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Remember when Bench closed its doors on December 27—practically overnight—and everyone collectively gasped at their screens? If you’re a small or medium-sized business owner who used the platform, you probably felt that wave of panic: Wait, who’s got my books? How do I trust these online platforms?

Then came the news that Employer.com would acquire Bench, stirring up more questions such as “Is my data really safe?”

The wake-up call no one asked for

Bench’s abrupt shutdown was more than a public relations nightmare for the brand (and its subsequent buyer). It was a major wake-up call for anyone who has ever typed “cheap online bookkeeping” into Google.

Sure, Bench had been a big name in the DIY bookkeeping space for a while. But the cautionary tale here is crystal clear: the bargain-basement providers—where you have no idea who’s actually handling your finances—might not offer the solid financial foundation you thought they did.

It’s not about technology. It’s about trust.

Technology isn’t the bad guy here – in fact, tech products are making it easier than ever for tax and accounting professionals to deliver the high-value services they want to provide, and that ultimately help clients like you. AI and automation are game-changers, helping to reduce tedious tasks and allow humans to focus on strategic thinking. That’s a huge win.

But here’s the thing: if AI is the engine of your finances, you still need a driver who knows how to steer. It’s kind of like trying to win the Indianapolis 500 with Mario from Mario Kart, instead of Mario Andretti. That is because a tool—no matter how powerful—can only do what it’s told.

For instance:

• AI can sort data in seconds
• AI can auto-categorize expenses
• AI can generate reports you barely need to glance at

Yet AI can’t console you during a tax crisis. It can’t sit down to develop an actual plan that factors in your business’s growth, your personal goals, and today’s uncertain economic climate.

Why a human expert is your business’s best ally

Ever tried to negotiate with the IRS with just a chatbot? Did you get anywhere? Exactly.

• We see nuances: A human accountant reads between the lines. We can spot hidden deductions or signals that your business is about to explode—or implode.
• We speak human: Your finances may be numbers, but your livelihood is people. You need someone who speaks your language, not just “Balance Sheet 101.”
• We adapt: Economic and regulatory changes are constant. What worked a year ago might be irrelevant today. An experienced pro has their finger on the pulse.

“I’ve got my AI + a cheap solution, isn’t that enough?”

That’s exactly what Bench’s former customers thought. Until it wasn’t.

They believed they could hand over their bookkeeping to a semi-automated system—and walk away. But when Bench imploded, the question everyone asked was: Who do I even call?

The real ROI of working with a qualified tax pro

Some business owners think, “I can’t afford a high-quality accountant.” But let’s flip that around:

• How much money are you losing with patchy books?
• How many tax benefits are you missing out on because the software didn’t prompt you correctly?
• How many sleep-deprived nights did you waste worrying about inaccurate numbers?

When you invest in a proper accounting expert, you’re not just paying for someone to do your books. You’re buying peace of mind and confidence to make bigger moves in your business.

AI is here to stay—use it wisely

Here’s the truth: AI isn’t the villain. It’s an incredibly powerful sidekick – the Robin to your Batman, if you will. Imagine being able to offload all that repetitive data entry so your advisor can dive into high-level strategy.

But that only works when you pair AI with a trusted human partner. If Bench’s story taught us anything, it’s this:

• Make sure you know who is behind the technology.
• Choose expertise over a rock-bottom price tag.
• Keep an actual human in your corner—someone who’s been there and gets your specific financial challenges.

Your next step: Don’t leave your finances to chance

If you’re rethinking your relationship with your current bookkeeping platform—good. This is your chance to break free from the “cheaper is better” trap and put your money where it actually counts: in building a partnership with a real-life expert.

Ready to talk specifics? Let’s discuss how we can integrate the best AI tools and real human smarts to keep your books pristine, your taxes optimized, and your business on a solid footing.

Talk to a Human (Us!)

Want to know how a qualified tax and accounting pro can bring clarity and confidence to your finances—while still leveraging the best of AI? Reach out to our firm for real advice. It’s time to invest in your business’s financial future without getting blindsided by the next “cheap solution” meltdown.

By now, you’ve probably heard the rumblings—or maybe caught a glimpse of job titles like “Fractional Sales Manager” or “Fractional Marketing Director” popping up on LinkedIn. But what does “fractional” actually mean?

In plain terms, fractional hiring is like bringing in a seasoned expert—minus the pressure and expense of a full-time staffer. You get their specialized skill set on a part-time or project basis. That means you benefit from top-tier expertise while dodging the overhead that comes with a 40-hour-per-week hire.

So if you’re a small or mid-sized business looking for big-league skills without the full-time commitment, keep reading. We’ll walk you through how fractional hiring works, the pros and cons, and how to decide if it’s right for you.

What Exactly Is Fractional Hiring?

Think of fractional hiring as a pay-as-you-go solution for specialized talent. Instead of bringing on a full-time employee for a role you may only need occasionally, you tap into a professional who can deliver results on a set schedule or for specific projects.

A Quick Example

• Fractional Sales Manager: Rather than recruiting a permanent Sales Director, you might hire a sales professional for 15 hours a week to set up your pipeline, manage leads, and coach your team. You get robust sales leadership—without a full-time salary or benefits.

Bottom Line: You only pay for the level of expertise (and hours) you actually need.

Why It’s Gaining Momentum

Small and mid-sized businesses are embracing fractional hires because it helps them stay competitive without breaking the bank. A few factors driving the trend:

1. Cost Efficiency: Save on base salaries, benefits, and overhead.
2. Targeted Expertise: Tap into high-level skills for niche needs, like launching a new marketing campaign or closing big-ticket sales.
3. Agility: You can easily scale hours up or down depending on your workload.
4. Access to Top Talent: Attract industry veterans who prefer flexible, project-based work and can pass along their big-company experience to smaller teams.

How Fractional Hiring Works

1. Identify the Gap
   Look at your existing team. Are you missing a strong marketing strategist or a sales closer? Figure out where you have the greatest need—or the biggest potential ROI.
2. Scope the Role
   Clarify the responsibilities and the time commitment. Maybe you need a sales pro to handle outreach and negotiations 10 hours a week. Or a marketing guru to run a short-term product launch.
3. Find Your Fractional Expert
   You can tap specialized staffing agencies and professional networks, or go the freelance route. The key is finding someone with the right expertise—and the right availability.
4. Define Deliverables
   Set clear goals and metrics. For instance: “We want 20 new qualified leads per month” or “We need a 30% bump in website conversions.”
5. Agree on a Contract
   Outline hours, fees, deliverables, and how you’ll measure success. Month-to-month or project-based arrangements offer maximum flexibility.

Pros of Fractional Hiring

• Cost Savings: You avoid the cost of a full-time salary package, which often includes benefits like health insurance and retirement contributions.
• Deep Expertise: You can nab someone with years of specialized experience—like advanced sales training or high-level marketing chops.
• Speed to Execution: Fractional pros typically start contributing right away, with minimal onboarding required.
• Scalability: If you need to pivot or ramp up a project, you can adjust the hours or scope with less red tape.

Cons (or at Least Potential Drawbacks)

• Limited Availability: Your fractional pro might be balancing multiple clients, so they won’t always be at your beck and call.
• Culture Fit: They’re not immersed in your day-to-day operations, which can make it tougher to mesh with internal team dynamics.
• Onboarding Time: Even experts need a ramp-up period to understand your products, customers, and processes.
• Continuity Questions: If your fractional hire moves on, you might have to start from scratch to replace them or switch to a full-time option.

Is It Right for Your SMB?

Ask yourself:

1. Do I need this expertise year-round, or is it more project-based?
2. Am I comfortable with a part-time or remote team member?
3. What’s my main priority—speed, cost, or a specific skill set?

If your answers lean toward “I need high-level help without full-time commitment,” fractional hiring may be the solution.

Next Steps: Ready to Explore Fractional Hiring?

If you’re intrigued but still unsure, we’re here to help. Our office supports small and mid-sized businesses through the budgeting and growth process—from forecasting how a fractional hire might impact your bottom line to ensuring your finances stay on track—so you can make an informed decision that aligns with your strategic goals.

Let’s Talk

Thinking about bringing on a fractional sales or marketing pro to inject fresh energy into your revenue goals? Wondering if the cost and flexibility outweigh the potential hurdles? Contact our office to set up a quick, no-pressure chat about how fractional hiring might work for you.

After all, sometimes the best hire is the one you don’t have to keep around full-time.

The landscape of digital transactions has undergone a significant transformation over the past few decades, prompting the Internal Revenue Service (IRS) to introduce and adapt tax reporting mechanisms to keep pace with the evolving nature of online payments and e-commerce. One such adaptation is the Form 1099-K, “Payment Card and Third Party Network Transactions,” a document designed to report payments received through payment card transactions and third-party network transactions (such as payment apps and online marketplaces). This article delves into the history of Form 1099-K, its current reporting threshold for 2024, the implications for recipients, and how it influences tax reporting.

Historical Context of Form 1099-K – Form 1099-K was introduced as part of the Housing and Economic Recovery Act of 2008, with its reporting requirements taking effect in 2011. The form was a response to the growing e-commerce sector and the IRS’s need to ensure that income from online transactions was accurately reported. Initially, the form aimed to provide the IRS with a mechanism to track payments processed by third-party networks and payment card companies, thereby reducing the tax gap resulting from underreported income.

The original reporting threshold was set at transactions totaling $20,000 or more and more than 200 transactions within a calendar year. This threshold was intended to capture significant e-commerce activity while excluding smaller, casual sellers from the reporting requirement.

The Evolution of Reporting Thresholds – Over the years, the threshold for reporting on Form 1099-K remained unchanged until Congress, in the American Rescue Plan Act of 2021, significantly lowered it. Starting with transactions in 2022, the threshold was reduced to $600 for the total amount of payments, with no minimum transaction number requirement. This change marked a significant shift in reporting requirements and was designed to capture a broader range of transactions and ensure that income from even small-scale online sales and services was reported to the IRS.

However, recognizing the challenges and concerns raised by this drastic reduction in the reporting threshold, the IRS announced transitional relief measures. For instance, the IRS designated 2022 and 2023 as transition years, allowing time for taxpayers and third-party settlement organizations (TPSOs) to adjust to the new requirements.

Current Reporting Threshold for 2024 – For 2024 the IRS plans to implement a phased approach to the $600 reporting threshold. According to IRS Notice 2023-74, issued on November 22, 2023, the threshold for the 2024 tax year (i.e., the 1099-K forms taxpayers will receive in 2025) is set at $5,000. This interim threshold is part of a gradual implementation strategy designed to ease the transition to the $600 threshold. It reflects the IRS’s responsiveness to feedback from taxpayers and industry stakeholders about the challenges associated with the lower threshold. The IRS recently announced the threshold for 2025 will be $2,500 and for all subsequent years it will be $600.

Implications for Recipients of Form 1099-K – Receiving a Form 1099-K means that you have received payments through payment cards or third-party networks that exceed the IRS’s reporting threshold. For individuals and businesses engaged in e-commerce, online services, or other digital transactions, this form is crucial for accurate tax reporting. It reports the gross amount of transactions, not accounting for returns, refunds, or fees, which means recipients must carefully account for these factors when reporting their income.

As a result of the lowered reporting threshold the number of taxpayers who will receive Form 1099-K will increase significantly, including small sellers and individuals who engage in occasional online sales. Even those who receive money from family and friends through a third-party network and that’s unrelated to selling products or providing services may receive a Form 1099-K. This change underscores the importance of maintaining meticulous records of online transactions, associated costs, and any related business expenses that can be deducted.

Impact on Tax Reporting – The introduction and subsequent adjustments to Form 1099-K reporting thresholds have profound implications for tax reporting. Taxpayers who receive this form must report the income on their tax returns, considering the gross transactions reported and deducting any relevant business expenses to arrive at their net taxable income.

For many, the receipt of Form 1099-K necessitates a more detailed approach to record-keeping and tax preparation. It may also lead to increased scrutiny from the IRS, as the agency uses the information to identify discrepancies between reported income and the amounts reflected on Form 1099-K.

• Individuals Selling Personal Items – For individuals selling personal items online, receiving a Form 1099-K can be a source of confusion. It’s crucial to understand that not all payments reported on Form 1099-K are necessarily taxable income. For instance, if you sell a personal item for less than you paid for it, you’re not making a profit, and thus, the sale proceeds are not considered taxable income. However, the receipt of Form 1099-K for such transactions necessitates proper reporting on your tax return to avoid potential issues with the IRS.
• Self-employed Individuals – If you are a self-employed individual, all business income, including amounts reported on Form 1099-K, should be included in the gross income you report on Schedule C (Profit or Loss from Business) that is part of your individual income tax (1040) filing. Here’s how to ensure you’re reporting your 1099-K income correctly:

Start by reporting the total gross income your business earned during the tax year on Schedule C. This includes all income from sales, services, and any other business activities, regardless of whether it was received in cash, checks, credit card payments, or through third-party networks.

If you’ve received a Form 1099-K, the amount reported should already be part of your gross receipts. Ensure that you’re not double counting this income. The total on your Schedule C should reflect all your business’s gross income, including the transactions reported on Form 1099-K.

• Reimbursement of Personal Expenses – You may receive a Form 1099-K from a third-party network or payment card that reports money you received from a family member or friend who sent you the money as a gift or as reimbursement for a joint expense. An example is when you pay the rent or household expenses on your home and your roommate reimburses you for their share. While these repayments shouldn’t be reported on Form 1099-K, they still may be. Personal payments included in the 1099-K will need to be reported on your return and then “backed-out”, so you don’t pay tax on the money you received but still satisfy the IRS’ reporting requirement.

Since each payment app or online marketplace has its own processes to determine the nature of payments, you should review the policies of any apps or online marketplaces you use. The person sending you the payment may be able to code the transaction as a personal one to prevent 1099-Ks in future years from being erroneously prepared.

• Crowdfunding – You may receive a Form 1099-K for money raised through crowdfunding. Depending on the circumstances some money raised through crowdfunding may be taxable to you, and you may be required to report it on your income tax return. However, some money raised may be considered a gift and would not be taxable. Other than gifts, here are some scenarios:
  • No Business Ownership Interest Given – When the fundraiser offers nominal gifts (like products from the business, coffee cups, or T-shirts) in exchange for contributions, the money raised is considered taxable income to the fundraiser. This is because the funds are received in exchange for goods or services and are seen as revenue for the business.
  • Not Taxable Crowdfunding Income – When the fundraiser provides contributors with a partial business ownership, such as stock or a partnership interest, the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment.
  • Special Considerations – Money received through crowdfunding that is structured as a loan that must be repaid, or as gifts made from detached generosity without any quid pro quo, may not be considered taxable income. The classification depends on the specific facts and circumstances of each case.
• Incorrect 1099-K Forms – If you believe the information on your Form 1099-K is incorrect, contact the issuer immediately to request a corrected form. Don’t contact the IRS as the Service can’t correct the form. Keep copies of any correspondence, as you may need to reference these communications if discrepancies arise during the tax filing process.

If you received a 1099-K and have questions or need assistance with preparing your return, please contact our office.

In recent years, wildfires, hurricanes, and other natural disasters have become increasingly frequent and devastating, leaving many individuals and families grappling with the loss of their homes and personal property. For those affected by such disasters, particularly in areas designated as federal disaster zones, understanding the tax implications and available relief options is crucial. This article delves into the various disaster loss tax provisions, including the limitations, claims process, and tax treatments associated with qualified disaster losses. We will explore the intricacies of claiming losses, the election to claim losses on prior year returns, and the tax implications of insurance payments and FEMA assistance.

Understanding Qualified Disaster Losses – A qualified disaster loss refers to a casualty or theft loss of personal-use property, including a personal residence, attributable to a major disaster declared by the President. These losses are subject to specific provisions that allow taxpayers to claim deductions, even if they do not itemize their deductions. The per-event limitations for qualified disaster losses include an increase in the standard deduction and a waiver of the 10% of adjusted gross income (AGI) reduction, although a $500 per casualty  threshold applies.

Specifically, each casualty loss must exceed $500 to be deductible. This threshold is in place to prevent taxpayers from claiming deductions for minor losses, ensuring that only significant losses are eligible for tax relief.

Claiming a Qualified Disaster Loss – The loss can be claimed in the year it occurred or, alternatively, on the prior year’s return, which if already filed would have to be amended. This flexibility allows taxpayers to potentially receive a quicker tax refund, providing much-needed financial relief.

However, if there is a reasonable prospect of reimbursement, the deduction is deferred until the reimbursement is determined. If the determination cannot be made by the return due date, then an extension can be filed extending the due date until October 15^th. If October 15 falls on a holiday or weekend, the due date is the next business day.

Election to Claim Loss on Prior Year Amended Return – Taxpayers can elect to claim their disaster loss on the prior year’s return, and if that return has already been filed, filing it can be amended to claim the disaster loss. This election must be made within six months after the due date of the taxpayer’s federal income tax return for the disaster year, without regard to extensions. The election statement should include details of the disaster, the location of the damaged property, and the amount of the loss.

Claiming a disaster loss in the prior year can provide several benefits:

• Quicker Access to Refunds: By claiming the loss on the prior year’s tax return, you may receive a tax refund more quickly than if you wait to claim it on the current year’s return.
• Potential for Greater Tax Benefit: Depending on your income and tax situation, claiming the loss in the prior year might result in a larger tax benefit. This is because the tax rates or your income level might have been different, potentially leading to a greater reduction in taxable income.
• Flexibility in Tax Planning: Electing to claim the loss in the prior year gives you the flexibility to choose the year that provides the most advantageous tax outcome.

Relief for Some Non-Itemizers – Normally taxpayers who aren’t itemizing deductions don’t include Schedule A in their return. However, taxpayers who are not itemizing and who have a net qualified disaster loss are eligible to claim both the qualified disaster loss and the standard deduction.

Net Operating Loss Deduction – A disaster loss Net Operating Loss (NOL) is created when a taxpayer’s allowable disaster-related losses exceed their income for the year. These losses are treated as “business” losses for the purpose of computing NOLs. When a disaster loss occurs, taxpayers in the affected area may be eligible to claim these losses as NOLs. This allows them to potentially offset taxable income in other years, by carrying the loss forward to future tax years.

For those familiar with NOLs, at one time an NOL could be carried back some years and then forward. However, per current law NOLs can only be carried forward until used up.

Insurance Coverage and Reimbursement – Insurance coverage plays a critical role in disaster recovery. Proceeds from insurance claims must be considered when calculating the deductible loss. If insurance reimbursement is received for living expenses, it is generally not taxable unless it exceeds the actual expenses incurred.

Taxation of FEMA Assistance Payments – FEMA assistance payments are typically not taxable. These payments are intended to help cover essential needs and expenses not covered by insurance. However, any payments received for expenses that are later reimbursed by insurance must be reported as income.

To apply for FEMA assistance after suffering a disaster loss, you can follow these steps:

• File a Claim with Your Insurance: Before applying for FEMA assistance, you must file a claim with your insurance company. FEMA cannot duplicate benefits for losses covered by insurance.
• Apply for FEMA Assistance: There are three ways to apply:
  • Online: Visit DisasterAssistance.gov to apply online. This is the easiest and fastest method if you have internet access and power.
  • FEMA App: Use the FEMA App on your mobile device to apply.
  • Phone: Call the FEMA Helpline at 1-800-621-3362. The helpline is available every day from 4 a.m. to 10 p.m. Pacific Standard Time. Assistance is available in most languages. If you use a relay service, provide FEMA with the number for that service.

For more information on the types of assistance available, you can visit fema.gov/assistance/individual/program. There is also an accessible video on how to apply available on YouTube titled “FEMA Accessible: Registering for Individual Assistance”.

When Disaster Losses Might Result in a Gain – In some cases, insurance proceeds may exceed the adjusted basis of the destroyed property, resulting in a gain. Taxpayers can defer this gain by purchasing replacement property within a specified period, under the involuntary conversion rules of Section 1033.

Involuntary Conversions – IRC Section 1033 allows taxpayers to defer gains from involuntary conversions, such as those resulting from insurance proceeds exceeding the property’s basis. To qualify, replacement property must be purchased within a specified timeframe.

This provision helps taxpayers avoid immediate tax liabilities that could arise from such conversions, allowing them to maintain their financial stability while replacing their lost or damaged property.

The general rule under Section 1033 is that taxpayers have two years (four in the case of a disaster) after the close of the first tax year in which any part of the gain is realized to reinvest in similar or related property.

Debris Removal and Demolition Expenses – Debris removal and demolition expenses are generally not deductible in the year of a disaster loss. The treatment of these expenses depends on their nature:

• Demolition Expenses: The costs of demolishing structures are typically not deductible. Instead, these costs are charged to the capital account of the underlying land.
• Debris Removal Expenses: If the debris removal costs are related to the replacement of part of the property that was damaged, these costs are capitalized and added to the taxpayer’s basis in the property.

Filing Extensions – When the President declares a disaster the IRS also provides filing and payment relief for individuals and businesses within the disaster area. These dates are different for each disaster and provided online at the IRS website.  As an example, the following are the extended due dates for the 2025 Los Angeles wildfires.

The Internal Revenue Service announced tax relief for individuals and businesses in southern California affected by wildfires and straight-line winds that began on Jan. 7, 2025. No ¶

The tax relief postpones various tax filing and payment deadlines that occurred from Jan. 7, 2025, through Oct. 15, 2025 (postponement period). As a result, affected individuals and businesses will have until Oct. 15, 2025, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the Oct. 15, 2025, deadline will now apply to:

• Individual income tax returns and payments normally due on April 15, 2025.

• 2024 contributions to IRAs and health savings accounts for eligible taxpayers.

• 2024 quarterly estimated income tax payments normally due on Jan. 15, 2025, and 2025 estimated tax payments normally due on April 15, June 16 and Sept. 15, 2025.

• Quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31, 2025.

• Calendar-year partnership and S corporation returns normally due on March 17, 2025.

• Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2025.

• Calendar-year tax-exempt organization returns normally due on May 15, 2025.

In addition, penalties for failing to make payroll and excise tax deposits due on or after Jan. 7, 2025, and before Jan. 22, 2025, will be abated if the deposits are made by Jan. 22, 2025.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief.

It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Using Retirement Funds for Recovery – Recent tax legislation includes a provision that allows taxpayers to withdraw up to $22,000 from their retirement funds in the case of federally declared disasters. This provision is designed to provide financial relief to individuals affected by such disasters. The withdrawal:

• Is not subject to the usual 10% early withdrawal penalty that typically applies to distributions taken before the age of 59½,
• amount can be included in income over a three-year period, and
• allows taxpayers to repay the distribution to their retirement account within three years to avoid taxation on the withdrawn amount.

Proving Losses – To substantiate a casualty loss, taxpayers must provide documentation such as photographs, receipts, and insurance claims. Accurate records are essential for claiming deductions and defending against potential audits. The IRS provides several safe harbor methods for calculating disaster losses, including:

• Estimated Repair Cost Safe Harbor Method for losses of $20,000 or less – To determine the decrease in the FMV of the personal-use residential real property, the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered in accordance with state or local regulations, may be used, provided the costs to restore the residence to pre-casualty condition are itemized. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the estimate. This safe harbor only applies if the loss is $20,000 or less before applying the per-disaster and, when applicable, percentage of AGI reductions.
• De Minimis Safe Harbor Method for losses of $5,000 or less – Under the de minimis method, the cost of repairs required to restore the residence to pre-disaster condition may be estimated by the taxpayer. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the estimate. The estimate must be done in good faith, and the individual must maintain records detailing the methodology used for estimating the loss. This safe harbor only applies if the loss is $5,000 or less before applying the per-disaster and, if applicable, percentage of AGI reductions.
• Insurance Safe Harbor Method for losses covered by insurance – The estimated loss determined in reports prepared by the individual’s homeowners’ or flood insurance company may be used.
• Contractor Safe Harbor Method based on contractor estimates – The contract price for the repairs specified in a contract prepared by an independent and licensed contractor (or one registered in accordance with state or local regulations) may be used if the contract itemizes the costs to restore the residence to the condition existing prior to the disaster. Costs that improve or increase the value of the residence above pre-disaster value must be excluded from the contract price for purposes of this safe harbor. To use the Contractor Safe Harbor Method, the contract must be a binding contract signed by the individual and the contractor.
• Disaster Loan Appraisal Safe Harbor Method based on loan appraisals – Under this method, to determine the decrease in FMV of the individual’s residence, an appraisal prepared for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government may be used. The appraisal should include the estimated loss the individual sustained because of the damage to or destruction of their residence from the Federally declared disaster.

For personal belongings, the IRS offers:

• De Minimis Safe Harbor Method for losses of $5,000 or less.
• Replacement Cost Safe Harbor Method for federally declared disasters. This method may be used to determine FMV of most personal belongings located in a disaster area immediately before the disaster to compute the disaster loss. If used, this method must be applied to all eligible personal belongings for which a disaster loss is claimed. This method may not be used for the following: boats, aircraft, mobile homes, trailers, vehicles, and antiques or other assets that maintain or increase in value over time.

Under this method, first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the personal belonging was owned, using the percentages in the adjacent Personal Belongings Valuation Table. A personal belonging owned by the individual for nine or more years, will have a pre-disaster FMV of 10% of the current replacement cost.

Home Destroyed – When a home is destroyed in a casualty or disaster the outcome can be quite different than expected by taxpayers. The reason being that their loss is measured from the lesser of the home’s adjusted basis or the fair market value (FMV) at the time of the loss.

The term “basis” refers to the monetary value used to measure a gain or loss on an asset. A  property’s basis is not always equal to the original purchase cost and can be adjusted based on various factors such as improvements, depreciation, and casualty losses. There are also different types of basis, including cost basis, adjusted basis, gift basis, and inherited basis, each with specific rules for calculation depending on the circumstances of how the asset was acquired.

Since real property generally appreciates in value, for tax purposes a home that’s destroyed will generally result in a casualty gain as opposed to a casualty loss once insurance payment is considered. However, the gain can be excluded under the home gain exclusion (IRC Sec 121) if the taxpayer(s) qualifies and any remaining gain (up to the basis of a replacement home acquired) can be deferred under the involuntary conversion rules discussed previously. In the case of a disaster loss, that replacement period ends four years after the close of the first tax year in which any part of the gain is realized.

The Section 121 home gain exclusion refers to the ability of taxpayers to exclude up to $250,000 of capital gains from the sale of their primary residence if they are single, or up to $500,000 if they are married and filing jointly. To qualify, the taxpayer must have owned and used the home as their principal residence for at least two of the five years preceding the sale. This exclusion can generally be used once every two years. There are exceptions and special rules, such as those related to involuntary conversions, expatriates, and depreciation recapture for business use of the home.

This is all best explained by example:

Example – A wildfire in a disaster area destroys Phil’s home which had an adjusted basis of $125,000. Phil is single and has owned and used the home for over 10 years before it was destroyed. Phil’s insurance company pays Phil $400,000 for the house. A tax loss is different from a financial loss in that a tax loss is measured from the lesser of the home’s adjusted basis or the FMV at the time of the loss. So, in this case Phil does not have a tax loss, he has a gain.

The destruction of Phil’s home is treated as a sale for tax purposes and since Phil meets the 2 out of 5 years ownership and use tests, the Sec 121 gain exclusion will apply. In addition, any gain more than the amount excluded can be deferred under Sec 1033.  Here is how it all plays out for Phil…

Insurance company payment                               $400,000

Phil’s adjusted basis in the home                         <125,000>

Realized Gain                                                      275,000

Sec 121 Gain Exclusion                                      <250,000>*

Remaining Gain                                                     25,000

Phil elects to defer gain into replacement              <25,000>**

Net taxable gain                                                            0

* Since the disaster was treated as a sale, presumably Phil would be qualified for another $250,000 Sec 121 exclusion after owning and using the replacement property for two years.

** Per Sec 1033 deferral, this amount reduces the basis of Phil’s replacement home. This is an election, and Phil could instead choose to pay the tax on the gain instead of deferring it.  In addition, the deferral cannot reduce the basis of the replacement property below zero; thus, any amount not deferred would be taxable.

Casualties on Business Property and Inventory Losses – Although this article is primarily devoted to homeowner disaster losses, some homeowners may also own a business within the disaster area:

• For business property, casualty losses are deductible against business income. Inventory losses due to a disaster can be claimed as a deduction, reducing both income and self-employment taxes.
• Losses from Investment Property – Losses from investment property are treated similarly to personal-use property losses. However, the deduction is limited to the lesser of the decrease in fair market value or the adjusted basis of the property.

Navigating the aftermath of a wildfire and the associated tax implications can be overwhelming. However, understanding the available disaster loss provisions and tax treatments can provide significant financial relief. By leveraging these provisions, affected individuals can mitigate the financial impact of their losses and begin the process of rebuilding their lives. We advise you to consult with our office to ensure all available options are utilized and compliance with IRS regulations is maintained.

You, like most taxpayers, probably dread the task of pulling together your records to prepare for your tax preparation appointment, but the effort usually pays off in the extra tax you might save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Evaluate which income reporting and deductions are best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about tax-planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives – The tax law allows a variety of methods of handling income and deductions on your return. Choices when preparing your return often affect not only the current year, but future returns as well. Topics these choices relate to include:

• Sales of property – For the year in which you sell property and arrange the sale so that you receive payments on the sales contract over a period of years, you can sometimes choose between reporting the entire gain on the return for the sale year or over several years as you receive payments from the buyer.
• Depreciation – When you purchase certain property used for business, generally the cost is written off (depreciated) over several years, but in some cases the cost can be deducted all in one year.

Where to Begin? Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, such as W-2 forms and 1099s reporting interest, dividends or other income, file them right away, before you forget or lose them. Make this a habit, and you’ll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include:

• Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully. By design, organizers remind you of transactions you may otherwise miss.)
• Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you have any special reporting requirements. The penalties for not making and submitting required reports can be severe.
• If you acquired your health insurance through a government Marketplace you will receive Form 1095-A, issued by the Marketplace that will include information needed to complete your return.
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships, S Corporations and Trusts). Be sure to take these documents to your appointment, including the instructions for K-1s!
• Write down questions so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to your income in the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven’t yet received the current year’s 1099-DIV form.
• Make sure you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them.
• Compare deductions from last year with your records for this year. Did you forget anything?
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details – To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s) and occupation(s) on last year’s return. Note any changes for this year. Although your telephone numbers and e-mail address aren’t required on your return, they are always helpful should questions occur during return preparation.

Marital Status Change – If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.

Dependents – If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3 you will not need to supply them again):

1. First and last name
2. Social security number
3. Birth date
4. Number of months living in your home
5. Their income amount (both taxable and nontaxable). If your dependent is your child over age 18, note how long the child was a full-time student during the year.

For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren’t sure), tally the amounts you provided toward their support vs. the amounts they and others provided. This will simplify a final decision.

Some Transactions Deserve Special Treatment – Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

• Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. In most cases brokers will provide a detailed list of transactions for the year along with the Forms 1099-INT and 1099-DIV they issue. If the sale isn’t included on the broker’s report, list each sale, and have purchase and sale documents available for each transaction.

Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Don’t forget to include information and documentation about digital asset transactions, including non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stable coins. This includes (not a complete list) if you:

• Received digital assets as payment for property you sold or services you provided;
• Received digital assets because of a reward or award; and
• Sold or exchanged digital assets for other digital assets.

• Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner’s death-date and the property’s value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor.
• Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If the company or fund hasn’t tracked this information and provided the details to you, then you will need to have records of each stock purchase made with the reinvested dividends.
• Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gain, it is good practice to keep a record of them. The exclusion of gain applies only to a primary residence; so keeping a record of improvement to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the closing escrow statement).
• Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home.
• Vehicle Purchase: If you purchased a new or used plug-in electric car or fuel-cell car (or cars) this year, you may qualify for a special credit. Please bring to the appointment the purchase statement and the paper copy of the seller’s report that the dealer was required to give you. If you transferred the credit to the dealer at the time you purchased the vehicle, you are required to report and reconcile the transaction on your return for the purchase year.
• Home Energy-Related Expenditures: If you installed a solar-electric system on your home or second home, or made other energy-saving improvements to your home(s), please bring the details of the purchase and manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.
• Identity Theft: Identity theft is rampant and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen.
• Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. When claiming a tax deduction for business use of your vehicle, the government requires your total mileage, business miles, and commuting miles for each business use of your car to be reported on your return. So be prepared to have those numbers available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it is included in your W-2.
• Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount.

Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements.

If you have questions about assembling your tax data prior to your appointment, please give our office a call.

We are thrilled to announce that Sean R. Smith has been promoted to Partner at RBF!

Since joining the firm in 2013, Sean has been a cornerstone of the Audit & Attestation department, providing exceptional service to clients and leading with dedication and expertise. Sean is a licensed CPA in Pennsylvania and has steadily risen through the ranks, holding positions as Staff, Senior, and Manager before achieving this significant milestone.

Sean’s leadership is guided by his personal philosophy: “Take good care of your people, and the rest tends to take care of itself.” This belief has shaped his approach to team development, client relationships, and delivering impactful results.

Outside of his professional accomplishments, Sean resides in Lancaster with his wife and 3 sons, enjoying the strong sense of community the city offers. In his free time, he enjoys reading, listening to podcasts, and exploring new ideas.

Please join us in congratulating Sean on this remarkable achievement. We are excited about the continued growth and success he will bring to the firm in his new role as Partner!

As the year draws to a close, it’s crucial to take stock of your financial situation and make strategic moves to minimize your tax liability. With a little planning and foresight, you can take advantage of various tax-saving opportunities. Here are some last-minute strategies to consider before the year ends.

Itemizing Deductions and Medical Expenses – If you itemize deductions, you can potentially lower your taxable income by paying outstanding medical bills, if the total of all medical expenses paid for the year will exceed 7.5% of your adjusted gross income (AGI). Even if you don’t have the cash on hand, you can pay these bills with a credit card before year-end and still deduct them for the current tax year. This strategy can be particularly beneficial if you’ve had significant medical expenses throughout the year.

Prepaying Property Taxes – Consider prepaying the second installment of your property taxes. This can increase your itemized deductions for the current year. However, be mindful of the $10,000 cap on state and local tax (SALT) deductions, which includes property taxes. If you’re already close to this limit, prepaying may not provide additional tax benefits.

Charitable Contributions and Bunching Deductions – Making charitable contributions is a great way to reduce your taxable income while supporting causes you care about. If you marginally itemize each year, consider “bunching” your deductions. This involves concentrating your charitable contributions and other deductible expenses in one year to exceed the standard deduction threshold, allowing you to itemize. In the alternate year, you can take the standard deduction.

Required Minimum Distributions (RMDs) – For 2024, if you’re 73 years or older, you must take required minimum distributions (RMDs) from your retirement accounts by December 31, 2024, to avoid hefty penalties. Failing to take the RMD can result in a penalty of 25% of the amount that should have been withdrawn. Ensure you meet this requirement to avoid unnecessary costs.

If 2024 is the year you turned 73, you can delay the first RMD until April 1, 2025. This can be beneficial if you have substantial income in 2024, and expect less income the following year. By delaying the distribution, you might be able to reduce your tax liability by taking the distribution in a year when you are in a lower tax bracket.

However, if you choose to delay the first RMD, you must take two distributions in the second year: the delayed first RMD by April 1 and the second year’s RMD by December 31.

Did You Know You Can Make Charitable Deductions from Your IRA Account? – Those who are age 70½ or older are allowed to transfer funds to qualified charities  from their traditional IRA without the transferred funds being taxable, provided the transfer is made directly by the IRA trustee to a qualified charitable organization. The annual limit for these transfers has been $100,000 per IRA owner, but the law was changed so that the annual maximum is inflation adjusted. This means for 2024, an IRA owner can make qualified charitable distributions of up to $105,000. If you are required to make an IRA distribution (i.e., you are age 73 or older), you may have the distribution sent directly to a qualified charity, and this amount will count toward your RMD for the year.

Although you won’t get a tax deduction for the transferred amount, this qualified charitable distribution (QCD) will be excluded from your income, with the result that you may get the added benefit of cutting the amount of your Social Security benefits that are taxed. Also, since your adjusted gross income will be lower, tax credits and certain deductions that you claim with phase-outs or limitations based on AGI could also be favorably impacted.

If you plan to make a QCD, be sure to let your IRA trustee or custodian know well in advance of December 31 so that they have time to complete the transfer to the charity. Your QCD need not be made to just one charity – you can spread the distributions to any number of charities you choose, so long as the total doesn’t exceed the annual limit. And don’t forget to have the charity you’ve donated to provide you with a receipt or letter of acknowledgment for the donation.

If you have contributed to your traditional IRA since turning 70½, the amount of the QCD that isn’t taxable may be limited, so it is a good idea to check with this office to see how your tax would be impacted.

Maximizing Retirement Account Contributions – Maximize your contributions to retirement accounts like IRAs and 401(k)s. Contributions to these accounts can reduce your taxable income, and the funds grow tax-deferred. For 2024, the contribution limit for a 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and over. For IRAs, the limit is $7,000 plus an age-50 or older $1,000 catch-up contribution.

Tax Loss Harvesting – If you have underperforming stocks, consider selling them to realize a loss. This strategy, known as tax loss harvesting, can offset capital gains and reduce your taxable income. Be mindful of the “wash sale” rule, which disallows a deduction if you repurchase the same or a substantially identical security within 30 days.

Reviewing Paycheck Withholdings and Estimated Taxes – Review your paycheck withholdings and estimated tax payments to ensure you’re not underpaying taxes. If you find that you’ve under-withheld, consider increasing your withholdings for the remaining pay periods or making an estimated tax payment to avoid or minimize underpayment penalties. The advantage of withholdings is they are treated as paid ratably throughout the year and can make up for underpayments earlier in the year. Other withholding strategies are available, contact this office for details.

Managing Health Flexible Spending Accounts (FSAs) – if you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year.  The maximum contribution for 2025 is $3,300.

If you have a balance remaining in your employer’s health flexible spending account (FSA), make sure to use it before the year ends. FSAs typically have a “use-it-or-lose-it” policy, meaning any unused funds may be forfeited. The amount you haven’t used in 2024 that may be carried to 2025 is $640 and must be used in the first 2½ months of 2025. Any unused portion is lost.

Did You Become Eligible to Make Health Savings Account (HSA) Contributions This Year? – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In short, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are
tax-deferred, and distributions are tax-free if made for qualifying medical expenses.

Prepaying College Tuition – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2024. If it is not the maximum allowed for computing the credits, you can prepay 2025 tuition if it is for an academic period beginning in the first three months of 2025. That will allow you to increase the credit for 2024. This is especially effective for students just starting college who only have tuition expenses for part of the year.

Is Your Income Unusually Low This Year? – If your income is unusually low this year, you may wish to consider the following:

• Converting your traditional IRA into a Roth IRA – The lower income likely results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount. Also, if you have stocks in your retirement account that have had a significant decline in value, it may be a good time to convert to a Roth.
• Planning for Zero Tax on Long-Term Capital Gains – Lower-income taxpayers and those whose income is abnormally low for the year can enjoy a long-term capital gain tax rate of zero, which provides an interesting strategy for these individuals. Even if the taxpayer wishes to hold on to a stock because it is performing well, they can sell it and immediately buy it back, allowing them to include the current accumulated gain in the sale-year’s return with no tax while also reducing the amount of taxable gain in the future. Since the sales results in a gain, the wash sale rule doesn’t apply.

To determine if you can take advantage of this tax-saving opportunity, you must determine if your taxable income will be below the point where the 15% capital gains tax rate begins. For 2024, the 15% tax rates begin at $94,051 for married taxpayers filing jointly, $63,001 for those filing as head of household and $47,026 for others.

Example: Suppose a married couple is filing jointly and has projected taxable income for 2024 of $50,000. The 15% capital gains tax bracket threshold for married joint filers is $94,051.  That means they could add $44,050 ($94,050- $50,000) of long-term capital gains to their income and pay zero tax on the capital gains. 

Additionally, if the taxpayer has any loser stocks, he or she can sell them for a loss, and thereby allow additional long-term capital gains to take advantage of the zero-tax rate.

Contact this office for assistance in developing a plan to take advantage of the zero capital gains rate.

Don’t Forget the Annual Gift Tax Exemption – Though gifts to individuals are not tax deductible, each year, you are allowed to make gifts to individuals up to an annual maximum amount without incurring any gift tax or gift tax return filing requirement. For the tax year 2024, you can give $18,000 ($19,000 in 2025) each to as many people as you want without having to pay a gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $18,000, or any unused part of it, over into 2025. Such gifts need not be in cash, and the recipient need not be a relative. If you are married, you and your spouse can each give the same person up to $18,000 (for a total of $36,000) and still avoid having to file a gift tax return or pay any gift tax.

By implementing these strategies, you can optimize your financial outcome and minimize your tax liability. Remember, tax planning is a year-round activity, and these last-minute moves are just one part of a comprehensive tax strategy.

Tax planning is a crucial aspect of financial management, yet it often remains underestimated by many taxpayers. One area that frequently causes confusion and potential financial strain is the management of estimated tax payments and the associated penalties for underpayment. Understanding the intricacies of estimated tax safe harbors, the requirement for payments to be made ratably, and the strategies to mitigate penalties can significantly impact a taxpayer’s financial health. This article delves into these topics, offering insights into how taxpayers can navigate these challenges effectively.

Understanding Underestimated Penalties – Underpayment penalties can catch taxpayers off guard, especially when they fail to meet the required estimated tax payments. The IRS imposes these penalties to encourage timely tax payments throughout the year, rather than a lump sum at the end. The penalty is essentially an interest charge on the amount of tax that should have been paid during the year but wasn’t. This penalty can be substantial, especially for those with fluctuating incomes or those who experience a significant increase in income without adjusting their estimated payments accordingly. While most wage-earning taxpayers have enough tax withheld from their paychecks to avoid the underpayment penalty problem, those who also have investment income or side gigs may find their withholding isn’t enough to meet the prepayment requirements to avoid a penalty.

Estimated Tax Penalty Amount – The IRS sets the interest rates for underpayment penalties each quarter.  It is equal to the federal short-term interest rate plus 3 percent. With the recent rapid rise in interest rates the underpayment interest rate for each quarter of 2024 is a whopping 8%, the highest it has been in almost two decades. Something you should be concerned about if you expect your withholding and estimated tax payments to be substantially underpaid.

Estimated Tax Due Dates – For individuals, this involves using Form 1040-ES to make the payments, generally on a “quarterly” basis.

The estimated tax payment schedule for individuals and certain other taxpayers is structured in a way that does not align with the even quarters of the calendar year. This is primarily due to the specific due dates set by the IRS for these payments. For 2024, the due dates for estimated tax payments are as follows:

1. First Quarter: Payment is due on April 15, 2024. This payment covers income earned from January 1 to March 31.
2. Second Quarter: Payment is due on June 17, 2024. This payment covers income earned from April 1 to May 31. Note that this period is only two months long, which contributes to the uneven nature of the quarters.
3. Third Quarter: Payment is due on September 16, 2024. This payment covers income earned from June 1 to August 31.
4. Fourth Quarter: Payment is due on January 15, 2025. This payment covers income earned in the four months of the period September 1 to December 31.

Note, these payment due dates normally fall on the 15^th of the month. However, whenever the 15^th falls on a weekend or holiday, the due date is extended to the next business day.

Estimated Tax Safe Harbors – To avoid underpayment penalties and having to make a projection of the expected tax for each payment period, taxpayers can rely on safe harbor rules. These rules provide a guideline for the minimum amount that must be paid to avoid penalties. Generally, taxpayers can avoid penalties if their total tax payments equal or exceed:

• 90% of the current year’s tax liability or
• 100% of the prior year’s tax liability.

However, for higher-income taxpayers with an adjusted gross income (AGI) over $150,000, the safe harbor threshold of 100% increases to 110% of the prior year’s tax liability.

Ratable Payments Requirement – One critical aspect of estimated tax payments is the requirement for these payments to be made ratably throughout the year. This means that taxpayers should aim to make equal payments each “quarter” to avoid penalties. However, income is not always received evenly throughout the year, which can complicate this requirement. For instance, if a taxpayer receives a significant portion of their income in the latter part of the year, they may find themselves underpaid for earlier quarters, leading to penalties.

Uneven Quarters and Computing Penalties – The challenge of uneven income can be addressed by understanding how penalties are computed. The IRS calculates penalties on a quarterly basis, meaning that underpayments in one quarter cannot be offset by overpayments in a later quarter. This can be particularly problematic for those with seasonal or sporadic income. To mitigate this, taxpayers can use IRS Form 2210, which allows them to annualize their income and potentially reduce or eliminate penalties by showing that their income was not received evenly throughout the year.

Workarounds: Increasing Withholding and Retirement Plan Distributions

• Increase Withholding – One effective workaround for managing underpayment penalties is to increase withholding for the balance of the year. Unlike estimated payments, withholding is considered paid ratably throughout the year, regardless of when the tax is actually withheld. This means that increasing withholding later in the year can help cover any shortfalls from earlier quarters.
• Retirement Plan Distribution – Another strategy involves taking a substantial distribution from a retirement plan such as a 401(k) or 403(b) plan, which is subject to a mandatory 20% withholding requirement. The taxpayer can then roll the distribution back into the plan within 60 days, using other funds to make up the portion of the distribution which went to withholding. Tax withholding can also be made from a traditional IRA distribution, but this approach requires careful planning to ensure compliance with the one IRA rollover per 12-month period rule.
• Annualized Exception – For taxpayers with uneven income, the annualized exception using IRS Form 2210 can be a valuable tool. This form allows taxpayers to calculate their required estimated payments based on the actual income received during each quarter, rather than assuming equal income throughout the year. By doing so, taxpayers can potentially reduce or eliminate underpayment penalties by demonstrating that their income was not received evenly.

Managing estimated tax payments and avoiding underpayment penalties requires careful planning and a thorough understanding of IRS rules and regulations. By leveraging safe harbor provisions, understanding the requirement for ratable payments, and utilizing strategies such as increased withholding and retirement plan distributions, taxpayers can effectively navigate these challenges.

If you are expecting your pre-payment of tax to be substantially underpaid and wish to develop a strategy to avoid or mitigate underpayment penalties, please contact this office.  But if you wait too late in the year, it might not provide enough time before the end of the year to make any effective changes.

There are special rules for qualifying farmers and fishermen, who may have different requirements and potential waivers for underpayment penalties; contact this office for details.

Starting your own business is an exciting journey filled with opportunities and challenges. As a young entrepreneur, you have the energy, creativity, and drive to turn your ideas into reality. This comprehensive guide will walk you through the essential steps to launch your business successfully. By following this blueprint, you’ll be well-prepared to navigate the complexities of entrepreneurship and set your business up for long-term success. And remember, before you get started, reach out to us for personalized advice and support tailored to your unique needs.

1. Find the Right Opportunity

The first step in starting a business is identifying the right opportunity. Consider your expertise, interests, and the amount of time and money you can invest. Some businesses can be launched from home with minimal overhead, especially in the e-commerce and remote work sectors. Evaluate your ideas to ensure they are viable and have the potential to generate revenue. If you’re unsure where to start, explore various business ideas and trends to get inspired.

2. Write a Business Plan

A solid business plan is crucial for your success. This document outlines your business goals, strategies, target market, and financial projections. It serves as a roadmap for your business and is essential when seeking funding from investors or lenders. Your business plan should include:

• Executive Summary: A brief overview of your business and its objectives.
• Business Description: Detailed information about your products or services.
• Market Analysis: Insights into your target market and competition.
• Organization and Management: Your business structure and team.
• Marketing and Sales Strategy: How you plan to attract and retain customers.
• Financial Projections: Budgets, cash flow projections, and funding requirements.

3. Choose a Business Structure

Selecting the right legal structure for your business is vital as it affects your taxes, liability, and regulatory requirements. Common structures include:

• Sole Proprietorship: Simple and easy to set up, but offers no personal liability protection.
• Partnership: Ideal for businesses with multiple owners, but personal liability is shared.
• Limited Liability Company (LLC): Provides personal asset protection and flexible tax options.
• Corporation: Offers the most protection but is more complex and costly to set up.
• S-Corporation: S-corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

Consult with our office to determine the best structure for your business.

4. Get a Federal Tax ID

An Employer Identification Number (EIN) is necessary for most businesses to file taxes, open bank accounts, and hire employees. Applying for an EIN is free and can be done online in just a few minutes.

5. Apply for Licenses and Permits

Depending on your industry and location, you may need various licenses and permits to operate legally. Research the specific requirements for your business and ensure you comply with all regulations. This may include health inspections, zoning permits, and professional licenses.

6. Open a Business Bank Account

Separating your personal and business finances is crucial for effective financial management. A business bank account helps you track expenses, manage cash flow, and simplify tax preparation. Setting up an account is straightforward and provides a professional image for your business.

7. Understand Your Startup Financing Options

Most businesses require some initial capital to get started. While traditional business loans may not be available to new businesses, there are alternative financing options to consider:

• Personal Savings: Many entrepreneurs use their own savings to fund their startups.
• Crowdfunding: Platforms like Kickstarter and Indiegogo allow you to raise funds from the public.
• Personal Loans: Borrowing from friends, family, or financial institutions.
• Business Grants: Explore grants available for small businesses and startups.
• Equity Financing: High-growth startups may attract investors in exchange for equity.

8. Get a Business Credit Card

A business credit card can provide short-term financing and help manage cash flow. It also helps separate personal and business expenses and can offer rewards such as cashback or travel points. Ensure you use the card responsibly and pay off the balance each month to avoid debt.

9. Choose the Right Accounting Software

Accurate financial records are essential for tracking your business performance and preparing for taxes. Invest in accounting software that suits your needs and budget. As your business grows, consider hiring a bookkeeper to maintain accurate records and provide financial insights.

10. Prepare to Pay Your Taxes

As a business owner, you’ll have new tax responsibilities, including potentially paying taxes throughout the year. Develop a relationship with a tax professional to ensure compliance and take advantage of any tax breaks available to your business.

11. Protect Yourself with Business Insurance

Business insurance protects your personal and business assets from potential risks. General liability insurance is recommended for all businesses, and you may need additional coverage depending on your industry and contracts.

12. Establish Your Online Presence

An online presence is crucial for reaching potential customers and building your brand. Create a professional website and set up social media profiles to engage with your audience. Invest in search engine optimization (SEO) to improve your visibility and attract organic traffic.

13. Set Up a Payments System

If you plan to accept credit and debit card payments, you’ll need a payment processor and point-of-sale (POS) system. Consider the costs of hardware, software, and processing fees when choosing a provider. Ensure your system is secure and user-friendly to provide a seamless customer experience.

14. Hire Employees

If your business requires additional help, you’ll need to hire employees. This involves setting up payroll, obtaining workers’ compensation insurance, and complying with labor laws. Create a clear job description and hiring process to attract the right talent.

15. Get Financing to Grow Your Business

Once your business is established, you may need additional financing to expand. Explore options such as business loans, lines of credit, and equity financing to support your growth. Ensure you understand the terms and conditions of any financing you pursue.

Are You Ready? 

Starting a business is a rewarding journey that requires careful planning and execution. By following this step-by-step guide, you’ll be well-equipped to launch and grow your business successfully. Remember, we’re here to help you every step of the way. Contact us before you get started for personalized advice and support tailored to your unique needs. Let’s turn your entrepreneurial dreams into reality!

In the digital age, crowdfunding has emerged as a revolutionary way for individuals and businesses to raise funds for a wide array of projects, from innovative products and artistic endeavors to personal causes and community projects. However, as with any financial activity, crowdfunding comes with its own set of tax implications and regulatory requirements, particularly when it involves raising money to fund a business. Understanding these implications and the involvement of the Securities and Exchange Commission (SEC) is crucial for anyone looking to embark on a crowdfunding campaign.

Understanding Crowdfunding – Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, even strangers and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.

There Are Three Main Types of Crowdfunding:

• Equity-Based Crowdfunding: Investors receive a stake in the company, typically in the form of shares.
• Donation-Based Crowdfunding: Contributions are made with no expectation of return; often used for charitable and humanitarian causes.
• Rewards-Based Crowdfunding: Backers receive a tangible item or service in return for their funds.

Tax Implications of Crowdfunding – The tax implications of crowdfunding can vary significantly based on the type of crowdfunding campaign and the nature of the funds raised. Generally, funds raised through crowdfunding can be considered taxable income by the Internal Revenue Service (IRS) if they are not classified as loans that need to be repaid, capital contributed in exchange for an equity interest, or gifts made out of detached generosity without any quid pro quo.

• For Equity-Based and Rewards-Based Crowdfunding – If the campaign provides backers with equity or rewards, the funds raised are generally considered taxable income to the fundraiser. However, if the funds are spent on deductible business expenses, the net taxable income could be reduced to zero.
• For Donation-Based Crowdfunding – Funds raised may not be taxable if they are considered gifts, but this depends on the specific circumstances and whether there is any expectation of return or benefit to the donor.

The IRS treats certain crowdfunding contributions as gifts, which means they are not taxable to the recipient. This treatment aligns with the principle that gifts are transfers made out of detached generosity. However, donors need to be aware of the gift tax rules. For instance, if an individual contributes more than the annual exclusion amount ($18,000 for 2024, but periodically adjusted for inflation) to a single recipient through a crowdfunding campaign, they may need to file a gift tax return.

A less understood but critical aspect of crowdfunding is the “gift tax trap.” This situation arises when someone sets up a crowdfunding campaign to benefit another individual but initially receives all the funds themselves. The IRS views these funds as a gift to the campaign organizer, who then gifts them to the intended beneficiary. If the total amount exceeds the annual gift tax exclusion, the organizer could be liable for gift tax and may need to file a gift tax return, reducing their lifetime gift and estate tax exemption.

Some crowdfunding platforms have addressed this issue by allowing organizers to designate beneficiaries who can directly access the funds, thereby avoiding the gift tax trap. However, not all platforms offer this feature, and organizers must be diligent in how they set up and manage their campaigns.

It’s important to distinguish between crowdfunding campaigns for charitable causes and those for personal benefit. Contributions to qualified charities through crowdfunding can be tax-deductible for the donor, provided all IRS documentation requirements are met. However, funds raised for individual needs, such as medical expenses or personal emergencies, are considered personal gifts and are not tax-deductible for donors. This distinction underscores the need for both donors and recipients to fully understand the tax implications of their crowdfunding activities.

• SEC Requirements When Raising Money – When a crowdfunding campaign involves offering equity in a business activity, it falls under the purview of the SEC, which has established regulations to protect investors and maintain fair, orderly, and efficient markets. The SEC’s involvement is particularly pronounced in equity-based crowdfunding, where businesses offer shares to investors.

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet certain qualifications to be exempt from registration. The Jumpstart Our Business Startups (JOBS) Act of 2012 introduced an exemption for crowdfunding, allowing companies to raise funds without the need for a traditional securities registration, provided they adhere to certain conditions:

• Fundraising limit: Businesses can raise up to $5 million in a 12-month period through crowdfunding platforms.
• Investor limitations: There are limits on the amount individuals can invest in crowdfunding projects, based on their income and net worth. The amount an individual can invest through crowdfunding in any 12-month period is limited.
  1. If the individual’s annual income or net worth is less than $124,000, their equity investment through crowdfunding is limited to the greater of either $2,500 or 5% of the greater of the investor’s annual income or net worth.
  2. If the individual’s annual income and net worth are at least $124,000, their investment via crowdfunding can be up to 10% of their annual income or net worth, whichever is greater, but not to exceed $124,000.
  3. The forgoing limits are based on the SEC Updated Investor Bulletin posted on October 14, 2022. These limits change from time to time. The bulletin also includes examples of how the limits, included above, are computed as well as instructions for determining net worth. The site also includes higher investment limits for Accredited Investors. Basically, Accredited Investors have higher incomes and net worth as described on the SEC website.

IRS Information Reporting and Crowdfunding – One of the key reporting requirements for crowdfunding campaigns comes in the form of IRS Form 1099-K, “Payment Card and Third Party Network Transactions.” This form is used to report payment transactions processed through payment card transactions or settlement entities. If a crowdfunding campaign processes over $5,000 (2024) in payments, the payment processor will issue a Form 1099-K to the IRS and the fundraiser. Congress has mandated the reporting threshold be reduced to $600 and the IRS is phasing in that lower threshold.

The issuance of Form 1099-K has significant implications for fundraisers:

• Income Reporting – Receipt of a Form 1099-K essentially notifies the IRS that the individual or business has received payments that may be taxable.
• Tax Liability – The fundraiser must report the income on their tax return, potentially increasing their tax liability. However, legitimate business expenses funded by the campaign can be deducted. Where the fundraising was not related to a business, such as with charity-based crowdfunding, and a 1099-K was issued, the 1099-K amount may need to be reported on the fundraiser’s income tax return, and then offset by a like amount, resulting in no taxable income. An explanation why the income is not taxable should be included. This procedure will prevent future inquiry from the IRS as to why the income was not reported.

Crowdfunding offers a unique and powerful means of raising funds, but it comes with complex tax implications and regulatory requirements. For businesses, understanding the nuances of equity-based crowdfunding and complying with SEC regulations are critical steps in leveraging this fundraising method effectively. Additionally, recognizing when funds raised may be taxable and how to report them correctly to the IRS is crucial for all types of crowdfunding campaigns.

If you have questions before launching a crowdfunding campaign, you may wish consult with this office to understand the specific implications for your project. Proper planning and advice can help ensure that your crowdfunding efforts are both successful and compliant with all financial and regulatory requirements.