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General

How to manage liquidity risk from crypto-assets

Last year, there were several notable bank failures, some of which were connected to market vulnerabilities associated with cryptocurrency and crypto-asset-related (CAR) entities. In the wake of these failures, the federal banking agencies provided banks with guidance on managing crypto-asset risks.

First, the agencies issued a Joint Statement on Crypto-Asset Risks to Banking Organizations, which warned banks in general about crypto-asset risks. Later, the agencies focused on liquidity with their Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities.

Highlights of the general guidance

The first statement warns banks of several key risks associated with crypto-assets and participants in this sector. They include:

  • Fraud and scams among crypto-asset sector participants,
  • Legal uncertainties related to crypto-asset custody practices, redemptions and ownership rights,
  • Inaccurate or misleading representations and disclosures by CAR companies,
  • Volatility in the crypto-asset markets,
  • Susceptibility of stablecoins (cryptocurrency whose value is tied to that of another currency, commodity or financial instrument) to run risk,
  • Contagion risk stemming from interconnections among sector participants (that is, opaque lending, investing, funding, service and operational arrangements), which may also present concentration risks,
  • Lack of maturity and robustness of risk management and governance practices in the crypto-asset sector, and
  • Heightened risk associated with open, public or decentralized networks (that is, lack of oversight, absence of contracts or standards, vulnerabilities to cyber-attacks, outages, lost or trapped assets, and illicit finance).

According to the statement, the agencies “believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network” is likely to be inconsistent with safe banking practices. They also have serious concerns about safety and soundness issues raised by business models that are concentrated in CAR activities or have concentrated exposures to the crypto-asset sector.

Highlights of the liquidity guidance

The statement on liquidity risks notes that certain funding sources from CAR entities present heightened liquidity risks, including:

Deposits by CAR entities for their customers’ benefit. The stability of these deposits may be driven by the behavior of these customers or market dynamics, not just the CAR entity itself.

Deposits that constitute stablecoin-related reserves. These deposits, the statement explains, are “susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets.”

To address these risks, the statement encourages affected banks to implement certain liquidity risk management practices, including actively monitoring liquidity risks inherent in CAR funding sources and maintaining effective risk management controls. In addition, these banks should make sure to understand the direct and indirect drivers of crypto-asset deposit behavior and the susceptibility of such deposits to unpredictable volatility.

It’s also important for banks to assess the liquidity risks associated with potential concentrations or interconnectedness of deposits from CAR entities. And they’ll need to incorporate liquidity risks and funding volatility associated with CAR deposits into their contingency funding plans (that is, via liquidity stress testing and other risk management processes). Finally, performing robust due diligence and ongoing monitoring of CAR entities that open deposit accounts (including scrutinizing the representations they make to their customers) is key.

Follow the rules

Finally, the statements remind banks to comply with all applicable laws and regulations. For insured depository institutions, this includes, but isn’t limited to, compliance with the FDIC’s “Brokered Deposit Rule” and, as applicable, the “Consolidated Reports of Condition and Income (Call Report)” filing requirements. Crypto-assets are now a fact of life, and community banks must take care to manage them properly.

© 2024

Categories
General

Review, revise, repeat!

Is it time to revisit your anti-money laundering program?

If you haven’t reviewed your bank’s anti-money laundering program recently, it may be time for an update. Here’s a look at the latest developments.

New terminology and rules

One sure sign that your program is outdated is if you still call it a Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program. These days, most banking regulators are using the term Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT). The new terminology reflects changes made by the Anti-Money Laundering (AML) Act of 2020 and aligns more closely with the AML/CFT national priorities outlined by the Financial Crimes Enforcement Network (FinCEN) in 2021. To ensure that your program passes muster with examiners, review these priorities and make any necessary changes to comply with the new law.

One of the most significant provisions of the AML Act was to establish a federal beneficial ownership registry administered by FinCEN. By allowing law enforcement and financial institutions (with permission from their customers) to view the information in the registry, the act makes it harder for criminals to hide behind shell companies to conceal their identities. The law also expands and enhances criminal penalties for BSA violations, increases rewards and protections for whistleblowers, and strengthens the U.S. government’s subpoena power over foreign bank accounts.

In addition, bankers should familiarize themselves with FinCEN’s recently proposed rules, which would impose new AML/CFT requirements on financial institutions. (See “Proposed rules would beef up AML/CFT requirements” below.)

Updated priorities

Among FinCEN’s AML/CFT priorities are:

Corruption. According to FinCEN, combating corruption is a “core national security interest.” Banks play a key role in this effort, because “corrupt actors and their financial facilitators may seek to take advantage of vulnerabilities in the U.S. financial system to launder their assets and obscure the proceeds of crime.” Banks should consult FinCEN advisories regarding corruption-enabled human rights abuses to identify typologies and red flags associated with these abuses.

Cybercrime. Specific concerns are:

  • Cyber-enabled financial crime,
  • Ransomware attacks, and
  • The misuse of virtual currencies that “exploits and undermines their innovative potential, including through laundering of illicit proceeds.”

FinCEN notes that financial institutions “are uniquely positioned to observe the suspicious activity that results from cybercrime,” and encourages them to share this information with one another under the BSA’s safe harbor provisions.

Foreign and domestic terrorist financing. Because terrorist groups need financing to operate, FinCEN reminds banks of their obligation to identify potential terrorist financing transactions and file suspicious activity reports (SARs). It also notes that banks must comply with required sanctions programs and be aware of terrorists or terrorist organizations on government-issued sanctions lists.

Fraud. According to FinCEN, fraud is believed to generate the largest share of illicit proceeds in the United States. Fraudulent proceeds may be laundered by “money mules” and transfers through offshore and cybercriminals’ accounts.

Transnational criminal organization (TCO) activity. According to FinCEN, drug trafficking organizations and other TCOs are increasingly turning to “professional money laundering networks that receive a fee or commission for their laundering services.” These groups specialize in laundering proceeds generated by others.

Drug trafficking organization (DTO) activity. FinCEN notes that both the proceeds of illicit drugs (which may be laundered in or through the United States) and the drugs themselves contribute to a “significant public health emergency.” DTOs tend to rely on professional money laundering networks in Asia (primarily China) that facilitate exchanges of Chinese and U.S. currency or serve as brokers in trade-based money laundering schemes.

Human trafficking and human smuggling. Financial activity related to human trafficking and human smuggling can “intersect with the formal financial system at any point during the trafficking or smuggling process.” Networks use a variety of methods to move illicit proceeds, including cash smuggling and front companies.

Proliferation financing. Proliferation support networks seek to exploit the U.S. financial system to move funds used to acquire weapons or support state-sponsored weapons programs. FinCEN notes that global correspondent banking is a principal vulnerability and driver of proliferation financing risk in the United States.

Review and update

Banks should evaluate their AML/CFT programs and revise them, as needed, to incorporate FinCEN’s priorities and reflect any changes in their risk profiles. Staying on top of the latest rules regarding money laundering is essential for any community bank going forward.

Sidebar: Proposed rules would beef up AML/CFT requirements

On June 28, 2024, FinCEN announced a proposed rule designed to strengthen and modernize financial institutions’ Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) programs. Among other things, the proposed rule, if adopted, will require banks to implement the following proactive measures:

  • Maintain effective, risk-based and reasonably designed AML/CFT programs. (By explicitly requiring programs to be effective, the proposed rule would impose new burdens on banks.)
  • Review FinCEN’s AML/CFT priorities and incorporate them, as appropriate, into their risk-based programs.
  • Conduct formal risk assessments to evaluate their exposure to AML/CFT risks.
  • Ensure that their AML/CFT programs are administered by people in the United States and are overseen and approved by their boards of directors.

Also, on July 19, 2024, the federal banking agencies jointly announced a proposed rule that would update their AML/CFT program requirements and align them with FinCEN’s proposed rule. Notably, the agencies’ proposal would require that banks’ AML/CFT officers be “qualified” and that independent testing of banks’ AML/CFT programs be conducted by qualified personnel or outside parties.

For more information, contact one of our advisors today.

© 2024

Categories
General

Advantages of Keeping your Business Separate from its Real Estate

Does your business require real estate for its operations? Or do you hold property titled under your business’s name? It might be worth reconsidering this strategy. With long-term tax, liability and estate planning advantages, separating real estate ownership from the business may be a wise choice.

How taxes affect a sale

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred. However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate is transferred to a pass-through entity instead, the profit upon sale will be taxed only at the individual level.

Safeguarding assets

Separating your business ownership from its real estate also provides an effective way to protect the real estate from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity. The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning implications

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but all members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one member and the real estate to another.

Handling the transaction

If you’re interested in this strategy, the business can transfer ownership of the real estate and then the transferee can lease it back to the company. Who should own the real estate? One option: The business owner can purchase the real estate from the business and hold title in his or her name. One concern though, is that it’s not only the property that’ll transfer to the owner but also any liabilities related to it. In addition, any liability related to the property itself may inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income. An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Tread carefully

It isn’t always advisable to separate the ownership of a business from its real estate. If it’s a valuable move, the right approach will depend on your individual circumstances. Contact us to help determine the best way to minimize your transfer costs and capital gains taxes while maximizing other potential benefits. © 2024

Categories
Tax

Make Year-End Tax Planning Moves Before it’s too Late!

With the arrival of fall, it’s an ideal time to begin implementing strategies that could reduce your tax burden for both this year and next. One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2024. You may not itemize because of the high 2024 standard deduction amounts ($29,200 for joint filers, $14,600 for singles and married coup les filing separately, and $21,900 for heads of household). Also, many itemized deductions have been reduced or suspended under current law. If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

The benefits of bunching

You may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you can itemize deductions for this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider:

Postpone income until 2025 and accelerate deductions into 2024 if doing so enables you to claim larger tax breaks for 2024 that are phased out over various levels of AGI. These include deductible IRA contributions, the Child Tax Credit, education tax credits and student loan interest deductions. Postponing income also may be desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2024 — for example, if you expect to be in a higher tax bracket next year.

Contribute as much as you can to your retirement account, such as a 401(k) plan or IRA, which can reduce your taxable income. High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others.

As year end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans. Sell investments that are underperforming to offset gains from other assets. If you’re age 73 or older, take required minimum distributions from retirement accounts to avoid penalties. Spend any remaining money in a tax-advantaged flexible spending account before December 31 because the account may have a “use it or lose it” feature. It could be advantageous to arrange with your employer to defer, until early 2025, a bonus that may be coming your way. If you’re age 70½ or older by the end of 2024, consider making 2024 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA and the contribution amount isn’t included in your gross income or deductible on your return.

Make gifts sheltered by the annual gift tax exclusion before year end. In 2024, the exclusion applies to gifts of up to $18,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower income tax brackets who aren’t subject to the kiddie tax. These are just some of the year-end strategies that may help reduce your taxes. Reach out to us to tailor a plan that works best for you. © 2024

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General

2024 Q4 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2024.

Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in a federally declared disaster area.

Tuesday, October 1 — The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Tuesday, October 15 — If a calendar-year C corporation that filed an automatic six-month extension: File a 2023 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2023 to certain employer-sponsored retirement plans.

Thursday, October 31 — Report income tax withholding and FICA taxes for third quarter 2024 (Form 941) and pay any tax due. (See exception below under “November 12.”)

Tuesday, November 12 — Report income tax withholding and FICA taxes for third quarter 2024 (Form 941), if you deposited on time (and in full) all the associated taxes due.

Monday, December 16 — If a calendar-year C corporation, pay the fourth installment of 2024 estimated income taxes. Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines. © 2024

Categories
Tax

It’s Time for Your Small Business to Think About Year-End Tax Planning

With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act soon.

  • Estimated taxes

Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.

  • QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in. Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

  • Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.

  • Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems. The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

  • Bonus depreciation

For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

  • Upcoming tax law changes

These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025.

Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks. © 2024

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Press Releases

ATA WINS CLEARLYRATED’S 2024 BEST OF ACCOUNTING AWARD FOR SERVICE EXCELLENCE

Jackson, TN – September 24, 2024 – ATA, a leading accounting firm, announced today that they have won the Best of Accounting Award for providing quality service to their clients. ClearlyRated’s Best of Accounting® Award winners have proven to be industry leaders in service quality based entirely on ratings provided by their clients. On average, clients of 2024 Best of Accounting winners are [1.5 times as likely OR 50% more likely] to be satisfied than those who work with non-winning firms. ATA received satisfaction scores of 9 or 10 out of 10 from 82.9% of their clients, significantly higher than the industry’s average of 56% in 2023.

“Being honored for our commitment to best serve our clients exemplifies our team’s hard work and dedication,” said Managing Partner John Whybrew. “We’re proud to receive ClearlyRated’s Best of Accounting Award.”

“I’m so excited to introduce the 2024 Best of Accounting winners alongside their verified ratings and reviews on ClearlyRated.com,” said ClearlyRated’s CEO, Eric Gregg. “Faced with another challenging year in 2023, these firms proved their commitment to providing outstanding experiences and superior service. They’re raising the bar for excellence and I couldn’t be more proud to celebrate their success – cheers to you all!”

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About ATA

ATA, recognized as an IPA Top 150 regional accounting firm, has provided a wide array of accounting, auditing, tax and advisory services for clients primarily located in the Southeast ranging from small family-owned businesses to international corporations. Headquartered in Jackson, Tennessee since 1940, ATA has approximately 250 employees across 16 office locations in Tennessee, Arkansas, Kentucky, Mississippi and Georgia. ATA is also an alliance member of BDO USA LLP, a top five global accounting firm, which provides additional resources and expertise for clients.

ATA guides its clients towards success by providing advisory services that are not traditionally associated with the accounting industry. For example, Revolution Partners, ATA’s wealth management entity provides financial planning expertise; ATA Technologies provides trustworthy IT solutions; ATA Digital focuses on growth through the design and development of digital applications and marketing products such as video, social media, and digital content for businesses; ATA Capital is an investment banking firm dedicated to providing clients with M&A brokerage services; and ATA Employment Solutions is a human resource management consulting agency.

About ClearlyRated

Rooted in satisfaction research for professional service firms, ClearlyRated utilizes a Net Promoter® Score survey program to help professional service firms measure their service experience, build online reputation, and differentiate on service quality. Learn more at https://www.clearlyrated.com/solutions/.

About Best of Accounting™
ClearlyRated’s Best of Accounting® Award recognizes accounting firms that have demonstrated exceptional service quality based exclusively on ratings provided by their clients and employees. The award program provides statistically valid and objective service quality benchmarks for the accounting industry, revealing which firms deliver the highest quality client and employee experience. Winners are featured on ClearlyRated.com—an online business directory that helps buyers of professional services find service leaders and vet prospective firms with the help of validated client ratings and testimonials.

Categories
General

Are you a small business owner?

Are you a small business owner looking to reduce your 2024 tax bill? Thanks to the Tax Cuts and Jobs Act, owners of pass-through entities may be able to claim tax deductions based on their qualified business income (QBI) and certain other income. This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels. Because of those limitations, be aware that some tax planning strategies can increase or decrease your allowable QBI deduction for 2024.

Contact us for help optimizing your overall tax results.

Note: The QBI deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.

Categories
General

Working Remotely is Convenient, but it May Have Tax Consequences

Many employees began working remotely during the pandemic and continue doing so today. Remote work has many advantages for employers and employees, and as a result, it’s here to stay in many industries. But it may also lead to some tax surprises, especially if workers cross state lines. Double taxation may occur It’s not unusual for employees to work remotely for an employer in another state. For some businesses, remote work has become a permanent arrangement that allows employees to live and work further away from a physical office.

If you live in one state and work remotely for an employer in another state, familiarize yourself with the tax laws in both states and determine how they may affect you. For example, you may need to file income tax returns in both states, which could result in increased — or even double — taxation.

Here’s the problem: A state generally has the power to tax the incomes of people who are domiciled in it as well as people who reside there. Domicile is a state of mind and is often based on a person’s intent to make a location his or her “true, fixed, permanent home.” Residency is based on physical presence in a state for a certain amount of time (typically, 183 days per year). It’s possible to be domiciled in one state and a resident of another. For example, let’s say you have a permanent home in one state where your job is located and a vacation home in another state. Your employer allows employees to work remotely, so now you spend more than 200 days per year living and working at your vacation home. The state where your permanent home is located considers you to be domiciled there, but the state where your vacation home is located views you as a resident. So you may be subject to taxes on the same income in both states.

You could avoid double taxation if one or both states provide credit for tax paid to other states. But your tax bill may still increase if, for example, one state’s income tax rate is significantly higher than the other state’s rate. Complications for employers From an employer’s perspective, allowing employees to work remotely may create obligations to withhold and remit income and payroll taxes in several states. Plus, having employees in other states may be sufficient to establish “nexus” with those states, potentially triggering liability for their income, franchise, gross receipts, or sales and use tax. In addition to the expense of tax reporting in multiple states, this may increase an employer’s overall tax liability. There are other complications as well. Business expense deductions Under current law, employees generally can’t deduct unreimbursed job-related expenses.

Years ago, employees could claim certain costs as miscellaneous itemized deductions, which are deductible to the extent they exceed 2% of adjusted gross income. But those deductions were eliminated for 2018 through 2025. Remote workers typically aren’t eligible for the home office deduction either. That deduction is generally limited to self-employed business owners. Prior to 2018, employees could claim the deduction if, among other things, they worked at home “for the convenience” of their employers. But that deduction was also eliminated for 2018 through 2025.

Employers may reimburse remote workers for their business expenses according to an “accountable plan” that requires employees to substantiate expenses and meet other requirements. Properly reimbursed expenses are deductible by an employer and excludable from an employee’s income. Be aware of the consequences If you’re a remote worker or own a business that employs remote workers, be sure you understand the tax implications.

In some cases, you may be able to take steps to minimize them. But even if you can’t, it’s important to know what to expect. Contact us for more information.© 2024

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General

Reasons an LLC Might be the Ideal Choice for Your Small to Medium-Size Business

Choosing the right business entity is a key decision for any business. The entity you pick can affect your tax bill, your personal liability and other issues. For many businesses, a limited liability company (LLC) is an attractive choice. It can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with several benefits. Like the shareholders of a corporation, the owners of an LLC (called members rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Therefore, an owner can operate a business with the security of knowing that personal assets (such as a home or individual investment account) are protected from the entity’s creditors.

This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability. Electing classification LLC owners can elect, under the “check-the-box rules,” to have the entity treated as a partnership for federal tax purposes. This can provide crucial benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners in proportion to the owners’ respective interests in the profits and are reported on the owners’ individual returns and taxed only once. To the extent the income passed through to you is qualified business income (QBI), you’ll be eligible to take the QBI deduction, subject to various limitations.

In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have. An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership).

Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued. (For example, an S corp can’t have more than 100 shareholders and can only have one class of stock.) Evaluate the options To sum up, an LLC can give you protection from creditors while providing the benefits of taxation as a partnership.

Be aware that the LLC structure is allowed by state statute, and states may use different regulations. Contact us to discuss in more detail how use of an LLC or another option might benefit you and the other owners. © 2024