taxes

Read This Before Listing Your Property as a Vacation Rental

Read This Before Listing Your Property as a Vacation Rental
Read This Before Listing Your Property as a Vacation Rental 850 500 smolinlupinco

Whether you own a lakefront cottage, vacation beach home, or ski chalet, renting out your property for part of the year can have significant tax impacts.

Here’s what you need to know.

Your level of personal use impacts your taxes

The number of days the property is rented has a direct impact on your taxes.

However, there are certain scenarios that don’t count towards this total since your official “personal use” of the property includes more than your own vacations. It also includes vacation use by your relatives—even if you charge them market-rate rent. It also includes use by nonrelatives if you don’t charge them a market rate rent.

This is important because if you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all.

Under these circumstances, you could see significant tax benefits since even a significant amount of rental income received won’t be included in your income for tax purposes. However, you also won’t be able to deduct operating costs or depreciation﹘only property taxes and mortgage interest. 

(Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you do rent the property out for nonpersonal use for more than 14 days, the rent received must be included in your income and you will be able to deduct operating costs and depreciation (subject to several rules). To do this, you’ll need to allocate expenses between rental days and personal use days.

For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. Additionally, you would allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. If the personal use exceeds the greater of 14 days or 10% of the rental days, the personal use portion of interest on a second home will also be deductible. In this case, though, depreciation on the personal use portion isn’t allowed.

Income and expenses

When rental income is greater than allocable deductions, you’ll need to report both in order to determine how much rental income you should add to your other income for tax purposes. 

When you may claim a loss

If the income is lower than the expenses and you don’t use the property personally for more than 14 days or 10% total percent of rental days, you could be able to claim a rental loss.

When calculating the loss, though, you must allocate your expenses between the rental and personal portions. It’s also important to keep in mind that the loss will be considered “passive” and may be limited under the passive loss rules.

When you cannot claim a loss

If rental income is higher than expenses or if the house is used personally for 10% of rental days or more than 14 days total (whichever is greater), you won’t be able to claim a loss. However, you’ll still be able to use your deductions to balance out rental income. Any unused deductions will be carried forward. This could be usable in future years.

While there are still multiple deductions up to the amount of rental income you can claim, you must use them in this order: 

  • Interest and taxes
  • Operating costs
  • Depreciation

Questions? Ask Smolin

Tax rules for vacation rentals can be complicated. If you plan to rent out your property, it pays to plan ahead. Contact your Smolin accountant to learn how you may be able to maximize deductions in your unique situation.

Estate Planning Don’t Forget the Generation-Skipping Transfer (GST) Tax

Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax
Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax 850 500 smolinlupinco

Would you like to include grandchildren, great grandchildren, or nonrelatives who are significantly younger than you in your estate plan? If so, you’ve got more to consider than gift and estate taxes. The generation-skipping transfer (GST) tax may also apply.

GST Tax Basics

One of the harshest taxes in the Internal Revenue Code, the GST tax is a flat 40% tax on asset transfers that “skip persons”. For example, the tax may apply if you plan to leave assets to grandchildren or other family members who are more than one generation below you. (For non-family members, the tax applies when the heir in question is more than 37 ½ years younger than you.)   

Because this tax is calculated in addition to estate and gift taxes, it can significantly impact the amount of wealth you’re able to leave to future generations. 

GST Tax Exemption Under the Tax Cuts and Jobs Act

A generous GST tax exemption may fortunately offer some relief. For persons dying after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs act adjusts the GST tax exemption amount to an inflation-adjusted $10 million. That totals $13.61 million for 2024.

Unless congress takes action before this time frame ends, the exemption will shrink back to an inflation-adjusted $5 million starting on January 1, 2026.

Of course, taking advantage of this exemption requires careful planning.

For an exemption to apply in some cases, it’s necessary to allocate the exemption to particular assets on a timely filed gift tax return. This is called an affirmative election.

In some cases, the exemption may be allocated automatically unless you opt out. If you prefer to allocate your exemption elsewhere, this can lead to unwanted results.

Reviewing each transfer for potential GST tax liability is a great way to avoid costly mistakes and ensure your exemption is allocated as advantageously as possible.

What transfers are taxable under the GST?

In addition to direct gifts that skip persons, GST tax applies to two types of trust-related transfers: 

  1. Taxable terminations

Trust assets pass to your grandchildren when your child dies and the trust terminates.

  1. Taxable distributions

Trust income or principal is distributed to a skip person.

Note: Gifts covered by the annual gift tax exclusion aren’t currently subject to the GST tax. 

Protections offered by automatic allocation rules

While the automatic allocation rules can be unfavorable if you prefer to allocate your exemption elsewhere, they’re ultimately intended to protect you against unintentional loss of GST tax exemptions.

For instance, your unused GST tax exemption may be automatically applied to a gift to a grandchild or other “skip person” that exceeds the annual gift tax exclusion ﹘without the need to make an allocation on a gift tax return. 

The rules’ impact on “GST trusts” are complex. In general, a trust is considered a GST trust if it will likely benefit skip persons or your grandchildren in the future.

In most cases, these automatic allocation rules work favorably and ensure your GST tax exemption is applied where it’s most needed. However, they can also lead to unintended﹘and potentially expensive﹘results in other cases.   

Questions? Smolin can help

For many people, the GST tax might not be top of mind right now. After all, the exemption amount is currently high enough that it doesn’t impact most families’ estate plans. 

However, the GST tax exemption rate is expected to decrease significantly after 2025 without action from congress. 

By choosing to contact your accountant to plan for this tax now, you can avoid unexpected costs and protect the wealth you want to leave to your younger relatives in the future. 

Can the Research Credit Help Your Small Business Save On Payroll Taxes

Can the Research Credit Help Your Small Business Save On Payroll Taxes?
Can the Research Credit Help Your Small Business Save On Payroll Taxes? 850 500 smolinlupinco

Often called the R&D credit, the research and development credit for increasing research activities offers a valuable tax break to many eligible small businesses. Could yours be one of them? 

In addition to the tax credit itself, the R&D credit offers two additional features of note for small businesses: 

  • Small businesses with $50 million or less in gross receipts for the three prior tax years can claim the credit against their alternative minimum tax (AMT) liability 
  • Smaller startup businesses may also claim the credit against their Medicare tax liability and Social Security payroll 

This second feature, in particular, has been enhanced by the Inflation Reduction Act (IRA), which

1. Doubled the amount of payroll tax credit election for qualified businesses
2. Made a change to the eligible types of payroll taxes the credit can be applied to

Payroll election specifics

Limits to claiming the R&D credit do apply. Your business might elect to apply some or all of any research tax credit earned against payroll taxes rather than income tax, which may make increasing or undertaking new research activities more financially favorable.

However, if you’re already engaged in these activities, this election may offer some tax relief.

Even if they have a net positive cash flow or a book profit, many new businesses don’t pay income taxes and won’t for some time. For this reason, there’s no amount against which the research credit can be applied.

Any wage-paying business, however, does have payroll tax liabilities. This makes the payroll tax election an ideal way to make immediate use of the research credits you earn. This can be a big help in the initial phase of your business since every dollar of credit-eligible expenses holds the potential for up to 10 cents in tax credit. 

Which businesses are eligible? 

Taxpayers may only qualify for the payroll election IF:

  • Gross receipts for the election year total less than $5
  • Their business is no more than five years past the start-up period (for which it had no receipts)

To evaluate these factors, an individual taxpayer should only consider gross receipts from the individual’s businesses. Salary, investment income, and other types of earnings aren’t taken into account.

It’s also worth noting that individuals and entities aren’t permitted to make the payroll election for more than six years in a row. 

Limitations

Prior to an IRS provision that became effective in 2023, taxpayers were only allowed to use the credit to offset payroll tax against Social Security. However, the research credit may be now applied against the employer portion of Medicare and Social Security. That said, you won’t be able to use it to lower FICA taxes that are withheld on behalf of employees.

You also won’t be able to make the election for research credit in excess of $500,000. This is a significant uptick compared to the pre-2023 maximum credit of $250,000.

A C corporation or individual may only make the election for research credits that would have to be carried forward in the absence of an election—not to reduce past or current income tax liabilities. 

Questions? Smolin can help. 

We’ve only covered the basics of the payroll tax election here. It’s important to keep in mind that identifying and substantiating expenses eligible for the research credit—and claiming the credit—is a complicated process that involves extensive calculations.

Of course, we’re here to help! Contact your Smolin accountant to learn more about whether you can benefit from the research tax credit and the payroll tax election. 

How do cash accounting and accrual accounting differ

How Do Cash Accounting and Accrual Accounting Differ?
How Do Cash Accounting and Accrual Accounting Differ? 850 500 smolinlupinco

Financial statements play a key role in maintaining the financial health of your business. Not only do year-end and interim statements help you make more informed business decisions, but they’re also often non-negotiable when working with investors, franchisors, and lenders.

So, which accounting method should you use to maintain these all-important financial records—cash or accrual?

Let’s take a look at the pros and cons of each method.

Cash basis accounting

Small businesses and sole proprietors often choose to use the cash-basis accounting method because it’s fairly straightforward. (Though, some other types of entities also use this method for tax-planning opportunities.)

With cash basis accounting, transactions are immediately recorded when cash changes hands. In other words, revenue is acknowledged when payment is received, and expenses are recorded when they’re paid.

The IRS places limitations on which types of businesses can use cash accounting for tax purposes. Larger, complex businesses can’t use it for federal income tax purposes. Eligible small businesses must be able to provide three prior tax years’ annual gross receipts, equal to or less than an inflation-adjusted threshold of $25 million. In 2024, the inflation-adjusted threshold is $30 million.

While it certainly has its pros, there are some drawbacks to cash-basis accounting. For starters, revenue earned isn’t necessarily matched with expenses incurred in a given accounting period. This can make it challenging to determine how well your business has performed against competitors over time and create unforeseen challenges with tracking accounts receivable and payable. 

 Accrual basis accounting

The United States. Generally Accepted Accounting Principles (GAAP) require accrual-basis accounting. As a result, a majority of large and mid-sized U.S. businesses use this method. 

Under this method, expenses are accounted for when they’re incurred, and revenue when it’s earned. Revenue and its related expenses are recorded in the same accounting period, which can help reduce significant fluctuations in profitability, at least on paper, over time. 

Revenue that hasn’t been received yet is tracked on the balance sheet as accounts receivable, as are expenses that aren’t paid yet. These are called accounts payable or accrued liabilities. 

With this in mind, complex-sounding line items might appear, like work-in-progress inventory, contingent liabilities, and prepaid assets.

As you can see, the accrual accounting method is a bit more complicated than cash accounting. However, it’s often preferred by stakeholders since it offers a real-time picture of your company’s financial health. In addition, accrual accounting supports informed decision-making and benchmarking results from period to period. It also makes it simpler to compare your profitability against other competitors.

For eligible businesses, accrual accounting also offers some tax benefits, like the ability to: 

  • Defer income on certain advance payments
  • Deduct year-end bonuses paid within the first 2.5 months of the following tax year

There are downsides, too.

In the event that an accrual basis business reports taxable income prior to receiving cash payments, hardships can arise, especially if the business lacks sufficient cash reserves to address its tax obligations. Choosing the right method? Smolin can help!

Each accounting method has pros and cons worth considering. Contact your Smolin accountant to explore your options and evaluate whether your business might benefit from making a switch.

Choosing the Best Accounting Method for Business Tax Purposes

Choosing the Best Accounting Method for Business Tax Purposes
Choosing the Best Accounting Method for Business Tax Purposes 850 500 smolinlupinco

Businesses categorized as “small businesses” under the tax code are often eligible to use accrual or cash accounting for tax purposes. Certain businesses may be eligible to take a hybrid approach, as well. 

Prior to the implementation of the Tax Cuts and Jobs Act (TCJA), the criteria for defining a small business based on gross receipts ranged from $1 million to $10 million, depending on the business’s structure, industry, and inventory-related factors.

By establishing a single gross receipts threshold, the TCJA simplified the small business definition. The Act also adjusts the threshold to $25 million for inflation, which allows more companies to take advantage of the benefits of small business status. 

In 2024, a business may be considered a small business if the average gross receipts for the three-year period ending prior to the 2024 tax year are $30 million or less. This number has risen from $29 million in 2023.

Small businesses may also benefit from: 

  • Simplified inventory accounting,
  • An exemption from the uniform capitalization rules, and
  • An exemption from the business interest deduction limit.

What about other types of businesses?

Even if their gross receipts are above the threshold, other businesses may be eligible for cash accounting, including: 

  • S-corporations
  • Partnerships without C-corporation partners
  • Farming businesses
  • Certain personal service corporations

Regardless of size, tax shelters are ineligible for the cash method.

How accounting methods differ

Cash method 

The cash method provides significant tax advantages for most businesses, including a greater measure of control over the timing of income and deductions. They recognize income when it’s received and deduct expenses when they’re paid. 

As year-end approaches, businesses using the cash method can defer income by delaying invoices until the next tax year or shift deductions into the current year by paying expenses sooner.

Additionally, the cash method offers cash flow advantages. Since income is taxed when received, it helps guarantee that a business possesses the necessary funds to settle its tax obligations.

Accrual method

On the other hand, businesses operating on an accrual basis recognize income upon earning it and deduct expenses as they are incurred, irrespective of the timing of cash receipts or payments. This reduces flexibility to time recognition of expenses or income for tax purposes. 

Still, this method may be preferable for some businesses. For example, when a company’s accrued income consistently falls below its accrued expenses, employing the accrual method could potentially lead to a reduced tax liability.

The ability to deduct year-end bonuses paid within the first 2 ½ months of the next tax year and the option to defer taxes on certain advance payments is also advantageous. 

Switching accounting methods? Consult with your accountant

Your business may benefit by switching from the accrual method to the cash method or vice versa, but it’s crucial to account for the administrative costs involved in such a change.

For instance, if your business prepares financial statements in accordance with the U.S. Generally Accepted Accounting Principles, using the accrual method is required for financial reporting purposes. Using the cash method for tax purposes may still be possible, but you’ll need to maintain two sets of books, the administrative burden of which may or may not offset those advantages.

In some cases, you may also need IRS approval to change accounting methods for tax purposes. When in doubt, contact your Smolin accountant for more information.

What’s the Difference Between Filing Jointly or Separately as a Married Couple a Business as a Sole Proprietor Here’s How It Could Impact Your Taxes

What’s the Difference Between Filing Jointly or Separately as a Married Couple?
What’s the Difference Between Filing Jointly or Separately as a Married Couple? 850 500 smolinlupinco

You know that you must choose a filing status when you file your tax return, but do you know what your choice really means?

Picking the right filing status matters because the status you select will influence your tax rates, eligibility for certain tax breaks, standard deduction, and correct tax calculation.

And there are plenty of filing statuses to choose from: 

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying surviving spouse

Married individuals may wonder whether filing a joint or separate tax return will yield the lowest tax. That depends. 

If you and your spouse file a joint return, you are “jointly and severally” liable for the tax on your combined income. That means you’re both on the line for getting it right and settling up. You’ll also both be liable for any additional tax the IRS assesses, including interest and penalties.

In other words, the IRS can pursue either you or your spouse to collect the full amount you owe. 

“Innocent spouse” provisions may offer some relief, but they have limitations. For this reason, some people may still choose to file separately even if a joint return results in less tax overall. For example, a separated couple may not want to be legally responsible for each other’s tax obligations. Still, filing jointly usually offers the most tax savings, especially when the spouses have different income levels.

While combining two incomes may put you in a higher tax bracket, it’s important to recognize that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. These rates are less favorable than the single rates.

Still, there are situations where it’s possible to save tax by filing separately. For example, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.

Tax breaks only available on a joint return

Some tax breaks are only available to married couples on a joint return, including: 

  • Child and dependent care credit
  • Adoption expense credit
  • American Opportunity tax credit
  • Lifetime Learning credit 

If you or your spouse were covered by an employer retirement plan, you may not be able to deduct IRA contributions if you file separate returns. Nor will you be able to exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.

Unless you and your spouse lived apart for the entire year, you won’t be able to take the tax credit designated for the elderly or the disabled, either. 

Social Security benefits

When married couples file separately, Social Security benefits may be taxed more.

Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Questions? Contact your accountant

Choosing a filing status impacts your state or local income tax bill, in addition to your federal tax bill. It’s important to evaluate the total taxes you might owe before making a final decision.

Considering these factors and deciding whether to file jointly or separately may not be as straightforward as you’d think. That’s where we come in. Contact your Smolin accountant for a fuller picture of the potential tax impacts of each option.

Is Qualified Small Business Corporation Status Right for You

Is Qualified Small Business Corporation Status Right for You?
Is Qualified Small Business Corporation Status Right for You? 850 500 smolinlupinco

For many business owners, opting for a Qualified Small Business Corporation (QSBC) status is a tax-wise choice.

Potential to pay 0% federal income tax on QSBC stock sale gains

For the most part, typical C corporations and QSBCs are treated the same when it comes to tax and legal purposes, but there is a key difference. QSBC shareholders may be eligible to exclude 100% of their QSBC stock sale gains from federal income tax. This means that they could face an extremely favorable 0% federal income tax rate on stock sale profits.

However, there is a caveat. The business owner must meet several requirements listed in Section 1202 of the Internal Revenue Code. Plus, not all shares meet the tax-law description of QSBC stock. And while they’re unlikely to apply, there are limitations on the amount of QSBC stock sale gain a business owner can exclude in a single tax year. 

The date stock is acquired matters

QSBC shares that were acquired prior to September 28, 2010 aren’t eligible for the 100% federal income tax gain exclusion. 

Is incorporating your business worth it?

Owners of sole proprietorships, single-member LLCs treated as a sole proprietorship, partnerships, or multi-member LLCs treated as a partnership will need to incorporate their business and then issue shares to themselves in order to attain QSBC status in order to take advantage of tax savings. 

There are pros and cons of taking this step, and this isn’t a decision that should be made without the guidance of a knowledgeable accountant or business attorney. 

Additional considerations

Gains exclusion break eligibility

Only QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible for the tax break—not shares owned by another C corporation. 

5 Year Holding period
QSBC shares must be held for five years or more in order to be eligible for the 100% stock sale gain exclusion. Shares that haven’t been issued yet won’t be eligible until 2029 or beyond. 

Share acquisition 

Generally, you must have acquired the shares upon original issuance by the corporation or by gift or inheritance. Furthermore, only shares acquired after August 10, 1993 are eligible.

Not all businesses are eligible

The QSBC in question must actively conduct a qualified business. Businesses where the principal asset is the reputation or skill of employee are NOT qualified, including those rendering services in the fields of:

  • Law
  • Engineering
  • Architecture
  • Accounting
  • Actuarial science 
  • Performing arts 
  • Consulting 
  • Athletics 
  • Financial services 
  • Brokerage services 
  • Banking
  • Insurance 
  • Leasing 
  • Financing 
  • Investing
  • Farming
  • Production or extraction of oil, natural gas, or other minerals for which percentage depletion deductions are allowed 
  • Operation of a motel, hotel, restaurant, or similar business 

Limitations on gross assets

Immediately after your shares are issued, the corporation’s gross assets can’t exceed $50. However, if your corporation grows over time and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

Impact of the Tax Cuts and Jobs Act

Assuming no backtracking by Congress, 2017’s Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent. This means that if you own shares in a profitable QSBC and decide to sell them once you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be the only tax you owe.

Wondering whether your business could qualify? Smolin can help.

The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are both strong incentives to operate as a QSBC, but before making your final decision, consult with us.

While we’ve summarized the most important eligibility rules here, additional rules do apply. 

sole proprietor business tax impacts

Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes
Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes 850 500 smolinlupinco

It’s not uncommon for entrepreneurs to launch small businesses as sole proprietors. However, it’s crucial to understand the potential tax impacts first.

Here are 9 things to consider. 

1. The pass-through deduction may apply

If your business generates qualified business income, you could be eligible to claim the 20% pass-through deduction. (Of course, limitations may apply.)

The significance of this deduction is that it’s taken “below the line”. It reduces taxable income, as opposed to being taken “above the line” against your gross income.

Even if you claim the standard deduction instead of itemizing deductions, you may be eligible to take the deduction. Unless Congress acts to extend the pass-through deduction, though, it will only be available through 2025. 

2. Expenses and income should be reported on Schedule C of Form 1040

Whether you withdraw cash from your business or not, its net income will be taxable to you. Business expenses are deductible against gross income, rather than as itemized deductions.

If your business experiences losses, they’ll be deductible against your other income. Special rules may apply in relation to passive activity losses, hobby losses, and losses from activities in which you weren’t “at risk”. 

2. Self-employment taxes apply

In 2024, sole proprietors must pay self-employment tax at a rate of 15.3% on net earnings from self-employment up to $160,600. You must also pay a Medicare tax of 2.9% on any earnings above that. If self-employment income is in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns, or $200,000 in other cases, a 0.9%
Medicare tax (for a total of 3.8%) will apply to the excess. 

Self-employment tax is charged in addition to income taxes. However, you may deduct half of your self-employment tax as an adjustment to income. 

4. You’ll need to make quarterly estimated tax payments

In 2024, quarterly estimated tax payments are due on April 15, June 17, September 16, and January 15. 

5. 100% of your health insurance costs may be deducted as a business expense

This means the rule that limits medical expense deductions won’t apply to your deduction for medical care insurance. 

6. Home office expenses may be deductible.

If you use a portion from your home to work, perform management or administrative tasks, or store product samples or inventory, you could be entitled to deduct part of certain expenses, such as: 

  • Mortgage
  • Interest 
  • Rent 
  • Insurance
  • Utilities 
  • Repairs 
  • Maintenance 
  • Depreciation

Travel expenses from a home office to another work location may also be deductible. 

7. Recordkeeping is essential

Keeping careful records of expenses is key to claiming all of the tax breaks to which you’re entitled. Special recordkeeping rules and deductibility limits may apply to expenses like travel, meals, home office, and automobile costs. 

8. Hiring employees leads to more responsibilities 

If you’d like to hire employees, you’ll need a taxpayer identification number and will need to withhold and pay over payroll taxes. 

9. Establishing a qualified retirement plan is worth considering

Amounts contributed to a qualified retirement plan will be deductible at the time of the contributions and won’t be taken into income until the money is withdrawn.

Many business owners prefer a SEP plan since it requires minimal paperwork. A SIMPLE plan may also be suitable because it offers tax advantages with fewer restrictions and administrative requirements. If neither of these options appeal to you, you may still be able to save using an IRA.

Questions? Smolin can help.

For more information about the tax aspects of various business structures or reporting and recordkeeping requirements for sole proprietorships, please contact your Smolin accountant. 

Q1 Tax Deadlines 2024

2024 Q1 Deadlines Employers Need to Know
2024 Q1 Deadlines Employers Need to Know 850 500 smolinlupinco

A new year means new tax-related deadlines! Here are the key dates that business owners and employers should keep on their tax planning radars in the first quarter of 2024. 

Jan. 16, 2024

  • Final installments of 2023 estimated taxes are due.

  • Farmers and fishermen must pay estimated taxes for 2023.

(If not, you must file your 2023 return and pay all taxes due by March 1, 2024 to avoid an estimated tax penalty.)

Jan. 31, 2024

  • File 2023 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration. Send copies to your employees.
  • Provide copies of 2023 Forms 1099-NEC, “Nonemployee Compensation,” to those who received income from your business, where required. File these forms with the IRS.
  • Provide copies of 2023 Forms 1099-MISC, “Miscellaneous Information,” reporting applicable payments to recipients.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2023.

You may pay undeposited tax of $500 or less with your return or deposit it. If the undeposited tax is higher than $500, you must deposit it. If you deposited the tax for the year on time and in full, you may file your return before February 12.

  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report income taxes, Social Security, and Medicare taxes withheld in the fourth quarter of 2023.

    You can pay tax liability of less than $2,500 in full with a timely filed return. You have until February 13 to file your return if you deposited the tax for the quarter in full and on time.



    (If you are an employer with an estimated annual employment tax liability of $1,000 or less, you may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2023 to report income tax withheld on all nonpayroll items.

    These include backup withholding and withholding on accounts, such as annuities, IRAs, and pensions. You may pay a tax liability of less than $2,500 in full with a timely filed return.

    You have until February 12 to file the return if you deposited the tax for the year on time and in full. 

Feb. 15, 2024

  • Provide the appropriate version of Form 1099 (or other information return) to give annual information statements to recipients of relevant payouts made during 2023.

    With the consent of the recipient, you may issue Form 1099 electronically.

    This due date applies only to the following types of payments:
  • All payments reported on Form 1099-B.
  • All payments reported on Form 1099-S.
  • Substitute payments reported in Box 8 or gross proceeds paid to an attorney reported in Box 10 of Form 1099-MISC.

Feb. 28, 2024

  • If you’re filing paper copies, File 2023 Forms 1099-MISC with the IRS.

    (If you’re filing electronic copies, the filing deadline is April 1.)

March 15, 2024

  • Calendar–year partnerships and S Corporations: File or extend your 2023 tax return and pay any tax due.
  • Last day to make 2023 contributions to profit-sharing and pension plan (if return isn’t extended). 

Questions? Smolin can help. 

While helpful, this list isn’t exhaustive. Additional tax deadlines may apply to you and your business. To ensure you’re meeting all applicable deadlines, please contact us to discuss your situation in more detail. 

11 Scenarios Avoid 10% Penalty Tax Early IRA Withdrawals

11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals
11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals 850 500 smolinlupinco

When financial challenges arise, it can be tempting to take an early withdrawal from your traditional IRA. However, making the decision without understanding the tax implications is risky.

Here’s what you need to know, including your options for avoiding the 10% early withdrawal penalty tax.

First off, the penalty doesn’t always apply.

A withdrawal from a traditional IRA will almost always constitute taxable income. The percentage of the withdrawal that will be considered taxable is dependent on whether you’ve made any nondeductible contributions to the account.

If you have made nondeductible contributions, each withdrawal consists of a proportionate amount of your total nondeductible contributions. This portion of the withdrawal is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable.

Of course, 100% of a withdrawal is taxable if you’ve never made any nondeductible contributions.

Exceptions to the 10% penalty tax

If any of these 11 exceptions are met, you may be able to avoid paying the 10% early withdrawal penalty tax on the taxable amount of your withdrawal.

1. The withdrawal is a substantially equal periodic payment (SEPP)

These annuity-like withdrawals must be taken for at least five years—or until you turn 59½. The rules for SEPPs are complicated, though, so it’s best to meet with an accountant before deciding to proceed with this route. 

2. The withdrawal is for qualified medical expenses

Medical expenses are a common reason to make an early withdrawal. If your qualified medical expenses exceed 7.5% of your adjusted gross income, the amount of excess won’t be subject to the tax.

3. The withdrawal is to cover higher education expenses

If you make the withdrawal and pay qualified higher education expenses in the same year, an equivalent amount of the withdrawal will be penalty-free. 

4. The withdrawal will cover health insurance premiums during a period of unemployment

If you have received unemployment compensation for 12 consecutive weeks or longer from the state or federal government during the current or previous year, you can use the withdrawal to cover health insurance premiums without a penalty. 

5. There is a birth or adoption in your immediate family

For each eligible birth or adoption, you may make a withdrawal of up to $5,000 penalty-free. 

6. You’re purchasing your first home

You may make a penalty-free withdrawal within 120 days of the purchase to cover qualified principal residence acquisition costs. However, this type of tax-exempt withdrawal is subject to a $10,000 lifetime limit.

7. You are a qualifying military reservist

If you are a military reserve member called to active duty for at least 180 days (or an indefinite period), your early withdrawal will be exempt from the penalty. 

8. You’re making the withdrawal after a qualifying disability

If you become mentally or physically disabled to the extent that you can no longer do your job or a similar gainful activity, your withdrawal will be exempt from the penalty tax IF the disability is expected to lead to death or be of long/indefinite duration.

9. The IRS makes a withdrawal to cover debt

If the IRS makes a withdrawal to levy against the account, the tax won’t be charged.

10. Withdrawals after death

In most cases, withdrawals taken from an IRA after the account owner’s death are exempt from the 10% penalty. If, however, the funds are rolled over into the surviving spouse’s IRA or the surviving spouse elects to treat it as their own account, the penalty will still apply.

11. A personal or family emergency is expected

Starting in 2024, a new exception for withdrawals used for unforeseeable or immediate financial needs relating to personal or family emergencies will be available thanks to the SECURE 2.0 law. Only one distribution of $1,000 is allowed per year, and you may repay it within three years. 

Be proactive

As you can see, exceptions to the 10% penalty tax are quite specific. As such, most or all of your early traditional IRA withdrawals will likely be subject to the tax. This can push you into a higher federal income tax bracket. This can possibly lead to you paying both a 10% early withdrawal penalty and higher state and federal tax payments.

Plan your finances accordingly if you plan to make a withdrawal. 

Questions? Smolin can help.

This article provides only general information, and many penalty tax exemptions have additional requirements we haven’t covered. If you’re considering making an early withdrawal from your traditional IRA account, the best course of action is to consult with your accountant.

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