Author: KraftCPAs

Comprehensive and accurate financial reporting systems have become essential tools for healthcare providers, but they’re often missing from small dental practices that lack in-house accounting expertise.

Roughly 36% of dentists in the U.S. operate solo-practices, and 40% have only a few dentists working from one shared office. Plus, 37% of dentists report feeling overworked, according to new statistics from the American Dental Association (ADA).

An increasing number of dental practices are turning to outsourced specialists to manage the financial side of their business, which can free up more time to focus on patient care and attract new patients. Here’s a look at some of the factors that could determine whether outsourcing is a good option:

Bookkeeping chores

A dental practice needs to maintain a detailed set of books and records that track money coming into and going out of the business. Examples of relevant transactions include:

• Payments collected from patients, insurance companies and governmental payers
• Outstanding balances due for services rendered
• Write-offs for uncollectible accounts
• Operating expenses (such as salaries, payroll taxes, office rent, insurance, marketing, lab fees, supplies and materials, equipment leases, and cleaning costs)
• Equipment purchases and depreciation expense
• Bank loans and interest expense
• Payments to and from owners

Failure to manage your records properly can lead to headaches when you file tax returns or apply for bank financing — not to mention the missed business opportunities. You can hire an in-house office manager to enter financial transactions into your accounting software, or you can outsource these time-consuming tasks to an external accountant.

Financial statement preparation

If you apply for loans or merge with another practice, your practice will need a full set of financial statements, including the following:

• An income (or profit-and-loss) statement that reports revenue and expenses
• A balance sheet that shows assets and liabilities
• A statement of cash flows that’s broken down into cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities

Lenders and other stakeholders will review these reports to determine your profitability, growth trends, and general financial well-being. Larger practices usually prepare financials that comply with U.S. Generally Accepted Accounting Principles (GAAP). But some small practices may prefer to issue cash-basis or tax-basis financial statements.

Key operating metrics

Most dentists have probably asked themselves the obvious question: How does my practice compare to my competitors? Benchmarking studies can help answer that question. Industry operating statistics are available from the ADA, the Academy of General Dentistry, and local or dental specialty trade associations, based on your size, location, and specialties.

Common dental practice operating metrics include:

• Average number of patient visits/billings per dentist
• Average dental assistant/hygienist work hours and time spent with patients
• Average wait time for scheduled patient visits
• Average billing per patient
• Composition of billings (whether direct patient payments, payments from private insurers or payments from government programs)
• Average salary per dental assistant/hygienist/dentist
• Individual operating costs as a percentage of revenue

Understanding how your practice measures up can help assess operational strengths and areas for improvement. Benchmarking can also help you evaluate your cost structure and the competitiveness of your compensation packages.

Financial forecasting

Analyzing your past financial results is only one piece of the puzzle. You also need to forecast how you expect to perform in the future. Budgets and forecasts are valuable management tools to gauge whether you have the office space, equipment and staffing to meet future demand. They also come in handy when applying for bank loans or merging with another practice.

It’s important to review these reports monthly or quarterly to see if you’re on track for the year. If not, you might need to adjust your expectations and take corrective measures before year end.

Brush up on financials

Most dental schools don’t teach the basics of financial management, so bookkeeping and accounting may be outside of your comfort zone. Working with a professional who specializes in dental practice financial accounting can help you handle these tedious and unfamiliar tasks with confidence, allowing your practice to shine like your patients’ pearly whites in today’s competitive environment.

© 2024 KraftCPAs PLLC

The U.S. Department of Labor (DOL) has issued a new final rule regarding the salary threshold for determining whether employees are exempt from federal overtime pay requirements. The threshold is slated to jump 65% from its current level by 2025, which will make as many as 4 million additional workers eligible for overtime pay.

On the same day the overtime rule was announced, the Federal Trade Commission (FTC) approved a final rule prohibiting most noncompete agreements with employees, with similarly far-reaching implications for many employers. Both regulations could be changed by court challenges, but here’s what the new laws mean for now.

The overtime rule

Under the Fair Labor Standards Act (FLSA), so-called nonexempt workers are entitled to overtime pay at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. Employees are exempt from the overtime requirements if they satisfy three tests:

1. Salary basis test. The employee is paid a predetermined and fixed salary that isn’t subject to reduction due to variations in the quality or quantity of his or her work.
2. Salary level test. The salary isn’t less than a specific amount, or threshold (currently, $684 per week or $35,568 per year).
3. Duties test. The employee primarily performs executive, administrative or professional duties.

The new rule focuses on the salary level test and will increase the threshold in two steps. Starting on July 1, 2024, most salaried workers who earn less than $844 per week will be eligible for overtime. On January 1, 2025, the threshold will climb further, to $1,128 per week.

The rule also will increase the total compensation requirement for highly compensated employees (HCEs). HCEs are subject to a more relaxed duties test than employees earning less. They need only “customarily and regularly” perform at least one of the duties of an exempt executive, administrative or professional employee, as opposed to primarily performing such duties.

This looser test currently applies to HCEs who perform office or nonmanual work and earn total compensation (including bonuses, commissions, and certain benefits) of at least $107,432 per year. The compensation threshold will move up to $132,964 per year on July 1, and to $151,164 on January 1, 2025.

The final rule also includes a mechanism to update the salary thresholds every three years. Updates will reflect current earnings data from the most recent available four quarters from the U.S. Bureau of Labor Statistics. The rule also permits the DOL to temporarily delay a scheduled update when warranted by unforeseen economic or other conditions. Updated thresholds will be published at least 150 days before they take effect.

Plan your approach

With the first effective date right around the corner, employers should review their employees’ salaries to identify those affected — that is, those whose salaries meet or exceed the current level but fall below the new thresholds. For employees who are on the bubble under the new thresholds, employers might want to increase their salaries to retain their exempt status. Alternatively, employers may want to reduce or eliminate overtime hours or simply pay the proper amount of overtime to these employees. Or they can reduce an employee’s salary to offset new overtime pay.

Remember also that exempt employees also must satisfy the applicable duties test, which varies depending on whether the exemption is for an executive, professional, or administrative role. An employee whose salary exceeds the threshold but doesn’t primarily engage in the applicable duties isn’t exempt.

Obviously, depending on the selected approach, budgets may require adjustments. If some employees will be reclassified as nonexempt, employers may need to provide training to employees and supervisors on new timekeeping requirements and place restrictions on off-the-clock work.

Be aware that business groups have promised to file lawsuits to block the new rule, as they succeeded in doing with a similar rule promulgated in 2016. Also, the U.S. Supreme Court has taken a skeptical eye to administrative rulemaking in recent years. So it makes sense to proceed with caution. Bear in mind, too, that some employers also are subject to state and local wage and hour laws with more stringent standards for exempt status.

The noncompete ban

The new rule from the FTC bans most noncompete agreements nationwide, which will conflict with some state laws. In addition, existing noncompete agreements for most workers will no longer be enforceable after the rule becomes effective, 120 days after it’s published in the Federal Register. The rule is projected to affect 30 million workers. However, it doesn’t apply to certain noncompete agreements and those entered into as part of the sale of a business.

The rule includes an exception for existing noncompete agreements with senior executives, defined as workers earning more than $151,164 annually who are in policy-making positions. Policy-making positions include:

• A business’s president
• A chief executive officer or equivalent
• Any other officer who has policy making authority
• Any other natural person who has policy making authority similar to an officer with such authority

Note that employers can’t enter new noncompetes with senior executives.

Unlike the proposed rule issued for public comment in January 2023, the final rule doesn’t require employers to legally modify existing noncompetes by formally rescinding them. Instead, they must only provide notice to workers bound by existing agreements — other than senior executives — that they won’t enforce such agreements against the workers. The rule includes model language that employers can use to provide notice.

A lawsuit was filed in a Texas federal court shortly after the FTC voted on the final rule, arguing the FTC doesn’t have the statutory authority to issue the rule. The U.S. Chamber of Commerce also subsequently filed a court challenge to block the noncompete ban.

Whether either of the new federal rules will remain as written isn’t clear. Judicial intervention or a potential swing in federal political power could mean they land in the dustbin of history before taking effect — or shortly thereafter.

© 2024 KraftCPAs PLLC

For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the 10-year rule for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice 2024-35 that forthcoming final regulations for the rule will apply for the purposes of determining RMDs from such accounts in 2025.

Beneficiaries face RMD rule changes

The need for the latest guidance traces back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other changes, the law eliminated so-called stretch IRAs.

Prior to the SECURE Act, all beneficiaries of inherited IRAs were allowed to stretch the RMDs on the accounts over their entire life expectancies. For younger heirs, this meant they could take smaller distributions for decades, deferring taxes while the accounts grew. They also had the option to pass on the IRAs to later generations, which deferred the taxes for even longer.

To avoid this extended tax deferral, the SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) may stretch payments over their life expectancies. The following heirs are EDBs:

• Surviving spouses
• Children younger than the “age of majority”
• Individuals with disabilities
• Chronically ill individuals
• Individuals who are no more than 10 years younger than the account owner

All other heirs (“designated beneficiaries”) must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) for RMDs. In 2023, the age at which account owners must start taking RMDs rose from age 72 to age 73, pushing the RBD date to April 1 of the year after account owners turn 73.

In February 2022, the IRS issued proposed regulations that came with an unwelcome surprise for many affected heirs. They provide that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the 10th year. In other words, they aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and could push them into higher tax brackets during those years.

Confusion reigns

It didn’t take long for the IRS to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. How? Beneficiaries could have been dinged with excise tax equal to 25% of the amounts that should have been distributed but weren’t (reduced to 10% if the RMD failure is corrected in a timely manner). The plans could have been disqualified for failure to make RMDs.

In response to the concerns, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.

The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021, or 2022 on or after the RBD.

Now the IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs, and plans won’t be disqualified based solely on such missed RMDs.

Delayed distributions aren’t always best

In a nutshell, the succession of IRS waivers means that designated beneficiaries who inherited IRAs or defined contributions plans after 2019 aren’t required to take annual RMDs until at least 2025. But some individuals may be better off beginning to take withdrawals now, rather than deferring them. The reason? Tax rates could be higher beginning in 2026 and beyond. Indeed, many provisions of the Tax Cuts and Jobs Act, including reduced individual income tax rates, are scheduled to sunset after 2025. The highest rate will increase from 37% to 39.6%, absent congressional action.

What if the IRS reverses course on the 10-year rule, allowing a lump sum distribution in the tenth year rather than requiring annual RMDs? Even then, it could prove worthwhile to take distributions throughout the 10-year period to avoid a hefty one-time tax bill at the end.

On the other hand, beneficiaries nearing retirement likely will benefit by delaying distributions. If they wait until they’re no longer working, they may be in a lower tax bracket.

Stay tuned

The IRS stated in its recent guidance that final regulations “are anticipated” to apply for determining RMDs for 2025.

© 2024 KraftCPAs PLLC

The Inflation Reduction Act (IRA) established and expanded numerous incentives to encourage taxpayers to increase their use of renewable energy and adoption of a range of energy efficient improvements. In particular, the law includes funding for nearly $9 billion in home energy rebates.

While the rebates aren’t yet available, many states are expected to launch their programs in 2024. And the IRS recently released some critical guidance (Announcement 2024–19) on how it’ll treat the rebates for tax purposes.

The rebate programs

The home energy rebates are available for two types of improvements. Home efficiency rebates apply to whole-house projects that are predicted to reduce energy usage by at least 20%. These rebates are applicable to consumers who reduce their household energy use through efficiency projects. Examples include the installation of energy efficient air conditioners, windows and doors.

The maximum rebate amount is $8,000 for eligible taxpayers with projects with at least 35% predicted energy savings. All households are eligible for these rebates, with the largest rebates directed to those with lower incomes. States can choose to provide a way for homeowners or occupants to receive the rebates as an upfront discount, but they aren’t required to do so.

Home electrification and appliance rebates are available for low- or moderate-income households that upgrade to energy efficient equipment and appliances. They’re also available to individuals or entities that own multifamily buildings where low- or moderate-income households represent at least 50% of the residents. These rebates cover up to 100% of costs for lower-income families (those making less than 80% of the area median income) and up to 50% of costs for moderate-income families (those making 80% to 150% of the area median income). According to the Census Bureau, the national median income in 2022 was about $74,500 — meaning some taxpayers who assume they won’t qualify may indeed be eligible.

Depending on your state of residence, you could save up to:

• $8,000 on an ENERGY STAR-certified electric heat pump for space heating and cooling
• $4,000 on an electrical panel
• $2,500 on electrical wiring
• $1,750 on an ENERGY STAR-certified electric heat pump water heater
• $840 on an ENERGY STAR-certified electric heat pump clothes dryer and/or an electric stove, cooktop, range, or oven

The maximum home electrification and appliance rebate is $14,000. The rebate amount will be deducted upfront from the total cost of your payment at the point of sale in participating stores if you’re purchasing directly or through your project contractors.

The tax treatment

In the wake of the IRA’s enactment, questions arose about whether home energy rebates would be considered taxable income by the IRS. The agency has now put the uncertainty to rest, with guidance stating that rebate amounts won’t be treated as income for tax purposes. However, rebate recipients must reduce the basis of the applicable property by the rebate amount.

If a rebate is provided at the time of sale of eligible upgrades and projects, the amount is excluded from a purchaser’s cost basis. For example, if an energy-efficient equipment seller applies a $500 rebate against a $600 sales price, your cost basis in the property will be $100, rather than $600.

If the rebate is provided after purchase, the buyer must adjust the cost basis similarly. For example, if you spent $600 to purchase eligible equipment and later receive a $500 rebate, your cost basis in the equipment drops from $600 to $100 upon receipt of the rebate.

Interplay with the energy efficient home improvement credit

The IRS guidance also addresses how the home energy rebates affect the energy efficient home improvement credit. As of 2023, taxpayers can receive a federal tax credit of up to 30% of certain qualified expenses, including:

• Qualified energy efficiency improvements installed during the year
• Residential energy property expenses
• Home energy audits

The maximum credit each year is:

• $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150)
• $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers

Taxpayers who receive home energy rebates and are also eligible for the energy efficient home improvement credit must reduce the amount of qualified expenses used to calculate their credit by the amount of the rebate. For example, if you purchase an eligible product for $400 and receive a $100 rebate, you can claim the 30% credit on only the remaining $300 of the cost.

Act now?

While the IRA provides that the rebates are available for projects begun on or after August 16, 2022, projects must fulfill all federal and state program requirements. The federal government, however, has indicated that it’ll be difficult for states to offer rebates for projects completed before their programs are up and running. In the meantime, though, projects might qualify for other federal tax breaks.

© 2024 KraftCPAs PLLC

Businesses are expected to gain $1.55 billion in tax refunds and save about $4 billion over the next 10 years after Tennessee legislators approved a significant change to the state’s franchise tax.

Approval of the tax break came late in the final day of the Tennessee General Assembly’s 2024 session, and it followed more than four months of negotiations between the House, Senate, and Gov. Bill Lee. As a result, the TDOR estimates that about 100,000 taxpayers are owed refunds on eligible returns filed on or after January 1, 2021, and covering tax periods that ended on or after March 30, 2020.

The governor’s office advocated for the measure to avoid legal action from businesses that claimed the property-based method for calculating state franchise tax – commonly known as the “alternative base” – was invalid. The Tennessee Department of Revenue (TDOR) said more than 80 companies had requested refunds based on that argument.

The legislation’s fate appeared uncertain even in the final days before approval. As recently as early April, the House insisted on just one year of refunds – worth about $700 million – and a requirement for companies that receive refunds to be listed publicly. The final bill included much of the Senate’s initial version, but with some of the House’s transparency requirements.

Specifically, the legislation eliminates the alternative base, which is one of two ways that Tennessee’s franchise tax – the state’s primary tax on businesses – has been calculated for several decades. The changes are:

Alternative base eliminated. Effective January 1, 2024, the franchise tax rate must be based on the taxpayer’s net worth. Removed is the long-standing option to base the tax on the value of property owned or used by the taxpayer. Previously, taxpayers were required to pay the higher amount resulting from those two options.

Alternative base refunds. Businesses that paid franchise taxes determined by the alternative base for tax periods that ended on or after March 30, 2020, can file amended returns with amounts based on net worth. The difference between the two amounts will be refunded.

Refund requests will be accepted by the TDOR between May 15, 2024, and November 30, 2024. In addition to amended returns, the TDOR will require a specific refund claim form and additional procedures.

The names of companies that receive refunds will be released by the TDOR, along with the range – but not the exact amount – of refund they received. Those ranges are $0 to $750, $750 to $10,000, or $10,000 and higher. This information will be published online for a one-month period of May 31, 2025 to June 30, 2025.

If you think your company may be eligible for refunds, please contact your KraftCPAs tax advisor to determine next steps. The TDOR will discuss specific requirements regarding the refund requests in a webinar at 9 a.m. (CT) on May 7, 2024. Registration information is available on the TDOR website.

© 2024 KraftCPAs PLLC

If you’re buying a new house, you may have considered keeping your current home and renting it out. It could be lucrative, after all: In March, the national average rent for a one-bedroom residence was $1,487, according to the Zumper National Rent Report.

In some parts of the country, rents are much higher or lower than the averages. The most expensive locations to rent a one-bedroom place were New York City ($4,200); Jersey City, New Jersey ($3,260); San Francisco ($2,900); Boston ($2,850) and Miami ($2,710). The least expensive one-bedroom locations were Wichita, Kansas ($690); Akron, Ohio ($760); Shreveport, Louisiana ($770); Lincoln, Nebraska ($840) and Oklahoma City ($860).

Becoming a landlord and renting out a residence comes with financial risks and rewards. However, you also should know that it carries potential tax benefits and pitfalls.

You’re generally treated as a real estate landlord once you begin renting your home. That means you must report rental income on your tax return, but you’re also entitled to offset landlord deductions for the money you spend on utilities, operating expenses, incidental repairs, and maintenance (for example, fixing a leaky roof). Additionally, you can claim depreciation deductions for the home. And you can fully offset rental income with otherwise allowable landlord deductions.

Passive activity rules

However, under the passive activity loss (PAL) rules, you may not be able to currently claim the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.

You should also be aware that potential tax pitfalls may arise from renting your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape tax on up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of your principal home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. In other words, renting your home out for an extended time could jeopardize a big tax break.

Even if you don’t rent out your home long enough to jeopardize the principal residence exclusion, the tax break you would get on the sale (the $250,000/$500,000 exclusion) won’t apply to:

• The extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or
• Any gain allocable to a period of nonqualified use (any period during which the property isn’t used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse) after December 31, 2008.

A maximum tax rate of 25% will apply to this gain, attributable to depreciation deductions.

Selling at a loss

What if you bought at the height of a market and ultimately sell at a loss? In those situations, the loss is available for tax purposes only if you can establish that the home was in fact converted permanently into income-producing property. Here, a longer lease period helps.

If you’re in this situation, be aware that you may not wind up with much of a loss for tax purposes. That’s because basis (the cost for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property. If a home was purchased for $300,000, converted to a rental when it’s worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

© 2024 KraftCPAs PLLC

If you haven’t already filed your 2023 tax return, you probably will in the next few days. But even after the IRS receives your return, there may still be some issues to bear in mind. Here are three to consider.

Check on your refund

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get your refund status” to find out about yours. You’ll need your Social Security number or Individual Taxpayer Identification Number, filing status, and the exact refund amount.

Keep those tax records

Hold on to tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should keep certain tax-related records longer. For example, keep your actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.

What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. You can keep these records for six years if you want to be extra safe.

Click here for a detailed list of important financial documents and how long to keep each one.

File an amended return

In most cases, you can file an amended tax return on Form 1040-X and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2023 tax return that you file on April 15, 2024, you can likely file an amended return until April 15, 2027.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

© 2024 KraftCPAs PLLC

Does your business need to prepare financial statements that conform to U.S. Generally Accepted Accounting Principles (GAAP)? Or should you generate financial statements based on the same methods you use for federal income tax purposes?

Not knowing the key differences between these frameworks can potentially be costly for your business.

GAAP basics

GAAP is the most common financial reporting standard in the United States. It’s based on the principle of conservatism, which generally ensures proper matching of revenue and expenses with a reporting period. The principle also aims to prevent companies from overstating profits and asset values to mislead investors and lenders.

The Securities and Exchange Commission (SEC) requires public companies to follow GAAP. Many lenders expect private borrowers to follow suit because GAAP is familiar and consistent. Likewise, if owners plan to sell the company, prospective buyers may prefer to perform due diligence on GAAP financial statements — or they may be public companies that are required to follow GAAP.

Tax-basis framework

However, some private companies opt to report financial results using a special reporting framework. One common format is based on reporting for federal income tax purposes. Contrary to GAAP, tax laws generally tend to favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known and other deductibility requirements have been met. In general, a company’s taxable income when reported in accordance with the tax-basis framework tends to be higher than its pretax profits as reported with GAAP.

To determine whether to use the tax-basis framework, management needs to decide if outside parties are going to rely on the financial statements. Tax-basis reporting might be appropriate if a business is owned, operated, and financed by individuals who are closely involved in day-to-day operations and understand its financial position. However, investors and lenders generally prefer GAAP financials to help them compare a company’s financial performance to others in the same industry.

Key differences

When comparing GAAP and tax-basis statements, one difference is the terminology used on the income statement. Under GAAP, companies report revenue, expenses, and net income. Tax-basis entities report gross income, deductions, and taxable income, and they report nontaxable items as separate line items or as footnote disclosures.

Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. Companies that use GAAP must assess whether useful lives and asset values remain meaningful over time and occasionally incur impairment losses if an asset’s market value falls below its book value. For tax purposes, fixed assets are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 and bonus depreciation deductions are subtracted before computing MACRS deductions.

Other reporting differences exist for inventory, pensions, leases, and accounting for changes and errors. Tax laws also prohibit deducting the following items:

• Penalties and fines
• Start-up costs
• Accrued vacations (unless they’re taken within 2½ months after the end of the taxable year)

In addition, companies record allowances for bad debts, sales returns, inventory obsolescence, and asset impairment under GAAP. These allowances generally aren’t permitted under tax law. Instead, they’re deducted when transactions take place or conditions are met that make the amount fixed and determinable.

Get it right

The optimal financial reporting method depends on your company’s situation, and deciding on one can be difficult. A CPA can help compare the pros and cons of each method to help determine the best option.

© 2024 KraftCPAs PLLC

The April 15 tax filing deadline is closing in. Even so, and despite best intentions, some taxpayers won’t be ready to file. Whatever the reason, consider filing Form 4868 for an extension if you suspect that April 15 will be an impossible deadline.

An extension will give most taxpayers until October 15 to file and helps avoid “failure-to-file” penalties. However, it only provides extra time to file, not extra time to pay. Whatever tax is owed must still be sent by April 15, or penalties will apply — and they can be steep.

There’s one notable change in the filing deadline this year for residents of Davidson, Dickson, Montgomery, and Sumner counties. Because those areas were declared federal disaster areas following severe storms in early December 2023, taxpayers in those counties have until June 17, 2024, to file federal returns. Extensions apply to many other returns as well.

Two different penalties

Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%.

The failure-to-pay penalty is based on the amount shown as due on the return (less amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be less, the penalty is based on the lower amount.

The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum 25%. If a Form 4868 extension is obtained, then the filing is late only if the extended due date is missed. However, keep in mind that a filing extension doesn’t change the responsibility for payment.

If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part), so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can eventually reach as much as 47.5%.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, not just the amount shown as due. (Credit is given for amounts paid through withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to this amount for an additional $135 in penalties.

A minimum failure-to-file penalty also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.

Exemption in certain cases 

Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family.

Interest is assessed at a fluctuating rate set by the federal government apart from and in addition to the above penalties. Also, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, but with a 75% maximum.

© 2024 KraftCPAs PLLC

If you have a tax-favored retirement account, including a traditional IRA, you’ll become exposed to the federal income tax required minimum distribution (RMD) rules after reaching a certain age. If you inherit a tax-favored retirement account, including a traditional or Roth IRA, these rules will also apply.

Specifically, you’ll be required to:

Take annual withdrawals from the accounts and pay the resulting income tax

and/or reduce the balance in your inherited Roth IRA sooner than you might like

Here’s a look at the current rules after recent tax-law changes.

RMD basics

The RMD rules require affected individuals to take annual withdrawals from tax-favored accounts. Except for RMDs that meet the definition of tax-free Roth IRA distributions, RMDs will generally trigger a federal income tax bill (and, in some states, a state tax bill).

Under a favorable exception, the original account owner of a Roth IRA is exempt from the RMD rules during his or her lifetime. But if you inherit a Roth IRA, the RMD rules for inherited IRAs come into play.

A later starting age

The SECURE 2.0 law was enacted in 2022. Previously, you generally had to start taking RMDs for the calendar year during which you turned age 72. However, you could decide to take your initial RMD until April 1 of the year after the year you turned 72.

SECURE 2.0 raised the starting age for RMDs to 73 for account owners who turn age 72 in 2023 to 2032. So, if you attained age 72 in 2023, you’ll reach age 73 in 2024, and your initial RMD will be for calendar 2024. You must take that initial RMD by April 1, 2025, or face a penalty for failure to follow the RMD rules. The tax-smart strategy is to take your initial RMD, which will be for calendar year 2024, before the end of 2024 instead of in 2025 (by the April 1, 2025, absolute deadline). Then, take your second RMD, which will be for calendar year 2025, by Dec. 31, 2025. That way, you avoid having to take two RMDs in 2025 with the resulting double tax hit in that year.

A reduced penalty

If you don’t withdraw at least the RMD amount for the year, the IRS can assess an expensive penalty on the shortfall. Before SECURE 2.0, if you failed to take your RMD for the calendar year in question, the IRS could impose a 50% penalty on the shortfall. SECURE 2.0 reduced the penalty from 50% to 25%, or 10% if you withdraw the shortfall within a “correction window.”

Controversial 10-year liquidation rule

A change included in the original SECURE Act (which became law in 2019) requires most non-spouse IRA and retirement plan account beneficiaries to empty inherited accounts within 10 years after the account owner’s death. If they don’t, they face the penalty for failure to comply with the RMD rules.

According to IRS proposed regulations issued in 2022, beneficiaries who are subject to the original SECURE Act’s 10-year account liquidation rule must take annual RMDs, calculated in the usual fashion — with the resulting income tax. Then, the inherited account must be emptied at the end of the 10-year period. According to this interpretation, you can’t simply wait 10 years and then drain the inherited account.

The IRS position on having to take annual RMDs during the 10-year period is debatable. Therefore, in Notice 2023-54, the IRS stated that the penalty for failure to follow the RMD rules wouldn’t be assessed against beneficiaries who are subject to the 10-year rule who didn’t take RMDs in 2023. It also stated that IRS intends to issue new final RMD regulations that won’t take effect until sometime in 2024 at the earliest.

© 2024 KraftCPAs PLLC