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The advantages of a living trust for your estate plan

Estate & Wealth Transfer Planning|July 17, 2025

Do you believe you don’t need to worry about estate planning because of the current federal estate tax exemption ($13.99 million per individual or $27.98 million for married couples in 2025)? Well, think again. Even with this substantial exemption, creating a living trust can offer significant benefits, especially if your goal is to avoid probate and maintain privacy.

Here are some answers to questions you may have about this estate planning tool.

What’s a living trust?

A living trust — also known as a revocable trust, grantor trust or family trust — is a legal entity that holds ownership of your assets during your lifetime and distributes them according to your instructions after your death. Unlike a will, a living trust allows your estate to bypass probate, which is the often lengthy and public court process of settling an estate.

How does a living trust work?

You begin by creating a trust document and transferring ownership of specific assets to the trust. These may include:

Your primary residence,
Vacation properties, and
Valuable personal items like antiques.

You’ll name a trustee to manage and distribute the assets after your death. You can serve as the trustee while you’re alive and legally competent. After that, you may appoint a successor trustee — such as a trusted family member, friend, attorney, CPA or financial institution.

Because a living trust is revocable, you can amend or cancel it at any time during your lifetime.

What are the tax implications?

For federal income tax purposes, the IRS doesn’t treat the living trust as separate from you while you’re alive. You’ll continue to report all income and deductions from the trust’s assets on your personal tax return.

However, under state law, the trust is recognized as a separate entity. When structured properly, this allows your estate to bypass probate, helping to ensure a more private and efficient distribution of your assets.

Upon your death, assets in the trust are generally included in your estate for federal estate tax purposes. However, any assets passed to a surviving spouse who’s a U.S. citizen qualify for the unlimited marital deduction, which exempts them from estate tax.

It’s also important to note that the current high federal estate tax exemption is set to expire at the end of 2025, unless Congress extends it. Under “The One, Big, Beautiful Bill,” which recently passed the U.S. House of Representatives, the federal gift and estate tax exemption would be increased to $15 million per individual in 2026. This amount would be permanent but annually adjusted for inflation. The bill is now being considered by the Senate. Keep in mind that the pending legislation could change.

Are there any common pitfalls to avoid?

While a living trust is a powerful tool, it’s only effective when properly executed. Here are some common mistakes to avoid:

Outdated beneficiary designations. The beneficiaries named on retirement accounts, life insurance policies and brokerage accounts override your trust. Make sure your designations align with your overall estate plan.
Jointly owned property. Real estate held as “joint tenants with right of survivorship” automatically passes to the surviving co-owner, regardless of what your trust says.
Failing to transfer assets. Simply creating a trust isn’t enough. You must formally transfer ownership of assets to the trust. Failing to do so means those assets may still be subject to probate.

When is more planning needed?

Although a living trust helps avoid probate, it doesn’t reduce estate or inheritance taxes. If your assets exceed the current exemption or if state estate taxes apply, additional strategies (such as irrevocable trusts, charitable giving or gifting) may be necessary.

Not a one-size-fits-all solution

A living trust is an estate planning tool that can simplify the transfer of your assets, protect your privacy and avoid probate. However, it’s not a one-size-fits-all solution. To make the most of your estate plan and stay ahead of changing tax laws, consult with us or an estate planning attorney.

DOs and DON’Ts to help protect your business expense deductions

Management Advisory Services & Business Consulting|July 15, 2025

If you’re claiming deductions for business meals or vehicle expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case. (T.C. Memo. 2024-82)

Facts of the case

The taxpayer operated a software installation, training and consulting business. She claimed substantial deductions for several tax years. The IRS disallowed many of the deductions and the U.S. Tax Court agreed. Here’s a rundown of some of the disallowed expenses and the reasons why they couldn’t be deducted:

Meals and entertainment. The business owner deducted nearly $9,000 for meal expenses in one tax year and testified the amount was for “working lunches” with the “person she worked for and the developer.” As documentation, she submitted bank statements. The court noted that “bank statements alone do not substantiate the ‘business purpose of the expense’ or the ‘business relationship’ between petitioner and the individuals with whom she dined.” It added: “The cost of eating lunch during the workday is not — without more — a deductible business expense.”

Supplies. The taxpayer deducted more than $17,000 for supplies purchased during two tax years. She testified that these included “desks, monitors, office equipment, paper, printers, [and] anything that was pertinent to the business itself.” To substantiate her reported expenses, the taxpayer submitted receipts from office supply stores. However, the receipts were dated later than the tax years in question, and they covered (among other things) purchases of soda dispensers and gift cards. The court noted that “some of these purchases appear personal” and all were made after she terminated her consulting business.

Home office expenses. Over two years, the taxpayer deducted $21,393 for the business use of a home office. But the court ruled that she “failed to prove that the ‘focal point’ of her software consulting business was her home.” At trial, she testified that she was required to be on site at a client’s office much of the time. In addition, she didn’t supply evidence to establish how much time she worked from home or what (if any) portion of her residence was used exclusively for business purposes.

Other expenses the court disallowed included attorney’s fees, utilities, hotel stays and vehicle expenses. In all cases, the taxpayer didn’t substantiate with adequate records or sufficient evidence that the expenses were related to her business.

Best practices

This case exemplifies why it’s critical to maintain meticulous records to support business expense deductions. Here’s a list of DOs and DON’Ts to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For example, for each business meal, record the amount, date, place, business purpose, and the business relationship of any person you dine with. If you have employees whom you reimburse for meals, travel and vehicle expenses, make sure they’re complying with all the rules.

DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of an event or soon after. Require employees to submit weekly or monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account and credit cards shouldn’t be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Vehicle, travel, meal and home office expenses are attention magnets. Be prepared for a challenge.

Stand up to scrutiny

With organization and our guidance, your tax records can stand up to IRS inspection. There may be other ways to substantiate your deductions. In addition, there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.

The One, Big, Beautiful Bill Act extends many business-friendly tax provisions

Tax Prep, Planning & Strategy|July 14, 2025

The One, Big, Beautiful Bill Act (OBBBA) includes numerous provisions affecting the tax liability of U.S. businesses. For many businesses, the favorable provisions outweigh the unfavorable, but both kinds are likely to impact your tax planning. Here are several provisions included in the new law that may influence your business’s tax liability.

Qualified business income (QBI) deduction

The Tax Cuts and Jobs Act (TCJA) created the Section 199A deduction for QBI for owners of pass-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships. The deduction had been slated to expire after 2025, putting many business owners at risk of higher taxes.

The OBBBA makes the QBI deduction permanent. It also expands the deduction limit phase-in ranges for specified services, trades or businesses, and other entities subject to the wage and investment limitation. For these businesses, the deduction is reduced when taxable income falls within the phase-in range and is eliminated when taxable income exceeds the range. The new law expands the phase-in thresholds from $50,000 to $75,000 for individual filers and from $100,000 to $150,000 for joint filers.

The OBBBA also adds an inflation-adjusted minimum QBI deduction of $400, beginning in 2025. It’s available for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate.

Accelerated bonus depreciation

The OBBBA makes permanent 100% first-year bonus depreciation for the cost of qualified new and used assets acquired and placed into service after January 19, 2025. Under the TCJA, the deduction was limited to 40% for 2025, 20% in 2026 and 0% in 2027.

The new law also introduces a 100% deduction for the cost of “qualified production property” (generally, nonresidential real property used in manufacturing) placed into service after July 4, 2025, and before 2031. In addition, the OBBBA increases the Sec. 179 expensing limit to $2.5 million and the expensing phaseout threshold to $4 million for 2025, with each amount adjusted annually for inflation.

Together, the depreciation changes are expected to encourage capital investments, especially by manufacturing, construction, agriculture and real estate businesses. And the permanent 100% bonus depreciation may alleviate the pressure on companies that didn’t want to delay purchases due to a smaller deduction.

Research and experimentation expense deduction

Beginning in 2022, the TCJA required businesses to amortize Sec. 174 research and experimentation (R&E) costs over five years if incurred in the United States or 15 years if incurred outside the country. With the mandatory mid-year convention, deductions were spread out over six years. The OBBBA permanently allows the deduction of domestic R&E expenses in the year incurred, starting with the 2025 tax year.

The OBBBA also allows “small businesses” (those with average annual gross receipts of $31 million or less) to claim the deduction retroactively to 2022. Any business that incurred domestic R&E expenses in 2022 through 2024 can elect to accelerate the remaining deductions for those expenditures over a one- or two-year period.

Clean energy tax incentives

The OBBBA eliminates many of the Inflation Reduction Act’s clean energy tax incentives for businesses, including the:

Qualified commercial clean vehicle credit,
Alternative fuel vehicle refueling property credit, and
Sec. 179D deduction for energy-efficient commercial buildings.
The law accelerates the phaseouts of some incentives and moves up the project deadlines for others. The expiration dates vary. For example, the commercial clean vehicle credit can’t be claimed for a vehicle acquired after September 30, 2025, instead of December 31, 2032. But the alternative fuel vehicle refueling property credit doesn’t expire until after June 30, 2026.

Qualified Opportunity Zones

The TCJA established the Quality Opportunity Zone (QOZ) program to encourage investment in distressed areas. The program generally allows taxpayers to defer, reduce or exclude unrealized capital gains reinvested in qualified opportunity funds (QOFs) that invest in designated distressed communities. The OBBBA creates a permanent QOZ policy that builds off the original program.

It retains the existing benefits and also provides for investors to receive incremental reductions in gain starting on their investment’s first anniversary. In the seventh year, taxpayers must realize their initial gains, reduced by any step-up in basis, the amount of which depends on how long the investment is held. The first round of QOFs available under the permanent policy will begin on January 1, 2027.

The OBBBA also introduces a new type of QOF for rural areas. Investments in such funds will receive triple the step-up in basis.

International taxes

The TCJA added several international tax provisions to the tax code, including deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). It also established the base erosion and anti-abuse tax (BEAT) on U.S. corporations that 1) have average annual gross receipts greater than or equal to $500 million for the prior three tax years, and 2) have made deductible payments to related non-U.S. parties at or above 3% of all deductible payments.

The OBBBA makes permanent the FDII and GILTI deductions and adjusts the effective tax rates for FDII and GILTI to 14%. It also makes permanent the minimum BEAT, increasing the tax rate to 10.5%. These changes take effect beginning in 2026.

Employer tax provisions

The new law makes permanent the exclusion from gross income (for employees) and from wages for employment tax purposes (for employers) for employer payments of student loans. It also provides that the maximum annual exclusion of $5,250 be adjusted annually for inflation after 2026.

In addition, the OBBBA permanently raises the maximum employer-provided child care credit from 25% to 40% of qualified expenses, up to $500,000 per year. (For eligible small businesses, these amounts are 50% and up to $600,000, respectively.) The maximum dollar amount will be adjusted annually for inflation after 2026.

The OBBBA also makes permanent the employer credit for paid family and medical leave (FML) after 2025. Employers will also be allowed to claim the credit for a portion of premiums for paid FML insurance.

Employee Retention Tax Credit

If you filed an Employee Retention Tax Credit claim after January 31, 2024, you may not see your expected refund. The OBBBA bars the IRS from issuing refunds for certain claims submitted after that date. It also gives the IRS at least six years from the date of filing to challenge these claims.

Miscellaneous provisions

The OBBBA increases the limit on the business interest deduction by excluding depreciation, amortization and depletion from the computation of adjusted taxable income (ATI), starting in 2025. The deduction is generally limited to 30% of ATI for the year.

The new law also makes permanent the excess business loss limit, which was set to expire in 2029. And it permanently extends the New Markets Tax Credit, which was scheduled to expire in 2026.

What’s next?

Since the OBBBA is simply extending or making relatively modest modifications to existing tax law, it probably won’t result in the years-long onslaught of new regulations and IRS guidance that followed the TCJA’s enactment. But we’ll keep you informed about any new developments.

Are you missing a valuable tax deduction for Medicare premiums?

Tax Prep, Planning & Strategy|July 10, 2025

If you’re age 65 or older and enrolled in basic Medicare insurance, you may need to pay additional premiums to receive more comprehensive coverage. These extra premiums can be expensive, particularly for married couples, since both spouses incur the costs. However, there may be a silver lining: You could be eligible for a tax deduction for the premiums you pay.

Deducting medical expenses: What counts?

For purposes of claiming an itemized deduction for medical expenses on your tax return, you can combine premiums for Medicare health insurance with other eligible medical expenses. These include amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Is itemizing required?

Qualifying for a medical expense deduction can be difficult for many people for several reasons. For 2025, you can deduct medical expenses only if you itemize deductions on Schedule A of Form 1040 and only to the extent that total qualifying expenses exceed 7.5% of adjusted gross income.

In recent years, many people haven’t been itemizing because their itemized deductions are less than their standard deductions. For 2025, the standard deduction amounts are $15,000 for single filers, $30,000 for married couples filing jointly and $22,500 for heads of household. (Under The One, Big, Beautiful Bill being considered by Congress, these amounts would increase. If the bill is enacted, the standard deduction will increase for 2025 through 2028 by an additional $1,000 for singles, $2,000 for married joint filers and $1,500 for heads of households.)

Note: Self-employed people and shareholder-employees of S corporations don’t need to itemize to get tax savings. They can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums.

What other expenses qualify?

In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatments, doctor visits, ambulance services, dentures, eye exams, eyeglasses and contacts, hearing aids, hospital visits, lab tests, qualified long-term care services, prescription medicines and others.

There are also many other items that Medicare doesn’t cover that can be deducted for tax purposes if you qualify. And itemizers can deduct transportation expenses to get to and from medical appointments. If you go by car, you can deduct a flat 21 cents-per-mile rate in 2025, or you can keep track of your actual out-of-pocket expenses for gas, oil, maintenance and repairs.

Claim all eligible expenses

Contact us if you have any questions about whether you’re able to claim medical expense deductions on your tax return. We’ll help ensure you claim all the tax breaks you’re entitled to.

The One, Big, Beautiful Bill could change the deductibility of R&E expenses

Tax Prep, Planning & Strategy|July 8, 2025

The treatment of research and experimental (R&E) expenses is a high-stakes topic for U.S. businesses, especially small to midsize companies focused on innovation. As the tax code currently stands, the deductibility of these expenses is limited, leading to financial strain for companies that used to be able to expense them immediately. But proposed legislation dubbed The One, Big, Beautiful Bill could drastically change that. Here’s what you need to know.

R&E expenses must currently be capitalized

Before 2022, under Section 174 of the Internal Revenue Code, taxpayers could deduct R&E expenses in the year they were incurred. This treatment encouraged investment in innovation, as companies could realize a current tax benefit for eligible costs.

However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) changed the rules. Under the law, R&E expenses must be capitalized and amortized over five years for domestic activities and 15 years for foreign activities. This means businesses can’t take an immediate deduction for their research spending.

The practical impact on businesses

Startups, tech firms and manufacturers, in particular, have reported significant tax hikes, even in years when they operated at a loss. The shift from immediate expensing to amortization has created cash flow issues for innovation-heavy firms and complicated tax reporting and long-term forecasting.

Lobbying groups, tax professionals and industry associations have been pushing for a reversal of the TCJA’s Sec. 174 provisions since they took effect.

What’s in The One, Big, Beautiful Bill?

The One, Big, Beautiful Bill is a comprehensive tax and spending package that narrowly passed in the U.S. House in May. It contains a provision that would restore the immediate deductibility of R&E expenses, among other tax measures.

Specifically, it would allow taxpayers to immediately deduct domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. This provision would also make other changes to the deduction.

If enacted, the bill would provide a lifeline to many businesses burdened by the amortization requirement — especially those in high-growth, innovation-focused sectors.

Legislative outlook and next steps

Passage of the current version of The One, Big, Beautiful Bill remains uncertain. The bill is now being debated in the U.S. Senate and senators have indicated they’d like to make changes to some of the provisions. If the bill is revised, it will have to go back to the House for another vote before it can be signed into law by President Trump.

However, it offers hope that lawmakers recognize the challenges businesses face and may be willing to act. If enacted, the bill could restore financial flexibility to innovators across the country, encouraging a new wave of research, development and economic growth.

Stay tuned, and contact us if you have questions about how these potential changes may affect your business.

Tax breaks in 2025 and how The One, Big Beautiful Bill could change them

Tax Prep, Planning & Strategy|July 1, 2025

The U.S. House of Representatives passed The One, Big, Beautiful Bill Act on May 22, 2025, introducing possible significant changes to individual tax provisions. While the bill is now being considered by the Senate, it’s important to understand how the proposals could alter key tax breaks.

Curious about how the bill might affect you? Here are seven current tax provisions and how they could change under the bill.

1. Standard deduction

The Tax Cuts and Jobs Act nearly doubled the standard deduction. For the 2025 tax year, the standard deduction has been adjusted for inflation as follows:

$15,000 for single filers,
$30,000 for married couples filing jointly, and
$22,500 for heads of household.

Under current law, the increased standard deduction is set to expire after 2025. The One, Big, Beautiful Bill would make it permanent. Additionally, for tax years 2025 through 2028, it proposes an increase of $1,000 for single filers, $2,000 for married couples filing jointly and $1,500 for heads of households.

2. Child Tax Credit (CTC)

Currently, the CTC stands at $2,000 per qualifying child but it’s scheduled to drop to $1,000 after 2025. The bill increases the CTC to $2,500 for 2025 through 2028, after which it would revert to $2,000. In addition, the bill indexes the credit amount for inflation beginning in 2027 and requires the child and the taxpayer claiming the child to have Social Security numbers.

3. State and local tax (SALT) deduction cap

Under current law, the SALT deduction cap is set at $10,000 but the cap is scheduled to expire after 2025. The bill would raise this cap to $40,000 for taxpayers earning less than $500,000, starting in 2025. This change would be particularly beneficial for taxpayers in high-tax states, allowing them to deduct a larger portion of their state and local taxes.

4. Tax treatment of tips and overtime pay

Currently, tips and overtime pay are considered taxable income. The proposed legislation seeks to exempt all tip income from federal income tax through 2029, provided the income is from occupations that traditionally receive tips. Additionally, it proposes to exempt overtime pay from federal income tax, which could increase take-home pay for hourly workers.

These were both campaign promises made by President Trump. He also made a pledge during the campaign to exempt Social Security benefits from taxes. However, that isn’t in the bill. Instead, the bill contains a $4,000 deduction for eligible seniors (age 65 or older) for 2025 through 2028. To qualify, a single taxpayer would have to have modified adjusted gross income (MAGI) under $75,000 ($150,000 for married couples filing jointly).

5. Estate and gift tax exemption

As of 2025, the federal estate and gift tax exemption is $13.99 million per individual. The bill proposes to increase this exemption to $15 million per individual ($30 million per married couple) starting in 2026, with adjustments for inflation thereafter.

This change would allow individuals to transfer more wealth without incurring federal estate or gift taxes.

6. Auto loan interest

Currently, there’s no deduction for auto loan interest. Under the bill, an above-the-line deduction would be created for up to $10,000 of eligible vehicle loan interest paid during the taxable year. The deduction begins to phase out when a single taxpayer’s MAGI exceeds $100,000 ($200,000 for married couples filing jointly).

There are a number of rules to meet eligibility, including that the final assembly of the vehicle must occur in the United States. If enacted, the deduction is allowed for tax years 2025 through 2028.

7. Electric vehicles

Currently, eligible taxpayers can claim a tax credit of up to $7,500 for a new “clean vehicle.” There’s a separate credit of up to $4,000 for a used clean vehicle. Income and price limits apply as well as requirements for the battery. These credits were scheduled to expire in 2032. The bill would generally end the credits for purchases made after December 31, 2025.

Next steps

These are only some of the proposals being considered. While The One, Big, Beautiful Bill narrowly passed the House, it faces scrutiny and potential changes in the Senate. Taxpayers should stay informed about these developments, as the proposals could significantly impact individual tax liabilities in the coming years. Contact us with any questions about your situation.

Still have tax questions? You’re not alone

Tax Prep, Planning & Strategy|June 24, 2025

Even after your 2024 federal return is submitted, a few nagging questions often remain. Below are quick answers to five of the most common questions we hear each spring.

1. When will my refund show up?

Use the IRS’s “Where’s My Refund?” tracker at IRS.gov. Have these three details ready:

Social Security number,
Filing status, and
Exact refund amount.

Enter them, and the tool will tell you whether your refund is received, approved or on the way.

2. Which tax records can I toss?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return.

So you can generally get rid of most records related to tax returns for 2021 and earlier years. (If you filed an extension for your 2021 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years to be on the safe side.)

3. I missed a credit or deduction. Can I still get a refund?

Yes. You can generally file Form 1040-X (amended return) within:

Three years of the original filing date, or
Two years of paying the tax — whichever is later.

In a few instances, you have more time. For instance, you have up to seven years from the due date of the return to claim a bad debt deduction.

4. What if the IRS contacts me about the tax return?

It’s possible the IRS could have a problem with your return. If so, the tax agency will only contact you by mail — not phone, email or text. Be cautious about scams!

If the IRS needs additional information or adjusts your return, it will send a letter explaining the issue. Contact us about how to proceed if we prepared your tax return.

5. What if I move after filing?

You can notify the IRS of your new address by filling out Form 8822. That way, you won’t miss important correspondence.

Year-round support

Questions about tax returns don’t stop after April 15 — and neither do we. Reach out anytime for guidance.

Corporate business owners: Is your salary reasonable in the eyes of the IRS?

Management Advisory Services & Business Consulting|June 17, 2025

Determining “reasonable compensation” is a critical issue for owners of C corporations and S corporations. If the IRS believes an owner’s compensation is unreasonably high or low, it may disallow certain deductions or reclassify payments, potentially leading to penalties, back taxes and interest. But by proactively following certain steps, owners can help ensure their compensation is seen as reasonable and deductible.

Different considerations for C and S corporations

C corporation owners often take large salaries because they’re tax-deductible business expenses, which reduce the corporation’s taxable income. So, by paying themselves higher salaries, C corporation owners can lower corporate taxes. But if a salary is excessive compared to the work performed, the IRS may reclassify some of it as nondeductible dividends, resulting in higher taxes.

On the other hand, S corporation owners often take small salaries and larger distributions. That’s because S corporation profits flow through to the owners’ personal tax returns, and distributions aren’t subject to payroll taxes. So, by minimizing salary and maximizing distributions, S corporation owners aim to reduce payroll taxes. But if the IRS determines a salary is unreasonably low, it may reclassify some distributions as wages and impose back payroll taxes and penalties.

The IRS closely watches both strategies because they can be used to avoid taxes. That’s why it’s critical for C corporation and S corporation owners to set compensation that reflects fair market value for their work.

What the IRS looks for

The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like enterprises under like circumstances.” Essentially, the IRS wants to see that what you pay yourself is in line with what you’d pay someone else doing the same job.

Factors the IRS examines include:

Duties and responsibilities,
Training and experience,
Time and effort devoted to the business,
Comparable salaries for similar positions in the same industry and region, and
Gross and net income of the business.

Owners should regularly review these factors to ensure they can defend their pay levels if challenged.

How to establish reasonable compensation

Several steps should be taken to establish reasonable compensation:

1. Conduct market research. Start by gathering data on what other companies pay for similar roles. Salary surveys, industry reports and reputable online compensation databases (such as the U.S. Bureau of Labor Statistics) can provide valuable benchmarks.

Document your findings and keep them on file. This shows that your compensation decisions were informed by objective data, not personal preference.

2. Keep detailed job descriptions. A well-written job description detailing your duties and responsibilities helps justify your salary. Outline the roles you perform, such as CEO-level strategic leadership, day-to-day operations management and specialized technical work. The more hats you wear, the stronger the case for higher compensation.

3. Maintain formal records. Hold regular board meetings and formally approve compensation decisions in the minutes. This adds an important layer of corporate governance and shows the IRS that compensation was reviewed and approved through an appropriate process.

4. Document annual reviews. Perform an annual compensation review. Adjust your salary to reflect changes in the business’s profitability, your workload or industry trends. Keep records of these reviews and the rationale behind any changes.

Strengthen your position

Determining reasonable compensation isn’t a one-time task — it’s an ongoing process. We can help you benchmark your pay, draft necessary documentation and stay compliant with tax law. This not only strengthens your position against IRS scrutiny but also supports your broader business strategy.

If you’d like guidance on setting or reviewing your compensation, contact us.

The “wash sale” rule: Don’t let losses circle the drain

Tax Prep, Planning & Strategy|June 12, 2025

Stock, mutual fund and ETF prices have bounced around lately. If you make what turns out to be an ill-fated investment in a taxable brokerage firm account, the good news is that you may be able to harvest a tax-saving capital loss by selling the loser security. However, for federal income tax purposes, the wash sale rule could disallow your hoped-for tax loss.

Rule basics

A loss from selling stock or mutual fund shares is disallowed if, within the 61-day period beginning 30 days before the date of the loss sale and ending 30 days after that date, you buy substantially identical securities.

The theory behind the wash sale rule is that the loss from selling securities and acquiring substantially identical securities within the 61-day window adds up to an economic “wash.” Therefore, you’re not entitled to claim a tax loss and realize the tax savings that would ordinarily result from selling securities for a loss.

When you have a disallowed wash sale loss, it doesn’t vaporize. Instead, the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. When you eventually sell the securities, the additional basis reduces your tax gain or increases your tax loss.

Example: You bought 2,000 ABC shares for $50,000 on May 5, 2024. You used your taxable brokerage firm account. The shares plummeted. You bailed out of the shares for $30,000 on April 4, 2025, harvesting what you thought was a tax-saving $20,000 capital loss ($50,000 basis – $30,000 sales proceeds). You intended to use the $20,000 loss to shelter an equal amount of 2025 capital gains from your successful stock market sales. Having secured the tax-saving loss — or so you thought — you reacquired 2,000 ABC shares for $31,000 on April 29, 2025, because you still like the stock. Sadly, the wash sale rule disallows your expected $20,000 capital loss. The disallowed loss increases the tax basis of the substantially identical securities (the ABC shares you acquired on April 29, 2025) to $51,000 ($31,000 cost + $20,000 disallowed wash sale loss).

One way to defeat the rule

Avoiding the wash sale rule is only an issue if you want to sell securities to harvest a tax-saving capital loss but still want to own the securities. In most cases, investors do this because they expect the securities to appreciate in the future.

One way to defeat the wash sale rule is with the “double up” strategy. You buy the same number of shares in the stock or fund that you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. That way, you’ve successfully made a tax-saving loss sale, but you still own the same number of shares as before and can still benefit from the anticipated appreciation.

Cryptocurrency losses are exempt (for now)

The IRS currently classifies cryptocurrencies as “property” rather than securities. That means the wash sale rule doesn’t apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency shortly before or after the loss sale. You just have a regular short-term or long-term capital loss, depending on your holding period.

Warning: Losses from selling crypto-related securities, such as Coinbase stock, can fall under the wash sale rule. That’s because the rule applies to losses from assets that are classified as securities for federal income tax purposes, such as stock and mutual fund shares.

Beware when harvesting losses

Harvesting capital losses is a viable tax-saving strategy as long as you avoid the wash sale rule. However, you currently don’t have to worry about the wash sale rule when harvesting cryptocurrency losses. Contact us if you have questions or want more information on taxes and investing.

Hiring independent contractors? Make sure you’re doing it right

Management Advisory Services & Business Consulting|June 5, 2025

Many businesses turn to independent contractors to help manage costs, especially during times of staffing shortages and inflation. If you’re among them, ensuring these workers are properly classified for federal tax purposes is crucial. Misclassifying employees as independent contractors can result in expensive consequences if the IRS steps in and reclassifies them. It could lead to audits, back taxes, penalties and even lawsuits.

Understanding worker classification

Tax law requirements for businesses differ for employees and independent contractors. And determining whether a worker is an employee or an independent contractor for federal income and employment tax purposes isn’t always straightforward. If a worker is classified as an employee, your business must:

Withhold federal income and payroll taxes,
Pay the employer’s share of FICA taxes,
Pay federal unemployment (FUTA) tax,
Potentially offer fringe benefits available to other employees, and
Comply with additional state tax requirements.

In contrast, if a worker qualifies as an independent contractor, these obligations generally don’t apply. Instead, the business simply issues Form 1099-NEC at year end (for payments of $600 or more). Independent contractors are more likely to have more than one client, use their own tools, invoice customers and receive payment under contract terms, and have an opportunity to earn profits or suffer losses on jobs.

Defining an employee

What defines an “employee”? Unfortunately, there’s no single standard.

Generally, the IRS and courts look at the degree of control an organization has over a worker. If the business has the right to direct and control how the work is done, the individual is more likely to be an employee. Employees generally have tools and equipment provided to them and don’t incur unreimbursed business expenses.

Some businesses that misclassify workers may qualify for relief under Section 530 of the tax code, but only if specific conditions are met. The requirements include treating all similar workers consistently and filing all related tax documents accordingly. Keep in mind, this relief doesn’t apply to all types of workers.

Why you should proceed cautiously with Form SS-8

Businesses can file Form SS-8 to request an IRS determination on a worker’s status. However, this move can backfire. The IRS often leans toward classifying workers as employees, and submitting this form may draw attention to broader classification issues — potentially triggering an employment tax audit.

In many cases, it’s wiser to consult with us to help ensure your contractor relationships are properly structured from the outset, minimizing risk and ensuring compliance. For example, you can use written contracts that clearly define the nature of the relationships. You can maintain documentation that supports the classifications, apply consistent treatment to similar workers and take other steps.

When a worker files Form SS-8

Workers themselves can also submit Form SS-8 if they believe they’re misclassified — often in pursuit of employee benefits or to reduce self-employment tax. If this happens, the IRS will contact the business, provide a blank Form SS-8 and request it be completed. The IRS will then evaluate the situation and issue a classification decision.

Help avoid costly mistakes

Worker classification is a nuanced area of tax law. If you have questions or need guidance, reach out to us. We can help you accurately classify your workforce to avoid costly missteps.

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