Changes in Sec. 174 make it a good time to review the R&E strategy of your business
A provision of the Tax Cuts and Jobs Act that took effect last year was the end of current deductibility for research and experimental (R&E) expenses. The provision affects businesses with significant R&E costs. Starting in 2022, Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the U.S.). Previously, businesses could opt to deduct these costs immediately as current expenses. For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses. Revenue Procedure 2023-11 provides a way to obtain automatic consent to change methods of accounting for specified Sec. 174 R&E expenses.
Protect the “ordinary and necessary” advertising expenses of your business
Under tax law, businesses can generally deduct advertising and marketing costs that help bring in and keep customers. However, the expenses must be “ordinary and necessary” to be deductible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is helpful and appropriate for the business. In a recent U.S. Tax Court case, an attorney argued he could deduct over $303,000 spent on car racing as advertising for his law firm because the firm sponsored the car. The IRS disallowed the costs as not ordinary and necessary. The court agreed, stating that the taxpayer’s primary motive for incurring the expenses wasn’t to promote his law firm. (TC Memo 2023-18)
Claiming losses on depreciated or worthless stock
Have you bought stock that later became worthless? At least you can claim a deduction on your tax return. You can claim a capital loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as if it was sold on the last day of the tax year. This date is important because it determines whether the loss is long- or short-term. You may not discover that a stock is worthless until after you’ve filed your return for the year. In that case, you can amend your return for that year to claim a credit or refund due to the loss. This can be done for 7 years from the date your original return was due, or 2 years from the date you paid the tax, whichever is later.
Forming a cross-functional sales team
A cross-functional team is any group of employees from different departments brought together to solve a problem or fulfill a goal. The concept can really shine, however, when applied to sales and marketing. The idea is to eliminate “silos” by creating a broad, flat structure for a diverse group of professionals to communicate and collaborate on improving sales results. Obviously, you’ll need to include members of the sales and marketing departments. But employees from IT, customer service and finance may also play roles. When effective, a cross-functional sales team can create exciting innovations and accelerate the sales cycle. But developing one will take patience and careful planning.
Renewed warning urging people to carefully review the Employee Retention Credit (ERC) guidelines
WASHINGTON — The Internal Revenue Service today issued a renewed warning urging people to carefully review the Employee Retention Credit (ERC) guidelines before trying to claim the credit as promoters continue pushing ineligible people to file. The IRS and tax professionals continue to see third parties aggressively promoting these ERC schemes on radio and online. […]
Supreme Court: Overtime rules still apply to highly compensated employees
Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. In a recent U.S. Supreme Court case, an employee sued his employer for violating the FLSA’s overtime rules. He was paid wages ranging from $963 to $1,341 per day, resulting in more than $200,000 of annual earnings. But he didn’t receive overtime pay. His employer argued that, as a bona fide executive and highly compensated employee (HCE), the employee was exempt. The Court disagreed. It held that even an HCE isn’t considered salaried if the person is paid daily wages. Therefore, the employee wasn’t exempt from receiving overtime pay.
Awarded money in a lawsuit or settlement? It’s only tax-free in certain circumstances
You generally must pay federal tax on all income you receive but there are some exceptions. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments. However, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.” If you receive a court award or out-of-court settlement, consult with us about the tax implications.
Influencer marketing could help your business (or not)
Most business owners who are active on social media would likely agree that building a following and getting meaningful reactions to posts isn’t easy. One way that some companies rise above the din is to not only market themselves on social media, but also engage an “influencer” to do it. Some influencers are famous celebrities; others are just high-profile experts in their fields. Under the right circumstances, just one image or video with a few positive words from an influencer can boost sales. But influencer marketing isn’t for everyone. You’ll need to vet prospective endorsers thoroughly, as well as carefully structure the contract to mitigate risk and ensure a return on investment.
Buying a new business vehicle? A heavy SUV is a tax-smart choice
If you’re buying or replacing a vehicle that you’ll use in your business, be aware that a heavy SUV may provide a more generous tax break this year than you’d get with a business car. New and used heavy SUVs, pickups and vans acquired and put in service in 2023 are eligible for 80% first-year bonus depreciation. However, you must use the vehicle more than 50% for business. If your business use is 51% or more, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This tax break is available only if the manufacturer’s gross vehicle weight rating is above 6,000 pounds. Contact us to help evaluate if this is the right move for your business.
There still may be time to make an IRA contribution for last year
If you’re getting ready to file your 2022 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until this year’s April 18 filing deadline and benefit from the tax savings on your 2022 return. For 2022 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or older). To be qualified, you must meet rules involving your income and whether you (or your spouse) are an active participant in an employer retirement plan. If you want more information, contact us or ask about it when we prepare your return.
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