While this year’s tax season should end without too many surprises, tax preparers say companies should already be thinking about 2025.
Tax professionals from across Northwest Indiana identified multiple tips for business owners to consider for year-end tax planning. But a seismic shift is coming in the near future, they collectively note.
“2024 seems to be a normal year; there’s not a lot of changes on the horizon that will impact most people and businesses. It’s mainly about maximizing your normal expenses,” said Tom Newman, a certified public accountant with Swartz Retson, which is based in Merrillville. “If people are going to be accelerating income in 2024, we want to do some planning. We want to understand losses and holdings to cover tax liabilities.”
However, uncertainties are ahead when considering 2025 and beyond, the accountants warn.
“We’ve got one more year before there are going to be significant individual changes,” Newman said.
Future concerns
In 2017, former President Donald Trump’s administration passed the Tax Cuts and Jobs Act. The plan was a major overhaul of the U.S. tax code that reduced taxes for individuals and businesses.
The federal law cut the corporate tax rate from 35% to 21% and enacted preferable tax treatment for pass-through companies, which include sole proprietorships, partnerships and S corporations — all businesses that are not subject to the corporate income tax rates. Instead, these businesses report their income based on the individual income tax returns of the owners, meaning the businesses are taxed at individual income tax rates.
“All of this is up in the air,” Newman said. “A lot of what will happen depends on who is in the White House next year and what party is in control of Congress.”
And that means individuals will need to be proactive when it comes to preparing for future returns, said Chuck Taylor, a tax specialist who leads the Schererville office of CliftonLarsonAllen, the eighth-largest accountancy firm in the U.S.
“We’re either going to have a lot to do, with new stuff to deal with or go back to the pre-2017 rules,” Taylor said. “We don’t know what’s going to happen and that creates uncertainty.”
The Tax Cut and Jobs Act’s near doubling of the standard deduction created large changes in financial incentives for millions of taxpayers.
Daniel Hungerman, a professor of economics at the University of Notre Dame and a research associate at the National Bureau of Economic Research, explains that the changes in the law regarding itemization caused charitable giving to decline.
He points to a recent study he co-authored with Indiana University Indianapolis professors Xiao Han and Mark Ottoni-Wilhelm that shows that people switching to the standard deduction impacted charitable giving by about $20 billion in 2018, the year Hungerman and his colleagues examined. The negative impact on charitable giving, excluding donations to religious organizations, is likely to be re-examined by Congress, he said.
Marisa Smoljan, director of tax services at Munster-based McMahon & Associates, added that at the end of 2025, a 20% qualified business deduction is set to expire as well. To maximize that deduction before it’s gone — unless it’s extended — Smoljan suggests that saving deductions for 2026 and creating higher income in 2024 and 2025 could be a strategy to maximize the 20% deduction. If tax rates increase after 2025, it will be another reason to defer deductions for 2026, she said.
The November presidential election is also a cause for uncertainty, Taylor said. The outcome of the election will likely impact future tax laws, particularly whether the TCJA will be allowed to sunset or if it will be extended.
“Being an election year (what happens) is a loaded question. A lot will depend on which party takes control and how quickly politicians can pass things,” Newman said.
He added that several tax-related bills have been proposed at the federal and state levels but those will likely not be addressed until after the election.
New reporting rules
Beginning Jan. 1, 2025, Newman points to another looming issue facing businesses. Beneficial Ownership Information reporting requires companies to report information to the Financial Crimes Enforcement Network about the individuals who directly or indirectly own or control a company. The information, which includes names, addresses and personal information about the owners of the companies, is reported to the financial crimes and reporting network, which is part of the U.S. Department of the Treasury.
The U.S. government established BOI reporting through the Corporate Transparency Act. This was passed to prevent the illegal use of businesses defined as corporations or limited liability companies from being used to launder money, evade taxes or finance terrorism.
Businesses created before Jan. 1, 2024, will have to file BOI on Jan. 1, 2025. For new businesses created after the Jan. 1, 2024, the report must be filed within 90 days, Smoljan said.
Newman said most businesses will be required to report beneficial ownership information. If companies do not comply, he added that penalties “are pretty steep.” Non-compliance can amount to $500 per day in civil penalties, while criminal penalties can be fines of up to $10,000 and two years in prison, Newman said.
“It’s a straightforward process, but the submission of legal information will be a burden. You don’t want to miss it because the penalties can be pretty steep,” Newman said.
Smoljan agreed, reiterating that the financial penalties can negatively impact the bottom line for most businesses.
“This is a far-reaching law that will impact many individuals who own a business,” she said. “Even individuals that created single member LLC’s to own real estate or operate a small business are subject to the filing requirement. Of course there are always exceptions to the rules, so there are exemptions that would allow a business to not file the report.”
In the meantime, accountants suggest several ways to improve any tax liabilities this year.
Standard deduction vs. itemizing
When filing taxes, people can claim either the standard deduction or itemized deductions, usually whichever is greater. Deductions are an amount of money taxpayers are allowed to subtract from their income. When taxes are filed, the deductions are subtracted from your annual income, which lowers the amount you pay taxes on. Deductions lower income, and thus, lower your taxes.
For 2024, the standard deduction amount has been increased for all filers. Single filers, or people who are married but filing separately, can deduct $14,600. People who are married and filing jointly, or are a qualified surviving spouse, can deduct $29,200.
Itemized deductions are a list of eligible expenses that can be deducted. Itemized deductions include charitable gifts, a percentage of medical expenses, as well as state and local taxes, which were capped at $10,000 by the TCJA. The Trump-era law doubled the standard deduction. That made it less likely that filers would itemize their taxes. That could change after 2025 if the standard deduction reverts to 2017 levels, tax experts said.
“Most people take standard amounts instead of itemizing because the standard deduction is so high,” Newman said.
One way to maximize deductions is through retirement contributions.
The contribution limits increase each year and the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, which was signed into law in late 2022, expanded some retirement contributions for individuals and businesses. Small businesses that don’t have a retirement plan in place should start exploring their options and try to create a plan before the end of the year, Smoljan said.
The SECURE Act 2.0 also changed the rules on 529 plans for college savings. The 2022 law allows individuals to convert up to $35,000 from a 529 plan to a Roth IRA without penalties, as long as the account has been open for more than 15 years. Before the SECURE 2.0 Act was passed, 529 contributions could be withdrawn, but any growth of those contributions would be subject to taxes if they were not used for expenses allowed under the plan.
“This puts a lot of people at ease, especially if their kids don’t go to college,” Newman said.
Potential tax credits
Educators are eligible for a $300 deduction on their federal tax return for unreimbursed expenses. For Indiana public educators, there is a tax credit up to $100 for certain classroom supplies, Smoljan explained.
A tax credit unique to Indiana is the Attainable Homeownership Tax Credit. The AHTC aims to make homeownership in Indiana more attainable for low- and moderate-income individuals and families by incentivizing developers to create affordable housing options.
The credit can significantly reduce the state tax liability of developers, making it more financially feasible for them to create affordable housing. The credit is part of a broader effort by the state of Indiana to promote affordable housing and support community development.
AHTC also provides benefits for individuals and businesses that make contributions to affordable housing organizations, such as Habitat for Humanity, Newman said. Taxpayers can receive a tax credit that’s half the donation, up to $10,000, Newman said.
“The Attainable Homeownership Tax Credit is a new credit for taxpayers who make donations to the Habitat for Humanity of Indiana. Taxpayers who donate to this nonprofit can receive a 50% tax credit for their donation. Money, land, real estate and in-kind donations all qualify for the tax credit,” Smoljan said.
Estate planning
Taylor said a “significant wealth transfer” is looming in the U.S. as baby boomers (born 1946 to 1964) and late boomers (people born between 1958 and 1964) prepare to shift their wealth to younger family members. Known as the “Great Wealth Transfer,” these older Americans are expected to transfer about $84 trillion in assets to their children and grandchildren over the next two decades.
Older Americans looking to transfer their assets to family members should meet with advisers to ensure their wishes can be fulfilled. That means legal documents such as wills and trusts need to be in order. Taylor noted that current tax laws may make it more beneficial for older people to gift money to family members and other beneficiaries before their death.
Currently, people are allowed to give $18,000 in annual gifting without impacting their ability to gift money in the future, or without affecting the taxability of their estate, he said.
“This is why estate planning is so important. You have to be smart in order to protect these assets,” Taylor said. “You have to understand what your net worth is and begin to look at plans for how you can shift that money before tax rules change.”
Smoljan added that the estate and gift tax exemption, which is set at $13,610,000, is expected to be cut in half after 2025. Taxpayers with high net worth should be looking to take advantage of the higher exemption. Gifting assets now could save a significant amount of estate taxes in the future, she said.
QBI
Self-employed individuals and small business owners who operate as a pass-through entity can benefit from the qualified business income deduction. Pass-through entities include businesses that are structured as partnerships, S corporations or limited liability companies.
The QBI allows eligible business owners to deduct up to 20% of their qualified business income on their taxes, Newman said. The government defines qualified income as the “net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” According to the guidelines, taxable income in 2023 must be below $182,100 for single filers or $364,200 for joint filers to qualify.
Contact is critical
Tax preparers aren’t just available to clients when it’s time to pay taxes. They’re available all year, and it’s important for individuals and business owners to remain in contact with them, Taylor said.
Newman agreed. He says maintaining regular contact with tax preparers is essential to keep abreast of all options available that can maximize your deductions or to determine other ways to mitigate tax liabilities.
Various events throughout the year such as marriage, divorce, the birth of a child, the sale of stock shares, the sale of a business, inheritance and the like are all common situations that can impact your tax situation. A certified public accountant can navigate these life events and help taxpayers adjust to the effect these changes can have on taxable income.
“Be aware there are changes coming down the road in one year that could be significant on the individual side,” Taylor said. “You want to prepare for that now.”
Read more stories from the current issue of Northwest Indiana Business Magazine.
In this issue: October – November 2024
In this issue
Professional advancement: Business, organizations share news about new hires and locations, promotions, accolades
Professional advancement
Journey to Industry 4.0: Experts, manufacturers take strides toward digital transformation of Hoosier factories
Capital requirement
Corporate cares: Helping employees live happier, healthier lives benefits community too
Simple client engagement
Framework for future competitiveness: Study’s first phase shows Indiana’s tax system friendly to businesses, long-term growth
‘Count to 10 before you hit send’
Blazing economic trails: Women build careers that break barriers, create opportunities for everyone
Business in a box
Big donations: Some Northwest Indiana firms find more is best when it comes to charitable giving
Serendipitous road to MBA
Ready for tomorrow: Schererville’s patience paying off as plans for major improvements take shape
Elkhart — Heart of the city
Build brand awareness with editor’s help
Siltworm: Product into purpose: Merrillville company’s inventions prevent construction erosion
