Tax

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

If your tax return shows a refund, you probably expect the IRS will pay that total amount when it processes your tax return. Unfortunately, this is not always the case. 

The Treasury Department can and does deduct from your tax refund certain debts owed to various government agencies. Such a deduction is called a “tax refund offset.” 

The Department of the Treasury Bureau of the Fiscal Service (BFS) processes tax refunds and runs the federal Treasury Offset Program. BFS is not part of the IRS.

If you owe any of the following types of debts, the creditor agency can notify BFS to add your debt to its database of delinquent debts:

• Child support
• Spousal support
• State income tax
• Federally insured student loans
• Debts owed to federal agencies such as the Small Business Administration
• Unemployment compensation debts

The IRS can deduct unpaid federal income taxes from refunds, but this is not part of the Treasury Offset Program.

A refund offset shouldn’t be a surprise, because you must be given notice before it occurs. The agency involved must send you a notice of intent to offset the debt at the name and address on file, at least 60 days before referring the debt to BFS (65 days for school loans).

Once you receive such a notice, you must act quickly to avoid the refund offset. You can prevent a refund offset by paying what you owe or entering into a payment plan with the creditor agency. You can request a review by the agency if you believe you don’t owe the debt or the amount owed is incorrect (you must submit evidence proving this). 

Contact the agency that imposed the offset, not the IRS or BFS. Neither the IRS nor BFS has the authority or the necessary information to help you. Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.

If you filed a joint tax return and the debt was owed by your spouse, not you, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. The IRS will compute your share of the tax refund and pay it to you.

The easiest way to avoid an offset is to have no tax refund (or a small refund). To avoid a refund while also avoiding penalties for underpaying your taxes, you must be sure that your withholding and/or estimated tax payments match the amount of tax you owe for the year. This isn’t always possible, but it should be your goal. 

In any event, large refunds are not good tax planning—they are an interest-free loan to the IRS.

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

• By Leon Clinton
• October 29, 2024