Some businesses may have an easier path to financial statements
There’s no getting around the fact that accurate financial statements are imperative for every business. Publicly held companies are required to not only issue them, but also have them audited by an independent CPA. Audited financial statements provide the highest level of assurance to third-party users that the documents in question are free of material misstatements.
The good news for privately held companies — particularly small businesses — is you may not need to incur the cost or undertake the effort that goes with formally audited financial statements. There are other less expensive and less arduous paths to follow.
The most basic: Preparations
True to its name, a financial statement preparation is simply the product of an accountant preparing a set of financial statements in accordance with an acceptable financial reporting framework. It’s usually done as part of bookkeeping or tax-related work.
A preparation provides no assurance of the accuracy and completeness of the financial statements in question. And assurance is typically critical if you plan to share the financial statements with third parties such as lenders and investors.
That said, some lenders may accept preparations in support of small lending arrangements. However, more often than not, preparations are used only for internal purposes to provide a business’s leadership with information on the company’s current financial condition and as a basis of comparison against future accounting periods. In fact, professional standards don’t even require a CPA to be independent of a business to perform a preparation.
To avoid misleading any third parties who might eventually receive a preparation, each page of the financial statements should include a disclaimer or legend stating that no CPA provides any assurance on the accuracy of the documents. In addition, a preparation must adequately refer to or describe the applicable financial reporting framework that’s used and disclose any known departures from that framework.
The next step up: Compilations
If you want to fortify the trust of potential third-party financial statement users a little more, consider a compilation. Like a preparation, a compilation is simply a set of financial statements generated in accordance with an acceptable financial reporting framework that provides no assurance of the documents’ accuracy and completeness.
The primary difference is a compilation includes a formal report by a CPA attesting that this professional has fully read the financial statements and evaluated whether they’re free from obvious material errors. If the CPA isn’t independent of the business, this fact must be disclosed in the report as well.
The use of a compilation can extend beyond the business’s leadership to third parties such as lenders, investors and collaborative partners who may view the input of a CPA as reassuring. However, many third parties might still insist on some level of formal assurance to accept your company’s financial statements.
The right level
We’d be remiss if we didn’t mention there’s another level in between audit (highest assurance) and preparation and compilation (no assurance). That would be a financial statement review. A review is performed by an independent CPA, who provides limited assurance that no material modifications should be made to the financial statements in question. If you need help deciding which level of financial statement services is right for your business, please contact us.
Smaller companies: Explore pooled employer plans for retirement benefits
Most businesses today need to offer a solid benefits package. Failing to do so could mean falling behind in the competition to hire and retain talent in today’s tight job market.
When it comes to retirement benefits, however, smaller companies may struggle with the financial and administrative burdens of sponsoring their own plans. The good news is, thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019, a relatively new solution is available: pooled employer plans (PEPs).
Meet the MEP
PEPs are a variation on an existing retirement plan model: multiple employer plans (MEPs). MEPs are qualified defined contribution plans, typically 401(k)s, maintained by two or more employers. MEP sponsors may be one of the participating employers or a third party, such as a trade association or professional employer organization.
MEPs offer several advantages. Group purchasing power and other economies of scale tend to lower plan sponsorship costs. Also, participating employers avoid time-consuming and often disruptive administrative tasks. Plus, they can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.
MEP sponsors are responsible for plan design and day-to-day management. This includes:
- Coordinating with various third-party service providers,
- Handling compliance issues, and
- Overseeing annual audit and reporting requirements.
Sponsors can also provide participating employers with access to expertise and advanced technology that the participants might otherwise be unable to afford.
MEP drawbacks
However, traditional MEPs have some drawbacks. For one thing, to be treated as a single employer plan for reporting, audit and administrative purposes, a MEP must be “closed.” That is, its members must share some “commonality of interest,” such as being in the same industry or geographical location.
Employers that join “open” MEPs, which don’t require a commonality of interest, are treated as if they maintained separate plans with their own reporting, audit and other compliance responsibilities. (Note: Certain smaller plans — generally, those with fewer than 100 participants — aren’t subject to audit requirements.)
Another drawback of traditional MEPs is the “one-bad-apple” rule. Under this rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.
PEPs step up
Properly designed PEPs avoid both the commonality-of-interest requirement and the one-bad-apple rule. PEPs are treated like single employer plans for reporting, audit and other compliance purposes — even if they allow unrelated employers to join. One participating employer’s compliance failure won’t jeopardize a PEP’s qualified status so long as the plan contains certain procedures for dealing with a participant’s noncompliance.
PEPs are available from “pooled plan providers,” which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. Although PEPs eliminate some of the obstacles that make traditional MEPs impractical for many companies, they’re not without disadvantages. For instance, PEPs have limited flexibility to customize plan designs or investment options to meet the needs of specific employers.
Also, while one of the advantages of PEPs is cost savings, they may increase one type of cost for some participants. That is, though small employers generally aren’t subject to annual audit requirements, PEPs are. So, small businesses that join a PEP will have to bear annual audit costs they otherwise wouldn’t. These costs can, however, be spread out among participants.
Dip your toes in
If you’re intrigued by the prospect of a PEP, dip your toes in slowly. Discuss the idea with your leadership team and professional advisors before you dive in. We’d be happy to help you estimate the costs and potential cost savings involved.
Key 2024 inflation-adjusted tax amounts for individuals
The IRS recently announced various 2024 inflation-adjusted federal tax amounts that affect individual taxpayers.
Most of the federal income tax rate bracket thresholds are about 5.4% higher than for 2023. That means that you can generally have about 5.4% more income next year without owing more to the federal government.
Standard deduction
Here are the inflation-adjusted standard deduction numbers for 2024 for those who don’t itemize:
- $14,600 if you’re single or use married filing separate status (up from $13,850 in 2023).
- $29,200 if you’re married and file jointly (up from $27,700).
- $21,900 if you’re a head of household (up from $20,800).
Older taxpayers and those who are blind are entitled to additional standard deduction allowances. In 2024 for those age 65 or older or blind, the amounts will be: $1,550 for a married taxpayer (up from $1,500 in 2023) and $1,950 for a single filer or head of household (up from $1,850 for 2023).
For an individual who can be claimed as a dependent on another taxpayer’s return, the 2024 standard deduction will be the greater of: 1) $1,300 (up from $1,250 for 2023) or 2) $450 (up from $400 for 2023) plus the individual’s earned income, not to exceed $14,600 (up from $13,850 for 2023).
Ordinary income and short-term capital gains
Here are the 2024 inflation-adjusted bracket thresholds for ordinary income and net short-term capital gains:
- 10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
- Beginning of 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
- Beginning of 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
- Beginning of 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
- Beginning of 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
- Beginning of 35% bracket: $243,726 for singles, $487,451 for married joint filers and $243,701 for heads of household; and
- Beginning of 37% bracket: $609,351 for singles, $731,201 for married joint filers and $609,351 for heads of household.
Long-term capital gains and dividends
Here are the 2024 inflation-adjusted bracket thresholds for net long-term capital gains and qualified dividends:
- 0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers, and $0 to $63,000 for heads of household;
- Beginning of 15% bracket: $47,026 for singles, $94,051 for married joint filers, and $63,001 for heads of household; and
- Beginning of 20% bracket: $518,901 for singles, $583,751 for married joint filers and $551,351 for heads of household.
Gift and estate tax
The annual exclusion for gifts made in 2024 will be $18,000 (up from $17,000 for 2023). That means you can give away up to $18,000 to as many individuals as you wish without incurring gift tax or using up any of your unified federal gift and estate tax exemption.
In 2024, the unified federal gift and estate tax exemption will be $13,610,000 (up from $12,920,000 for 2023).
For gifts made in 2024, the annual exclusion for gifts to a noncitizen spouse will be $185,000 (up from $175,000 in 2023).
Conclusion
This article only covers some of the inflation-adjusted tax amounts. There are others that may potentially apply, including: alternative minimum tax parameters, kiddie tax amounts, limits on the refundable amount of the Child Tax Credit, limits on the adoption credit, IRA contribution amounts, contributions to your company’s retirement plan and health savings account amounts. Various other inflation-adjusted amounts may affect your tax situation if you own an interest in a sole proprietorship or a pass-through business. Contact us with questions.
There still may be time to reduce your small business 2023 tax bill
In the midst of holiday parties and shopping for gifts, don’t forget to consider steps to cut the 2023 tax liability for your business. You still have time to take advantage of a few opportunities.
Time deductions and income
If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2023 and deferring income into 2024 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2023 even though you don’t pay the credit card bill until 2024. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2023.
As for deferring income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Buy assets
If you’re thinking about purchasing new or used equipment, machinery or office equipment in the new year, it might be time to act now. Buy the assets and place them in service by December 31, and you can deduct 80% of the cost as bonus depreciation in 2023. This is down from 100% for 2022 and it will drop to 60% for assets placed in service in 2024. Contact us for details on the 80% bonus depreciation break and exactly what types of assets qualify.
Bonus depreciation is also available for certain building improvements.
Fortunately, the first-year Section 179 depreciation deduction will allow many small and medium-sized businesses to write off the entire cost of some or all of their 2023 asset additions on this year’s federal income tax return. There may also be state tax benefits.
However, keep in mind there are limitations on the deduction. For tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million and a phaseout rule kicks in if you put more than $2.89 million of qualifying assets into service in the year.
Purchase a heavy vehicle
The 80% bonus depreciation deduction may have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.
Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.
Think through tax-saving strategies
Keep in mind that some of these tactics could adversely impact other aspects of your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.