Important Events that Affect Year-End Tax Planning

October 29, 2024 by Nicholas DaPaz CPA

As we approach the end of the year, it’s crucial to consider how significant personal and business events may impact your tax situation. Here are some key tips to help you plan effectively.

Business Mergers and Acquisitions

If your company underwent a merger or acquisition this year, carefully review the tax implications:

Assess any changes to your business structure and how it affects your tax filing status.
Evaluate carryover tax attributes like net operating losses or tax credits from the acquired company.
Consider the tax impact of any asset step-ups or goodwill created in the transaction.
Review the structure of the transaction to understand the tax implications.

New Product Lines or Services

Launching new offerings can have tax consequences:

Document all research and development costs, as they may qualify for tax credits.
Review capitalization rules for startup costs related to new products or services.
Assess how the new revenue streams impact your overall tax liability.

Business Equipment Purchases

If you need new equipment for your business, now might be the time to buy:

Take advantage of Section 179 expensing for immediate write-offs of qualifying purchases.
Consider bonus depreciation for eligible assets to accelerate deductions.
Evaluate leasing versus buying based on your tax situation and cash flow needs.

Year-End Review and Planning

Take these final steps to prepare for the upcoming tax season:

Schedule a meeting with your tax advisor to discuss these events and strategize.
Gather all relevant documentation for life changes and business transactions.
Project your income and deductions for the year to identify any last-minute tax-saving opportunities.

Personal Life Events

Marriage or divorce are major life events that can significantly affect your tax situation. Here are three important factors to consider:

If married, decide whether to file jointly or separately based on your combined income and deductions.
For divorces, consider the tax implications of alimony payments and property transfers.
Review beneficiary designations on retirement accounts and insurance policies.

Your Home

Real estate transactions have important tax considerations:

Track all expenses related to buying, selling, or moving for potential deductions.
If selling your primary residence, calculate any capital gains and potential exclusions.
For new homeowners, prepare to itemize deductions for mortgage interest and property taxes.
Be sure to have all the proper documentation if you will claim the Energy Efficient Home Improvement Credit.

Retirement Planning

Maximize your tax-advantaged savings with retirement account contributions.

Contribute the full amount to your 401(k) or IRA before year-end to reduce taxable income.
If you’re 50 or older, take advantage of catch-up contributions.
Consider converting traditional IRA funds to a Roth IRA if your income was lower this year.

Required Minimum Distributions (RMDs) if you’re over 72:

Ensure you take your RMD by December 31st to avoid hefty penalties.
Consider qualified charitable distributions to satisfy RMD requirements tax-free.

Charitable Giving

Optimize your charitable contributions:

For businesses, consider donating inventory or equipment for potential tax deductions.
Individuals should look into bunching charitable donations to exceed the standard deduction threshold.
Explore donor-advised funds for more strategic long-term giving.

By addressing these major events early in your year-end tax planning, you can potentially reduce your tax liability and set yourself up for a smoother filing process. Remember, tax laws are complex and constantly changing, so consulting with your CironeFriedberg tax professional is always recommended for personalized advice.

HAVE QUESTIONS?

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Darien) or email us at info@cironefriedberg.com.

Classifying Your Employees Correctly

September 5, 2024 by Nicholas DaPaz CPA

Employee classifications are based on job duties and responsibilities. The classifications impact compensation, benefits and work hours and are used by employers to maintain compliance with labor laws.

The most common classifications are exempt and nonexempt. Exempt employees are typically salaried workers who (a) are paid the same amount each week regardless of hours worked, (b) are paid at least $844 each week, and (c) hold administrative, professional or executive positions. Nonexempt employees are often hourly workers who perform more manual or technical duties. Nonexempt employees are entitled to overtime pay for any hours worked beyond 40 in a workweek, which is defined as seven consecutive 24-hour periods.

Classifying employees as exempt or nonexempt under the Fair Labor Standards Act (FLSA) determines their eligibility for overtime pay as well as meal and rest breaks. Most employers have both exempt and nonexempt workers.

Other employment types come with their own sets of laws and considerations:

Full time describes someone who works a specified number of hours a week and gets access to company benefits. The specific terms are set by the employer and may be subject to state-specific labor laws. The category is subject to FLSA.

Part time describes someone who works fewer hours than full time, though the exact number of hours that constitutes part time is left to the employer to define. Part-time workers are covered by FLSA.

Contract employees are hired for a defined period, often for their specialized knowledge or skills. They work varying hours according to the contract and are eligible for FLSA benefits.

Independent contractors are like contract employees but aren’t on the company’s payroll. Their work hours and exemptions are determined by the organization they work for. Independent contractors are not covered by FLSA.

Temporary employees are hired on a short-term basis and are eligible for FLSA benefits.

On-call employees are expected to be able to work during specific hours, are paid hourly and may be covered by certain provisions of FLSA.

Seasonal workers or employees are hired for a specific period — typically of six months or less. Seasonal workers tend to be hired for the same six months from year to year (for example, summers), while seasonal employees tend to work as help during peak times (for example, winter holiday workers). FLSA does not specifically cover these categories, but certain provisions of the act may apply.

Volunteers are not employees, so they are neither exempt nor nonexempt.

Because employee classifications impact companies’ budgets, some employers may seek to treat workers as independent contractors to avoid compliance with unemployment insurance, workers’ compensation, Social Security, tax withholding, temporary disability, and minimum wage and overtime laws. However, if you establish an employee classification policy and apply it consistently, you will be less likely to face costly fines for misclassification. Payroll software, which offers such extras as analytics to aid in decision making, can help with compliance while fostering business growth.

Employee classification is essential for workforce planning, recruitment and retention strategies, and compliance. Be sure to talk with labor/benefit professionals to create your classifications thoughtfully.

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What You Need To Know About SECURE Act 2.0

July 8, 2024 by Nicholas DaPaz CPA

The SECURE Act — Setting Every Community Up for Retirement Enhancement — was passed in 2019. After that, SECURE Act 2.0 was passed in December 2022 and went into effect January 1, 2023.

The SECURE Act 2.0 establishes new rules regarding the timeline that individuals must adhere to with regard to taking required minimum distributions (RMDs) from their retirement accounts. The SECURE Act 2.0 also reduces penalties attached to RMDs, among other things.

Important Changes Taxpayers Need to Know About

The SECURE Act increased the age at which taxpayers must start taking RMDs to 72. But with the passage of the SECURE Act 2.0, the age increased to 73. In 2030, the age will increase to 74, and in 2033, it will be 75.

Before any legal changes went into effect, the penalty for failing to withdraw any RMDs was 50%, but the new laws have reduced the penalty by half, to 25%. Additionally, the penalty will be reduced to 10% for individual retirement account owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.

Keep in mind that tax-related consequences can go into effect if an RMD is not taken in a timely manner, let alone ever. Also, other factors will influence RMDs over time, such as individuals no longer needing to withdraw RMDs from employer-related Roth accounts beginning in 2024.

In time, a Roth-associated emergency savings account can be added to a defined contribution retirement plan as well. In 2025, the limit for catch-up contributions will increase for those who are at least 50 years old. In the same year, taxpayers aged 60 to 63 will be able to add $10,000 more to their accounts on an annual basis. These dollar values will be indexed to inflation.

Please note that catch-up contributions for people who earn more than $145,000 will need to be made to a Roth account, with after-tax dollars.

Furthermore, in 2025, employers will be permitted to auto-enroll eligible employees into defined contribution plans whereby the respective employees will automatically make deferrals between 3% and 10% of eligible compensation. Employees would be required to affirmatively opt out of this feature to avoid the auto-enrollment. Businesses that employ no more than 10 workers as well as companies that have been in operation for fewer than three years are exempted from the automatic enrollment provisions. Also in 2025, portability services might roll out, allowing retirement plans to provide automatic transfers of certain retirement accounts to a new plan if and when an employee switches jobs.

Additionally, part-time employees who have worked for a company for two years and performed at least 500 hours of work are eligible to enroll in company retirement plans. Previously, three years of service were required.

Starting in 2024, employers may opt to make contributions to workplace savings plans on behalf of employees with student loan debt even if those employees do not make retirement plan contributions. Certain 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000.

The SECURE Act 2.0 expanded the exceptions to the current 10% penalty for early withdrawal from a retirement account. Also beginning in 2024, the maximum contribution amount for qualified charitable distributions will be allowed to increase based on the inflation rate.

In addition, beginning last year, taxpayers have a one-time opportunity to use a qualified charitable distribution to fund a Charitable Remainder Unit Trust, Charitable Remainder Annuity Trust or Charitable Gift Annuity up to $50,000.

This is just a summary of the more prominent provisions in the Secure Act 2.0. To fully understand what impact the Secure Act 2.0 may have on you personally, and when, consider consulting with a CironeFriedberg tax professional before taking any action.

Tax-Advantaged Qualified Small Business Stock

July 8, 2024 by Nicholas DaPaz CPA

According to Public Law Number 117-154 (06/23/2022), the U.S. Tax Code is 6,871 pages. When you add the federal tax regulations and official tax guidance, the number of pages increases to approximately 75,000. Some very helpful tax breaks can get lost in the shuffle.

One of the lesser-known tax provisions is IRC Section 1202, regarding qualified small business stock (QSBS). Taxpayers who are either starting a small business or investing in one should be aware of the potential tax savings in this provision, as it reduces capital gains when the stock is sold.

What is QSBS?

The following requirements must be met for a stock to be considered QSBS:

Only stock in a qualified small business organized as a C corporation qualifies for QSBS treatment. This means the company’s gross assets at the time of the stock issuance and immediately thereafter cannot exceed $50 million.
The stock must be held for at least five years before it is sold.
Qualifying shares must have been acquired in an original issuance from the corporation, acquired as a gift to another individual or acquired through inheritance.
At least 80% of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses during the period the stock is held.
The business may not be engaged in banking, leasing, insurance, financing, investing, hotels, restaurants, oil and gas, or farming; be a personal service business in the fields of health, law, architecture, engineering, accounting, actuarial science, consulting, brokerage services, financial services, athletics or performing arts; or be a business whose principal asset is the reputation or skill of one or more of its employees.

Tax Benefits of QSBS

In general, owners of QSBS who acquired that stock after September 27, 2010, and sold it more than five years after acquiring it can exclude 100% of their capital gain from the sale. The gain is also exempt from the alternative minimum tax. (Stock acquired before that date is subject to different exclusion amounts and may also be subject to the AMT.)

The amount of excludable gain is capped at the greater of 10 times the individual’s cost basis in the stock or $10 million. Any earnings above that amount are taxed at the ordinary capital gains rate.

In addition to the Section 1202 benefits, there is another beneficial code section for QSBS owners, which is IRC Section 1045 which allows for a deferral of gains from QSBS if there is a reinvestment of the proceeds of the sale in replacement QSBS. This is most beneficial for holders of QSBS that do not meet the 5-year holding period or are unable to exclude 100% of the capital gain on the originally held QSBS.

If you hold QSBS exploring both Section 1202 and 1045 for the best tax advantage for your situation is critical. Your CironeFriedberg tax advisor can assist you with planning for your best tax advantage.

The QSBS Tax Break May Change

While these are the rules that currently apply, the law may change. For example, recently there has been some debate in Congress about how and whether to change IRC Section 1202. Not surprisingly in the current political climate, the parties have differing views: The Democrats want to put an income limit on the 100% exclusion, and the Republicans want to expand it to include S corporations.

While it is unlikely that there will be any changes before the 2024 presidential election, this might be an ideal time to speak with your CironeFriedberg tax advisor.

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Connecticut Employers Can Expect Higher Payroll Costs

January 26, 2024 by Nicholas DaPaz CPA

Effective January 1, 2024, Connecticut’s minimum wage increased from the previous rate of $15.00 per hour to $15.69 per hour as a result of the state’s first-ever economic indicator adjustment.

This adjustment is required under a state law that Governor Lamont signed in 2019 (Public Act 19-4), which implemented five incremental increases in the minimum wage between 2019 and 2023. This will be followed by future adjustments that are tied to the percentage change in the federal employment cost index.

Annually, by October 15, Connecticut workers and employers can expect announcements declaring the change in the minimum wage that will become effective on January 1 of the following year.

Hotel and restaurant workers are paid a little differently, as their wages are calculated to account for tips. Under current law, the tip credit allows employers to pay these workers less than the established minimum wage per hour, as long as their tips make up the difference. The One Fair Wage bill is currently up for discussion by the Labor and Public Employees Committee starting in February 2024. If passed, it would abolish the tip credit and mandate minimum wage payments for all Connecticut workers.

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Navigating the Complexities of the New Lease Standard under ASC 842

August 28, 2023 by Nicholas DaPaz CPA

By now all organizations should have implemented Accounting Standards Codification 842, Leases (ASC 842), into their financial reporting practices under generally accepted accounting principles in the United States of America. The Financial Accounting Standards Board (FASB) introduced ASC 842 to address the longstanding concern of lease accounting transparency. ASC 842 aims to provide a comprehensive framework for reporting leases, mandating organizations to recognize right-of-use-assets (ROU assets) and lease liabilities on their balance sheets. While ASC 842 was introduced to enhance financial reporting accuracy and comparability, its adoption has proven to be a complex and challenging process for many businesses.

One of the primary challenges faced by organizations adopting ASC 842 is the complexity of implementation for new or existing leases. The standard requires organizations to reassess their lease portfolios, identify embedded leases, and calculate lease liabilities and ROU assets. This process demands a thorough review of existing or new lease contracts and an understanding of complex lease terms, which can be intimidating whether you are an organization with a large and diverse lease portfolio or an organization with only one lease. In most instances, each lease presents a unique challenge with implementing the provisions of ASC 842.

Specifically, determining the lease term has been a challenge for organizations. Part of the confusion is when to include renewal options as part of the lease term. ASC 842 indicates that if the organization is reasonably certain to exercise the renewal option, then the renewal option should be included as part of the lease term. In practice this has led to much subjectivity in interpreting the standard as various factors such as economic incentives or site-specific reasons are evaluated. Including renewal options as part of the lease term will increase the ROU assets and lease liabilities recorded by organizations. The lease term also has a significant impact on the classification of the lease as either operating or finance under ASC 842, which impacts the accounting treatment. In both instances, ROU assets and lease liabilities are recorded on the balance sheet, however differences arise for accounting in the income statement. Under operating leases an organization will record straight-line lease expense in the income statement, whereas under finance leases an organization will record straight-line amortization and interest expense.

ASC 842 also requires changes in financial reporting processes. Lease contracts must be reassessed whenever significant modifications occur, leading to continuous monitoring of lease agreements to ensure accuracy and consistency in financial reporting. Maintaining compliance with the standard’s requirements for reporting, disclosures, and the tracking of lease modifications adds to the administrative burden and requires a robust system to ensure accurate and timely reporting.

The adoption of ASC 842 has and will continue to have a significant impact on organizations’ financial reporting processes. Many organizations have struggled with implementing ASC 842 based on the complexities of the standard. If your organization is experiencing difficulties with the implementation of the standard or the ongoing monitoring required related to changes for contract modifications, we would welcome the opportunity to discuss your specific needs and how our services can facilitate a seamless ASC 842 implementation process. Please feel free to contact one of our specialists to schedule a consultation or to inquire about our services.

Important Events that Affect Year-End Tax Planning

HAVE QUESTIONS?

Classifying Your Employees Correctly

HAVE QUESTIONS?

What You Need To Know About SECURE Act 2.0

Tax-Advantaged Qualified Small Business Stock

HAVE QUESTIONS?

Connecticut Employers Can Expect Higher Payroll Costs

HAVE QUESTIONS?

Navigating the Complexities of the New Lease Standard under ASC 842

Have questions?

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