For the first time in a while, it appears we have only a few changes to keep in mind as we head into the new year. Don’t get comfortable though, it’s not likely to last. We know for certain, several of the TCJA (Tax Cuts and Job Act of 2018) tax law changes are set to expire at the end of 2025. This will make long term tax planning a little challenging in the next few years, especially for potentially significant events, such as selling a business. For now, we’ll focus on 2024.
SDI Rate Changes
California employees are used to having SDI (State Disability Insurance) deducted from their paychecks. For 2023, the contribution rate was 0.9% on annual wages up to $153,164 (maximum contribution/withholding of $1,378.48). Starting January 1, 2024, the rate increases to 1.1% with NO maximum wage base. This means higher compensated employees will be paying in quite a bit more than the past.
Employers with highly compensated employees and generally low disability claims may want to consider a voluntary plan. Such a plan must be pre-approved by the state but may be a viable alternative to help employees keep more of their wages.
New Beneficial Ownership Reporting Requirements
(This information has been reproduced from a client letter published by Spidell.com)
Starting in 2024 newly formed, corporations, limited liability companies (LLCs), limited partnerships, and other entities that file formation papers with a state’s Secretary of State’s office (or similar government agency) must file a report with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) providing specified information regarding the entity’s “beneficial owners.” Entities in existence prior to January 1, 2024, must begin filing these reports on January 1, 2025.
This is part of the federal government’s anti-money laundering and anti-tax evasion efforts and is an attempt to look beyond shell companies that are set up to hide money. Unfortunately, this will impose burdensome reporting requirements on most businesses, and the willful failure to report information and timely update any changed information can result in significant fines of up to $500 per day until the violation is remedied, or if criminal charges are brought, fines of up to $10,000 and/or two years imprisonment. These penalties can be imposed against the beneficial owner, the entity, and/or the person completing the report.
Magnus Blue clients can expect a client letter with further details.
CA Unclaimed Property Reporting
Have you ever heard a news headline that said something like, “Millions of dollars of unclaimed property held by the state!” This is not a new matter, but it’s gaining attention again. California law requires organizations to review their records annually to determine if they’re holding any funds or property that have been “unclaimed” for the required dormancy period. For small/mid-sized businesses, transactions such as uncashed payroll checks, vendor payments, or customer deposits may be subject to these reporting requirements. We’ve seen the state audit clients over noncompliance with some clients. Starting with the 2022 business tax returns, there is now a specific question as to whether or not the company had previously filed an unclaimed property Holder Remit Report with the state. This is low hanging fruit for the state to start targeting noncompliance. They will likely have an industry priority list to make its targets, but the bottom line is that now is the time to review your compliance.
In 2022, AB 2280 established a voluntary compliance program that waives interest (12% on the value of property held) for taxpayers who come into compliance.
You can find more information here: https://www.sco.ca.gov/upd_how_to_report.html
The bonus depreciation is currently 80% for qualified assets placed in service in 2023 and drops to 60% for assets placed in service in 2024. Section 179 deduction is still available as well but is subject to certain limitations.
Research & Experimental expenditures
Historically, research and experimental expenditures were 100% deductible when incurred and may have been eligible for certain research & development tax credits. TCJA changed section 174 of the tax code that previously allowed for immediate deduction of those expenses, and now requires business to capitalize and amortize such expenses over 5 years (if US based expenses) or 15 years (for foreign expenses). The entire CPA industry thought that Congress would fix this before it went into effect for the 2022 tax year, and many (including Magnus Blue) still held out until the summer of 2023 anticipating a resolution for the 2022 tax year. This did not happen and has been devastating for many businesses, especially those in which R&D is core to their business model. We won’t go into details here, but rather we wanted to make sure you were aware of the changes to help prompt conversation with your tax preparer, if applicable.
Disclaimer – Magnus Blue does not update articles past the article date. It is your responsibility to discuss tax matters with your tax professional before making tax-related decisions.