Month: November 2024

If you’ve recently been billed by the IRS with the claim that you owe a penalty for late filing, late payment, or missed employment tax deposits, I urge you to pause before making any payment. You may not have to pay that penalty at all.

The IRS often imposes steep penalties for filing tax returns late, failing to pay taxes on time, or not depositing employment taxes correctly. However, several strategies can help you get those penalties removed—and in some cases, even refunded if you have already paid them.

Common IRS Penalties and Their Impact

Some of the most common penalties include:

• Late filing penalty. For individual or C corporation returns, this can be up to 5 percent of the unpaid tax for each month the return is late, maxing out at 25 percent. Partnerships and S corporations can incur penalties of $245 per partner or shareholder per month.
• Late payment penalty. This penalty is generally 0.5 percent of the unpaid tax per month, maxing out at 25 percent.
• Failure to deposit employment taxes. This penalty ranges from 2 percent to 10 percent, depending on how late the deposit was.

Strategies for Relief

Here are a few ways to potentially avoid or reduce these penalties:

First-time abate. If this is your first time receiving a penalty—or your first time in over three years—you may be eligible for a “first-time abate.” This is one of the easiest and most common ways to remove a penalty. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. As long as your tax compliance history is clean, you may qualify.

Partnership relief. If your business is a partnership with 10 or fewer partners, and if all partners filed their tax items on time, you may be eligible for relief under Revenue Procedure 84-35. This is a little-known but effective option.

Reasonable cause. If neither of the first two options applies, you can request penalty relief by showing that there was a reasonable cause for your late filing or payment. This could include illness, a natural disaster, or other significant life events that impacted your ability to meet IRS deadlines.

Next Steps

If you believe any of the penalties you’re facing may qualify for relief, I’d be happy to assist you in navigating the process. You can remove many penalties with a simple phone call, and using the right approach and trigger words when speaking to the IRS can make all the difference.

If you have already paid the penalties, you can use IRS Form 843 to file for a refund if you do so within three years of filing the return or within two years of paying the penalty.

If you want to discuss penalty abatement, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 5, 2024

The purpose of this letter is to reveal how you can get the IRS to owe you money.

Of course, the IRS will not likely cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2024. 

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2024 prepayments cannot go into 2026. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2024, you mail a rent check for $36,000 to cover all of your 2025 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2025. Here are the results:

• You deduct $36,000 this year (2024—the year you paid the money).
• The landlord reports $36,000 as rental income in 2025 (the year he received the money).

You get what you want—the deduction this year. 

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable. 

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2024. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2024 income by moving that income to 2025.

3. Buy Office Equipment

Increased limits on Section 179 expensing now enable 100 percent write-offs on most equipment and machinery, whereas bonus depreciation enables 60 percent write-offs. Either way, when you buy your equipment or machinery and place it in service before December 31, you can get a big write-off this year.

Qualifying Section 179 and bonus depreciation purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But suppose you operate your business as a corporation and you are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. And the good news is that NOLs can turn into future cash infusions for your business because you carry 2024 NOLs forward to future years.

What does this mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would have produced a tax loss.

6. Deal with Your Qualified Improvement Property (QIP)

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date the building was placed in service.

The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for 

• immediate deduction using Section 179 expensing, and 
• 60 percent bonus and MACRS depreciation. 

To get the QIP deduction in 2024, you need to place the QIP in service on or before December 31, 2024.

I trust that you found the six tax-saving ideas listed above worthwhile. If you want to discuss any of them, please call me on my direct line (408-778-9651).

• By Leon Clinton
• November 4, 2024

Here are some key points about renting personal property, which includes equipment, vehicles, and furniture. The tax treatment differs from real estate rentals, and how you classify the rental activity will affect how you report income, expenses, and potential self-employment tax.

Classification of Personal Property Rentals

The tax code treats personal property rentals in three ways:

1. Business. If your primary purpose is to earn income and the activity is continuous, it is considered a business. You must report the income on Schedule C, subject to self-employment tax.
2. For-profit activity. If the rental is profit-motivated but sporadic, it’s a for-profit activity. You report the income on Schedule 1. There’s no self-employment tax.
3. Not-for-profit activity. If the rental activity is primarily for personal reasons (e.g., for recreation), it is considered not-for-profit. You report the income on Schedule 1, but cannot deduct expenses related to the activity.

Renting to Your Own Business

If you rent personal property to your own business, the tax implications depend on the business structure:

Sole proprietorship or single-member LLC. Rentals between you and your business are not taxable events.

Corporation, partnership, or multi-member LLC. Renting to your business is a taxable event. The business can deduct rental payments, and you report the income on your tax return.

For C corporations, this can help avoid double taxation, as rent payments are taxed only once as income to you.

Self-Rental Rule

The “self-rental” rule applies to renting personal property to a business in which you materially participate. The rule works like this:

• If the rental activity produces net income, it is characterized as non-passive income, meaning you can’t deduct passive losses against this income. 
• If the rental activity creates a loss, the loss continues as a passive loss, which you can offset only with passive income.

Key point. Self-rental gives you the worst of both worlds—passive classifications.

Grouping

You can avoid the self-rental rules with the grouping election. You may group your property rental with your business when the group forms an appropriate economic unit and

• the rental activity is insubstantial relative to the business activity, or vice versa, or
• each owner of the business activity has the same proportionate ownership interest in the rental activity.

Caution 1. The tax code prohibits grouping real and personal property rentals.

Exception. If you rent the business building or office unit to your business and such rental includes furnished offices, the prohibition on combining activities does not apply. You can group with the business activity under the grouping rules above.

Caution 2. The self-rental grouping election does not work with a C corporation.

If you want to discuss personal property rentals, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 1, 2024