Small Business

Forfeited FSA Balances — What’s an Employer to do?

September 6, 2024 by Nick Magone, CPA, CGMA, CFP®

Under an employer-sponsored flexible spending account (FSA) plan, employees can elect to contribute a designated pre-tax amount of their annual salary to their personal healthcare FSA, dependent-care FSA or both.

For a personal healthcare FSA, the maximum amount they can contribute for the 2024 tax year is $3,200 (up from $3,050 in 2023). For a dependent-care FSA, the maximum amount is $5,000. And for a married employee, the $5,000 cap represents the highest amount that both spouses can together contribute.

But what happens to the money that isn’t used?

What you can and can’t do

Because FSAs have a strict “use it or lose it” mandate, employers have several options.

You can simply keep the money
If you don’t keep the money, forfeited amounts must be used to:

Defray expenses of administering the FSA
Reduce employee FSA salary reduction amounts for the following plan year
Add to your employees’ FSA coverage on a reasonable and uniform basis

Forfeited funds may not be returned to individual employees or donated to charity. If an employee terminates when their reimbursements for the year are greater than their contributions to that point, you may not withhold funds from their final paycheck or bill them for the difference.

Exceptions to the rule

While the leftover balance generally reverts back to the employer, there are some exclusions:

An FSA plan can allow a grace period of up to two and a half months
A healthcare FSA plan can allow employees to carry over up to $610 of unused balances from one year to the next. (However, if the $610 carryover privilege is allowed, the healthcare FSA cannot also offer the grace-period deal.)
Dependent-care FSAs cannot allow the carryover privilege, but they can allow the grace period

FSA forfeitures total at least $3 billion per year. While the best-case scenario is that employees max out their funds for their own expenses, it’s important to understand your options.

For tax planning guidance for your small business, call Magone & Company today at (973) 301-2300.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Employee or Independent Contractor? New Regulations Now in Effect

June 21, 2024 by Nick Magone, CPA, CGMA, CFP®

As an employer, it’s critical to stay informed about changes in regulations that impact how you classify workers.

The U.S. Department of Labor has updated the rules regarding independent contractor classification. The traditional tests used to classify independent contractors versus employees are no longer valid, requiring a shift in how you approach this distinction when hiring.

For years, many employers have grappled with the blurred line between independent contractors and employees. Misclassifying workers can lead to significant legal and financial consequences for your business.

The DOL released a comprehensive six-part test to assist you in correctly classifying workers as either independent contractors or employees. Here’s a brief overview:

Is the work vital to your business? If the worker’s role impacts the core operations of the business, they’re likely economically dependent on the employer. On the other hand, the work of an independent contractor is usually inessential to the organization.
Does the worker’s managerial skill affect their opportunity for profit or loss? An independent contractor can experience both profit and loss based on their managerial decisions, such as hiring, purchasing and marketing. In contrast, an employee’s ability to earn more money is not tied to their managerial skills.
How does the worker’s relative investment compare to your investment? Independent contractors typically make investments that contribute to the growth and success of the business, while an employee’s investment is usually minimal compared to the employer’s.
Does the work require special skill and initiative? A worker’s business skills and initiative play a role in determining their economic independence. But having specialized skills alone does not automatically classify a worker as an independent contractor.
Is the relationship permanent or indefinite? If the worker’s association is ongoing or indefinite, they’re likely an employee. Independent contractors work on a project basis.
What is the degree of your control as the employer? The level of control exerted by the employer is a key factor in determining the worker’s economic dependence. Independent contractors have more autonomy over their work, while stringent control over a worker’s job schedules and tasks indicates an employer-employee relationship.

Implications for employers

It’s essential to review and update your current practices and contracts to ensure compliance with the updated classification criteria. This includes outlining the scope of work, payment terms and the level of control exerted over the contractor.

By keeping detailed records, you can demonstrate compliance in the event of an audit or legal dispute. The U.S. Department of Labor requires employers to maintain careful documentation for each exempt and independent contractor hired including:

Forms signed by independent contractors acknowledging their classification
A copy of contract between the employer and the independent contractor
Copies of any licenses or registrations held by the independent contractor

Taking a proactive approach

While the new regulations may require adjustments to your current practices, they also present an opportunity to ensure fair treatment of all workers and uphold the integrity of your business.

If you’re looking for guidance regarding your employee classifications or business structure, reach out to our business advisory team– we’re here to help.

Cash vs. Accrual Accounting: Making the Right Choice for Your Business

June 7, 2024 by Nick Magone, CPA, CGMA, CFP®

Unless you’re a financial professional, navigating your business’s accounting can seem daunting. One key decision you must make as a business owner is choosing between cash and accrual accounting methods.

Each method has its own set of advantages and considerations.

What’s best for your business? Here’s a quick breakdown:

Accrual accounting. Accrual accounting recognizes revenue and expenses when they’re incurred, regardless of when cash actually changes hands. This method provides valuable insights into your business’s financial health and performance, as it reflects all transactions in real-time.

The downside? If your business has limited accounting expertise, accrual accounting may require more time and resources to implement and maintain.

From a tax strategy perspective, accrual accounting can help you track and manage your receivables and payables more effectively, which can be advantageous for tax planning purposes. And because you can match revenues and expenses with greater accuracy, this can lead to more consistent tax liability over time.

Cash accounting. Cash accounting is a straightforward method that records transactions when cash actually changes hands. Revenue is recognized when it’s received and expenses are recorded when they’re paid.

One of the main advantages of cash accounting is its simplicity and ease of use, making it ideal for small businesses with straightforward finances. However, this method may not provide a clear picture of your business’s financial wellness — especially if you have outstanding invoices or bills.

The cash method is often preferred by businesses due to its flexibility in timing income and deductions, allowing for strategic management of taxable income. This can be beneficial for businesses looking to defer income or accelerate deductions. By delaying the receipt of payments or accelerating expenses, you can potentially lower your taxable income for a particular year.

Expanded cash method eligibility

Under the Tax Cuts and Jobs Act (TCJA), eligibility criteria for using the cash method of accounting has been expanded for small businesses. Previously, the gross receipts threshold for small business classification varied depending on factors such as business structure, industry and inventory considerations.

The TCJA simplified this definition by establishing a single gross receipts threshold of $25 million (adjusted for inflation), making small business status accessible to a wider range of companies.

Considering a change?

While a change in accounting methods may result in tax advantages, it may also add additional administrative complexities, especially if financial statements are prepared using the accrual method for reporting purposes. Consulting with a tax professional can help you make an informed decision and develop a tax strategy that aligns with your business’s goals.

The CPAs at Magone & Company can support you in making the most tax-efficient decisions for your business. Give us a call today at (973) 301-2300 to learn more.

A Chunk of Change: Keeping Your Small Business Financially Healthy Amid New Tax Regulations

May 10, 2024 by Nick Magone, CPA, CGMA, CFP®

Business owners know that keeping up with the latest tax regulations is critical for the financial health and continued success of your organization. And in 2024, there are some major tax concerns to heed.

From expiring provisions of the Tax Cuts and Jobs Act (TCJA) to new reporting requirements, prepare for what’s next so you can best manage your tax obligations — and keep more money in your business.

Here a few key changes to keep in mind this year:

The Qualified Business Income (QBI) deduction phase-out. If you’ve benefited from the QBI deduction in the past, this generous tax break won’t be around after 2025. This deduction allows small business owners more financial breathing room, freeing up money for hiring and expanding operations. But unless new legislation is introduced, applicable partnerships, proprietorships and S-corps may no longer deduct 20% of qualified business income from individual federal income taxes.

Continued bonus depreciation on qualified property. The TCJA changed the applicable percentages and qualifying property rules, allowing businesses to write off 100% of the cost of eligible property. Each year, the bonus percentage decreases by 20 points. Going forward, consider the impact the phase-out schedule may have on your financials:

2024: 60%
2025: 40%
2026: 20%
2027: 0%

Possible tax bracket revisions. The government has recently proposed raising the corporate tax rate to 28% in an effort to create a more equitable tax system. If new legislation is introduced, businesses like yours may experience adjustments in tax liability, depending on your income. To plan ahead, review your current financial position to estimate your projected income for the upcoming year, and determine how your tax bracket may affect your business’s profitability.

Updated reporting requirements. Beginning this year, many small businesses will be required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) in an effort to build a national database to aid in the prevention of using of shell companies for criminal activity. Your reporting due date depends on when your company was created or registered. Get the details to ensure your business is in compliance, or you may face the risk of costly penalties.

Tax planning — A year-round strategy

At Magone & Company, we’ll help your small business proactively plan for new tax regulations before they become effective. Our goal is to help minimize your liability now and in the future. For small business tax planning guidance or assistance, give us a call today at (973) 301-2300.

Financial Metrics That Matter for Business Owners

April 26, 2024 by Nick Magone, CPA, CGMA, CFP®

One crucial element that can make or break your business? Financial management.

Understanding the financial health of your organization is essential for making informed decisions and planning for the future. But to gain valuable insights and take proactive steps to improve your financial stability, you need to know what metrics to track.

Every business is different, but the following metrics can serve as a solid foundation:

Profit and Loss (P&L) statement. Also known as an income statement, your P&L is a fundamental financial tool that tracks your business’s revenue, expenses and profitability. This statement provides a snapshot of your financial performance over a specific period — typically a month, quarter or year — revealing your gross profit margin, operating profit margin and net profit margin.

P&L statements are very telling in terms of how effectively your business generates profit from its core operations and oversees day-to-day financial operations.

Cash flow statement. A cash flow statement shows how cash moves in and out of your business over time, while separating cash inflows (sales revenue, loans or investments) from cash outflows (expenses, loan repayments or asset purchases).

By regularly reviewing this statement, you can identify potential cash flow gaps and take proactive measures to address them. For example, you can negotiate more favorable payment terms with suppliers or make tweaks to optimize your inventory management.

Key performance indicators (KPIs). KPIs are specific metrics that measure various aspects of your business’s operations, helping assess its overall health and progress toward your goals. Important financial KPIs include revenue growth rate, customer lifetime value, return on investment (ROI) and customer acquisition cost (CAC).

By tracking these KPIs, you can best prioritize customer retention efforts, assess the profitability and efficiency of your business’s investments, and identify areas of strength and weakness within your business. CAC, for example, is a straightforward metric. Simply divide the funds spent on customer acquisition by the number of prospects who converted during a given time period. Understanding your CAC is crucial for marketing planning and budgeting, ensuring you’re not overspending time and resources in the pursuit of new customers.

Revenue per employee. This ratio can help you keep an eye on how well you’re utilizing resources, as well as how productive your employees are. The formula is simple: Calculate the total revenue for a set time period and divide your employee count for the same period. The result is a general idea of the value you’re getting from your talent, making sure they’re contributing to your profitability.

Only a starting point

Tracking the right financial metrics is vital for every business owner, and you may need to customize your approach based on your unique business circumstances. With the right knowledge in hand, you’ll be empowered to work smarter and drive your business forward.

At Magone & Company, we can help your business maintain a healthy cash flow and plan for long-term financial success. Reach out to us today at (973) 301-2300.

Keep More Money in Your Business: Are You Claiming All Eligible Tax Deductions?

March 29, 2024 by Nick Magone, CPA, CGMA, CFP®

How should I structure my business for tax efficiency? It’s a question we hear often from business owners and entrepreneurs. And the answer? That depends…

Whether you choose to operate as a sole proprietorship, C-corporation, S-corporation, partnership or LLC, there are unique deductions that can lower your taxable income and keep more money in your business. Here’s a quick overview of each:

Sole proprietorships. As a sole proprietor, you have the freedom and flexibility to run your business as an individual. This business structure comes with its own set of tax deductions that can help save you some cash, including:

The home office deduction. If you use a portion of your residence exclusively for your business, you can deduct expenses like rent, mortgage interest, utilities and insurance.
Self-employment tax. You’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. However, you can deduct the employer portion of these taxes when calculating your business’s net income.
Personal vehicle use. If you use your personal car for business purposes, you can deduct gas, maintenance and insurance or other related expenses.
Professional fees. Any expenses considered ordinary or necessary for your business — such as legal or accounting fees — can be written off on your tax return.

C-corporations. Unlike sole proprietorships paying individual income tax, businesses operating as a C-corporation must pay corporate taxes — which can also be beneficial when it comes to deductions:

Employee wages and benefits. C-corporations can deduct the full amount of employee salaries, bonuses and benefits as ordinary and necessary business expenses. This deduction not only helps reduce your taxable income but also can help to attract and retain top talent by offering competitive compensation packages.
Business travel and entertainment expenses. This deduction includes airfare, hotel accommodations, meals and even some client entertainment expenses.
Research and development (R&D) tax credit. If your business invests in R&D activities, you may be eligible for a tax credit that can significantly reduce your tax liability.

S-corporations. S-corporations, also known as “small business corporations,” offer exclusive tax advantages to minimize your liability:

Qualified Business Income (QBI) deduction. Under this deduction, business owners can deduct up to 20% of their qualified business income on their taxes.
Expenses related to employee benefits. This includes health insurance premiums, retirement plan contributions and other fringe benefits provided to employees. Additionally, S-corporations can deduct business-related expenses such as advertising, professional fees and office supplies.

Partnerships and LLCs. Partnerships and LLCs, also known as “pass-through entities,” allow profits and losses to flow through to the individual partners or members, who then report them on their personal tax returns. Deductions include:

Self-employment tax. This one is exclusively available to partners and LLC members. Similar to sole proprietors, these individuals can deduct the employer portion of their self-employment taxes when calculating their taxable income.
Expenses related to employee wages and benefits. This deduction covers salaries, bonuses and benefits provided to employees. You can also deduct ordinary and necessary business expenses such as rent, utilities, professional fees and advertising costs.

Boost your bottom line

When it comes to taxes, every dollar saved can add up to a significant amount of cash. Keep in mind, there are other tax deductions that eligible businesses can make, regardless of structure — from charitable donations to health insurance to retirement plan contributions.

We know that’s a lot to take in when you’re just starting out. Choosing (or changing) your entity type is a big decision, so be sure you’re getting professional guidance. Reach out if we can help.