Intangible assets, such as patents, trademarks, copyrights and goodwill, play a crucial role in today’s businesses. The tax treatment of these assets can be complex, but businesses need to understand the issues involved. Here are some answers to frequently asked questions.

What are intangible assets?

The term “intangibles” covers many items. Determining whether an acquired or created asset or benefit is intangible isn’t always easy. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to, options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entities (for example, corporations, partnerships, LLCs, trusts and estates) and other rights, assets, instruments and agreements.

What are the expenses?

Some examples of expenses you might incur to acquire or create intangibles that are subject to the capitalization rules include amounts paid to:

• Obtain, renew, renegotiate or upgrade business or professional licenses,
• Modify certain contract rights (such as a lease agreement),
• Defend or perfect title to intangible property (such as a patent), and
• Terminate certain agreements, including, but not limited to, leases of tangible property, exclusive licenses to acquire or use your property, and certain non-competition agreements.

IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it’s paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any business and many ordinary business transactions. Examples of costs that facilitate the acquisition or creation of an intangible include payments to:

• Outside counsel to draft and negotiate a lease agreement,
• Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder,
• Outside consultants to investigate competitors in preparing a contract bid, and
• Outside counsel for preparing and filing trademark, copyright and license applications.

Why are intangibles so complex?

IRS regulations require the capitalization of costs to:

• Acquire or create an intangible asset,
• Create or enhance a separate, distinct intangible asset,
• Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
• “Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

Are there any exceptions to the rules?

Like most tax rules, these capitalization rules have exceptions. Taxpayers can also make certain elections to capitalize items that aren’t ordinarily required to be capitalized. The examples described above aren’t all-inclusive. Given the length and complexity of the regulations, transactions involving intangibles and related costs should be analyzed to determine the tax implications.

For assistance and more information

Properly managing the tax treatment of intangible assets is vital for businesses to maximize tax benefits and ensure compliance with tax regulations. Contact us to discuss the capitalization rules and determine whether any costs you’ve paid or incurred must be capitalized, or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.

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Understanding how to deduct transportation costs could significantly reduce the tax burden on your small business. You and your employees likely incur various local transportation expenses each year, and they have tax implications.

Let’s start by defining “local transportation.” It refers to travel when you aren’t away from your tax home long enough to require sleep or rest. Your tax home is the city or general area in which your main place of business is located. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest to do your work.

Your work location

The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive to get to work and home again are personal and not for business purposes. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone or laptop, performing business-related tasks on the subway).

An exception applies for commuting to a temporary work location outside of the metropolitan area where you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does, in fact, last) for no more than a year.

Work location to other sites

On the other hand, once you get to your work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the cost of traveling between them is deductible.

Recordkeeping

If your deductible trip is by taxi or public transportation, save a receipt or note the expense in a logbook. Record the date, amount spent, destination and business purpose. If you use your own car, note the miles driven instead of the amount spent. Also, note any tolls paid or parking fees, and keep receipts.

You must allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.

Your deduction can be computed using:

1. The standard mileage rate (for 2024, 67 cents per business mile) plus tolls and parking, or
2. Actual expenses (including depreciation, subject to limitations) for the portion of car use allocable to the business. For this method, you’ll need to keep track of all costs for gas, repairs and maintenance, insurance, interest on a car loan, and any other car-related costs.

Employees vs. self-employed

From 2018–2025, under the Tax Cuts and Jobs Act, employees can’t deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — including employee business expenses — are suspended (not allowed) for these years. (Self-employed taxpayers can deduct the expenses discussed in this article.) But beginning in 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income. However, with Republican control in Washington, this unfavorable provision may be extended by Congress, and miscellaneous itemized deductions won’t be allowed.

Contact us with any questions or to discuss these issues further.

© 2024

As a small business owner, managing health care costs for yourself and your employees can be challenging. One effective tool to consider adding is a Health Savings Account (HSA). HSAs offer a range of benefits that can help you save on health care expenses while providing valuable tax advantages. You may already have an HSA. It’s a good time to review how these accounts work because the IRS has announced the relevant inflation-adjusted amounts for 2025.

HSA basics

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Employees can’t be enrolled in Medicare or claimed on someone else’s tax return.

Here are the key tax benefits:

• Contributions that participants make to an HSA are deductible, within limits.
• Contributions that employers make aren’t taxed to participants.
• Earnings on the funds within an HSA aren’t taxed so the money can accumulate tax-free year after year.
• HSA distributions to cover qualified medical expenses aren’t taxed.
• Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Key 2024 and 2025 amounts

To be eligible for an HSA, an individual must be covered by a “high-deductible health plan.” For 2024, a high-deductible health plan has an annual deductible of at least $1,600 for self-only coverage or at least $3,200 for family coverage. For 2025, these amounts are $1,650 and $3,300, respectively.

For self-only coverage, the 2024 limit on deductible contributions is $4,150. For family coverage, the 2024 limit on deductible contributions is $8,300. For 2025, these amounts are increasing to $4,300 and $8,550, respectively. Additionally, for 2024, annual out-of-pocket expenses for covered benefits can’t exceed $8,050 for self-only coverage or $16,100 for family coverage. For 2025, these amounts are increasing to $8,300 and $16,600.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2024 and 2025 of up to $1,000.

Making contributions for your employees

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can build for years. An employer that decides to make contributions on its employees’ behalf must generally make similar contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make similar contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Using funds to pay medical expenses

Your employees can take HSA distributions to pay for qualified medical expenses. This generally means expenses that would qualify for the medical expense itemized deduction. They include costs for doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

The withdrawal is taxable if funds are withdrawn from the HSA for any other reason. Additionally, an extra 20% tax will apply to the withdrawal unless it’s made after age 65 or in the case of death or disability.

As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us with questions or if you’d like to discuss offering this benefit to your employees.

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You’re not alone if you’re confused about the federal tax treatment of business-related meal and entertainment expenses. The rules have changed in recent years. Let’s take a look at what you can deduct in 2024.

Current law

The Tax Cuts and Jobs Act eliminated deductions for most business-related entertainment expenses. That means, for example, that you can’t deduct any part of the cost of taking clients out for a round of golf or to a football game.

You can still generally deduct 50% of the cost of food and beverages when they’re business-related or consumed during business-related entertainment.

Allowable food and beverage costs

IRS regulations clarify that food and beverages are all related items whether they’re characterized as meals, snacks, etc. Food and beverage costs include sales tax, delivery fees and tips.

To be 50% deductible, food and beverages consumed in conjunction with an entertainment activity must: be purchased separately from the entertainment or be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages. You can deduct 50% of the approximate reasonable value if they aren’t purchased separately.

Other rules

Per IRS regulations, no 50% deduction for the cost of business meals is allowed unless:

1. The meal isn’t lavish or extravagant under the circumstances.
2. You (as the taxpayer) or an employee is present at the meal.
3. The meal is provided to you or a business associate.

Who are business associates? They’re people with whom you reasonably expect to conduct business — such as established or prospective customers, clients, suppliers, employees or partners.

IRS regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself — for example, because you’re working late at night.

Traveling on business

Per IRS regulations, the general rule is that you can still deduct 50% of the cost of meals while traveling on business. The longstanding rules for substantiating meal expenses still apply. Message: keep receipts.

IRS regulations also reiterate the longstanding general rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals accompanying you on business travel. (This is also true for spouses and dependents accompanying an officer or employee on a business trip.)

The exception is when the expenses would otherwise be deductible. For example, meal expenses for your spouse are deductible if he or she works at your company and accompanies you on a business trip for legitimate business reasons.

100% deductions in certain situations

IRS regulations confirm that some longstanding favorable exceptions for meal and entertainment expenses still apply. For example, your business can deduct 100% of the cost of:

• Food, beverage, and entertainment incurred for recreational, social, or similar activities that are primarily for the benefit of all employees (for example, at a company holiday party);
• Food, beverages, and entertainment available to the general public (for example, free food and music you provide at a promotional event open to the public);
• Food, beverages and entertainment sold to customers for full value;
• Amounts that are reported as taxable compensation to recipient employees; and
• Meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, a customer wins a dinner cruise for ten valued at $750 at a sales presentation).

In addition, a restaurant or catering business can deduct 100% of the cost of food and beverages purchased to provide meals to paying customers and consumed at the worksite by employees who work in the restaurant or catering business.

Bottom line

Business-related meal deductions can be valuable, but the rules can be complex. Contact us if you have questions or want more information.

© 2024

If you own a growing, unincorporated small business, you may be concerned about high self-employment (SE) tax bills. The SE tax is how Social Security and Medicare taxes are collected from self-employed individuals like you.

SE tax basics

The maximum 15.3% SE tax rate hits the first $168,600 of your 2024 net SE income. The 15.3% rate is comprised of the 12.4% rate for the Social Security tax component plus the 2.9% rate for the Medicare tax component. For 2025, the maximum 15.3% SE tax rate will hit the first $176,100 of your net SE income.

Above those thresholds, the SE tax’s 12.4% Social Security tax component goes away, but the 2.9% Medicare tax component continues for all income.

How high can your SE tax bill go? Maybe a lot higher than you think. The real culprit is the 12.4% Social Security tax component of the SE tax, because the Social Security tax ceiling keeps getting higher every year.

To calculate your SE tax bill, take the taxable income from your self-employed activity or activities (usually from Schedule C of Form 1040) and multiply by 0.9235. The result is your net SE income. If it’s $168,600 or less for 2024, multiply the amount by 15.3% to get your SE tax. If the total is more than $168,600 for 2024, multiply $168,600 by 12.4% and the total amount by 2.9% and add the results. This is your SE tax.

Example: For 2024, you expect your sole proprietorship to generate net SE income of $200,000. Your SE tax bill will be $26,706 (12.4% × $168,600) + (2.9% × $200,000). That’s a lot!

Projected tax ceilings for 2026–2033

The current Social Security tax on your net SE income is expensive enough, but it will only worsen in future years. That’s because your business income will likely grow, and the Social Security tax ceiling will continue to increase based on annual inflation adjustments.

The latest Social Security Administration (SSA) projections (from May 2024) for the Social Security tax ceilings for 2026–2033 are:

• 2026 – $181,800
• 2027 – $188,100
• 2028 – $195,900
• 2029 – $204,000
• 2030 – $213,600
• 2031 – $222,900
• 2032 – $232,500
• 2033 – $242,700

Could these estimated ceilings get worse? Absolutely, because the SSA projections sometimes undershoot the actual final numbers. For instance, the 2025 ceiling was projected to be $174,900 just last May, but the final number turned out to be $176,100. But let’s say the projected numbers play out. If so, the 2033 SE tax hit on $242,700 of net SE income will be a whopping $37,133 (15.3% × $242,700).

Disconnect between tax ceiling and benefit increases

Don’t think that Social Security tax ceiling increases are linked to annual Social Security benefit increases. Common sense dictates that they should be connected, but they aren’t. For example, the 2024 Social Security tax ceiling is 5.24% higher than the 2023 ceiling, but benefits for Social Security recipients went up by only 3.2% in 2024 compared to 2023. The 2025 Social Security tax ceiling is 4.45% higher than the 2024 ceiling, but benefits are going up by only 2.5% for 2025 compared to 2024.

The reason is that different inflation measures are used for the two calculations. The increase in the Social Security tax ceiling is based on the increase in average wages, while the increase in benefits is based on a measure of general inflation.

S corporation strategy

While your SE tax bills can be high and will probably get even higher in future years, there may be potential ways to cut them to more manageable levels. For instance, you could start running your business as an S corporation. Then, you can pay yourself a reasonably modest salary while distributing most or all of the remaining corporate cash flow to yourself. That way, only your salary would be subject to Social Security and Medicare taxes. Contact us if you have questions or want more information about the SE tax and ways to manage it.

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How much can you and your employees contribute to your 401(k)s or other retirement plans next year? In Notice 2024-80, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for retirement plans, as well as other qualified plans, for 2025. With inflation easing, the amounts aren’t increasing as much as in recent years.

401(k) plans

The 2025 contribution limit for employees who participate in 401(k) plans will increase to $23,500 (up from $23,000 in 2024). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees age 50 or over who participate in 401(k) plans and the other plans mentioned above will remain $7,500 (the same as in 2024). However, under the SECURE 2.0 law, specific individuals can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are age 60, 61, 62 or 63 will be $11,250.

Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $34,750.

SEP plans and defined contribution plans

The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $69,000 to $70,000 in 2025. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will remain $750 in 2025.

SIMPLE plans

The deferral limit to a SIMPLE plan will increase to $16,500 in 2025 (up from $16,000 in 2024). The catch-up contribution limit for employees who are age 50 or over and participate in SIMPLE plans will remain $3,500. However, SIMPLE catch-up contributions for employees who are age 60, 61, 62 or 63 will be higher under a change made by SECURE 2.0. Beginning in 2025, they will be $5,250.

Therefore, participants in SIMPLE plans who are 50 or older can contribute $20,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $21,750.

Other plan limits

The IRS also announced that in 2025:

• The limitation on the annual benefit under a defined benefit plan will increase from $275,000 to $280,000.
• The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $220,000 to $230,000.
• The limitation used in the definition of “highly compensated employee” will increase from $155,000 to $160,000.

IRA contributions

The 2025 limit on annual contributions to an individual IRA will remain $7,000 (the same as 2024). The IRA catch-up contribution limit for individuals age 50 or older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.

Plan ahead

The contribution amounts will make it easier for you and your employees to save a significant amount in your retirement plans in 2025. Contact us if you have questions about your tax-advantaged retirement plan or want to explore other retirement plan options.

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