Tax Breaks: The What You Don’t Know Could Hurt You Edition
My husband and I talk about the Corporate Transparency Act—or CTA—at least once a week. Don't misunderstand. Neither of us is thrilled about it—and I promise we talk about other things, too—but the reality is that we both represent clients who may be subject to CTA reporting.
Getting the word out about the CTA has been difficult. And frustrating.
I realize there have been many s written about the new law—and various webinars and seminars—but those have primarily been targeted at advisors (my husband jokes that the same 20 advisors are at every event). Still, many taxpayers seem to believe that the CTA doesn't apply to them but to big corporations. Ironically, it's largely the opposite.
Your company may need to report information about its beneficial owners if it is a corporation, a limited liability company (LLC), a partnership, an S-corporation, a nonprofit corporation or another entity created by the filing of a document with a secretary of state or any similar office in the U.S. Some trusts—those registered with the state—may also be required to report. And, reporting requirements extend to a foreign company formed under the law of a foreign country–if it's registered to do business in the U.S. by the filing of a document with a secretary of state or any similar office.
Some companies, including public companies, are exempt from the reporting requirements. So, those big corporations? They don't need to file. But your small business? You likely need to report.
The penalties for failing to report are significant—you can be fined up to $10,000. And yes, jail is also on the table (it's reminiscent of FBAR reporting requirements).
FinCEN has been beating the reporting drum since the online portal opened in January. They've also been rolling out guidance and recently updated their FAQs . ()
Still, businesses are worried. According to research from Corporation Service Company (CSC), a provider of global business administration and compliance solutions, an overwhelming majority (83%) of U.S. businesses do not feel confident about their organization's compliance with the CTC. Over three quarters (76%) believe the CTA is more broadly causing concern among U.S. businesses. Just 1% of those surveyed have no concerns about their organization's CTA compliance. ()
It's not just advisors who are reaching out to potential reporting companies. FinCEN Director Andrea Gacki was at an outreach event in the Philadelphia, Pennsylvania area earlier this month. It was the latest in a series of events held by senior Treasury officials, in partnership with members of Congress, to help small businesses fulfill their reporting requirements.
FinCEN stresses that many companies can report on their own—you don't need an attorney, accountant, preparer or other advisor to report (you file online ). However, some companies may find some of the terms confusing or may be unsure whether to report—in some cases, an advisor may know more about the structure of the company than the owners.
Expect to hear more about the CTA as the deadline for existing companies to report creeps closer.
The CTA applies to companies that do business in the U.S. but may include foreign companies. Alan McLean, chair of the tax committee at Business at the Organisation for Economic Co-operation and Development (OECD), knows a little something about the international business tax world. He recently sat down with Tax Notes' Stephanie Soong to talk about what the OECD tax committee does, how it operates, and what kinds of tax issues it's focusing on. You can listen in here —the transcript is also available.
One of the issues that McLean referenced is the OECD's efforts to implement Pillars One and Two. Pillar One focuses on where tax should be paid. You can think of it in terms of nexus—similar to the same kinds of discussions we have in the U.S. between states. The critical question is: Who has the right to tax income even if there's no physical presence? Pillar Two examines the amount of tax to be paid, with an eye toward the disparate tax rates from country to country.
This issue of who gets taxed—and on what revenue—made news again with the European Union's recent legal victory over Apple and Ireland. After years of appeals, the E.U.'s highest court has upheld a decision requiring Ireland to collect €13 billion in unpaid taxes from Apple. () However, Ireland has remained reluctant to claim the money —money they had argued, along with Apple, that it wasn't owed in the first place. The explanation for this seemingly paradoxical policy position is that Ireland is a low-tax haven known for attracting some of the world's largest corporations to enjoy tax benefits. Collecting the sum could undermine its status as a magnet for these businesses.
It just goes to show that tax policy fixes are rarely easy.
Expect to hear more about tax policy as Congress goes back to work. This week, the House rejected legislation to continue funding the federal government past the October 1 deadline. The federal government is on a fiscal year that ends on September 30—that's not so far away. It could well be that we'll see yet another government shutdown (though, as I noted earlier, most pundits predict we'll reach a short-term fix to, at the least, move us past the elections).
Another deadline of note—if you filed for an extension for your federal income tax return, your due date is October 15, 2024. It will be here before you know it.
There's one more date to pay attention to, but this is a nice one—Sunday, September 22, 2024, marks the official start of fall. Here's hoping you can grab an apple cider and peep at a few leaves—it's already beautiful in southeastern Pennsylvania.
Enjoy your weekend!
Kelly Phillips Erb (Senior Writer, Tax)
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Taxes From A To Z: Q Is For Qualified Business Income DeductionThe qualified business income deduction is often called the Section 199A deduction.
The section 199A deduction was a central feature of the 2017 tax reform—the idea was to reduce the taxable income attributable to owners of pass-through entities like sole proprietorships, partnerships, S corporations, and some trusts and estates to make it more comparable to corporate tax rates.
Under the Tax Cuts and Jobs Act, the corporate tax rate is a flat 21%, while the top individual tax rate is 37%—a difference of 16%. The Section 199A deduction allows eligible taxpayers to deduct up to 20 % of what's called qualified business income (QBI) plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
The calculation for figuring the deduction can be tricky but generally, if your taxable income is below the threshold amount ($383,900 for joint returns and $191,950 for other taxpayers for the 2024 tax year ), you can deduct up to 20% of your QBI for each business.
If your taxable income exceeds the threshold amount, you are subject to limitations and exceptions determined by your occupation and a wage and capital limit.
No matter where you fall on the income spectrum, you can't even begin calculating the deduction without understanding QBI. QBI includes income, gain, deduction, and loss from your trades or business, but only those effectively connected with the conduct of a trade or business within the United States.
When determining QBI, remember that the idea is to allow deductions against "working" income. In other words, income attributable to services or production is typically included in QBI, but income attributable to investments is generally excluded. A quick and dirty rule is that active income is QBI while passive income is not. (And yes, exceptions apply.)
The best part? The Section 199A deduction is available no matter whether you itemize deductions on Schedule A or take the standard deduction. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025.
As I noted last week, keeping accounts separate can save you from a headache later. But not all expenses are deductible. This week, a taxpayer asks:
I work as an employee at a hair salon. I drive to work and park in a paid lot. Can I write off the costs of getting to work and paying for parking?
I'll tackle the first bit—the drive—first. The drive to and from your home to your place of employment is considered a commute, and commuting expenses are personal, not business. That means those expenses are not deductible.
If you're traveling between two business locations—say, the salon to an on-site location for a wedding—that's not considered a commute. If you're self-employed, you can deduct it as business mileage, but, as here, if you're an employee, there's no deduction available–but your employer may reimburse you for mileage at the IRS business mileage rate.
(For 2024, you can deduct 67 cents per mile driven for business use , up 1.5 cents from 2023.)
With respect to those parking fees, unfortunately, fees you pay to park your car at your place of business are not deductible. Those are treated as commuting expenses.
Here again, if you're self-employed you may be able to deduct parking fees for business when visiting a customer or client—that's a business expense for self-employed persons. But if you're an employee, there's no deduction available. However, your employer may offer a qualified transportation fringe benefit that provides a tax-free reimbursement for a ride in a commuter highway vehicle between the employee's home and workplace, a transit pass, and, happily, qualified parking. The monthly limitation for the perk increased to $315 in 2024 , a boost of $15 from the 2023 amount.
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Maryland is the ninth new state to announce plans to allow its residents to file taxes through IRS Direct File . () The state joins Connecticut, Maine, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, and Wisconsin, which have signed on for the next filing season. That's in addition to the 12 states from the pilot program (Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming).
In addition, Code for America and Maryland have announced a partnership that will enable Maryland residents to file their federal and state tax returns online—for free. Allowing taxpayers to link their federal and state returns is the next step in the plan to provide taxpayers with a free online filing option.
A Deeper DiveThe dollars involved in legal gambling are huge—and getting bigger, likely thanks to sports betting. Last year, 30 of 36 states set annual records for commercial gaming revenue—and their coffers are benefiting from those bets. Commercial gaming operations generated $14.67 billion in direct gaming tax revenue paid to state and local governments, not including billions more paid in income, sales, or other taxes.
Sports betting wasn't always legal in most states. Beginning in 1992, the Professional and Amateur Sports Protection Act (PASPA) largely barred states from allowing sports gambling. A few exceptions existed—for example, it was legal in Nevada casinos, and a handful of states, like Oregon, allowed limited pools or lotteries.
That changed in 2018 when the U.S. Supreme Court struck down PASPA, opening the door for states to allow sports gambling. In Murphy v. National Collegiate Athletic Association, Justice Alito writing for the majority declared, "Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own."
Predictably, a clamor to get a piece of the gambling pie followed. Sports betting is now legal in some form in most states.
It's not just state tax authorities with a vested interest in ensuring that gambling stays above board—the federal government is paying attention, too . () Between fiscal years 2020 and June 2024, IRS-Criminal Investigation (CI) initiated 151 investigations into illegal gambling activity totaling more than $178.8 million. Those investigations resulted in 71 sentences with an average prison term of over two years.
Tax Filings And DeadlinesFebruary 3, 2025. Due date for individuals and businesses affected by Hurricanes Beryl and Debby—more info here () and here . ()
February 3, 2025. Due date for individuals and businesses in South Dakota affected by severe storms, straight-line winds and flooding that began on June 16, 2024.
February 3, 2025. Due date for individuals and businesses in Puerto Rico affected by Tropical Storm Ernesto .
February 3, 2025. Due date for individuals and businesses in Connecticut and New York affected by severe storms and flooding from torrential rainfalls that began on August 18, 2024.
Tax Conferences And EventsSeptember 23-27, 2024. ABA Section of Taxation Virtual 2024 Fall Tax Meeting. Registration required .
September 28, 2024. National Association of Black Accountants (NABA) Washington Regional Conference. CPE available. Registration required .
October 22-24, 2024. NATP Tax Season Updates. Virtual. Registration required.
December 16-17, 2024. NYU 43rd Institute on State and Local Taxation, Westin New York at Times Square, New York, NY. CLE and CPE available. Registration required , virtual option available.
How many companies does the Financial Crimes Enforcement Network (FinCEN) estimate that the beneficial ownership reporting rule will impact in 2024 alone?
A. 326,000
B. 3.26 million
C. 32.6 million
D. 326 million
Find the answer at the bottom of this newsletter.
Positions And Guidancehas posted an early draft of instructions for Form 1099-DA, which digital asset brokers are expected to use to report certain sales and exchanges of digital assets beginning in the calendar year 2025.
has also posted an updated version of the draft form. An earlier draft () was published in April 2024 and updated regulations followed. ()
has updated its frequently asked questions for the Premium Tax Credit. This refundable tax credit is designed to help eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace.
has published copies of the Internal Revenue Bulletin for September 16, 2024 ( IRB 2024-38, and September 23, 2024 ( IRB 2024-39 ).
announced that Taxpayer Services Chief Kenneth C. Corbin has received the 2024 Government Executive of the Year Award from the Service to the Citizen Awards program. The recognition highlights Corbin's outstanding contributions to public service and his dedication to improving the service provided to taxpayers. The annual award recognizes federal leaders who demonstrate excellence in delivering services that impact the public.
has appointed ten new members to the Electronic Tax Administration Advisory Committee or ETAAC. Founded by statute in 1998, the committee comprises state tax officials, cybersecurity and information security experts, tax professionals, tax software developers, representatives from the payroll and financial sectors, and consumer groups. Those appointed to serve three-year terms on the committee beginning in September 2024 are David Casey (Madison, Wisconsin), Manuel Dominguez (Kansas City, Missouri), Jane Chou (San Diego, California), Richard Lavina (Coconut Grove, Florida), Jack Mao (San Francisco, California), Jose Martinez (East Rutherford, New Jersey), Ryan Minnick (Orlando, Florida), Amy Nowak (New Orleans, Louisiana), Graham O'Neill (Philadelphia, Pennsylvania) and Kristine Willson, CPP (Snohomish, Washington).
Deloitte Tax LLPTax Analysts, the nonprofit publisher of Tax Notes products, announced that they are extending their agreement to make Tax Notes' federal tax law library available to the general public. The deal was first inked in 2021, and since that time, Tax Analysts has garnered nearly 6.5 million page views, with an average yearly growth of 90%. Deloitte has also integrated the tax law library into its Intela global platform.
McCarter & English announced the arrival of Tax & Employee Benefits partner Robert Kaplan in its Philadelphia office. Kaplan has extensive experience advising clients on employee benefit plans and executive compensation arrangements, including health and retirement plans.
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In Case You Missed ItHere's what readers clicked through most often last week:
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Trivia AnswerThe answer is (D) 32.6 million.
FinCEN estimates that in 2024, approximately 32.6 million companies will be required to report, with 5 million additional companies per year required to report for the next nine years.
