Feature Articles Unlocking the Potential Benefits of ESOPs Prepare for Resilience with a Business Continuity Plan 4 Key Tax Questions About 2025 Taxes Tax Tips Married Filing Separately: When It May Make Sense A Better Way to Help with Tuition Business Mileage Rate Is Up for 2025 QuickBooks Tips Are You Sending Automated Invoice Reminder Emails in QuickBooks Online?

Unlocking the Potential Benefits of ESOPs

Wouldn’t it be great if your employees worked as if they owned part of the company? An employee stock ownership plan (ESOP) could make that a reality.

Under an ESOP, employee participants gain partial ownership of the business through a retirement savings arrangement. Meanwhile, the company and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and, potentially, a smoother path for succession planning.

ESOP Basics

To implement an ESOP, your business establishes a trust fund and either:

• The company contributes shares of stock or money to buy the stock (an “unleveraged” ESOP) to the ESOP, or
• The ESOP borrows funds to buy the stock initially, and then the company contributes cash to the ESOP to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often tied to their compensation. The business must formally adopt the plan and submit documents and specific forms to the IRS.

The Tax Effects

Among the most significant benefits of an ESOP is that employer contributions to qualified retirement plans such as ESOPs are typically tax-deductible. However, employer contributions to all defined contribution plans, including ESOPs, are generally capped at 25% of covered payroll. One exception applies: C corporations with leveraged ESOPs can deduct all contributions used to pay interest on the ESOP loan. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, provided the dividends are reasonable. Additionally, dividends voluntarily reinvested by employees in company stock in the ESOP are usually also deductible for the business. (Employees, however, should consider the tax implications for their situations.)

Another potential benefit arises for shareholders in some closely held C corporations: They can sell stock to the ESOP and defer federal income taxes on any gains from the sale. Several stipulations apply, including that the ESOP must own at least 30% of the company’s stock immediately after the sale. Also, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic corporations within a set period.

Finally, when a business owner is ready to retire or leave the company for another reason, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares. Alternatively, the ESOP can borrow money to buy the shares.

Risks to Consider

The tax implications of an ESOP differ for entity types other than C corporations, and these should be carefully evaluated before implementing an ESOP for another entity type. While an ESOP offers many potential benefits, it also presents risks, such as the complexity of setup and, in some situations, a strain on cash flow.

ESOPs typically involve high initial costs plus ongoing costs that grow with the plan’s size. Additionally, ESOPs can be burdensome to administer. Because they’re considered a type of retirement plan, they’re heavily regulated by federal and state governments. Compliance will require hiring various professionals, including a trustee.

Choosing the Right Fit

Is your company a good candidate for an ESOP? It’s essential to sort through the details with an experienced advisor. Contact the office for guidance.

 

Prepare for Resilience with a Business Continuity Plan

Companies without a disaster recovery or business continuity plan need only consider the aftermath of recent hurricanes. News reports estimated property damages from Hurricane Helene alone last year to be more than $59.6 billion, plus disruption of untold businesses and services.

Disasters such as storms, wildfires and earthquakes are unavoidable. However, companies can protect employees, safeguard data and recover costs through a business continuity plan. This plan reduces losses and speeds up recovery.

What Should Your Plan Encompass?

The complexity of your business continuity plan should align with your company’s size, its location, the nature of your industry and the specific risks you face. Small companies may not need a sophisticated media relations plan. However, plans should prepare for local risks and gather feedback from department heads, including plans for these three areas:

1. People. Assign a primary contact and backups to ensure employee safety at work and home. This person should maintain an updated list of employee contact information and be ready to coordinate evacuation if needed. Designate an offsite meeting location and a central contact number for check-ins.

2. Information technology. To remain operational after a disaster, back up email, data and software offsite or in the cloud. Cloud services allow you to restore data securely from anywhere, keeping communication open with employees, customers and vendors during recovery.

3. Insurance. Regularly review your insurance coverage to confirm it’s sufficient to replace assets, restore operations or relocate if necessary. Consider potential losses, such as lost sales. Check details carefully. Standard policies may not cover certain damages, such as flooding after a hurricane.

Planning Isn’t One and Done

It’s not enough to create a disaster plan. You also need to review, revise and test it periodically. Hold regular fire and other evacuation drills and ask employees to update personal contact information. At least once a year, ensure that your IT backup systems function correctly and that your insurance coverage keeps pace with your business’s value.

By making business continuity an ongoing process, you and your employees will be ready to act should the worst happen. Contact the office with questions.

 

4 Key Tax Questions About 2025 Taxes

Right now, you may be more focused on what you’ll owe (or receive as a refund) when you file your 2024 tax return in April than on tax planning for the new year. However, as you work through your annual tax filing, you should familiarize yourself with amounts that may have changed for 2025 due to inflation adjustments.

Here are four commonly asked questions (and answers) about 2025 tax figures:

1. How much money can I contribute to an IRA? If eligible, you can contribute up to $7,000 to a traditional or Roth IRA (but only up to 100% of your earned income, if less). If you’re age 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts are the same as for 2024.)

2. What’s the maximum I can contribute to a 401(k) plan through my job? The amount you can contribute is up to $23,500 to a 401(k) or 403(b) plan (up from $23,000 in 2024). Those 50 or older can add a $7,500 catch-up contribution (unchanged from 2024). New in 2025, employees ages 60 through 63 can make enhanced catch-up contributions of up to $11,250 (including the $7,500 standard catch-up contribution).

3. How much must I earn not to pay Social Security on my entire salary? The Social Security tax wage base rises to $176,100 (from $168,600 for 2024). You don’t owe Social Security tax on amounts earned above this threshold. (Medicare tax must be paid on all amounts earned.)

4. How much can I give one person without requiring a gift tax return? The annual gift tax exclusion is $19,000 (up from $18,000 in 2024).

These are only some of the tax figures that may apply to you. Contact the office for more information.

 

Married Filing Separately: When It May Make Sense

Filing joint tax returns generally results in the lowest tax bill for married couples. However, in some circumstances, they may pay less taxes if they file separately, such as when one spouse has large medical expenses. Medical expenses are deductible only to the extent that they exceed 7.5% of adjusted gross income (AGI). So if one spouse would have significantly lower AGI filing separately, it may increase the deduction.

But be mindful of the downsides of filing separately. Certain tax credits, for instance, are generally unavailable to separate filers, specifically for child and dependent care and education. Also, the capital loss deduction for separate filers is limited to $1,500 (as opposed to $3,000 for married couples filing jointly).

Yet there may be reasons filing separately is better even if the tax cost is higher, such as if one spouse has an income-sensitive repayment plan for student loans. Contact the office to weigh all the factors and determine the most advantageous strategy for your situation.

 

A Better Way to Help with Tuition

Another year is here, and that comes with a new school semester and tuition bills for many people. If you’re considering helping a grandchild or other loved one with their college expenses, first take time to review the tax implications. If the total amount you give to the student in 2025 exceeds the annual gift tax exclusion, you might owe gift tax on the excess. In 2025, this exclusion is $19,000 per recipient or $38,000 for married donors who split gifts (up from $18,000 and $36,000, respectively, in 2024).

To avoid tax implications on gifts over the exclusion (or to preserve the exclusion for other gifts), you can pay tuition directly to the school, which qualifies for an unlimited gift tax exclusion. This exclusion applies only to tuition, not to room, board, books or supplies.

 

Business Mileage Rate Is Up for 2025

The IRS has issued the 2025 cents-per-mile rates that can be used to calculate tax-deductible vehicle operating costs. Effective Jan. 1, 2025, the standard mileage rate for the business use of a car, van, pickup truck or panel truck is 70 cents per mile. This is up from 67 cents per mile for 2024. (For medical or eligible moving purposes, the 2025 rate is 21 cents per mile, and for charitable driving, it’s 14 cents per mile, both unchanged from 2024.)

These rates apply to gasoline and diesel-powered vehicles and to electric and hybrid-electric automobiles. To protect your deduction, don’t forget to keep detailed mileage records. Contact the office with questions.

 

Are You Sending Automated Invoice Reminder Emails in QuickBooks Online?

Collecting unpaid invoices is probably one of the most unpleasant tasks you must complete to keep your company’s finances going. No one likes contacting a customer and requesting that an outstanding bill be settled. But you know your cash flow will suffer if you don’t do this when needed.

Putting it off leads to an uneven collections schedule for your business. Plus, your customers never know when they might hear from you about a debt.

Setting up automated invoice reminder emails in QuickBooks Online solves that problem. It can also ease at least some of your anxiety about overdue payments. Here’s how you can get started.

A Simple Process

The mechanics of setting up automated invoice reminders aren’t complicated. The hardest parts are deciding on the timing of reminders and setting the right tone in your emails.

Start by clicking the gear icon in the upper right. Click Account and Settings under Your Company. Scroll down to the Sales tab and click it, then scroll to the Reminders section. If Automate Invoice Reminders are set to Off, click it, then click the toggle button to turn it to On. QuickBooks Online allows you to set up three different reminders for different periods. Click the down arrow on the Reminder 1 line.

Three Different Reminders

Each reminder is labeled with QuickBooks Online’s suggested timing (before the due date, on the due date and after the due date). You don’t have to follow this approach. You can specify the number of days you want the email reminder to go out before, on or after the due date for the first and third reminders. Reminder 2 only allows you to have the email sent on or after the due date. So, if you want, you can have all the reminders arrive after the due date, which is more typical.

You can select an email greeting (Dear, etc.) and specify whether full name, first name, company name, etc., should address the recipient. You can also modify the subject line to whatever you’d like it to say.

Below this heading information is the email message that will go out to the customer. QuickBooks Online supplies a boilerplate message, but you can edit it or rewrite it entirely.

Preparing Your Email Messages

You’ll notice that the invoice number and company name appear in brackets ([]). You’ll understand this concept if you’ve ever done a mail merge. If not, you should know that data in brackets gets replaced by actual data from your QuickBooks Online file. So, if one of the companies you’re writing to is Copy City, that name will replace the boilerplate text in brackets. The customer’s actual invoice number will appear in that field.

Of course, you’ll want to write separate messages for each reminder depending on when it will be sent. For example, your language will be a little more potent if the payment is 30 or more days late rather than seven days late. Give your customers the benefit of the doubt, at least on your first reminder. The customer may have missed the invoice or not have noticed the due date.

When you’re done setting up your reminders, click Save. Automatic invoice reminders only apply to new invoices. You can modify or turn off your reminders anytime. If you want to send an individual reminder to a customer about an invoice, hover your mouse over Sales in the toolbar and click Invoices. Click the down arrow in the Action column on the appropriate line and select Send Reminder.

Do You Need Your Own Reminders?

QuickBooks Online displays a list of Tasks that need to be done on its opening (Home) page. It provides various ways to get invoice information quickly. For example, you can scroll down on the Home page to the Income box to learn about open and overdue invoices.

You can also hover your mouse over Sales in the toolbar and click All Sales. You can see how much revenue is tied up in Estimates and Unbilled Income. Click the colored bars to see a list of transactions of each type. You can also see a list of Overdue Invoices. Look in the Action column to see what your options are. And there are always reports like Accounts Receivable Aging Detail, Open Invoices, Unbilled Charges, and Unbilled Time.

New Year, New Habits?

Perhaps one of your resolutions for 2025 is to improve your cash flow. Setting up automated invoice reminders as described here is one way to work toward that, but there are others. If you’re interested in exploring how QuickBooks Online can help, contact the office to set up a training session once you’re caught up with your 2024 accounting work. There’s always more you can learn about QuickBooks Online.

 

Upcoming Tax Due Dates

January 15

Employers: Deposit nonpayroll withheld income tax for December 2024 if the monthly deposit rule applies.

Individuals: Pay the fourth installment of 2024 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

January 31

Employers: File 2024 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration.

Employers: File a 2024 return for federal unemployment taxes (Form 940) and pay any tax due if all the associated taxes weren’t deposited on time and in full.

Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2024 (Form 941) if all of the associated taxes due weren’t deposited on time and in full.

Employers: Provide 2024 Form W-2 to employees.

Businesses: Provide Form 1098, Form 1099-MISC (except for those with a February 18 deadline), Form 1099-NEC and Form W-2G to recipients.

Individuals: File a 2024 income tax return (Form 1040 or Form 1040-SR) and pay the tax to avoid penalties for underpaying the January 15 installment of estimated taxes.

February 10

Employers: File a 2024 return for federal unemployment taxes (Form 940) if all associated taxes due were deposited on time and in full.

Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2024 (Form 941) if all associated taxes due were deposited on time and in full.

Individuals: Report January tip income of $20 or more to employers (Form 4070).

 

Copyright © 2024   All materials contained in this document are protected by U.S. and international copyright laws. All other trade names, trademarks, registered trademarks and service marks are the property of their respective owners.