Services

Choosing the Best Accounting Method for Business Tax Purposes

Choosing the Best Accounting Method for Business Tax Purposes
Choosing the Best Accounting Method for Business Tax Purposes 850 500 smolinlupinco

Businesses categorized as “small businesses” under the tax code are often eligible to use accrual or cash accounting for tax purposes. Certain businesses may be eligible to take a hybrid approach, as well. 

Prior to the implementation of the Tax Cuts and Jobs Act (TCJA), the criteria for defining a small business based on gross receipts ranged from $1 million to $10 million, depending on the business’s structure, industry, and inventory-related factors.

By establishing a single gross receipts threshold, the TCJA simplified the small business definition. The Act also adjusts the threshold to $25 million for inflation, which allows more companies to take advantage of the benefits of small business status. 

In 2024, a business may be considered a small business if the average gross receipts for the three-year period ending prior to the 2024 tax year are $30 million or less. This number has risen from $29 million in 2023.

Small businesses may also benefit from: 

  • Simplified inventory accounting,
  • An exemption from the uniform capitalization rules, and
  • An exemption from the business interest deduction limit.

What about other types of businesses?

Even if their gross receipts are above the threshold, other businesses may be eligible for cash accounting, including: 

  • S-corporations
  • Partnerships without C-corporation partners
  • Farming businesses
  • Certain personal service corporations

Regardless of size, tax shelters are ineligible for the cash method.

How accounting methods differ

Cash method 

The cash method provides significant tax advantages for most businesses, including a greater measure of control over the timing of income and deductions. They recognize income when it’s received and deduct expenses when they’re paid. 

As year-end approaches, businesses using the cash method can defer income by delaying invoices until the next tax year or shift deductions into the current year by paying expenses sooner.

Additionally, the cash method offers cash flow advantages. Since income is taxed when received, it helps guarantee that a business possesses the necessary funds to settle its tax obligations.

Accrual method

On the other hand, businesses operating on an accrual basis recognize income upon earning it and deduct expenses as they are incurred, irrespective of the timing of cash receipts or payments. This reduces flexibility to time recognition of expenses or income for tax purposes. 

Still, this method may be preferable for some businesses. For example, when a company’s accrued income consistently falls below its accrued expenses, employing the accrual method could potentially lead to a reduced tax liability.

The ability to deduct year-end bonuses paid within the first 2 ½ months of the next tax year and the option to defer taxes on certain advance payments is also advantageous. 

Switching accounting methods? Consult with your accountant

Your business may benefit by switching from the accrual method to the cash method or vice versa, but it’s crucial to account for the administrative costs involved in such a change.

For instance, if your business prepares financial statements in accordance with the U.S. Generally Accepted Accounting Principles, using the accrual method is required for financial reporting purposes. Using the cash method for tax purposes may still be possible, but you’ll need to maintain two sets of books, the administrative burden of which may or may not offset those advantages.

In some cases, you may also need IRS approval to change accounting methods for tax purposes. When in doubt, contact your Smolin accountant for more information.

Is Qualified Small Business Corporation Status Right for You

Is Qualified Small Business Corporation Status Right for You?
Is Qualified Small Business Corporation Status Right for You? 850 500 smolinlupinco

For many business owners, opting for a Qualified Small Business Corporation (QSBC) status is a tax-wise choice.

Potential to pay 0% federal income tax on QSBC stock sale gains

For the most part, typical C corporations and QSBCs are treated the same when it comes to tax and legal purposes, but there is a key difference. QSBC shareholders may be eligible to exclude 100% of their QSBC stock sale gains from federal income tax. This means that they could face an extremely favorable 0% federal income tax rate on stock sale profits.

However, there is a caveat. The business owner must meet several requirements listed in Section 1202 of the Internal Revenue Code. Plus, not all shares meet the tax-law description of QSBC stock. And while they’re unlikely to apply, there are limitations on the amount of QSBC stock sale gain a business owner can exclude in a single tax year. 

The date stock is acquired matters

QSBC shares that were acquired prior to September 28, 2010 aren’t eligible for the 100% federal income tax gain exclusion. 

Is incorporating your business worth it?

Owners of sole proprietorships, single-member LLCs treated as a sole proprietorship, partnerships, or multi-member LLCs treated as a partnership will need to incorporate their business and then issue shares to themselves in order to attain QSBC status in order to take advantage of tax savings. 

There are pros and cons of taking this step, and this isn’t a decision that should be made without the guidance of a knowledgeable accountant or business attorney. 

Additional considerations

Gains exclusion break eligibility

Only QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible for the tax break—not shares owned by another C corporation. 

5 Year Holding period
QSBC shares must be held for five years or more in order to be eligible for the 100% stock sale gain exclusion. Shares that haven’t been issued yet won’t be eligible until 2029 or beyond. 

Share acquisition 

Generally, you must have acquired the shares upon original issuance by the corporation or by gift or inheritance. Furthermore, only shares acquired after August 10, 1993 are eligible.

Not all businesses are eligible

The QSBC in question must actively conduct a qualified business. Businesses where the principal asset is the reputation or skill of employee are NOT qualified, including those rendering services in the fields of:

  • Law
  • Engineering
  • Architecture
  • Accounting
  • Actuarial science 
  • Performing arts 
  • Consulting 
  • Athletics 
  • Financial services 
  • Brokerage services 
  • Banking
  • Insurance 
  • Leasing 
  • Financing 
  • Investing
  • Farming
  • Production or extraction of oil, natural gas, or other minerals for which percentage depletion deductions are allowed 
  • Operation of a motel, hotel, restaurant, or similar business 

Limitations on gross assets

Immediately after your shares are issued, the corporation’s gross assets can’t exceed $50. However, if your corporation grows over time and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

Impact of the Tax Cuts and Jobs Act

Assuming no backtracking by Congress, 2017’s Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent. This means that if you own shares in a profitable QSBC and decide to sell them once you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be the only tax you owe.

Wondering whether your business could qualify? Smolin can help.

The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are both strong incentives to operate as a QSBC, but before making your final decision, consult with us.

While we’ve summarized the most important eligibility rules here, additional rules do apply. 

Can too much cash be bad for business

Can Too Much Cash Be Bad For Business?
Can Too Much Cash Be Bad For Business? 850 500 smolinlupinco

Today’s marketplace can feel uncertain, so it’s no surprise that many businesses are stashing operating cash in their bank accounts. However, without imminent plans to deploy these reserves, do these excessive “rainy day funds” really offer efficient use of capital?

If you want to estimate reasonable cash reserves while maximizing your company’s return on long-term financial positions, try this approach. 

Why is it harmful to reserve extra cash? 

While maintaining a “cushion” can help with slowed business or unexpected maintenance needs, it’s important to acknowledge that cash has a carrying cost. The return your company earns on cash vs. the price you pay to obtain cash may be more significant than you realize. 

Carrying debts on your balance sheet for equipment loans, credit lines, and mortgages comes with interest that might be higher than the interest earned on your business checking account. After all, interest earnings on checking accounts are often little to none. Many generate returns of 2% or less.

The greater this spread, the higher the cost of carrying cash. 

What’s the ideal amount for a cash reserve?

While dividing current assets by current liabilities is helpful, there’s no magic ratio that’s appropriate for every business. A lender’s liquidity covenants can only provide an educated guess.

Still, it’s possible to analyze how your business’s liquidity metrics have evolved in previous months or years and compare those numbers to industry benchmarks. If you notice ratios well above industry norms—or substantial increases in liquidity—this could be a sign that capital is being inefficiently deployed. 

Looking forward may also prove helpful. Developing prospective financial reports for the next 12 to 18 months may help you evaluate whether your company’s cash reserves are too high.

For instance, you might use a monthly forecasted balance sheet to estimate expected seasonal ebbs and flows in the cash cycle. Projecting a truer picture of a worst-case scenario, using “what-if” assumptions, could also be helpful. When examining these scenarios, be sure to consider future cash flows, including debt maturities, working capital requirements, and capital expenditures.

Formal financial projections and forecasts provide a much better method for building up healthy cash reserves than relying on gut instinct alone. Over time, comparing actual performance to this data—and adjusting them, if necessary—will help you reach your ideal reserve.   

What to do with excess cash

Once you’ve determined your company’s ideal cash balance, it’s time to find a way to reinvest any cash surplus.

Some possible options include: 

  • Paying down debt to reduce the carrying cost of cash reserves
  • Investing in marketable securities like diversified stock-and-bond portfolios or mutual funds  
  • Repurchasing stock, especially if minority shareholders routinely challenge management decisions 
  • Acquiring a struggling competitor or its assets 

When implemented with due diligence, these strategies are the key to growing your business in the long run—not just your checking account balance.  

Questions? Smolin can help

Need help creating formal financial forecasts and projections to devise sound cash management strategies? We’re here to help. Contact your Smolin accountant for personalized advice on the efficient use of your business capital and the ideal cash reserve needed to meet your business’s operating needs. 

Answers to Your Tax Season Questions

Answers to Your Tax Season Questions
Answers to Your Tax Season Questions 850 500 smolinlupinco

Ready or not—the 2024 tax season is officially open! The IRS is now accepting and processing 2023 income tax returns

Just as in years prior, we’re receiving an abundance of questions about this tax season. Let’s take a look at seven of the most relevant ones. 

1. What are the 2024 tax season deadlines?

For most taxpayers, returns and extensions must be filed by Monday, April 15, 2024.

However, Massachusetts and Maine state holidays will earn some taxpayers an extra two days. You may also be granted additional time to file if you live in a federally declared disaster area.

2. If I request an extension, when is my return due?

Taxpayers who request an extension must file before October 15, 2024.

Of course, it’s important to note that you will still need to pay any taxes owed before April 15. If not, you could face penalties. 

3. When’s the best time to file?

Filing for an extension or waiting until the last minute can be tempting, but filing early has its benefits. Namely, filing your return early in the tax season offers some protection against tax identity theft. 

4.  How does early filing help protect me from tax identity theft? 

When a thief uses another person’s sensitive information to file a fake tax return and claims a fraudulent refund, we call this tax identity theft.

Oftentimes, taxpayers only discover these scams once it comes time to file their return, and the IRS informs them their return is being rejected since a tax return with the same social security number has already been filed for the year. 

Proving which return is valid and which one is the fraud can be a frustrating, time-consuming process. It may also delay your refund.

If you file early, however, the IRS will reject fraudulent returns filed after your return.

5. Why else should I try to file my return early? 

If you want your refund as soon as possible, filing early can help.

In fact, the IRS asserts that “most refunds will be issued in less than 21 days.” If you choose to file electronically and elect to receive your refund via direct deposit, your wait could be shorter.

As an added benefit, receiving a refund via direct deposit eliminates the odds that your refund check could be caught in a mail delay or returned to the IRS as undeliverable, stolen, or lost.  

6. When should I expect to receive my W-2s and 1099s?

Before you can file your tax return, you’ll need all of your Forms 1099 and W-2.

January 31, 2024, is the deadline for employers to file 2023 W-2s and, generally, for businesses to file Form 1099s for recipients of any 2023 interest, dividends, or reportable miscellaneous income payments (including those made to independent contractors).

If early February arrives and you still haven’t received a W-2 or 1099, contact the entity that should have issued it. If that doesn’t work, contact your accountant. 

7. When should I contact Smolin to prepare my return?

An accurate, timely return is crucial to ensure you avoid penalties and receive all of the tax breaks you’re entitled to. Make sure you contact us as soon as possible to get the ball rolling. 

Questions? Smolin can help.

If you still have questions about the 2024 tax season, you’re not alone. Reach out to the friendly accountants at Smolin for more personalized tax advice.

A hybrid DAPT may offer the asset protection you need

A Hybrid DAPT May Offer the Asset Protection You Need
A Hybrid DAPT May Offer the Asset Protection You Need 850 500 smolinlupinco

Asset protection is a vital part of estate planning. Chances are you want to pass on as much of your wealth to family and friends as possible. To do this, you may need to shield your assets from frivolous creditors’ claims and lawsuits.

One option available to you as you plan your estate is to establish a domestic asset protection trust (DAPT).

What is a DAPT?

A DAPT is an irrevocable self-settled trust that empowers an independent trustee to manage and distribute trust assets to beneficiaries. This unique structure enables the trust’s creator (known as the “settlor” or “trustor”) to enjoy the advantages of both asset protection from external creditors and the beneficial use of trust assets. 

Domestic asset protection trusts can offer creditor protection even if you’re a trust beneficiary, but there are risks involved. Bear in mind that DAPTs are relatively untested, so there’s some uncertainty over their ability to repel creditors’ claims.

Not all states currently recognize the DAPT. Those that do include: Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. 

Keep in mind that you don’t necessarily have to live in one of those states to qualify; what matters most is where the asset is located. So you can explore the possibility even if your state doesn’t currently participate.

A hybrid DAPT in action

A “hybrid DAPT” may offer the best option to the person planning their estate and to the beneficiary. In this arrangement, you’re not initially named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds down the road, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

A hybrid domestic asset protection trust is initially set up as a third-party trust, meaning it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t considered a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the risks mentioned above.

Alternatives to a hybrid DAPT

Before forming a hybrid domestic asset protection trust, you should determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children, or other family members, either outright or in a trust, without retaining any personal control.

If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children, provided your relationship with them remains in good standing.

Questions about hybrid DAPTs? Contact Smolin.

The hybrid domestic asset protection trust can add flexibility while offering significant asset protection. It also minimizes the risks associated with DAPTs, while retaining your ability to convert to one should the need arise. 

Consult with your accountant today to assess whether a hybrid DAPT is right for you.

Standard-Business-Mileage-Rate-Increasing-in-2024

Standard Business Mileage Rate Increasing in 2024
Standard Business Mileage Rate Increasing in 2024 850 500 smolinlupinco


The IRS recently announced an increase to the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business. In 2024, the cents-per-mile rate for panel trucks, pickups, vans, and cars will rise from 65.5 cents to 67 cents.

The increase is meant to reflect, in part, changing gasoline prices. According to AAA, the national average price of a gallon of gas rose from $3.10 in December 2022 to $3.12 in December 2023.

Tracking expenses vs. standard rate

Generally, businesses can deduct actual expenses attributable to the business use of vehicles, such as:

  • Vehicle registration fees 
  • Licenses 
  • Insurance
  • Repairs
  • Oil
  • Tires
  • Gas

You may also claim a depreciation allowance for the vehicle. (Of course, it’s worth noting that certain limits may apply.) 

If maintaining detailed records of vehicle-related expenses feels tedious, the cents-per-mile rate may be a helpful alternative. However, you’ll need to keep track of certain information for each trip, including:

  • Destination 
  • Rate
  • Business trip

Businesses use the standard rate when reimbursing employees for the business use of their personal vehicles. This practice aids in attracting and retaining employees who utilize their personal vehicles for business purposes. The rationale behind this is that, according to existing laws, employees cannot deduct unreimbursed business expenses, including business mileage, from their individual income tax returns.

When employing the cents-per-mile rate, it’s important to note that adherence to various rules is necessary. Failure to comply may result in reimbursements to employees being treated as taxable wages for them.

How the rate is calculated

The IRS commissions an annual study about fixed and variable costs of vehicular operation, including depreciation, repairs, maintenance, and gas. The business cents-per-mile rate is adjusted each year based on this study.

Occasionally, the IRS will change the rate midyear if gas prices fluctuate substantially. 

Cases where the cents-per-mile rate is not allowed

The cents-per-mile method isn’t appropriate—or allowed—in every scenario.

  • How you’ve claimed deductions for the same vehicle in the past
  • Whether the vehicle is new to your business 
  • If you plan to take advantage of certain first-year depreciation tax breaks on it

Questions? Smolin can help.

Need assistance determining the best method to deduct business vehicle expenses? We’re here to help. Contact us to learn more about tracking and claiming these expenses on your 2023 tax returns and throughout 2024.

Preparing Year-End Inventory Counts

Preparing for Year-End Inventory Counts
Preparing for Year-End Inventory Counts 850 500 smolinlupinco

Year-end is approaching quickly. If your business operates according to the calendar year, it’s time for a physical inventory account. While this task can feel tedious and time-consuming, it’s also a key chance to further develop your business’s operational efficiency.

As you prepare to undertake the count, let’s review some best practices that will help you make the most of the process. 

The Importance of Accuracy

Accuracy is crucial for many reasons. After all, why bother going through the process of a physical inventory count only to wind up with inaccurate numbers? In addition, you’ll need a trustworthy estimate of ending inventory in order to accurately estimate your company’s annual profits. 

For your income statement

For manufacturers, retailers, and myriad other businesses, the cost of sales is a major expense on the income statement. Calculating it is simple at the basic level. Simply subtract your ending inventory from the beginning inventory plus purchases during the year. 

However, things can become far more complicated without an accurate count. If the inventory balance for the end or the beginning of the year is incorrect, it’s impossible to determine how profitable your company truly is. 

For your balance sheet

When it comes to your company’s balance sheet, inventory is a major line item. In fact, inventory is often viewed as a form of loan collateral by lenders. Plus, stockholders review inventory-based ratios to evaluate the financial strength of your organization. 

And, of course, determining the amount of insurance coverage you’d need in the event of a major loss isn’t possible without an understanding of your true inventory. 

Importance of a Physical Count

Many companies use a computerized perpetual inventory. In it, value increases as you purchase goods (or raw materials are transformed into finished goods.) By contrast, it decreases as those goods are sold.

While this is a great first step, this method doesn’t always lead to an accurate count. This is why it’s so crucial to conduct physical counts at key times of the year as part of a strong internal control system.

In addition to double-checking the system’s accuracy, a physical count also signals to potential thieves and fraudsters that your company takes theft seriously and keeps a firm watch on its assets. 

Challenges Involved in Estimating Inventory Values

Your balance sheet might include inventory that consists of finished goods, works-in-progress, and raw materials, depending on the nature of your company’s origins. Under U.S. Generally Accounting Principles, inventory items are recorded at the market value or the lower of cost.

Subjective judgment calls could be involved when it comes to estimating the market value of inventory, particularly if your business creates and sells finished goods from raw materials. For works-in-progress, assessing value objectively can be particularly challenging because it includes overhead allocations. Percentage of completion assessments could also be needed.

Prepping for the count

Completing some tasks before you begin counting will help the entire process run more smoothly. Steps include:

  1. Create (or order) inventory tags that are prenumbered
  2. Examine inventory ahead of time and look for potential challenges that should be addressed prior to counting
  3. Create two-person teams of workers and assign them to specific count zones
  4. If any inventory items are defective or obsolete, write them off. 
  5. If any items are slow-moving, count them ahead of time and separate them into sealed, clearly marked containers. 

Additional procedure for companies that issue audited financial statements 

Arrange for at least one member of your external audit team to be present throughout your physical inventory count. However, don’t expect them to help with the counting.

Instead, they’ll be responsible for: 

  • witnessing your procedures (including any statistical sampling methods employed)
  • evaluating inventory processes
  • assessing internal controls over inventory
  • running an independent count to compare counts made by your employees with your inventory listing 

Questions? Smolin can help.

Over the years, we’ve witnessed the best (and worst) practices you could imagine when it comes to physical inventory counts. If you’re looking for more specific guidance on how to conduct a physical inventory count at your company—or simply additional recommendations on how to manage your inventory more efficiently year-round—we can help.

Contact your accountant to learn more.  

Navigating Tax Implications Restricted Stock Awards

Navigating the Tax Implications of Restricted Stock Awards
Navigating the Tax Implications of Restricted Stock Awards 850 500 smolinlupinco

Equity-oriented executive compensation can take many forms, but restricted stock awards are a popular option. In fact, many businesses offer them as an alternative to stock option awards in light of the fact that options can lose most or all of their value if the price of the underlying stock decreases. This is less of an issue with restricted stock. If the price declines, companies can issue additional restricted shares to balance the difference. 

If you’re in a position to receive a restricted stock award, it’s important to know what to expect in regard to your taxes. 

Restricted stock: How it works 

Typically, when a company grants an employee restricted stock, the shares are subject to certain limitations. The restricted shares are transferred to the employee, but the employee won’t actually own them until they become vested.

Oftentimes, you must continue working for the company for a particular length of time. If you leave the job before the designated date, you may be forced to forfeit the restricted shares. 

Tax rules for awards of restricted stock

Before the shares become vested, you won’t have taxable income from a restricted share award. In other words, there won’t be an immediate tax obligation associated with the shares.

Once the shares become vested, however, you’ll receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount they paid for them (if anything).

Federal income tax for compensation is up to 37%, and you may also owe an additional 3.8% net investment income tax (NIIT). You could also owe state income tax on the income.

Appreciation occurring after the shares are vested will be treated as capital gain. If you hold the stock for a year or more after vesting date, you’ll be subject to a lower-taxed, long-term capital gain on that appreciation. For long-term capital gains, the current maximum federal tax rate is 20%, but you may also be subject to state income tax and the 3.8% NIIT. 

Section 83(b) election

You’ll also have the option to make a special Section 83(b) election, which gives you the option to be taxed at the time they receive the restricted stock award rather than when the shares vest. In this case, income will equal the difference between the amount that you paid for the shares (if anything) and the value of them.

This income will still be treated as compensation and subject to federal employment taxes, federal income tax, and state income tax. However, making a Section 83(b) election offers the benefit that further appreciation in the value of the stock will be treated as lower-taxed, long-term capital gain if the stock is held for over a year. It also provides a level of protection against higher tax rates that could be in place when the shares become vested. 

However, recognizing taxable income the year the restricted stock award is received does come at a risk. The election can be a financial disadvantage in the event that the shares are later forfeited or decline in value. If you do go on to forfeit the shares, you may be able to claim a capital loss for the amount paid for them (if anything).

To make a Section 83(b) election, you must notify the IRS either before the stock is transferred or within the following 30 days. 

Questions? Smolin can help. 

While the tax rules for restricted stock awards are fairly simple, deciding whether to make a Section 83(b) election is still a time-sensitive decision that has the potential to impact the true financial benefit of your award.

Before making the decision to opt for a Section 83(b) election, contact your accountant for more personalized guidance. 

New Per Diem Business Travel Rates Effective October 1st

New Per Diem Business Travel Rates Effective October 1st
New Per Diem Business Travel Rates Effective October 1st 850 500 smolinlupinco

Do traveling employees at your business find documenting expenses tedious? Are you equally frustrated at the energy and time needed to review business travel expenses? If so, relief is on its way. In Notice 2023-68, the IRS set forth special “per diem” rates, which became effective on October 1st.

These rates may be used to substantiate expenses for lodging, incidentals, and meals when traveling away from home. (Note: Employees in the transportation industry can use the transportation industry rate.)

How to use the “high-low” method

Rather than tracking actual business travel expenses, the high-low method provides a simplified alternative through fixed travel per diems. These amounts are provided by the IRS and vary by locality.  

For certain areas with higher costs of living, the IRS establishes an annual flat rate. Any location within the continental United States that the IRS does not list as a “high-cost” area should automatically be considered “low-cost” under the high-low method. 

Areas such as Boston and San Francisco, for example, may be considered high-cost, while less metropolitan areas could be considered low-cost. Some areas, like resort areas, could be considered high-cost only during certain times of the year.

For business travel, this method can be used in lieu of the specific per-diem rates for business destinations.

When employers provide lodging or pay for the hotel directly, employees may only receive a per diem reimbursement for meals and incidental expenses. For employees who don’t incur meal expenses for a calendar day (or partial day) of travel, there is also a $5 incidental-expenses-only rate. 

Recordkeeping simplified

Employees working for companies that use per diem rates don’t need to meet the typical recordkeeping rules required by the IRS. Generally, receipts aren’t required under the high-low per diem method.

However, employees are still responsible for substantiating the business purpose, place, and time of travel. Per diem reimbursements aren’t typically subject to payroll tax withholding or income tax withholding reported on an employee’s Form W-2. 

What to know about the FY2024 rates

For travel occurring after September 30, 2023, FY2024 rates apply. The high-cost area per diem increased by $12, and the low-cost area per diem increased by $10. 

High-cost area per diem in 2024

The 2024 rate for all high-cost areas within the continental United States is $309. This can be broken down as follows.

Lodging: $235
Meals and incidental expenses: $74

Low-cost area per diem in 2024

For all other areas within the continental United States, the per diem rate is $214 for travel occurring after September 30, 2023. This may be broken down as follows:

Lodging: $150
Meals and incidental expenses: $64

Special considerations

The rules and restrictions that apply to reporting business travel expenses are nuanced. 

As an example, companies using the high-low method for an employee must continue using the same method to reimburse expenses for travel within the continental United States throughout the calendar year. However, the company may reimburse the same employee for travel outside of the continental United States using any permissible method during that calendar year.

In the last three months of a calendar year, employers must continue to use the same method (high-low method or per diem) for an employee as they used during the first nine months of the calendar year. 

Also worth noting: per diem rates don’t apply to individuals who own at least 10% of the business. 

Questions? Smolin can help. 

Now is the time to review travel rates and consider switching to the high-low method in 2024. Reduce the time and frustration associated with traditional travel reimbursement benefits managers and traveling employees alike.

For more information, contact your accountant.

Determining Business Entity Tax-Favorable

Determining Which Business Entity is Most Tax-Favorable
Determining Which Business Entity is Most Tax-Favorable 850 500 smolinlupinco

Are you planning to start a business? Perhaps you have already and are now thinking about changing your business entity. In either circumstance, careful evaluation is needed to determine which business structure works best for you. From C-corporations to sole proprietorships, there are many issues to consider.

At present, individual federal income tax rates begin at 10% and range up to 37%. Meanwhile, corporate federal income tax is evaluated at a flat 21% rate. For some pass-through entity owners that are individuals (and some trusts and estates), the qualified business income (QBI) deduction may ease these differences in rates. 

Comparing corporate rates to individual rates

Unless Congress acts to extend it, the QBI deduction will end in 2026. By contrast, the 21% corporate rate isn’t scheduled to expire. It’s also worth considering that noncorporate taxpayers with modified adjusted gross incomes that exceed certain levels face an additional 3.8% tax on net investment income.

For some, opting to organize a business as a C-corporation rather than a pass-through entity could soften federal income tax impacts on the business’s income. Of course, the corporation will still pay interest on loans from shareholders, as well as reasonable compensation to those shareholders. Although that income will be taxed at higher individual rates, the corporation’s overall tax burden may be lowered in comparison to if the business was operated as a pass-through entity instead.

Other tax-related factors to take into consideration 

If most of the profits from the business will be distributed to the owners…

Structuring the business as a pass-through entity instead of a C-corporation may be preferable because shareholders will be taxed on dividend distributions from the corporation leading to double taxation.

Owners of a pass-through entity are only taxed once—at the personal level—on income from the business. Meanwhile, the true cost of double taxation must be evaluated based on projected income levels for both the owners and the business. 

If the value of the assets is likely to increase… 

Typically, conducting business as a pass-through entity can help owners avoid corporate tax in the event that assets are sold or the business is liquidated. When the corporation’s shares (rather than its assets) are sold, corporate tax may be avoided. 

However, the buyer may attempt to negotiate a lower price since the tax basis of appreciated business assets can’t be stepped up to reflect the purchase price. This can secure 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. When his or her interests in the entity are sold, structuring the business as a pass-through entity could lead to less taxable gain for the owner.

If the business is expected to incur tax losses for a while…

Structuring the business as a pass-through entity may be favorable because it makes it possible to deduct the losses against other income.

On the other hand, it may be preferable for the business to operate as a C-corporation if you have insufficient other income or those losses aren’t usable. (For example, losses aren’t usable when they’re limited by passive loss rules.)

If the owner of a business is subject to the alternative minimum tax (AMT)…

AMT rates can range from 26%-28%. Since corporations aren’t subject to AMT, it may be preferable to organize the business as a C-corporation in this situation. 

Questions? Smolin can help.

As you can tell, there is much nuance involved in choosing a business entity. This article covers some general information, but we recommend consulting with a knowledgeable accountant before making your final decision.

For more details about the best way to structure your business, consult with Smolin.

Start Typing
in NJ, NY & FL | Smolin Lupin & Co.