As we near year-end, proactive tax planning becomes more crucial than ever for businesses and family offices with complex tax portfolios. While 2024 hasn’t brought significant legislative tax changes, foundational tax strategies remain invaluable. With potential transactions and evolving state and federal rules, now is the time to connect with your CPA to set the groundwork for 2025.
The following guide highlights the top tax planning strategies to have on your radar, from expiring benefits to SALT planning, partnerships, and more. This year, focus on reaching out early to maximize tax savings and avoid costly surprises.
Estate planning is a cornerstone of wealth management, offering ways to secure assets, reduce tax burdens, and ensure a smooth transition for future generations. For federal purposes, 2025 may be the pivotal year for estate planning. Without congressional action, the current estate and gift tax lifetime exclusion amount of $13.61 million ($27.22 million for a married couple) will revert to 2016 levels, or to about half. With just over a year before the higher exemptions expire, now is the time to consult with your estate planning team. Acting soon could mean significant savings for your heirs, while a delay might expose your estate to higher taxes when the exemption drops.
In terms of state-level considerations, Massachusetts recently enacted significant changes to its estate tax laws. This year presents unique planning opportunities, particularly for high-net-worth families. Here’s what you need to know and consider as part of a proactive year-end estate strategy.
Key Changes in the New Tax Law
Tax reform Acts introduced in 2023 and 2024 contained several key changes to the Massachusetts estate tax which could impact how you plan your estate. Here’s a breakdown of what you need to know:
- Increased Estate Tax Exemption
One of the most significant changes is the increase in the estate tax exemption from $1 million to $2 million. This change is retroactive to January 1, 2023, meaning that estates of individuals who passed away in 2024 can benefit from the higher exemption. Previously, Massachusetts had one of the lowest estate tax exemptions in the country, but this increase brings some relief, though it remains on the lower end compared to other states. - Elimination of the “Cliff Effect”
Under the old law, if your estate slightly exceeded the $1 million exemption, the entire value of your estate was subject to taxation. This scenario could result in a hefty tax bill even for relatively modest estates. The new law eliminates this “cliff effect,” ensuring that only the portion of your estate that exceeds $2 million is taxed. For example, if your estate is valued at $2.1 million, only the $100,000 above the exemption will be taxed rather than the entire estate. - Elimination of Real Estate and Tangible Personal Property Located Outside Massachusetts
In September 2024, the Massachusetts legislature updated the 2023 Act to clarify the treatment of real estate and tangible property located outside Massachusetts in the estate of a Massachusetts resident decedent.
Planning Opportunities
These new tax laws substantially change Massachusetts estate tax, but how much it benefits you depends on your individual situation.
If you own or are considering purchasing out-of-state property, now is an excellent time to review your estate plan and consider how this new law and the recent changes to it can work to your advantage.
If you hold a complex portfolio with assets in and out of Massachusetts, now is the time to start the conversation with your CPA or estate planning attorney. They can help you navigate the new law's provisions and identify strategies to optimize your estate plan. Don't wait - reaching out now will give you the best chance to take full advantage of these changes before year-end.
Bonus Depreciation
Under the TCJA tax act of 2017, bonus depreciation was restored to 100% of the eligible purchase cost. However, that change in the law has a sunset provision. Starting for purchases in 2023, the bonus depreciation is reduced to 80% and will continue to decline by 20% per year until it is phased out in 2027. Therefore, the bonus depreciation in 2024 will be 80%, and in 2025 will be 60%. If substantial equipment, land improvements, or qualified improvement purchases are on your horizon, consider accelerating these to 2024 to take advantage of the 80% bonus depreciation before it goes down for 2025.
Self-Employment Tax Case: The Soroban Capital Partners Litigation Ruling
A recent tax court decision clarified self-employment tax exclusions for limited partners. Under state law, limited partners involved in management may not be eligible for automatic self-employment tax exclusion. This underscores the importance of precise partner role definitions within partnerships. Simply put, if the agreement allows for a limited partner to participate in the management of the LP business, then the limited partner will be subject to self-employment tax.
Inflation Reduction Act Tax Credit Monetization
The signing of the Inflation Reduction Act on August 16, 2022, marked the largest-ever U.S. investment to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing the manufacturing of clean energy equipment and the development of renewable energy generation.
Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry. Capital investments in renewable energy or energy storage, manufacturing of solar, wind, and battery components, and the production and sale or use of renewable energy are activities that could trigger one of the over 20 new or expanded IRA tax credits. The IRA also introduced new ways to monetize tax credits and additional bonus credit amounts for projects meeting prevailing wage and apprenticeship, energy community, and domestic content requirements.
Electric Vehicle Tax Credits
On May 3, 2024, the U.S. Treasury Department unveiled the final IRS regulations for the electric vehicle (EV) tax credit of up to $7,500 for new and previously owned EVs. These new requirements are intended to enhance aspects of the 2022 Inflation Reduction Act (also called the “climate law”) and incentivize automakers to supply battery components from companies with ties to countries with a U.S. free trade agreement. The new rules became effective on July 5, 2024. Business owners adding EVs to their fleets may benefit from these incentives, contributing to sustainability and cost savings.
With varied regulations across jurisdictions, proactive SALT planning is essential, especially if transactions or expansions are anticipated in 2024-2025. Here are key areas of focus:
State PTE Tax Elections
Roughly 35 states now allow pass-through entities (PTEs) to elect to be taxed at the entity level to help their residents avoid the $10,000 limit on federal itemized deductions for state and local taxes known as the “SALT cap.” Those PTE tax elections are much more complex than simply checking a box to make an election on a tax return. Although state PTE tax elections are meant to benefit the individual members, not all elections are alike and are not always advisable.
Before making an election, a PTE should model the net federal and state tax benefits and consequences to the PTE — for every state in which the PTE operates, as well as for each resident and nonresident member — to avoid potential unintended tax results. A thorough evaluation of whether to make a state PTE tax election (or elections) should be completed before the end of the year, modeling the net tax benefits or costs, as should a determination of timing elections, procedures, and other election requirements (e.g., owner consents, owner votes to authorize the election and partnership or LLC operating agreement amendments). If those steps are completed ahead of time, then the table has been set to make the election in the days ahead.
When considering a state PTE tax election, one of the most important issues to evaluate is whether members who are nonresidents of the state for which the election is made can claim a tax credit for their share of the taxes paid by the PTE on their resident state income tax returns. If a resident state does not offer a tax credit for elective taxes paid by the PTE, then a PTE tax election could result in an additional state tax burden that exceeds some members’ federal itemized deduction benefit ($0.37 is less than $1.00). Therefore, as part of the pre-year-end evaluation and modeling exercise, PTEs should consider whether the election would result in members being precluded from claiming other state tax credits — which ordinarily would reduce their state income tax liability dollar for dollar — to receive federal tax deductions that are less valuable.
Does P.L. 86-272 Still Exist?
P.L. 86-272 is a federal law that prevents a state from imposing a net income tax on any person’s net income derived within the state from interstate commerce if the only business activity performed in the state is the solicitation of orders of tangible personal property that are sent outside the state for approval or rejection and, if approved, are filled by shipment or delivery from a point outside the state by a common carrier.
The Multistate Tax Commission (MTC) adopted a revised statement of its interpretation of P.L. 86-272, which, for practical purposes, largely nullifies the law’s protections for businesses that engage in activities over the internet. To date, California and New Jersey have formally adopted the MTC’s revised interpretation of internet-based activities, while Minnesota and New York have proposed the interpretation as new rules. Other states are applying the MTC’s interpretation on audit without any notice of formal rulemaking.
Online sellers of tangible personal property that have previously claimed protection from state net income taxes under P.L. 86-272 should review their positions. Online sellers that use static websites that don’t allow them to communicate or interact with their customers — a rare practice — seem to be the only type of seller that the MTC, California, New Jersey, and other states still consider protected by P.L 86-272.
The effect of the MTC’s new interpretation on a taxpayer’s state net income tax exposure should be evaluated before the end of the year. Structural changes, ruling requests, or plans to challenge states’ evolving limitation of P.L. 86-272 protections applicable to online sales can be put into place.
However, nexus or loss of P.L. 86-272 protection can be a double-edged sword. For example, in California, if a company is subject to tax in another state using California’s new standard, then it is not required to throw those sales back into its California numerator for apportionment purposes.
Property Tax
Property tax is the largest state and local tax obligation for many businesses and a significant recurring operating expense that accounts for a substantial portion of local government tax revenue. Unlike other taxes, property tax assessments are ad valorem, meaning they are based on the property's estimated value. Thus, they could be confusing for taxpayers and subject to differing opinions by appraisers, making them vulnerable to appeal. Assessed property values also tend to lag true market value in a recession.
Property tax reductions can provide valuable above-the-line cash savings, especially during economic downturns when assessed values may be more likely to decrease. The current economic environment amplifies the need for taxpayers to avoid excessive property tax liabilities by ensuring their properties are not overvalued.
Annual compliance and real estate appeal deadlines can provide opportunities to challenge property values. Challenging real property assessments issued by jurisdictions within the appeal window may reduce real property tax liabilities. Taking appropriate positions on personal property tax returns related to any detriments to value could reduce personal property tax liabilities. Planning for and attending to property taxes can help a business minimize its total tax liability.
Valuing Profits Interests
The recent ES NPA Holding LLC case reiterates the need for accurate valuation when assigning profits interests in partnerships. Accurate documentation can help partnerships reward service providers while avoiding unintended tax implications.
If you are a Partnership and want to find a way to reward non-owners, profit interests are a way of accomplishing this. But keep this in mind: if you’re a partnership looking to reward individuals who aren’t owners, granting a profit interest (or carried interest) can be an effective method. However, be cautious: if you offer an employee a salary with W-2 wages and then grant them a 5% profit interest, it converts them into a partner. A partner gets a guaranteed payment or distribution, not a W-2 salary. The partner is responsible for paying both the employer and employee share of the self-employment tax and the Medicare tax, and the partner must make estimated tax payments because there is no withholding from the guaranteed payment or distribution.
This is a tax-saving strategy because you can issue a profits interest to a person without that person having a current tax bill. Of course, the partnership also doesn’t get a tax deduction. It is an excellent planning opportunity to consider if you want to recognize employees. Once they become a partner, they’ll be compensated as such rather than as an employee.
With additional IRS funding from the Inflation Reduction Act, audit activity is expected to rise, especially for complicated partnerships, entities with assets exceeding $250 million, and wealthy individuals (those earning more than $10 million annually). The IRS is using advanced AI technology to flag compliance risks, so careful documentation and proactive discussions with your CPA are crucial for high-accuracy filings.
On June 6, 2024, the Supreme Court issued a ruling in Connelly v. United States that has significant implications for privately held business owners. The Court unanimously decided that the value of company-owned life insurance policies must be included in the estate valuation for federal estate tax purposes, regardless of any contractual obligations that dictate how these insurance proceeds are used.
This decision marks a pivotal moment in estate planning for business owners who rely on life insurance as part of their business succession strategies. The decision underscores the need for business owners to carefully evaluate how their life insurance policies and redemption agreements are structured.
This ruling has profound implications for business owners with company-owned life insurance policies. The Court effectively raises the potential estate tax liability for business owners and their heirs by mandating that life insurance proceeds be included in the estate’s valuation. The decision underscores the need for business owners to carefully evaluate how their life insurance policies and redemption agreements are structured.
Important deadline: Reports for existing businesses are due by December 31, 2024
The enforcement of the Corporate Transparency Act (CTA) is here, and it's important for business owners (including single-member LLC's) to take note to avoid any hefty penalties.
Under the CTA, the Beneficial Ownership Reporting requirements will be effective January 1, 2024. This reporting requirement mandates most U.S. corporate entities and foreign entities operating in the U.S. to report ownership information to the Financial Crimes Enforcement Network (FinCEN). The CTA’s enactment establishes unprecedented protocols, compelling reporting entities to disclose the identities of their beneficial owners.
We published this article that overviews key points, definitions, and important deadlines for corporations, LLCs, and other similar entities registered to do business in the U.S.
What does this mean for you?
Unless you meet one of the exceptions, which generally apply to large companies, you need to report certain information about your company to the Financial Crimes Enforcement Network (FinCen) using this website: https://fincen.gov/boi
Reporting must be done at the following times:
- If the company is formed after January 1, 2024, within 30 days of the formation. Most attorneys are doing the initial reporting upon formation of the company.
- If the company was in existence as of January 1, 2024, you must report by December 31, 2024. Most companies are doing this reporting themselves. It is fairly easy.
- Regardless of when you were formed, if there is any change to the information you reported you must report the changes within 30 days of the change.
Although we are here to help you report this information, Walter Shuffain and its employees cannot be responsible for reporting this information. The reason we can’t take full responsibility is that reporting events will occur that we don’t know about. As an example, if one of your owners moves or changes, we may not know about it until we prepare the tax return; by then, the reporting period has passed.
Important Next Steps
Plan on filing as soon as possible to avoid website slowdowns that will happen as we get closer to December 31, 2024. If you have any questions about these new reporting rules and how they affect you or your business, please contact us or your attorney.
Starting in 2025, digital asset transactions will require more rigorous reporting. If your portfolio includes digital assets, new IRS brokerage reporting requirements may affect your tax strategy. Work closely with your tax advisor to ensure compliance and explore planning opportunities.
Accurate financial records are essential to any effective tax strategy. As year-end approaches, businesses should prioritize aligning their books, as clean, reconciled numbers pave the way for proactive tax planning and help prevent surprises during filing season. This year, consider preparing for tax season and assessing and enhancing your financial processes to improve efficiency and accuracy.
Ensuring Clean Books
Accurate, up-to-date records are foundational to successful tax planning, as outdated or misaligned financials can disrupt strategies and lead to unanticipated results. Year-end offers a prime opportunity to review and refine your processes for optimal alignment.
No matter how thorough your tax planning is, if your numbers aren’t accurate and reconciled throughout the year, you risk unexpected outcomes that can undermine even the best strategies.
Real-Time Financial Data
Investing in technology that provides real-time financial insights can empower more strategic decision-making. Tools like QuickBooks Online offer automation features that enhance speed, accuracy, and efficiency across your financial operations, setting a solid foundation for success in 2025.
Final Thoughts
As we close 2024, this guide is your roadmap to proactive, effective tax planning. With the right strategy and early planning, business owners and high-net-worth families can secure optimal results and avoid costly surprises in the year ahead.