2024 Business Planning Guide

November 21, 2024

This Guide outlines strategies that may help lower your tax bill.  However, careful planning involves more than just focusing on lowering taxes for the current and future years. Each potential tax savings opportunity must be considered in the context of its effect on your entire business. In addition, tax planning for closely-held business entities requires a delicate balance between planning for the business and planning for its owners.   WellsColeman is available to answer any questions or help you with your planning needs.

 



Corporate Transparency Act – 12/31/24 Deadline

As previously communicated, we want to keep you informed on this important matter. Please consult our Corporate Transparency Act Guide for more details on this reporting requirement and to see if your entity must comply.

 

Virginia Pass-Through Entity Tax

During the 2022 session, the Virginia General Assembly enacted the Virginia Pass-Through Entity Tax option, which permits a qualifying pass-through entity (PTE) to make an annual election to pay income tax (the pass-through entity tax or PTET) at a rate of 5.75% at the entity level. The legislation also allows a corresponding refundable income tax credit to certain PTE owners for the elective income tax imposed at the entity level. In addition, eligible PTEs that make this election will be able to deduct the state tax payment from their federal business tax return in the year a payment is made as long as an electronic payment of the PTET is made by December 31, 2024.

  • Qualifying pass-through entities include:
  • Limited partnerships
  • Limited liability partnerships
  • General partnerships
  • Limited liability companies
  • S corporations

The election is officially made each year by filing the new PTET form, Virginia Form 502PTET. Once filed, the election for that tax year is binding. Individual owners will not have an option to opt out of an entity’s election with the Virginia Department of Revenue once the Form 502PTET has been filed.

 

Consider Tax Accounting Method Changes

More small businesses are eligible to use the cash (as opposed to accrual) method of accounting in earlier years. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test. For 2024, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts do not exceed $30 million. Cash method taxpayers may find it easier to shift income or accelerate expenses.

 

Qualified Business Income Deduction

Taxpayers other than corporations can deduct up to 20% of their qualified business income. For 2024, if taxable income exceeds $383,900 for a married couple filing jointly or $191,950 for single, married filing separately, and heads of household, the deduction may be limited based on:

  • Whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health or consulting);
  • The amount of W-2 wages paid by the trade or business; and/or
  • The unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in applies to joint filers with taxable income between $383,900 and $483,900, and to all other filers with taxable income between $191,950 and $241,950.

 

Business Property Section 179 Expensing and First Year Bonus Depreciation Deductions

Section 179 Expensing

Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2024, the expensing limit is $1,220,000, and the investment ceiling limit is $3,050,000.

  • Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software.
  • It is also available for qualified improvement property, such as:
    • Any improvement to a building’s interior (but not for enlargement of a building, elevators or escalators, or the internal structural framework);
    • Roofs; and
    • HVAC, fire protection, alarm, and security systems.

The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to deduct most, if not all, of their outlays for machinery and equipment. As an additional value consideration, the expensing deduction is not prorated for the time that the asset is in service during the year.

  • The expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year and can be a useful tool for year-end tax planning.
  • Property acquired and placed in service at any time during 2024 can result in a full expensing deduction for 2024.
  • Please note that there are some additional limits to expensing vehicles that may prevent a full write-off in the year of purchase.

Bonus Depreciation

Businesses can claim an 60% first year bonus depreciation deduction for machinery and equipment bought used (with some exceptions) or new (if purchased and placed in service this year), and for qualified improvement property (as defined in the section above).

  • The 60% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. The 60% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2024.
  • There will be a reduction to this bonus of 20% each year, until 12/31/2026 when the bonus depreciation is scheduled to be phased out.

 

Safe Harbor Election

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense lower-cost assets and materials and supplies, assuming the costs do not have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules.

To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; i.e., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.

 

Maximize Tax Benefits of NOLs

Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.

  • For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation, but may be carried forward only 20 years). If the corporation does not have pre-2018 NOL carryovers, but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2024 taxable income with the remaining subject to the 21% federal corporate income tax rate. Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties.
  • Losses from pass-through entities must meet certain requirements to be deductible at the partner or S corporation owner level.

 

Defer Tax on Capital Gains

Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors.

Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock. For other sales, businesses should consider potential long-term deferral strategies, including:

  • Reinvesting capital gains in Qualified Opportunity Zones;
  • Reinvesting proceeds from sales of real property in other “like-kind” real property; and
  • Selling shares of a privately held company to an Employee Stock Ownership Plan.

 

Claim Available Tax Credits

Businesses should make sure they are claiming all available tax credits. The U.S. offers a variety of tax credits and other incentives to encourage employment and investment. These tax credits are often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives.

  • Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to temporarily defer the federal tax due on the capital gains. The investment must be made within a certain period after the disposition giving rise to the gain. Post-reinvestment appreciation is exempt from tax if the investment is held for at least 10 years but sold by December 31, 2047.

 

  • Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA).

 

  • There are several tax benefits available for investments to promote energy efficiency and sustainability initiatives. Projects that have historically been eligible for tax credits and that have been placed in service in 2024 may be eligible for credits at higher amounts.

 

Considerations for Employers

Employers should consider the following issues as they close out 2024 and enter 2025:

  • Employers have until the extended due date of their 2024 federal income tax return to retroactively establish a qualified retirement plan and to fund the new or an existing plan for 2024. However, employers cannot retroactively eliminate existing retirement plans (such as simplified employee pensions (SEPs) or SIMPLE plans) to make room for a retroactively adopted plan (such as an employee stock ownership plan (ESOP) or cash balance plan).

 

  • Contributions made to a qualified retirement plan by the extended due date of the 2024 federal income tax return may be deductible for 2024. Contributions made after this date are deductible for 2025.

 

  • Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a SEP plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2024 is $69,000. The maximum SEP contribution for 2025 is $70,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

 

  • Year-end bonuses can be timed for maximum tax effect by both cash-basis and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 17, 2025) for the bonus to be deductible in 2024. However, the bonus compensation must be paid before the end of 2024 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

 

State and Local Taxes

Businesses should monitor the tax laws and policies in the states in which they do business to understand their tax obligations, to identify ways to minimize their state tax liabilities, and to eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2024 and 2025:

Nexus rules

  • Has the business reviewed the nexus rules in every state in which it has property, employees or sales to determine whether it has a tax obligation? State nexus rules are complex and vary by state. Even minimal or temporary physical presence within a state can create nexus (i.e., temporary visits by employees for business purposes; presence of independent contractors making sales or performing services, especially warranty repair services; presence of mobile or moveable property; or presence of inventory at a third-party warehouse). In addition, many states have adopted a bright-line factor-presence nexus threshold for income tax purposes (i.e., $500,000 in sales). Also keep in mind that foreign entities that claim federal treaty protection are likely not protected from state income taxes, and those foreign entities that have nexus with a state may still be liable for state taxes.

 

  • Has the business considered the state income tax nexus consequences of its mobile or remote workforce, including the impacts on payroll factor and sales factor sourcing? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021.

 

These are just some of the year-end tax planning strategies that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to assist with year-end planning.

 

Sincerely,

WellsColeman

5004 Monument Ave

Richmond, VA 23230

T: 804.249.3328

www.wellscoleman.com

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