Starting January 1, 2024, a significant number of businesses were required to comply with the Corporate Transparency Act (“CTA”). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The BOI reporting requirement intends to help U.S. law enforcement combat money laundering, the financing of terrorism and other illicit activity. To learn more about the CTA, listen to this audio blog by Matt Richardson, a senior tax accountant at CK.

Transcript:

My name is Matt Richardson. I’m a senior tax accountant at Cray Kaiser.

So the Corporate Transparency Act is a piece of legislation that went into effect in 2024. And it requires certain companies to report their beneficial ownership information, also known as BOI. And this is a report that goes not to the IRS, but to the FinCEN, which is the Financial Crimes Enforcement network, which is the law enforcement arm of the US Treasury Department. Information that needs to be reported for the business includes the full legal name and any DBA names ortrade names, a business address and the state or jurisdiction of formation, and an IRS taxpayer ID number. Additionally, information has to be reported for each beneficial owner, including a name, address, and an ID number from a valid ID like a passport or a driver’s license. With a few exceptions, the filing is required for any domestic corporations, limited liability companies, or other entities that are formed by a filing with a secretary of state or a similar office to do business under a state or a tribal jurisdiction. Foreign-incorporated entities are also required to file if they’re registered with a state or tribal jurisdiction to do business, and domestic entities that are not created by filing with a secretary of state, like an unincorporated sole proprietorship, are not required to file this reporting.

So a beneficial owner under the CTA is any individual who has substantial control over the company, either directly or indirectly. It can also include anyone who controls at least 25% of ownership. And this is important to note because it’s not only ownership, but it’s also control. So a non-owner officer who has decision-making power can also be considered a beneficial owner under the legislation. The purpose of the BOI is to aid law enforcement and enforcement of financial crimes like fraud, money laundering, sanctions evasion, and the financing of other crimes like terrorism or drug trafficking. And this disclosure of corporate ownership is intended to make it harder for criminals to use shell companies to cover up the financial aspects of their criminal activities. So the BOI reporting requirement has exceptions for certain categories of companies, as well as what it calls large operating entities. The specific categories of companies are highly regulated areas like banking and publicly traded companies and non-profit entities. A large operating entity is defined as any company that has 20 or more employees, five million dollars in gross sales or more, and a physical presence in the United States.

Many are confused about why large companies are exempt from reporting rather than small companies. Since so many government reporting requirements do exempt small companies. But this is because in general these larger companies are going to be visible to law enforcement and regulators through other types of tax and payroll banking reports. Whereas the purpose of the legislation is to make these smaller companies more visible, I mean, easier to track ownership for law enforcement.

So there are different filing requirements for the BOI report depending on when the entity was formed. New entities created in 2024 have 90 days after their creation to file the report. New entities created starting January 1st, 2025 have 30 days to file the report and existing entities created before January 1^st, 2024 have until January 1^st, 2025 to file the report. And then any companies that have a change in their ownership information or have a correction of an error to report have 30 days from the discovery of the error or from the change in information to file an updated report.

Penalties for willful non-compliance are steep, so the risk involved in shirking the requirements are serious. Consequences can include civil penalties of over $500 per day that the report has filed late, and those can escalate to up to $10,000 in criminal fines or up to two years in jail time. These requirements are generally covered by the Treasury Department’s criminal enforcement arm, which is different than the tax law and IRS matters that CPAs are generally authorized to address. And there are some legal complexities in determining who is a beneficial owner and who is subject to the requirement that need the expertise of a lawyer.

As the accounting industry evolves, businesses increasingly rely on advisory services to navigate the complexities of their financial landscapes. CAS (Client Accounting Services) and CAAS (Client Accounting Advisory Services) are two such services often discussed. Although these acronyms may sound similar, they represent distinct offerings tailored to different needs. At Cray Kaiser, we aim to empower our clients with the knowledge they need to confidently make informed decisions. By understanding the differences between CAS and CAAS, you can understand which service best aligns with your business’s unique requirements.

What is CAS?

Client Accounting Services (CAS) refers to the traditional accounting services that businesses rely on to manage their financial records and transactions. These services are essential for maintaining accurate financial data and ensuring compliance with relevant regulations. CAS focuses on the day-to-day accounting functions that keep a business running smoothly.

Services typically included in CAS:

Bookkeeping: Managing daily financial transactions, including recording sales, expenses, and other activities.

Payroll Services: Processing employee payroll or working with a payroll provider, managing deductions, and ensuring compliance with tax laws.

Financial Reporting: Preparing financial statements and reports that provide insights into the business’s financial health.

Tax Preparation and Compliance: Ensuring businesses meet their tax obligations and prepare necessary tax filings.

What is CAAS?

Client Accounting Advisory Services (CAAS) takes CAS further by combining traditional accounting services with high-level strategic advice and guidance. It is designed to handle routine accounting functions and provide insights that help businesses make informed decisions and achieve their goals. By integrating advisory services with accounting functions, CAAS offers a more comprehensive approach.

Services typically included in CAAS:

All CAS Services: Including bookkeeping, payroll, financial reporting, and tax compliance.

Strategic Planning: Assisting businesses in developing long-term strategies for growth and success.

Financial Forecasting and Budgeting: Providing insights into future financial performance and helping businesses plan accordingly.

Business Process Improvement: Identifying inefficiencies in business processes and recommending improvements.

Risk Management: Helping businesses identify potential risks and develop mitigation strategies.

Key Differences Between CAS and CAAS

The primary difference between CAS and CAAS lies in the level of advisory support provided. While CAS focuses on the essential accounting functions necessary to keep a business operational, CAAS offers strategic advice and guidance beyond that. CAAS is ideal for businesses that need both reliable accounting services and the added benefit of high-level advisory support to drive growth and efficiency.

CK, CAAS, and You

At Cray Kaiser, we recognize that no two engagements are alike, which is why our proactive strategies are customized to meet each client’s unique needs. Whether you’re looking for dependable accounting support, strategic guidance, or a combination of both, we’re here to help you navigate the complexities of your financial landscape—all under one roof.

If you’re ready to learn more about the CK team and how CAAS can benefit your business, call (630) 953-4900 or click here.

Implementing new accounting standards can often be a daunting task for businesses, requiring significant adjustments to their financial reporting processes. One such change came in February 2016, when the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”. This update, effective for annual reporting periods beginning after December 15, 2021, marked a significant shift in how companies must account for leases. As businesses navigate these new requirements, understanding the nuances of ASU 2016-02 became crucial in ensuring compliance and accurate financial reporting.

In this ASU, lessees are required to recognize a right-of-use asset and associated lease liability on their balance sheet for most operating leases, with exemptions provided to those operating leases with an initial lease term of twelve months or less.

The reasoning behind this ASU is that when entities enter operating leases, they have a “right-of-use” asset and liability with this agreement that prior to this ASU, would have only needed to be disclosed in the footnotes to the financial statements in the form of future payments.

What this pronouncement requires is that the operating right of use assets and lease liabilities are recorded on the date of lease commencement based on the present value of the lease payments over the lease term. Further, over the course of agreement, both the asset and the liability are amortized, which is calculated based on the discount rate. The pronouncement allows for using the risk-free or incremental borrowing rate, depending on the entity’s policy election, that most closely aligns with the terms of the lease agreement at inception.

Think of it as the entity purchasing a tangible asset and financing by obtaining a loan, even though no such loan exists. Therefore, cash paid on the lease will no longer be solely categorized as a lease expense in accordance with Generally Accepted Accounting Principles, but rather a combination of the cash paid, periodic lease expense, and the amortization of the right-of-use asset and right-of-use-liability.

If the entity is subject to financial covenants with a financial institution, this pronouncement may affect the financial ratios to stay in compliance. It is important to discuss with the financial institution and to adjust any covenant calculations to remove its impact from these calculations.

The bad news is regarding the increased burden of implementing ASU 842, especially considering that the resulting change, usually is a marginal change to the entity’s bottom line as it mostly impacts the balance sheet. The good news is that we at Cray Kaiser,  understand the ASU and its calculations and can assist with consulting and calculations to navigate this new standard. You can contact us here or call us at (630) 953-4900.   

As a business owner, the first quarter of each year can be a blur. You work to finalize the prior year’s operating results and complete tax reporting in a timely manner so you can focus on the current year’s operations. As changes occur in tax legislation, this becomes increasingly difficult as different information is being requested from the outside accounting firm and more time is needed to comply. You feel the impact of staff shortages in your company, and you hear murmurs of this occurring at your accounting firm too. Before you know it, you are having a conversation about tax extensions. Which only means more uncertainty in the weeks ahead as you continue to wind down operating results from the prior year and continue to stay afloat in the current year. If this sounds familiar to you, read on. We will offer some considerations to make year-end more manageable and simultaneously allow you to have control of your financial reporting all year long.

Implementing the following tips throughout 2024 will help streamline your financial reporting, plan for tax obligations and bring a sense of “certainty” in uncertain times.

• Keep track of tax-significant items in a separate chart of accounts in your accounting software to minimize additional account analysis and reclassifications at year-end. A few accounts to consider:
  • Meals (employee reimbursed and company paid such as sales promotions)
  • Meals billed to customers (associated with travel billed to customers and recognized in income)
  • Entertainment
  • Small equipment purchases (individual purchases less than $2,500)
  • Officer compensation or guaranteed payments (separate from salaries and wages)
  • Salary and wages (separate from 1099 contractor payments)
• Maintain sales by state report in your accounting software. This is generally available in most accounting packages or can be easily tracked by adding a custom field. This report should be reviewed with your accountant during the year to determine whether you may have tax obligations outside of your home state. 
• Develop a capitalization policy for new purchases of property, plant and equipment (asset accounts). This policy will allow you to directly expense new purchases up to the threshold you select. Once you select the threshold, you need to monitor the postings in your chart of accounts, meaning you would only post items above the threshold into your property, plant and equipment accounts. We recommend you use the IRS safe harbor amounts in selecting your capitalization policy which would be $2,500 for unaudited financial statements.
• Attach key agreements, bank statements and invoices to the transactions if using QuickBooks Online. This feature will allow you, as well as your accountant, to quicky review the supporting documentation without having to pull documentation from other electronic or hard copy means. Please keep in mind if the documentation is confidential, you will need to decide who has access to the accounting software to determine whether that information should be attached and uploaded into the software.
• Consider a recurring accounting engagement (monthly, quarterly or semiannually) with your accountant. The purpose of this engagement is to review your accounting transactions, key reconciliations and provide a cursory computation for tax obligations. You can consider earmarking funds for tax obligations throughout the year so there are no surprises at the time of tax filing.
• Develop and document a monthly closing procedure and time schedule and then follow it.
  

As we embark on the second quarter of 2024, we have plenty of time to make some tweaks so that the year-end scramble is more manageable and will allow you to be confident as you approach 2025. Contact Cray Kaiser at 630-953-4900 to help you understand how you can implement some of these tips today.

What is outsourced accounting? It is generally defined as an option for a business to hire an outside third party to complete accounting and finance functions for the organization. This can include but is not limited to bookkeeping, accounting and compliance work. It typically can encompass accounts payable and receivable and payroll as well as month-end closing tasks such as reconciliations and bookkeeping and tax and compliance preparation. Increasingly common are other engagements such as financial reporting, budgeting, financial planning as well as ad hoc projects, advisory and consulting services. Business owners seeking more time to focus on their core business are increasingly turning to firms such as Cray Kaiser that can do everything from performing the bookkeeping and accounting tasks to providing CFO-level financial analysis and advice.

In the past, accounting and finance was a function that was required to be in-house for access to records and other company resources and employees. Outsourcing is losing its stigma. The negative connotations associated with hiring out tasks are fading as the pace of life accelerates, work-life balance priorities shift, entrepreneurship expands, and business challenges grow increasingly complex. With the availability of cloud-based software and advances in technology, outsourced accounting has become easy to implement and is a proven time and cost savings for many businesses. Our firm can be on the same system and remotely share files and documents, allowing for real-time conversations. Owners of small businesses gain valuable time to focus on growing their business instead of managing and running the accounting functions. Businesses benefit from cost savings and efficiency by considering outsourcing many of the accounting functions to a team of specialists that offer expertise and flexibility to meet business needs as they change.

Some thoughts about the positive impact of outsourced accounting so you can grow your business not your management of accounting functions:

• Advertising, recruiting, hiring and training of competent accounting department personnel is reduced or no longer needed.
• Greater access to specialized expertise and seamless coordination with other areas of our firm. 
• Access to proven processes and streamlining of responsibilities and expertise.
• Flexibility to meet your business needs as they change from month to month and year to year allowing personalized service.
• Seamless and timely integration between bookkeeping tasks to accounting and financial reporting and tax preparation.
• Agreed upon division of responsibilities between owner, employees and outsourced firm can improve internal controls.
• Access to a dedicated team of specialists with current knowledge, experience and training in software, processes, technology.
• Option to start small – services and additional responsibilities and advisory or consulting projects can be added after a relationship, familiarity and trust is built.

Important considerations when reviewing outsourcing options and engaging a firm:

• Costs
• Expertise and niche area of accounting firm
• Create a plan of which tasks and roles need to be outsourced
• Create a service level agreement – maintaining an element of flexibility
• Open communication about the needs and responsibilities of all parties involved
• Technology and resources available

Cray Kaiser can help – let’s start a conversation as to how best to help your business grow and gain efficiencies in order for you to reach the ultimate goal of focusing on your core business and areas of growth. If you feel now is the best time to learn more about outsourcing your accounting department give us a call at (630) 953-4900 to discuss options and opportunities offered in our Accounting Services Division.

As small business owners continue to look for ways to cut costs in response to pressures from economic uncertainty such as rising interest rates, employee retention and inflation, one solution may be Accounts Payable (AP) automation. AP automation once reserved for larger companies has now found its home in many medium to small sized companies.  

Is your company still manually recording vendor invoices, printing, and mailing checks?  You will want to read our case study below to see how AP automation helped one of our clients. It may be a good fit for you too. 

Small to mid-size businesses are now able to automate AP through apps such as BILL.com which also integrates with leading accounting software solutions such as QuickBooks, Sage Intacct, Xero and Netsuite.

We recently assisted a midsized client who had a dedicated employee that spent 30 hours a week manually recording vendor invoices, printing out checks, stapling checks to invoices, handing them over to owners to review and sign, mailing payments and then dealing with all the paper documents. If this does not sound exhausting enough, to add to the complexity some vendors were set up on auto pay, which required the employee to take additional steps to manage cash flow. Sound familiar? 

When we first proposed Bill.com to our client, they expressed valid concerns such as security issues with electronic payments, how would Bill.com handle vendors who only accept paper checks, subscription costs, etc. We scheduled a meeting with both our client and a Bill.com representative where the client was able to not only view a demo, but also address their concerns and questions. Needless to say, the client was on board and eager to begin.

From there, we provided our client with a detailed timeline of events which included steps they needed to take to prepare for Bill.com setup within their QBO file such as vendor cleanup, determination of approval levels, etc, scheduled integration and implementation training. This process took two weeks. 

Bill.com has transformed the way our client processes invoices. All vendor invoices are sent to the company’s centralized inbox in BILL.com, so that it goes through the automated approval process. The owner who lives out of state approves bills that are to be paid, using his mobile app!! BILL.com automatically sends the team email reminders about upcoming or overdue bills and lets them pull up payment statuses and view invoices in just a few clicks. No more frantically tracking down invoices. 

BILL.com’s two-way sync with QuickBooks Online provides a seamless integration which minimizes the need for double data entry in both systems and the risk of error that could occur. The AP employee now only spends about 2-3 hours weekly with AP, or 30 minutes a day. Allowing our client to better utilize the employee’s time on other projects. The Bill.com integration took less than 1 month from the initial call to full implementation. 

If you are interested in learning more about AP automation for your company, please contact the experts at Cray Kaiser at (630) 953-4900 to schedule a consultation.

When I was beginning my journey to become an accountant, I had the opportunity to intern at Cray Kaiser and KPMG. These internship experiences allowed me multiple opportunities when deciding on my post-graduation employment. In the first semester of my senior year, I signed and accepted an offer to join the CK team where I  currently work full-time. It is essential to take the initiative to take as many internships as possible. Taking a proactive approach allows you ample time to secure a spot, as many firms tend to fill up a year in advance.  

Working full-time at Cray Kaiser was a smooth transition. I was getting exposed to so much as an intern that I felt prepared to advance into the next step.  What was an adjustment for me was not going to school while working. Now with my extra time, I use it to focus on my career goals. One career goal for me is studying for the CPA exam.

Preparation Made Easy

If you plan to pursue the CPA exam, I recommend the Becker program. The software is easy to use, provides printed material, and is always on sale (there is usually a better sale around the holidays). They also have a fantastic planning system. You enter when you want to take the exam, and it will tell you how many hours you need to study, or you can tell Becker how many hours you can study, and it will give you a custom plan for what days to study, what to study, etc. The program makes you feel less overwhelmed when you are deciding when, what, and how long you should study.

Audit or Tax?

In any career, I think it’s important to make sure you enjoy what you are doing. In the accounting profession, everyone always asks if you are interested in audit or tax. Without experience in both fields, how does one know? Two solutions I found to this are to have internships in both areas or work at a smaller firm where you can assist in both areas.

I love working on complex tax returns and was thrilled to join the tax department. However, I still am allotted the opportunity to work with the assurance team and build on those skills too.  

One skill I have built is being a self-advocate and letting management know what areas interest me and where I would like to see my skills grow.  Remember that no one can read your mind. You will need to speak up to management to tell them the areas you find most interesting to work in. My goal is to enjoy what I do and make a difference to the organization I work for and the clients we serve. I have found at Cray Kaiser, we aren’t just tax preparers and auditors we are trusted business advisors who are going to help all the family-owned businesses we serve.

Following the Covid pandemic, the government implemented many programs to provide much needed relief to employers.  One of these included the Employer Retention Credit (ERC). This is a fully refundable tax credit that is available to both small and mid-sized businesses, even if you received the Paycheck Protection Program (PPP) Loan. 

Businesses who are eligible can claim up to $5,000 in fully refundable tax credits for each employee in 2020 and up to a $7,000 credit PER quarter for each employee in 2021. Please note that the ERC is only applicable in quarters 1, 2 and 3 for 2021. 

Can I Still Qualify for ERC?

Although we are in 2023, it’s NOT too late to qualify and claim ERC retroactively! Businesses have up to three years to conduct a lookback to determine if they qualify and if wages paid March 13, 2020 through September 30, 2021 are eligible.

How to Qualify?

For 2020, businesses with 100 or less employees can qualify if they pass one of the two tests below:

• The full or partial suspension of the business’s operation during any calendar quarter from March 13, 2020, because of governmental orders limiting commerce, travel, or group meetings due to the Covid 19 pandemic. IRS Notice 2021-20 defines specific requirements that need to be met to qualify under this method.

OR

• Gross receipts for any calendar quarter in 2020 showing at least a 50% reduction as compared to that same calendar quarter in 2019.

For 2021, businesses with 500 or less employees can qualify if they pass one of the two tests below:

• The full or partial suspension of the business’s operation during any calendar quarter through September 30, 2021 because of governmental orders limiting commerce, travel, or group meetings due to the Covid 19 pandemic. IRS Notice 2021-20 defines specific requirements that need to be met to qualify under this method.

OR

• Gross receipts for any calendar quarter 1, 2 or 3 in 2021 showing at least a 20% reduction as compared to that same calendar quarter in 2019.  In 2021 a safe harbor test was provided that allows you to qualify based on the previous calendar quarter’s gross receipts and compare them to the same calendar quarter in 2019.

Per IRS Aggregation Rules under section 448(c)(2) and 52(a)(b) and provisions of section 2301(d) of the CARES Act, All members of an aggregated group are treated as a single employer. In other words, if multiple businesses are controlled by common ownership, all entities are deemed single employers for ERC eligibility purposes.

How to Calculate ERC?

Once a business determines that they qualify, the next step is to calculate the ERC tax credits.  Find CK’s helpful template to assist you in calculating your credits here.

Businesses that received the PPP, will need to run additional analysis to make sure that they have enough eligible wages to benefit from both the PPP loan forgiveness while maximizing the ERC. Any eligible wages used for PPP cannot be used to calculate ERC. No double dipping!

How to Claim ERC?

To claim the ERC, a business will need to amend its federal payroll tax form 941 for the quarter in which they are looking to claim the refundable credit. The IRS is only accepting paper filings and refunds are taking around 200 days to come in the mail via paper check, as the IRS is not funding any other way. This amendment does not impact previously filed W-2s.

Important to note, unlike PPP, the ERC income is taxable in the year that the credit is claimed and not received. We do highly recommend speaking with your CPA to determine tax implications and net benefits. For any additional information or assistance with ERC, please contact Cray Kaiser, your ERC specialists at (630) 953-4900.

QuickBooks accounting software is used by more than 29 million small businesses in the U.S. If you are one of those users, there is now an easy way to customize your marketing efforts based on actual customer purchase data. 

In 2021 Intuit® QuickBooks® acquired the Mailchimp marketing platform. The integration of the popular marketing tool with QuickBooks Online gives small and mid-size businesses the ability to leverage customer sales data for customized marketing efforts using one platform.

Features of the new integration include:

• Ability to import customer data from QuickBooks into Mailchimp without manual entry.
• Creation of customer profiles based on campaign engagement, transaction history, and total revenue.
• Targeting current customers using purchase data and activity to organize contacts. Use tags, segmentation tools and automation to simplify your marketing efforts.
• Expedite payments by allowing customers to pay online utilizing a pay now button.

Prior to this integration data was housed in two different places. Your email list sitting in Mailchimp or another marketing platform – most likely exported from QuickBooks or another CRM. And your customer purchase history and buying behavior data sitting in QuickBooks.

QuickBooks users who are willing to invest a bit of time and resources into this integration can engage in email marketing that has a greater chance of generating revenue.

Instead of blindly sending out a promotional message or monthly newsletter, you can tailor your communications based on a customer’s sales history.

Do you get coupons mailed to you from your grocery store? Not the generic weekly circulars, but self-mailers with coupons included. Those coupons are usually for items you purchase on a regular basis, right? That’s no coincidence. The grocery store is capturing data from your frequent shopper/reward account and customizing your offers based on your purchase history.

The QuickBooks/Mailchimp integration allows you to target your customers in a similar way.

If you are running a special on an Acme Widget, you can alert customers who have purchased the Widget in the past of the sale. Or alert those same customers if there is a new accessory for the Widget.

Or perhaps you want to let customers who purchased a Thingamajig three years ago that it is due for routine maintenance.

How to Get Started

1. If you don’t already have it, get QuickBooks online. There are multiple plans to choose from ranging from Simple to Advanced. Choose a plan that fits your business needs.
2. Sign up for Mailchimp. You can start with a free plan and upgrade as needed based on the sophistication of your marketing efforts.
3. Connect QuickBooks to Mailchimp with just a few clicks and sync customer information.

For more information about taking advantage of the QuickBooks/Mailchimp integration, please contact Cray Kaiser today.

As it does every year, the Internal Revenue Service recently announced the inflation-adjusted 2023 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2023, the standard mileage rates for the use of a car (van, pickup or panel truck) are:

• 65.5 cents per mile for business miles driven (including a 28-cent-per-mile allocation for depreciation), up from 62.5 cents for the last half of 2022.
• 22 cents per mile driven for medical care or by an active member of the armed forces for moving purposes, unchanged from the last half of 2022. 
• 14 cents per mile driven in service of charitable organizations. 

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 15 years.

Important Consideration

The 2023 rates are based on 2022 fuel costs. Given the potential for the continuation of substantially higher gas prices, it may be appropriate to consider switching to the actual expense method for 2023, or at least keep track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that the option is available for 2023.  

Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the possibility of higher fuel prices, the bonus depreciation and increased depreciation limitations for passenger autos that were part of the 2017 Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year a vehicle is placed in business service.

However, the standard mileage rates cannot be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or more than four vehicles simultaneously.  

Employer Reimbursement

When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, from 2018 through 2025. Therefore, employees may not take a deduction on their federal returns for those years for unreimbursed employment-related use of their autos, light trucks or vans. However, those who are self-employed are eligible to claim expenses for their personal vehicles used in their businesses.

Faster Write-offs for Heavy Sport Utility Vehicles (SUVs)

Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation. Taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $28,900 in 2023) and the bonus depreciation (the Section 179 deduction must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

Consider Bonus Depreciation

Consider using bonus depreciation as an alternative to the Section 179 deduction. Under this provision, a taxpayer can elect to claim a deduction of 100% of the cost of a new or used vehicle used for business in the first year it is placed into business service. However, the luxury auto rules impose a maximum annual deduction for depreciation, including the bonus depreciation. For example, in 2021, the maximum depreciation deduction for an auto for which bonus depreciation was claimed was $18,200. This compares to a maximum of $10,200 if bonus depreciation isn’t elected. Of course, if the vehicle is used only partly for business, then only the business-use percentage of the cost is eligible to be deducted.

After 2022, the deductible bonus depreciation percentage drops by 20 percentage points a year, until 2027 when, barring an extension by Congress, no bonus depreciation will be allowed.

Whether to claim bonus depreciation, Section 179, regular depreciation, or a combination of these methods for a business vehicle or to use the standard mileage rate instead, can be a complicated decision to make.

If you have questions about the best methods of deducting the business use of your vehicle or the documentation required, please give our office a call at (630) 953-4900.