Getting Used to 12 Higher Tax Limits in 2024

I don’t know about you, but taxes are not my favorite thing to think about. However, if you’re a small business owner like me, it’s important to understand taxes in order to lower your tax bill and avoid troubles with the IRS. The good news is that the IRS adjusts about 30 tax rules every year to account for inflation. This year, due to a high inflation rate, there have been some changes for 2024 that could benefit small businesses like ours. Let me tell you about 12 of these changes and what you need to do about them. Don’t worry, we won’t get too caught up in the numbers. Just remember that we may need to update our budget, plans, and even our conversations with employees.

1. Adoption Credit: Making Adoption More Affordable

I want to tell you about this awesome thing called the Adoption Credit. It’s a special benefit that some companies offer to help their employees with the costs of adopting a child. Cool, right? Well, in 2024, the maximum amount of money you can get reimbursed on a tax-free basis for adoption expenses is $16,810. That’s even more than last year! Of course, companies can choose to offer smaller reimbursements if they want. The important thing is that if a company offers an adoption assistance plan, they have to treat everyone equally. No favoritism allowed!

By the way, there’s something you should know: Even though the money you get through the Adoption Credit is tax-free and you don’t have to worry about income tax, it’s still subject to FICA. Just a little heads up!

2. Small Employer Health Insurance Credit: Helping Small Businesses Help You!

If you’re a small business owner and you cover at least half of the employee health insurance costs through the government’s SHOP in 2024, you might qualify for a tax credit. This credit is equal to 50% of the premiums you pay. To claim the maximum credit, your company can have no more than 10 full-time equivalent employees, which includes both full-time and part-time employees using a specific formula. Also, the average annual wages of your employees must not exceed a certain limit, which for 2024 is $32,400 (increased from $30,000 in 2023).

If you don’t want to offer a group health insurance plan where you pay at least half of the premiums, there are other healthcare options available for you to consider. You can learn more about them in points #3 and #4.

3. QSEHRAs

Did you know that there’s an affordable way to help employees with their health coverage? It’s called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). With a QSEHRA, small employers like me can contribute towards the premiums for the coverage that employees get on their own.

Now, a QSEHRA is only available to small employers who don’t have any other health plan and have less than 50 full-time employees. In 2024, the yearly reimbursements are limited to $6,150 for individual coverage and $12,450 for family coverage. These limits have increased compared to 2023, when they were $5,850 and $11,800 respectively. You can choose to receive the reimbursements on a monthly basis.

Oh, and by the way: There’s another option for employers, no matter their size. It’s called an Individual Coverage Health Reimbursement Arrangement (ICHRA). With ICHRAs, employers like me set the limits for reimbursing employees for their personally-obtained coverage, instead of the government setting them like with QSEHRAs.

Alright, let’s move on to the fourth option:

4. High Deductible Health Plans (HDHPs) paired with Health Savings Accounts (HSAs)

I’m here to tell you about a super cool way for employers to provide health coverage to their employees without breaking the bank. Instead of a traditional group health plan, they can offer a high-deductible health plan (HDHP) along with a health savings account contribution (HSA). Let me break it down for you!

So, what’s the deal with this HDHP? Well, it’s a lot cheaper than a group health plan. Plus, the employer can deduct the premiums for the coverage. And here’s the exciting part: in 2024, the limits for both the coverage and the savings contribution are even higher than in 2023.

Here’s another cool thing: Cafeteria plans!

Employers can set up something called a health flexible spending account (FSA) to help employees pay for medical expenses with pre-tax dollars. It’s like a little savings account just for healthcare. And guess what? In 2024, employees can contribute up to $3,200 (that’s more than in 2023!) to their FSA. How awesome is that?

Let me break it down for you. These plans are like a use-it-or-lose-it deal. You either have to spend the money within a certain time frame or you lose it. But here’s the thing – some plans have a grace period of up to 2 and a half months where you can still use the money, OR they allow you to carry over some dollars from one year to the next. It’s one or the other, you can’t have both. In 2024, you can carry over $640 (up from $610 in 2023).

6. Transportation fringe benefits

Now let’s talk about transportation fringe benefits. These are cool perks that employers can offer to their employees. It includes things like free parking, monthly transit passes, and even van pooling. And guess what? These perks are tax-free for the employees! But there’s a catch, there’s always a catch, right? There’s a limit to how much you can get tax-free each month. In 2024, that limit is $315 (up from $300 in 2023).

7. First-year expensing

Instead of spreading out the cost of machinery and equipment I buy over a certain number of years, like the tax law usually says, I can choose to deduct the entire cost in the first year, if I make a profit. In 2024, the most I can deduct is $1,220,000 (it was $1,660,000 in 2023). This deduction can affect when I decide to buy new equipment or upgrade the ones I already have for my business. Just ordering them in 2023 won’t count for the deduction; I need to have them ready to use in my business for it to count.

It’s good to know that bonus depreciation, which is another deduction for equipment purchases and some other expenses, is getting smaller (80% in 2023; 60% in 2024). So, being able to write off the full cost in the first year is an important choice for me to consider.

8. Energy-saving benefits for businesses

Did you know that as a landlord, you can save some money by making energy-efficient improvements to your commercial building? It’s true! By upgrading things like lighting and HVAC systems to meet specific energy standards, you can qualify for a special deduction. The amount of money you can deduct per square foot depends on the amount of energy savings you achieve and whether you follow certain wage and apprenticeship rules. In 2024, the maximum deduction is $5.65 per square foot, which is higher than it was in 2023. Remember, though, the year you can claim the deduction depends on when the improvements are actually put into action, not when you order or pay for them.

9. Deduction for Qualified Business Income (QBI)

If you own a business, like a sole proprietorship or a partnership, you might be able to deduct a part of your business income. This deduction is called a personal deduction and it can be up to 20% of your profits. However, there are some limits on who can claim this deduction. For the year 2024, if you file jointly, your taxable income must be below $383,900 to qualify. If you file separately, the limit is $191,950. These limits phase out for higher incomes, up to $483,900 for joint filers and $241,950 for other filers.

10. The cash method of accounting

When it comes to keeping track of money, big businesses like C corporations and partnerships with C corporation partners have to use a method called the accrual method of accounting. It helps them keep a detailed record of their income and expenses. On the other hand, small businesses have the option to use a simpler method called the cash method, which is easier to understand and use.

One thing that large businesses have to deal with when it comes to accounting is inventories. They have to follow special rules for recording and managing their inventory items. However, small businesses have the luxury of treating their inventory items as nonincidental material and supplies, which makes things a lot simpler for them in terms of recordkeeping.

There are certain rules, including the gross receipts test, that depend on the size of a business. If a business meets certain criteria, they can choose to use the simpler options. In order to meet the gross receipts test for the year 2024, a business must have an average annual gross receipts in the 3 prior years not exceeding $30 million (up from $29 million in 2023).

11. Limit on Excess Business Losses

I want to talk to you about pass-through entities and how they can’t always deduct all the losses they receive in a year. There’s this limit they have, which is basically their income minus expenses plus a certain amount called a threshold.

But don’t worry, if they have losses that go beyond this limit, they don’t just disappear. Instead, they become a part of something called a net operating loss. This loss can be carried forward to future years and used to offset any income they make.

Now, let’s talk about penalties.

I want to talk to you about something pretty important: tax penalties. Now, I know this might not sound super exciting, but it’s crucial to understand how these penalties changed from 2023 to 2024. So, let me break it down for you.

In 2024, the penalties for failing to file your taxes, pay them, or meet any other tax obligations are higher compared to 2023. Let me give you an example to make things clearer.

Let’s say you have a partnership or an S corporation with multiple owners, and you’re a bit late in filing your tax returns for 2023, which need to be filed in 2024. In that case, you’ll be hit with a penalty. Now, this penalty is calculated by multiplying a certain dollar amount by the number of owners and the number of days you were late, up to a maximum of 12 months.

In 2023, the penalty amount was $220. For every day you were late, this amount would be multiplied by the number of owners and the number of late days. But in 2024, the penalty has increased to $245 for the same situation.

Let’s use an S corporation with 3 owners as an example. If they filed their 2023 return 4 months late, the penalty they’d have to pay would be $2,640 ($220 multiplied by 3 owners and 4 months). However, if they did the same thing with their 2024 return, the penalty would be even higher at $2,940.

In conclusion,