Also see: 2024 Year-End Tax Planning for Individuals.

2024 Year-End Tax Planning for Businesses (Client Letter Included)

(Parker Tax Publishing November 2024)

The second installment of Parker's annual two-part series on year-end tax planning reviews the changes affecting businesses for 2024 as well as some strategies clients can utilize to minimize their business's 2024 tax bill.

Practice Aid: Use Parker's Sample Client Letter as a template or just sign your name at the bottom. See Our Sample Client Letter (Businesses).

The following are some of the considerations to review when deciding what year-end actions may reap the biggest tax benefits for a client's business. The list includes clean energy incentives that were enacted as part of the Inflation Reduction Act of 2022 (Pub. L. 117-169) (2022 IRA), as well as retirement plan provisions enacted by the SECURE 2.0 Act of 2022 (Pub. L. 117-328).

Section 179 Expensing and Bonus Depreciation

Generally, the two most popular tax deductions for businesses are the Code Sec. 179 expense deduction and the bonus depreciation deduction. For years beginning in 2024, businesses can deduct 60 percent (rather than 80 percent for 2023) of the purchase price of qualified property. The percentage continues to decrease by 20 points until it is completely phased out in 2027. Thus, businesses have a greater incentive to take advantage of the bonus depreciation in earlier years if they can.

The bonus depreciation rules apply unless a taxpayer elects out of those rules. An election out may be advisable where a business has a loss for the year and will get no benefit from the loss. Most businesses no longer have the option to carryback a net operating loss (NOL) and NOLs arising in tax years ending after 2020 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, the NOL deduction for tax years beginning after December 31, 2020, is limited to 80 percent of the excess (if any) of taxable income (determined without regard to certain deductions) over the total NOL deduction from NOLs arising in tax years beginning before January 1, 2018.

By not taking bonus depreciation in the current year, a business can defer depreciation deductions into future years when it expects to have taxable income that can be offset by the depreciation deductions. Of course, where the business is operated through a flow-through entity, additional considerations must be given to the tax situation of the owner of the flow-through entity and whether the owner can benefit from the flow-through of the bonus depreciation deductions.

Since the Code Sec. 179 expense deduction can't reduce taxable income, this is a better option for clients with taxable income. For 2024, the maximum Code Sec. 179 expense deduction is $1,220,000. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during the year exceeds $3,050,000.

If a client is looking for business-related property to purchase in order to reap the maximum benefit of the Code Sec. 179 expense deduction and/or the bonus depreciation deduction, a vehicle purchase could result in a substantial tax savings. By purchasing a sport utility vehicle weighing more than 6,000 pounds, a client can obtain a bigger deduction than if a smaller vehicle is purchased. Because vehicles that weigh 6,000 pounds or less are considered listed property, deductions are limited to $20,400 for cars, trucks and vans acquired and placed in service in 2024. However, if the vehicle weighs more than 6,000 pounds, up to $30,500 of the cost of the vehicle can be immediately expensed.

Retirement Plans and Employee Benefits

A business may reap substantial tax benefits, as well as non-tax benefits, by offering a retirement plan and/or other fringe benefits to employees. Businesses that offer such benefits have a better chance of attracting and retaining talented workers which, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and the business may be eligible for a tax credit for setting up a qualified plan.

In addition, business owners and spouses can take advantage of the retirement plan themselves. Where a spouse is not currently on the payroll of a business, consideration should be given to adding the spouse as an employee and paying a salary up to the maximum amount that can be deferred into a retirement plan. If the spouse of a business owner is 50 years old or over and receives a salary of $30,500, all of it could go into a 401(k), leaving him or her with a retirement account but no current year taxable income.

To help employees with medical expenses, a business might consider setting up a high deductible health plan paired with a health savings account (HSA). The benefits to the business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA and the funds can grow tax free and be used in retirement.

Another employee benefit a business might consider is the establishment of a flexible spending arrangement (FSA). An FSA allows employees to be reimbursed for medical expenses or dependent care expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Contributions made by the business are excludible from the employee's gross income and thus no employment or federal income taxes apply to the contributions. Reimbursements to the employee are tax free if used for qualified medical or dependent care expenses, and the FSA can be used to pay qualified expenses even if the employer or employee haven't yet placed the funds in the account.

Employers can also offer de minimis financial incentives, not paid for with plan assets (for example, low-dollar gift cards), to boost employee participation in retirement plans. In Notice 2024-2, the IRS advised that such an incentive qualifies as de minimis only if it does not exceed $250 in value.

In addition, the following tax credits may be available for employers that offer benefits such as paid leave, retirement benefits, and health insurance.

Credit for Paid Family and Medical Leave. Under Code Sec. 45S, eligible employers may claim a general business credit equal to 12.5 percent of the wages paid to qualifying employees while such employees are on paid leave. The rate of payment must be at least 50 percent of the wages normally paid to the employee, and the employer is required to have a written policy that provides family and medical leave to all employees on a non-discriminatory basis.

Credit for Small Employer Pension Plan Startup Costs. The Code Sec. 45E credit for small employer pension plan startup costs allows businesses with 50 or fewer employees that do not currently offer a retirement plan to claim a credit for 100 percent of the administrative costs of setting a qualified employer plan. For employers with 51-100 employees, the credit applies for 50 percent of qualified startup costs. An additional credit of up to $1,000 per employee is available for qualified employer contributions. This additional credit, which is calculated as a percentage of the amount contributed by the employer on behalf of employees, applies for the first tax year the eligible employer plan becomes effective and the succeeding 4 tax years.

Small Employer Contributions Credit. Businesses that employ 25 or fewer full-time employees can claim a credit under Code Sec. 45R for contributions made on employees' behalf for premiums for qualified health plans offered by the employer. The credit amount is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement. The credit is available to eligible employers only for a two-consecutive-year credit period.

Small Employer Auto-Enrollment Credit. Employers with new or existing retirement plans can claim a credit for adding an auto-enrollment feature. The credit is $500 per year for the three-year period beginning with the first year auto-enrollment is made available to employees.

Military Spouse Participation Credit: Employers with 1-100 employees can claim a credit for enrolling military spouse employees in their retirement plan. The amount of the credit is $200 for employing a military spouse who participates in employer's defined contribution plan within 2 months of being hired, plus 100 percent of the contributions made, up to $300. The maximum credit is $500 and may be claimed for the first 3 years the military spouse participates in the plan.

Qualified Business Income Deduction

For an individual operating as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction under Code Sec. 199A can significantly reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily-defined amount (i.e., the threshold amount). For any tax year beginning in 2024, the threshold amount is $383,900 for married filing joint returns, $191,950 for married filing separately, and $191,950 for all other returns.

Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income. The QBI deduction does not apply to a "specified service trade or business," which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.

Rental Real Estate Considerations

For clients with real estate businesses that generated losses, it's important to determine whether such losses from the activity are deductible. Generally, passive activity losses are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent an individual actively participates in the rental real estate activities. However, the deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately).

Rental real estate enterprises operated by individuals and owners of passthrough entities may also qualify for the QBI deduction if certain criteria are met. For example, in order to qualify for the deduction, a taxpayer's rental activity must be considerable, regular, and continuous in scope. In determining whether a rental real estate activity meets this criteria, relevant factors include, but are not limited to, the following:

(1) the type of rented property (commercial real property versus residential property);

(2) the number of properties rented;

(3) the taxpayer's or taxpayer's agent's day-to-day involvement;

(4) the types and significance of any ancillary services provided under the lease; and

(5) the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).

A rental real estate activity will be treated as a business eligible for the QBI deduction if certain safe harbor requirements are satisfied, such as:

(1) separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;

(2) for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);

(3) contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and

(4) certain compliance requirements are met.

Thus, to qualify for the QBI deduction, it's essential to determine if the safe harbor conditions are met and, if not, whether such conditions can be met by year end. Alternatively, even if the safe harbor requirements are not met, certain actions may be taken to ensure that a taxpayer's real estate business falls within the "trade or business" guidelines for taking the deduction.

Meal and Entertainment Expenses

The business deduction allowable for food or beverage expenses paid or incurred in 2024 is limited to 50 percent of the amount which would otherwise be allowable as a deduction. Entertainment expenses are generally not deductible.

Vehicle-Related Deductions and Substantiation Requirements

Deductions relating to vehicles are generally part of any business tax return. Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not properly substantiated, it's important to remind business clients that the following should be part of their business's tax records with respect to each vehicle used in the business:

(1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);

(2) the amount of mileage for each business or investment use and the total miles for the tax period;

(3) the date of the expenditure; and

(4) the business purpose for the expenditure.

The following are considered adequate for substantiating such expenses:

(1) records such as a notebook, diary, log, statement of expense, or trip sheets; and

(2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Increasing Basis in Pass-thru Entities

If a client is a partner in a partnership or a shareholder in an S corporation, and the entity is expecting to pass through a loss for the year, it's important to determine if the partner or shareholder has enough basis to absorb the loss. If not, then actions should be taken before the end of the entity's tax year to increase basis, if possible. Generally, this is done by contributing or loaning money to the entity.

S Corporation Shareholder Salaries and Benefits

For any business operating as an S corporation, it's important to ensure that shareholders involved in running the business are paid an amount that is commensurate with their workload. The IRS scrutinizes S corporations which distribute profits instead of paying compensation subject to employment taxes. Failing to pay arm's length salaries can lead not only to tax deficiencies, but penalties and interest on those deficiencies as well. The key to establishing reasonable compensation is being able to show that the compensation paid for the type of work an owner-employee does for the S corporation is similar to what other corporations would pay for similar work. Practitioners should document in their workpapers the factors that support the salary being paid to a shareholder.

Also, because there are stringent requirements for who may be an S corporation shareholder, it's prudent to check annually as to the residency or citizenship status of S corporation shareholders and S stock beneficiaries (including contingent and residuary beneficiaries).

Energy Efficient Commercial Buildings Deduction

A business that owns or leases a commercial building may qualify for the deduction under Code Sec. 179D for the cost of "energy efficient commercial building property" (EECBP) placed in service during the tax year. EECBP includes property installed as part of the building's interior lighting systems; heating, cooling, ventilation, and hot water (HVAC) systems; or the building envelope that is certified as being installed as part of a plan to reduce the total energy and power costs for these systems. An alternative deduction is available for energy efficient lighting, HVAC, and building envelope costs placed in service in connection with a qualified retrofit plan. The amount of the Code Sec. 179D deduction generally equals the lesser of (1) the cost of the EECBP placed in service during the tax year or (2) the energy savings per square foot, reduced by the aggregate amount of the Code Sec. 179D deductions taken with respect to the building for the previous 3 tax years.

Clean Vehicle Credits

The credit for purchasing and placing in service a new clean vehicle is available to individuals but can also be claimed as a general business credit for vehicles used in a business. The qualified commercial clean vehicle credit is a separate credit available for businesses that purchase and place in service a commercial clean vehicle.

New Clean Vehicle Credit. The new clean vehicle credit under Code Sec. 30D is a credit of up to $7,500 for the year a taxpayer places in service a new clean vehicle, final assembly of which occurs in North America. The credit amount equals $3,750 for vehicles meeting a critical minerals requirement plus $3,750 for vehicles meeting a battery component requirement.

The Code Sec. 30D credit is not available to taxpayers whose adjusted gross income (AGI) for the year is over $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (single). Price limits (i.e., MSRP limitations) also apply depending on the type of the vehicle ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles).

If a partnership or an S corporation places a new clean vehicle in service, and the new clean vehicle credit is claimed by individuals who are partners of the partnership or shareholders of the S corporation, the AGI thresholds apply to those partners or shareholders. In addition, if a new clean vehicle is used both for personal and business use, and the business use of the vehicle is less than 50 percent of the total use of the vehicle, the credit must be apportioned and treated as a general business credit corresponding to the percentage of the business use.

The Department of Energy provides a list at FuelEconomy.gov of qualifying vehicles with the credit amount for each vehicle and the applicable MSRP limitation.

Qualified Commercial Clean Vehicles Credit. Under Code Sec. 45W, a credit is available for qualified commercial electric vehicles placed into service and used in a trade or business by the taxpayer. The amount of credit is the lesser of (1) 15 percent of the taxpayer's basis in the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel engine) or (2) the "incremental cost" of the vehicle. The credit is limited to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.

A "qualified commercial clean vehicle" is defined as any vehicle that is (1) used in the taxpayer's trade or business or for the production of income, (2) acquired for use or lease by the taxpayer and not for resale, (3) treated as a motor vehicle under the Clean Air Act and is (i) manufactured primarily for use on public roads or (ii) mobile machinery, and (4) propelled to a significant extent by an electric motor which draws electricity from a rechargeable battery. The "incremental cost" of the vehicle generally means the excess of the purchase price over the price of a comparable vehicle that is powered solely by a gasoline or diesel internal combustion engine. Under a safe harbor rule for 2024 provided by the IRS in Notice 2024-5, the incremental cost will not limit the available credit amount for street vehicles that weigh less than 14,000 pounds and are placed in service in calendar year 2024.

Observation: The credit under Code Sec. 25E for the purchase of a previously-owned clean vehicle applies only to individuals and is not available to businesses.

Credits for Production of and Investment in Clean Electricity

The production tax credit under Code Sec. 45 is an inflation-adjusted per-kilowatt hour (kWh) credit for electricity generated wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, and marine and hydrokinetic renewable energy, and sold to an unrelated person during the tax year. Projects must begin construction before January 1, 2025, and the credit applies for the first 10 years of a system's operation. For systems more than 1 megawatt in size, prevailing wage and apprenticeship requirements apply. In addition, bonus credit amounts apply for projects of any size that meet certain domestic content requirements or are placed in service within an "energy community" (i.e., brownfield sites and certain other areas).

The investment tax credit under Code Sec. 48 is a credit for a percentage of the cost of solar energy property, geothermal property, fiber-optic solar property, fuel cell property, microturbine property, small wind property, offshore wind property, combined heat and power property, and waste energy recovery property that is installed during the tax year. Construction must begin before January 1, 2025. The provision provides a base credit rate of 2 or 6 percent of the basis of energy property or a bonus credit rate of 10 or 30 percent of the basis of energy property if prevailing wage and apprenticeship requirements are met. Bonus credit amounts apply for projects that meet certain domestic content requirements or are placed in service within an energy community.

Research and Development Expenditures

The previously-allowed deduction for research and development expenses expired at the end of 2021, and such expenses must now be amortized over five years. However, a business that engages in certain types of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit. Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (i.e., a business with less than $5 million in gross receipts and that is under five years old) to apply up to $500,000 of the research credit toward its social security payroll tax liability.

Impact of the 2024 Election

As a result of the November 5 elections, Republicans will gain unified control of the White House and both houses of Congress. Tax legislation is therefore likely to be a top priority early next year as lawmakers seek to prevent many of the individual tax provisions enacted under the Tax Cuts and Jobs Act of 2017 (TCJA) from expiring at the end of 2025. For businesses, the legislation is likely to include a restoration of full 100-percent bonus depreciation and the immediate deduction for research and development expenses. President-elect Trump's proposal to lower the corporate tax rate for companies that produce goods in the United States could also be included. However, given the Republicans' narrow majorities in Congress and the limits imposed by the budget reconciliation process, the ultimate size and scope of TCJA 2.0 is uncertain.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com