Category: Article

The Tax Cuts and Jobs Act (TCJA) was signed into law in 2017 and generally took effect at the start of 2018. It brought sweeping changes to tax regulations for both individuals and businesses.

But many of its provisions aren’t permanent. In fact, some of the most important ones are scheduled to expire after 2025. Although the outcome of the November election is expected to affect the fate of many expiring provisions, now’s still a good time for business owners to read up on the impending tax law changes and plan for their potential impact.

Key provisions at risk

Essentially, if no significant tax legislation is passed by late 2025, many of the law’s provisions will return to pre-TCJA levels. Key individual provisions scheduled to expire December 31, 2025, include:

• The top individual income tax rate on ordinary income, which will return to 39.6% (up from 37% currently)
• The standard deductions for individuals, which will return to lower pre-TCJA levels after being roughly doubled under the TCJA
• The gift and estate tax exemptions, which will drop to $5 million (though indexed for inflation) from the current $13.61 million

Other provisions that may be felt by business owners include:

The Section 199A deduction for many “pass-through” entities. Under this provision, owners of sole proprietorships and eligible pass-through entities (most partnerships and S corporations) may qualify for a deduction of up to 20% of qualified business income (QBI). It’s a substantial tax break that’s intended to put pass-through entities on more equal footing tax-wise with C corporations eligible for the flat 21% corporate tax rate, which isn’t scheduled to expire.

Business income for pass-through entities is taxed according to ordinary individual income tax rates. And unless Congress acts to extend the QBI deduction, it won’t be available after 2025, potentially substantially increasing tax liability for these entities.

Employer credit for paid family and medical leave. Under the TCJA, eligible employers that continue to pay wages while employees are on qualified family and medical leave may be able to claim a tax credit calculated as a percentage of wages paid while on leave. This credit won’t be available after 2025 unless Congress acts to extend it.

Accelerated depreciation. Under bonus depreciation, eligible companies can immediately deduct a certain percentage of the cost of qualifying asset purchases in the year those assets are placed in service. This has been a particularly useful tax break for construction businesses, which must regularly invest in heavy equipment and vehicles. Unfortunately, it’s being phased out.

The TCJA initially raised bonus depreciation’s deductible percentage to a full 100%. But it fell to 80% in 2023 and then to 60% this year. It’s scheduled to continue decreasing annually to 40% for 2025 and 20% for 2026 before vanishing in 2027. After 2026, absent congressional action, companies will generally have to capitalize the cost of asset purchases and recover those costs much more slowly — unless the asset purchases qualify for Sec. 179 expensing.

The TCJA also increased the Sec. 179 deduction. In 2024, companies may be able to claim first-year-in-service deductions of up to $1.22 million for eligible asset purchases (subject to various limitations). Before the TCJA, Sec. 179 deductions were limited to a mere $500,000. Fortunately, the higher limit isn’t scheduled to expire, and it will continue to be indexed for inflation annually.

Matters to consider

Because of the scheduled increase in individual tax rates and lower standard deductions, business owners that operate their companies as sole proprietorships, most forms of partnerships, and S corporations — and that don’t itemize deductions — may want to consider accelerating income to take advantage of the lower tax rates and higher standard deductions through 2025.

Beyond that, you may want to evaluate the tax accounting methods your business uses on a contract-by-contract basis, particularly in an industry such as construction. Several options are available to align tax payments with contract revenue — including the accrual method, which allows eligible contractors to recognize revenue as soon as they bill for work, regardless of payment status.

Also, to the extent possible, forecast whether you’ll need to make any big-ticket asset purchases in upcoming years — and, if so, which ones. You may want to buy equipment, vehicles and other qualifying items while bonus depreciation is still available and before it decreases any further.

Bear in mind that your company may be able to combine bonus depreciation with the Sec. 179 deduction in the same tax year.

© 2024 KraftCPAs PLLC

Are you an older taxpayer who owns a house that has appreciated greatly? At the same time, maybe you need extra income?

A solution could involve a reverse mortgage, and it could include a tax-saving bonus.

Reverse mortgage basics

With a reverse mortgage, the borrower doesn’t make payments to the lender to pay down the mortgage principal over time. Instead, the reverse happens. The lender makes payments to you and the mortgage principal gets bigger over time. Interest accrues on the reverse mortgage and is added to the loan balance. But you typically don’t have to repay anything until you permanently move out of the home or pass away.

You can receive reverse mortgage proceeds as a lump sum, in installments over time, or as line-of-credit withdrawals. So, with a reverse mortgage, you can stay in your home while converting some of the equity into much-needed cash. In contrast, if you sell your highly appreciated residence to raise cash, it could involve relocating and a big tax bill.

Most reverse mortgages are so-called home equity conversion mortgages, or HECMs, which are insured by the federal government. You must be at least 62 years old to be eligible. For 2024, the maximum HECM allowed is a little over $1.1 million. However, the maximum you can actually borrow depends on the value of your home, your age, and the amount of any existing mortgage debt against the property. Reverse mortgage interest rates can be fixed or variable depending on the deal. Interest rates can be higher than for regular home loans, but not by much.

Basis step-up and reverse mortgage to the rescue

An unwelcome side effect of owning a highly appreciated home is that selling your property could trigger a taxable gain well over the federal home sale gain exclusion tax break. The exclusion is up to $250,000 for unmarried individuals, or $500,000 for married couples filing jointly. The tax bill from a big gain can be painful, especially if you live in a state with a personal income tax. If you sell, you lose all the tax money.

Fortunately, taking out a reverse mortgage on your property instead of selling it can help you avoid this tax bill. Plus, you can raise needed cash and take advantage of the tax-saving basis “step-up” rule.

The basis step-up: The federal income tax basis of an appreciated capital gain asset owned by a person who dies, including a personal residence, is stepped up to fair market value (FMV) as of the date of the owner’s death.

If your home value stays about the same between your date of death and the date of sale by your heirs, there will be little or no taxable gain — because the sales proceeds will be fully offset (or nearly so) by the stepped-up basis.

The reverse mortgage: Holding on to a highly appreciated residence until death can save a ton of taxes thanks to the basis step-up rule. But if you need cash and a place to live, taking out a reverse mortgage may be the answer. The reason is payments to the lender don’t need to be made until you move out or pass away. At that time, the property can be sold and the reverse mortgage balance paid off from the sales proceeds. Any remaining proceeds can go to you or your estate. Meanwhile, you stay in your home.

Consider the options

If you need cash, it has to come from somewhere. If it comes from selling your highly appreciated home, the cost could be a big tax bill. Plus, you must move somewhere. In contrast, if you can raise the cash you need by taking out a reverse mortgage, the only costs are the fees and interest charges. If those are a fraction of the taxes that you could permanently avoid by staying in your home and benefitting from the basis step-up rule, a reverse mortgage may be a tax-smart solution.

© 2024 KraftCPAs PLLC

An advisory body for the Financial Accounting Standards Board (FASB) has chosen four key business accounting rules to scrutinize and determine whether relief measures or other changes are needed.

The Private Company Council (PCC) and its 12-member board, which advises the FASB on accounting issues faced by private companies, compiled a list of 16 topics that stood out after its annual survey of private company stakeholders earlier this year. In April, it agreed to research four of the most critical areas and determine whether action is needed by the FASB. PCC members also considered whether these issues have an identifiable scope and whether technically feasible solutions are achievable before the end of 2025.

PCC Chair Jere Shawver said the group will have its opinions ready to present to the FASB in 12-18 months.

The four topics being studies are:

1. Credit losses: Short-term trade receivables and contract assets

Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, requires an entity to estimate an allowance for credit losses (ACL) on financial assets based on current expected credit losses (CECL) at each reporting date. Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand.

Under CECL methodology, the initial ACL is a measurement of total expected credit losses over the asset’s contractual life. The estimate is based on historical information, current conditions, and reasonable and supportable forecasts. The ACL is remeasured at each reporting period and is presented as a contra-asset account. The net amount reported on the balance sheet equals the amount expected to be collected.

The updated guidance was designed to be scalable for entities of all sizes. While banks and other financial institutions tend to hold more financial assets within the scope of CECL, nonfinancial entities with financial instruments, such as trade accounts receivables and contract assets, also must apply the CECL model.

Many private companies question whether the benefits of applying CECL to these assets justify the costs. For example, trade receivables are generally short term, and the amount collectible is rarely affected by macroeconomic conditions or the time value of money decay.

The PCC is considering a private company practical expedient or alternative to the application of CECL to short-term trade receivables and contract assets. One possible solution would be to allow the use of historical cost to estimate credit losses, without the evaluation of reasonable and supportable forecasts.

2. Debt modifications and extinguishments

During its September and December 2023 meetings, the PCC discussed the accounting and reporting requirements of Accounting Standards Codification (ASC) Subtopic 470-50, Debt — Modifications and Extinguishments. During those meetings, some PCC members said that applying the guidance in Subtopic 470-50 can be complex and costly when transactions involve multiple lenders. They also questioned whether the benefits of the different reporting outcomes justify the costs. This was identified as a particularly pressing concern as rising interest rates are causing many companies to renegotiate their debt terms.

Under the existing guidance, companies must assess whether a modification or extinguishment of debt has occurred when an entity either modifies the terms of an existing debt instrument or issues a new debt instrument and concurrently satisfies an existing debt instrument.

The assessment is based on a comparison of two factors:

• The present value of the cash flows from the terms of the new debt instrument
• The present value of the remaining cash flows from the original debt instrument on a lender-by-lender basis

If the difference is greater than 10%, the transaction is accounted for as an extinguishment of the original debt instrument. When debt is extinguished, the original debt is derecognized and a gain or loss equal to the difference between the carrying amount of the original debt and the fair value of the new debt is recognized. Any new fees paid to, or received from, lenders are expensed, and any new fees paid to third parties are capitalized and amortized as debt issuance costs.

If the difference in the present value of the cash flows is less than 10%, the transaction is accounted for as a modification of the original debt. When debt is modified, no gain or loss is recognized, and any new fees paid to, or received from, the existing lender are capitalized and amortized.

The PCC is considering a private company alternative to simplify the guidance. For example, some PCC members have suggested allowing private companies to bypass the required assessment and account for the transaction as a debt extinguishment. Additionally, some members have questioned whether it’s necessary to have different guidance for term debt and line-of-credit or revolving-debt arrangements when evaluating debt modifications and extinguishments.

3. Lease accounting

In 2016, the FASB issued updated guidance that requires companies to report on their balance sheets their leased assets (such as office space, vehicles, and equipment) and the rent they pay for them as liabilities. It also calls for detailed disclosures about the terms and assumptions used to estimate lease obligations, including information about variable lease payments, options to renew and terminate leases, and options to purchase leased assets. The rules took effect in 2019 for public companies and 2022 for private entities.

In some cases, deciding whether to report leases on the balance sheet requires complex judgment calls. Management must review data not just from rental agreements for real estate and equipment, but also from service arrangements and third-party outsourcing contracts. Plus, certain areas of guidance in ASC Topic 842, Leases, can be costly and complex to apply.

After evaluating PCC concerns, the FASB issued ASU No. 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities. The update allows private companies to elect to use the risk-free rate, as opposed to an incremental borrowing rate, at an underlying asset class level rather than having to elect it for their entire portfolio of leases.

The PCC is now considering whether additional practical expedients or alternatives for private companies should be considered. One area of particular concern is lease modifications.

4. Retainage and overbillings as contract assets and liabilities

Under ASC Topic 606, Revenue from Contracts with Customers, when either party has performed work on a long-term contract, the entity must present the contract on the balance sheet as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. Any unconditional rights to consideration are reported separately as a receivable.

Some private company stakeholders noted that Topic 606 changes the presentation of retainage in the construction industry and results in diversity in practice. Retainage is a construction industry concept, rather than a GAAP concept. It generally refers to a portion of consideration held back by the customer until project completion. For example, a company may invoice a customer 100% of the fee, but the customer holds back, say, 5% until a later date. In practice, companies could appropriately classify retainage as a receivable or a contract asset — or it could be allocated between the two, depending on the terms under which the right to consideration is conditional.

Before the adoption of Topic 606, companies presented conditional retainage separately from billings in excess of costs. Under Topic 606, conditional retainage is required to be netted with related contract liabilities on the balance sheet. Some stakeholders have suggested two possible alternatives for construction companies:

1. Grossing up the balance sheet, rather than netting the contract assets and contract liabilities
2. Providing additional disclosures about conditional retainage and billings in excess of costs

The PCC is considering whether these options could provide better transparency about retainage for companies in the construction industry.

PCC abandons study of share-based payment transactions

After two years of study, the PCC decided to remove the issue of stock compensation disclosures from its agenda. The PCC had discussed aspects of the guidance in Accounting Standards Codification Topic 718, Compensation — Stock Compensation, since 2014. It formed a working group in 2022 to discuss stock compensation disclosures for private companies in greater depth.

However, feedback from practitioners indicated that companies with share-based payment transactions are largely owned by private equity firms or are venture capital-backed start-ups. Because stock compensation disclosure issues aren’t broadly pervasive for private companies, PCC members agreed to focus on other topics identified by private companies.

© KraftCPAs PLLC 2024

Unless your business always collects payment for items and services on the spot (or accepts credit cards on your website), you need to know how to create effective invoices. QuickBooks Online makes this easy enough that you could be completing invoice forms and sending them out within about 15 minutes of logging in for the first time.

But would these sales forms really be the best you could do? No. To get them noticed and paid quickly, you need to take advantage of the tools QuickBooks Online provides to improve the effectiveness of your invoices. And you’ll need to use a little psychology to nudge your customers the right way.

Here are seven tips for doing just that.

1. Include everything

Think like a customer for a minute. Why do some invoices get your attention and others don’t?  Learn from the ones that do and incorporate those things into your own forms.

If you do nothing else to improve their quality, make sure that your invoices are thorough. Don’t leave anything out that could make your customers hesitate and change their perception of your business. People will think better of you if you don’t leave them hanging by neglecting to include everything they might want to know. So be sure to:

• Provide comprehensive contact information for your company and for your customer – and triple-check to make sure it’s correct. If the invoice goes to the wrong individual, it may not be paid.
• Do the same for your product and service descriptions, so they know you got the order right.
• Display the due date prominently.
• Fill in QuickBooks Online fields for sales reps, reference numbers, shipping addresses, etc. – anything at the top of the form that applies.
• Make sure adjustments like sales tax and discounts can’t be missed.

2. Sweat the details

This again goes to shaping your customers’ impression of your business. Spell everything correctly. Make sure the type and any graphics are sharp and clear, so your customers will have no trouble reading the forms. Use color if you can and make the invoice aesthetically pleasing without overdoing it and making it look like a birthday party invitation.

You probably don’t have many opportunities to communicate with your customers personally. Accurate, attractive invoices bolster your company’s overall image.

3. Use your company logo

A good-looking, professional logo speaks volumes about your company. If you don’t have one, or if you’re not happy with your current one, you can have one designed for you by freelancers at a reasonable price. Websites like Fiverr are often good options.

4. Offer an unexpected discount to regulars

You might consider surprising repeat or even new customers with a small discount. You might make up for the reduced sales totals in other ways, like repeat business. It certainly will foster goodwill.

5. Make customer messages meaningful

“Thank you for your business” is QuickBooks Online’s default Message on invoice. You can probably be a little more creative and personal with yours. If your sales volume isn’t overwhelming, write a new message on each invoice that references something about your customer or the products and/or services ordered. Here are some examples:

• Suggest similar items they might consider.
• Tell them you hope they’re pleased with their purchase.
• Pay special attention to repeat customers. Let them know you recognize them as such.
• Alert them to upcoming sales, discounts, new offerings, etc.
• And yes, thank them for their order.

6. Send invoices immediately

When you send invoices quickly after orders are placed, you signal to customers that you’re organized, professional, and conscientious.

7. Use QuickBooks Online’s sales form design tools

You have a great deal of control over how your invoices look. You can, for example:

• Choose from different templates.
• Select colors and fonts.
• Add, remove, and relabel standard fields.
• Add custom fields.
• Edit the emails that go out with invoices.

Click the gear icon in the upper right and select Account and settings, then click Sales. Click Customize look and feel. You can either Edit an existing style or create your own. You don’t have to be a design expert to modify your forms, but you may need our help making these changes.

Changes coming to QuickBooks Online

Intuit is introducing major new invoice and dashboard layouts and navigation tools. You may or may not see them yet because the company is releasing them slowly. You’ll see links when the changes are active for your account. They’re easy to learn, but you can go back to the old invoice layout if you don’t have time to make the adjustment immediately. Eventually, they’ll be in place for all users.

© 2024 KraftCPAs PLLC

It’s not uncommon to dream of turning a hobby into a regular business. Perhaps you enjoy boating and would like to open a charter fishing business. Or maybe you’d like to turn your sewing or photography skills into an income-producing business.

You probably won’t have any tax headaches if your new business is profitable over a certain period of time. But what if the new enterprise consistently generates losses and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby rather than a business. Then you’ll be unable to deduct losses.

By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses are deductible, generally on Schedule C, even if they exceed income from the enterprise.

Before 2018, deductible hobby expenses could be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.

How to not be a hobby 

There are two ways to avoid the hobby loss rules:

1. Show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses).
2. Run the venture in such a way as to show that you intend to turn it into a profit-maker rather than a mere hobby. The IRS regulations themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove you have a profit-making objective? You should operate the venture in a businesslike manner. The IRS and the courts will look at the following factors:

• How you run the activity
• Your expertise in the area (and your advisors’ expertise)
• The time and effort you expend in the enterprise
• Whether there’s an expectation that the assets used in the activity will rise in value
• Your success in carrying on other activities
• Your history of income or loss in the activity
• The amount of any occasional profits earned
• Your financial status
• Whether the activity involves elements of personal pleasure or recreation

Case illustrates the issues

In one recent court case, partners operated a farm that bought, sold, bred and raced Standardbred horses. It didn’t qualify as an activity engaged in for profit, according to a U.S. Appeals Court. The court noted that the partnership had a substantial loss history and paid for personal expenses. Also, the taxpayers kept inaccurate records, had no business plan, earned significant income from other sources, and derived personal pleasure from the activity. (Skolnick, CA 3, 3/8/23)

© 2024 KraftCPAs PLLC

Accounting isn’t as simple as just balancing the books every month — particularly in the construction industry, where contractors tend to have multiple projects underway at various stages of completion and, ideally, more in the pipeline. Your accounting practices need to be nimble, multifaceted, and comprehensive.

Unfortunately, from underperforming budgets to overlooked expenses, contractors often find themselves grappling with financial reporting challenges. Let’s look at two of the  accounting problems common to many construction businesses.

1. Lack of organization

Among the most prevalent causes of accounting struggles is lack of organization. With every project having different moving parts, the process of tracking expenses, invoices,  and receipts can become overwhelming. Without formalized accounting practices for gathering and organizing information, critical data and important documents can be misplaced, overlooked, or just hard to find. Eventually, this can lead to faulty financial reporting as well as unnecessary obstacles to timely collections for work performed.

If you’re still using a general business accounting program or some combination of paper processes and spreadsheets, it could be doing more harm than good. Investing in construction-specific accounting software can help clarify and streamline critical processes.

These software solutions automate tasks and create digital workflows and filing systems. They typically come equipped with features such as expense tracking, invoice management, and budget forecasting. Such functionality enables staff to maintain a clear, organized record of financial transactions. Plus, today’s cloud-based mobile tools make it quick and easy for authorized team members to input and access financial information, as well as store and locate documents, whenever and wherever necessary.

2. Outdated or lax processes

Failing to reconcile accounts, neglecting to track expenses in real time, or relying on manual data entry can introduce errors and discrepancies into the accounting process. Outdated or overlooked procedures not only undermine the credibility of your construction company’s financial statements and other reporting, but they also can expose your business to compliance issues and legal risk.

If you haven’t already, establish standardized accounting processes supported by clear procedures to help ensure accounting consistency. And even if you have established them, most accounting processes and procedures can be improved over time as errors are caught, technology improves and the business grows. Best practices include:

• Conducting regular reconciliations of financial accounts
• Implementing real-time expense tracking systems
• Using standard forms
• Automating manual and repetitive tasks wherever possible

Make sure you’ve established and continuously improve sound accounting or accounting-related processes for project managers as well. For example, they should compare actual labor hours and materials costs against each job’s budget to assess progress and make adjustments if necessary.

However, before projects even begin, there are accounting concerns to address. Accurate estimates are at the core of every construction business’s financial health. They should be as detailed as possible, itemizing all expected costs associated with the job in question. This includes the obvious: labor, equipment, tools and materials, of course. But estimates should also reflect overhead and indirect costs, which can be trickier to identify and quantify.

A good practice for both accounting and estimating purposes is to use an approach called “job costing” to assign a code and dollar amount to every project-related task or activity. Job costing can also help with strategic planning. Done properly, it should reveal over time which types of jobs are profitable and which ones aren’t.

© 2024 KraftCPAs PLLC

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