Cope With New Corporate Reporting Rules
Requirements relating to beneficial owners
Under new reporting rules taking effect January 1, 2024, certain companies are required to provide information about their “beneficial owners” – those who ultimately control the operation – to the Financial Crimes Enforcement Network (FinCEN). The new requirements were imposed by the Corporate Transparency Act (CTA) that was passed in 2021.
Comparable reporting requirements already applied to many larger corporations, but this is the first time that some smaller firms will have to step up.
Background: The new CTA rules apply to a business entity that is a “reporting company” and is not specifically exempted. Reporting companies include any U.S. entity – such as a C corporation, S corporation or limited liability company (LLC) – and any privately-owned foreign entity registered to do business in a U.S. state.
There is a lengthy list of 23 exemptions ranging from charitable organizations to insurance companies to government units. One key exemption applies to a U.S.-based “large operating company” that employs more than 20 full-time employees and has more than $5 million in gross receipts or sales. Note: A company that subsequently meets these standards can file for an updated status.
Under the CTA, the entity must provide identifying information about its beneficial owners. A beneficial owner is defined as a person who, directly or indirectly, exercises “substantial control” over a reporting company or owns or controls at least 25% of the business. The following factors indicate substantial control of a reporting company.
• The individual is a senior officer of the company.
• The individual has authority over the appointment of certain senior officers or majority of the board of a company.
• The individual has substantial influence over the company’s important decisions.
• The individual has any other type of substantial control over the company.
The CTA also requires reporting companies created on or after January 1, 2024, to provide identifying information about “company applicants” responsible for the filings creating the company, such as legal counsel, as well as anyone who directed the filing to be made.
Depending on its date of formation, reporting companies have either 30 days or one year from the January 1, 2024, effective date to comply with the new reporting rules. If a company was created or registered prior to January 1, 2024, it has one year to file its initial reports. Companies created or registered on January 1, 2024 or thereafter will have 30 days upon receipt of their documents for initial filing.
Note: A reporting company has 30 days to file an updated report after any change relating to information it previously reported. Also, it must correct any inaccurate information in its reports within 30 days of becoming aware of the error.
The penalties for omissions or misstatements can be severe. Failing to comply with the new reporting rules could result in civil fines of $500 a day for as long as reports are missing or remain inaccurate. Such failures may also trigger criminal fines of up to $10,000 and a jail term of up to two years.
Practical advice: Prepare now for this new requirement taking effect in 2024. Once all the information is compiled, establish the processes for meeting the reporting rules. Rely on your professional advisors to lead the way.
Ten Top Money Ideas for 2024
Start planning ahead for next year
Are you ready to make some financial resolutions for 2024? Although every situation is different, here are ten money management ideas that might make sense for you.
1. Diversify. If volatility in the stock market has taught us anything, it is the need to diversify. Diversification means spreading out your investments over different asset classes as well as investing within those classes. Conversely, if your investment focus is extremely narrow, the risk of disaster is greater.
2. Consider asset allocation. This investment principle often works hand-in-hand with diversification. By assigning various percentages to the assets in your portfolio, you increase the likelihood of meeting your main objectives and addressing risk aversion.
3. Re-balance your portfolio. Even the best investment design can skew over time. This is a moving target that you must keep an eye on. For instance, if you have adopted an asset allocation plan, now is a good time to review it and make the necessary adjustments.
4. Be tax-efficient. As you become more proficient at investing, make sure you fully account for all the tax implications. Factor taxes into your investment decisions. Remember that it is what you keep after taxes, not how much you earn, that really matters.
5. Develop a budget. Spending more than you make is a common problem. It helps to draw up a monthly budget that takes all your expenses into account. Give yourself a little leeway – everyone is entitled to splurge occasionally – but stick close to the guidelines throughout 2024.
6. Reduce debt. Although some forms of debt may be perfectly acceptable, such as the mortgage on a home, you should do your best to reduce your other debt load, especially if you are paying interest at relatively high rates. In some cases, debt consolidation may be advisable.
7. Set aside emergency funds. The old axiom about saving for a rainy day is true. Squeeze some extra savings into the monthly budget even if you do not think it is critical. A sudden job loss or unexpected health issue can change things in a hurry.
8. Contribute to retirement plans. If you are already contributing to an employer plan like a 401(k), keep plugging away. In fact, where you can afford to, you might increase contributions for 2024. The money in your account continues to grow on a tax-deferred basis until it is withdrawn – usually, not until you retire.
9. Rely on IRAs. Qualified plan contributions may be supplemented by traditional and Roth IRAs. Because Roth IRAs offer future tax advantages, you may choose to convert IRA funds into a Roth this year and pay the resulting tax.
10. Do some estate planning. Finally, look forward even more. Fine-tune your estate plan by addressing the changing needs of your family. When possible, maximize the benefits for your heirs with a minimum of tax erosion. Your professional advisors can provide any assistance you may need.
Six Tax Deductions for Charitable Volunteers
Reap tax rewards for expenditures
If you help out your favorite charity, you do it out of the goodness of your heart – not for the tax breaks. But there is no reason you should not claim all the tax benefits you are entitled to if you itemize deductions. This can include a variety of out-of-pocket expenses incurred on behalf of the charity. Of course, the other usual rules for deducting charitable donations, including strict record-keeping requirements, still apply.
What sort of expenses are we talking about? Here are six common expenses that may be deducted by charitable volunteers.
1. Travel expenses: Generally, you can claim a charitable contribution deduction for travel for an organization as long as there is no significant element of personal pleasure, recreation or vacation in the travel. This includes the following:
• Air, rail and bus transportation;
• Expenses for your vehicle;
• Taxi fares and other transportation costs; and
• Meals and lodging.
Because these travel expenses are not business-related, they are not subject to the same limits as business expenses. For instance, you can normally deduct only 50% of the cost of qualified business meals.
If you use your own vehicle for driving on behalf of a charity, you may deduct your expenses based on detailed records or choose to use the IRS-approved flat rate. The current flat rate, which is set statutorily and is not indexed for inflation, is 14 cents per mile.
2. Phone/fax expenses: Specific charges for landline telephone calls, cellphone calls and faxes incurred for charitable purposes are tax-deductible. In addition, you may deduct the cost of installing a separate phone line used strictly for charity-related purposes.
3. Conventions: When you attend a convention as a charity’s designated representative, you may deduct unreimbursed travel expenses. This includes reasonable costs of meals and lodging at the convention.
4. Uniforms: The initial cost and maintenance of a uniform that is not “suitable for everyday wear” is deductible if used for performing charitable services (e.g., Boy Scout or Girl Scout uniforms for troop leaders).
5. Foreign exchange students: If you house a foreign exchange student, you may deduct up to $50 per month of expenses for each month the child attends high school. The student must reside in your home under a written agreement with a qualified charitable organization and cannot be related to you.
6. Underprivileged youths: You may deduct reasonable unreimbursed expenses paid to allow underprivileged youths to attend athletic events, movies or dinners if the youths are selected by a charitable organization as a means of reducing juvenile delinquency. But your own expenses are nondeductible in this case.
Finally, remember that detailed record-keeping is critical. Be prepared to prove your expenses in case the IRS ever challenges your deductions. Your professional tax advisors can provide more information.
How to Fix Your Business Budget
Steps for reviewing the process
In another article on personal “money ideas,” we talk about the need for sticking to a budget. But your small business should operate on a budget, too. And, if 2023 is not shaping up the way you had planned, it may be time to revisit matters, especially if you expect to see improvement in 2024.
Practical idea: Make an in-depth review of your budgeting process. Is it accomplishing all the objectives you hope to meet, including strategic planning, resource allocation and performance and compensation evaluations? If not, some changes may be required. To this end, following are several suggestions to consider.
• Become more dynamic. Important business decisions should depend on a realistic business plan. However, the traditional annual budget can quickly become obsolete when certain assumptions inevitably prove to be wrong. Move quickly to revise the budget when it is warranted.
For many firms, a quarterly review is no longer sufficient. When significant factors change—such as interest rates, fuel costs or direct competition—you may need to adapt on the fly. Build this flexibility into your budget.
• Allocate and react. Initial allocations are difficult, but once they are made, they do not have to be etched in stone. Just because more resources are needed does not necessarily mean you should not do it. Additional budget allocations may be allowed during the year.
When it is not feasible to complete a comprehensive review, you might ease some financial constraints. If you have good people in place, you need to trust them to make sound decisions without micromanaging the situation.
• Give perspective to performance evaluation. It usually does not make sense to judge worker performance based on target numbers and principles that have become outdated. Furthermore, basing pay on budgets that managers have set for themselves encourages them to lower expectations to provide a better chance of meeting their goals.
If possible, keep performance evaluations separate from the planning processes. Managers should have to account for how their units actually perform during the measurement period.
• Develop other metrics. Financial results do not have to be the only measuring sticks for business units and their managers. You might supplement the financial data with metrics specific to each segment, some of which are leading indicators of future financial performance. Depending on the operation, these could include attaining significant new clients or customers, success in research and development or improvements in production or customer satisfaction.
• Revise your assumptions. Frequently, budgets are defined by exceeding a threshold, so no bonuses may be paid if the goal is not achieved. This arrangement encourages managers who could be denied a bonus to manipulate the results. If your company shies away from this approach, there will be less temptation to “work the system” and greater emphasis on doing what is best for the company.
Final words: These principles may create an environment that is conducive to growth and sustained success. They will help managers make better decisions based on updated information. Of course, budgeting will still be time-consuming, but it should be time well-spent.
Tee Up This Tax Break
Do you own a vacation home near a golf course that will be hosting a pro tournament? You may be able to benefit from the “Masters tax break.”
Idea in action: Rent out the home to a golfing enthusiast. As long as the rental period lasts for less than 15 days, you do not have to report any taxable income to the IRS. But you cannot deduct any of your rental-related expenses, either.
This tax strategy became popular among homeowners in Augusta, Georgia when the iconic Masters tournament was being held (hence, the name). It also works for other sporting events, concerts, festivals, state fairs, etc. Consider the opportunities.
Facts and Figures
Timely points of particular interest
ERC Claims – Due to rising concerns about improper Employee Retention Credit (ERC) claims, the IRS has put a halt to processing these credits, at least through the end of the year. The ERC was designed to provide tax relief for businesses during the height of the pandemic, but scams by aggressive promoters have proliferated. The moratorium on ERC claims went into effect on September 14. Expect the IRS to provide more guidance in the near future.
Catch-Up Contributions – The IRS has announced an extension to the new requirement that catch-up contributions to a 401(k) plan made by certain high-income employees must be deposited in a Roth account. This provision in SECURE 2.0, which was scheduled to take effect in 2024, has been postponed to 2026. At the same time, the IRS clarified that plan 401(k) participants age 50 and older may continue to make catch-up contributions after 2023, regardless of income.