Posts in category: Tax, Advisory

As the landscape of charitable giving continues to evolve, 2026 ushers in significant changes in the tax treatment of donations. For both itemizers and non-itemizers, understanding the new rules is crucial to maximizing the benefits of charitable contributions and ensuring compliance with tax obligations. Among the key changes are new guidelines for non-itemizers wishing to claim deductions for cash donations, an adjusted gross income (AGI) floor for itemizers, and a phaseout of itemized deductions for high-income taxpayers. This article aims to provide an in-depth look at these developments and offer guidance for donors navigating the 2026 charitable giving landscape.

New Charitable Giving for Non-Itemizers: For most past years, taxpayers claiming the standard deduction have been unable to get a tax benefit for the charitable donations they made, as federal tax law typically has reserved this benefit for those who itemize deductions on their tax returns. However, changes in 2026 carve out a notable exception for cash donations.

Under the new provisions, non-itemizers can now claim a deduction for cash contributions, though it requires meeting a set of documentation standards. Non-itemizers must maintain bank records or written communication from the eligible charitable organizations to substantiate their donations. This requirement ensures that only legitimate contributions are deducted and underscores the importance of meticulous record-keeping. Examples of qualifying charities include churches, nonprofit educational and medical institutions, and public charities. Contributions to donor advised funds or supporting organizations do not qualify

One critical distinction for non-itemizers is the cash donation limitation. Unlike itemizers, who can potentially deduct a substantial percentage of their income, non-itemizers face more restrictive caps on their deductible contributions. For joint filers, the deduction limit is $2,000, and for other individuals the cap is $1,000. Donors should be aware that these limitations might influence their giving strategies.

New AGI Floor for Itemizers: For itemizers, the tax landscape is changing with the introduction of an AGI floor for charitable contributions. Starting in 2026, the One Big Beautiful Bill Act (OBBBA) imposes a 0.5% AGI floor for itemized deductions on charitable contributions. This new threshold means that only contributions exceeding 0.5% of a taxpayer’s AGI will be deductible. The rationale behind this change is to encourage substantial giving and ensure that deductions primarily benefit those with significant charitable activities.

Example: Consider a taxpayer with an AGI of $200,000. Under the new rule, only the amount contributed exceeding $1,000 (0.5% of AGI) will qualify for a deduction. This change emphasizes the need for strategic planning, as smaller donations might no longer provide the same tax incentives, potentially impacting the charitable strategies of many itemizing taxpayers.

The effect can be more profound for higher income taxpayers. For instance, a taxpayer with an AGI of $500,000, will be unable to get any tax benefit from the first $2,500 of charitable contributions. 

Cash Contribution AGI Limitation Made Permanent: In 2026, the 60% of AGI limitation for cash contributions was made permanent, offering a reliable option for taxpayers looking to maximize their charitable deductions. This means that donors can deduct cash contributions up to 60% of their AGI, which can be particularly advantageous for those inclined to give in cash rather than assets.

By comparison, other types of contributions, such as non-cash gifts, have different AGI limitations. Non-cash contributions face a 50% AGI cap, while contributions to most other organizations, like fraternal societies, are limited to 30% of AGI. When donating capital gain property, the limit is even tighter at 20% of AGI for gifts to qualified organizations. These variations highlight the flexibility cash donations offer to those looking to benefit maximally from their philanthropic efforts.

Phaseout of Itemized Deductions: Another significant change in 2026 involves the reintroduction of a phaseout for itemized deductions, reminiscent of the former Pease limitation. Targeted at high-income taxpayers, this phaseout reduces the allowable amount of itemized deductions, including charitable contributions, once income exceeds a certain threshold. The 2026 phaseout threshold for joint filers is roughly $769,000 (one-half that if married and filing separately), and $641,000 for others.

Example: A taxpayer with an income significantly above the threshold will see a reduction in the total itemized deductions they can claim. This phaseout operates as a percentage of the excess income, capping the amount that high earners can deduct from their total taxable income. It applies not only to charitable giving but also to other itemized deductions, creating a more complex landscape for planning and executing tax-efficient charitable strategies.

This phaseout could have a profound impact on how high-income individuals approach their charitable giving. For example, a philanthropist accustomed to donating substantial amounts may have to adjust their timing or contribution method to align with the phaseout rules, possibly increasing their focus on maximizing deductions through cash or other high-limit contributions.

Strategic Charitable Giving in 2026: As donors look to navigate these changes, strategic planning becomes essential. Here are some tips for maximizing charitable impact while ensuring tax efficiency:

1. Diversify Donation Methods: Consider mixing cash and non-cash contributions to take full advantage of varying AGI limitations and potentially broaden the scope of tax benefits.
2. Document Meticulously: Ensure comprehensive documentation for cash donations, even for non-itemizers, to safeguard deductions and avoid possible IRS challenges.
3. Plan High-Impact Donations: For substantial donations, focus on giving strategies that exceed the AGI floor, enabling full deduction potential while supporting causes aligned with personal and philanthropic values.
4. Consider Multi-Year Planning: For those affected by the phaseout, spread out contributions over several years or make use of donor-advised funds to manage deductions more effectively and mitigate the impact of the phaseout.
5. Engage with Financial Advisors: Collaborate with tax professionals to explore opportunities and develop a tailored approach that aligns with the latest laws and maximizes benefits.

Charitable Giving Documentation – What You Need to Know in 2026

In the ever-evolving landscape of tax regulations, it’s reassuring to note that there has been no change in the documentation requirements for proving charitable giving under OBBBA. However, understanding and adhering to these requirements remains crucial for taxpayers wishing to claim deductions on their cash and non-cash charitable contributions. This article provides a comprehensive guide to the documentation you need to ensure your charitable giving is not only effective but also compliant with IRS standards.

• Documentation for Cash Contributions – Cash contributions are one of the most straightforward forms of charitable giving, but they also require careful documentation to qualify for tax deductions. Here’s what you need to know:
  1. Contributions Under $250: For cash contributions under $250, taxpayers must keep a reliable bank record such as a canceled check, bank statement, or credit card statement. Alternatively, a written communication from the charitable organization stating the amount and date of the contribution is also acceptable. This documentation must clearly identify the recipient organization to validate the donation.
  2. Contributions of $250 or More: For cash donations of $250 or more, a contemporaneous written acknowledgment from the receiving charitable organization is essential. This written acknowledgment must include:
     • The amount of cash contributed.
     • A statement as to whether the organization provided any goods or services in exchange for the donation, and if so, a description and estimate of the value of those goods or services.
     • If only intangible religious benefits (such as admission to a worship service) were received, the acknowledgment must indicate this without needing to estimate their value.
  3. Payroll Deductions: For contributions made via payroll deductions, employees must retain a pay stub, Form W-2, or other documents furnished by the employer indicating the amount donated. Additionally, a pledge card or other document from the recipient organization is needed, detailing the intended allocation.

• Documentation for Non-Cash Contributions – Non-cash contributions, such as property, goods, or securities, require a more nuanced documentation approach:
  1. Contributions Less Than $250: A receipt from the charitable organization is required for non-cash contributions valued at less than $250. The receipt must include:
     • The organization’s name.
     • The date and location of the contribution.
     • A reasonably detailed description of the donated property.
  2. Contributions Between $250 and $500: Non-cash donations in this range necessitate an acknowledgment from the organization with the following elements:
     • The name and address of the charitable organization.
     • A description of the donated property.
     • An affirmation from the charity regarding any goods or services provided in return, including their value or the nature of any intangible religious benefits received.
  3. Contributions Over $500 and up to $5,000: Taxpayers must provide the same acknowledgement as for donations between $250 and $500. Additionally, they should document:
     • How the taxpayer acquired the property (purchase, gift, inheritance, etc.).
     • The approximate acquisition date.
     • The property’s cost basis, especially if available.
  4. Contributions Over $5,000: For these substantial non-cash contributions, a qualified appraisal is mandatory unless the property is publicly traded securities. The appraisal must be produced by a qualified appraiser who meets IRS regulations, and the taxpayer must complete Form 8283, detailing the contribution and attaching it to their tax return.

Common Pitfalls to Avoid

While assembling documentation for charitable contributions, taxpayers should avoid common errors that could lead to denied deductions:

• Incomplete Acknowledgments: Ensure every statement includes all the required elements, particularly for donations of $250 or more. Missing information such as the “no goods or services were provided” statement can invalidate a deduction.
• Delayed Acknowledgments: Obtain documentation contemporaneously, ideally before filing your tax return or the due date, including any extensions.
• Overstating Fair Market Value Estimates: For non-cash donations, especially in-kind goods or used items, accurately determine and document their fair market value.

Charitable giving in 2026 presents new challenges and opportunities for taxpayers. Whether dealing with the fresh AGI floor, the permanency of the 60% cash contribution limit, or the re-emergence of itemized deduction phaseouts, donors need to understand and adapt to these changes.

By staying informed and engaging in strategic planning, taxpayers can continue to make impactful charitable contributions while optimizing their tax benefits.

Please contact us with any questions.  

Lately, it feels like everyone is talking about moving for tax reasons.

Lower income taxes. Friendlier states. A fresh start that supposedly comes with a smaller tax bill.

And on the surface, it sounds simple. You move. Your taxes go down. Done.

Except… that’s rarely how it works.

Before boxes are packed or homes are listed, there’s a conversation that needs to happen. Actually, two of them:

1. One with your family
2. One with your tax advisor

Because moving for taxes isn’t just a relocation decision. It’s a long-term financial strategy. And like any strategy, the details matter.

The Big Misnomer: “Once You Move, You’re Done”

One of the most common assumptions we hear goes something like this:

“As long as I move and spend enough time in the new state, I’m fine.”

People often believe there’s a simple rule. Six months and a day. Cut ties. Change addresses. Problem solved.

In reality, some states are far more aggressive than people realize. Having any meaningful presence in your former state — a home, a business, time spent there, even patterns of behavior — can complicate things quickly.

This isn’t about doing anything wrong. It’s about understanding that residency, domicile, and tax exposure don’t always line up neatly with where you sleep most nights.

That’s why this isn’t just a moving decision. It’s a planning decision.

Lower Income Taxes Don’t Always Mean Lower Taxes

Another surprise for many people? Lower income tax rates don’t always translate to a lower overall tax burden.

Here’s why.

When income taxes go down, something else often goes up.

Property taxes. Sales taxes. Local fees. Insurance costs. Even healthcare access and costs can shift dramatically depending on where you land.

For someone on a fixed income or nearing retirement, this matters more than headline tax rates.

If your taxable income is relatively modest, the progressive nature of income taxes may mean you weren’t paying as much as you thought to begin with. In those cases, a jump in property taxes or cost of living can outweigh any income tax savings.

In other words, you might “win” on paper and lose in real life.

This Is a Family Conversation, Not Just a Financial One

Moving for taxes isn’t just about numbers.

It affects:

• Where you spend your time
• Access to family and support systems
• Healthcare providers
• Lifestyle and long-term comfort

These are family conversations first, financial conversations second.

And the financial side needs to support the life you’re trying to live — not force tradeoffs you didn’t anticipate.

Why This Is an Advisory Conversation (Not a Checklist)

There’s no universal rulebook for moving safely and smartly for tax reasons.

What does matter is understanding:

• How states evaluate residency and presence
• How income, property, and other taxes interact
• How your specific income sources are taxed
• How timing and documentation affect your position

There are strategies to reduce risk. There are ways to structure a move thoughtfully. There are also situations where moving for taxes simply doesn’t make sense once everything is considered.

But none of that comes from assumptions or internet advice. It comes from planning.

The Bottom Line

Moving for tax reasons can absolutely make sense. For some people, it’s a smart and strategic move.

For others, it’s more complicated than expected. And in some cases, it’s not cheaper at all.

That’s why the most important step isn’t choosing a destination. It’s having the right conversation first.

If you’re thinking about moving and wondering how it could impact your taxes — or whether it actually helps — don’t go it alone.

This is one of those decisions where a conversation with your tax advisor can save you from surprises later and help you build a game plan that truly works for your life.

Because when it comes to taxes and relocation, clarity upfront beats regret down the road.

The reinstatement of bonus depreciation is a critical component of recent U.S. tax legislation aimed at fostering economic growth. The 2017 Tax Cuts and Jobs Act (TCJA) had already put significant emphasis on bonus depreciation, but its permanent reinstatement under the “One Big Beautiful Bill Act” at 100% further emphasizes its importance, especially after considering the economic ramifications of the pandemic. This article explores the tax benefits, historical context, applicability, and specific rules surrounding bonus depreciation, ultimately outlining the recent changes in its reinstatement.

Historical Context: Originally Enacted to Stimulate the Economy – Bonus depreciation was first introduced as part of the Job Creation and Worker Assistance Act in 2002, allowing businesses to immediately deduct a substantial amount of the cost of qualifying property, rather than having to recover the cost as depreciation over a number of years. Initially, the deduction was set at 30% but was later increased to 50% and eventually to 100% during specific economic downturns.

The TCJA significantly altered bonus depreciation by allowing a 100% first-year deduction for qualified property, which was a substantial incentive for businesses. This provision was aimed at encouraging capital procurement and economic growth. However, the TCJA also included a sunset provision that began phasing out the bonus depreciation rate starting in 2023, and by 2027 no bonus depreciation would have been allowed.

Tax Benefits of Bonus Depreciation – Bonus depreciation allows businesses to fully deduct the cost of assets in the year they are placed into service, providing immediate tax relief and encouraging investment. This benefit enhances a company’s cash flow by reducing taxable income, making it a powerful incentive for purchasing new assets. However, utilizing bonus depreciation effectively requires careful planning. For example, the Section 199A deduction is based on qualified business income (QBI), and writing off large capital purchases can reduce an entity’s profit, consequently decreasing the Sec 199A deduction. Conversely, reducing taxable income might help avoid certain phase-outs and limitations associated with 199A.

Qualification Criteria for Bonus Depreciation – Qualifying property generally includes tangible property with a recovery period of 20 years or less, computer software, water utility property, and qualified improvements and productions. Recovery periods are set by the IRS. For example, most business vehicles have a recovery period of 5 years, while it is 7 years for most office equipment. No bonus depreciation is allowed for real property since the recovery period is either 27.5 or 39 years, depending on how the real property is used.

The TCJA expanded the scope of eligible property to include both new and used qualifying property, enhancing the attractiveness of investing in second-hand equipment. Public utility properties and dealer properties related to vehicles are specifically excluded, adding a layer of complexity.

Qualified Improvement and Property Issues – Qualified improvement property initially experienced legislative challenges. The intent under the TCJA was to combine properties such as leasehold, restaurant, and retail improvements into a category eligible for bonus depreciation under a 15-year MACRS recovery period. However, an oversight initially excluded these properties, later corrected by the CARES Act.

Revoking Bonus Depreciation and AMT Implications – Typically, opting out of bonus depreciation can only be revoked with IRS consent unless made on a timely filed return, allowing revocation within six months on an amended return. One noteworthy benefit is that property with claimed bonus depreciation is exempt from alternative minimum tax (AMT) adjustments, aligning AMT depreciation relief with regular tax purposes.

Business Automobiles and Other Depreciation Rules – Special rules and deduction limitations apply to business automobiles categorized as “luxury autos.” The depreciation limit is augmented by $8,000 in years when bonus depreciation is permitted, as established by the TCJA. It is not addressed in OBBBA so it is assumed the extra amount will continue.

Related party rules, and the application of Section 179, which requires pre-bonus depreciation adjustments, add further complexity. (Section 179 provides another way to write off purchase of some business property without having to depreciate the asset’s cost, but the deduction will need to be recaptured if business use drops to 50% or less in a year after the year placed in service.)

Issues Addressed by the Recent Legislation – The OBBBA reinstatement extends the 100% deduction for qualified property purchased and placed in service after January 19, 2025. OBBBA has made bonus depreciation permanent. For qualifying property placed in service between January 1, 2025, and January 19, 2025, the bonus depreciation remains at 40%.

This continuity provides businesses with long-term planning capabilities and aligns investments with broader economic policies intended to spur growth.

Qualified Production Property – The “One Big Beautiful Bill Act” also introduced a provision to promote manufacturing in the U.S. Under pre-OBBBA law, taxpayers were generally required to deduct (depreciate) the cost of business-related nonresidential real property over a 39-year period. And bonus depreciation was generally limited to tangible personal property, not real estate.

Effective for property placed in service after July 4, 2025, OBBBA generally, allows taxpayers to immediately deduct 100% of the cost of certain new factories, certain improvements to existing factories, and certain other structures. Specifically, this provision allows taxpayers to deduct 100% of the adjusted basis of qualified production property in the year such property is placed in service.

Qualified Production Property refers to specific portions of nonresidential real property that meet a set of criteria:

• The property must be used by the taxpayer as an integral part of a qualified production activity.

• It must be placed in service within the United States or any possession of the United States.

• The original use of the property must commence with the taxpayer.

• Construction of the property must begin after January 19, 2025, and before January 1, 2029.

• The property must be designated by the taxpayer in an election on the taxpayer’s tax return.

• The IRS will issue instructions on how to make this election.

• The property must be placed in service before January 1, 2031.

• Any portion of a property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or certain other functions is ineligible for this benefit

Production Machinery: Even though manufacturing machinery that does not qualify as qualified production property is not expensed under this provision, it will generally qualify for 100% bonus depreciation that is reinstated by OBBBA.

Qualified Production Activity: Generally, a “Qualified Production Activity” is defined as follows:

• Activities Involved: It refers to the manufacturing, production (limited to agricultural and chemical production), or refining of a qualified product. These activities should result in a substantial transformation of the property comprising the product.

Qualified Product: A qualified product refers to any tangible personal property that is not a food or beverage prepared in the same building as a retail establishment in which such property is sold.In summary, for an activity to qualify under this section, it must involve significant production or transformation processes, excluding certain types of agricultural and chemical productions.

Recapture rules apply in certain cases where, during the 10-year period after qualified production property is placed in service, the use of the property changes. When the property is sold, to the extent of the bonus depreciation taken, any gain will be ordinary income rather than capital gain,

The reinstatement of bonus depreciation is a vital tool for economic rejuvenation, providing businesses with immediate tax incentives to make capital investments. While it offers substantial benefits, understanding the complexities and planning strategically around QBI deductions, AMT implications, and specific qualifications is essential. Amid legislative nuances and phased-out provisions, bonus depreciation remains a keystone in strategic business planning for enduring economic development. The addition of the qualified production property provides a huge incentive for building production facilities in the U.S. While thought of as a deduction for big business, it can also apply to small manufacturing facilities.

If you are in business and have questions about how the Bonus Depreciation can benefit your business, please contact our office.

Section 529 plans are tax-advantaged savings plans designed to encourage saving for future education costs. They are legally known as “qualified tuition plans” and are sponsored by states, state agencies, or educational institutions. With rising education expenses, these plans offer a valuable option for families to invest in the future of a child’s education. Let’s delve into the specifics of who can contribute, the contribution limits, and the various uses of these funds, including recent updates under the “One Big Beautiful Bill” Act (OBBBA).

Who Can Contribute? A 529 plan can be funded by anyone — parents, grandparents, relatives, or friends. There is no restriction on who can make contributions, or what the contributor’s income is, as long as the total contributions for the beneficiary do not exceed the plan’s limits. This flexibility makes 529 plans a popular gift option for birthdays, holidays, or special occasions.

Maximum Contribution Without Gift Tax: Contributions to a 529 plan are considered gifts under the federal tax code. As of 2025, individuals can contribute up to the annual gift tax exclusion limit of $19,000 per beneficiary without triggering the requirement to file a gift tax return. This amount is adjusted annually for inflation, allowing for potential increases in future years.

For example, a married couple could contribute a total of $38,000 to their grandchild’s 529 plan in 2025, provided they hadn’t made other gifts to the grandchild that reduced the available gift tax exclusion.

The 5-Year Advance Contribution Rule: One of the unique features of 529 plans is the ability to “superfund” an account by front-loading contributions. This rule allows individuals to contribute up to five times the annual gift tax exclusion amount in a single year without incurring gift taxes, provided they do not make additional gifts to the same beneficiary over the subsequent four years.

For 2025, this means contributing a lump sum of up to $95,000. Superfunding a 529 plan while the intended beneficiary is young will allow the funds to grow tax free for a longer time.  

Additional Contributions During the 5-Year Period: If the annual gift tax exclusion limit increases during the five-year period after a lump-sum contribution has been made, it is possible to make an additional contribution up to the new limit without incurring gift taxes. For instance, if the limit increases due to inflation adjustments, contributors can take advantage of the increased exclusion amount.

State Limitation on Sec 529 Contributions: The maximum contribution limit for Section 529 plans can vary significantly by state, as each state sets its own limit based on its estimates of the future costs of education. However, the typical range for maximum account balances across most states is from $235,000 to over $550,000 per beneficiary. It’s crucial to check the specific limit for the state plan you are interested in, as these caps are intended to cover qualified education expenses and are periodically adjusted to account for rising education costs.

Also, of note: individuals are not limited to plans from their home state.

Paying Tuition Directly and Avoiding Gift Tax Issues: Grandparents often play a pivotal role in supporting a child’s educational journey, and many might contemplate utilizing their personal investment strategies to fund a family member’s education, believing they can achieve better returns than a 529 plan offers. However, for those who prioritize giving substantial financial support without impacting gift tax implications, it’s important to understand the benefits of direct tuition payments. The gift tax rules provide a strategic advantage by not considering the direct payment of tuition to an educational institution as a taxable gift. This allows grandparents to pay tuition bills directly without incurring gift tax consequences, enabling them to simultaneously maintain their investment portfolios while contributing significantly to a grandchild’s education in a tax-efficient manner. This approach not only aids in reducing estate value but also maximizes support for education without impinging upon annual gift tax exclusion limits.

Qualified Uses of 529 Plan Funds: 529 plan funds can be used for a vast range of educational expenses. These include:

• Tuition and fees for college, university, or eligible postsecondary institutions.
• Books, supplies, and equipment required for courses.
• Computers, peripheral equipment and internet access.
• Special needs services for a beneficiary with special needs, necessary for enrollment or attendance.
• Room and board for students enrolled at least half-time.
• K-12 Education: The OBBBA has expanded the use of 529 plans to cover more K-12 education expenses, permitting tax-free distributions of up to $20,000 annually per beneficiary for tuition and related expenses at public, private, or religious schools, starting January 1, 2026. From 2018 through 2025 only tuition of up to $10,000 per year was allowed as a tax-free distribution for K-12 expense. Among the newly eligible expenses are books or other instructional materials, online educational materials, tuition for tutoring or educational classes outside of the home, fees for achievement tests and advanced placement tests, and fees related to enrolling in colleges and universities.
• Apprenticeships and Additional Education Expenses: New provisions under the OBBBA and other recent legislation have expanded the types of qualified expenses to include costs associated with registered apprenticeship programs and “qualified postsecondary credentialing expenses.”

Taxation and Penalties on Non-Qualified Distributions: While 529 plans offer tax-free growth and withdrawals for qualified expenses, distributions not used for qualified education expenses are subject to income tax and a 10% penalty on the earnings portion. The contributions, which were made with after-tax dollars (i.e., they weren’t tax deductible), are not taxable, but the appreciation of those contributions is.

The IRS does offer exemptions from the 10% penalty in certain situations, such as if the beneficiary receives a scholarship. In these scenarios, the penalty is waived, although the earnings would still be subject to income tax.

Rollover Options:

• Rollover to an ABLE Account – Under the ABLE Act, funds in a 529 plan can be rolled over into an Achieving a Better Life Experience (ABLE) account for the same beneficiary or a qualifying family member without incurring income taxes or penalties. This option allows for flexibility if the original beneficiary needs support for disability-related expenses rather than educational costs.
• IRA Rollover for Unused Funds – The SECURE Act 2.0 introduced a provision allowing up to $35,000 in leftover 529 plan funds to be rolled over into a Roth IRA for the designated beneficiary. This provides a way to utilize any excess funds that were originally earmarked for education by rolling the excess amount into a tax-advantaged retirement account. However, eligibility for a Roth IRA and contribution limits remain applicable, and the $35,000 rollover limit is a lifetime limit.

In conclusion, Section 529 plans offer a multifaceted and flexible approach to saving for education. They provide tax advantages while allowing contributors to offer significant support for a beneficiary’s educational journey. With recent legislative updates, such as those under the OBBBA, the scope and utility of 529 plans have expanded, encompassing a wider array of educational uses and offering additional financial planning options through rollovers to ABLE accounts and IRAs. As education costs continue to rise, these plans remain an essential tool for families planning for the future.

Consulting with a tax professional can provide invaluable assistance in providing personalized advice tailored to individual circumstances, helping to optimize educational savings strategies and ensure compliance with gift tax rules. If you’re considering a strategy involving 529 plans, reaching out to our office is a prudent step to ensure your plan aligns with current tax laws and best practices.

Qualified Small Business Stock (QSBS) offers a compelling tax advantage for investors aiming to support small business ventures. Introduced as a part of the Revenue Reconciliation Act of 1993, QSBS enables investors to exclude a considerable portion of their capital gains from taxable income under Section 1202 of the Internal Revenue Code or to elect to roll over the gain into other QSBS. This article explores important facets of QSBS—from its definition to its complex tax treatments.

What is Qualified Small Business Stock (QSBS)? QSBS refers to shares held in a C corporation that qualify for tax benefits outlined in Section 1202. Not every C corporation stock meets the criteria; specific conditions around issuing corporations, holding periods, and more must be satisfied.

What Stock Qualifies as QSBS? To qualify as QSBS, stock must be issued by a domestic C corporation that actively conducts a qualified trade or business. Key qualifications include:

• Small Business Status: At the time of stock issuance, the corporation’s gross assets must not exceed $50 million ($75 million after July 4, 2025) before and after the issuance.
• Active Business Requirement: At least 80% of the corporation’s assets must be actively used in the conduct of the qualified trade or business.
• Qualified Trade or Business: Most service-oriented businesses, such as health, law, and financial services, as well as farming and operating hotels, restaurants or similar businesses, are excluded. The business should engage primarily in qualifying activities.

The Tax Benefits of QSBS: One of the most attractive features of QSBS is the potential to exclude up to 100% of the capital gains from the sale of such stock. Here’s how the exclusions have evolved for stock acquired:

• Before 2009 amendments: 50% exclusion on capital gains.
• Post-2009 amendments and before the 2010 Small Business Jobs Act: 75% exclusion.
• After the 2010 Small Business Jobs Act and before the OBBBA change: 100% exclusion for stock acquired between September 28, 2010, and before July 5, 2025.

Maximum Exclusions and Updated Legislation under OBBBA: The One Big Beautiful Bill Act (OBBBA), effective for stock acquired after July 4, 2025, introduced new exclusions:

• 50% for three-year holds
• 75% for four-year holds
• 100% for five-year holds

For stocks acquired prior to July 5, 2025, the investor’s excludable gain is limited to $10 million or ten times the taxpayer’s adjusted basis in the QSBS, whichever is greater. For stock acquired post-July 4, 2025, the limit increases to $15 million with inflation adjustments in future years.

Disqualifications and Special Cases: Certain conditions render stock ineligible for QSBS benefits:

• Disqualified Stock: Stock acquired via repurchase from the same corporation within two years.
• S Corporation Stock: Entity status disqualifies S corporation stock from qualifying unless converted to C corporation status.

Transfers, Passthroughs, and Rollover Opportunities

• Gift Transfers: QSBS can be transferred as a gift; the recipient inherits the holding period, maintaining potential eligibility for tax benefits.
• Passthrough Entities: Partnerships and S corporations may hold QSBS, with each partner potentially benefiting from QSBS exclusions, assuming specific conditions are met.
• Gain Rollover Election under Section 1045: Allows deferral of gains from sale of QSBS held for more than 6 months. When this option is elected, the gain not taxed reduces the basis of the acquired stock. The QSBS gain exclusion can be used later when the replacement stock is sold and after it has been held the required number of years.

Understanding Tax Rates and Exclusions

Not all gains are excludable under Section 1202. Additionally:

• Non-excludable QSBS gains do not qualify for the 0%, 15%, or 20% capital gains rates, instead subjecting the gains to a maximum tax rate of 28%.

Alternative Minimum Tax (AMT) and Electivity – Exclusions under QSBS were once considered a preference item for AMT, but recent amendments remove its consideration as AMT preference. The treatment under Section 1202 is generally automatic given eligibility is met, without an explicit elective procedure.

QSBS offers significant tax savings and encourages investments in domestic small businesses. By understanding the qualifications, benefits, and limitations, investors can more effectively strategize their portfolios to harness QSBS provisions.

Remaining informed and consulting with our office can ensure compliance and optimization of tax benefits.

You did it. You worked hard, saved consistently, and now you’re either enjoying retirement—or it’s just around the corner.

You’ve been told for years to put money into retirement accounts, defer taxes, and wait for the golden years. But wait… no one told you?

Retirement Might be your Highest-Taxed Phase Yet

Seriously. Between Social Security income, Required Minimum Distributions (RMDs), capital gains, Medicare premium adjustments, and even state taxes… it can feel like a financial ambush.

Let’s break down why this happens—and what you can do now to soften the blow.

1. RMDs: The Tax Bomb That Starts at Age 73

If you’ve saved in a traditional IRA or 401(k), you’ve been enjoying tax deferral for years. But the IRS eventually wants their cut.

That’s where RMDs come in. Once you hit age 73, you’re forced to take money out of your retirement accounts—and those withdrawals are taxed as ordinary income.

Why it matters:

● Your RMD could bump you into a higher tax bracket.

● It could trigger higher Medicare premiums (thanks, IRMAA).

● It might even impact how much of your Social Security is taxed.

What to do now: Consider Roth conversions in your 60s to reduce your future RMDs. Yes, you’ll pay tax now, but it could save you significantly down the road.

2. Social Security Isn’t Always Tax-Free

Up to 85% of your Social Security benefits could be taxable depending on your total income—including investment income, part-time work, and yes, those RMDs.

Here’s the trap: You think you’re getting $3,000/month from Social Security.

But add in just a few thousand from another source, and suddenly, a big chunk of that is taxable.

Solution: Work with an advisor who can map out income sources before you trigger your benefits. Sometimes, waiting a year or two—or rebalancing your withdrawal strategy—can dramatically reduce taxes.

3. IRMAA: The Medicare Surcharge You Didn’t See Coming

This one stings. You file your taxes, enjoy a good year, and then boom—two years later, your Medicare premiums go up.

That’s IRMAA (Income-Related Monthly Adjustment Amount). If your income exceeds certain thresholds, you’ll pay more for Medicare Part B and D—even if the bump was from a one-time event like a Roth conversion or asset sale.

Proactive planning = lower premiums. A well-timed income strategy can keep you just under IRMAA thresholds. And in some cases, you can file an appeal based on a “life-changing event” like retirement or loss of income.

4. Capital Gains & Selling Assets in Retirement

Selling your long-held investments? Downsizing your home? These capital gains could push your income higher than expected—and cause a domino effect with taxes, Medicare, and Social Security.

Even if you’re “living off savings,” your tax return may tell a different story.

Pro tip: There’s a 0% capital gains bracket for certain income ranges. With the right strategy, you can sell appreciated assets without triggering taxes—but timing is everything.

5. State Taxes Still Matter—Even in Retirement

Not all states treat retirees the same. Some tax Social Security, some don’t. Some offer pension exemptions, others tax everything.

If you’re thinking about relocating in retirement, don’t just compare housing costs. Compare tax policies. And if you’re staying put? Learn how your current state impacts your bottom line.

6. Your Filing Status Can Change Your Tax Life

A tough but important truth: Losing a spouse in retirement often means going from “Married Filing Jointly” to “Single.”

Which means:

● Lower standard deductions

● Tighter income thresholds

● Bigger tax bills on the same income

If you’re newly widowed or preparing for that reality, it’s worth building a multi-year tax strategy now—not later.

7. You Don’t Have to Navigate This Alone

The retirement tax landscape is not DIY-friendly. Rules change. Thresholds shift. And one wrong move (or missed opportunity) can cost you thousands.

But with the right guide, you can:

● Smooth out income across years

● Reduce your lifetime tax bill

● Maximize your Social Security and Medicare benefits

● And keep more of the money you worked so hard to earn

Let’s Build a Tax-Smart Retirement Plan—Together

You planned for retirement. Now it’s time to plan for retirement taxes.

We’re here to help you make smart, proactive decisions that reduce surprises, minimize your tax burden, and give you the peace of mind to enjoy the years ahead.

Contact our office today to schedule a retirement tax check-up. You’ve done the saving—now let’s make sure you keep more of it.

Tax planning is a crucial aspect of financial management, yet it often remains underestimated by many taxpayers. One area that frequently causes confusion and potential financial strain is the management of estimated tax payments and the associated penalties for underpayment. Understanding the intricacies of estimated tax safe harbors, the requirement for payments to be made ratably, and the strategies to mitigate penalties can significantly impact a taxpayer’s financial health. This article delves into these topics, offering insights into how taxpayers can navigate these challenges effectively.

Understanding Underestimated Penalties – Underpayment penalties can catch taxpayers off guard, especially when they fail to meet the required estimated tax payments. The IRS imposes these penalties to encourage timely tax payments throughout the year, rather than a lump sum at the end. The penalty is essentially an interest charge on the amount of tax that should have been paid during the year but wasn’t. This penalty can be substantial, especially for those with fluctuating incomes or those who experience a significant increase in income without adjusting their estimated payments accordingly. While most wage-earning taxpayers have enough tax withheld from their paychecks to avoid the underpayment penalty problem, those who also have investment income or side gigs may find their withholding isn’t enough to meet the prepayment requirements to avoid a penalty.

Estimated Tax Penalty Amount – The IRS sets the interest rates for underpayment penalties each quarter.  It is equal to the federal short-term interest rate plus 3 percent. With the recent rapid rise in interest rates the underpayment interest rate for each quarter of 2024 is a whopping 8%, the highest it has been in almost two decades. Something you should be concerned about if you expect your withholding and estimated tax payments to be substantially underpaid.   

Estimated Tax Due Dates – For individuals, this involves using Form 1040-ES to make the payments, generally on a “quarterly” basis. 

The estimated tax payment schedule for individuals and certain other taxpayers is structured in a way that does not align with the even quarters of the calendar year. This is primarily due to the specific due dates set by the IRS for these payments. For 2024, the due dates for estimated tax payments are as follows:

1. First Quarter: Payment is due on April 15, 2024. This payment covers income earned from January 1 to March 31.
2. Second Quarter: Payment is due on June 17, 2024. This payment covers income earned from April 1 to May 31. Note that this period is only two months long, which contributes to the uneven nature of the quarters.
3. Third Quarter: Payment is due on September 16, 2024. This payment covers income earned from June 1 to August 31.
4. Fourth Quarter: Payment is due on January 15, 2025. This payment covers income earned in the four months of the period September 1 to December 31.

 Note, these payment due dates normally fall on the 15^th of the month. However, whenever the 15^th falls on a weekend or holiday, the due date is extended to the next business day.  

Estimated Tax Safe Harbors – To avoid underpayment penalties and having to make a projection of the expected tax for each payment period, taxpayers can rely on safe harbor rules. These rules provide a guideline for the minimum amount that must be paid to avoid penalties. Generally, taxpayers can avoid penalties if their total tax payments equal or exceed:

• 90% of the current year’s tax liability or 
• 100% of the prior year’s tax liability.

However, for higher-income taxpayers with an adjusted gross income (AGI) over $150,000, the safe harbor threshold of 100% increases to 110% of the prior year’s tax liability.

Ratable Payments Requirement – One critical aspect of estimated tax payments is the requirement for these payments to be made ratably throughout the year. This means that taxpayers should aim to make equal payments each “quarter” to avoid penalties. However, income is not always received evenly throughout the year, which can complicate this requirement. For instance, if a taxpayer receives a significant portion of their income in the latter part of the year, they may find themselves underpaid for earlier quarters, leading to penalties.

Uneven Quarters and Computing Penalties – The challenge of uneven income can be addressed by understanding how penalties are computed. The IRS calculates penalties on a quarterly basis, meaning that underpayments in one quarter cannot be offset by overpayments in a later quarter. This can be particularly problematic for those with seasonal or sporadic income. To mitigate this, taxpayers can use IRS Form 2210, which allows them to annualize their income and potentially reduce or eliminate penalties by showing that their income was not received evenly throughout the year.

Workarounds: Increasing Withholding and Retirement Plan Distributions

• Increase Withholding – One effective workaround for managing underpayment penalties is to increase withholding for the balance of the year. Unlike estimated payments, withholding is considered paid ratably throughout the year, regardless of when the tax is actually withheld. This means that increasing withholding later in the year can help cover any shortfalls from earlier quarters.
• Retirement Plan Distribution – Another strategy involves taking a substantial distribution from a retirement plan such as a 401(k) or 403(b) plan, which is subject to a mandatory 20% withholding requirement. The taxpayer can then roll the distribution back into the plan within 60 days, using other funds to make up the portion of the distribution which went to withholding. Tax withholding can also be made from a traditional IRA distribution, but this approach requires careful planning to ensure compliance with the one IRA rollover per 12-month period rule.
• Annualized Exception – For taxpayers with uneven income, the annualized exception using IRS Form 2210 can be a valuable tool. This form allows taxpayers to calculate their required estimated payments based on the actual income received during each quarter, rather than assuming equal income throughout the year. By doing so, taxpayers can potentially reduce or eliminate underpayment penalties by demonstrating that their income was not received evenly.

Managing estimated tax payments and avoiding underpayment penalties requires careful planning and a thorough understanding of IRS rules and regulations. By leveraging safe harbor provisions, understanding the requirement for ratable payments, and utilizing strategies such as increased withholding and retirement plan distributions, taxpayers can effectively navigate these challenges.

If you are expecting your pre-payment of tax to be substantially underpaid and wish to develop a strategy to avoid or mitigate underpayment penalties, please contact this office.  But if you wait too late in the year, it might not provide enough time before the end of the year to make any effective changes. 

There are special rules for qualifying farmers and fishermen, who may have different requirements and potential waivers for underpayment penalties; contact our office for details.

As the year draws to a close, small business owners have a unique opportunity to implement strategies that can significantly reduce their tax liability for the upcoming year. By taking proactive steps in the final months, businesses can not only minimize their tax burden but also streamline their financial operations. Here’s a comprehensive guide on actions you can take to optimize your tax situation for 2024.

1. Accelerate Business Expenses

One of the most effective ways to reduce taxable income is to accelerate business expenses. Consider purchasing office equipment, machinery, vehicles, or tools before the year ends. By doing so, you can take advantage of Section 179 expensing or bonus depreciation.

• Section 179 Expensing: This allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. For 2024, the deduction limit is again substantial, allowing businesses to deduct up to $1,220,000 of eligible property. This can include machinery, office furniture, and certain business vehicles. That limit phases out dollar-for-dollar once the amount of section 179 property placed in service during the tax for year exceeds $3,050,000. This means that a business can no longer claim section 179 expensing in 2024 if it places in service $4,270,000 or more of expense-eligible property. Property eligible for 179 expensing includes:

 •   Generally, machinery and equipment, depreciated under the MACRS rules, regardless of its depreciation recovery period,

•    Off-the-shelf computer software,

•    Qualified improvements to building interiors, and

•    Roofs, HVAC systems, fire protection systems, alarm systems, and security systems.

• Bonus Depreciation: In addition to Section 179, businesses can use bonus depreciation to write off a significant portion of the cost of new and used business assets. For 2024, the bonus depreciation allows 60% of an asset’s cost to be expensed. That is down from 80% in 2023 and will further reduce to 40% for purchases in 2025.

Qualifying property includes tangible property depreciated under MACRS with a recovery period of 20 years or less and most computer software.   

2. Review and Adjust Payroll

If you have employees, reviewing your payroll can provide additional tax savings. Consider the following:

• Reasonable Compensation for S-Corporation Shareholders: If you are a shareholder in an S-Corporation, ensure that you are paying yourself a reasonable salary. This affects your Section 199A deduction and payroll taxes. The IRS requires that S-Corporation shareholders receive reasonable compensation for services provided.
• Year-End Bonuses: Consider issuing bonuses before the year ends. Bonuses are deductible in the year they are paid, reducing taxable income. However, year-end bonuses are considered supplemental wages and are subject to payroll taxes and withholding. Ensure that bonuses are processed through payroll to account for withholding taxes.

3. Manage Inventory and Cost of Goods Sold

For businesses that maintain inventory, managing your year-end inventory levels can impact your taxable income. Consider the following strategies:

• Inventory Write-Downs: If you have obsolete or unsellable inventory, consider writing it down. This reduces your taxable income by increasing the cost of goods sold.
• Year-End Inventory:  From a tax perspective, the value of your ending inventory affects your taxable income. A larger ending inventory increases your taxable income because it reduces the cost of goods sold (COGS), while a smaller ending inventory decreases taxable income by increasing COGS. Therefore, if your goal is to reduce taxable income, you might prefer to have a smaller inventory at year-end.

4. Optimize Retirement Contributions

Contributing to retirement plans is a powerful way to reduce taxable income while planning for the future. Consider the following options:

• SEP IRAs and Solo 401(k)s: If you are self-employed, you can contribute up to 25% of your net earnings to a SEP IRA, with a maximum contribution limit of $69,000 for 2024. Solo 401(k) plans also offer significant contribution limits, allowing both employee and employer contributions.
• Catch-Up Contributions: If you are over 50, take advantage of catch-up contributions to increase your retirement savings and reduce taxable income.
• Contribution Due Dates: SEP IRA contributions must be made by the due date of your business’s tax return, including extensions.

For 401(k) contributions, employee elective deferrals must be made by the end of the calendar year (December 31, 2024) to count for that tax year. However, employer contributions, such as matching or profit-sharing contributions, can be made by the due date of the employer’s tax return, including extensions, for the 2024 tax year.

5. Charitable Contributions

Making charitable contributions before the end of the year can provide tax benefits. C corporations can directly deduct charitable contributions on their corporate tax returns. The deduction is generally limited to 10% of the corporation’s taxable income.

However, Sole Proprietorships, Partnerships, and S Corporations can not directly deduct charitable contributions as business expenses. Instead, the deduction is passed through to the individual owners, partners, or shareholders, who can then claim the deduction on their personal tax returns if they itemize deductions. Thus, they do not reduce the   business’s taxable income or income of the owners that’s subject to Social Security or self-employment tax.

For 2024, individuals can deduct cash contributions up to 60% of their adjusted gross income.

6. Business Advertising

Advertising expenses are generally considered ordinary and necessary business expenses. As such, they are fully deductible on a business’s tax return. This includes costs associated with promoting the business through various media, sponsorships, and events where the primary intent is to advertise the business.

However, the distinction between advertising and charitable contributions can be unclear. Business advertising is defined as an expense to promote the business and generate revenue. Whereas charitable contributions are made with the intent of supporting a charitable cause or organization without expecting a direct business benefit in return. 

Example: If a business donates money to a local food bank without receiving any advertising or promotional benefit, this is considered a charitable contribution. The business does not expect to receive a direct financial return from the donation.

7. Filing Obligations and Compliance

As you prepare for year-end, ensure that you are compliant with all filing obligations:

• Beneficial Ownership Reporting: If your business is required to report beneficial ownership information, ensure that you have gathered the necessary details. This includes information about individuals who own or control the company.

The FinCEN Beneficial Ownership Information (BOI) report filing has specific due dates depending on when a business is created or registered. For existing businesses that were in operation before January 1, 2024, the initial BOI report must be filed by January 1, 2025. For new businesses created or registered between January 1, 2024, and December 31, 2024, the report is due within 90 calendar days from the date the business receives actual or public notice of its creation or registration. Starting January 1, 2025, newly created or registered businesses have 30 calendar days from the effective date of their creation or registration to file their initial BOI reports. These deadlines are crucial for compliance and avoiding potential penalties.

• Information Returns: Prepare for filing information returns, such as Form 1099-NEC for non-employee compensation. Ensure that you have collected Social Security Numbers (SSNs) or Taxpayer Identification Numbers (TINs) from all independent contractors. Independent Contractors should be required to complete Form W-9 before beginning work. If that was not done originally, make sure to collect them so the 1099-NEC forms can be properly and timely filed in January.
• Estimated Tax Payments: If you or your business is required to make estimated tax payments, ensure that these are up to date to avoid penalties.

8. Tax Credits and Incentives

Explore available tax credits and incentives that can reduce your tax liability:

• Research and Development (R&D) Tax Credit: If your business engages in research and development activities, you may qualify for the R&D tax credit. This credit can offset income tax liability and, in some cases, payroll tax liability.
• Energy Efficiency Credits: Consider investing in energy-efficient equipment or renewable energy systems. Federal and state governments offer credits for businesses that make energy-efficient upgrades.

9. Employee Gifts

Employee gifts are a common practice in many organizations, especially during the holiday season or as a token of appreciation for hard work and dedication. However, when it comes to gifting employees, businesses must consider the tax implications of such gestures.  Generally, they are deductible by the business but may or may not be included in the wage income of the employee, as explained here:

• Cash Bonuses: These are often the most appreciated form of gift, as they provide employees with the flexibility to use the money as they see fit. However, cash bonuses are considered taxable income and are subject to payroll taxes and withholding.
• Gift Cards and Certificates: These are popular because they offer a degree of choice to the recipient. However, if they are easily convertible to cash, they are also considered taxable income.
• Non-Cash Gifts: Items such as company merchandise, holiday baskets, or event tickets can be considered de minimis fringe benefits if they are of low value and given infrequently, making them non-taxable.

10. Disaster Loses

A disaster loss refers to a financial loss incurred by a taxpayer due to a federally declared disaster. Taxpayers who experience such losses in 2024 have the option to make an election to deduct the loss on their 2023 tax return instead of waiting to claim it on their 2024 return. This election can provide quicker financial relief by potentially generating a tax refund for the prior year.

It your business or you personally were affected by any of many disasters in 2024, that can impact your year-end strategies and your overall tax planning for 2024.  

By implementing these strategies in the final months of the year, small businesses can significantly reduce their 2024 tax liability. From accelerating expenses to managing inventory and exploring tax credits, there are numerous opportunities to enhance your tax efficiency. Stay proactive, remain compliant with filing obligations.

If you would like to explore how these year-end strategies might benefit your business, please consult with our office.