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Divorce or legal separation creates many questions. Among the most important financial considerations for couples with children is who'll be eligible for potentially valuable child-related federal income tax breaks. Claiming the Child The Internal Revenue Code includes rules for determining when a divorced or legally separated parent is the "custodial" parent and can treat a child as his or her qualifying child for federal tax purposes, potentially making that parent eligible for various tax benefits. Usually, the parent with whom the child spends the most nights during the year wins out. However, under the "noncustodial parent rule," a custodial parent may voluntarily release to the noncustodial parent the right to claim the child for certain federal tax breaks. For this to occur, the couple must pass five tests for the tax year in question: 1. The support test. More than half of the child's support needs to come from one or both parents. 2. The divorced or separated test. The parents must be divorced or legally separated, have lived apart for the last six months of the year, or be separated under a private written separation agreement. 3. The custody test. The child needs to have lived with one or both parents for more than half of the year. For federal tax purposes, custody is determined by the child's actual residence — based on overnight stays — rather than by legal custody rights under state law. Temporary absences, such as for school or vacations, are generally treated as time the child lived with the parent who'd otherwise have custody. 4. The written declaration test. The custodial parent must sign a written declaration releasing to the noncustodial parent the right to claim the child as a qualifying child for the year. The required written declaration is typically made by having the custodial parent sign IRS Form 8332, "Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent," to release the claim for one or more years. 5. The return attachment test. The noncustodial parent must attach the signed Form 8332 to his or her Form 1040, "U.S. Individual Income Tax Return." For e-filed returns, Form 8332 is retained but not physically attached. Yes and No When the five tests are passed, the noncustodial parent qualifies for the following federal tax breaks with respect to the qualifying child (assuming all other rules are met): The Child Tax Credit. For 2025, the One Big Beautiful Bill Act increased this credit to $2,200 per eligible child under age 17, subject to an income-based phaseout. The IRS will annually adjust that dollar amount for inflation. An eligible noncustodial parent can claim a smaller credit of $500 for a dependent child who's ineligible for the regular child credit (usually one who's age 17 or older). This smaller credit is subject to the same income-based phaseout but isn't adjusted for inflation annually. Higher education credits. An eligible noncustodial parent can claim the American Opportunity Tax Credit (worth up to $2,500 per student) or the Lifetime Learning Credit (worth up to $2,000 per tax return) for a child's qualified education expenses. Both credits are subject to an income-based phaseout. The student loan interest deduction. An eligible noncustodial parent can claim a deduction of up to $2,500 (per tax return) for qualified education loan interest expense incurred for a child's education, also subject to an income-based phaseout. However, the noncustodial parent rule has its limits. According to the IRS, a noncustodial parent can't claim the following four tax breaks based on a qualifying child: Head of household filing status, The child and dependent care credit, The Earned Income Tax Credit, and Tax-free benefits under an employer-sponsored dependent care assistance program. These tax breaks always belong to the custodial parent. Mutually Claimable Breaks Whether or not the noncustodial parent rule applies to a qualifying child, both parents can generally take advantage of certain other federal tax breaks. These include itemized deductions for the child's medical expenses and tax-free: Distributions from a Health Savings Account for the child's qualifying medical expenses, Employer reimbursements for the child's medical expenses, and Treatment of employee discounts and no-additional-cost services provided to the child. This "both parents rule" applies as long as: 1) the parents provide more than half of the child's support for the year, 2) the child is in the custody of one or both parents for more than half the year, and 3) the child meets the definition of a qualifying child of one of the parents. If these conditions aren't satisfied, and the noncustodial parent rule doesn't apply, the aforementioned mutually claimable tax breaks are off limits to the noncustodial parent. Revoking the Release Under IRS regulations, a custodial parent may unilaterally revoke his or her release of the right to claim a qualifying child, effectively taking back the applicable federal tax breaks. To do so, the custodial parent must provide the noncustodial parent with written notice of the revocation or make reasonable efforts to provide such notice. The revocation can't take effect any earlier than the year after the year in which the custodial parent provides notice or makes reasonable efforts to do so. The custodial parent should keep a copy of the revocation and evidence of delivery (or att empts thereof) of the required notice to the noncustodial parent. Work With Your Advisors Child-related tax breaks can be overlooked or undervalued during divorce or legal separation proceedings. Both custodial and noncustodial parents should work closely with their attorneys and tax advisors to address this matter during negotiations. Your tax advisor can explain the rules further and answer any questions you may have.

Catch-up contributions have long been a way for taxpayers to put more dollars into their retirement accounts as they get older. But the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, enacted in 2022, included a major change to the catch-up contribution rules for higher-income taxpayers — and employers that sponsor qualified retirement plans. It requires higher-income taxpayers to make catch-up contributions to qualified plans as after-tax Roth contributions. The requirement was scheduled to take effect in 2024, but the IRS delayed it by two years. The IRS has now issued final regulations for the requirement. Here's what employees and employers need to know for 2026 and beyond. Catch-Up Contributions 101 For many years, taxpayers age 50 or older have been allowed to make catch-up contributions to their 401(k) or other employer-sponsored qualified retirement plan accounts, up to an annual limit that's adjusted for inflation. For 2025, eligible individuals can chip in an additional $7,500 on top of the regular $23,500 limit, for a total of $31,000. Under SECURE 2.0, beginning in 2025, those age 60 to 63 can make additional catch-up contributions, for a total catch-up contribution of up to $11,250 (if their retirement plans allow) and a maximum overall contribution up to $34,750 for 2025. In 2026, the catch-up limit rises to $8,000, and the regular limit increases to $24,500, for a total of $32,500. The total catch-up contribution limit for participants age 60 to 63 remains at $11,250, for a maximum overall contribution up to $35,750. The New Roth Requirement The current rules also allow eligible taxpayers to choose whether to make a pretax or after-tax Roth contribution, provided the qualified plan includes the Roth option. But SECURE 2.0 requires that, beginning in 2026, any catch-up contributions made by higher-income participants to 401(k), 403(b) or 457(b) plans be designated as Roth contributions. A plan that allows higher-income participants to make such catch-up contributions must also allow other participants age 50 or older to opt to make Roth catch-up contributions. The Roth requirement was originally scheduled to take effect for tax years beginning after December 31, 2023. But, in 2023, the IRS extended the effective date to January 1, 2026, as transitional relief. That effective date hasn't been extended any further. Finer Points of the Final Regs The final regs provide employers with guidance on implementing the Roth requirement. For example, they explain how employers should determine whether a participant is subject to the higher-income earner rules. That is, for 2026 plan years, the Roth requirement applies to participants whose 2025 Social Security wages from the employer exceed $150,000 as reflected in Box 3 of Form W-2, "Wage and Tax Statement." The $150,000 threshold will be adjusted annually for inflation. The final regs also allow — but don't require — an employer to treat all related organizations as a single employer if all of the organizations are within a controlled group or use a "common paymaster" (that is, a related organization that pays the employees of two or more organizations on their behalf). In such cases, an employee's wages from the employer sponsoring the plan, and from one or more other employers that are aggregated with that employer, will be treated as coming from the employer sponsoring the plan for purposes of determining whether the new catch-up rules apply. In addition, the final regs permit employers to adopt a "deemed election" approach in their plans for employees subject to the new rules. Such employees will be automatically deemed to have made an irrevocable Roth election for catch-up contributions, though they must be given an "effective opportunity" to make a different election — for instance, to not make catch-up contributions. Notably, employers that don't already include a qualified Roth contribution program in their qualified retirement plans face a critical decision. They must either amend their plans to allow Roth contributions or eliminate higher-income participants' ability to make any catch-up contributions. By December 31, 2026, most employers will need to amend their plans to reflect the new rules, as well as update their systems and procedures to comply with the final regs' many administrative requirements. Important: Although the final regs don't officially take effect until 2027, the SECURE 2.0 changes to the catch-up contribution rules are effective for 2026. Impact on Higher-Income Earners As a result of the required Roth treatment of catch-up contributions, higher-income participants making such contributions will have to pay income taxes on them upfront — while they may be in a higher tax bracket than they'll be during retirement. Some people could even be pushed into a higher tax bracket during the years the new rules apply. In addition, the adjusted gross incomes of higher-income earners making catch-up contributions will increase, potentially reducing or eliminating their eligibility for various federal tax breaks with income-based phaseouts. On the bright side, withdrawals of both contributions and earnings from Roth accounts are tax-free, provided the account has been open for five years and the account owner is age 59½ or older. Plus, Roth accounts generally don't have required minimum distributions. Help May Be Needed You may want to re-evaluate some of your tax planning if you're age 50 or older with income high enough to likely subject you to the new catch-up contribution rules coming in 2026. And if you're an employer that offers an affected qualified plan, ensure you make the necessary updates to comply with the final regs. Contact your tax and benefits advisors for help.

Social Security is still taxable , but many seniors mistakenly believe otherwise. This confusion stems from a temporary tax deduction introduced in the 2025 One Big Beautiful Bill Act , which lowers taxable income for seniors—but doesn’t eliminate Social Security taxes altogether. The 2025 tax law grants an enhanced standard deduction—$6,000 for individuals 65+ ($12,000 for couples)—which can significantly lower taxable income for many seniors. This has fueled misinterpretations that Social Security is now tax-free.   Here's what you need to know: Depending on your combined income , up to 85% of your benefits may still be taxable . The misconception arises because most retirees now pay no federal tax on their Social Security income , thanks to that one-time deduction—not because the taxes are gone. Stay informed and plan wisely—mistakes here could lead to surprise IRS bills!   Learn more: IRS reminds taxpayers their Social Security benefits may be taxable | Internal Revenue Service

Starting September 30, 2025 , the federal EV tax credit —up to $7,500 for new electric vehicles and $4,000 for used ones—will expire due to new legislation under the “One Big Beautiful Bill” Act. Don’t worry entirely—if you sign a binding contract and make a payment by September 30 , you may still qualify for the credit even if you take delivery later. New rules also apply and include income caps, vehicle price limits, and North American assembly requirements . Learn More.

Attention! Beginning September 30, 2025 , the U.S. Treasury will no longer send paper checks for most federal payments—including tax refunds, Social Security, and vendor payments. This initiative stems from a recent executive order aimed at reducing fraud, cutting costs, and improving efficiency. If you currently receive paper checks, now is the time to switch to electronic payments like direct deposit, prepaid debit cards, or digital wallets (exceptions may apply). Learn more about what's changing .

Are you ready to move and want to sell your home, but you're worried about a slowing real estate market? You're not alone. Many homeowners want to move up to a bigger home or downsize to a smaller one. However, they're currently unable to sell their homes for the price they want. Fortunately, selling isn't your only option. The current market could be an opportunity to rethink your next step, especially when you take the tax implications into account. Basic Home Sale Rules First, let's review the tax implications if you do sell your home. You may owe capital gains tax on the profit. Fortunately, many homeowners qualify for a capital gains exclusion. If the home was your primary residence for at least two of the last five years, you may generally exclude gain up to: $250,000 if single, or $500,000 if married and filing jointly. This means you won't owe tax on gains below that threshold. Above that amount, you could owe up to 20% capital gains tax, depending on your income, if you owned the house for more than a year. (See "Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales" for information about a bill introduced in Congress that could change the rules.) Different rules apply in the case of a divorce or when a homeowner is on qualified military duty. And you may be eligible for a partial capital gains tax exclusion in certain situations when you don't meet the two-out-of-five-year rule. What happens if you need to sell quickly for a loss — perhaps due to relocation, health issues or financial reasons? Unfortunately, a capital loss for personal-use property like a home isn't deductible on your tax return. Only losses on investment property are deductible under specific rules. Other Routes to Consider With the basic home sale tax rules in mind, here are four options to consider if your home isn't selling, along with the tax issues involved: 1. Rent out the property. If your home isn't generating acceptable offers, turning it into a rental property may provide steady income while you wait for the market to rebound. This approach can help offset mortgage, tax and maintenance costs — and may even offer tax benefits. For tax purposes, once your home becomes a rental, it's treated as an investment property. That means: You'll report rental income on your tax return. You can deduct related expenses, such as mortgage interest, property taxes, insurance, repairs and depreciation. You may lose the ability to exclude capital gains under the $250,000/$500,000 primary residence exclusion if you eventually sell. If you rent for too long, you may forfeit that benefit. Consult with your tax advisor to determine how long you can rent without losing eligibility for this exclusion. Important: The tax rules differ if you rent out your home for 14 days or less during the year. In that case, the rental income is tax-free. You don't have to report it on your tax return, but you can't deduct any rental-related expenses (such as cleaning or advertising) for those days. 2. Offer seller financing. In a seller-financed sale, you act as the lender and receive payments from the buyer over time instead of receiving the full purchase price upfront. In a slow market, this might attract buyers who don't qualify for traditional loans or prefer different terms. For tax purposes, you may qualify to report the gain over time using the IRS installment sale method, spreading out the capital gains tax liability across the payment schedule. You must report the interest portion of each payment as ordinary income on your tax return. Of course, there's potential risk. If the buyer defaults, you may face repossession issues and complex tax treatment depending on how much gain was previously recognized. 3. Make strategic improvements. If your home isn't attracting offers, the problem might not be related to the market alone — it could be the property's condition, layout or features. Investing in key updates could improve your resale value or help it sell faster. Capital improvements made while the property is your primary residence can increase your tax basis, which reduces your taxable gain when you sell. Qualifying improvements must add value, prolong the property's useful life or adapt the home for new uses. Keep detailed records and receipts to prove the basis for capital improvements. Regular maintenance doesn't qualify as an improvement for tax purposes. However, not all upgrades are equal. A real estate agent can identify improvements with a high rate of return on investment, and your tax pro can assess how these costs would impact your eventual capital gains calculation. 4. Engage in a rent-to-own agreement. This arrangement allows the tenant to rent the home with the option to buy it later. A portion of the rent may go toward the eventual purchase price. For tax purposes, you'll report all rent as rental income until the sale occurs. You won't recognize a capital gain until the option is exercised and the sale is finalized. What if the tenant pays an upfront option fee? It's typically treated as advance rent (taxable income) until the sale occurs — or potentially nonrefundable income if the tenant doesn't exercise the option. This structure may affect your ability to claim the primary residence exclusion. Timing is critical. If you rent the property for too long before the sale, you may no longer meet the two-out-of-five-year rule. Moving Forward Figuring out what to do if your home isn't selling is frustrating, especially if your financial plans hinge on the sale. But by understanding your options, you can make a well-informed decision that helps support your financial goals and takes advantage of potential federal tax breaks. State taxes may also apply. Consult with your tax advisor before deciding on the optimal strategy for your situation. Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales If a new bill gains traction, there could be good news ahead for homeowners looking to sell their homes. Currently, qualified sellers can exclude up to $250,000 in capital gains from the sale of a primary residence ($500,000 for married couples filing jointly). This limit was set in 1997.  U.S. Rep. Marjorie Taylor Greene (R-GA) has introduced a bill to raise or eliminate that exclusion, calling the current threshold "an outdated, unfair burden," particularly in today's high-priced housing market. She says the change could boost the housing supply by removing a financial barrier to selling.  The "No Tax on Home Sales Act" is still in its early stages so it's unclear whether it could be enacted. But it has caught the attention of President Trump who said he's "thinking about no tax on capital gains on houses."

New college graduates will face some of the harsh realities of adulthood, including paying taxes, filing their own tax returns and possibly coordinating with their parents to achieve the best overall family tax results. Here are answers to graduates' most common tax questions. Can My Parents Claim Me as a Dependent? Under the current rules, you're a so-called "qualifying child" of your parents and, therefore, their dependent for the year if you meet the following four requirements: 1. You'll be under age 24 at year end, 2. You were a full-time student for some part of at least five months during the year, 3. You don't pay more than half of your own support for the year, and 4. You have the same principal place of residence as your parents for more than half the year, excluding temporary absences while you were in school. If all those requirements aren't met, your parents can still claim you as a so-called "qualifying relative" dependent for 2025 if: • Your gross income for the year is less than $5,200, and • Your parents pay more than half of your support for the year. If My Parents Claim Me as a Dependent, Do I Need to File a Tax Return? Most dependents still must file federal income tax returns to report their taxable income. However, they usually owe little or no federal income tax. Why? First, a dependent can claim a standard deduction against gross income to arrive at taxable income. For an unmarried dependent, the standard deduction for 2025 is the greater of: • $1,350, or • Earned income for the year, plus $450, up to a maximum of $15,000. If a dependent's gross income exceeds the standard deduction, the tax rate on the first $11,925 is only 10%. Important: Earned income for this purpose includes salaries, wages, tips, professional fees and other amounts paid for work the dependent performs. It also includes any part of a taxable scholarship or fellowship grant. (See "Less-Common Tax Issues" below.) For example, 22-year-old Percy graduated in May 2025. He starts a job in September 2025, collecting a salary of $25,000 for the year. He has no other income for 2025. Percy's parents pay more than half of his support for the year, including his education costs and living expenses before he started his job. Therefore, Percy is his parents' qualifying child and, therefore, their dependent for 2025. Assuming Percy isn't eligible for any other tax breaks, his 2025 taxable income will be $10,000 ($25,000 minus $15,000). His federal income tax bill will be $1,000 (10% of $10,000). However, it's possible that Percy could qualify for an education tax credit that would lower his 2025 tax obligation. Can I Claim a Tax Break for Student Loan Repayments? If you're eligible, you can deduct the lesser of $2,500 or the amount of student loan interest you actually paid during the year. To be eligible, your modified adjusted gross income (MAGI) must be below a certain threshold. For 2025, the MAGI threshold for single taxpayers is up to $85,000 for the full deduction, with a phaseout ending at $100,000. For married couples filing jointly, the MAGI threshold is up to $170,000 for the full deduction, with a phaseout ending at $200,000. Who's Eligible for Education Credits — and Who Should Claim Them?   There are two higher education federal income tax credits: the American Opportunity credit and the Lifetime Learning credit. You can't claim both credits for the same student's expenses in the same year. In addition, both credits are phased out (reduced or completely eliminated) at higher income levels. For 2025, the credits are phased out for MAGI between the following ranges: • $80,000 and $90,000 for single taxpayers, and • $160,000 and $180,000 for married couples who file jointly. Should you claim education credits, or should your parents claim them? If your parents' MAGI falls below the lower end of the applicable threshold, it usually makes sense for them to claim the credits (assuming they're in a higher tax bracket than you are). However, if your parents' MAGI exceeds the upper end of the applicable threshold, you can claim the credits (assuming your income isn't too high) because the credits are completely phased out for your parents. Here's a closer look at these education credits: American Opportunity Credit. This credit equals 100% of the first $2,000 of qualified undergraduate education expenses, plus 25% of the next $2,000. The maximum credit is $2,500 per year for a maximum of four years per student. Qualified expenses include: • Tuition, • Mandatory enrollment fees, and • Course materials. You can't count room and board costs or optional fees, such as expenses related to student activities, athletics and health insurance. Qualified expenses are eligible for the credit if you haven't already completed four years of undergraduate work as of the beginning of the tax year. This credit is allowed only for a year during which you carry, for at least one academic period beginning in that year, at least half of a full-time course load in a program that would ultimately result in an undergraduate degree or other recognized credential. You can use the credit to offset your entire federal income tax bill. After reducing your federal income tax bill to zero, 40% of any leftover credit amount is refundable, subject to a refundable limit of $1,000. Lifetime Learning Credit. This credit equals 20% of up to $10,000 of qualified education expenses, for a maximum credit of $2,000 yearly. Unlike the American Opportunity credit, there's no limit on the number of years the Lifetime Learning credit can be claimed and no course-load requirement. It can be used to help offset costs for undergraduate study that drags on for more than four years, for undergraduate years with light course loads or for graduate school courses.      The maximum amount of annual expenses for which the Lifetime Learning credit can be claimed is limited to $10,000, regardless of how many students are in the family. Qualified expenses include college tuition and mandatory enrollment fees. Room, board and optional fees are off limits.   Let's return to our hypothetical example and assume that Percy qualifies for the $2,500 American Opportunity tax credit because 2025 is the fourth year of his undergraduate study. If he claims the credit, the first $1,000 eliminates his federal income tax liability. Of the remaining $1,500, $600 is refundable (40% of $1,500). The rest of the credit ($900) disappears. Alternatively, Percy's parents can claim him as a dependent on their joint tax return. If their income allows them to collect the full $2,500 American Opportunity credit, Percy could agree to let them claim him as their dependent on their 2025 tax return, which in turn allows them to collect the full $2,500 American Opportunity credit. Important: Under the facts in this hypothetical example, the deciding factor in whether Percy's parents claim him as a dependent is who can claim the bigger American Opportunity credit.                  Uncle Sam Welcomes You to Adulthood Taxes are an inevitable financial fact of life. Between figuring out if your parents can still claim you, understanding deductions, and cashing in on education credits and other possible tax breaks, there's a lot to wrap your head around. While we've covered some of the most common questions, the tax world is full of twists and turns. The smartest move? Team up with a tax professional who can help you and your family make the most of the situation.

Managing payroll can be a major challenge for small business owners, especially as state and federal payroll tax regulations continue to evolve. Missteps in this area aren't just minor hiccups — they can lead to significant financial penalties and operational disruptions. Below are some common payroll compliance pitfalls and ways to avoid them. Misclassifying Workers Businesses often prefer to treat workers as independent contractors (rather than employees) to lower costs and administrative burdens. However, the IRS, the U.S. Department of Labor, various state agencies and even workers themselves may challenge worker classifications. Properly classifying a worker as an independent contractor is beneficial because the business doesn't have to worry about employment tax issues or provide expensive fringe benefits. However, when a business mistakenly treats an employee as an independent contractor, the employer could owe unpaid employment taxes, penalties and interest. The employer also may be liable for employee benefits, such as health insurance and retirement plan contributions, that should have been provided but weren't. So, it's important to get worker classification right. Beware: IRS and DOL rules can differ from state and local rules. That said, worker classification is generally based on the degree of control the employer has over the person and their work product. Another misclassification error happens when an employer misinterprets an exemption from overtime pay. Most salaried executives and many other employers are exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). However, the FLSA includes several key exceptions reflecting earnings thresholds. Miscalculating Pay Inaccurate earnings calculations can cause headaches for employers and hardship for workers. For instance, shorted employees may have to scramble to pay their bills. Examples of mistakes involving employee compensation include: Overpayment or underpayment, Errors relating to new hires and employees on disability or leave, Inaccurate retroactive payments, and Incorrect deductions for fringe benefits. If you make a mistake when compensating an employee, resolve the issue immediately and take steps to prevent it from happening again. Being transparent and responsive helps retain valued workers and maintain morale and productivity.   Tracking Time Improperly Accurately tracking time for hourly employees can be challenging. Employers may unintentionally overlook compensable time, such as meal or rest breaks, travel to off-site assignments, or participation in company-sponsored events. Under the FLSA, nonexempt employees — typically paid hourly — must receive overtime pay at 1.5 times their regular rate for any hours worked beyond 40 in a workweek. Improper time tracking can lead to two unfavorable outcomes: 1) underpayment, where employees aren't properly compensated for overtime, or 2) overpayment, which may require repayment or adjustments to future wages. Either scenario can cause frustration, damage morale, and potentially expose the employer to legal risk. Failing to Report All Sources of Income Compensation includes more than just salaries and hourly pay. Examples of alternative pay sources are: Overtime, Bonuses, and Commissions. Some lesser-known income items may also come into play. For instance, some employers may offer incentive stock options (ISOs) or other rights, gift cards, employee awards, and other fringe benefits, such as the use of company-owned vehicles. Payroll and income taxes must be paid on these items, too. Failing to include the value of awards, bonuses and fringe benefits (when required) in employees' taxable incomes can lead to substantial underreporting penalties for employers. Missing Deadlines The IRS and state tax agencies expect your business to deposit federal payroll taxes on time. That means your organization must deposit amounts withheld for income tax, Social Security and Medicare taxes (FICA) and Federal Unemployment Tax Act taxes (FUTA) throughout the year. It's critical to follow the IRS schedule for depositing payroll payments. Deposit frequency depends on your total tax liability. Most small businesses must deposit payroll taxes by the 15th of the following month. However, some may be required to make semiweekly deposits. In addition, small businesses must generally report wages and tax withholding quarterly. The due dates for calendar-year businesses' quarterly reports are as follows: Quarter Pay period Due date First January 1 – March 31 April 30 Second April 1 – June 30 July 31 Third July 1 – September 30 October 31 Fourth October 1 – December 31 January 31 of the following year Note: If a due date falls on a weekend or legal holiday, the deadline moves to the next business day. When cash is tight, business owners may be tempted to borrow money from withheld payroll taxes. This is never a good idea. Missed deadlines or underpaying the IRS could cost more taxes (plus penalties and interest). Additionally, an officer, business owner and/or other employee responsible for meeting payroll tax obligations on behalf of your organization could be held personally liable for the full amount of the unpaid taxes under Section 6672 of the Internal Revenue Code. Issuing Inaccurate W-2s Form W-2, "Wage and Tax Statement," is the only payroll tax form that goes directly from an employer to its employees. It provides the following tax information: Gross income, Taxable income, and Payroll withholding for fringe benefits and retirement account contributions. Reporting these items correctly is critical. Mistakes on an employee's W-2 can have a domino effect throughout the company. It can lead to penalties for errors, extra paperwork and disgruntled employees. Relying on Manual Recordkeeping It might be relatively easy for a small business owner to handle payroll matters for a handful of employees. But as your business grows, payroll tasks become more complicated. Reliance on paper processes, manual data entries and spreadsheets to track employees' hours can lead to miscalculations in pay. For example, manual processes can lead to misplaced worksheets and missed payments. Furthermore, when the person in charge of processing payroll is out of the office, his or her designated replacement may not be fully prepared for the responsibilities. This situation can cause payroll entries to fall through the cracks or be misrepresented. Consider investing in an automated payroll system integrates with your accounting system and other digital tools, such as customer relationship management platforms, project management tools, cloud storage and communication apps. Potential benefits include simplified payroll processing, improved oversight and fewer payroll errors.  Get It Right Payroll-related laws and regulations aren't written in stone. Payroll practices should take into account any changes applicable to your business and government requirements. For example, some procedures were paused or postponed during the pandemic, and new laws and rulings may require updates to your payroll management system. This requires continuous vigilance. If you feel overwhelmed by payroll tasks, it may be time to shift payroll management responsibilities to an external payroll provider. Professionals who specialize in payroll processing can help you avoid costly mistakes. Contact your professional advisors for more information.

by Casey Donnelly Tax Associate at Brewer, Eyeington, Patout & Co., LLP Depreciation recapture might sound complicated, but it’s an important concept for anyone who owns and sells property or business assets. Essentially, it’s a way for the IRS to “recapture” some of the tax benefits you received from depreciating an asset over time. Let’s dive into what this means and how it affects you. What is Depreciation? First, let’s understand depreciation. When you buy a property or an asset for your business, you can deduct a portion of its cost each year as depreciation. It helps spread out the cost of the asset over its useful life. What is Depreciation Recapture? When you sell that asset, depreciation recapture comes into play. If you sell the asset for more than its depreciated value (also known as the adjusted or book basis), you might have to pay taxes on the amount you depreciated. This is because the IRS wants to recover some of the tax benefits you received from those depreciation deductions. Types of Property and How They Are Treated Personal Property (Section 1245) : This includes things like machinery, equipment, and vehicles. When you sell these items, any gain up to the amount of depreciation you took is taxed as ordinary income. Real Property (Section 1250) : This includes buildings and structures. For these, only the depreciation that exceeds straight-line depreciation (a method that spreads the cost evenly over the asset’s life) is recaptured as ordinary income. The rest is taxed at a lower capital gains rate. How to Calculate Depreciation Recapture Here’s a simple way to think about it: Find the Adjusted or Book Basis : This is the original cost minus all the depreciation you’ve taken. Calculate the Gain : Subtract the adjusted basis from the sale price. Determine the Recapture Amount : The recapture amount is the lesser of the total depreciation taken or the gain on the sale. Tax the Recapture : This amount is taxed as ordinary income, while any remaining gain is taxed at capital gains rates. Why It Matters Depreciation recapture can increase your tax bill when you sell an asset. It’s important to be aware of this so you can plan accordingly. For example, if you’re selling a piece of equipment or a rental property, knowing about depreciation recapture can help you properly estimate your tax liability. Tips to Manage Depreciation Recapture Like-Kind Exchanges : You may be able to defer the gain on the sale of the property, by exchanging the asset for a similar one under Section 1031.  However, this is only applicable for real property. Installment Sales : Spreading the sale over several years can help manage the tax impact. Consult a Tax Professional : They can provide strategies tailored to your specific situation. Depreciation recapture is a key concept for anyone selling depreciated assets. By understanding how it works, you can better prepare for the tax implications and make informed decisions. Always consider consulting with your tax professional to navigate these rules effectively.

Many U.S. businesses filed for bankruptcy last year. Through the end of the third quarter of 2024 (the latest available statistics at this writing), formal bankruptcy filings were on track to exceed the 2023 mark and the watershed year of 2020. Here's a look at what's driving the increase and how the process works, including revised rules for small businesses that went into effect in 2022. A Perfect Storm As of September 30, 2024, 512 U.S. companies had filed for bankruptcy in calendar year 2024. This is higher than year-to-date filings reported in the third quarter of 2023 (504) and perilously close to 2020's year-end total (518). (That peak was generally attributed to fallout from the COVID-19 pandemic.)  Why are bankruptcies on the upswing? Rising inflation, higher interest rates, low consumer confidence and geopolitical uncertainty are contributing factors. Also, adverse market conditions may cause a small business to experience: Decreased demand.  Customer preferences may change, causing a shift in the marketplace, or the need for goods or services can dry up. More sophisticated, nimble competitors might be better positioned to adjust offerings or prices to accommodate these changes or may use advanced analytics to take market share from unwary small businesses. Cash flow shortages.  Small businesses can run into trouble when outgoing expenditures exceed incoming revenue. Shortfalls may happen when companies grow rapidly. But lax working capital management — for example, bloated inventory, late customer payments and bad debts — is often a precursor to bankruptcy. Ineffective debt management.  Business owners may borrow money to stay afloat during a cash crunch. However, interest payments and other related problems can drain a company's resources and eventually sink it. Poor leadership. Successful businesses have qualified, experienced managers in key roles. Without professional management, small businesses can struggle and fail to implement corrective measures. In addition, small businesses may have difficulty recovering from online scams, cyberattacks and embezzlement schemes. Larger companies generally have greater resources to absorb fraud losses and respond appropriately.  Bankruptcy Basics Bankruptcy is a formal legal proceeding initiated when a business can't meet its legal obligations. It offers a "fresh start" when a business is no longer viable. Chapter 11 of the U.S. Bankruptcy Code mainly allows a distressed business to reorganize its debt. After the filing is complete, the business continues to operate. This option may be preferable to Chapter 7 or Chapter 13. With Chapter 7, assets are liquidated, so creditors typically receive little or nothing. Chapter 13 is only available to wage-earners, self-employed individuals or sole proprietors. Among other differences, Chapter 13 has higher income thresholds than the other options, but you must pay off secured debts like car loans and mortgages in full. Close-Up on Chapter 11 Chapter 11 filings are most prevalent, in part, because there's no income limit and they're flexible. Typically, these proceedings involve debt restructuring — including priority tax debts, secured debts, unsecured debts, and leases and contract debts — while offering protection of business assets. The process starts when a debtor business voluntarily  petitions the bankruptcy court or when creditors file an involuntary  petition against the debtor after certain conditions have been met. In either situation, the business typically has about four months to develop its reorganization plan. However, the court may extend that timeline to up to 18 months if the debtor can show "just cause" for a delay. A bankruptcy judge makes several important determinations, including whether a debtor is eligible to file and will be discharged of its debts. Courts also appoint trustees to administer the proceedings. When bankruptcy is complete, a business's debts are discharged. Legislative Relief for Small Businesses Historically, it was difficult and expensive for small business owners to seek bankruptcy protection under Chapter 11. However, the Small Business Reorganization Act (SBRA) of 2019 provides more flexibility to small businesses that file for bankruptcy. The law includes six changes for businesses with no more than $2.75 million (indexed for inflation) in secured and unsecured debts under Subchapter V of Chapter 11. 1. Streamlined reorganizations. The law eliminates certain procedural requirements and lowers costs for small business reorganizations. Significantly, no one except business debtors can propose a reorganization plan. Plus, debtors aren't required to obtain approval or solicit votes for plan confirmation. Absent a court order, there's no unsecured creditor committee. The SBRA also requires courts to hold a status conference within 60 days of a petition filing, giving debtors 90 days to file their plan. 2. New value rule.  The SBRA repeals the requirement that equity holders of a small business debtor must provide "new value" to retain their equity interests without fully paying off creditors. Now, the plan must be nondiscriminatory and "fair and equitable." In addition, similar to Chapter 13, the debtor's entire projected disposable income must be applied to payments, or the value of the property to be distributed can't be less than the debtor's projected disposable income. 3. Trustee appointments.  A standing trustee is appointed to serve as the trustee for the bankruptcy estate. This trustee presides over the reorganization and monitors its progress. 4. Administrative expense claims.  Previously, a debtor had to pay any administrative expense claims on the plan's effective date. Under the SBRA, a small business debtor can stretch payment of administrative expense claims over the plan's term, giving this class of debtors a distinct advantage. 5. Residential mortgages.  The SBRA eliminates the ban on small business debtors modifying their residential mortgages. Thus, a debtor has more leeway if the underlying loan was used primarily for the debtor's small business. Otherwise, secured lenders continue to have the same protections as in other Chapter 11 cases. 6. Discharges.  The SBRA provides that courts must grant debtors a discharge after completing payments within the first three years of a plan (or a longer period of up to five years established by the judge). Discharges relieve debtors of personal liability for all debts under a plan (with certain exceptions). Important:  The debt limit under Subchapter V of Chapter 11 was temporarily raised by other pandemic-era legislation. The inflation-adjusted limit is now $3,024,725 for cases filed after June 20, 2024.  Seeking Outside Expertise Financial advisors usually play prominent roles in bankruptcies and reorganizations, regardless of the debtor's size. A CPA can help with the following: Budget preparation.  Companies with inadequate budgets that take on excessive debt may be forced to declare bankruptcy. CPAs can help develop viable reorganization plans. They can even help avert a formal bankruptcy filing with an informal reorganization plan that more effectively allocates working capital, without adversely affecting quality or performance. Debt management. Financial and legal advisors are instrumental in restructuring debt, including negotiations with creditors. A debtor may be able to lower monthly debt payments to a manageable level through consolidation or elimination of high-interest charges. CPAs may also unearth ways to tap into other resources and avert bankruptcy. Review of financial condition.  Bankruptcy requires a thorough examination of assets and liabilities. Advisors can prepare a statement of financial condition indicating whether any assets are held jointly or in a partnership. The bankruptcy court or IRS may request this statement. Tax matters.  Whether a business is on the verge of bankruptcy or has already filed a bankruptcy petition, a CPA firm can help comply with federal and state tax regulations. For More Information      Bankruptcy doesn't necessarily mean the end of your business venture. A reorganization can help distressed businesses recover from a downward spiral. Contact your financial advisor to discuss your options.

The Republicans will soon control the White House and both chambers of Congress, which will likely open the door for major tax legislation next year. Here are some thoughts on how this power shift could affect the taxes of small businesses and their owners. Extension of TCJA Provisions The Tax Cuts and Jobs Act (TCJA), which generally became effective in 2018, included many important federal income tax provisions that affect small businesses and their owners. Some are scheduled to expire at the end of 2025, while others are permanent. Republicans are expected to extend many of the expiring provisions, including: Individual tax rates on business income. The TCJA retained seven tax rate brackets as under pre-TCJA law, but five rates are lower than they were before. These rates generally apply to an individual taxpayer's: Net taxable income from a sole proprietorship or from a limited liability company (LLC) that's treated as a sole proprietorship for tax purposes, and Share of net income passed through from a partnership, an LLC that's treated as a partnership for tax purposes or an S corporation. For 2025, the tax rates for ordinary income are as follows: 2025 Federal Tax Rates onOrdinary Income and Short-Term Capital Gains Tax Rates Single  Married Joint Filers Head of Household 10% $0 – $11,925 $0 – $23,850 $0 – $17,000 12% $11,926 – $48,475 $23,851 – $96,950 $17,001 – $64,850 22% $48,476 – $103,350 $96,951 – $206,700 $64,851 – $103,350 24% $103,351 – $197,300 $206,701 – $394,600 $103,351 – $197,300 32% $197,301 – $250,525 $394,601 – $501,050 $197,301 – $250,500 35% $250,526 – $626,350 $501,051 – $751,600 $250,501 – $626,350 37% $626,351 and up $751,601 and up $626,351 and up   In 2026, the rates and bracket edges that were in place for 2017 (with cumulative inflation adjustments) are scheduled to return unless future legislation is enacted to change that outcome. When the Republicans take control of Congress in 2025, the TCJA rates for individuals will probably be extended — and the top rate will likely stay at the current 37%. QBI deduction. Before the TCJA, net taxable income from sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or partnerships for tax purposes, and S corporations was passed through to the owners and taxed at owners' standard federal income tax rates. The TCJA established a new deduction based on a noncorporate owner's qualified business income (QBI) from these businesses. This tax break is available to individuals, estates and trusts. Under current law, a deduction of up to 20% of QBI may be available. However, it's subject to limitations that may apply at higher income levels. The QBI deduction isn't allowed in calculating a noncorporate business owner's adjusted gross income (AGI), but it reduces taxable income. In effect, it's treated the same as an allowable itemized deduction, though you're not required to itemize to benefit. The QBI deduction is scheduled to expire after 2025, absent congressional action. However, the Republican-controlled Congress will likely extend this tax break — or they might liberalize it or make it permanent. First-year depreciation tax breaks. For qualified property, the TCJA initially increased the first-year bonus depreciation percentage to 100% for eligible assets. After 2022, first-year bonus depreciation is still available, but the bonus depreciation percentages are reduced as follows: 80% for property placed in service in calendar year 2023, 60% for property placed in service in calendar year 2024, 40% for property placed in service in calendar year 2025, and 20% for property placed in service in calendar year 2026. First-year bonus depreciation is scheduled to vanish after 2026 without congressional action. However, there's a good chance the new Congress will extend or revive it. President-Elect Donald Trump has even proposed returning to 100% first-year bonus depreciation for qualifying capital investments. In addition, Trump has floated the idea of doubling the ceiling on the Section 179 expensing deduction for small businesses' qualifying investments in equipment. The TCJA permanently capped the deduction at $1 million, adjusted annually for inflation ($1.22 million in 2024 and $1.25 million in 2025). The deduction is subject to a phaseout when the cost of qualifying asset additions exceeds $2.5 million, adjusted annually for inflation ($3.05 million in 2024 and $3.13 million in 2025).   C Corporation Tax Rate The TCJA permanently established a flat 21% corporate rate for C corporations, which also applies to personal service corporations (PSCs). Before the TCJA, C corporations paid graduated federal income tax rates of 15%, 25%, 34% and 35% on taxable income. When taxable income exceeded $10 million, the effective tax rate was a flat 35%. PSCs paid a flat 35% rate on all taxable income. Trump campaigned to lower the corporate tax rate from 21% to 15% for corporations that make their products in America. However, it's currently unclear whether he has congressional support for this proposal.   R&E Expenditures Starting in 2022, the TCJA brought a significant permanent change to the tax treatment of research and experimentation (R&E) costs under Internal Revenue Code Section 174. Under current law, businesses no longer have the option to deduct so-called "specified R&E expenses" (those paid or incurred during the tax year). Instead, they must amortize these costs over five years if incurred in the United States, or 15 years if incurred outside the country. Amortization continues even if the underlying property is disposed of, retired or abandoned during the applicable period. In addition, software development costs now must be treated as Sec. 174 expenses. Making matters even more complicated is a provision requiring that the amortization period begin at the midpoint of the tax year in which the expenditures are incurred or paid. As a result, taxpayers can deduct only 10% of expenses in the first year and 20% of expenses in years two through five, with the remaining 10% deducted in year six. R&E expenditures generally include research and development (R&D) costs in the experimental or laboratory sense. Applicable costs also include those incurred in efforts intended to discover information that would eliminate uncertainty about the development or improvement of a product, including salaries. Important: Sec. 174 defines R&E expenditures more broadly than R&D expenses are defined for Sec. 41 R&D tax credit purposes. So, costs not covered by the credit may still be considered R&E expenditures. That means Sec. 174 may apply to a business regardless of whether it claims the credit. Before the TCJA went into effect, a business could either: Deduct R&E expenses in the year they were incurred, or Capitalize and amortize the costs over a minimum of five years. Software development costs could be expensed immediately. They could also be amortized over five years from the date of completion or amortized over three years from the date the software was placed in service. The new Congress may try to restore the option to deduct R&E costs. Bipartisan support exists for this change because this TCJA provision has adversely affected many small businesses. Specifically, the provision has caused many companies — particularly those in the life sciences and technology sectors — to report taxable income, even if they incur losses. In January 2024, the House passed the Tax Relief for American Families and Workers Act (H.R. 7024) by a vote of 357-70. Among other things, the bill would have temporarily restored the previous Sec. 174 immediate expensing option through 2025 on a retroactive basis for domestic R&E expenses. The Senate never voted on the bill. It's likely that the new Congress will revisit the issue. Additional Tax Proposals On the campaign trail, President-Elect Trump proposed various tax law changes that could affect employers' payroll tax obligations if enacted. Examples include: Eliminating taxes on tips paid to restaurant and hospitality workers, Eliminating taxes on overtime pay, and Eliminating taxes on firefighters, police officers, active-duty military members and veterans. However, Trump didn't provide any details on possible rules and restrictions. If these changes are enacted, employers presumably wouldn't have to pay federal payroll taxes on any tax-free payments. In addition, Trump generally doesn't support the various "green" energy tax subsidies implemented over the last few years, including the tax credit for "clean" commercial vehicles. In fact, he's promised to dismantle the Inflation Reduction Act (IRA), including cutting unspent funds allocated for the law's tax incentives for clean energy projects. However, Republicans from districts and states with significant clean energy projects planned or underway may push back on a full repeal of the IRA. As a compromise, Congress might propose retaining some of the IRA tax credits or restricting them through tighter eligibility requirements. Finally, the president-elect has repeatedly pledged to impose a baseline tariff on imported goods. In his latest proposal, he stated that he would impose a 25% tariff on products from Canada and Mexico and additional tariffs on imports from China. During the campaign, he made several other proposals. Trump routinely claims that the exporting countries will bear the cost of the tariffs. However, U.S. companies that buy imported goods pay the tariffs and will likely pass them along to their customers. Some major U.S. companies and the National Retail Federation have already warned that Trump's tariff proposals would increase product prices. Wait and See It's currently unclear whether Republicans will be able to deliver on their campaign promises. But, with the looming expiration date of many TCJA provisions, 2025 is certain to be a landmark year for federal tax legislation. Contact your tax advisor to stay atop the latest developments and devise tax planning strategies for your business to optimize your tax outcome.

With year end rapidly approaching, many business owners are focusing on budgeting and strategic planning for 2025. But you shouldn't overlook last-minute opportunities to cut taxes for 2024. Here are some tax-smart moves for businesses to consider executing by December 31. Invest in Fixed Assets If you've been planning to buy new or used machinery, equipment or computer systems, you can deduct a significant chunk of the purchase price this year if it's placed in service before December 31, 2024. The first-year bonus depreciation percentage is only 60% for 2024 (down from 80% for 2023 and 100% for 2022). It's scheduled to drop to 40% for 2025, absent congressional action. The bonus depreciation deduction also is available for software, certain vehicles, office furniture and qualified improvement property(generally, interior improvements to nonresidential property, including roofs; HVAC, fire protection and alarm systems; and security systems). However, Section 179 expensing may give you more bang for your buck for 2024. With Sec. 179, you can deduct 100% of the purchase price of new and used eligible assets. The maximum deduction is $1.22 million for 2024. In addition, the deduction begins phasing out on a dollar-per-dollar basis when qualifying purchases exceed $3.05 million for 2024. The maximum deduction also is limited to the amount of your income from business activity. You can carry forward excess amounts or claim the unused amounts as bonus depreciation, which isn't subject to any income limits or phaseouts. Bonus depreciation can even create net operating losses (NOLs). Under the Tax Cuts and Jobs Act (TCJA), NOLs can be carried forward only and are subject to an 80% limitation. Beware: Depreciation-related deductions can reduce qualified business income (QBI) deductions (see below) and certain other tax breaks that depend on taxable income. Your tax advisor can help determine what's right for your situation. Important: President-Elect Trump has expressed support for returning to 100% bonus depreciation, as well as doubling the phaseout threshold for Sec. 179 expensing. In 2025, the Republican-controlled Congress could pass legislation that includes these changes as part of its efforts to extend and expand the TCJA. Timing Income and Deductions If you conduct your business using a so-called pass-through entity — meaning a sole proprietorship, S corporation, limited liability company or partnership — your shares of the business's income and deductions are passed through to the owners and taxed at your personal rates. Under current law, the 2025 individual federal income tax rate brackets will be the same as this year's, with modest bracket adjustments for inflation. So, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. At a minimum, this strategy will postpone part of your tax bill from 2024 until 2025. Most small businesses (including C corporations and personal service corporations) can use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting allows you to manage your 2024 and 2025 business taxable income to minimize taxes over the two-year period. If you expect your business income will be taxed at the same or lower rate next year, there are specific cash-method moves that can defer some taxable income until 2025. On the income side, the general rule for cash-basis businesses is that you don't have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. That will defer some income until 2025, because you won't collect the money until early next year. Of course, this should be done only for customers with solid payment histories. Other ways for cash-basis businesses to reduce taxable income for the current year include: Charging recurring expenses at year end. You can claim 2024 deductions even though you won't pay the credit card bills until 2025. Paying expenses with checks and mailing them a few days before year end. The tax rules allow you to deduct the expenses in the year you mail the checks, even though they won't be cashed or deposited until early next year. Prepaying some expenses before year end. Prepaid expenses can be deducted in the year they're paid if the economic benefit from the prepayment doesn't extend beyond the earlier of 1) 12 months after the first date on which your business realizes the benefit of the expenditure, or 2) the end of the next tax year. Important: Timing strategies that reduce business income may also reduce your QBI deduction (see below) and certain other tax breaks that depend on taxable income. Your tax advisor can help determine what's right for your situation. On the other hand, if you expect to be in a higher tax bracket in 2025, take the opposite timing approach: Accelerate income into this year (if possible) and postpone deductible expenditures until 2025. That way, more income will be taxed at this year's lower rate instead of next year's expected higher rate. Maximize Your QBI Deduction A noncorporate owner of a pass-through entity may be eligible for a deduction of up to 20% of the owner's share of the entity's QBI. This deduction is subject to complex rules and restrictions. For example, it's subject to limitations based on an owner's taxable income. So, if you're close to the income limit, you might consider deferring taxable income into next year and accelerating deductible expenditures into this year. However, you don't want to lower taxable income too much — the QBI deduction itself is based on income from the business. Additionally, the QBI deduction is subject to limitations based on the W-2 wages paid and the unadjusted basis of qualified property for the tax year. To increase your QBI deduction this year, consider increasing W-2 wages (possibly through year-end bonuses) or buying qualified property in 2024. (However, be aware that increasing wages or taking first-year depreciation deductions can have the unintended consequence of decreasing your QBI deduction.) Note: The QBI deduction is currently scheduled to expire after 2025, unless Congress extends it or makes it permanent. There's currently notable bipartisan support for extending this TCJA provision because it benefits small businesses. Leverage Retirement Plan Credits Eligible small employers that don't already offer a retirement plan can reap multiple tax benefits by establishing a qualified retirement plan. For example, you can claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan, such as a 401(k) plan. Eligible costs are those incurred to set up and administer the plan and to educate employees about it. A perk of this credit is that you can elect to claim it for the tax year before the plan starts, for the start-up costs paid or incurred that year. For instance, a qualified small employer (meaning one with no more than 100 employees) whose new plan doesn't become effective until January 1, 2025, can elect to treat 2024 as the first credit year. In addition, eligible small employers can claim a tax credit for contributions made to a defined contribution plan, SEP or SIMPLE IRA plan. An eligible employer that adds an auto-enrollment feature can claim a credit of $500 annually for three years, beginning with the first tax year the employer includes automatic enrollment. Be Proactive With significant parts of the TCJA scheduled to expire after 2025 and a new GOP majority in Congress, 2025 will likely bring some major shifts in the tax landscape. Contact your tax advisor to take advantage of current tax breaks to minimize your federal tax liability for 2024 and stay atop any new developments. Have You Considered the PTET Election? Most states have pass-through entity tax (PTET) laws. This tax functions as a workaround for the current $10,000 cap on the federal income tax deduction for state and local taxes (SALT). PTET may benefit owners of pass-through entities — including partnerships, S corporations and limited liability companies — who pay individual income tax on their share of the business's income. The details vary by state. But the general goal is to shift the state tax burden for pass-through entity income from the individual partners or shareholders to the entity. Typically, the laws allow eligible pass-through entities to pay an elective entity-level state tax on business income with an offsetting tax benefit at the owner level. The benefit usually is a full or partial tax credit, deduction or exclusion. The business can claim a Section 164 business deduction for the full tax payment because the SALT cap doesn't apply to businesses. Important: The $10,000 SALT limit is scheduled to expire after 2025, without congressional action. President-Elect Trump supports increasing or eliminating it, but some members of Congress may push back on changing the current rules because increasing the SALT limit would only benefit taxpayers living in high-tax states. The PTET election isn't necessarily right for every pass-through entity. Contact your tax advisor to discuss whether this option is available in your state and makes sense for your situation.