Maxwell Locke & Ritter has outlined a few 2024 year-end tax planning considerations for business owners.
Federal Tax Policy & Legislation
Significant tax law changes were contained within the Tax Relief for American Families and Workers Act of 2024 which passed the House but not the Senate. The proposed changes would have reinstated certain business tax deductions which were limited under the TCJA, such as research and development expensing (IRC 174) and business interest expense deductions (IRC 163(j)). It also would have reinstated 100% bonus depreciation.
With a unified GOP Congress and a new presidential administration, it’s possible that we could see these or other changes in 2025 including the extension of various TCJA provisions such as the Section 199A (“QBI”) deduction available to certain flow-through business entities.
Depreciation-Based Deductions
As the year draws to a close, a business may benefit from one or more of three depreciation-based tax breaks: (1) the Section 179 deduction; (2) first-year “bonus” depreciation; and (3) regular depreciation.
- Section 179 deduction: Under Section 179 of the tax code, a business may currently deduct the cost of qualified property placed in service during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold for assets placed in service during the year. For 2024, the deduction limit and phase-out threshold are $1,220,000 and $3,050,000, respectively (the amounts for 2025 are $1,250,000 and $3,130,000). Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2024.
- First-year bonus depreciation: The TCJA authorized 100% first-year bonus depreciation through 2022, subject to a phase-out over a five-year period. The applicable percentage for 2024 is 60% and is scheduled to drop to 40% in 2025, 20% in 2026, and zero thereafter if not extended, or enhanced, by the new administration.
- Regular depreciation: If any acquisition cost remains after taking the Section 179 deduction or bonus depreciation, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).
Tip: Special “luxury car” rules limit deductions for business vehicles. Nevertheless, due to the TCJA, you can write off up to $20,400 (including bonus depreciation) for such a vehicle placed in service in 2024. The luxury car limits do not apply to certain heavy-duty vehicles. If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $30,500 before considering bonus depreciation.
Credit for Increasing Research Activities: Proposed Changes to Form 6765
The IRS announced the release of a revised draft of Form 6765, Credit for Increasing Research Activities. This was done in an effort for the IRS to enhance the documentation requirement for claiming the credit. It is important for eligible taxpayers to abide by the updated forms and provide all required documentation, as starting in January 2025, the IRS can treat research credit claims as invalid if they are submitted without the required information.
YEAR-END MOVE: Based on the updates and requirements listed below, determine eligibility and whether consideration should be given for an approach to capture the information needed to complete the forms. For most eligible taxpayers, this means keeping a detailed project list throughout the year or utilizing a cost-tracking system starting in 2025.
- For tax years beginning in 2024, new information required in Section E includes: the number of business components generating qualified research expenditures, officers’ wages included in the credit, and several yes or no questions related to the nature of the company’s specific research being conducted.
- Section G will be optional for all taxpayers in 2024. For tax years beginning in 2025, the section will remain optional for taxpayers who claim a reduced payroll tax credit or taxpayers with qualified research expenditures equal to or less than $1.5 million and with $50 million or less in gross receipts. Taxpayers which are not exempt from Section G will be required to provide substantial detail regarding the business components for which they are claiming qualified research expenditures and will have to provide costs by business component.
Miscellaneous
- There is a new requirement in 2024 to file a beneficial ownership information (“BOI”) report for most entities, including corporations (C or S corporations), limited partnerships, and limited liability companies (LLCs). These reports are generally due no later than 12/31/2024, and possibly earlier for entities formed in 2024.
- Consider hiring workers from certain target groups eligible for the Work Opportunity Tax Credit (WOTC). Generally, the WOTC is 40% of first-year wages of up to $6,000, for a maximum $2,400 credit per qualified worker. For certain qualified veterans, the credit may be claimed for up to $24,000 of wages, for a $9,600 maximum. The credit is currently available through 2025.
- Energy credits applicable under the IRA may be available to taxpayers placing energy property in service in 2024. Common examples of eligible property include solar power system components, battery storage devices and geothermal heat pumps. For property placed in service after 2024, the current energy credit regulations will be replaced by the Section 48E clean electricity investment tax credit. The framework of the credit is similar to the one previously in place. However, the new framework emphasizes a technology-neutral approach that will no longer be based on investing in specific technologies to qualify. Instead, the property will need to have the ability to generate electricity without emitting any greenhouse gases.
- Additionally, the Inflation Reduction Act (IRA) gives taxpayers the option to purchase various clean energy tax credits from unrelated sellers. A business with taxable income may want to reduce their federal income tax liability by buying these credits.
- The TCJA requires that any research and development costs incurred in 2022 or thereafter must be amortized ratably over five years rather than deducted in the year the costs are incurred (15 years for foreign research).
- Under the IRA, a start-up business can elect to use up to $500,000 of qualified research credits to offset payroll taxes instead of income taxes. A start-up business is defined for this purpose as a business which had no gross receipts prior to the 5-year period ending with this tax year and has gross receipts < $5 million during the current tax year.
- The costs incurred with starting up a new business must be amortized over 180 months. However, the tax law allows a start-up business to claim a current deduction of up to $5,000 for qualified start-up costs, subject to a phaseout above $50,000 of start-up costs incurred.
- If your business realizes a net operating loss (NOL) in 2024, it can no longer be carried back under current law, but the NOL may be carried forward indefinitely (subject to a limit of 80% of taxable income).
- Maximize the qualified business interest (QBI) deduction for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB). Unless extended, the QBI deduction is scheduled to expire on December 31, 2025.
- If you pay year-end bonuses to employees in 2024, the amounts are generally deductible by the company and taxable to the employees in 2024. But a calendar-year company operating on the accrual basis may be able to deduct bonuses that are paid as late as March 15, 2025, on its 2024 return if the bonuses are not contingent upon any post year-end events and are paid to non-owner employees.
- The Inflation Reduction Act of 2022 provides a new $7,500 credit for the purchase of clean commercial vehicles after 2022 and an even higher credit amount ($40,000) for qualifying vehicles with a GVWR over 14,000 pounds. These credit amounts are also capped at a percentage of the cost basis, and other specific requirements also apply, similar to the credit available for individuals. See https://www.irs.gov/credits-deductions/commercial-clean-vehicle-credit for additional details.
