a worker as an employee for non-tax purposes—reasons that have nothing to do with whether the firm reasonably believed the worker qualified as an independent contractor for IRS purposes.

The IRS’s new approach makes it more important than ever for hiring firms that use independent contractors to plan ahead to ensure that they qualify for Section 530 relief. Hiring firms must document that they qualify for relief when they classify the workers as independent contractors. You can’t wait until you are audited, and the IRS questions your worker classification practices, to think about Section 530. 

 

Protect Yourself: Digitize Tax Receipts

When it comes to IRS audits, one of the most common reasons taxpayers lose deductions is the lack of proper documentation. 

While your credit card or bank statements prove you spent money, they don’t show what you purchased. Without supporting receipts or invoices, these records are considered “naked”—and during an audit, that’s a problem.

To fully protect your deductions, especially for business-related expenses such as meals, travel, vehicle use, and gifts, you need to keep receipts that document five key facts: the date, the amount, the place, the business purpose, and the business relationship. The best way to do this is by capturing digital copies of your receipts.

Fortunately, it’s now easier than ever. Using your smartphone, you can snap a photo of your receipt and store it securely using apps such as Shoeboxed, Expensify, Zoho Expense, and others. These tools often let you add notes, categorize expenses, and sync directly with accounting software like QuickBooks or FreshBooks.

Why go digital? Paper receipts fade—especially those printed on thermal paper. Digitizing them ensures they’re legible and accessible when needed, whether for year-end tax preparation or an unexpected audit.

Taking a few seconds now to scan or photograph each receipt can save you time, stress, and potential lost deductions later.

 

Avoid Unwanted Partnership Tax Status: Elect Out

If you’re involved in a real estate or investment venture with one or more other parties—perhaps co-owning property or collaborating on a business project—you might think you’re simply sharing ownership. 

But the IRS may see it differently. Without proper precautions, your arrangement could be classified as a partnership for federal tax purposes, triggering filing requirements and potential penalties you weren’t expecting.

 

Why It Matters

Under IRS rules, many informal joint ventures—such as syndicates, pools, and unincorporated business arrangements—can be treated as partnerships, even without a legal partnership agreement. 

This could mean:

  • You would need to file Form 1065 annually.
  • You would have to issue Schedule K-1s to all co-owners.
  • You might lose eligibility for Section 1031 like-kind exchanges.
  • You could incur potential IRS penalties of up to $255 a month per partner, limited to 12 months.

Fortunately, if your situation qualifies, you can elect out of partnership status and avoid these headaches.

 

How to Elect Out

The IRS allows co-owners of certain investments—such as real estate or oil and gas ventures—to opt out by filing a “blank” Form 1065 with specific details and a formal election statement. This proactive step ensures each owner can independently report income and deductions on their return, often using Schedule E or Schedule F of Form 1040.

 

Take Action Now

Failing to file a partnership return when required can be costly.

 

Greed or Goodwill? Your Motive Makes a Scam Loss Deductible

Scams are incredibly common. 

According to recent Federal Trade Commission data, consumers reported losing more than $12.5 billion to fraud in 2024. They reported losing more money to investment scams—$5.7 billion—than any other category. Older people are particularly prone to being scammed. 

If you’re the victim of a scam, can you deduct your losses as a theft loss? In the past, you often could because losses due to fraud and larceny were deductible theft losses subject to certain limits.

All this changed in 2017 when Congress enacted the Tax Cuts and Jobs Act (TCJA). The TCJA added a new provision to the tax code, providing that from 2017 to 2025, personal theft losses are deductible only if they are attributable to a federally declared disaster. This means almost all theft losses are not deductible at all during these years.

But all is not necessarily lost for fraud victims. Thefts involving business property and those involving transactions entered into for profit are deductible without the need for a disaster. Thefts arising from for-profit activities are deductible as a miscellaneous itemized deduction on Schedule A, not subject to the 2 percent of adjusted gross income floor.

Thus, if you’re the victim of a scam, you can get a theft loss deduction if it arose from a for-profit transaction.

The IRS chief counsel has provided helpful guidance explaining when common scams are deductible. The scams clarified involve victims transferring money from their IRA and non-IRA accounts to scammers, typically overseas.

The IRS chief counsel advised that losses due to compromised account scams, “pig butchering” investment scams, and phishing scams are deductible because the victims of these scams all have a profit motive: earning more investment returns or safeguarding IRA and non-IRA accounts established to earn a profit.

On the other hand, losses due to romance scams or fake kidnapping scams are not deductible as theft losses because the victims voluntarily transferred their money to the scammers out of mistaken love or intending to protect loved ones—which are not profit motives. Their losses were non-deductible personal theft losses.

In short, losses due to scams that rely on the victim’s greed are deductible. Losses from scams that count on the victim’s love or desire to help others are not deductible. 

This seems ridiculous, but it is the natural result of the very harsh rule established by the TCJA, which states that personal theft losses are never deductible. The IRS chief counsel tries to ameliorate the harshness of this rule by taking a relatively liberal view of what constitutes a transaction entered into for profit.

Court Battles Rage: File Your FinCEN BOI Report Now or Wait?

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Court Battles Rage: File Your FinCEN BOI Report Now or Wait?

Here’s an update on the Corporate Transparency Act (CTA) and its beneficial ownership information (BOI) reporting requirements. Recent legal developments have created uncertainty around filing deadlines, and it’s important to understand your options and responsibilities.

 

Background on the CTA

The CTA requires many smaller corporations and LLCs to file a BOI report with FinCEN, identifying and providing contact information for the individuals who own or control the entity. This report is used solely for law enforcement purposes and is not made public.

Initially, businesses in existence before 2024 were required to file by January 1, 2025, while new businesses formed in 2024 had a 90-day filing deadline. However, recent court rulings have disrupted these deadlines.

 

Current Status

As of January 1, 2025, a nationwide injunction is in place, delaying all BOI filing requirements. While the injunction is active, you are not required to file a BOI report, and no penalties apply for non-filing. The injunction impacts the following entities:

  • Businesses formed before 2024 with a January 1, 2025, deadline
  • New businesses formed in 2024 with a 90-day filing deadline
  • Businesses with changes requiring updates to previously filed reports

 

Voluntary Filing Option

Although filing is not currently required, you may file voluntarily. This can simplify compliance by avoiding last-minute deadlines if the injunction is lifted. Should the injunction end, deadlines may resume with little notice, so being prepared is essential.

 

Takeaways

While the CTA remains under judicial review, you are not obligated to file your BOI report. But it may be prudent to prepare now by gathering the necessary information. If you have already filed, no further action is needed unless there are reportable changes.

 

Can Real Estate Professional Status Free Up Old Passive Losses?

Deducting your rental property tax losses against your other income is tricky, as you likely know. You have to get the tax law to treat you—say, a computer engineer—as a tax-code–defined real estate professional.

Let’s say you get there. Does that status allow immediate use of suspended passive losses? Unfortunately, the answer is no. Here’s why.

 

Understanding Passive Loss Rules

The tax code limits passive loss deductions to passive income, with any excess carried forward to future years. You release the carried-forward losses when you have offsetting passive income from the same or other passive activities, or when you completely dispose of the activity generating the loss.

 

Real Estate Professional Status

Qualifying as a real estate professional under IRS rules requires meeting two tests annually:

  1. Spend more than 50 percent of your work time in real property trades or businesses.
  2. Perform at least 750 hours of your work in real property trades or businesses.

 

Material Participation

Additionally, to create non-passive losses, you must materially participate in the rental activity.

 

The Two-Part Solution 

Meeting (1) the real estate professional test and (2) the material participation standard allows current-year rental losses to offset non-passive income, such as wages or business income.

 

Impact on Prior Passive Losses

Qualifying as a real estate professional is not retroactive. Suspended passive losses from prior years remain subject to the original rules. You can use the prior suspended losses in the following ways:

  • To offset passive income from the same or other passive activities
  • When you completely dispose of the activity that created the suspended passive losses

 

Key Takeaways

Real estate professional status offers valuable tax benefits for your rental properties but does not free up prior passive losses. Annual testing is required to maintain this status.

 

Missed an Estimated Tax Payment—Now What?

Missing an estimated tax payment can result in non-deductible penalties. Make timely payments via IRS Direct Pay or EFTPS—secure and convenient methods to help you avoid the penalties.

 

Key Points

  • Due dates. For tax year 2024, payment deadlines are April 15, June 17, and September 16, 2024, and January 15, 2025. For tax year 2025, payments are due April 15, June 16, and September 15, 2025, and January 15, 2026.
  • Avoid penalties. Pay at least 90 percent of your current year’s tax or 100 percent of last year’s tax—or 110 percent if prior-year adjusted gross income (AGI) exceeds $150,000.
  • Exceptions. Uneven income earners can use the annualized income method to align payments with earnings.
  • Catch-up payments. Catching up when you miss a payment stops the penalty from accruing further but does not achieve forgiveness for the previous penalty assessed.

 

Tax-Free Home Sale: When and Why You Need to Report to the IRS

You’re probably aware that when you sell your home, you may exclude up to $250,000 of your gain from tax if you’re unmarried (or married, filing separately) and $500,000 if you are married and file jointly. 

To claim the whole exclusion, you must have owned and lived in your home as your principal residence for an aggregate of at least two of the five years before the sale. You can claim the exclusion once every two years.

The home sale exclusion is one of the great tax benefits of home ownership. Many home sellers owe no tax at all when they sell their homes.

If a home sale is tax-free due to the exclusion, do you need to report the sale to the IRS on your tax return? It depends.

Your home sale may have already been reported to the IRS by your real estate agent, closing company, mortgage lender, or attorney. The IRS has a special information return for this purpose: Form 1099-S, Proceeds from Real Estate Transactions. This form lists 

  • the gross proceeds from the sale, 
  • the property address, and 
  • the closing date.

Typically, the 1099-S is issued at the home sale closing and is included in the closing documents you receive at settlement. If you received a Form 1099-S, you must report the sale on your tax return, even if your entire gain is tax-free due to the $250,000/$500,000 exclusion. Failure to do so will result in the IRS assuming that the selling price is the taxable gain (and that’s a mess).

Form 1099-S need not be filed if your home sold for less than the applicable $250,000/$500,000 exclusion and you sign a certification stating that you qualified for the exclusion. You generally do this at the closing.

If Form 1099-S was not issued, the IRS does not require you to report the sale on your return. But doing so anyway can be a good idea because it can prevent the IRS from asserting that the six-year statute of limitations on audits should apply because you omitted more than 25 percent of gross income from your return.

Reporting the sale of a principal residence is not difficult. You must file IRS Form 8949, Sales and Other Dispositions of Capital Assets, with your annual return and enter your zero gain on IRS Schedule D.

If you have questions, don’t hesitate to contact me.

Tax-Saving -Three Possible Ways to Deduct Your Dog or Cat

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Three Possible Ways to Deduct Your Dog or Cat

Dogs, cats, and other household pets are expensive. Owners spend an average of $1,270 to $2,800 a year to own a dog. Can you ever deduct these costs from your taxes?

The expenses for a family pet that provides you only with love and companionship are never deductible. They are purely personal expenses. 

But it is possible to deduct the expenses for a dog, a cat, or another animal if it qualifies as a

  • medical expense
  • business expense, or
  • charitable deduction.

The costs of buying, training, and maintaining a dog or another animal qualify as deductible medical expenses if you 

  • use the animal primarily for medical care, and
  • would not have paid the expenses but for the disease or illness involved. 

Medical deductions are allowed for service animals trained to aid their owners with a disability. Examples include guide dogs for people who are blind or have low vision, or dogs trained to carry items for people with physical disabilities.

You can also deduct as a medical expense emotional support animals, such as dogs, cats, or other animals that help people suffering from mental or emotional disabilities. Emotional support animals are more challenging to deduct than service animals because they can seem little different from regular pets. The animal should be prescribed (or at least recommended) by a licensed healthcare provider as part of a mental health treatment plan.

You can deduct dogs and other animals as a business expense if they serve a legitimate business purpose. For example, you can deduct a guard dog used for security at your business location. The guard dog should be trained and should be an appropriate breed for guarding purposes, such as a Rottweiler, German shepherd, or Doberman pinscher. Don’t try to deduct a small dog like a Chihuahua as a guard dog!

Cats have achieved business-deductible status when used for pest control at a business location.

If you foster dogs, cats, or other animals in your home, you may be able to take a charitable deduction for the reasonable expenses you pay out of your own pocket, such as pet food expenses and veterinary bills. You may not deduct the value of the time you spend fostering animals or the value of donating space in your home for this purpose.

To qualify for this charitable deduction, you cannot foster animals on your own. You must do so on behalf of a Section 501(c)(3) charitable organization. You must also obtain a written acknowledgment from the charity if your expenses exceed $250.

 

Got IRS Penalties? Know the Rules, Pay Nothing

If the IRS has recently claimed that you owe a penalty for late filing, late payment, or missed employment tax deposits, pause before making any payment. You may not have to pay that penalty at all.

The IRS often imposes steep penalties for filing tax returns late, failing to pay taxes on time, or not depositing employment taxes correctly. However, several strategies can help you get those penalties removed—and in some cases, even refunded if you have already paid them.

Common IRS Penalties and Their Impact

Some of the most common penalties include:

  • Late filing penalty. For individual or C corporation returns, this can be up to 5 percent of the unpaid tax for each month the return is late, maxing out at 25 percent. Partnerships and S corporations can incur penalties of $245 per partner or shareholder per month.
  • Late payment penalty. This penalty is generally 0.5 percent of the unpaid tax per month, maxing out at 25 percent.
  • Penalty for failure to deposit employment taxes. This penalty ranges from 2 percent to 10 percent, depending on how late the deposit was.

 

Strategies for Relief

Here are a few ways to potentially avoid or reduce these penalties:

First-time abate. If this is your first time receiving a penalty—or your first time in over three years—you may be eligible for a “first-time abate.” This is one of the easiest and most common ways to remove a penalty. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. As long as your tax compliance history is clean, you may qualify.

Partnership relief. If your business is a partnership with 10 or fewer partners, and if all partners filed their tax items on time, you may be eligible for relief under Revenue Procedure 84-35. This is a little-known but effective option.

Reasonable cause. If neither of the first two options applies, you can request penalty relief by showing that there was a reasonable cause for your late filing or payment. This could include illness, a natural disaster, or other significant life events that impacted your ability to meet IRS deadlines.

Next Steps

If you believe any of the penalties you’re facing may qualify for relief, you may be able to remove those penalties with a simple phone call. Using the right approach and trigger words when speaking to the IRS can make all the difference.

If you have already paid the penalties, you can use IRS Form 843 to file for a refund if you do so within three years of filing the return or within two years of paying the penalty.

 

Know the Three Ways the Tax Law Treats Personal Property Rentals

Here are some key points about renting personal property, which includes equipment, vehicles, and furniture. The tax treatment differs from real estate rentals, and how you classify the rental activity will affect how you report income, expenses, and potential self-employment tax.

Classification of Personal Property Rentals

The tax code treats personal property rentals in three ways:

  1. Business. If your primary purpose is to earn income and the activity is continuous, it is considered a business. You must report the income on Schedule C, subject to self-employment tax.
  2. For-profit activity. If the rental is profit-motivated but sporadic, it’s a for-profit activity. You report the income on Schedule 1. There’s no self-employment tax.
  3. Not-for-profit activity. If the rental activity is primarily for personal reasons (e.g., for recreation), it is considered not-for-profit. You report the income on Schedule 1, but cannot deduct expenses related to the activity.

 

Renting to Your Own Business

If you rent personal property to your own business, the tax implications depend on the business structure.

Sole proprietorship or single-member LLC. Rentals between you and your business are not taxable events.

Corporation, partnership, or multi-member LLC. Renting to your business is a taxable event. The business can deduct rental payments, and you report the income on your tax return.

For C corporations, this can help avoid double taxation, as rent payments are taxed only once as income to you.

Self-Rental Rule

The “self-rental” rule applies to renting personal property to a business in which you materially participate. The rule works like this:

  • If the rental activity produces net income, it is characterized as non-passive income, meaning you can’t deduct passive losses against this income. 
  • If the rental activity creates a loss, the loss continues as a passive loss, which you can offset only with passive income.

 

Key point. Self-rental gives you the worst of both worlds—passive classifications.

Grouping

You can avoid the self-rental rules with the grouping election. You may group your property rental with your business when the group forms an appropriate economic unit and

  • the rental activity is insubstantial relative to the business activity, or vice versa, or
  • each owner of the business activity has the same proportionate ownership interest in the rental activity.

Caution 1. The tax code prohibits grouping real and personal property rentals.

Exception. If you rent the business building or office unit to your business and such rental includes furnished offices, the prohibition on combining activities does not apply. You can group with the business activity under the grouping rules above.

Caution 2. The self-rental grouping election does not work with a C corporation.

If you have questions, don’t hesitate to contact me.

Tax Guide to Deducting Long-Term Care Insurance Premiums

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Tax Guide to Deducting Long-Term Care Insurance Premiums

Tax Guide to Deducting Long-Term Care Insurance Premiums

Long-term care costs can be substantial, and neither Medicare nor Medicaid provide comprehensive coverage for most people. Long-term care insurance can help protect your finances, and there may be ways to deduct the premiums, depending on your business structure.

Here are four key points to consider:

  1. C corporations can provide long-term care insurance as a fully deductible, tax-free benefit to owners.
  2. Sole proprietors or single-member LLCs with a spouse as the only employee may be able to deduct 100 percent of the premiums through a Section 105-HRA plan.
  3. S corporation owners, partners, and other sole proprietors may be able to deduct premiums subject to age-based limits.
  4. If you don’t qualify for business-related deductions, you might deduct premiums as itemized deductions subject to age-based limits and the 7.5 percent floor.

Smart Solutions That Decrease Social Security and Medicare Taxes

Here are some important updates and strategies regarding Social Security and Medicare taxes that may significantly impact your business.

For 2024, the Social Security tax ceiling increased to $168,600, resulting in a maximum Social Security tax of $20,906 for high-earners. The Social Security Administration projects this ceiling to rise annually, reaching $242,700 or more by 2033. Additionally, the government adds a 2.9 percent Medicare tax to all wages and self-employment income, with an extra 0.9% for high-income earners.

If you’re self-employed, these taxes can be particularly burdensome. Here are three strategies that can potentially reduce your tax liability:

  1. Operate as an S corporation. This structure allows the corporation to pay you a reasonable salary and distribute the remaining profits to you, exempt from self-employment taxes.
  2. Leverage community property rules. Married filers living in community property states can use IRS rules to eliminate or create a spouse partnership in order to reduce self-employment taxes.
  3. Avoid the husband-wife partnership classification. With close attention to partnership attributes, you can avoid the husband-wife partnership classification and reduce overall self-employment taxes.

Each of these strategies has specific requirements and potential trade-offs.

What Happens When You Die and Your S Corporation Owns the Rental?

You may own an S corporation with a rental property as its sole asset.

A common concern with this approach is what happens when the owner passes away, specifically regarding the step-up in basis.

Here’s good news. While technically the rental property itself doesn’t receive a step-up in basis upon your death, your heirs will achieve the same outcome. It works like this:

  • Your heirs inherit the S corporation stock at its stepped-up fair market value.
  • When the S corporation sells the rental property, it recognizes a gain.
  • The gain on the rental property increases your heirs’ basis in the S corporation stock.
  • Upon liquidation of the S corporation, your heirs recognize a capital loss that offsets the earlier gain.

The result is that your heirs can potentially sell the property without incurring any federal income tax liability, effectively achieving the same outcome as they would with a traditional rental property basis step-up.

Reduce Taxes by Using the Best Cryptocurrency Accounting Method

Consider this happy scenario: You purchased one Bitcoin for $15,000 14 months ago and another six months later for $40,000. Today, you sell one Bitcoin for $60,000. You’re a genius! But is your taxable gain $45,000 or $20,000? 

It all depends on your crypto accounting method.

Many crypto owners are enjoying substantial gains at a time of surging cryptocurrency prices. When you sell multiple crypto units in the same year, you reduce your taxable gains using a crypto accounting method that provides the highest possible tax basis for each unit sold, resulting in the lowest taxable profit.

As you might expect, the default method approved by the IRS doesn’t always provide the highest basis, resulting in higher taxes. The IRS made FIFO (first in, first out) the default method. It requires you to calculate your basis in chronological order for each crypto unit sold. With FIFO, your basis in the above example is $15,000, and your taxable profit is $45,000.

You can use a method other than FIFO. The other methods are called “specific identification methods” and include HIFO (highest in, first out) and LIFO (last in, first out). With HIFO, you are deemed to sell the crypto units with the highest cost basis first; your basis in the above example would be $40,000, and your taxable profit only $20,000.

Because HIFO sells your crypto with the highest cost basis first, it ordinarily results in the lowest capital gains and the largest capital losses. But using HIFO can cause loss of long-term capital gains treatment if you have not held the crypto for more than one year.

Using HIFO or LIFO is more complicated than using FIFO. You must keep records showing

  • the date and time you acquired each crypto unit,
  • your basis and the fair market value of each unit at the time it was acquired,
  • the date and time each unit was sold or disposed of, and
  • the fair market value of each unit when sold or disposed of.

If you lack adequate records, the IRS will default to the FIFO method during an audit, which could result in more taxable profit.

It’s next to impossible to manually create the needed crypto records, particularly if you have many trades. Most crypto owners use specialized crypto tax software that automates the basis and gain/loss calculations and can even fill out the required tax forms.

You can change your crypto accounting method from year to year without obtaining IRS permission—for example, you can change from FIFO to a specific identification method such as HIFO. You don’t have to disclose which method you use on your tax return.

Avoid the Hidden Dangers of the Accumulated Earnings Penalty Tax

If you run your business as a regular C corporation, beware of the accumulated earnings tax (AET). 

The IRS can use the AET to penalize C corporations that retain earnings in the business rather than pay them to shareholders as taxable dividends. When retaining earnings, the C corporation first pays the corporate tax of 21 percent on those earnings.

When the corporation distributes those already taxed earnings to shareholders, the shareholders include those distributed earnings as dividends in their taxable income, where they are taxed again at the shareholders’ capital gains rate.

The AET is a flat 20 percent tax. It is a penalty tax imposed after an audit in which the IRS concludes that the corporation paid out insufficient dividends when compared with the amount of income accumulated by the corporation. 

You have AET exposure when your C corporation has large balances in retained earnings, cash, marketable securities, or loans to shareholders reported on its balance sheet on IRS Form 1120, Schedule L.

The IRS can impose the AET on any C corporation, including public corporations. However, closely held C corporations are the most likely targets because their shareholders have more influence over dividend policy than do public corporations’ shareholders.

Historically, IRS auditors have not prioritized the AET, but anecdotal evidence suggests this may change.

Fortunately, there are many ways to avoid problems with the AET—for example:

  • Elect S corporation status.
  • Retain no more than $250,000 in earnings ($150,000 for corporations engaged in many types of personal services)—all C corporations are allowed to retain this much without incurring the AET.
  • Establish that the corporation needs to retain earnings above $250,000/$150,000 for its reasonable business needs—for example, to provide necessary working capital, fund expansion needs, pay debts, or redeem stock. 

The key to avoiding the AET is to document the reasons for accumulating earnings beyond $250,000/$150,00 in corporate minutes, board resolutions, business plans, budget documents, or other contemporaneous documentation.

If you have questions, don’t hesitate to contact me.

Protect Yourself from Payroll Fraud

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Protect Yourself from Payroll Fraud

Owning and running a business means wearing many hats, including keeping a close eye on your payroll taxes. Here’s a real-life story that underscores the importance of vigilance.

Rodney Taylor trusted his corporation’s accounting to Robert Gard, CPA. Over several years, Gard embezzled between $1 million and $2 million, including funds meant for payroll taxes.

Despite Gard’s actions, Taylor was held responsible for settling the unpaid payroll taxes with the IRS as the business owner and “a responsible party” under tax law.

This case teaches a vital lesson: delegation is necessary in business, but you cannot delegate your legal responsibilities. Here are two proactive measures to help safeguard your business:

  1. Direct oversight: Ensure you personally receive payroll reports for initial review.
  2. Regular verification: Periodically confirm that payroll tax payments have been made via the IRS Electronic Federal Tax Payment System (EFTPS).

By incorporating these practices, you can significantly reduce the risk of embezzlement and ensure compliance with tax regulations, protecting your business’s financial health.

 

Selling Your Home to Your S Corporation

If you’re considering turning your home into a rental property, selling it to your S corporation can offer significant tax advantages.

 

Advantages of Selling to Your S Corporation

– Tax-free profit on the home sale: By selling your home to your S corporation, you can take advantage of the home-sale profit exclusion—up to $500,000 for married couples—assuming you meet the eligibility requirements.

– Higher depreciation deductions: The sale increases the depreciable basis of your property, leading to higher annual depreciation deductions.

 

Addressing Potential Concerns

– Property tax increase: The sale may lead to higher property taxes due to reassessment at current market value, but the overall tax savings and increased depreciation typically outweigh these costs.

– Homestead exemption loss: Converting your home to a rental property means losing any homestead exemption benefits, whether or not you sell to your S corporation. Therefore, this is not a disadvantage unique to the sale.

– Legitimacy of the transaction: Selling to your S corporation is a related-party transaction, but it is legitimate under tax law. The profit is treated as ordinary income, but if you can apply the home-sale exclusion, you avoid federal taxes on that income.

 

Steps to Implement

– Form an S corporation: Establish a separate S corporation to hold your former home as rental property.

– Get an appraisal: Obtain an independent appraisal to determine the fair market value of your home.

– Follow formal procedures: Use professional services to handle the title transfer and legal documentation, ensuring the sale reflects an arm’s-length transaction.

– Keep thorough records: Maintain detailed records to support the transaction’s legitimacy if the IRS investigates.

 

Conclusion

Selling your home to your S corporation before converting it to a rental property can offer substantial financial benefits. Despite the potential for increased property taxes, the tax savings and enhanced cash flow can result in a net positive financial outcome.

 

Home-Office Deduction Without Business Income?

You might have heard that you can’t claim a home-office deduction without business income. That’s a misconception. Here’s why:

 

Key Points

– Claim business deductions regardless of income: Even if your business didn’t generate income this year, you should still claim all business deductions. This might create a net operating loss, which can be carried forward to offset future taxable income.

– Claim home-office deduction without income: Home-office expenses that aren’t deductible this year can be carried forward to future years. This is particularly important for deducting business miles.

– Impact on business miles: If you don’t claim your home office as your principal place of business, trips to many business locations are considered personal miles. Claiming the home office simplifies this.

– File a tax return: Even without business income, file a tax return to claim these deductions and losses.

 

Action Steps

– Document your home office: Keep records proving your home office is your principal place of business.

– Claim all deductions: Even in loss years, ensure you claim all possible deductions.

 

Conclusion

A home office can provide substantial tax advantages, even when your business income is minimal or nonexistent. Position yourself to fully utilize these benefits now and in the future.

 

Tax Implications of Dissolving a Partnership

Considering winding down your partnership? Here’s what to expect in three common scenarios of dissolution.

 

Scenario 1: One Partner Buys Out the Others

When one partner buys out the others, the departing partners will likely recognize a capital gain or loss on their sale. The remaining partner’s new basis in the acquired assets becomes their foundation for a new business structure, whether as a sole proprietorship or another entity.

 

Scenario 2: Liquidation with Asset Sale

If the partnership liquidates by selling all assets and distributing cash, each partner must report their share of gains or losses on Schedule K-1. These gains could be taxed as long-term capital gains or ordinary income, depending on the asset type and depreciation recapture rules.

 

Scenario 3: Distributing Assets Directly to Partners

The most complex scenario involves directly distributing all assets to the partners. This can lead to varied tax outcomes based on asset type and each partner’s basis in the partnership. Gains may arise if “hot assets” like appreciated inventory or receivables are included.

 

General Considerations

– Tax forms: Regardless of the scenario, file a final partnership tax return (IRS Form 1065) and issue a final Schedule K-1 to each partner.

– State taxes: Be aware of potential state tax obligations.

– Passive losses: Liquidating the partnership may make suspended passive losses deductible.

Understanding these scenarios and planning accordingly can help mitigate tax burdens and streamline the dissolution process. If you have questions, don’t hesitate to contact me.