Adjusting to a Dozen Higher Tax Limits for 2024





No one enjoys thinking about taxes, but small business owners must do so to minimize their tax bill and avoid an IRS audit. It’s good to know that about 3 dozen tax rules are adjusted annually for inflation. Due to the high rate of inflation in the past year, cost-of-living adjustments for 2024 that the IRS has made to various deductions and credits. These mean changes for small businesses, most of which are favorable. Here are a dozen changes to note…and what to do about them. Don’t get bogged down in the numbers; just recognize that your budget, your plans, and in some cases, communications with employees may need to be updated.

adjusting to a dozen higher tax limits for 2024

1. Adoption credit

If your company offers employees assistance with adoption costs, the dollar limit for reimbursement on a tax-free basis in 2024 is $16,810 (up from $15,950 in 2023). Companies do not have to offer this maximum amount; they can provide smaller reimbursements. If they want to offer an adoption assistance plan, it must be done on a nondiscriminatory basis.

Note: While adoption assistance is not subject to income tax withholding because reimbursements to employees are not taxable to them, the payments are still subject to FICA.



2. Small employer health insurance credit

If you are a small employer and pay at least half the premiums for employee health coverage in 2024 obtained through the government’s SHOP, you may be eligible for a tax credit of 50% of those premiums. In order to claim the maximum credit, there can be no more than 10 full-time equivalent employees (total of full-time and part-timers using a formula) with average annual wages of no more than a set limit. For 2024, it’s $32,400 (up from $30,000 in 2023).

Instead of offering a group health insurance plan in which you pay at least half the premiums, there are other health care options to consider (see #3 and #4).

3. QSEHRAs

An affordable way to help employees with health coverage is to offer a qualified small employer health reimbursement arrangement (QSEHRA) to cover part of the premiums on coverage they obtain on their own. A QSEHRA is only for small employers that do not have any other health plan and have fewer than 50 full-time employees. Annual reimbursements for 2024 are limited to $6,150 for self-only coverage and $12,450 for family coverage (up from $5,850 and $11,800, respectively, in 2023). Reimbursements can be arranged on a monthly basis.

Note: Employers of any size can offer another option: Individual Coverage HRAs. These plans, like QSEHRAs, reimburse employees for their individually-obtained coverage. But unlike QSEHRAs, it’s not the government but the employer that sets the reimbursement limits.


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4. HDHPs plus HSAs

There’s a less costly way to offer health coverage to employees than a traditional group health plan: provide a high-deductible health plan (HDHP), which is considerably less costly than a group health plan, with a health savings account contribution (HSA). The limits for both the coverage, the premiums of which are deductible by the employer, and the savings contribution, also deductible by the employer if the employer makes it, are higher in 2024 than in 2023.

5. Cafeteria plans

Employers can enable employees to pay out-of-pocket medical costs on a pre-tax basis using a health flexible spending account (FSA). For 2024, employees can add up to $3,200 (up from $3,050 in 2023).

These plans usually are use-it-or-lose-it. But they can allow for a carryover to a grace period of up to 2½ months or permit a dollar carryover; it’s one or the other. For 2024, the carryover is $640 (up from $610 in 2023).

6. Transportation fringe benefits

Parking, monthly transit passes, and van pooling can be a tax-free fringe benefit to employees…up to a monthly dollar limit. For 2024, it’s $315 (up from $300 in 2023).



7. First-year expensing

Instead of depreciating the cost of machinery and equipment purchased during the year of a set number of years fixed by tax law (depending on the item involved), you can elect to write off the cost in the first year, assuming you’re profitable. For 2024, the dollar limit on purchases for this purpose is $1,220,000 (it was $1,660,000 in 2023). If you need to upgrade or add new equipment for your business, this write-off may influence when you make your purchases. Ordering items in 2023 isn’t enough for a deduction in 2023; they must be ready for use in the business (in tax parlance, “placed in service”) to fix the year for the deduction.

Given the fact that bonus depreciation—another first-year write-off for equipment purchases and some other expenditures—is declining (80% in 2023; 60% in 2024), first-year expensing is an important deduction option.

8. Energy-efficient commercial building deduction

Landlords can claim a deduction for new lighting, HVAC, and some other internal improvements that bring a commercial building up to certain energy standards. The amount of the deduction, which is a dollar amount per square foot, depends on the amount of energy savings achieved and whether the project complies with prevailing wage and apprenticeship requirements. For 2024, the maximum is $5.65 per square foot (up from $5.36 per square foot in 2023). Again, the year of the deduction depends on when the items are placed in service, not when they’re ordered or merely paid for.

9. QBI deduction

Owners of sole proprietorships, partnerships, limited liability companies, and S corporations (pass-through entities) may qualify for a personal deduction based on their business income. In simple terms, the deduction can be up to 20% of profits. But there’s a taxable income limit on claiming it. For 2024, the limit is $383,900, with a phase-out to $483,900 for joint filers and $191,950 to $241,950 for other filers. The limits for 2023: $364,200, phased out at $464,200 for joint filers and $182,100, phased out at $232,100 for all other filers.



10. Cash method of accounting

C corporations and partnerships with C corporation partners—typically, large businesses must use the accrual method of accounting to track income and expenses, while small businesses use the cash method, which is much simpler. Large businesses record inventories and follow special rules for them, while small businesses can treat inventory items as nonincidental material and supplies, which simplifies recordkeeping. Accounting methods, inventory rules, and some other rules depend on meeting a “gross receipts test.” Meet it and you can use the simple options. For 2024, the gross receipts test means having average annual gross receipts in the 3 prior years not exceeding $30 million (up from $29 million in 2023).

11. Excess business loss limit

Pass-through entities may not be able to deduct the full amount of losses passed through to them in the current year. There’s a limit, which is essentially income minus expenses plus a threshold amount.

Losses in excess of the limit aren’t lost; they become part of a net operating loss that can be carried forward and used to offset income in future years.

12. Penalties

The amount of various penalties for failing do file, pay, or otherwise comply with tax obligations are higher in 2024 than in 2023. For example, partnerships (which include multi-member LLCs) and S corporations that fail to timely file their returns are penalized a set dollar amount per owner (at any time during the year) and per day for a maximum of 12 months. For 2023 returns required to be filed in 2024, the dollar amount is $220. For 2024 returns required to be filed in 2024, it’s $245. Say an S corporation has 3 owners and files their 2023 return 4 months late. The penalty is $2,640 ($220 x 3 x 4). For 2024 returns, that same penalty will be $2,940.



Calendar year partnerships and S corporations mark your calendar for the due date of the 2023 return: March 15, 2024.

Conclusion

These aren’t the only COLAs to address for 2024. There are many related to qualified retirement plans. And the IRS will likely adjust the standard mileage rate for business driving. All these changes add up to adjustments to various employee benefits, reimbursement arrangements, and more. It is important to review the changes with your CPA or other tax adviser to see what actions you could or should take now to prepare for 2024.

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Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.

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