Author: KraftCPAs

The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments, and due to high inflation, the adjustments for 2023 were big.

Here are key numbers that small business owners need to know.

Section 179 deductions

For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles, and commercially available software.

Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.

Deduction for heavy SUVs

There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.

First-year bonus depreciation cut

For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.

However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60%, then to 40% in 2025, 20% in 2026, and 0% in 2027 and beyond.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles, and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.

A noteworthy exception to remember: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.

Passenger auto limitations

For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks, and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:

• $12,200 for Year 1 ($20,200 if bonus depreciation is claimed)
• $19,500 for Year 2
• $11,700 for Year 3
• $6,960 for Year 4 and thereafter until fully depreciated

These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.

Advantage for heavy vehicles

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As a result, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.

But there is a catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.

Reach out to a KraftCPAs advisor to discuss depreciation tax breaks specific to your situation.

© 2023 KraftCPAs PLLC

Manual transaction entry doesn’t make sense anymore – not when QuickBooks Online makes the process of importing them from your bank so easy. If you enter them on your own, you risk data transposition errors, which can create inaccuracies in your customer billing, reports, and income taxes. Plus, it takes an inordinate amount of time that you could use in running other areas of your business.

If you’re still using a manual method, consider setting up connections to your online banks. Once your transactions are delivered to QuickBooks Online, the site provides tools that allow you to view them and make sure they’re complete before you store them. Whenever you need to see them, you’ll be able to find them easily.

Here are step-by-step instructions to how this all works.

Making a connection

You’ll need to have set up a username and password for your online bank accounts if you haven’t done so already. In QuickBooks Online, click Bookkeeping in the navigation toolbar. It should open to Transactions | Bank transactions. Click Link account over to the right.

A page opens with suggested financial institutions. If yours isn’t there, enter it in the search field at the top. If there are multiple options, be sure to select the correct one and click it.

Click Continue and go through any of the security steps your financial institution may have. You’ll get to a page that says, Which accounts do you want to connect?, with a drop-down list displaying options from your Chart of Accounts. Select the type of account you’re creating (checking, credit card, etc.) and continue to follow the onscreen instructions until your connection is complete and QuickBooks Online has downloaded your transactions.

It’s important that you set up your linked accounts correctly since you’re dealing with the Chart of Accounts. If any step is confusing, we can schedule a session to go over online account connections with you.

Dealing with transactions

Once you’ve connected to all your online accounts, you’ll see that they appear on the Bank transactions page, displayed in small boxes containing their balances and the number of transactions they contain (there might be quite a few when you first download). You can also see how recently each account was updated (click Update anytime you want to refresh an account).

Click one, and its register will appear below. Above that, you’ll see three labeled bars:

• For review. QuickBooks Online puts all downloaded transactions in this list.
• Categorized. Your transactions will move to this list after you’ve assigned categories to them.
• Excluded. If you happen to run into duplicate transactions, you can move them here.

Below that, you’ll see that you can filter your transactions by date, by type, or by description, check number, or amount.

As you continue to work with accounts, you occasionally might find that a connection has been unlinked. When that happens, just repeat the connection process again.

Working with individual transactions

You’ll want to set some time aside the first time you download transactions so you can look at each one and add or edit its content. Click one to open its detail box, as shown below. The top line defaults to Categorize. First, select the correct Vendor/Customer (or  + Add new), then check the Category and change it from the drop-down menu if it’s incorrect.

There’s one more field here that’s very important. If you’re purchased something on behalf of a customer, be sure to select the correct one from the drop-down list under the Customer field and click the Billable box. QuickBooks Online will make this transaction information available to you the next time you invoice the customer. Other fields not shown in the above image are optional, like Tags, Memo, and Add attachment. When your transaction is complete, click Confirm to move it to the Categorized list.

There are two other options in these individual transaction boxes besides Categorize: Find match (match downloaded payments to invoices, for example) and Record as transfer (move money from one account to another). These are advanced topics that aren’t necessarily intuitive, so we can schedule a session to go over them if you anticipate needing to use them.

The mechanics of connecting to your banks in QuickBooks Online aren’t complicated, but you may run into problems in moving transactions along when they’re first downloaded. It’s much easier to get it right from the start than to try to untangle transactions that weren’t processed properly.

© 2023 KraftCPAs PLLC

A job that includes life insurance as a fringe benefit is usually one of many selling points to employees. However, if group term life insurance is part of your benefits package, and the coverage is higher than $50,000, there may be undesirable income tax implications.

You’re taxed on income you didn’t receive

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s phantom income.

What’s worse, the cost of group term insurance must be determined under a table prepared by the IRS even if the employer’s actual cost is less than the cost figured under the table. With these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as an employee gets older and as the amount of his or her compensation increases.

Look at your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is higher than you’d like? First, you should establish if this is the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12, and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return.

What to do

If you decide that the tax cost is too high for the benefit you’re getting in return, find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can provide the employee with an individual policy for the balance of the coverage. Alternatively, the employer can give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

© 2023 KraftCPAs PLLC

Business owners are being overrun with messages that they might be missing out on the lucrative Employee Retention Tax Credit (ERTC). While some employers do remain eligible if they meet certain criteria, the IRS has added new urgency to its warnings cautioning businesses about third-party scams related to the credit.

Employers are always encouraged to claim any credit they’re entitled to, but those that claim the ERTC improperly could find themselves in hot water with the IRS and face penalties as a result.

ERTC in a nutshell

The ERTC is a refundable tax credit intended for businesses in two ways: It continued paying employees while businesses were shut down due to the pandemic in 2020 and 2021, or to businesses that suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers could receive credits worth up to $26,000 per retained employee. The credit may still be available on an amended tax return.

The requirements are strict, though. Specifically, a qualifying business must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or in the first three quarters of 2021, or
• Qualified as a recovery startup business — which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021. Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERTC.

In addition, a business can’t claim the ERTC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness, or it used to claim certain other tax credits. Also, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.

Prevalence of scams

The potentially high value of the ERTC, combined with the fact that employers can file claims for it on amended returns until April 15, 2025, has led to a wave of fraudulent promotions offering to help businesses claim the credit. These scams wield inaccurate information and inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees in the thousands of dollars or commissions as high as 25% of the refund received.

The IRS has called the amount of misleading marketing around the credit “staggering.” For example, in recent guidance, the tax agency explained that contrary to advice given by some promoters, supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.

ERTC fraud has grown so serious that the IRS has included it in its annual Dirty Dozen list of the worst tax scams in the country. In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as 1099 Tax Pros, with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERTC filings and COVID-related sick and family leave wage credits for their clients.

Scammers have been able to monopolize on the general confusion and uncertainty around the ERTC. A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.

Although it’s unclear how much progress the IRS has made on the backlog, the agency has announced that it has entered a new phase of intensified scrutiny of ERTC claims. It’s stepping up its compliance work and establishing additional procedures to deal with fraud in the program. The IRS already has increased its audit and criminal investigation work on ERTC claims, focusing on both the promoters and the businesses filing dubious claims.

If you fell into the trap and are among those businesses, you could end up on the hook for repayment of the credit, along with penalties and interest on top of the fees you paid the fraudulent advisor.

Even if you’re eligible for the credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. As the IRS has noted, promoters may leave out key details that potentially set off a domino effect of tax problems for unsuspecting businesses.

Moreover, providing your business and tax documents to an unscrupulous promoter could put you at risk of identity theft.

Red flags to watch for

The IRS has identified several warning signs of illegitimate promoters, including:

• Unsolicited phone calls, text messages, direct mail, or ads highlighting an easy application process or a short eligibility checklist (in reality, the rules for eligibility and computation of credit amounts are quite complicated)
• Statements that the promoter can determine your ERTC eligibility within minutes
• Hefty upfront fees
• Fees based on a percentage of the refund amount claimed
• Preparers who refuse to sign the amended tax return filed to claim a refund of the credit
• Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers)
• Refusal to provide detailed documentation of how your credit was calculated

The IRS also warns that some ERTC mills are sending out fake letters from nonexistent government entities such as the Department of Employee Retention Credit. The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.

Protect yourself

Taking several simple steps can help you cut your risk of being victimized by scammers. First, if you think you may qualify for the credit, work with a trusted professional — one who isn’t proactively soliciting ERTC work. Those who are aggressively marketing the credit (and in some cases, only the credit) are more interested in making money themselves and are unlikely to prioritize or protect your best interests.

You also should request a detailed worksheet that explains how you’re eligible for the credit. The worksheet should show the math for the credit amount as well.

If you’re claiming you suspended business due to a government order, ensure that you have legitimate documentation of the order. Don’t accept a generic document about a government order from a third party. Rather, you should acquire a copy of the actual government order and review it to confirm that it applies to your business.

Proceed with caution

No taxpayer ever wants to leave money on the IRS’s table, but skepticism is warranted whenever something seems too good to be true. If you believe your business might be eligible for the ERTC, we can help you verify eligibility, compute your credit, and file your refund claim.

© 2023 KraftCPAs PLLC

The annual three-day sales tax holiday in Tennessee will stretch into October this year, but with caveats.

Sales on school supplies, clothing, and computers will be exempt from sales tax during the traditional back-to-school sales tax holiday that starts at 12:01 a.m. Friday, July 28, and ends at 11:59 p.m. Sunday, July 30. That translates into a savings of as much as 9.75% in some areas where sales tax nears double digits.

Items sold online are also eligible for the sales tax exemptions. Click here for a full list of items that qualify.

This year, Tennessee has also added a three-month sales tax holiday on groceries that begins Tuesday, August 1, and ends on Tuesday, October 31.

Here are a few of the specifics for the July 28-30 event:

What is tax-free: School supplies, art supplies, and clothing items, including backpacks, books, binders, pens, paper, drawing pads, artist paint brushes, clay, glaze, shoes, shirts, pants, socks, dresses, and diapers. Desktop computers and laptop computers intended for personal use and priced at $1,500 or less are also tax-free.

Not tax-free: Jewelry, purses, sports and recreational equipment, compact discs, printer supplies, computer software, and flash drives. Individual items (with the exception of computers) priced at more than $100 each are not tax-free.

For the three-month grocery holiday, qualifying items are described broadly as any liquid, concentrated, solid, frozen, dried, or dehydrated substance sold to be ingested or chewed by humans and consumed for taste or nutritional value.

Among items not included are alcohol, tobacco, candy, and dietary supplements.

© 2023 KraftCPAs PLLC

If you’re age 50 or older, you can probably make extra catch-up contributions to your tax-favored retirement account(s). It is worth the trouble? Absolutely.

The deal with IRAs 

Eligible taxpayers can make extra catch-up contributions of up to $1,000 annually to a traditional or Roth IRA. If you’ll be 50 or older as of December 31, 2023, you can make a catch-up contribution for the 2023 tax year by April 15, 2024.

Extra deductible contributions to a traditional IRA create tax savings, but your deduction may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels.

Extra contributions to Roth IRAs don’t generate any up-front tax savings, but you can take federal-income-tax-free qualified withdrawals after age 59½. There are also income limits on Roth contributions.

Higher-income individuals can make extra nondeductible traditional IRA contributions and benefit from the tax-deferred earnings advantage.

How company plans stack up 

You also have to be age 50 or older to make extra salary-reduction catch-up contributions to an employer 401(k), 403(b), or 457 retirement plan — assuming the plan allows them and you signed up. You can make extra contributions of up to $7,500 to these accounts for 2023. Check with your human resources department to see how to sign up for extra contributions.

Salary-reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. You can use the resulting tax savings to help pay for part of your extra catch-up contribution, or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement wealth.

Tally the amounts

IRAs: Let’s say you’re age 50 and you contribute an extra $1,000 catch-up contribution to your IRA this year and then do the same for the following 15 years. Here’s how much extra you could have in your IRA by age 65 (rounded to the nearest $1,000).

• 4% annual return: $22,000
• 6% annual return: $26,000
• 8% annual return: $30,000

Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional contributions to a Roth IRA won’t, but you can take more tax-free withdrawals later in life.

Company plans: If you’ll turn 50 next year, let’s say you contribute an extra $7,500 to your company plan next year. Then, you do the same for the next 15 years. Here’s how much more you could have in your 401(k), 403(b), or 457 plan account (rounded to the nearest $1,000).

• 4% annual return: $164,000
• 6% annual return: $193,000
• 8% annual return: $227,000

In this scenario, making larger contributions can also lower your tax bill.

IRA and company plans: Finally, let’s say you’ll turn age 50 next year. If you’re eligible, you contribute an extra $1,000 to your IRA for next year, plus you make an extra $7,500 contribution to your company plan. Then, you do the same for the next 15 years. Here’s how much extra you could have in the two accounts combined (rounded to the nearest $1,000).

• 4% annual return: $186,000
• 6% annual return: $219,000
• 8% annual return: $257,000

Make retirement more golden 

Obviously, making extra catch-up contributions can add up to pretty big numbers by the time you retire. If your spouse can make them too, you can potentially accumulate even more. Contact a KraftCPAs advisor if you have questions or want more information.

 © 2023 KraftCPAs PLLC

Scammers keep coming up with new and more creative ways to steal information from taxpayers, according to the IRS. New scams in the form of email, text messages, telephone calls, or regular mail regularly target both individuals and businesses, and they often prey on the elderly.

“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” IRS Commissioner Danny Werfel said. “Be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams.”

The biggest key to avoid getting caught by scammers: Remember that the IRS will never contact you by email, text, or social media channels about a tax bill or refund. Most IRS contacts are first made through regular mail. So, if you get a text message saying it’s the IRS and asking for your Social Security number, it’s someone trying to steal your identity and rob you. Remember that the IRS already has your Social Security number.

Here are some of the crimes the IRS has identified in recent months:

Email messages and texts that infect recipients’ computers and phones. In this scam, a phony email claims to come from the IRS. The subject line of the email often states that the message is a notice of underreported income or a refund. There may be an attachment or a link to a bogus web page with your “tax statement.” When you open the attachment or click on the link, a Trojan horse virus is downloaded to your computer.

The trojan horse is an example of malicious code (also known as malware) that can take over your computer hard drive, giving someone remote access to the computer. It may also look for passwords and other information. The scammer will then use whatever information is gathered to commit identity theft, gain access to bank accounts and more.

Phishing and spear phishing messages. Emails or text messages that are designed to get users to provide personal information are called phishing. Spear phishing is a tailored phishing attempt sent to a specific organization or business department.

For example, one spear phishing scam targets employees who work in payroll departments. These employees might get an email that looks like it comes from an official source, such as the company CEO, requesting W-2 forms for all employees. The payroll employees might erroneously reply with these documents, which then provides criminals with personal information about the staff that can be used to commit fraud.

The IRS recommends using a two-person review process if you receive a request for W-2s. In addition, employers should require any requests for payroll to be submitted through an official process, like the employer’s human resources portal.

Scams keep evolving

These are only a few examples of the types of tax scams circulating. Be on guard for any suspicious messages. Don’t open attachments or click on links. Contact us if you get an email about a tax return we prepared. You can also report suspicious emails that claim to come from the IRS at [email protected]. Those who believe they may already be victims of identity theft should find out what do by going to the Federal Trade Commission’s website, OnGuardOnLine.gov.

 

 

© 2023 KraftCPAs PLLC

If you own or manage a business with employees, there’s a harsh tax penalty that you could be at risk for paying personally. The Trust Fund Recovery Penalty (TFRP) applies to Social Security and income taxes that are withheld by a business from its employees’ wages.

Sweeping penalty

The TFRP is dangerous because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are answers to a few common questions about the penalty:

What actions are penalized? The TFRP applies to any willful failure to collect, or truthfully account for, and pay over taxes required to be withheld from employees’ wages.

Why is it so harsh? Taxes are considered the government’s property. The IRS explains that Social Security and income taxes “are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount.”

The penalty is sometimes called the “100% penalty” because the person found liable is personally penalized 100% of the taxes due. The amounts the IRS seeks are usually substantial and the IRS is aggressive in enforcing the penalty.

Who’s at risk? The penalty can be imposed on anyone deemed “responsible” for collecting and paying tax. This has been broadly defined to include a corporation’s officers, directors and shareholders, a partnership’s partners, and any employee with related duties. In some circumstances, voluntary board members of tax-exempt organizations have been subject to this penalty. In other cases, responsibility has been extended to professional advisors and family members close to the business.

According to the IRS, responsibility is a matter of status, duty, and authority. Anyone with the power to see that taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. For example, you might not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay withheld taxes and have the power to pay them, you are considered to be a responsible person. Although taxpayers held liable can sue other responsible people for contribution, this action is up to the individual and can’t be used to delay the TFRP payment.

What’s considered willful? There doesn’t have to be an overt intent to evade taxes. Simply paying bills or obtaining supplies instead of paying taxes is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Failing to do the job yourself can be treated as willful.

Recent cases

Here are two cases that illustrate the risks.

• A U.S. Appeals Court held a hospital administrator liable for the TFRP. The administrator was responsible for payroll, as well as signing and reviewing checks. She also knew that the financially troubled hospital wasn’t paying withheld taxes to the IRS. Instead of prioritizing paying taxes, she paid vendors and employees’ wages. (Cashaw, CA 5, 5/31/23)
• A corporation owner’s daughter/corporate officer was assessed a $680,472 TFRP for unpaid payroll taxes. She argued that she wasn’t a responsible party. She owned no stock and couldn’t hire and fire employees. But she did have the power to write checks and pay vendors and was aware of the unpaid taxes. A U.S. Appeals Court found the “great weight of evidence” indicated she was a responsible party and the TFRP was upheld. (Scott, CA 11, 10/31/22)

Best advice

Under no circumstances should you “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact a KraftCPAs advisor with any questions.

© 2023 KraftCPAs PLLC

Your business might be able to claim big first-year depreciation tax deductions for eligible real estate expenditures rather than depreciate them over several years. But should you? It’s not as simple as it might seem.

Qualified improvement property

For qualifying assets placed in service in tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. Importantly, the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP), up to the maximum annual allowance.

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. For Sec. 179 deduction purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems and security systems that are placed in service after the building is first placed in service.

However, expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP and must be depreciated over several years.

Mind the limitations

A taxpayer’s Sec. 179 deduction can’t cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property is placed in service in the tax year. The Sec. 179 deduction limitation rules can get tricky if you own an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation). Finally, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face additional restrictions. We can give you full details.

First-year bonus depreciation for QIP

Beyond the Sec. 179 deduction, 80% first-year bonus depreciation is also available for QIP that’s placed in service in calendar year 2023. If your objective is to maximize first-year write-offs, you’d claim the Sec. 179 deduction first. If you max out on that, then you’d claim 80% first-year bonus depreciation.

Note that for first-year bonus depreciation purposes, QIP doesn’t include nonresidential building roofs, HVAC systems, fire protection and alarm systems, or security systems.

Consider depreciating QIP over time

Here are two reasons why you should think twice before claiming big first-year depreciation deductions for QIP.

Lower-taxed gain when property is sold: First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create depreciation recapture that’s taxed at higher ordinary income rates when the QIP is sold. Under current rules, the maximum individual rate on ordinary income is 37%, but you may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

Write-offs may be worth more in the future: When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If federal income tax rates go up in future years, you’ll have effectively traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

As you can see, the decision to claim first-year depreciation deductions for QIP, or not claim them, can be complicated. We can help you determine the best depreciation options.

© 2023 KraftCPAs PLLC

Companies that do business in Tennessee will face new limits to the way they collect, use, and transfer customer information as a result of the new Tennessee Information Protection Act (TIPA).

The law, effective July 1, 2025, will require companies to obtain consent for the processing of sensitive personal data and will allow consumers to opt out of data sales, targeted advertising, and other significant sales and marketing initiatives. Tennessee joins eight other states with consumer data privacy laws, but like Iowa, Utah, and Virginia, it narrowly defines the types of disclosures involved and provides a 60-day grace period for businesses to resolve compliance issues.

The bipartisan legislation passed unanimously in both houses of the Tennessee legislature and was signed into law by Gov. Bill Lee.

Businesses impacted

Specifically, the law will apply to businesses that post more than $25 million in annual revenue and:

• Control or process the personal information of 175,000 or more Tennessee consumers, or
• Control or process the personal information of 25,000 or more Tennessee consumers and obtain more than 50% of gross revenue from the sale of that information.

Noncompliance is punishable by a fine of $7,500 per violation, although a business found in violation will have 60 days to comply before fines are levied. Companies with existing consumer privacy policies can be exempt if the programs “reasonably conform” to the National Institute of Standards and Practices (NIST) Privacy Framework or “other documented policies, standards, and procedures designed to safeguard consumer privacy.”

Who’s protected?

The TIPA will require companies to obtain consent from a consumer to collect and process sensitive information such as race, ethnic origin, religious affiliation, mental or physical health, sexual orientation, precise geolocation, genetic and biometric data, and citizenship and immigration status.

The privacy rule applies to any Tennessee resident “acting only in a personal context” and does not shield the personal data of individuals acting in a commercial or employment role. The privacy laws also will not shield data collected by government agencies, insurance companies, nonprofit organizations, financial institutions, higher education facilities, and businesses already subject to the Health Insurance Portability and Accountability Act (HIPAA) or the Health Information Technology for Economic and Clinical Health Act (HITECH).

If you’re unsure whether your business will be subject to new TIPA regulations, reach out to an advisor with our risk assurance and advisory services team for guidance.

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