IRAs: Build a tax-favored retirement nest egg

Although traditional IRAs and Roth IRAs have been around for decades, the rules involved have changed many times. The Secure 2.0 law, which was enacted at the end of 2022, brought even more changes that made IRAs more advantageous for many taxpayers. What hasn’t changed is that they can help you save for retirement on a tax-favored basis. Here’s an overview of the basic rules and some of the recent changes.

Rules for traditional IRAs

You can make an annual deductible contribution to a traditional IRA if:

  • You (and your spouse) aren’t active participants in employer-sponsored retirement plans, or
  • You (or your spouse) are active participants in an employer plan, and your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary annually by filing status.

For example, in 2024, if you’re a joint return filer covered by an employer plan, your deductible IRA contribution phases out over $123,000 to $143,000 of MAGI ($77,000 to $87,000 for singles).

Deductible IRA contributions reduce your current tax bill, and earnings are tax deferred. However, withdrawals are taxed in full (and subject to a 10% penalty if taken before age 59½, unless one of several exceptions apply). Under the SECURE 2.0 law, you must now begin making minimum withdrawals by April 1 of the year following the year you turn age 73 (the age was 72 before 2023 and 70½ before 2020).

You can make an annual nondeductible IRA contribution without regard to employer plan coverage and your MAGI. The earnings in a nondeductible IRA are tax-deferred but taxed when distributed (and subject to a 10% penalty if taken early, unless an exception applies).

Nondeductible contributions aren’t taxed when withdrawn. If you’ve made deductible and nondeductible IRA contributions, a portion of each distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).

Amount you can sock away

The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $7,000 for 2024 (up from $6,500 for 2023). If you are age 50 or over, you can make a $1,000 “catch-up contribution” for 2024 (unchanged from 2023). Additionally, your contribution can’t exceed the amount of your compensation includible in income for that year.

Rules for Roth IRAs

You can make an annual contribution to a Roth IRA if your income doesn’t exceed certain levels based on filing status. For example, in 2024, if you’re a joint return filer, the maximum annual Roth IRA contribution phases out over $230,000 to $240,000 of MAGI ($146,000 to $161,000 for singles). Annual Roth contributions can be made up to the amount allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP or SIMPLE plan.

Roth IRA contributions aren’t deductible. However, earnings are tax-deferred and (unlike a traditional IRA) withdrawals are tax-free if paid out:

  • After a five-year period that begins with the first year for which you made a contribution to a Roth IRA, and
  • Once you reach age 59½, or upon death or disability, or for first-time home-buyer expenses of you, your spouse, child, grandchild, or ancestor (up to a $10,000 lifetime limit).

You don’t have to take required minimum distributions from a Roth IRA. You can “roll over” (or convert) a traditional IRA to a Roth IRA regardless of your income. The amount taken out of the traditional IRA and rolled into the Roth IRA is treated for tax purposes as a regular withdrawal (but not subject to the 10% early withdrawal penalty).

There’s currently no age limit for making regular contributions to a traditional or Roth IRA, as long as you have compensation income. Contact us if you have questions about IRAs.

© 2024


Facing a future emergency? Two new tax provisions may soon provide relief

Perhaps you’ve been in this situation before: You have a financial emergency and need to get your hands on some cash. You consider taking money out of a traditional IRA or 401(k) account but if you’re under age 59½, such distributions are not only taxable but also are generally subject to a 10% penalty tax.

There are exceptions to the 10% early withdrawal penalty, but they don’t cover many types of emergencies.

Good news: Beginning in 2024, there will be new relief for some taxpayers facing emergencies. The SECURE 2.0 law, which was enacted late last year, contains two different relevant provisions:

1. Pension-linked emergency savings accounts. Employers with 401(k), 403(b) and 457(b) plans can opt to offer these emergency savings accounts to non-highly compensated employees. For 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee. Here are some more details of these new type of accounts:

  • Contributions to the accounts will be limited to up to $2,500 a year (or a lower amount determined by the plan sponsor).
  • The accounts can’t have a minimum contribution or account balance requirement.
  • Employers can offer to enroll eligible participants in these accounts beginning in 2024 or can automatically enroll participants in them.
  • Participants can make a withdrawal at least once per calendar month and such withdrawals must be made “as soon as practicable.”
  • For the first four withdrawals from an account in a plan year, participants can’t be subject to any fees or charges. Subsequent withdrawals may be subject to reasonable fees or charges.
  • Contributions must be held as cash, in an interest-bearing deposit account or in an investment product.
  • If an employee has a pension-linked emergency savings account and is not highly compensated, but becomes highly compensated as defined under tax law, he or she can’t make further contributions but retains the right to withdraw the balance.
  • Contributions will be made on a Roth basis, meaning they are included in an employee’s taxable income but participants won’t have to pay tax when they make withdrawals.

2. Penalty-free withdrawals for emergency expenses. This new provision is another way to get money for emergencies. As mentioned earlier, taking a distribution from an IRA or 401(k) before age 59½ generally results in a 10% penalty tax unless an exception exists. SECURE 2.0 adds a new exception for certain distributions used for emergency expenses, which are defined as “unforeseeable or immediate financial needs relating to personal or family” emergencies.

Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions made beginning in 2024.

Guidance likely coming soon

These are just the basic details of the two new emergency-related provisions. Other rules apply and the IRS will need to issue guidance to address certain details. Contact us if you have questions or need cash and want to explore the most tax-efficient ways to tap one of your accounts.


What businesses can expect from a DOL benefits plan audit

All but the smallest businesses today are generally expected to offer employees “big picture” benefits such as health insurance and a retirement plan. Among the risks of doing so is that many popular plan types must comply with the Employee Retirement Income Security Act (ERISA). That means lots of rules and much documentation.

No matter how careful your company is with ERISA compliance, it could receive a request from the U.S. Department of Labor (DOL) for plan-related documents. Such a request usually initiates a DOL civil investigation — commonly referred to as a “plan audit.”

The first rule of the day is: Don’t panic! The second is to respond in a timely fashion. Here are the basic steps that a DOL plan audit will usually take:

Initial document request. Generally, a plan sponsor learns of an audit when it receives a letter or phone call from the DOL’s Employee Benefits Security Administration (EBSA) advising those responsible for the plan — typically referred to as “plan officials” — of the investigation and requesting a detailed list of documents. The investigation may be general in nature or target a specific issue.

On-site review and interviews. The investigator may arrange to visit the plan sponsor’s offices and could request additional documents for review during the visit, such as payroll and claims processing records. Often, the investigator will also interview plan officials.

Investigation findings. If the investigator finds no ERISA violations, EBSA will send a closing letter stating that the investigation is complete, and no further action is contemplated. If the investigator does find violations, EBSA will issue a voluntary compliance notice letter identifying the violations and inviting plan officials to voluntarily make corrections.

Corrections and settlement. Whenever possible, EBSA seeks voluntary compliance through full corrections of identified violations and restoration of plan losses. After negotiating corrective actions with plan officials, the agency issues a detailed settlement agreement.

A typical agreement requires evidence of corrections and provides that, if EBSA determines that the agreement’s terms have been fulfilled, no further enforcement action will be taken regarding the specified violations. When voluntary compliance isn’t achieved, EBSA may refer a case to DOL attorneys for litigation. Some situations are inappropriate for voluntary correction — such as those involving fraud, criminal misconduct, or severe or repeated fiduciary violations.

Fiduciary violations. ERISA imposes a mandatory 20% penalty on any amounts recovered from a fiduciary or other person for a fiduciary breach, including amounts recovered under a settlement agreement. Generally, EBSA assesses the penalty in a separate letter, though the penalty may be addressed in the settlement agreement.

Closing letter following corrections. After EBSA confirms that corrective action has been completed and any penalties have been paid, it will send a closing letter indicating that compliance was achieved.

The steps described above could be completed in a matter of weeks or take a year or more. It all depends on factors such as complexity of plan design, issues identified in the investigation and number of potential violations. The availability of documents and individuals for interviews, as well as how cooperative your company’s plan officials are with EBSA, will also affect the duration and severity of the investigation.

Again, if your business receives notification about a DOL plan audit, address the inquiry immediately. Failure to provide requested documents to EBSA can lead to a penalty assessment. A prompt and cordial response, on the other hand, can establish a positive rapport with the investigator.

Above all, obtain the assistance of experienced advisors and legal counsel. Contact us for further information, as well as for support throughout the audit process.


New per diem business travel rates kicked in on October 1

Are employees at your business traveling and frustrated about documenting expenses? Or perhaps you’re annoyed at the time and energy that goes into reviewing business travel expenses. There may be a way to simplify the reimbursement of these expenses. In Notice 2023-68, the IRS announced the fiscal 2024 special “per diem” rates that became effective October 1, 2023. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidentals when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)

Basics of the method

A simplified alternative to tracking actual business travel expenses is to use the “high-low” per diem method. This method provides fixed travel per diems. The amounts, provided by the IRS, vary from locality to locality.

Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, and San Francisco. Other locations, such as resort areas, are considered high-cost during only part of the year.

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

Reduced recordkeeping

If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.

The FY2024 rates

For travel after September 30, 2023, the per diem rate for all high-cost areas within the continental United States is $309. This consists of $235 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $214 for travel after September 30, 2023 ($150 for lodging and $64 for meals and incidental expenses). Compared to the FY2023 per diems, the high-cost area per diem increased $12, and the low-cost area per diem increased $10.

Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.

For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.

If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information or read the IRS notice here.


Contributing to your employer’s 401(k) plan: How it works

If you’re fortunate to have an employer that offers a 401(k) plan, and you don’t contribute to it, you may wonder if you should participate. In general, it’s a great tax and retirement saving deal! These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about contributing to a plan at work, here are some of the advantages.

With a 401(k) plan, you can opt to set aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income and defer tax on the amount until the cash (adjusted by earnings) is distributed to you in the future. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.

Tax benefits

Your wages or other compensation will be reduced by the pre-tax contributions that you make, which will save you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis. These are Roth 401(k) contributions. With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.

Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. In 2023, the maximum amount permitted is $22,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. In 2023, that additional amount is up to $7,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2023 is $30,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2023, $66,000, whichever is less.

In a typical plan, you’re permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.

Taking withdrawals

Another important characteristic of these plans is the limitation on withdrawals while you’re working. Amounts in the plan attributable to elective contributions aren’t available to you before one of the following events:

  • Retirement (or other separation from service),
  • Reaching age 59½,
  • Disability,
  • Plan termination, or
  • Hardship.

Eligibility rules for a hardship withdrawal are strict. A hardship distribution must be necessary to help deal with an immediate and heavy financial need.

As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s plan may allow you to receive a loan, which you pay back to your account with interest.

Matching contributions

Employers may opt to match 401(k) contributions up to a certain amount. Although matching is not required, surveys show that most employers offer some type of match. If your employer matches contributions, you should make sure to contribute enough to receive the full amount. Otherwise, you’ll lose out on free money!

These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have.


Businesses: Know who your privileged users are … and aren’t

Given the pervasiveness of technology in the business world today, most companies are sitting on treasure troves of sensitive data that could be abducted, exploited, corrupted or destroyed. Of course, there’s the clear and present danger of external parties hacking into your network to do it harm. But there are also internal risks — namely, your “privileged users.”

Simply defined, privileged users are people with elevated cybersecurity access to your business’s enterprise systems and sensitive data. They typically include members of the IT department, who need to be able to reach every nook and cranny of your network to install upgrades and fix problems. However, privileged users also may include those in leadership positions, accounting and financial staff, and even independent contractors brought in to help you with technology-related issues.

What could go wrong?

Assuming your company follows a careful hiring process, most of your privileged users are likely hardworking employees who take their cybersecurity clearances seriously.

Unfortunately, sometimes disgruntled or unethical employees or contractors use their access to perpetrate fraud, intellectual property theft or sabotage. And they don’t always act alone. Third parties, such as competitors, could try to recruit privileged users to steal trade secrets. Or employees could collude with hackers to compromise a company’s network in a ransomware scheme.

How can you protect yourself? 

To best protect your business, you may want to implement a formal privileged user policy. This is essentially a set of rules and procedures governing who gets to be a privileged user, precisely what kind of access each such user is allowed, and how your company tracks and revokes privileged-user status.

When developing and enforcing the policy, you’ll first need to identify who your privileged users are and what specific security clearances each one needs. A good way to start is to list the privileges required for every position and then compare that list to a separate record of privileges that each employee currently has. What makes sense? What doesn’t? When in doubt whether someone needs a certain type of access, it’s generally best to err on the side of caution.

Also, establish an “upgrading” process under the policy. Only trusted and qualified managers or supervisors should have the power to upgrade or reinstate an employee’s privileges, perhaps in consultation with the leadership team. Use technology to help standardize and track requests and approvals. For sensitive systems and applications, such as those that store customer and financial data, consider requiring two levels of approval to elevate a user’s privileges.

In addition, your privileged user policy should include stipulations to carefully monitor user activity. Observe and track how employees use their privileges. Let’s say a salesperson repeatedly accesses customer data for a region that the person isn’t responsible for. Have the sales manager inquire why. Subtly reminding employees that the company is aware of their tech-related activities is a good way to help deter fraud and unethical behavior.

Another important aspect of the policy is how you revoke privileges and remove dormant accounts. When employees leave the company, or independent contractors end their engagements, privileged access should be revoked immediately. Keep clear records of such actions. If a previously deactivated account somehow shows signs of activity, block access right away and investigate how and why it’s come back to life.

Do you know?

Every business should be able to definitively say who is a privileged user and who isn’t. If there’s any gray area or uncertainty regarding current or former employees or other workers, the security of your data could be severely compromised. And the ramifications, both financially and for your company’s reputation, are potentially very serious.


Choosing a business entity: Which way to go?

If you’re planning to start a business or thinking about changing your business entity, you need to determine what will work best for you. Should you operate as a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation? There are many issues to consider.

Currently, the corporate federal income tax is imposed at a flat 21% rate, while individual federal income tax rates currently begin at 10% and go up to 37%. The difference in rates can be alleviated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, and some estates and trusts.

Individual rate caveats: The QBI deduction is scheduled to end in 2026, unless Congress acts to extend it, while the 21% corporate rate is not scheduled to expire. Also, noncorporate taxpayers with modified adjusted gross incomes above certain levels are subject to an additional 3.8% tax on net investment income.

Organizing a business as a C corporation instead of a pass-through entity may reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.

More to take into account

There are other tax-related factors to take into consideration. For example:

  • If most of the business profits will be distributed to the owners, it may be preferable to operate the business as a pass-through entity rather than a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
  • If the value of the assets is likely to appreciate, it’s generally preferable to conduct business as a pass-through entity to avoid a corporate tax when the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
  • If the business is a pass-through entity, an owner’s basis in his or her interest in the entity is stepped-up by the entity income that’s allocated to the owner. That can result in less taxable gain for the owner when his or her interests in the entity are sold.
  • If the business is expected to incur tax losses for a while, you may want to structure it as a pass-through entity so you can deduct the losses against other income. Conversely, if you have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation, since it’ll be able to offset future income with the losses.
  • If the owner of a business is subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.

As you can see, there are many factors involved in operating a business as a certain type of entity. This only covers a few of them. For more details about how to proceed in your situation, consult with us.


What you need to know about restricted stock awards and taxes

Restricted stock awards are a popular way for companies to offer equity-oriented executive compensation. Some businesses offer them instead of stock option awards. The reason: Options can lose most or all of their value if the price of the underlying stock takes a dive. But with restricted stock, if the stock price goes down, your company can issue you additional restricted shares to make up the difference.

Restricted stock basics

In a typical restricted stock deal, you receive company stock subject to one or more restrictions. The most common restriction is that you must continue working for the company until a certain date. If you leave before then, you forfeit the restricted shares, which are usually issued at minimal or no cost to you.

To be clear, the restricted shares are transferred to you, but you don’t actually own them without any restrictions until they become vested.

Tax rules for awards 

What are the tax implications? You don’t have any taxable income from a restricted share award until the shares become vested — meaning when your ownership is no longer restricted. At that time, you’re deemed to receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount you paid for them, if anything. The current federal income tax rate on compensation income can be as high as 37%, and you’ll probably owe an additional 3.8% net investment income tax (NIIT). You may owe state income tax too.

Any appreciation after the shares vest is treated as capital gain. So, if you hold the stock for more than one year after the vesting date, you’ll have a lower-taxed long-term capital gain on any post-vesting-date appreciation. The current maximum federal rate on long-term capital gains is 20%, but you may also owe the 3.8% NIIT and possibly state income tax.

Special election to be currently taxed

If you make a special Section 83(b) election, you’ll be taxed at the time you receive your restricted stock award instead of later when the restricted shares vest. The income amount equals the difference between the value of the shares at the time of the restricted stock award and the amount you pay for them, if anything. The income is treated as compensation subject to federal income tax, federal employment taxes and state income tax, if applicable.

The benefit of making the election is that any subsequent appreciation in the value of the stock is treated as lower-taxed, long-term capital gain if you hold the stock for more than one year. Also, making the election can provide insurance against higher tax rates that might be in place when your restricted shares become vested.

The downside of making the election is that you recognize taxable income in the year you receive the restricted stock award, even though the shares may later be forfeited or decline in value. If you forfeit the shares back to your employer, you can claim a capital loss for the amount you paid for the shares, if anything.

If you opt to make the election, you must notify the IRS either before the restricted stock is transferred to you or within 30 days after that date. We can help you with election details.

Important decision 

The tax rules for restricted stock awards are pretty straightforward. The major tax planning consideration is deciding whether or not to make the Section 83(b) election. Consult with us before making that call.


Is your business subject to the new BOI reporting rules?

The Corporate Transparency Act (CTA) was signed into law to fight crimes commonly associated with illegal business activities such as terrorist financing and money laundering. If your business can be defined as a “reporting company” under the CTA, you may need to comply with new beneficial ownership information (BOI) reporting rules that take effect on January 1, 2024.

Who’s who?

A reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A reporting company may also be any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.

Reporting companies must provide information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. A beneficial owner is someone who, directly or indirectly, exercises substantial control over a reporting company, or who owns or controls at least 25% of its interests. Indirect control is often exhibited by a senior officer or person with authority over senior officers.

The CTA does exempt a wide range of entities from the BOI reporting rules — including government units, nonprofit organizations and insurers. Notably, an exemption was created for “large operating companies” that:

  • Employ more than 20 employees on a full-time basis,
  • Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and
  • Physically operate in the United States.

However, many of these businesses need to comply with other reporting requirements.

What info must be provided?

The BOI reporting requirements are extensive. Reporting companies must file a report with FinCEN that includes the entity’s legal name (or any trade or doing-business-as name), address, jurisdiction where the entity was formed and Taxpayer Identification Number.

Reporting companies must also submit the name, address, date of birth and “unique identifying number information” of each beneficial owner. A unique identifying number may be a U.S. passport or state driver’s license number. An image of the document containing the identifying number must be included in the filing.

In addition, the CTA requires reporting companies to provide identifying information about their “company applicants.” A company applicant is defined as someone who’s responsible for:

  • Filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a U.S. state), or
  • Directing or controlling the filing of the relevant formation or registration document by another individual.

Note: This rule often encompasses legal representatives acting in a business capacity.

When to file?

Reporting companies have either 30 days or one year from the effective date of January 1, 2024, to comply with the CTA. Reporting companies created or registered before the effective date have one year to file their initial reports with FinCEN. Those created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file initial reports.

After initially filing, reporting companies have 30 days to file an updated report reflecting any changes to previously reported BOI. In addition, reporting companies must correct inaccurate BOI in previously filed reports within 30 days after the date they become aware of the error.

Who can help?

With the effective date closing in quickly, now’s the time to determine whether your business is a nonexempt reporting company that must comply with the BOI reporting rules. We can help you make this determination in consultation with your legal advisors.


A cost segregation study may cut taxes and boost cash flow

Is your business depreciating over 30 years the entire cost of constructing the building that houses your enterprise? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow.

Depreciation basics

Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). In most cases, a business depreciates a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — including equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.

Frequently, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases, the distinction between real and personal property is obvious. For example, computers and furniture are personal property. But the line between real and personal property is not always clear. Items that appear to be “part of a building” may in fact be personal property. Examples are removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, decorative lighting and signs.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. These include reinforced flooring that supports heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment and dedicated cooling systems for data processing rooms.

Identifying and substantiating costs

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Speedier depreciation tax breaks

The Tax Cuts and Jobs Act (TCJA) enhanced certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other changes, the law permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

In addition, the TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And the law temporarily increased first-year bonus depreciation from 50% to 100% in 2022, 80% in 2023 and 60% in 2024. After that, it will continue to decrease until it is 0% in 2027, unless Congress acts.

Making favorable depreciation changes

It isn’t too late to get the benefit of faster depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return you file, that will result in automatic IRS consent to a change in your accounting for depreciation.

Cost segregation studies can yield substantial benefits, but they’re not the best move for every business. Contact us to determine whether this strategy would work for your business. We’ll judge whether a study will result in tax savings that are greater than the costs of the study itself.