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Don’t let the IRS treat your sideline as a hobby

Tax Prep, Planning & Strategy|July 7, 2026

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 Recent tax law changes permanently repealed itemized deductions for miscellaneous business expenses.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:

Your activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.
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.

Cost segregation studies can reveal substantial tax savings

Tax Prep, Planning & Strategy|June 30, 2026

Businesses that own commercial real property may be sitting on an overlooked treasure chest of tax savings — and a cost segregation study can be the key to unlocking it. This is a strategic tool that combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. A cost segregation study may allow you to accelerate depreciation deductions on certain items, thereby deferring taxes and boosting cash flow.

Timing counts when depreciating assets

Commercial rental properties and buildings used for business purposes are generally depreciated over 39 years under federal tax law. But such properties may include a wide range of components with much shorter depreciation recovery periods. These can include parts of various systems such as HVAC, plumbing, electrical, fire protection, alarm and security, as well as:

Drywall,
Doors,
Fixtures,
Data and communication ports,
Flooring, and
Cabinetry.

These assets could have useful lives of five, seven or 15 years — all significantly less than 39 years. By segregating such assets, you can claim greater depreciation deductions sooner. You’ll claim the same total amount of depreciation on the assets over time but reduce your tax bill in the short term, providing greater cash flow.

OBBBA changes add value

Recent tax law changes under the One Big Beautiful Bill Act (OBBBA) enhanced these benefits by increasing first-year depreciation write-offs. The two most widely relevant provisions relate to:

1. Bonus depreciation. The OBBBA restored 100% first-year bonus depreciation deductions for eligible assets acquired and placed in service after January 19, 2025. While commercial real properties aren’t eligible for first-year bonus depreciation, segregated building components with shorter recovery periods may be eligible. There are no phaseout limits for bonus depreciation, which is helpful for larger companies.

2. Section 179 expensing. For tax years beginning in 2025, the OBBBA increased the maximum amount of eligible assets you can immediately deduct under the Sec. 179 expensing election to $2.5 million. A phaseout reduces the maximum Sec. 179 deduction if, during the year, you place in service eligible assets in excess of $4 million. Both figures are adjusted annually for inflation. For 2026, they’re $2.56 million and $4.09 million, respectively. Again, commercial real properties aren’t eligible for Sec. 179 expensing, but segregated building components with shorter recovery periods may be eligible.

Additionally, if your business involves manufacturing or certain agricultural activities, you may be eligible for a new depreciation-related tax break. The OBBBA introduced a 100% deduction for the cost of qualified production property (QPP). To be eligible, among other requirements, a qualifying real property’s construction must begin after January 19, 2025, and before January 1, 2029, and it must be placed in service before 2031. This break allows eligible businesses to immediately deduct the cost of QPP that otherwise would be depreciable over 39 years.

The QPP deduction makes cost segregation studies less relevant for qualifying property. But it’s subject to several specific requirements and exceptions that may prevent you from claiming it.

Ready, set, save

A cost segregation study can significantly lower your taxes, but it isn’t a do-it-yourself project. Although this strategy has been consistently upheld in the courts, the IRS closely monitors deductions based on cost segregation studies. And the rules can be confusing.

So, it’s prudent to hire experienced professionals to help you identify various building components and break down write-off periods for them. Contact us to discuss whether a cost segregation study could potentially save you taxes. We can determine reasonable cost allocations to help withstand IRS scrutiny.

Fine-tune your tax withholding after filing your return

Tax Prep, Planning & Strategy|June 23, 2026

Many taxpayers discover at filing time that their tax payments during the year didn’t align with their actual liability — either too much or too little was withheld from their paychecks. A small difference is to be expected, but withholding that’s significantly off target can have negative consequences. Overwithholding reduces the amount available to you throughout the year. Substantial underwithholding can lead to a large balance due, along with potential interest and penalties.

If you received a large refund or owed a lot of tax when you filed your 2025 return, it’s a good idea to take a closer look at how much tax is being withheld from your income this year. Reviewing and fine-tuning your withholding now can help you better align your payments with your 2026 tax liability.

Review your income and withholding

If all or most of your income is from wages, whether from a salary or hourly pay, your employer withholds amounts from your paychecks intended to cover your annual income tax liability. However, these withholding amounts are estimates based on IRS withholding tables, which approximate a typical worker’s annual tax liability at your compensation level.

Your situation may differ from that of a comparably compensated worker for various reasons. You might have larger deductions or credits than is typical, which could make standard withholding too high. Or you might have additional income from other sources, which could make standard withholding too low.

Adjust your withholding if needed

One way to minimize overpayments or underpayments is to estimate your tax liability for the year. Then, if necessary, adjust your withholding by completing a new Form W-4, “Employee’s Withholding Certificate.”

The IRS’s Tax Withholding Estimator can help. It now reflects key provisions of the One Big Beautiful Bill Act (OBBBA), including the elimination of taxes on qualified tips and qualified overtime (up to applicable limits), as well as new deductions for seniors and auto loan interest. It also more accurately accounts for OBBBA changes to tax breaks related to families, homeownership and charitable giving.

Once you submit a new Form W-4 to your employer, changes typically will take a few weeks to go into effect. Keep that in mind when you determine your adjustments.

Revisit withholding after life changes

Changes during the year can affect the accuracy of your withholding. Review your Form W-4 and consider making adjustments if you:

Experience a significant increase or decrease in income,
Get married or divorced,
Have a child or add a dependent,
Buy a home, or
Receive new sources of income not subject to withholding.

Even if you’ve already adjusted your withholding, reviewing it again after a major life event can help you stay on track.

Use withholding strategically

If part of your income isn’t subject to withholding, estimated tax payments may also come into play. You can avoid penalties for missing or underpaying an estimated payment by increasing your withholding to make up the difference. Unlike estimated tax payments, withholding amounts are treated as paid evenly throughout the year — regardless of when they’re actually withheld.

Using this strategy, you can increase withholding from your wages (or from your spouse’s, if you’re married). Alternatively, if you’re retired and don’t have wages from which to withhold taxes, increasing withholding from your IRA or other retirement plan distributions may be possible.

Find the right balance

Keeping your withholding aligned with your expected tax liability can help you enjoy better cash flow during the year and avoid surprises at filing time. We can review your current withholding (and estimated tax payments, if applicable), project your tax liability for the year and assist with deciding whether to make any withholding changes for 2026.

Unlock tax-free gains with QSB stock

Management Advisory Services & Business Consulting|June 18, 2026

If you run your business as a C corporation, you may be eligible for a potentially significant tax break for qualified small business (QSB) stock. This opportunity has existed for years, but recent tax law changes have enhanced it.

What’s a QSB corporation?

QSB corporations are a special type of C corporation. At the entity level, QSB corporations are generally treated as regular C corporations for legal and federal income tax purposes. So, most of the standard advantages and disadvantages of C corporation status apply equally to QSB corporations, including the 21% flat federal income tax rate on corporate income. However, QSB shareholders can potentially enjoy a significant tax advantage: A special gain exclusion rule can allow them to avoid the federal income tax hit on up to 100% of the gain from selling QSB stock.

C corporations that own QSB stock aren’t eligible for the gain exclusion. But sales of QSB stock held by pass-through business entities — such as S corporations, partnerships and, typically, limited liability companies — may be eligible. The break is effectively passed through to individual pass-through entity owners.

Which shares qualify as QSB stock?

To be eligible for the QSB stock gain exclusion, several requirements must be met, including the following:

You must acquire the shares upon original issuance by the corporation or by gift or inheritance.
The corporation must be a QSB corporation on the date the stock is issued and for substantially all the time you own the shares. Among other things, this means it must not have assets that exceed $75 million ($50 million if the stock was issued on or before July 4, 2025). The $75 million limit will be indexed for inflation after 2026.
The corporation must actively conduct a qualified business. Service businesses and certain other businesses don’t qualify. (Contact us for a complete list of nonqualified businesses.)

Timing is also critical. To take advantage of the 100% gain exclusion for sales of QSB stock, you must have acquired the shares after September 27, 2010, and held them for at least five years.

How did the OBBBA expand the exclusion?

In addition to raising the QSB asset ceiling, the One Big Beautiful Bill Act (OBBBA) enhanced the gain exclusion rules for QSB shares acquired after July 4, 2025. It allows a 50% gain exclusion for QSB stock held for at least three years and a 75% gain exclusion for QSB stock held for at least four years. The 100% gain exclusion still applies to QSB stock held for at least five years.

For QSB shares acquired after July 4, 2025, your excludable gain for any year is limited to the greater of:

10 times your aggregate tax basis in the QSB stock that was sold, or
$15 million ($7.5 million if you were married but filed separately), reduced by the amount of gain you excluded in prior tax years from sales of QSB stock issued by the same corporation.

When the $15 million (or $7.5 million) restriction applies, it’s effectively a lifetime limitation.

Next steps

The gain exclusion for QSB stock and the flat 21% corporate federal income tax rate are two powerful incentives to operate a business as a QSB corporation. You can potentially convert an existing unincorporated business into a QSB corporation by incorporating it. Contact us to learn more about this tax-saving strategy. We can help you navigate the complex rules and requirements.

What’s a “small business,” and why does it matter?

Management Advisory Services & Business Consulting|June 11, 2026

Although your business may seem big to you, you may wonder how the government classifies it for tax purposes. If your organization qualifies as a “small business,” you may enjoy several important tax advantages. But the rules for specific tax provisions vary. So, depending on your size, you might be eligible for some so-called small business breaks but not others. Here’s a closer look.

No universal definition

Under federal tax law, there’s no one definition of a small business. Instead, several definitions apply depending on the context, various criteria and certain thresholds. Criteria may include a business’s:

Gross assets,
Gross receipts, and
Number of shareholders and employees.

Even if a criterion such as gross receipts is the same across definitions, different thresholds may apply. Also, for some purposes, the tax code might define a small business in more than one way. Depending on how your performance and operations change over time, you might meet the government’s definition of a small business one year but not the next year.

5 special breaks for certain small businesses

The Section 448(c) gross receipts test serves as a common eligibility standard for several tax provisions available to qualifying small businesses. Under this test, your business may qualify for five potential tax breaks if it had average annual gross receipts of $25 million or less for the prior three-year period. This threshold is adjusted for inflation — for 2026, businesses that had average gross receipts up to $32 million are eligible for:

1. Cash accounting. You’re generally permitted to use the cash method of accounting for tax purposes even if you have inventories or use the accrual method for financial reporting. With certain exceptions, larger businesses — particularly those that carry inventory — must use accrual accounting. Using the cash method will likely allow you to defer more taxable income than you could under the accrual method.

2. Inventory simplification. You’re generally exempt from complex inventory accounting rules and may account for inventories by:

Treating them as nonincidental materials and supplies, or
Conforming to the inventory method you use in your financial statements or books and records.

Treating inventories as nonincidental materials or supplies allows you to deduct their cost when they’re “used or consumed.” Final IRS regulations clarify that materials aren’t used and consumed until the inventory is sold. So businesses can’t treat raw materials as used and consumed when converted into work-in-progress or finished goods.

3. Relief from UNICAP rules. You’re exempt from the uniform capitalization (UNICAP) rules, which require taxpayers to capitalize certain direct and indirect production costs to inventory, rather than deduct them when incurred. Not only can these rules increase your tax liability, but they also make tax reporting more complex.

4. Exemption from the business interest deduction limitation. You’re not subject to the cap on business interest write-offs, which generally limits deductions of net business interest expense to 30% of adjusted taxable income.

5. The completed contract method. If your business is in construction, manufacturing or another industry where long-term contracts are common, you may use the completed contract method rather than the percentage-of-completion method to account for long-term contracts expected to be completed within two years. The completed contract method allows you to defer tax until the contract is substantially complete, while the percentage-of-completion method can accelerate the tax.

When determining your business’s gross receipts, you may need to include those earned by certain related entities, such as those with common control. Special rules apply to organizations in existence for less than three years. Also, tax shelters, including syndicates, don’t qualify for small business status, even if their gross receipts are below the threshold.

Sizing up your business

Of course, these five relief measures aren’t the only tax-saving opportunities for small business owners at the federal and state levels. And determining eligibility can be more complicated than it appears. We can help evaluate your eligibility for these breaks and others — and develop a long-term plan that’s tailored to your situation. Contact us to explore the potential tax benefits of small business status.

Moving to a new state? Review the tax implications first

Tax Prep, Planning & Strategy|June 9, 2026

Whether you’re relocating for work, retirement, family or lifestyle reasons, state taxes can have a significant financial impact. Taxes vary widely from state to state. And establishing residency for tax purposes may be more complicated than you expect. Before moving, be sure you understand how changing states could affect your overall tax situation.

A variety of taxes to consider

It may seem like a tax-smart idea to simply move to a state with no personal income tax. But to make an informed decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If the state you’re considering has an income tax, look at the types of income it taxes. For example, some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.

Some states with low or no income tax have higher-than-average property tax rates or sales tax rates that could offset income tax savings. Even if you’re moving from one no-income-tax state to another, it’s important to look at how your potential property and sales tax expenses in each state compare.

When it comes to estate taxes, the federal estate tax doesn’t apply to many people these days. For 2026, the federal gift and estate tax exemption is $15 million per individual, or $30 million for a married couple (with proper planning). But some states that have an estate tax provide a much lower exemption. And some states have an inheritance tax in addition to (or in lieu of) an estate tax.

Effectively establishing domicile

If you make a permanent move to a new state and want to ensure you’re not taxed in the state you came from, be careful to establish legal domicile in the new location and terminate it in your old one. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home and the place where you plan to return, even after periods of residing elsewhere.

The more time that passes after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Five ways to help establish domicile in a new state are to:

Change your mailing address at the post office,
Change your address on insurance policies, will or living trust documents, and other important documents,
Buy or lease a home in the new state and sell your home in the old state (or rent it out at the market rate to an unrelated party),
Open and use bank accounts in the new state and close accounts in the old one, and
Register to vote, get a driver’s license and register your vehicle in the new state.

If you’re required to file an income tax return in the new state, file a resident return. And file a nonresident return or no return (whichever is appropriate) in the old state. We can help you make these decisions and file these returns.

Plan before you relocate

Moving to another state can affect your taxes in ways that aren’t always obvious. Before you relocate, contact us to review the potential income, property, sales and estate tax implications. We can help you minimize potential negative tax consequences and make the most of any tax advantages offered by the new state.

ACA penalties may still apply — and they’re increasing for 2026

NEWS|June 2, 2026

Many small businesses don’t have enough employees to worry about the play-or-pay provisions of the Affordable Care Act (ACA). However, as your business grows, these rules can apply sooner than expected. This issue also may not be on your radar because there’s a common misconception that the repeal of ACA penalties under the Tax Cuts and Jobs Act applied to both individuals and businesses. While the individual mandate penalty was eliminated beginning in 2019, the employer shared responsibility rules are still in effect.

Don’t let ACA compliance become a blind spot for your business. Here’s what you need to know to comply with the law’s requirements.

The play-or-pay threshold

The ACA’s employer shared responsibility rules apply to applicable large employers (ALEs). In general, ALEs are businesses with 50 or more full-time employees, including full-time equivalents (FTEs). Once a business crosses that threshold, it must comply with several requirements related to employee health coverage. An employer’s size for the year is determined by the number of full-time employees plus FTEs in its prior year. The challenge is that many business owners don’t realize they’re approaching the ALE threshold until it’s too late.

First, for ACA purposes, a full-time employee generally is an individual employed on average at least 30 hours of service per week or 130 hours per month. So some employees you might consider to be part-time because they work less than 40 hours a week may be considered full-time for ACA purposes.

Second, FTEs are determined by adding all hours of service for the month for employees who weren’t full-time employees (but no more than 120 hours per employee), and dividing by 120. This can push a company into ALE status faster than expected. For example, a small company with 35 full-time employees and a significant number of part-time workers could exceed the 50-full-time-employee threshold once part-time hours are aggregated.

2 types of penalties

Under the ACA, an ALE may incur a penalty if it doesn’t offer minimum essential coverage to its full-time employees and their eligible dependents or if it offers such coverage, but that coverage isn’t affordable and/or fails to provide minimum value. The penalty is typically triggered when at least one full-time employee receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace.

One of two penalty structures may apply, depending on the circumstances. First, under Section 4980H(a), a penalty may be assessed if an ALE fails to offer coverage to at least 95% of its full-time employees and their dependents. This penalty is calculated based on the total number of full-time employees, excluding the first 30. Second, under Section 4980H(b), a penalty may apply for each full-time employee who receives a premium tax credit for purchasing coverage through a Health Insurance Marketplace because the employer’s coverage is unaffordable or doesn’t provide minimum value.

Updated penalties for 2026

The adjusted penalty amounts (per the applicable number of full-time employees used to calculate the specific penalty) for failures occurring in the 2026 calendar year are:

$3,340 (up from $2,900 in 2025) under Sec. 4980H(a), for ALEs not offering health coverage, and
$5,010 (up from $4,350 in 2025) under Sec. 4980H(b), for ALEs offering coverage but that have employees who qualify for premium tax credits or cost-sharing reductions.

The IRS uses Letter 226-J to inform ALEs of their potential liability for an employer shared responsibility penalty. A response form — Form 14764, “ESRP Response” — is included with Letter 226-J so that an ALE can inform the IRS whether it agrees with the proposed penalty. A response is generally due within 30 days. Be on the lookout for this letter so that you’re prepared to promptly review and respond if the IRS contacts you.

Considerations for growing businesses

As your workforce expands, it’s important to address the following questions:

How close is your company to the 50-full-time-employee threshold?
Are you properly identifying who’s a full-time employee under the ACA and calculating your number of FTEs based on part-timers’ hours?
If your company becomes an ALE, how will it structure health coverage to satisfy affordability and minimum value requirements?
Are your payroll and human resource systems prepared to support ACA reporting requirements, including Forms 1094-C and 1095-C?

Addressing these issues early can help ensure that expansion plans don’t come with unexpected ACA penalties.

For more information

Careful compliance with the ACA remains critical for companies that qualify as ALEs. Growing small businesses should be particularly wary as they become midsize ones. Contact us with questions about your obligations and ways to better manage the costs of health care benefits.

Debt vs. equity: Classification counts when shareholders put money into their corporations

Management Advisory Services & Business Consulting|May 28, 2026

If you operate your business as a C corporation, how you put money into your company — and how you take it back out — can have a major impact on your tax bill. Payments from shareholders to fund the business can either be classified as capital contributions (equity) or shareholder loans (debt). That might sound like an accounting technicality, but it has real tax consequences because our federal income tax system treats corporate debt more favorably than corporate equity. Put simply, equity can lead to double taxation; loans can help you avoid it.

Why it matters

Companies occasionally need capital infusions. Start-ups need cash to help get the business up and running. And established businesses may need additional funds to pursue growth opportunities or cover short-term cash flow gaps. If your business needs money, you could seek financing from a third-party lender. But for closely held businesses, shareholders are often a more convenient (and affordable) source of financing.

Some closely held C corporations are funded exclusively with equity, but many are intentionally structured with a mix of equity and shareholder loans. Lending money to your corporation can be a tax-smart move over the long run.

That’s because when you later get your money back out of the corporation in the form of loan repayments, the repayments of loan principal will generally be tax-free. Interest payments on a shareholder loan are taxable to you as ordinary income, but the corporation gets an offsetting deduction. In essence, shareholder loans provide a built-in, tax-advantaged mechanism for C corporation owners to get cash out of the business.

In contrast, making a capital contribution (a stock investment) can be costly from a tax perspective. When you later, as an equity investor, want to take cash out of the corporation, the withdrawals may be treated as nondeductible dividends to the extent of the corporation’s earnings and profits. This results in double taxation.

In other words, the corporation already paid income taxes on the profits (at a flat 21% rate), and you as a shareholder must pay individual-level taxes on the dividends. The maximum federal rate on qualified dividends is 20%, but most taxpayers pay 15%. Individuals may also owe the 3.8% net investment income tax (NIIT) on dividends.

How it works

Suppose your C corporation needs a $5 million capital infusion. As the sole shareholder, you ante up with a $2 million capital contribution and a $3 million loan. You execute a formal, written note that specifies the loan terms, including the interest rate, maturity date, any collateral pledged to secure the loan and a repayment schedule.

If the interest rate on your loan to the company equals or exceeds the applicable federal rate (AFR), you’ll avoid federal income tax complications and possible adverse tax results. AFRs can change monthly. In April 2026, the monthly AFR for mid-term loans with terms of three to nine years is only 3.75%. This is significantly lower than the rate you’d get from a third-party lender.

This capital structure allows you to recover $3 million of your investment in the company as tax-free repayments of loan principal. The interest payments give you additional cash from the corporation without double taxation, because your company can deduct the interest.

If you instead supply the full $5 million as a capital contribution and later want to withdraw money, all or part of the withdrawal could be treated as a double-taxed dividend.

For instance, say you withdraw $3 million after a few years, and the entire amount is treated as a taxable dividend. Assuming you’d be subject to the maximum 20% federal income tax rate and the 3.8% NIIT, you’d owe Uncle Sam $714,000 on the withdrawal ($3 million × 23.8%). You could have avoided incurring that tax liability by making a $2 million capital contribution and a $3 million loan to the corporation.

Bottom line

Structuring part of a needed capital infusion as a loan — rather than all equity — can minimize double taxation, giving you a more tax-efficient way to access cash in the future. But this arrangement only works if it’s properly documented and respected as bona fide debt. This includes 1) drafting a written promissory note with a stated interest rate and stated repayment dates, and 2) making timely principal and interest payments. The IRS may reclassify shareholder loans as equity if they’re not properly structured, thereby eliminating the intended tax benefits. If you’d like to take advantage of this strategy, we can explain your options and help you structure the loan to reduce the chance of IRS reclassification.

Individual tax calendar: Key deadlines for the remainder of 2026

Tax Prep, Planning & Strategy|May 21, 2026

Yes, the April 15 tax deadline is now behind us. But there are also deadlines during the rest of the year that are important to be aware of. To help you not miss any, here’s when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive. There may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

File a 2025 individual income tax return (Form 1040 or Form 1040-SR) or file for a four-month extension (Form 4868) if you live outside the United States and Puerto Rico or you serve in the military outside those two locations. Pay any tax, interest and penalties due.
Pay the second installment of 2026 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

September 15

Pay the third installment of 2026 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

September 30

If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2025 calendar year (Form 1041) if an automatic five-and-a-half-month extension was filed. Pay any tax, interest and penalties due.

October 15

File a 2025 individual income tax return (Form 1040 or Form 1040-SR) if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States and Puerto Rico or serving in the military outside those two locations). Pay any tax, interest and penalties due.
Make contributions for 2025 to certain retirement plans or establish a SEP for 2025 if an automatic six-month extension was filed.
File a 2025 gift tax return (Form 709) if an automatic six-month extension was filed. Pay any tax, interest and penalties due.

December 31

Make 2026 contributions to certain employer-sponsored retirement plans.
Make 2026 annual exclusion gifts (up to $19,000 per recipient).
Incur various expenses that potentially can be claimed as itemized deductions on your 2026 tax return. Examples include charitable donations, medical expenses and property tax payments.

Material participation: Why it matters for LLP and LLC owners

Tax Prep, Planning & Strategy|May 19, 2026

The passive activity loss (PAL) rules may limit your ability to deduct losses from a business structured as a limited liability partnership (LLP) or limited liability company (LLC). Depending on how your ownership interest is treated under these rules, you may have more or less flexibility to claim losses in the current year. Here’s a closer look.

The basics

Under the PAL rules, you generally can use passive activity losses only to offset income from other passive activities. (Keep in mind that other limitations, such as basis and at-risk rules, may apply before the PAL rules.)

There are two types of passive activities: 1) trade or business activities in which you don’t materially participate during the year, and 2) rental activities, even if you do materially participate (unless you qualify as a real estate professional under the PAL rules). Disallowed losses may be carried forward to future years and deducted from passive income or recovered when the passive business interest is sold.

If you’re an LLP or LLC owner, you can avoid passive treatment by materially participating in the business’s activities. This allows you to use LLP or LLC losses to offset nonpassive income, such as wages, interest, dividends and capital gains.

7 factors

Material participation in this context means participation on a “regular, continuous and substantial” basis. Unless you’re treated as a limited partner, you’re deemed to materially participate in a business activity during the year by meeting one of the following seven criteria:

You participate in the activity more than 500 hours during the year.
Your participation constitutes substantially all the participation for the year by anyone, including nonowners.
You participate more than 100 hours and as much or more than any other person.
The activity is a “significant participation activity” — that is, you participate more than 100 hours — but you participate less than one or more other people yet your participation in all your significant participation activities for the year totals more than 500 hours.
You materially participated in the activity for any five of the preceding 10 tax years.
The activity is a personal service activity in which you materially participated in any three previous tax years.
Regardless of the number of hours, based on all the facts and circumstances, you participate in the activity on a regular, continuous and substantial basis.

Limited partners face more restrictive rules; they can establish material participation only by satisfying criterion 1, 5 or 6.

Supporting your deductions

If you’re an LLC or LLP owner, it’s important to track the time you spend on business activities. In addition, if your spouse also participates in an activity, you can combine your hours to meet the material participation standards. Contact us for additional guidance on documenting your hours, applying the material participation test and maximizing business loss deductions.