As we approach the end of 2024, it’s the perfect time to take action and set your business up for success in the new year.
Part two of this month’s small business updates includes the following:
Fund Your Retirement
You have time before December 31 to take steps that will help you fund the retirement you desire. Here are five things to consider.
Establish Your 2024 Retirement Plan
First, a question: Do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2024.
For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a sole proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
Claim the New, Improved Retirement Plan Start-Up Tax Credit of up to $15,000
By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of:
- $500 or
- the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.
The law bases your credit on your “qualified start-up costs.”
For the retirement start-up credit, your qualified start-up costs are the ordinary and necessary expenses you pay or incur in connection with:
- the establishment or administration of the plan, and
- the retirement-related education of employees for such plan.
Claim the New Small Employer Pension Contribution Tax Credit (up to $3,500 per Employee)
The SECURE 2.0 Act, passed in 2022, added an additional credit for your employer retirement plan contributions on behalf of your employees. The new up-to-$1,000-per-employee tax credit begins with the plan start date.
The new credit is effective for 2023 and later.
Exception. The new $1,000 credit is not available for employer contributions to a defined benefit plan or elective deferrals under Section 402(g)(3).
In the year you establish the plan, you qualify for a credit of up to 100% of your employer contribution, limited to $1,000 per employee.
In subsequent years, the dollar limit remains at $1,000 per employee, but your credit is limited as follows:
- 100% in year 2
- 75% in year 3
- 50% in year 4
- 25% in year 5
- No credit in year 6 and beyond
Example. You establish your retirement plan this year and contribute $1,000 to each of your 30 employees’ retirement. You earn a tax credit of $30,000 ($1,000 x 30).
If you have between 51 and 100 employees, you reduce your credit by 2% per employee in this range. With more than 100 employees, your credit is zero.
Also, you earn no credit for employees with wages in excess of $100,000 adjusted for inflation in increments of $5,000 in years after 2023.
Claim the New Automatic-Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The first SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans.
Further, you don’t have to spend any money to trigger the credit. You just need to add the auto-enrollment feature (which does contain a provision that allows employees to opt out).
Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes.
Here are four reasons you should consider converting your retirement plan to a Roth IRA:
- You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
- You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10% penalty. Each conversion has its own five-year period.)
- When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
- Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 73—or to put this another way, you can keep your Roth IRA intact and earning money until you die. After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.
The Tax Cuts And Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) has been part of our tax landscape for nearly seven years, shaping how businesses and individuals plan their finances. As we approach 2025, when many key provisions expire, here are some critical changes that could affect you and your business.
Expiring Provisions: Mixed News for Businesses
Some of the most impactful changes, including lower individual tax rates and the qualified business income (QBI) deduction, are slated to sunset after 2025.
Here are some highlights:
- Lower individual tax rates. Rates under the TCJA are generally lower, but thresholds for higher rates can affect upper-middle-income taxpayers. Unless extended, pre-TCJA rates will return, including a top rate of 39.6%.
- QBI deduction. This valuable 20% deduction for qualified pass-through business income will expire after 2025, potentially increasing your tax burden.
- Bonus depreciation. First-year bonus depreciation is phasing out, dropping to 40% in 2025 and disappearing after 2026 unless extended.
Permanent Provisions: Long-Term Opportunities
Certain TCJA changes are permanent, offering stability and planning opportunities:
- Corporate tax rate. The flat 21% federal corporate tax rate remains a game-changer for C corporations, including personal service corporations.
- Section 179 deductions. Enhanced deduction limits ($1.22 million for 2024) and expanded eligibility provide opportunities for capital investment.
- Repeal of C corporation AMT. This permanent repeal simplifies planning for corporations.
Winners and Losers: Assessing the Impact
The TCJA introduced both benefits and limitations for taxpayers:
- Winners. Businesses benefit from faster depreciation rules, more generous Section 179 deductions, and liberalized vehicle depreciation.
- Losers. Restrictions on 1031 exchanges for personal property, limits on business interest deductions, and the disallowance of entertainment expense deductions have increased costs for some.
Planning for the Future
The expiring provisions and ongoing legislative uncertainty make proactive tax planning essential. Key considerations include:
- Adjusting for potential higher individual tax rates
- Maximizing the benefits of expiring deductions and credits
- Evaluating your entity structure
Contact your tax and financial advisors to determine the best moves for your situation.