2024 Business Tax Update for Federal & CA
As we move into 2024, several important federal tax changes and updates will affect businesses, including sole proprietors, S-corporations, and LLCs. Here’s a summary of key changes you should be aware of to ensure compliance and maximize your tax savings.
Updated Tax Rates for Corporations, LLCs, and Pass-Through Entities
- Corporate Tax Rate (C-Corporations):
- The corporate tax rate remains a flat 21% in 2024. This flat rate applies to all C-corporations and is one of the key aspects of the Tax Cuts and Jobs Act (TCJA), which continues to apply.
- Pass-Through Entities (S-Corporations, LLCs, Sole Proprietors):
- For pass-through entities (such as S-corporations and LLCs taxed as partnerships or sole proprietorships), income is typically taxed at individual income tax rates. These rates were adjusted for inflation in 2024 (see individual tax brackets earlier). Pass-through entities do not pay federal income tax directly but pass income through to the owners, who report it on their personal tax returns.
Qualified Business Income Deduction (QBI) for Pass-Through Entities
- The Qualified Business Income (QBI) deduction allows eligible taxpayers to deduct up to 20% of qualified business income from a pass-through entity, such as a sole proprietorship, S-Corp, or LLC. This deduction is still in place for 2024.
- Income Limitations: The QBI deduction begins to phase out for taxpayers with taxable income over $182,100 for single filers and $364,200 for married filing jointly (adjusted for inflation in 2024). Beyond these thresholds, the deduction may be limited depending on the nature of the business.
- Business Type Impact: The QBI deduction may be limited for certain businesses, such as those providing services in health, law, accounting, or consulting.
Self-Employment Taxes and Deductible Expenses for Sole Proprietors
- Self-Employment Taxes: Sole proprietors are subject to self-employment taxes (Social Security and Medicare) on their net earnings from self-employment. The self-employment tax rate remains at 15.3% for 2024, with 12.4% allocated to Social Security (up to the annual wage base limit) and 2.9% allocated to Medicare.
- Additional Medicare Tax: If your net income exceeds $200,000 ($250,000 for married filing jointly), you will also be subject to an additional 0.9% Medicare tax.
- Deductible Expenses: Sole proprietors can deduct business-related expenses, including:
- Office supplies, equipment, and furniture
- Business travel, meals, and entertainment (with restrictions)
- Home office expenses, if applicable
- Health insurance premiums, if self-employed
- Retirement plan contributions (SEP IRA, SIMPLE IRA, or Solo 401(k))
Standard Mileage Rate for Business Use of Vehicle
- For 2024, the standard mileage rate for business use of a vehicle is 65.5 cents per mile. This is a slight increase from the 2023 rate of 65.0 cents per mile. You can use this rate to calculate your vehicle expenses for business purposes, or you may opt to deduct actual expenses (gas, maintenance, etc.) if you track them separately.
- Note: Keep accurate records to substantiate your deductions, whether using the standard mileage rate or actual expenses.
S-Corp Reasonable Compensation Rule
- The IRS requires S-corporation owners who are also employees to pay themselves a “reasonable salary” for services rendered to the business. The salary is subject to payroll taxes (Social Security and Medicare), while any additional income is passed through to the owners and subject to ordinary income tax but not self-employment tax.
- In 2024, there’s no specific change to the “reasonable compensation” rule, but the IRS continues to scrutinize S-corporation owners to ensure they are not underpaying themselves to avoid payroll taxes.
New Reporting Requirements for Digital Assets
- Beginning in 2024, businesses that accept digital assets (such as cryptocurrency) as payment will have new reporting requirements. The IRS now requires businesses to report transactions involving digital assets on tax forms such as Form 1099-K if the transactions exceed $600.
- Businesses need to ensure they track all digital asset transactions and report them correctly. Failure to do so can result in penalties or audits.
Section 179 Expensing and Bonus Depreciation
- Section 179 Expensing: In 2024, businesses can expense up to $1.17 million of qualifying property under Section 179, with a phase-out threshold of $2.89 million in total purchases (both figures are adjusted for inflation). This allows businesses to fully deduct the cost of equipment, machinery, and other capital assets in the year they are placed in service, instead of depreciating them over several years.
- Bonus Depreciation: Businesses can also take advantage of bonus depreciation, which allows for 100% immediate depreciation of qualifying property in the first year (this applies to property placed in service through 2022, and phases down to 80% in 2023, 60% in 2024, and beyond).
- New for 2024: As bonus depreciation is phased out, businesses may need to plan for increased tax liabilities in future years as depreciation benefits decrease.
Retirement Plan Contributions for Small Businesses
- Solo 401(k) Contributions: Sole proprietors, partners, and LLC members can contribute to a Solo 401(k), which allows for both employee deferrals and employer contributions. For 2024:
- Employee Contribution Limit: Up to $22,500 ($30,000 if 50 or older) for salary deferrals.
- Employer Contribution: Up to 25% of compensation (subject to income limits).
- Total Contribution Limit: The combined total contribution (employee + employer) is capped at $66,000 ($73,500 if age 50 or older).
- Simplified Employee Pension (SEP) IRA: Another option for small business owners, the SEP IRA allows employers to contribute up to 25% of compensation, up to a maximum of $66,000 in 2024. Contributions are made solely by the employer, and there are no annual filing requirements.
Changes to 1099 Reporting
- Starting in 2024, businesses must report payments of $600 or more to independent contractors and freelancers via Form 1099-NEC (Non-Employee Compensation). This is similar to prior years but is a reminder to accurately track all business payments to contractors and ensure timely filing.
Net Operating Loss (NOL) Carryforwards
- Businesses can still carry forward Net Operating Losses (NOLs) to offset future taxable income. For 2024, the NOL carryback provision is still suspended, but losses can be carried forward indefinitely. However, the NOL carryforward can only offset up to 80% of taxable income in future years.
- For LLCs, sole proprietors, and S-corporations, NOLs are passed through to individual returns, and the 80% limitation will apply at the individual level.
Research & Development (R&D) Tax Credit
- Businesses that engage in research and development activities may be eligible for the R&D tax credit. For 2024, this credit remains in place, and eligible businesses can offset research-related costs like wages, supplies, and contract research. It’s available to companies of any size that incur R&D expenses in developing new products, processes, or software.
Conclusion
For 2024, businesses, sole proprietors, S-corporations, and LLCs have several important tax considerations. Key updates include changes to tax rates, deductions for business expenses, and retirement plan contribution limits. Business owners should also plan for the phase-out of bonus depreciation, maintain accurate records for 1099 reporting, and explore opportunities for the QBI deduction, R&D credits, and retirement plan contributions.
To ensure compliance and maximize tax benefits, consult a tax professional or accountant who can provide guidance tailored to your business type and specific needs.
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Use this include important tax updates for pertaining to California for businesses
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Key 2024 Tax Updates for Businesses in California
California businesses need to be aware of several important state-specific tax updates and changes for 2024. These updates affect various business structures, including C-corporations, S-corporations, LLCs, and sole proprietors. Below is a summary of the key changes that could impact your business operations and tax filings in California.
California Corporate Income Tax Rate
- C-Corporations: California imposes a flat 8.84% income tax rate on C-corporations for 2024. This rate applies to net income, and businesses must file and pay taxes on an annual basis.
- S-Corporations: S-corporations in California are subject to a 1.5% income tax on net income, with a minimum franchise tax of $800 for most S-corporations.
California Franchise Tax (Minimum Tax)
- Minimum Franchise Tax for LLCs, S-Corps, and C-Corps: California imposes an annual minimum franchise tax of $800 on LLCs, S-corporations, and C-corporations that are doing business in the state.
- For LLCs, this tax applies regardless of whether the business is profitable, though the amount can vary depending on gross receipts. For LLCs with gross receipts under $250,000, the minimum is still $800.
- Newly incorporated or qualified LLCs and S-corporations are exempt from the minimum tax in their first year of operation, but this exemption expires after the first year.
Pass-Through Entity (PTE) Tax Election
- For S-corporations and LLCs taxed as partnerships, California offers a Pass-Through Entity (PTE) Tax election, which allows these businesses to pay their state taxes at the entity level instead of passing the tax liability to individual owners.
- This election allows for a 5% tax on business income for eligible pass-through entities. This can provide federal tax benefits, as the owners can claim a credit for the PTE tax paid against their federal income taxes.
- For 2024, the PTE tax election is still in effect, and eligible businesses should consider it if they want to reduce their California tax liability at the individual level.
California Sales and Use Tax Updates
- Sales Tax Rate: The statewide sales tax rate remains at 7.25%. However, local jurisdictions (cities and counties) can add additional sales taxes. As a result, the rate can be as high as 10.25% in certain locations in California.
- Remote Sales: If your business sells goods online or in other states, you must still collect California sales tax if you meet the state’s economic nexus threshold (sales of over $500,000 in California during the previous year).
- Sales Tax Exemption for Clean Energy: Businesses that invest in renewable energy systems or electric vehicle charging stations may be eligible for sales tax exemptions or partial exemptions under California's Sales and Use Tax Exemption for Manufacturing Equipment program.
California Employment Tax Updates
- State Disability Insurance (SDI): The SDI rate for 2024 is 1.2% of the first $153,164 of wages earned by each employee. This covers both Disability Insurance (DI) and Paid Family Leave (PFL) benefits.
- Unemployment Insurance (UI): Employers must continue to pay California's State Unemployment Insurance (UI) tax, which is 1.5% on the first $7,000 of each employee's wages. The UI tax rate can vary based on your experience rating.
- California New Hire Reporting: Businesses are required to report new hires to the California Employment Development Department (EDD) within 20 days of hiring. Failure to comply may result in penalties.
California Research and Development (R&D) Tax Credit
- California provides a state-level R&D Tax Credit to businesses that engage in qualified research activities. The credit is designed to encourage innovation and can be used to offset California income or franchise taxes.
- In 2024, businesses can claim a credit for qualified research expenses (including wages, supplies, and contract research) incurred in California. Businesses must maintain adequate documentation of their R&D activities to substantiate claims for the credit.
California Net Operating Loss (NOL) Carryforwards
- California allows businesses to carry forward Net Operating Losses (NOLs) to offset future taxable income. For taxable years 2024 and beyond, the state does not impose a cap on NOL carryforwards, unlike the federal tax system, which imposes a 80% limitation on NOL carryforwards for individuals and businesses.
- Businesses in California can use NOL carryforwards to reduce their future state tax liabilities, making it important for businesses to track their NOLs carefully.
Clean Energy and Electric Vehicle Incentives
- California Clean Vehicle Rebate: The state continues to offer rebates for businesses purchasing or leasing zero-emission vehicles (ZEVs). Businesses can claim a rebate of up to $7,000 for new electric vehicles and up to $4,000 for used electric vehicles.
- Sales Tax Exemption for Clean Energy: Businesses that purchase equipment for renewable energy production, such as solar panels or wind turbines, may qualify for a sales tax exemption under the California Manufacturing Equipment Exemption.
California Minimum Wage for Employers
- In 2024, California's minimum wage for employers with 26 or more employees is $16.00 per hour, and for employers with 25 or fewer employees, the minimum wage is $15.50 per hour. Cities and counties may impose higher minimum wages, so it’s important for businesses to verify the applicable local rate.
- Employers must ensure compliance with California's minimum wage laws, as violations can result in penalties, interest, and potential lawsuits.
California Family Leave and Paid Sick Leave
- Paid Family Leave (PFL): California requires employers to provide Paid Family Leave benefits, which are funded through employee contributions to the state disability insurance program (SDI). In 2024, employees can receive benefits for up to 8 weeks for family care, bonding, or medical leave.
- Paid Sick Leave: California law mandates that businesses provide at least 3 days (or 24 hours) of paid sick leave per year to all employees, regardless of full-time or part-time status. Employees can accrue and use sick leave, and unused sick leave may carry over from year to year.
California Prop 65: Business Compliance
- Proposition 65 requires businesses to provide warnings to consumers about exposures to chemicals known to the state of California to cause cancer or reproductive harm. In 2024, businesses must continue to comply with the warning requirements and post signage if their products or services involve exposure to these chemicals.
- Non-compliance can result in penalties, so businesses must stay updated on chemicals added to the Prop 65 list and provide appropriate warnings where necessary.
California LLC Fee Based on Gross Receipts
- In 2024, LLCs doing business in California are subject to an annual fee based on their gross receipts. The fee is assessed if the LLC has gross receipts of over $250,000, and ranges from $900 to $11,790 depending on the gross receipts amount. LLCs with gross receipts of $250,000 or less are only required to pay the minimum franchise tax of $800.
California’s Statewide Paid Leave Program Expansion
- California has expanded its Paid Family Leave (PFL) program, providing wage replacement for workers who need to take time off to care for a seriously ill family member or bond with a new child. The program is funded by employee contributions and can be used by employees of businesses of any size.
