The Inaugural Taxy’s
My wife and I have always been streamers and when the pandemic hit, like many folks, our streaming hit another gear.
I’ve been listening to the Big Picture for movie recommendations and for the first time I got sucked into chatter about the Oscar’s.
All kinds of storylines heading into this year’s Oscar’s. A wide-open Best Picture race. Could Chalamet make a final push to beat out Adrian Brody for Best Actor? Would Demi take home Best Actress?
The rumors, the intrigue, the indicators from preceding awards shows. All culminating into 3.5 hours of drama.
Awards season always coincides with another slightly less popular season: Tax Season.
Taxes get a lot of hate. Can’t avoid ‘em. Always side-by-side with death.
When you don’t abide by the tax rules, the tax cops can make life hard on you and your business.
But for all of the hate, let’s give a little love to the deductions and credits that help minimize the taxes we pay each year.
Deductions and credits, it’s your time to shine.
Welcome to the Inaugural Taxy’s!
Deductions vs Credits.
Before we start the show, a simplified explanation of the differences:
Deductions lower your taxable income. Using a quick and easy example: Your income is $1,000 and you receive a $50 deduction. Your taxable income is $950 instead of $1,000.
If your tax rate is 10%, you pay $95 in taxes rather than $100 in taxes with the deduction. An easy way to arrive at tax savings is to multiply your deduction amount $50 by your tax rate 10% = $5.
Credits are more impactful. If your income is $1,000, your tax rate is 10% and your credit is $50, that’s worth more than a $50 deduction.
$1,000 x 10% = $100 in taxes MINUS the $50 credit = $50 in taxes paid.
Addition by Deduction
And the award for Best Adapted Office Location Deduction goes to… The Home Office Deduction!
If you use part of your home regularly and exclusively for business, you can deduct expenses related to that portion, including rent/mortgage interest, utilities, and repairs.
Your home office must be your primary place of business where you conduct most of your work. If you also have a coworking space or another office but do most of your work at home, you can still qualify.
There are two methods for calculating the home office deduction:
1. The Simplified Method allows a $5 per square foot deduction (up to 300 square feet) for a maximum deduction of $1,500.
2. The Actual Expenses Method can result in a much larger deduction but requires more leg work. You deduct a percentage of your home expenses based on the office's square footage relative to the entire home.
Eligible expenses include: rent or mortgage interest, property taxes, utilities (electricity, water, gas, internet), home insurance, repairs and maintenance, depreciation (if you own your home).
Example: If your office is 10% of your home’s total square footage, you can deduct 10% of your rent, utilities, and other costs.
And the award for best deduction for capital-intensive small businesses goes to… The Section 179 Depreciation!
The Section 179 Deduction allows businesses to deduct the full purchase price of qualifying business equipment, passenger vehicles, off-the-shelf software products, and certain leasehold and building improvements.
It’s a powerful tax-saving tool for small businesses investing in growth.
For 2024, business owners can expense the value of qualifying purchases for maximum deductions of $1,220,000.
There is a dollar-for-dollar phaseout for equipment purchases over $3.05 million up to $4.27 million. Over that number, a business no longer qualifies for the Section 179 deduction.
You cannot create a loss with 179 deductions so if you can’t use the full deduction available in a given year, you can carry over indefinitely to future years.
Section 179 deductions are valuable in high-income years for your business. Your accountant can help you file Form 4562 to elect into Section 179 deductions.
Some states like California do not acknowledge Section 179 deductions so keep that in mind when preparing your state tax returns.
And the award for Best Pass-Through Deduction goes to… The Qualified Small Business Income Deduction!
The 20% Qualified Business Income deduction (QBI or QBID) was part of the 2017 Tax Cuts and Jobs Act which reduced the C-Corporation tax rate from 35% to 21%.
Business owners who file their taxes as pass-through entities (sole proprietors, S-Corps or Partnerships) needed some love as well.
After all, they are paying up to 37% marginal tax rates not including state income taxes. QBI was a solution to help level the playing field between C-Corps and pass-through entities. To calculate QBI, you deduct the lesser of:
1. 20% of Qualified Business Income (QBI) – Your net income from the business, excluding wages, capital gains, dividends, and interest.
2. 20% of Taxable Income – Your total taxable income minus capital gains.
Managing QBI is tricky as there are taxable income phaseouts with two different sets of rules depending on whether you operate a Specified Service Trade or Business (SSTBs) or non-SSTB (think selling services vs. selling widgets though there are a few exceptions).
When managed properly, QBI can be a powerful tax deduction.
2025 is an interesting year for tax and estate planning with the TCJA sunsetting at year-end. We should have guidance in the coming months on what stays, what goes and what is revised.
More to come on QBI soon.
Give Me Credit
And the award for Best Credit for Cutting Edge Small Businesses goes to… the Research & Development (R&D) Tax Credit!
R&D credits are available for businesses investing in new products, software, or process improvements. Employee wages associated with the R&D also qualify.
If your business is profitable, you can use the credit towards your federal income tax liability up to 20% of qualified R&D expenses.
If your business has no income tax liability (e.g., a startup operating at a loss), you can elect to use the payroll tax offset instead. This allows your business to apply up to $500,000 per year against employer payroll taxes as long as your business has less than $5M in gross receipts & less than 5 years of revenue.
The R&D credit can be claimed for up to five years (totaling $2.5M in savings) and carried forward for up to 20 years.
There’s a four-part test to qualify for the R&D credit.
1. The work must develop or improve a product, process or software
2. Must be technological in nature
3. Your business must try to resolve technical uncertainty
4. R&D must involve experimentation – trial & error, modeling, or simulations.
You can claim the R&D credit by filling out IRS Form 6765.
And the award for Best Health is Wealth Credit goes to… the Small Business Health Care Tax Credit!
The healthcare tax credit covers up to 50% of health insurance premiums for small businesses with fewer than 25 full-time employees offering health coverage.
To qualify for the full credit, the average employee salary must be $30,700 or lower with a phaseout as wages increase, fully disappearing at $61,400 per employee for tax year 2024.
Ultimately, the smaller your business and lower the wages, the larger the credit.
Employers must pay at least 50% of health insurance premiums. It only applies to employees not their spouse or dependents.
Businesses must purchase a qualifying plan through the Small Business Health Options Program (SHOP) or qualify for an exemption (e.g., certain state-based plans).
The only downer with this credit is it’s available for two consecutive years and expires thereafter. Moreover, if you deduct health insurance premiums, you cannot also claim the same costs for this credit.
You can calculate your credit using IRS Form 8941 and claim your credit on Form 3800 (the General Business Credit form).
And the award for Best For-The-Kids Tax Credit goes to… the Employer-Provided Childcare Tax Credit (Section 45F)!
For small business owners who provide childcare services or assistance for their employees, they receive a credit of 25% of direct childcare expenses (e.g., running an on-site daycare) or 10% of childcare resource/referral expenses (e.g., paying a third-party service to help employees find childcare) for a maximum credit of $150,000 per year.
If the employer deducts childcare expenses as a business expense, they cannot also claim those same expenses for the credit.
The Section 45F credit can be a valuable incentive for businesses looking to attract and retain employees. What better way to support your employees than offering to offset the ever-increasing cost of childcare?
Claim the credit by tracking all eligible childcare expenses and filing IRS Form 8882.
And the award for Best Win-Win Credit goes to… the SECURE Act Startup Retirement Plan Credit!
Businesses with less than 100 employees can receive a retirement plan startup cost credit (100% for 50 employees or less and 50% for between 51-100 employees).
The credit is worth up to $5,000 per year for three years with an additional employer contribution credit of up to $1,000 per employee, phased out over five years. Employers implementing automatic enrollment can also receive an extra $500 per year for three years.
All three credits can be stacked with the auto-enrollment and administrative cost credits allowing for up to $16,500 in credits over three years.
Businesses can save on taxes and employees can start building their retirement nest eggs.
Source: IRS.gov
Awards season is full of drama. There were some obvious winners, some snubs and always a bit of controversy.
Some business deductions and credits apply to the vast majority of small businesses while others apply to businesses in specific industries, in different stages of growth and operations in different states.
While the above winners are a few of my favorites, make sure you are working with a qualified tax professional to capture all deduction and credit opportunities available to your business at state and federal levels.
Two Palms Planning LLC, doing business as Two Palms Financial, is a registered investment adviser registered with the State of California. Registration does not imply a certain level of skill or training. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. The information contained herein is based on current tax laws and regulations, which are subject to change. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.
