How can your business set the stage for organic sales growth?

How can your business set the stage for organic sales growth?

For businesses looking to reach the next level of success, there’s no bigger star than organic sales growth. Simply defined, this is achieving an increase in revenue through existing operations rather than from mergers, acquisitions or other external investments.

As you’ve likely noticed, coaxing this star into the spotlight isn’t easy. How can you set the stage for organic sales growth? Here are some fundamental ways.

It begins with customer service

Organic sales growth largely comes from getting more from your current customer base. Accomplishing this feat begins with premier customer service, which means more than just a smile and a handshake. Are your employees really hearing the issues and concerns raised? Do they not only solve problems, but also exceed customers’ expectations whenever possible?

The ability to conduct productive dialogues with customers is key to growing sales. Maintaining a positive, ongoing conversation starts with resolving any negative (or potentially negative) issues that arise as quickly as possible under strictly followed protocols. In addition, it includes simply checking in with customers regularly to see what they may need.

Marketing counts

Boosting sales of any kind, organic or otherwise, inevitably involves marketing. Do you often find yourself wondering why all your channels aren’t generating new leads at the same level? Most likely, it’s because your messaging on some of those channels is no longer connecting with customers and prospects.

On a regular basis, you might want to step back and reassess the nature and strengths of your company. Then use this assessment to revise your overall marketing strategy.

If you work directly with the buying public, you may want to cast as wide a net as possible. But if you sell to a specific industry or certain types of customers, you could organically grow sales by focusing on professional networking groups, social organizations or trade associations.

People matter

At the end of the day, organic sales growth is driven by a business’s people. Even the best idea can fail if employees aren’t fully prepared and committed to design, produce, market and sell your products or services. Of course, as you well know, employing talented, industrious staff requires much more than simply getting them to show up for work.

First, you must train employees well. This means they need to know how to do their jobs and how to help grow organic sales. You might ask: Does every worker really contribute to revenue gains? In a sense, yes, because everyone from entry-level staff to executives in corner offices drives sales.

Second, beyond receiving proper training, employees must be cared for and inspired through valued benefits and a positive work environment. Happy workers are more productive and more likely to preach the excellence of your company’s products or services to friends and family. Organic sales may occur as a result.

Star of the show

It’s the star of the show for a reason. Organic sales growth is generally considered more sustainable than inorganic revenue gains and a strong indicator of a healthy, competitive business. It also avoids the integration and compliance risks of mergers and acquisitions, not to mention the complications and dangers of acquiring outside financing. We can help you identify your company’s optimal strategies for achieving organic sales growth.

© 2025

by Zak Barbagallo

The new law includes favorable changes for depreciating eligible assets

The new law includes favorable changes for depreciating eligible assets

The One Big Beautiful Bill Act (OBBBA) includes a number of beneficial changes that will help small business taxpayers. Perhaps the biggest and best changes are liberalized rules for depreciating business assets. Here’s what you need to know.

100% bonus depreciation is back

The new law permanently restores 100% first-year depreciation for eligible assets acquired and placed in service after January 19, 2025. The last time 100% bonus depreciation was allowed for eligible assets was in 2022. The deduction percentage was generally reduced to 80% for 2023, 60% for 2024, and 40% for eligible assets placed in service between January 1, 2025, and January 19, 2025.

For certain assets with longer production periods, these percentage cutbacks were delayed by one year. For example, a 60% first-year bonus depreciation rate applies to long-production-period property placed in service between January 1, 2025, and January 19, 2025.

Eligible assets include most depreciable personal property such as equipment, computer hardware and peripherals, commercially available software and certain vehicles. First-year bonus depreciation can also be claimed for real estate qualified improvement property (QIP). This is defined as an improvement to an interior portion of a non-residential building placed in service after the building was initially put into use. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP. They usually must be depreciated over 39 years.

Section 179 first-year depreciation

For eligible assets placed in service in tax years beginning in 2025, the OBBBA increases the maximum amount that can immediately be written off via first-year depreciation (sometimes called expensing) to $2.5 million. This is up from $1.25 million for 2025 before the new law.

A phase-out rule reduces the maximum Sec. 179 deduction if, during the year, you place in service eligible assets in excess of $4 million. This is up from $3.13 million for 2025 before OBBBA was enacted. These increased OBBBA amounts will be adjusted annually for inflation for tax years beginning in 2026.

Eligible assets include the same items that are eligible for bonus depreciation. Sec. 179 deductions can also be claimed for real estate QIP (defined earlier), up to the maximum annual allowance. In addition, Sec. 179 deductions are also allowed for roofs, HVAC equipment, fire protection and alarm systems, and security systems for non-residential real property. Finally, Sec. 179 write-offs can be claimed for depreciable personal property used predominantly in connection with furnishing lodging.

There’s a special limit on Sec. 179 deductions for heavy SUVs used over 50% for business. This means vehicles with gross vehicle weight ratings between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Sec. 179 deduction for a heavy SUV is $31,300.

Strategy: Sec. 179 deductions are subject to a number of limitations that don’t apply to first-year bonus depreciation. In particular, things can get complicated if you operate your business as a partnership, LLC treated as a partnership for tax purposes or an S corporation. The conventional wisdom is to claim 100% first-year bonus depreciation to the extent allowed rather than claiming Sec. 179 deductions for the same assets.

First-year depreciation for qualified production property

The OBBBA allows additional 100% first-year depreciation for qualified production property (QPP) in the year it’s placed in service. QPP is non-residential real estate, such as a building, that’s used as an integral part of a qualified production activity, such as the manufacturing, production, or refining of tangible personal property. Before the new law, non-residential buildings generally had to be depreciated over 39 years.

QPP doesn’t include any part of non-residential real property that’s used for offices, administrative services, lodging, parking, sales or research activities, software development, engineering activities and other functions unrelated to the manufacturing, production or refining of tangible personal property.

The favorable new 100% first-year depreciation deal is available for QPP when the construction begins after January 19, 2025, and before 2029. The property must be placed in service in the U.S. or a U.S. possession before 2031.

Take another look

These are only some of the business provisions in the new law. We can help you take advantage of tax breaks that are beneficial in your situation for 2025 and future years.

© 2025

by Zak Barbagallo

What families need to know about the new tax law

What families need to know about the new tax law

The One, Big, Beautiful Bill Act (OBBBA) has introduced significant tax changes that could affect families across the country. While many of the provisions aim to provide financial relief, the new rules can be complex. Below is an overview of the key changes.

Adoption credit enhanced

Parents who adopt may be eligible for more generous tax relief. Under current law, a tax credit of up to $17,280 is available for the costs of adoption in 2025. The credit begins to phase out in 2025 for taxpayers with modified adjusted gross income (MAGI) of $259,190 and is eliminated for those with MAGI of $299,190 or more.

If you qualify, the adoption credit can reduce your tax liability on a dollar-for-dollar basis. This is much more valuable than a deduction, which only reduces the amount of income subject to tax.

What changed? Beginning in 2025, the OBBBA makes the adoption tax credit partially refundable up to $5,000. This means that eligible families can receive this portion as a refund even if they owe no federal income tax. Previously, the credit was entirely nonrefundable, limiting its benefit to families with sufficient tax liability. The refundable amount is indexed for inflation but can’t be carried forward to future tax years.

Child Tax Credit increased, and new rules imposed

Beginning in 2025, the OBBBA permanently increases the Child Tax Credit (CTC) to $2,200 for each qualifying child under the age of 17. (This is up from $2,000 before the law was enacted). The credit is subject to income-based phaseouts and will be adjusted annually for inflation after 2025.

The refundable portion of the CTC is made permanent. The refundable amount is $1,700 for 2025, with annual inflation adjustments starting in 2026.

The MAGI phaseout thresholds of $200,000 and $400,000 for married joint-filing couples are also made permanent. (However, these thresholds won’t be adjusted annually for inflation.)

Important: Starting in 2025, no CTC will be allowed unless you report Social Security numbers for the child and the taxpayer claiming the credit on the return. For married couples filing jointly, a Social Security number for at least one spouse must be reported on the return.

Introduction of Trump Accounts

We’re still in the early stages of learning about this new type of tax-advantaged account but here’s what we know. Starting in 2026, Trump Accounts will offer some families a way to save for the future. An account can be set up for anyone under age 18 at the end of the tax year who has a Social Security number.

Annual contributions of up to $5,000 (adjusted annually for inflation after 2027) can be made until the year the child turns 18. In addition, U.S. citizen children born after December 31, 2024, and before January 1, 2029, with at least one U.S. citizen parent, may potentially qualify for an initial $1,000 government-funded deposit.

Contributions aren’t deductible, but earnings grow tax deferred as long as they’re in the account. The account generally must be invested in exchange-traded funds or mutual funds that track the return of a qualified index and meet certain other requirements. Employers may make contributions to Trump accounts on behalf of employees’ dependents. Withdrawals generally can’t be taken until the child turns age 18.

Even more changes

Here are three more family-related changes:

The child and dependent care credit. This credit provides parents a tax break to offset the cost of child care when they work or look for work. Beginning in 2026, there will be changes to the way the credit is calculated and the amount of income that parents can have before the credit phases out. This will result in more parents becoming eligible for the credit or seeing an increased tax benefit.

Qualified expenses for 529 plans. If you have a 529 plan for your child’s education, or you’re considering starting a plan, there will soon be more opportunities to make tax-exempt withdrawals. Beginning in 2026, you can withdraw up to $20,000 for K-12 tuition expenses, as well as take money out of a plan for qualified expenses such as books, online education materials and tutoring. These withdrawals can be made if the 529 plan beneficiary attends a public, private or religious school.

Sending money to family members in other countries. One of the lesser-known provisions in the OBBBA is that the money an individual sends to another country may be subject to tax, beginning in 2026. The 1% excise tax applies to transfers of cash or cash equivalents from a sender in the United States to a foreign recipient via a remittance transfer provider. The transfer provider will collect the tax as part of the transfer fee and then remit it quarterly to the U.S. Treasury. Transfers made through a financial institution (such as a bank) or with a debit or credit card are excluded from the tax.

What to do next

These and other changes in the OBBBA may offer substantial opportunities for families — but they also bring new rules, limits and planning considerations. The sooner you start planning, the better positioned you’ll be. Contact us to discuss how these changes might affect your family’s tax strategy.

© 2025

by Zak Barbagallo

Are “workationers” a danger to your business?

Are “workationers” a danger to your business?

Every company presumably wants a workforce full of engaged employees. However, is it possible for workers to be too engaged?

Apparently so. A 2024 survey of 3,000 workers by employee engagement consultants Perceptyx found that 72% of respondents work to some degree throughout their vacations. As a business owner, your initial response to this might be, “Wow, those are some dedicated individuals!” However, the long-term impact of the practice can be harmful to both your “workationers” and company.

No rest for the worker

For starters, when employees don’t completely step away from their jobs for a while, their brains never get a chance to rest. As a result, the fresh perspectives and renewed energy that usually materialize following an extended break never do. It should also be noted that the work employees perform while on vacation is typically rushed or half-baked, which may lead to costly mistakes and miscommunications.

In addition, productivity may gradually decline. Although working on vacation likely boosts an employee’s productivity in the short term, a workactioner’s long-term productivity may slowly drop off as the person grows weary and uninspired.

The most perilous consequence for workationers is that they never recharge and wind up burned out and disengaged. This can lead to or worsen mental health conditions such as anxiety and depression. Some employees may even decide to quit.

Companywide effect

From a wider perspective, the negative impact of employees working while on vacations can accumulate to hurt your company’s performance. Many business owners wake up one day to realize that their company cultures have evolved to embody the expectation that everyone must stay connected to work 24/7 — even when taking time off. This can lead to conflicts, resentment and lower morale.

It may also reduce innovation and impair strategic planning. When no one is taking a real break, there are no opportunities to step back and have that “ah ha!” moment. Workationers on your leadership team might be unable to tear themselves away from the daily grind to help you identify growth opportunities.

And yes, there may be real financial costs. Widespread declines in work quality and productivity inevitably cut into a company’s bottom line. Higher turnover means greater hiring and training costs — and even more lost productivity if vacated positions are left open for a while. Last but not least, don’t forget that dishonest employees who never disconnect from their jobs could be committing fraud.

How to address the issue

To protect your business from the risks of workactioners and promote a healthier culture in general:

• Explicitly inform and regularly remind employees that vacations are time off from work; you don’t expect them to check in or otherwise perform tasks,
• Establish a written policy fully describing the boundaries that employees should adhere to when they’re on vacation as well as when colleagues are out,
• Create support systems for employees, such as pre-vacation checklists and cross-training, so others can cover critical tasks while someone is out, and
• Prioritize mental health and wellness in your fringe benefits, HR initiatives and communications.

Finally, to the extent possible, lead by example! Although it’s certainly not easy for any business owner to completely disconnect, try to minimize contact with your company while on vacation.

Real risks

Employing multiple workationers may seem harmless or even like a good thing. However, it carries real risks. Now that you know about the problem, next steps might be surveying employees about the issue and discussing it with your leadership team. We can help you calculate productivity metrics and weigh the costs of initiatives and benefits aimed at helping workers maintain a healthy work-life balance.

© 2025

by Zak Barbagallo

D&O insurance may be worth considering for some companies

D&O insurance may be worth considering for some companies

Strong leadership is essential to running a successful business. However, as perhaps you’ve experienced, playing the role of a strong leader can force you to make tough decisions that expose you to legal claims.

Business owners who are particularly worried about this type of risk can buy directors and officers (D&O) insurance to hedge against it. Although every small to midsize business may not need one of these policies, some should consider buying coverage.

Financial protection

D&O insurance financially protects business owners, executives and other leaders from legal claims arising from management-related decisions and actions.

Some common examples of such claims include breach of fiduciary duty, regulatory noncompliance and mismanagement of resources. Without coverage, leadership team members could be forced to use personal assets to pay legal costs as well as settlements or judgments.

Many D&O policies provide coverage from three perspectives:

• Side A, which protects insureds (covered individuals) when the business is unable or unwilling to indemnify (financially protect) them,
• Side B, which reimburses the company itself for indemnifying insureds, and
• Side C, which extends coverage to the company in case it’s named as a defendant in a lawsuit involving the insureds.

Not every policy covers all three. Specific coverage varies depending on the insurer and the policy buyer’s needs.

Reasons to buy

Many people believe only large companies and perhaps bigger nonprofits need D&O coverage. However, this type of insurance can benefit some small to midsize businesses under the right circumstances. It all depends on the industry and environment in which you operate.

First, assess your litigation risks. Have you been sued in the past? How likely is it that you or a member of your leadership team could face legal action from parties such as employees, independent contractors, customers, vendors or investors? Remember, even baseless claims can lead to considerable expenses.

D&O insurance may also fortify hiring and retention. If you need to recruit executives or other leaders, having strong liability protection in place may help you win them over. Good coverage could also reassure existing leaders who may be thinking about jumping ship or just worried about their exposure.

Finally, you may encounter a situation in which you must buy a D&O policy. Some lenders and investors require companies to implement coverage before they agree to provide capital.

Shopping tips

If you decide to pursue D&O insurance, you’ll face many of the same decisions you’d encounter when buying other forms of coverage. Here are some shopping tips:

Scrutinize scope of coverage. You need the policy to indemnify your insureds and company (if you opt for Sides B and C) against the most likely eligible claims. These may include financial mismanagement, employment-related lawsuits, fiduciary breaches, regulatory investigations or some combination thereof.

Discuss “must-have” coverage with your leadership team. Investigate whether legal fees are included with coverage or can be added at extra cost. Some D&O policies even cover claims related to management decisions or actions made in the past.

Beware of exclusions. Carefully identify what any prospective policy won’t cover. Standard exclusions include claims regarding intentional misconduct or criminal activity, such as fraud. In addition, most policies exclude claims involving bodily injury or property damage, though these may be covered under a general liability policy.

Focus on financial capacity. Premiums for D&O policies vary based on company size, industry-specific risks and claims history. A higher deductible may lower premiums, but it will increase your out-of-pocket costs before coverage kicks in. Look for an affordable policy that covers you against reasonable risks without overextending your company financially.

Confidence is key

D&O insurance may help you and your leadership team more confidently make the tough decisions necessary to run and grow the business. Explore the possibility of buying coverage with professional advisors such as your attorney and insurance agent. Meanwhile, contact us for help tracking and analyzing all your insurance costs.

© 2025

by Zak Barbagallo

On developing an effective IT modernization strategy

On developing an effective IT modernization strategy

Information technology (IT) is constantly evolving. As the owner of a small to midsize business, you’ve probably been told this so often that you’re tired of hearing it. Yet technology’s ceaseless march into the future continues and, apparently, many companies aren’t so sure they can keep up.

In October of last year, IT infrastructure services provider Kyndryl released its 2024 Kyndryl Readiness Report. It disclosed the results of a survey of 3,200 senior decision-makers across 25 industries in 18 global markets, including the United States. The survey found that, though 90% of respondents describe their IT infrastructures as “best in class,” only 39% believe their infrastructures are ready to manage future risks.

A tricky necessity

The concept and challenge of keeping business technology current is called “IT modernization.” And to be clear, the term doesn’t refer only to IT infrastructure — which includes your hardware, software, internal networks, cloud services and cybersecurity measures. It also refers to your company’s IT policies and procedures.

To stay competitive in most industries today, some more than others, you’ve got to modernize everything continuously. But here’s the tricky part: You have to approach IT modernization carefully and cost-consciously. Otherwise, you could wind up throwing money at the problem, severely straining your cash flow and even putting the business at financial risk.

4 tips for getting it right

So, how can you develop an effective IT modernization strategy? Here are four tips to consider:

1. Begin with an IT audit. Many small to midsize businesses develop their technology improvisationally. As a result, they may not be fully aware of everything they have or are doing. If you really want to succeed at IT modernization, a logical first step is to conduct a formal, systematic review of your infrastructure, policies, procedures and usage. Only when you know what you’ve got can you determine what needs to be upgraded, replaced or eliminated.

2. Align modernization with strategic objectives. It’s all too easy to let IT modernization become a game of “keeping up with the Joneses.” You might learn of a competitor investing in a certain type of hardware or software and assume you’d better follow suit. However, your modernization moves must always follow in lockstep with your strategic goals. For each one, ensure you can clearly rationalize and project how it will bring about a desired business outcome. Never lose sight of return on investment.

3. Take a phased, pragmatic approach. Another mistake many small to midsize business owners make is feeling like they’ve fallen so far behind technologically that they must undertake a “big bang” and effectively recreate their IT infrastructures. This is a huge risk, not to mention a major expense. Generally, it’s better to modernize in carefully planned phases that will have the broadest positive impact. Prioritize mission-critical areas, such as core business applications and cybersecurity, and go from there.

4. Train and upskill your people. As funny as this may sound, IT modernization isn’t just about technology; it’s also about your users. If your employees don’t have the right skills, attitude and security-minded approach to technology, the most up-to-date systems in the world won’t do you much good. So, as you mindfully develop every aspect of your IT infrastructure, policies and procedures, pay close attention to how modernization initiatives will affect your people. Be prepared to invest in the training and upskilling needed to roll with the changes.

Tech support

The evolution of business technology will be ongoing — especially now that artificial intelligence has taken hold in nearly every sector and industry. The good news is that you don’t have to undertake IT modernization alone. Be sure to leverage external relationships with trusted consultants and software vendors. And don’t forget our firm — we can provide tailored cost analysis and financial insights to support your company’s technological evolution.

© 2025

by Zak Barbagallo

Questions about taxes and tips? Here are some answers for employers

Questions about taxes and tips? Here are some answers for employers

Businesses in certain industries employ service workers who receive tips as a large part of their compensation. These businesses include restaurants, hotels and salons. Compliance with federal and state tax regulations is vital if your business has employees who receive tips.

Are tips becoming tax-free?

During the campaign, President Trump promised to end taxes on tips. While the proposal created buzz among employees and some business owners, no legislation eliminating taxes on tips has been passed. For now, employers should continue to follow the existing IRS rules until the law changes — if it does. Unless legal changes are enacted, the status quo remains in effect.

With that in mind, here are answers to questions about the current rules.

How are tips defined?

Tips are optional and can be cash or noncash. Cash tips are received directly from customers. They can also be electronically paid tips distributed to employees by employers and tips received from other employees in tip-sharing arrangements. Workers must generally report cash tips to their employers. Noncash tips are items of value other than cash. They can include tickets, passes or other items that employees receive from customers. Workers don’t have to report noncash tips to employers.

Four factors determine whether a payment qualifies as a tip for tax purposes:

1. The customer voluntarily makes a payment,
2. The customer has an unrestricted right to determine the amount,
3. The payment isn’t negotiated with, or dictated by, employer policy, and
4. The customer generally has a right to determine who receives the payment.

There are more relevant definitions. A direct tip occurs when an employee receives it directly from a customer (even as part of a tip pool). Directly tipped employees include wait staff, bartenders and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees can include bussers, service bartenders, cooks and salon shampooers.

What records need to be kept?

Tipped workers must keep daily records of the cash tips they receive. To do so, they can use Form 4070A, Employee’s Daily Record of Tips. It’s found in IRS Publication 1244.

Workers should also keep records of the dates and values of noncash tips. The IRS doesn’t require workers to report noncash tips to employers, but they must report them on their tax returns.

How must employees report tips to employers?

Employees must report tips to employers by the 10th of the month after the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include the:

• Employee’s name, address, Social Security number and signature,
• Employer’s name and address,
• Month or period covered, and
• Total tips received during the period.

Note: If an employee’s monthly tips are less than $20, there’s no requirement to report them to his or her employer. However, they must be included as income on his or her tax return.

Are there other employer requirements?

Yes. Send each employee a Form W-2 that includes reported tips. In addition, employers must:

• Keep employees’ tip reports.
• Withhold taxes, including income taxes and the employee’s share of Social Security and Medicare taxes, based on employees’ wages and reported tip income.
• Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income.
• Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return.
• Deposit withheld taxes in accordance with federal tax deposit requirements.

In addition, “large” food or beverage establishments must file another annual report. Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, discloses receipts and tips.

What’s the tip tax credit?

Suppose you’re an employer with tipped workers providing food and beverages. In that case, you may qualify for a valuable federal tax credit involving the Social Security and Medicare taxes you pay on employees’ tip income.

How should employers proceed?

Running a business with tipped employees involves more than just providing good service. It requires careful adherence to wage and hour laws, thorough recordkeeping, accurate reporting and an awareness of changing requirements. While President Trump’s pledge to end taxes on tips hasn’t yet materialized into law, stay alert for potential changes. In the meantime, continue meeting all current requirements to ensure compliance. Contact us for guidance about your situation.

© 2025

by Zak Barbagallo

Do you have an excess business loss?

Do you have an excess business loss?

If an individual taxpayer has substantial business losses, unfavorable federal income tax rules can potentially come into play. Here’s what you need to know as you assess your 2024 tax situation.

Disallowance rule

The tax rules can get complicated if your business or rental activity throws off a tax loss — and many do during the early years. First, the passive activity loss (PAL) rules may apply if you aren’t very involved in the business or if it’s a rental activity. The PAL rules generally only allow you to deduct passive losses to the extent you have passive income from other sources. However, you can deduct passive losses that have been disallowed in previous years (called suspended PALs) when you sell the activity or property that produced the suspended losses.

If you successfully clear the hurdles imposed by the PAL rules, you face another hurdle: You can’t deduct an excess business loss in the current year. For 2024, an excess business loss is the excess of your aggregate business losses over $305,000 ($610,000 for married joint filers). For 2025, the thresholds are $313,000 and $626,000, respectively. An excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards explained below.

Deducting NOLs

You generally can’t use an NOL carryover, including one from an excess business loss, to shelter more than 80% of your taxable income in the carryover year. Also, NOLs generally can’t be carried back to an earlier tax year. They can only be carried forward and can be carried forward indefinitely. The requirement that an excess business loss must be carried forward as an NOL forces you to wait at least one year to get any tax-saving benefit from it.

Example 1: Taxpayer has a partial deductible business loss

David is unmarried. In 2024, he has an allowable loss of $400,000 from his start-up AI venture that he operates as a sole proprietorship.

Although David has no other income or losses from business activities, he has $500,000 of income from other sources (salary, interest, dividends, capital gains and so forth).

David has an excess business loss for the year of $95,000 (the excess of his $400,000 AI venture loss over the $305,000 excess business loss disallowance threshold for 2024 for an unmarried taxpayer). David can deduct the first $305,000 of his loss against his income from other sources. The $95,000 excess business loss is carried forward to his 2025 tax year and treated as part of an NOL carryover to that year.

Variation: If David’s 2024 business loss is $305,000 or less, he can deduct the entire loss against his income from other sources because he doesn’t have an excess business loss.

Example 2: Taxpayers aren’t affected by the disallowance rule

Nora and Ned are married and file tax returns jointly. In 2024, Nora has an allowable loss of $350,000 from rental real estate properties (after considering the PAL rules).

Ned runs a small business that’s still in the early phase of operations. He runs the business as a single-member LLC that’s treated as a sole proprietorship for tax purposes. For 2024, the business incurs a $150,000 tax loss.

Nora and Ned have no income or losses from other business or rental activities, but they have $600,000 of income from other sources.

They don’t have an excess business loss because their combined losses are $500,000. That amount is below the $610,000 excess business loss disallowance threshold for 2024 for married joint filers. So, they’re unaffected by the disallowance rule. They can use their $500,000 business loss to shelter income from other sources.

Partnerships, LLCs and S corporations

The excess business loss disallowance rule is applied at the owner level for business losses from partnerships, S corporations and LLCs treated as partnerships for tax purposes. Each owner’s allocable share of business income, gain, deduction, or loss from these pass-through entities is taken into account on the owner’s Form 1040 for the tax year that includes the end of the entity’s tax year.

The best way forward

As you can see, business losses can be complex. Contact us if you have questions or want more information about the best strategies for your situation.

© 2025

by Zak Barbagallo