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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.

Claim Up to $32,220 Today

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Claim Up to $32,220 in Missed 2021 Self-Employed COVID-19 Sick and Family Leave Credits Today

Claim Up to $32,220 in Missed 2021 Self-Employed COVID-19 Sick and Family Leave Credits Today

Were you self-employed during 2021? If so, there is a good chance that you could have qualified for COVID-19 sick and family leave credits worth as much as $32,220.

If you’re like many self-employed individuals or partners, you probably never heard about these tax credits. Unlike employee retention credit for employers, the special temporary credits for the self-employed received relatively little publicity. Many tax professionals were unaware of them. As a result, many self-employed individuals and partners never applied for them.

You qualified for the credits if you could not work or telework for various COVID-related reasons—for example, if you suffered from COVID-19; were under quarantine; underwent COVID testing; or looked after a friend, roommate, or family member impacted by the virus.

There are four separate credits:

  1. Credit for Sick Leave—January 1, 2021, through March 31, 2021
  2. Credit for Family Leave—January 1, 2021, through March 31, 2021
  3. Credit for Sick Leave—April 1, 2021, through September 30, 2021
  4. Credit for Family Leave—April 1, 2021, through September 30, 2021

The COVID-related sick leave credit was for up to 10 days from January 1, 2021, through March 31, 2021, plus an additional 10 days from April 1, 2021, through September 30, 2021. The maximum credit was $511 per day ($200 per day if you cared for others).

The COVID-related family leave credit was capped at $200 per day. Up to 50 days of credits were available from January 1, 2021, through March 31, 2021, plus an additional 60 days from April 1, 2021, through September 30, 2021. From January 1, 2021, through March 31, 2021, the credit was available only if you needed to care for a child whose school was closed or whose caregiver was unavailable because of COVID. From April 1, 2021, through September 30, 2021, lawmakers greatly expanded eligibility to include caring for yourself, roommates, friends, and relatives.

You were supposed to claim the credits on your 2021 tax return. But if you overlooked the credits, don’t worry. You can still claim them by amending your 2021 tax return. You need to file a completed 2021 IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, along with Form 1040-X.

To determine your eligible sick and family leave days, you’ll likely have to consult your calendar for 2021, emails, vaccination or other medical records, school records, or other records showing the days you could not work for COVID-related reasons. 

You don’t need to file any documentation with your amended return. Just keep it with your tax records. 

You must file your amended return within three years (including extensions). The deadline is April 18, 2025, or if you filed for an extension, up to October 15, 2025. But why wait? Amend your 2021 tax return today, and you’ll get your money as soon as possible.

Shutting Down Your S Corporation

As you consider the process of shutting down your S corporation, it is crucial to understand the federal income tax implications that come with it. Here, I outline the tax basics for the corporation and its shareholders under two common scenarios: stock sale and asset sale with liquidation.

Scenario 1: Stock Sale

One way to shut down an S corporation is to sell all your company stock. The gain from selling S corporation stock generates a capital gain. Long-term capital gain tax rates apply if you held the shares for more than a year. The maximum federal rate for long-term capital gains is 20 percent, but this rate affects only high-income individuals.

If you are a passive investor, you may also owe the 3.8 percent Net Investment Income Tax (NIIT) on the gain. But if you actively participate in the business, you are exempt from the NIIT. Additionally, state income tax may apply to the gain from selling your shares.

Scenario 2: Asset Sale and Liquidation

A more common way to shut down an S corporation involves selling all its assets, paying off liabilities, and distributing the remaining cash to shareholders. Here’s how the tax implications unfold.

Taxable gains and losses. The S corporation recognizes taxable gains and losses from selling its assets. These gains and losses are passed to shareholders and reported on their personal tax returns. You will receive a Schedule K-1 showing your share of the gains and losses to report on your Form 1040.

Long-term gains and ordinary income. Gains from assets held for more than a year are typically taxed as Section 1231 gains at long-term capital gains rates. But gains attributable to certain depreciation deductions are taxed at higher ordinary income rates, up to 37 percent. Real estate depreciation gains attributable to straight-line depreciation can be taxed up to 25 percent.

NIIT considerations. Passive investors may owe the 3.8 percent NIIT on passed-through gains, while active participants are exempt.

Liquidating distributions. The cash distributed in liquidation that exceeds the tax basis of your shares results in a capital gain, taxed as a long-term capital gain if held for more than a year. If the cash is less than the basis, it results in a capital loss.

Tax-Saving Strategy for Asset Sales

Your number one strategy for tax savings is to allocate more of the sale price to assets generating lower-taxed gains (e.g., land, buildings) and less to those generating higher-taxed ordinary income (e.g., receivables, heavily depreciated assets).

Compliance and Reporting

Report asset sales and allocations on IRS Form 8594 (Asset Acquisition Statement Under Section 1060).

File the final federal income tax return using Form 1120-S, including final shareholder Schedule K-1s.

Know the Exceptions to the 10 Percent Penalty on Early IRA Withdrawals

Early withdrawals from a traditional IRA before age 59 1/2 generally incur a 10 percent penalty tax on the taxable portion of the withdrawal. There are several exceptions to this rule that can help you avoid the penalty under specific circumstances. Below, we have outlined the key exceptions that may apply to your situation.

Substantially equal periodic payments. You can arrange for a series of substantially equal periodic payments. This method requires careful calculation and adherence to strict rules but allows penalty-free withdrawals.

Medical expenses. Withdrawals for medical expenses exceeding 7.5 percent of your adjusted gross income, or AGI, are exempt from the penalty.

Higher education expenses. You can use penalty-free withdrawals for qualified higher education expenses for you, your spouse, and your children.

First-time home purchase. You can withdraw up to $10,000 (lifetime limit) for qualified home acquisition costs without penalty.

Birth or adoption. You can withdraw up to $5,000 for expenses related to the birth or adoption of a child.

Emergency expenses. Starting January 1, 2024, you can withdraw up to $1,000 annually for emergency personal expenses without penalty.

Disaster recovery. Withdrawals for qualified disaster recovery expenses are exempt from the penalty, up to an aggregate limit of $22,000.

Disability. If you are disabled and cannot engage in substantial gainful activity, you can withdraw funds without penalty.

Long-term care. Beginning December 29, 2025, you can take penalty-free withdrawals for qualified long-term care expenses.

Terminal illness. Withdrawals due to terminal illness are exempt from the penalty.

Post-death withdrawals. Amounts withdrawn after the IRA owner’s death are not subject to the penalty.

Military reservists. Active-duty military reservists called to duty for at least 180 days can withdraw funds without penalty.

Health insurance premiums during unemployment. If you receive unemployment compensation for 12 consecutive weeks, you can withdraw funds to pay for health insurance premiums without penalty.

Domestic abuse victims. Starting January 1, 2024, you can take penalty-free withdrawals of up to $10,000 if you are a victim of domestic abuse.

IRS levies. Withdrawals to pay IRS levies on the IRA account are not subject to the penalty.

It’s important to note that SIMPLE IRAs incur a 25 percent penalty for early withdrawals within the first two years of participation. Additionally, Roth IRAs have different rules, allowing penalty-free access to contributions but potentially taxing and penalizing withdrawals of earnings.  If you have questions, don’t hesitate to contact me.

Cost Segregation: Is This Strategy for You?

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Cost Segregation

One significant tax benefit of owning residential rental property or non-residential commercial or investment property is depreciation—a deduction you get without spending any additional money.

But regular depreciation for real property is slow. Residential rental property is depreciated over 27.5 years and non-residential property over 39 years, providing a relatively small deduction each year.

Fortunately, there is a way you can speed up your depreciation deductions—especially during the first year or years you own the property: cost segregation.

“Cost segregation” is the technical term for separately depreciating the elements of property that are not real property. These are elements other than land, buildings, and building components. They include

  • improvements made to the land, such as landscaping, swimming pools, paved parking areas, and fences; and
  • personal property items inside a building that are not building components—for example, refrigerators, stoves, dishwashers, and carpeting in residential rentals.

Using cost segregation does not increase a property owner’s total depreciation deductions, but it does accelerate them over the first few years because personal property has a five- or seven-year depreciation period and land improvements a 15-year period. 

In addition, by using bonus depreciation and/or Section 179 expensing, owners can deduct all or most of the cost of personal property and land improvements the first year they own the property—providing a potentially enormous first-year deduction.

A cost segregation study must be conducted to identify which building elements are personal property and land improvements and then to determine their depreciable basis. Studies can be conducted by engineers or done more cheaply with other methods that the IRS views as less reliable.

Cost segregation may not be advisable for every property owner—for example, where it results in a loss that can’t be deducted due to the passive loss rules, or where the owner intends to sell the property within a few years and has to recapture as ordinary income the cost-segregated depreciation deductions.

The best time to perform a cost segregation study is the same year you buy, build, or remodel your real property. But you can wait until a future year—perhaps when you have enough rental or other passive income to use the speeded-up depreciation deductions.

 

Tax Implications of Shutting Down a Sole Proprietorship

As you consider shutting down your sole proprietorship or your single-member LLC treated as a sole proprietorship for tax purposes, it’s crucial to understand the tax implications of this decision. Here’s an overview of key points you need to consider.

  1. Asset Sale Tax Implications

When you sell a sole proprietorship, you sell its assets, not the company. Federal tax rules tell you how to allocate the total sale price to specific business assets. This allocation is critical as it impacts the calculation of taxable gain and loss.

  1. Taxable Gain and Loss
  • Gain. You have a taxable gain if the allocated sale price exceeds the asset’s tax basis (original cost plus improvements minus depreciation/amortization).
  • Loss. You incur a deductible loss if the tax basis exceeds the sale price.
  1. Special Rules for Depreciable Real Estate

For depreciable real estate, specific federal income tax rules apply:

  • Section 1250 ordinary income recapture. The portion of the gain on sale attributable to tax-code-defined “additional depreciation.” It’s taxed at ordinary income rates. 
  • Section 1231 gains. Gains from the sale or exchange of real estate used in a trade or business, which the tax code treats as long-term capital gains if the gains exceed any non-recaptured Section 1231 losses from the previous five years.
  • Unrecaptured Section 1250 gain. The portion of gain from the sale of real estate attributable to depreciation deductions previously taken on the property that were not recaptured as ordinary income under Section 1250. The unrecaptured 1250 gain is taxed at a maximum rate of 25 percent.
  1. Other Depreciable or Amortizable Assets

Gains attributable to depreciation or amortization deductions are recaptured and taxed at higher ordinary income rates. Remaining gains on assets held for more than one year are taxed at lower long-term capital gains rates.

  1. Non-Compete Agreement Payments

Payments received under a non-compete agreement are treated as ordinary income but are not subject to self-employment tax.

  1. Tax-Saving Strategies

To minimize tax liability, strategically allocate more of the sale price to assets generating lower-taxed long-term capital gains and less to those generating higher-taxed ordinary income.

  1. Tax Return Reporting

Report gains and losses on IRS Form 4797 and Schedule D for capital gains and losses. Use IRS Form 8594 to allocate the sale price and IRS Form 8960 to calculate the net investment income tax, if applicable (not likely).

  1. State Income Tax

You may also owe state income tax on gains from the sale of your business.

Takeaways

Properly managing the shutdown of your sole proprietorship or single-member LLC involves careful planning and accurate reporting to optimize tax outcomes.

 

Limited Partners and Self-Employment Taxes

Self-employment taxes are substantial, and most people want to minimize them. Self-employed taxpayers often avoid self-employment taxes by operating as an S corporation.

The distributions from the S corporation are not subject to self-employment tax. But Social Security and Medicare tax must be paid on the shareholders’ employee compensation (which must be reasonable based on the services they provide). S corporations are also subject to various legal restrictions that can be inconvenient. 

How about using the partnership form to avoid self-employment tax? This doesn’t work for general partnerships because general partners always have to pay self-employment taxes on their distributive share of the ordinary income earned from the partnership’s business.

But what about limited partnerships? These are partnerships that contain two classes of partners:

  1. General partners who are personally liable for partnership debts and manage the business 
  2. Limited partners whose personal liability for partnership debts is limited to the amount of money or other property they contribute

The tax law provides that limited partners “as such” don’t have to pay self-employment tax on their distributive share of partnership income. 

Moreover, in about half the states, limited partnership laws have been revised to permit limited partners to work for the partnership without losing their limited liability.

Does this mean limited partners in many states can work for the partnership and avoid paying self-employment tax on their share of the partnership income? High-earning limited partners—hedge fund managers, for example—could save substantial tax if this were the case.

Unfortunately, in Soroban, a recent precedential decision involving a highly successful hedge fund and well-paid limited partners, the U.S. Tax Court held that the answer to this question is “no.”

The court held that the limited partner exception to self-employment taxes applies only to limited partners who are passive investors, not to those actively involved in the partnership business.

Soroban is the latest in a series of cases involving self-employment taxes for partnership-like entities that the IRS has won. The other cases involved active participants in a state limited liability partnership, a limited liability company taxed as a partnership, and a professional limited liability company. Only passive investors in these entities can avoid self-employment tax.

Encouraged by these victories, the IRS is writing regulations requiring a functional analysis to determine whether a person is a limited partner. The IRS is also likely to conduct more self-employment audits of limited partnerships.

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.

IRAs for Young Adults

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IRAs for Young Adults

As we navigate the complexities of financial planning, one opportunity stands out for young adults: individual retirement accounts (IRAs). With the 2023 tax-year contributions deadline fast approaching on April 15, 2024, now is the perfect time to consider how you can leverage an IRA.

Traditional and Roth IRAs: A Brief Overview

Both traditional and Roth IRAs offer unique benefits, so the choice between them largely depends on your current financial situation and future expectations. For the 2023 tax year, you can contribute up to $6,500 or your earned income for the year, whichever is less. This cap increases to $7,000 for the 2024 tax year.

Traditional IRAs provide the potential for tax-deductible contributions, which can be particularly advantageous if you’re looking for immediate tax relief. The deductibility of your contributions may phase out based on your income and whether you’re covered by a workplace retirement plan. It’s also important to note that withdrawals from traditional IRAs are taxable, and early withdrawals may incur penalties.

On the other hand, Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. Although contributions are not tax-deductible, the tax-free withdrawal benefit in retirement can be significant, especially if you expect to be in a higher tax bracket then. Additionally, Roth IRAs do not require minimum distributions during your lifetime, offering more flexibility in retirement planning.

Key Considerations for Young Adults

Income limits and phaseouts. Be mindful of the income-based phaseout ranges that may affect your ability to contribute to Roth IRAs or deduct traditional IRA contributions.

Tax bracket considerations. Your current and expected future tax brackets are critical in deciding between traditional and Roth IRAs. If you anticipate being in a higher tax bracket in retirement, Roth IRAs may offer greater benefits.

Flexibility and future planning. Roth IRAs provide significant flexibility, allowing for tax-free and penalty-free withdrawals of contributions and offering benefits to your heirs.

The Power of Early Contributions

If you can start your IRA contributions while young, you can significantly impact your retirement savings. Even modest annual contributions can grow substantially over time, thanks to the power of compounding.

Get up to $32,220 in Sick and Family Leave Tax Credits  

If you are self-employed or operate a small corporation, it’s likely that you have not applied for your sick and family leave tax credits.

If that’s the case, we will need you to get your act together so we can file amended 2021 and 2020 tax returns now. You could find up to $32,220 in tax credits. 

To see if you qualify for the credits, ask yourself if you were unable to work or perform services from April 1, 2021, through September 30, 2021, on any day, for one or more of the following reasons: 

  1. You were subject to a federal, state, or local quarantine or isolation order related to COVID-19.
  2. You were advised by a health care provider to self-quarantine due to concerns related to COVID-19.
  3. You were experiencing symptoms of COVID-19 and seeking a medical diagnosis of COVID-19.
  4. You were seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19.
  5. You were exposed to COVID-19 or were unable to work pending the results of a test or diagnosis.
  6. You were obtaining immunization related to COVID-19.
  7. You were recovering from any injury, disability, illness, or condition related to such immunization.
  8. You were caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to COVID-19.
  9. You were caring for an individual who had been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
  10. You were caring for your son or daughter because the school or place of care for that child was closed, or because the childcare provider for that child was unavailable, due to COVID-19 precautions.
  11. You were accompanying an individual to obtain immunization related to COVID-19.
  12. You were caring for an individual who was recovering from any injury, disability, illness, or condition related to the immunization.

If you answered yes to any of these 12 questions, you qualify for tax credits. And depending on the number of qualifying days and your income, such credits could total $32,220 just for you. There’s much to this.

New Crypto Tax Reporting Rules Are Coming Soon

If you invest or trade in Bitcoin, non-fungible tokens (NFTs), Stablecoins, or other digital assets, prepare for sweeping new tax reporting requirements.

Congress wants the IRS to crack down on taxpayers who buy and sell crypto but don’t report or pay tax on their gains. To do so, it wants people and companies that facilitate the sale of digital assets to provide the IRS with the same information that stockbrokers must provide when selling stocks and other investments.

Crypto is complicated, so it has taken the IRS two years to draft over 280 pages of proposed regulations explaining how these new reporting requirements should work.

Starting with the 2025 tax year (which is just around the corner), digital asset brokers must file a new Form 1099-DA with the IRS whenever they facilitate the sale of digital assets. The 1099-DA will include such information as the customer name and TIN, sales proceeds, tax basis, and gains and losses.

“Digital asset” is defined broadly to include any digital representation of value recorded on a blockchain, including Bitcoin and other cryptocurrencies, Stablecoins, and NFTs. 

“Digital asset brokers” includes any entities that provide services that facilitate sales of digital assets and that would typically know or be in a position to know the identities of the parties involved in such sales. This includes digital asset trading platforms, payment processors, and many digital wallet providers.

The IRS scheduled the reporting rules to go into effect in two stages: For the 2025 tax year, brokers must report the gross proceeds of digital asset sales. For 2026 and later, brokers must report the adjusted basis and whether any gains or losses are short-term or long-term. Brokers do not have to report digital asset sales for tax years 2023 and 2024.

When the reporting requirements take effect, the IRS estimates that it will receive eight billion new Form 1099-DAs each year filed on behalf of 13 million to 16 million taxpayers.

Receiving Form 1099-DA should make your life easier when you file your tax return. You can rely on the gains and losses reported on the form when you complete your return. 

The new rules will also enable the IRS to compare the amounts reported on Form 1099-DA with the numbers taxpayers report on their returns. If there is a discrepancy, the IRS system will automatically send you a notice to correct your error. So, the days of evading tax on crypto transactions may soon be over.

The proposed regulations are not set in stone. There could be more changes before those rules go into effect.

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

Corporate Transparency Act Requires BOI Reporting to FinCEN

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Corporate Transparency Act Requires BOI Reporting to FinCEN

The Corporate Transparency Act (CTA) is upon us. It took effect on January 1, 2024, and imposes a new federal filing requirement for most corporations, limited liability companies (LLCs), and other business entities. 

Corporations, LLCs, and other entities subject to the CTA are called “reporting companies.” People who form new reporting companies during 2024 must file a beneficial ownership information (BOI) report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) within 90 days of forming the company.

The owners of reporting companies created before 2024 must also file a BOI report, but they have until January 1, 2025 (but think December 31, 2024).

Some businesses are exempt from filing—for example, large operating companies, which the CTA defines as those with over 20 employees and $5 million in income. There are other, narrower exemptions as well.

The BOI report must contain the name, the birth date, the address, and an ID number and image of that ID for each “beneficial owner” of the reporting company. These are the human beings who (1) own or control at least 25 percent of the company or (2) exercise “substantial control” over the company. 

The BOI report is filed online at a new federal database called BOSS (an acronym for Beneficial Ownership Secure System). There is no filing fee. 

Government law enforcement and security agencies will use the data from BOI reports to help combat money laundering, tax evasion, terrorism, and other crimes. It will not be available to the public.

Naturally, people have lots of questions about the BOI report filing requirements—for example:

  • Do you have to file a BOI report if you own a single rental property in an LLC? (Yes.)
  • Do you have to file 10 BOI reports if you own 10 LLCs? (Yes.)
  • Can certified public accountants, enrolled agents, and other non-lawyers file BOI reports for clients without running afoul of unauthorized practice of law rules? (Unclear.)
  • Are registered agents responsible for filing the BOI report? (No.)
  • Do the self-employed have to file? (No.)
  • Do I need to list a street address in the BOI report? (Yes.)
  • Do I need to list my Social Security number in the BOI report? (No.)
  • Do I need to list my attorney in the BOI report? (Maybe.)
  • Must I file an updated BOI report if a beneficial owner leaves the company? (Yes.)
  • Do I have to list my minor child in a BOI report? (No.)
  • Will criminals file BOI reports? (Who knows?)

New 1099-K Filing Rules Delayed Again  

Do you sell goods or services and receive payment through a third-party settlement organization (TPSO)? If so, you must know the IRS’s new Form 1099-K reporting rules.

TPSOs include

  • payment apps such as PayPal, Cash App, and Venmo;
  • online auction or marketplace services such as eBay and Amazon; 
  • gig economy platforms such as Uber and Airbnb;
  • some cryptocurrency processors such as BitPay;
  • craft or maker marketplaces like Etsy ;
  • ticket exchange or resale sites like Ticketmaster; and
  • some crowdfunding platforms.

For over a decade, TPSOs filed IRS Form 1099-K, Payment Card and Third Party Network Transactions, reporting certain payments the TPSOs processed for goods and services. 

But a TPSO had to file Form 1099-K only if the recipient had

  • gross annual earnings over $20,000, and
  • more than 200 transactions in the calendar year.  

With these thresholds, only frequent users of TPSOs exceeded both thresholds and had their payment information reported to the IRS. If you never received a 1099-K from a TPSO that processed payments on your behalf, this is why.

That is changing. Congress drastically reduced the 1099-K filing thresholds when it enacted the American Rescue Plan Act of 2021 to require TPSOs to file Form 1099-K for any recipient who is paid more than $600 during the year with no minimum transaction requirement.

The new 1099-K filing rules were supposed to go into effect for the 2022 tax year. 

But the IRS delayed them until 2023. Now, the IRS has delayed them yet again, announcing that the old rules ($20,000/200 transactions) remain in place for 2023

For the 2024 tax year, the IRS is replacing the $20,000/200 transaction threshold with a $5,000 threshold and no minimum transaction requirement.

For the 2025 tax year and later, the IRS will apply the $600 threshold, again with no minimum transaction requirement.

Why all the delays? Because the IRS fears that TPSOs will mistakenly file many of the expected 44 million 1099-Ks. For example, TPSOs might mistakenly file 1099-Ks for personal payments from family and friends.

Do You Qualify as a Tax Law–Defined Professional Gambler?

When it comes to taxes, the tax code treats professional gamblers better than recreational gamblers. 

Unlike recreational gamblers, professionals get to deduct all their gambling expenses (including travel, lodging, and meal expenses) up to their annual winnings, without itemizing. This is a big advantage.

If you gamble a lot, you could benefit by qualifying as a professional and filing IRS form Schedule C to report your winnings, losses, and other expenses. But it’s not easy to qualify as a professional gambler. You must

  1. gamble regularly and continuously, and 
  2. gamble with the primary purpose of earning a profit.

Most professional gamblers gamble full-time. But qualifying as a professional and having another job is possible if you gamble regularly and continuously throughout the year. 

For example, Linda Myers spent 25 to 35 hours per week running her trucking business and about 40 hours playing slot machines. She qualified as a professional gambler. But gambling sporadically won’t cut it, even if you spend a lot of time gambling.

The IRS uses a nine-factor test to determine whether you gamble primarily for profit or for other reasons, such as having fun. The profit factors include whether you carry out the activity in a businesslike way, your history of winnings or losses, your financial status, your expertise at gambling, and the time and effort you spend gambling.

Court cases show that the single most important factor is keeping good gambling records. Don’t rely on casino win/loss statements. 

A Las Vegas couple won over $19,000 at video poker but learned the hard way, when they tried to file as professional gamblers, that good records are essential. The fact that they never kept their own gambling records weighed heavily in the Tax Court’s refusal to classify them as professional gamblers.

Do this. To prove you are a professional, create your own contemporaneous gambling log or diary showing your wins and losses by gambling session. 

Also do this. Use a separate bank account for your gambling activity. 

Other things you can do to help establish your professional gambler bona fides include creating a business plan, educating yourself about gambling, and changing games if you consistently lose. Remember, as a professional, you’re gambling to make money, not to have fun. 

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

New FinCEN Filings Go into Effect on January 1

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FinCEN Filings

For existing businesses, the Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and imposes a brand-new federal filing requirement on most corporations, limited liability companies, and limited partnerships and on certain other business entities. 

No later than December 31, 2024, all non-exempt business entities must file a beneficial owner information report (BOI report) with the Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit.

The BOI reports must disclose the identities and provide contact information for all of the entity’s “beneficial owners”: the humans who either (1) control 25 percent of the ownership interests in the entity or (2) exercise substantial control over the entity. 

Your BOI report must contain all the following information for each beneficial owner:

  • Full legal name
  • Date of birth
  • Complete current residential street address
  • A unique identifying number from either a current U.S. passport, state or local ID document, or driver’s license or, if the individual has none of those, a foreign passport
  • An image of the document from which the unique identifying number was obtained

FinCEN will create a new database called BOSS (Beneficial Ownership Secure System) for the BOI data and will deploy the BOSS to help law enforcement agencies prevent the use of anonymous shell companies for money laundering, tax evasion, terrorism, and other illegal purposes. It will not make the BOI reports publicly available.

The CTA applies only to business entities such as corporations and LLCs that are formed by filing a document with a state secretary of state or similar official. It also applies to foreign business entities that register to do business in the United States.

Some businesses are exempt from the CTA, including 

  • larger businesses with 20 or more employees and $5 million in receipts, and 
  • businesses already heavily regulated by the government, such as publicly traded corporations, banks, insurance companies, non-profits, and others.

The CTA does not apply to sole proprietors or general partnerships in most states. But it does apply to single-member LLCs, even though the tax code disregards such entities and taxes them on Schedule C, E, or F of Form 1040.

The initial BOI report filing does not expire, and you don’t need to renew it. But you have an ongoing duty to keep the BOI report up to date by reporting any changes to FinCEN within 30 days of occurrence.

Failure to comply can result in hefty monetary penalties and up to two years in prison.

Beat the Net Investment Income Tax 

Here is some important information regarding the net investment income tax (NIIT), which may be relevant to your financial situation.

NIIT Overview

The NIIT is a 3.8 percent tax that could apply if your modified adjusted gross income (MAGI) exceeds $200,000 (single filers), $250,000 (married, filing jointly), or $125,000 (married, filing separately). It targets the lesser of your net investment income or the amount by which your MAGI exceeds the thresholds.

What Qualifies as Net Investment Income?

Net investment income includes income from investments (such as interest, dividends, and annuities), net rental income, and income from businesses in which you don’t materially participate. It does not include wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans.

Reducing or Avoiding the NIIT

To mitigate the NIIT, it’s crucial to understand what’s triggering it—your net investment income or your MAGI. Here are some strategies:

  1. Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal and state taxes.
  2. Donate appreciated assets. The correct asset donation avoids the NIIT and provides a tax deduction.
  3. Avoid selling appreciated stock. Buy growth stocks that don’t pay dividends, and hold them. 
  4. Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes.
  5. Invest in life insurance and annuities. This typically defers tax until withdrawal.
  6. Harvest investment losses. This can offset gains and reduce taxable income.
  7. Invest in rental real estate. Structured correctly, this can minimize taxable income.

Other Strategies

  • Active participation in business. It avoids classifying income as net investment income.
  • Short-term rentals and real estate professional status. These also avoid classifying income as net investment income.
  • Alternative marital status. Though this option may seem extreme, two single taxpayers have a higher MAGI threshold than a married couple.
  • Retirement plan investments. These can reduce MAGI.
  • IRA conversions. Converting traditional IRAs to Roth IRAs may trigger the NIIT but can have long-term tax benefits.
  • Installment sales. They can level out MAGI over time.

The NIIT can be complex, but strategic planning can significantly reduce its impact.

Deducting Start-up Expenses for a Rental Property

Are you interested in becoming a commercial or residential landlord? 

If so, you’ll likely have to shell out plenty of money before ever collecting a dime in rent. The tax code treats some of those monies as start-up expenses.

Start-up expenses are some of the costs you incur before you offer a property for rent. There are two broad categories:

  1. Investigatory 
  2. Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs

Your cost of purchasing a rental property is not a start-up expense. Rental property and other long-term assets, such as furniture, must be depreciated once the rental business begins.

On the day you start your rental business, you can elect to deduct your start-up expenses.

The deduction is equal to

  • the lesser of your start-up expenditures or $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, plus
  • amortization of the remaining start-up expenses over the 180-month period beginning with the month in which the rental property business begins.

When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return). 

Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business.

Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible.

The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses.

You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them. 

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