Ordinary repair and maintenance costs are generally deductible in the year they’re paid or incurred, depending on your accounting method. Costs that improve property must be capitalized. However, under current tax law, capitalization doesn’t necessarily mean waiting years to recover the cost. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for eligible property and increased the Section 179 expensing limit and phaseout threshold.

Still, these provisions don’t cover every improvement. And even when an improvement qualifies for one of these breaks, repair treatment may offer certain advantages. Here’s a closer look at why distinguishing repairs from improvements remains important — and why you should consider all available deduction options.

Improvement tests

Generally, repairs keep property in ordinarily efficient operating condition without adding significant value or substantially extending its useful life. Examples might include fixing a leak, replacing a small number of damaged roof shingles or servicing machinery. An expenditure generally must be treated as an improvement and, therefore, be capitalized if it results in a betterment, restoration or adaptation of the unit of property:

• Under the “betterment test,” you generally must capitalize amounts paid for work that’s reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that’s a material addition to a unit of property.
• Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that’s a major component or a significant portion of the physical structure of a unit of property.
• Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

For a building, these tests generally apply separately to the building structure and designated systems, such as plumbing, electrical, HVAC, elevators, fire protection and security. Consequently, replacing an entire building system may be an improvement even if the work affects only a portion of the building.

Tangible property safe harbors

Several safe harbors may allow expenditures that might otherwise be capitalized to be deducted currently:

Routine maintenance safe harbor. Recurring work performed to keep property in ordinarily efficient operating condition may be deductible. At the time the property was placed in service, you must have reasonably expected to perform the activity more than once during a 10-year period for buildings or during the applicable class life (such as three years or seven years) for other property.

Safe harbor for small businesses. Businesses with average annual gross receipts of $10 million or less during the three preceding tax years may qualify for an annual election to currently deduct the cost of work on an eligible building with an unadjusted basis of $1 million or less. The total amount paid for repairs, maintenance and improvements during the year must be no more than the lesser of $10,000 or 2% of the building’s unadjusted basis.

De minimis safe harbor. Subject to accounting-policy and recordkeeping requirements, a business may elect to deduct qualifying expenditures up to $2,500 per invoice or item. The threshold is $5,000 for a business with an applicable financial statement, such as a qualifying audited financial statement.

These safe harbors have specific requirements, and some elections must be made annually on a timely filed tax return.

100% first-year deductions for capitalized costs

If an expenditure must be capitalized, you may still be able to deduct its full cost in the year the improvement is placed in service. The OBBBA permanently restored 100% bonus depreciation for eligible property acquired and placed in service after January 19, 2025. Qualifying property generally includes machinery, equipment and real estate qualified improvement property (QIP).

QIP generally consists of improvements made to the interior of an existing nonresidential building. However, expenditures attributable to enlarging a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and are usually depreciated over 39 years.

Sec. 179 may also cover machinery, equipment and QIP, as well as certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection and alarm systems, and security systems. The OBBBA doubled the expensing limit for 2025 and also increased the phaseout threshold, but less significantly. These amounts are annually indexed for inflation. For 2026, businesses may deduct up to $2.56 million of eligible costs. The deduction begins to phase out when qualifying purchases in 2026 exceed $4.09 million and is limited by taxable income from the active conduct of a business.

Remember, eligible property generally must be placed in service — that is, ready and available for its intended use — by year end to qualify for bonus depreciation or a Sec. 179 expensing election for 2026. Merely purchasing, ordering or paying for property isn’t enough.

Benefits of repair treatment

Even when a capital improvement qualifies for a full first-year deduction, repair treatment isn’t interchangeable with bonus depreciation or Sec. 179 treatment. When an expenditure meets the requirements for repair treatment, properly classifying it as a deductible repair (rather than grouping it with capital improvements) may be advantageous for several reasons:

• Repair costs don’t have to meet the eligibility or placed-in-service requirements for bonus depreciation.
• Repair deductions aren’t subject to the Sec. 179 limits.
• Repair treatment generally avoids depreciation elections, related basis tracking and potential depreciation recapture consequences when the property is sold.

In addition, some states don’t fully conform to the federal bonus depreciation or Sec. 179 rules. So, when applicable, repair treatment may provide an earlier state tax deduction. If an improvement qualifies for neither bonus depreciation nor Sec. 179, you may have to depreciate its cost over the applicable recovery period, which could be as long as 39 years.

Year-end planning

Now is a good time to review your property-related expenditures in 2026 to determine whether they’ve been classified correctly and whether any safe harbors or immediate deduction provisions apply. You may also be considering additional purchases or improvements to reduce your current-year taxable income. Contact us for help classifying your 2026 expenditures and evaluating the potential tax benefits of planned purchases or improvements before year end.

The post Repair or Improvement: Does the Distinction Matter Under Current Tax Law? first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Many individuals invest in real estate to help diversify their portfolio, create an income stream for themselves from rental income and build net worth over time. Often, this is a side activity to a career in another field or running another type of business — not the individual’s primary source of income. Holdings might range from a condo or small house you rent out to a multifamily residential building or even a commercial property.

Whatever type of property you own, investment real estate comes with special tax considerations you need to be aware of. With proper planning, you can maximize your after-tax returns.

Rental activity rules

One important consideration is the tax treatment of income and losses from rental properties. They’re considered passive by definition — unless you’re a real estate professional. Even then, you generally must “materially participate” in a rental activity for it to be treated as nonpassive. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT) on top of any income tax otherwise due, and passive losses are deductible only against passive income, with the excess being carried forward.

For investors who have another primary occupation, qualifying as a real estate professional can be difficult. To qualify, you must annually perform:

• More than 50% of your personal services in real property trades or businesses in which you materially participate, and
• More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances to keep in mind.

To materially participate in an activity, generally you must participate more than 500 hours during the year or demonstrate that your involvement constitutes substantially all of the participation in the activity. But there are other ways to meet the material participation test.

Carefully track the time you spend on your real estate activities. If you own rental properties in addition to working in another business or profession, also carefully track the time spent on those non-real-estate activities, so you can see if you spend a small enough portion of your time on them vs. real-estate activities that you can pass the first real estate professional test.

Although your spouse’s hours can’t be counted toward the tests for qualifying as a real estate professional, special rules for spouses may help you meet the material participation test: Generally, your spouse’s participation can be counted when determining whether you materially participate.

Depreciation breaks

Buying an investment property may be only the beginning of your expenditures. If you renovate or improve a property, the tax treatment of those costs can vary depending on the type of property and improvement. Generally, residential real estate, including improvements, must be depreciated over 27.5 years and commercial real estate over 39 years. But three valuable depreciation-related breaks may be available to real estate investors:

1. Qualified improvement property (QIP) deduction. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the building was initially put into use. So these rules can apply to qualifying improvements to commercial real estate, but not to improvements to a residential rental property. QIP has a 15-year Modified Accelerated Cost Recovery System (MACRS) recovery period and qualifies for bonus depreciation and Section 179 expensing.

However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP. They usually must be depreciated over 39 years.

2. Bonus depreciation. This additional first-year depreciation allowance is available for qualified assets, including QIP. Bonus depreciation is 100% for eligible assets acquired and placed in service after January 19, 2025.

3. Section 179 expensing election. This allows you to currently deduct qualified property, subject to certain limits. This includes QIP, certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems For 2026, the maximum Sec. 179 deduction is $2.56 million. The deduction begins to phase out if the cost of qualifying property placed in service during the year exceeds $4.09 million.

Deferring gains

Eventually, you may decide to sell an appreciated rental or other investment property. You might be able to structure the transaction to defer some or all of the taxable gain. Such strategies may even help you keep your income low enough to avoid triggering the 3.8% NIIT and the 20% long-term capital gains rate.

One example is an installment sale. It allows you to defer gains by spreading them over several years as you receive the proceeds. But ordinary gain from certain depreciation recapture is recognized in the year of sale, even if you receive no cash.

Another option is a Section 1031 exchange. Also known as a “like-kind” exchange, this technique allows you to exchange one real estate investment property for another and defer paying tax on any gain until you sell the replacement property. If you receive cash or other non-like-kind property as part of the exchange, however, you generally must recognize gain to that extent.

These tax deferral strategies aren’t without risks. For example, if tax rates go up, you could ultimately end up paying more in taxes. They also have detailed requirements, so it’s important to consider the tax consequences before completing a sale or exchange.

Tax-smart decisions

Taxes can affect the economics of an investment property from the time you buy it through the time you sell it. Decisions about your involvement in rental activities, improvements to the property, and the timing and structure of a sale can all have tax consequences. Contact us to discuss tax planning related to your investment real estate. We can help you identify potential tax-saving opportunities and avoid tax pitfalls.

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Trading items or services — without exchanging cash — has long been common among small businesses. Today, some use online barter exchanges to facilitate trades. In addition to preserving cash flow, these types of transactions may expand your purchasing power, help you move overstocked inventory and increase your business’s exposure to new markets. But bartering isn’t tax free. For tax purposes, bartering is treated the same as being paid in cash.

How it works

The fair market value (FMV) of goods you receive in business barter transactions must be reported as taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. You must report barter income the same way you report comparable income from regular cash transactions. For instance, a sole proprietor generally reports barter income on Schedule C, and this income may also be subject to self-employment tax.

Depending on what you receive in the exchange, you may be entitled to a business expense deduction or obtain tax basis in property. So, although bartering generates taxable income, it doesn’t necessarily increase taxable profit by the full value of the transaction.

Let’s say a veterinarian agrees to exchange services with a marketing consultant. In this situation, both parties must report the FMV of the services received as income. So the veterinarian would report the FMV of the marketing services received, and the marketing consultant would report the FMV of the veterinary services received. This generally is the amount that would normally be charged for these services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

Business expense deductions may also be available with barter transactions. For instance, if a plumber installs a new toilet at a local computer repair shop in exchange for fixing a broken laptop, the plumber would report the FMV of the computer repair services as income. But he or she may also deduct certain expenses:

• If the laptop is used in the plumber’s business and the repair would have been deductible had it been paid for in cash, the plumber can still claim a business expense deduction for the repair, subject to the usual deduction rules.
• The plumber can also deduct qualifying business expenses associated with the plumbing work, such as materials, supplies and any wages paid to employees.

Income also must be reported if services are exchanged for property. For example, if an HVAC contractor does work for a retail business in exchange for unsold inventory, he or she will have to report income equal to the fair market value of the inventory. Or if an architect does work for a corporation in exchange for shares of the company’s stock, he or she must report income equal to the fair market value of those shares.

Barter exchanges

Some businesses join online barter exchanges (sometimes referred to as barter clubs) that facilitate these transactions. Barter exchanges generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter exchange, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $3 in goods and services. In that year, you’ll have $7,500 of income. If you redeem the units the next year, you won’t pay additional tax because you’ve already been taxed on that income.

If you join a barter exchange, you’ll generally be asked to provide your taxpayer identification number — such as your Social Security number or Employer Identification Number — and complete Form W-9 or a similar certification. In certain circumstances, including failure to provide or properly certify a taxpayer identification number, barter income may be subject to 24% backup withholding.

The IRS generally treats barter exchanges as brokers. If the reporting requirements apply, a barter exchange will send participants a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” by February 15 of the following calendar year. This form shows the value of cash, property, services and credits that you received through the exchange during the previous year. This information will also be reported to the IRS.

No tax-free trade

Bartering may be more common than you think: According to the National Association of Trade Exchanges, more than 400,000 U.S. businesses used some form of barter in 2022, the latest available statistics. Regardless of how you make a trade — directly with another business or through a barter exchange — remember your federal and state tax obligations. We can help you estimate the fair market value of items and services exchanged, identify potential deductions, and maintain the records needed to report these transactions properly. Contact us to learn more.

The post Let’s Trade! Business Bartering Is Still Taxable first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

On August 11, 2026, the US. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule that permanently removes the requirement for U.S. companies and persons to report beneficial ownership information to FinCEN under the Corporate Transparency Act. FinCEN also announced that it will delete information previously reported by U.S. persons–now exempt from the reporting requirements–from the beneficial ownership information database.

Under the final rule, foreign entities that are reporting companies will still be required to report beneficial ownership information for foreign individuals.

Frequently Asked Questions

The following questions and answers were published by FinCEN here. Below are the first few entries.

1. What are the key changes between the interim final rule (IFR) and the final rule?

The final rule adopts all of the changes made on an interim basis by the IFR as permanent changes to the beneficial ownership information (BOI) reporting requirements. Most notably, the final rule permanently removes the requirement for U.S. companies and U.S. persons to report BOI to FinCEN.

In addition, the final rule makes two substantive changes that expand on the relief the IFR extended relating to U.S. persons.

• It exempts foreign companies from the requirement to report U.S. person “company applicants” (i.e., the individuals who helped those foreign companies register to do business in the United States).
• It exempts U.S. persons who have applied for FinCEN identifiers (FinCEN IDs) from having to update or correct the information they provided to FinCEN when they applied.

2. What is beneficial ownership information?

Beneficial ownership information (BOI) refers to identifying information about the individuals who directly or indirectly own or control a company.

3. Who is still required to report BOI under the final rule?

“Reporting companies” under the revised reporting requirements include only those entities that are formed under the law of a foreign country and have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office.

There are multiple types of entities that are exempt from the reporting requirements. Foreign entities potentially falling under the definition of “reporting company” should carefully review the qualifying criteria before concluding whether the foreign company must report BOI.

If you have any questions about this new final rule from FinCEN, please contact us. Further resources on this topic are linked below.

Treasury Press Release
Final Rule
Frequently Asked Questions

The post FinCEN Permanently Ends Beneficial Ownership Reporting Requirements first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Many small businesses start out as sole proprietorships. This structure is simple and inexpensive to establish and maintain — and it gives the owner direct access to profits without having to take formal distributions. But it also makes your taxes more complicated than when you were a W-2 employee. Here are some federal tax issues to consider if your business operates as a sole proprietorship.

Reporting income and expenses

You’ll report income and expenses from your business activities on Schedule C of your personal return (Form 1040). The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income, not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, “excess” business losses incurred by noncorporate taxpayers, passive activity losses and losses from activities in which you weren’t “at risk.”

Sole proprietors may be eligible for certain deductions that generally aren’t available to other individual taxpayers. For instance, you may qualify for an above-the-line self-employed health insurance deduction for premiums paid for medical, dental and qualifying long-term care coverage, subject to certain limitations. This means your deduction for medical insurance won’t be subject to the rule that limits itemized deductions for medical expenses.

In addition, you may be entitled to deduct home office expenses if:

• A home office is your principal place of business (including when you perform management or administrative tasks there and have no other fixed place to perform them),
• You use your home as a place to meet or deal with customers, clients or patients in the normal course of business, or
• You store inventory or product samples at home.

In general, to qualify, the area must be used regularly and exclusively for business purposes.

The home office deduction may include an allocable part of mortgage interest or rent, insurance, utilities, repairs, maintenance and, if you own the home, depreciation. Alternatively, you can use a simplified method based on the square footage of the qualifying space. You may also be able to deduct travel expenses from your home office to another work location.

Be sure to keep complete records of your income and expenses. Proper documentation is needed to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

Claiming the QBI deduction

Another special tax break that you might qualify for as a sole proprietor is the Section 199A qualified business income (QBI) deduction. It generally equals 20% of QBI, not to exceed 20% of taxable income. QBI generally is defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items or reasonable compensation paid to an owner for services rendered to the business.

This deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the QBI deduction even if you don’t itemize deductions and instead claim the standard deduction.

One word of caution: The QBI deduction is subject to additional limits at higher income levels. For 2026, these limitations generally begin to apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). For 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers). Contact us to learn more about the limitations that apply to your situation.

The One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent. Starting in 2026, the OBBBA also expands the income ranges over which the limitations phase in, potentially allowing larger deductions for some taxpayers. And it provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it. The minimum deduction will be annually adjusted for inflation after 2026.

Paying self-employment taxes

One downside of owning your own business is that you must pay self-employment taxes. These taxes are the equivalent of federal payroll taxes for employees, but self-employed people must pay both the employer’s and employee’s share of them. They’re imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

For 2026, you must pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $184,500, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint filers, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. The additional Medicare tax threshold isn’t adjusted for inflation.

Establishing a tax-advantaged retirement plan

You might also want to consider setting up a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t subject to income tax until they’re withdrawn.

One option is a Simplified Employee Pension (SEP) plan, which requires minimal paperwork. You generally can set up a SEP and make deductible contributions for the tax year as late as the due date of your income tax return for the year, including extensions. The contribution amounts are discretionary, and the annual limits are high. But, if you have employees, they generally must be included in the plan, provided they work enough hours and meet other qualification requirements.

If you don’t establish a qualified retirement plan, you may still be able to contribute to a traditional IRA. But your annual contribution limit will generally be significantly lower.

Making quarterly estimated payments

The U.S. tax system is considered “pay as you go.” So, you’ll probably have to make estimated tax payments each quarter. Estimates should include both federal income tax and self-employment taxes. Estimated payments are generally calculated using Form 1040-ES.

Quarterly payments are generally due on April 15, June 15 and September 15 of the current year and January 15 of the following year. If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day. Paying enough by each deadline is critical; if you fall behind, you’ll likely owe interest and penalties.

Applying for an EIN

Sole proprietors don’t automatically need an employer identification number (EIN). You can generally use your Social Security number for federal tax purposes — unless you hire employees. You might also need an EIN if your business:

• Owes employment or excise taxes,
• Withholds certain taxes on payments to a nonresident alien,
• Establishes certain retirement plans, or
• Changes its legal structure, such as incorporating or forming a partnership.

Additionally, you might consider obtaining an EIN voluntarily for banking or administrative purposes. An EIN is available at no cost through the IRS website. To apply, you’ll need to provide identifying information, including a valid Social Security number or other taxpayer identification number, and details about the business. Eligible U.S. applicants generally receive the EIN immediately after completing the online application. You can also submit Form SS-4 by fax or mail.

We can help

Even though your business may be small, tax compliance and planning are a big deal. These are just highlights of federal income tax issues sole proprietors face. State and local income, sales, payroll, and other tax requirements may also apply. Contact us if you’d like additional information regarding the tax aspects of your business, or if you have questions about the reporting or recordkeeping requirements.

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Businesses in economically distressed communities often have difficulty obtaining capital for expansion, equipment, facilities and other investments. The New Markets Tax Credit (NMTC) encourages private investment in these underserved areas by offering federal income tax credits to qualifying investors.

This credit was previously scheduled to expire on December 31, 2025. However, the One Big Beautiful Bill Act made it permanent. Let’s take a closer look at how this tax break could benefit your small business.

Potential tax and financing benefits

The NMTC is generally available to individuals and businesses that make qualified equity investments in community development entities (CDEs). A CDE is generally a domestic corporation or partnership whose primary mission is to serve low-income communities or provide investment capital to them. To participate in the program, a CDE must be certified by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund.

The CDE then raises funds from investors to use for qualifying loans, equity investments or other approved activities in low-income communities. Your benefits depend on your role in the transaction. If your business invests in a CDE, you may be able to claim the tax credit. If your business receives financing from a CDE, you may benefit indirectly by gaining access to capital or financing terms that might not otherwise be available. For many small business owners, these financing opportunities may be the more relevant aspect of the NMTC program.

Credit amount and filing requirements for investors

The NMTC equals 39% of the investor’s qualified equity investment in the CDE. The credit is claimed over seven years as follows:

• 5% of the investment in each of the first three years, and
• 6% in each of the next four years.

So, a qualifying $1 million investment could generate $390,000 in federal tax credits over seven years, subject to applicable limitations.

To claim the credit, you must make a cash investment that the CDE designates as a qualified equity investment. The CDE must use “substantially all” of the funds for qualified low-income community investments (QLICIs). In general, a CDE satisfies this threshold if it invests at least 85% of its aggregate gross assets in QLICIs (reduced to 75% in the seventh year).

The credit is calculated using Form 8874, “New Markets Credit,” and reported as part of the general business credit on Form 3800.

Claiming the NMTC reduces your tax basis in the investment, which may affect the tax consequences of a later sale. In addition, previously claimed credits may be recaptured (with interest) if the CDE fails to meet program requirements or redeems your investment during the seven-year credit period.

Financing benefits for qualifying businesses

By encouraging investment in CDEs, the NMTC may expand access to financing for qualifying businesses and nonprofit organizations in low-income communities. Examples of businesses and projects that may receive NMTC-supported financing are:

• Real estate developments,
• Manufacturers,
• Retailers,
• Health care providers,
• Child care centers and schools,
• Hotels, and
• Community centers.

For example, suppose you own a grocery store in a qualifying community and need funds to renovate the building. A CDE could use capital raised from investors to provide your business with a loan or equity financing for this project. In this scenario, qualified investors would receive the federal tax credit, and your business would benefit from access to financing that might otherwise be difficult to obtain through conventional sources.

Simply operating in a low-income area doesn’t automatically qualify a business or project for NMTC-supported financing. The CDE must determine whether the business, location and planned use of the financing satisfy the program’s requirements.

Exploring NMTC opportunities

The now-permanent NMTC may offer a valuable tax break for qualified investors and provide an important source of financing for qualifying businesses and community development projects. However, the rules are complex. Contact us to learn more. We can help you estimate the potential tax or financing benefits and address the applicable compliance requirements.

The post Could the New Markets Tax Credit Benefit Your Business? first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Recognizing an invalid form

An employee is responsible for the information provided on Form W-4 and signs the form under penalties of perjury. Businesses generally aren’t required to verify whether the employee’s filing status, credits, deductions or other adjustments are accurate.

However, a Form W-4 may be invalid if the employee:

• Alters the official form,
• Deletes or crosses out the penalties-of-perjury declaration, or
• Indicates that information on the form is false.

You must also reject any substitute form created by an employee. An electronic or substitute form developed by your business may be acceptable if it meets IRS requirements.

If an employee submits an invalid Form W-4, you should explain that you can’t accept it and should request a valid replacement. You can generally continue using any valid Form W-4 already in effect until you receive the replacement. If you don’t have a valid form already on file, withhold as if the employee selected “single or married filing separately” and made no entries in Steps 2, 3 or 4.

Similarly, a claim of exemption from withholding isn’t automatically invalid. Beginning with the 2026 Form W-4, employees claiming exemption from withholding use the exemption checkbox on the form. For 2026, an employee generally may claim exemption only if the employee had no federal income tax liability in 2025 and expects to have none in 2026. The employee — not the employer — is responsible for determining whether those requirements are met.

Responding to IRS instructions

Businesses aren’t required to routinely send Forms W-4 to the IRS. You generally must submit these forms only when directed to do so in a written IRS notice or in specific published guidance.

The IRS uses information reported on Forms W-2 and other records to identify employees who may have inadequate withholding. If the IRS determines that an employee’s withholding needs to be increased, it may send you a “lock-in letter” specifying the filing status and adjustments that must be used. Before these instructions take effect, the employee receives a separate notice and an opportunity to dispute the determination with the IRS.

Once the lock-in instructions take effect, you generally must disregard a Form W-4 that would reduce withholding below the IRS-mandated amount. However, you must honor a new form that results in more withholding. If your business accepts Forms W-4 electronically, its system must prevent an employee subject to a lock-in letter from reducing withholding below the locked-in amount.

An employee who disagrees with a lock-in determination must work directly with the IRS. The employee may submit a new Form W-4 and supporting information to the address provided in the IRS notice. Don’t reduce withholding unless the IRS authorizes the change. Businesses that fail to follow lock-in instructions may be liable for the additional tax that should have been withheld.

Establishing consistent procedures

Your payroll procedures should explain how Forms W-4 are submitted, reviewed and retained. Train payroll personnel to recognize altered or unauthorized forms, but don’t ask them to evaluate whether an employee has calculated the proper amount of withholding. That determination generally belongs to the employee and, when necessary, the IRS.

For questions about completing Form W-4, direct employees to the IRS Tax Withholding Estimator or suggest consulting their personal tax advisors. Avoid giving individualized tax advice unless your business is qualified and authorized to provide it.

Know when to seek assistance

Unusual Forms W-4 and IRS lock-in letters can create compliance risks if they aren’t handled correctly. We can guide you through the withholding rules to help reduce the risk of costly errors. Contact us for assistance evaluating your payroll procedures, responding to an invalid form or complying with an IRS lock-in letter.

The post When an Employee’s Form W-4 Raises Red Flags first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Offering a broad menu of employee benefits can help your business attract and retain skilled workers. One benefit that’s popular among employees with families is employer-provided child care. Although this option hasn’t been financially feasible for many small businesses, recent tax law changes may give you a reason to reconsider opening (or upgrading) a child care facility, contracting with a child care provider or participating in a jointly operated arrangement. Here’s an overview of the credit and how it’s been enhanced starting in 2026.

Recent changes

Under Section 45F of the tax code, employers may claim a tax credit for eligible expenses paid or incurred to provide child care to employees. For 2026, the credit has increased from 25% to 40% of an employer’s qualified child care facility expenditures, plus 10% of its qualified child care resource and referral expenditures paid or incurred during the tax year. It’s limited to a total of $500,000 per tax year (up from $150,000 for 2025). Beginning in 2027, the $500,000 limit will be adjusted annually for inflation.

The credit has been further enhanced for certain small businesses. If you meet the eligibility requirements, you can claim a credit equal to 50% of qualified child care facility expenses, plus 10% of qualified resource and referral expenditures, up to a maximum of $600,000 for 2026 (annually inflation-adjusted going forward).

Eligible small businesses are generally those that had average annual gross receipts for the previous five tax years below an inflation-adjusted threshold. For 2026, the threshold is $32 million.

Also, eligible small businesses can now pool their resources to provide child care for their employees and to use third-party intermediaries to facilitate child care services. These options may make the credit more accessible to businesses that can’t justify operating their own facilities.

Qualified expenditures

Qualified child care facility expenditures are amounts paid or incurred to:

• Acquire, construct, rehabilitate or expand property that’s 1) to be used as part of your qualified child care facility, 2) depreciable or amortizable, and 3) not part of your principal residence or an employee’s home,
• Operate your qualified child care facility, including the costs to train and compensate its employees and provide scholarship programs, or
• Contract with a qualified child care facility to provide eligible services to your employees.

It’s important to note that qualified child care expenses exclude amounts that exceed the fair market value of providing such care.

A qualified child care facility is one that meets all state and local regulatory requirements. In addition, the facility 1) must be used principally to provide child care (unless it’s also the personal residence of the person who operates it), 2) must be open to all employees during the tax year, and 3) can’t discriminate in favor of highly compensated employees. And, if the facility is your principal trade or business, at least 30% of enrollees must be your employees’ dependents.

Additional rules

To avoid doubling your tax benefits from the same expenditures, your tax basis in any qualified child care facility is reduced by the amount of the credit attributable to facility-related expenditures. You also can’t claim other deductions or credits based on the same expenses.

In addition, if your child care facility ceases to operate as such or undergoes a change in ownership before the tenth tax year after the tax year in which it’s placed in service, you may have to recapture (pay back) some or all of the credit. The percentage of the credit that must be recaptured decreases gradually over the 10-year period.

The Sec. 45F credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. So the amount you can use in the current year may be limited. However, any unused credit can generally be carried back one year and carried forward for 20 years. The credit is calculated and claimed on Form 8882, “Credit for Employer-Provided Childcare Facilities and Services.”

Look before you leap

Providing child care for your employees can be a major long-term investment. Although the recent enhancements to the employer-provided child care credit help make this benefit option more feasible, it isn’t right for every employer. You should also consider workforce demographics, operational costs, available providers, and the associated risks and responsibilities. Even when outsourcing, you’ll have to exercise due diligence to select a reputable provider, monitor service quality and make changes as necessary.

If you’re interested in pursuing this family-friendly benefit, we can help you evaluate the pros and cons and model the credit’s potential value. Contact us for more information and assistance.

The post The New-And-Improved Credit for Employer-Provided Child Care first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Tax problems can happen to even the most organized small business owners. A cash flow crunch, an unexpected tax notice, a missed filing deadline or a payroll tax oversight can be stressful — especially when penalties and interest begin to add up. Fortunately, businesses can get back on track by addressing tax issues promptly and strategically.

What should I do if I receive a tax notice?

If you or your business receives a tax notice from the IRS or a state agency, don’t ignore it. Start by reviewing the notice carefully. It may relate to:

• A balance due,
• A missing tax return,
• A proposed tax adjustment,
• A payroll tax deposit issue, or
• A request for documentation.

Be aware that tax notices typically include response deadlines — and missing them can limit your options and lead to additional penalties and interest. Tax authorities may eventually pursue collection measures (such as liens or levies) on unpaid amounts. A lien is a legal claim against property, which can affect your ability to secure credit or complete financial transactions. A levy allows the tax agency to seize assets to satisfy the debt.

Before making a payment or sending a response, confirm that the notice is accurate. We can help you compare the notice with your business records, gather supporting documentation and prepare an appropriate response.

How far back can I file unfiled tax returns?

If you have unfiled tax returns, it’s important to address them as soon as possible. In many cases, you’ll need to file past-due returns before you can qualify for certain resolution options, such as a payment plan or settlement program.

How far back you need to file depends on your circumstances, the type of return involved and the tax agency’s requirements. There generally isn’t a simple time limit that makes an unfiled return “go away.”

For federal income taxes, the statute of limitations for the IRS to assess additional tax for a particular tax year generally starts only after a valid return is filed. It’s typically three years, but it’s six years if you understate your gross income by more than 25%. If you fail to file a return (or you file a false or fraudulent return), the IRS has an unlimited amount of time to assess tax for the tax year.

So filing past-due returns can help reduce the risk of penalties, interest and collection activity — as well as the risk that the taxing authority could create a “substitute for return” for you. (This is generally undesirable because the return likely will include your income but not all the deductions, credits and other tax breaks you may be eligible for.)

If you’re owed a refund, filing promptly is especially important because you may lose the ability to receive an otherwise valid refund if you wait too long. Federal income tax refunds and credits generally must be claimed by the later of three years from the date you filed the return or two years from the date you paid the tax.

What are my options if I owe back taxes?

Some business owners who owe tax can’t immediately pay the full balance due. If you owe back taxes, you may have several options depending on the amount owed, the type of tax involved and your financial situation. Ways to manage tax debt may include:

• Making a payment,
• Asking for a temporary delay in collection due to financial hardship,
• Participating in a settlement program (see below), and
• Setting up an installment agreement or payment plan.

An installment agreement or payment plan may give qualifying taxpayers extra breathing room to pay the balance over time. However, you must generally stay current with future tax filings and payments. Falling behind again can cause you to default on your payment plan and potentially lead to additional collection actions.

Can I settle my tax debt for less than the full amount owed?

Some tax agencies offer settlement programs that allow eligible taxpayers to settle tax debt for less than the full amount owed. For federal tax debt, the offer in compromise (OIC) program may be available in limited circumstances.

However, an OIC isn’t available to all taxpayers and may not be the best option in every situation. The IRS reviews income, expenses, asset equity and ability to pay when determining whether to approve an OIC request. Before applying, you’ll generally need to have all required tax returns filed. You also must be current with ongoing tax obligations, including estimated tax payments and federal tax deposits.

Can tax penalties be reduced or removed?

Penalty relief may be available in certain circumstances. Depending on the penalty and the facts involved, you may qualify for administrative relief, such as an automatic exemption from penalty, first-time penalty abatement or relief based on reasonable cause.

Reasonable cause may apply when you made a good-faith effort to meet your tax obligations but were unable to do so because of circumstances beyond your control, such as:

• A serious illness,
• A death in your immediate family,
• A natural disaster, or
• Loss of records.

Penalty abatement isn’t automatic. You must follow the instructions in the notice. You might need to call the IRS or submit a written request with a clear explanation and supporting documentation. Even if penalties are reduced, interest may still apply, so it’s advisable to respond as soon as possible.

Why are payroll tax-withholding problems so serious?

Payroll tax-withholding problems are among the most urgent tax issues small business owners can face. If you have employees on your payroll, you’re responsible for withholding federal income tax, state income tax (if applicable), Social Security tax and Medicare tax from their wages and remitting those amounts to the government. Tax agencies closely monitor these tax remittances because you’re withholding money on behalf of your employees and holding it in trust until you deposit it with the taxing authority.

In some cases, business owners or other responsible individuals may be held personally liable for unremitted taxes through the Trust Fund Recovery Penalty. The penalty can apply to individuals who are responsible for collecting, accounting for or depositing the taxes and who willfully fail to do so. If your business falls behind on these tax deposits, professional guidance is critical.

How can I avoid future tax problems?

For small business owners, preventing future tax issues starts with strong accounting systems, accurate bookkeeping and timely tax filings. You should also engage in proactive tax planning by reviewing financial reports regularly, setting aside funds for taxes, and making estimated income tax payments and depositing withheld taxes by the required deadlines.

If you’re facing tax resolution issues, contact us. We can help you understand your options, communicate with tax authorities and create a plan to keep your business moving full speed ahead.

The post FAQs About Resolving Small Business Tax Issues first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Do you operate a side gig in addition to your regular day job? Whether you’ve turned a love for crafting into an online store or you play the guitar at a local venue, you’ll need to report the income from your sideline activity on your tax return. But can you deduct the related expenses? The answer depends on whether the IRS classifies your activity as a business or a hobby. Let’s take a closer look.

Why the distinction matters

If your activity incurs significant expenses — or even losses in some years — how the IRS classifies it can have a major impact on your taxes. For-profit businesses can deduct “ordinary and necessary” business expenses.

So, if you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can use the loss to offset income from other sources, such as salary and self-employment income, subject to annual limits. In 2026, the limit is $256,000 ($512,000 for married couples filing jointly). You can carry any excess losses forward to later tax years.

Conversely, hobbies receive less favorable treatment. Before 2018, hobby expenses could be claimed as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. Recent tax law changes permanently repealed itemized deductions for miscellaneous business expenses. So you generally can’t deduct hobby-related expenses for federal income tax purposes — even though you’re still required to report 100% of hobby-related income.

Potential safe harbors for profitable ventures

If you can show a profit motive for your sideline activity, the IRS will classify it as a for-profit business, and you can generally write off related expenses as the cost of doing business. Two safe harbors create a presumption that an activity is engaged in for profit:

1. Your activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.
2. You’re engaged in a horse racing, breeding, training or showing activity, and your activity produces positive taxable income in at least two out of every seven years.

Proactive tax planning can help you qualify for these safe harbors — and earn the right to deduct your losses in unprofitable years.

Factors that demonstrate a profit motive

If you aren’t eligible for one of the safe harbors but can demonstrate an honest intent to make a profit, you may still be able to treat your side gig as a for-profit business. After all, many start-ups take years to become profitable. Questions the IRS considers when determining whether your activity is a business or a hobby include:

• Do you carry on the activity in a business-like manner?
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, did they occur due to circumstances beyond your control or in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

The degree of personal pleasure you derive from the activity is also a factor. For example, most people would say that woodworking is more fun than working in a high-stress executive position — so the IRS is far more likely to classify the former is a hobby if you start claiming recurring losses on your tax returns.

Year-by-year determination

The IRS tests each year separately when determining whether an activity is a for-profit business or a hobby. So what once was considered a hobby can become a business — and vice versa. However, you generally bear the burden of proving your profit motive each year.

For example, you might be able to persuade the IRS that you’ve established a profit motive by keeping more detailed records, advertising and devoting more time to your side gig. It also helps to report profits for a few years, rather than just recurring losses. In fact, a pattern of losses over multiple years can sometimes trigger IRS scrutiny of whether an existing business is operating with a profit motive.

Start planning now

If you have a side business that isn’t yet profitable, we can evaluate your situation and offer suggestions to help improve your odds of business tax treatment. But don’t wait until year end — many factors the IRS considers when evaluating your profit motive require proactive planning throughout the year. We can help strengthen your position in case the IRS questions your deductions. Contact us to learn more.

The post Don’t Let the IRS Treat Your Sideline as a Hobby first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..