Tax

After years of delays, the first stage of the Corporate Transparency Act (CTA) goes into effect on January 1, 2024. It imposes a new federal filing requirement for most corporations and limited liability companies (LLCs) formed in 2024 and later.

The CTA’s purpose is to prevent the use of anonymous shell companies for money laundering, tax evasion, and other illegal purposes. But it applies to honest business owners as well as criminals.

The CTA does not apply to all new businesses. It applies only to entities such as corporations, LLCs, and others formed by filing a document with a state secretary of state or similar official. It doesn’t apply to sole proprietors.

Some businesses are exempt, including

• large businesses—businesses with more than 20 full-time employees and $5 million in receipts on their prior-year tax return,
• certain businesses already heavily regulated by the government, such as banks and insurance companies,
• nonprofits, and
• several others.

Note that the exemption for large businesses may apply to updates but not to the initial formation because there is no prior-year tax return.

The CTA’s purpose is to compile a massive government database containing the identities and contact information of the “beneficial owners” of most types of business entities. Beneficial owners are the humans who own or exercise substantial control over the entity.

For most reporting companies, identifying the beneficial owners is simple. For example, a three-member LLC in which each member has a one-third ownership interest has three beneficial owners. Identifying beneficial owners for reporting companies with complex ownership structures can be more difficult.

Here’s what happens if you form a new LLC or corporation in 2024. Within 90 days of formation, you must file the beneficial owner information report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit. The report must contain the following for each beneficial owner:

• Full legal name
• Date of birth
• Complete current residential street address
• A unique identifying number from a current U.S. passport, state or local ID document, driver’s license, or foreign passport
• An image of the document that contains the unique identifying number

You must provide similar information for the people who filed the documents to form the entity, such as the articles of incorporation or articles of organization for an LLC.

The beneficial owner information report is filed online at a new federal database called BOSS (an acronym for Beneficial Ownership Secure System). You can’t file until January 1, 2024. You don’t pay any filing fees. The information in the BOSS database is strictly for use by law enforcement, the IRS, and other government agencies. FinCEN does not disclose the BOSS information to the public.

BOSS reporting is separate from your state and local filings when forming a new business entity. But from now on, filing the BOSS report must become a routine part of creating most new business entities.

If you want my help with your BOSS reporting, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 7, 2023

If you can convert a personal vehicle to business use, you likely can increase your tax benefits—and do that without spending any money or driving another business mile.

Here’s an example: Once Mel and Sharpe, his wife, started using both cars, they had 73.7 percent business use of each car. Before their agreement to switch cars every week, Mel drove one car and achieved 93.3 percent business use. After the switch, business miles applied to each car.

If you are single and have two or more vehicles, you likely come out ahead by using all vehicles for business. Why? Let’s look at an example.

Jim has three cars with the following basis for depreciation:

• $50,000 for vehicle 1
• $33,000 for vehicle 2
• $27,000 for vehicle 3

If Jim drives only vehicle 1 for business, the most he could deduct for depreciation would be $50,000. But if he drives all three, the most he could deduct would be $110,000.

You get the idea.

Now, let’s get into some of the rules.

Depreciating the Former Personal Vehicle

When you convert a personal vehicle to business use, the law sees you as placing the vehicle in service in your business at that time. That means on that placed-in-service date, you can begin depreciating the asset and claiming your tax deductions.

To determine the basis for depreciation, use the lesser of

• fair market value on the date of conversion from personal to business use; or
• adjusted basis of the property (generally the amount you paid for the vehicle plus the cost of any improvements).

Example 1. Your spouse paid $43,000 for her personal vehicle. Today, the day you convert it to business use, it has a fair market value of $31,000. Your basis for depreciation is $31,000.

Bonus Depreciation and Section 179 Expensing

You may not use Section 179 expensing on assets that you convert from personal to business use.

But you likely can use bonus depreciation. This depends on when you acquired the vehicle that you are converting from personal to business use:

• If you acquired the vehicle before September 28, 2017, you may not claim bonus depreciation by converting that vehicle to business use in 2023.
• If you acquired the vehicle on or after September 28, 2017, you use today’s 2023 bonus depreciation rules on the converted vehicle.

Example 2. Henry converts his 2016 personal SUV to business use in 2023. He may not claim bonus depreciation on the 2016 SUV.

Example 3. Helen converts her personal 2021 SUV, which has a gross vehicle weight rating (GVWR) of over 6,000 pounds, to business use in 2023 when it has a fair market value of $35,000—far less than the $60,000 she paid for it. Helen will use the SUV 70 percent for business.

She can deduct $19,600 in bonus depreciation ($35,000 x 70 percent business use x 80 percent bonus depreciation). In addition, Helen can claim MACRS depreciation on the remaining basis and 70 percent of her vehicle operating expenses.

Bonus Depreciation Rule You Must Know

The law makes bonus depreciation your method of depreciation if you don’t elect out of it on your tax return. This is unusual. Generally, to qualify for an additional tax break, you must take action. But with bonus depreciation, you are in for the tax break if you don’t elect out of it.

And beware: when you “don’t elect out” of bonus depreciation, the 80 percent 2023 bonus depreciation deduction applies to all assets in the class.

Example 4. You place in service a vehicle that’s in the five-year class, and also seven other non-vehicle five-year-class assets. You must claim 80 percent bonus depreciation on either (a) all eight assets or (b) none.

Key point. To get to the “none,” you must elect out of bonus depreciation for this class of assets on your tax return.

Three Bonus Depreciation Basics for Vehicles

1. Optional mileage rates. When, during 2023, you place a business vehicle in service and elect to use the IRS optional mileage rate of 65.5 cents a mile, your 28 cents-a-mile depreciation deduction is included inside the 65.5 cent mileage rate. So for the optional mileage rate user, that’s it—there’s no bonus or other depreciation.

2. Heavy vehicles. SUVs, crossover vehicles, pickup trucks with beds six feet long or longer, cargo vans, and certain passenger vans with GVWRs in excess of 6,000 pounds are exempt from the luxury vehicle limits and thus qualify for 2023 bonus depreciation of up to 80 percent.

3. Luxury passenger vehicles. Cars with curb weights of 6,000 pounds or lighter and SUVs and other vehicles from number 2 above with GVWRs of 6,000 pounds or less with acquisition dates after September 27, 2027, qualify for bonus depreciation of up to $8,000.

Basis When You Sell

There’s a trick to basis when you sell property that you converted from personal to business use—you have a rule for calculating losses and then a different rule for calculating gains:

• Losses. To calculate losses, use your tax return’s adjusted basis (i.e., the lower of cost or market basis at time of conversion minus depreciation).
• Gains. To calculate gains, use original cost basis minus post-conversion depreciation. In most cases, original cost gives you a higher basis and thus less tax on your gains. So don’t accidentally use adjusted basis.

Takeaways

When it comes to your taxes, most personal assets other than your home are disappointments because

• you pay taxes on the personal gains, and
• you may not deduct the personal losses.

But when you convert a personal vehicle or other personal asset to business use, you create tax benefits. And you create these new tax benefits without spending any new money.

If you want to discuss converting personal assets to business use, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 3, 2023

As the year winds down, many of our clients look toward clothing and household item donations as a means to give back and optimize tax deductions.

Recent cases, such as the one involving Duncan Bass, highlight the importance of understanding and following the IRS regulations concerning these contributions.

Mr. Bass made a staggering 172 trips to Goodwill and the Salvation Army, cleverly keeping each donation receipt below the $250 threshold. Unfortunately, he overlooked the aggregation of similar items and appraisal rules.

But before getting to aggregation and appraisal, what is the $250 rule? If you make a single charitable contribution of $250 or more, you must obtain a written acknowledgment from the charitable organization to substantiate your deduction. This is often called a “contemporaneous written acknowledgment.”

• It must confirm the amount of cash or a description of any property contributed by you.
• It must state whether the charity provided you any goods or services in exchange for the gift. If so, it must provide a description and a good faith estimate of the value of those goods or services.
• It must state that the only benefit you received was an intangible religious benefit, if that was the case.

If you make several smaller gifts to the same charity throughout the year, you need an acknowledgment only if any single gift is $250 or more.

Assigning fair market value. This can be the most challenging aspect. The fair market value isn’t what you paid for an item, but rather what it’s worth now. Several reputable resources, including The Salvation Army and Goodwill, provide donation value guides.

Over $5,000. If you claim a deduction of over $5,000 for a non-cash charitable contribution of one item or a group of similar items, you must obtain a qualified appraisal of such item or group of items and attach it to your tax return.

Key point. Note that a “group of similar items” can trigger the appraisal requirement. That’s what happened to Mr. Bass. His 172 trips were for clothing donations totaling $13,852 and $11,594 for the two years before the court—well over the $5,000 appraisal requirement for the group.

If you want to discuss your charitable giving strategy, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 31, 2023