Many states are implementing state-sponsored retirement savings programs to promote retirement savings and tackle the looming retirement crisis. Maryland is no exception and introduced the MarylandSaves Program, a program geared towards small to medium-sized businesses and designed to offer retirement savings options to employees who do not have access to a retirement plan through their employers.

 

The MarylandSaves Program uses individual retirement accounts (IRAs) for employee retirement savings. Employers who elect into this program would facilitate employee contributions to IRAs through automatic payroll deductions. Contributions are deducted from employees’ paychecks and deposited into their IRA accounts. The accounts are portable, meaning employees can retain their accounts even if they change jobs.

 

One of the key advantages of the MarylandSaves Program for employers is the minimal administrative burden. Employers are not responsible for managing or investing in IRAs and do not contribute to the accounts. They simply facilitate payroll deductions and transmit employee contributions to the program.  If an employer participates in the program, employees can opt out if they wish, but they will be automatically enrolled otherwise.

 

Maryland businesses with one W-2 employee that have been in operation for at least two years and use an automated payroll system are required to enroll in MarylandSaves.  However, it appears there are no penalties at this time for noncompliance with this requirement.

 

Maryland has incentivized employers to participate in MarylandSaves or provide another type of retirement plan for their employees.  If a business enrolls in MarylandSaves, or if they offer another retirement plan to their employees, Maryland State Department of Assessments and Taxation will waive their $300 annual report fee.  If the business already offers a retirement plan, they must file a certification with MarylandSaves.  The certification is only good for one year, so this will need to be done annually.  To qualify for the 2025 annual report fee exemption, a business must file the certification online at MarylandSaves.org by December 31, 2024.

 

As with any retirement program, there are many rules and restrictions so you should consult with your attorney or tax professional before enrolling your business.  If you are a business that already has a retirement plan in place, it makes sense to take the time to file the certification before December 31, 2024 to have your $300 annual report fee waived. If you have any questions or want to learn more about the MarylandSaves program, please contact a Snyder Cohn team member or visit MarylandSaves.org.

By: Billy Litz

In the aftermath of a natural disaster, the IRS may step in as an unexpected ally in your financial recovery. If you’ve been impacted by a federally declared disaster (as determined by the President and FEMA), you may benefit from postponed deadlines for filing returns and making tax payments. Additionally, Congress may allow you to claim disaster losses for damage to your home, property or business. Though navigating these options can be complex, careful planning can guide you toward a strategic revival.

Who is Eligible for Disaster Relief?

Taxpayers who live, work, or have records in a federally declared disaster zone may be eligible for relief. You do not have to be directly affected by the disaster to qualify. Also eligible are:

• Visitors to the disaster zone who suffered injury or loss during the disaster.
• Businesses with their principal address within the zone.
• Taxpayers whose tax preparers are in the zone.

If your IRS-registered address is within a disaster zone, relief is granted automatically. Otherwise, contact the Disaster Hotline at 866-562-5227 or work with your tax advisor.

Eligible Areas for Hurricanes Debby, Helene, and Milton

State	Eligible Counties
Alabama	All
Florida	All
Georgia	All
North Carolina	All
South Carolina	All
Tennessee	Carter, Cocke, Green, Hamblen, Hawkins, Johnson, Unicoi, and Washington
Virginia	Bland, Bristol City, Buchanan, Carroll, Craig, Dickenson, Galax, Giles, Grayson, Montgomery, Pittsylvania, Pulaski, Radford, Russell, Scott, Smyth, Tazewell, Washington, Wise, and Wythe Additionally – Bedford, Covington, Danville, and Norton cities

What Relief is Provided?

Deadlines for the following returns and payments are postponed to May 1, 2025:

• 2023 business and individual returns with a valid extension.
• 2024 business and individual timely filed returns, tax payments, and Q3/Q4 estimated payments.
• Quarterly payroll and excise tax returns for Q4 2024, Q1 2025 and Q2 2025.

Penalties for underpayments during this period are also suspended. Interest on old balances will continue to accrue.

Additional Relief

• Qualified disaster relief payments: Payments received from government agencies for living expenses are generally non-taxable. Payments for replacing or repairing lost or destroyed property are generally excludable, too, but they may reduce casualty losses.
• Hardship withdrawals: Taxpayers may be eligible to make hardship withdrawals from certain retirement plans without the 10% early distribution tax.
• Casualty losses: Taxpayers who suffered losses from the disaster may be eligible to claim disaster casualty losses.

Claiming Casualty Losses

Taxpayers in a federally declared disaster area have the unique opportunity to elect to claim the loss for either the year the loss occurred or for the prior year. You cannot split losses between years or choose different years for different properties. Casualty losses may be taken on real estate, business property, and personal property (including vehicles, appliances and furniture). These losses are typically reported on Schedule A, offsetting regular income and wages.

Calculating Casualty Losses

The loss on personal property is determined as:

• The lesser of the cost basis of the property or its decline in fair market value,
• Less insurance reimbursements,
• Less $500 per disaster,
• Less 10% of AGI.

Business and investment property are not subject to the limitations in points 3) and 4).

The IRS acknowledges the difficulty in valuing property after a natural disaster and encourages taxpayers to make reasonable estimations in good faith and keep good records. You can estimate the decline in FMV by:

• Using the actual costs incurred to repair and/or restore the property to its pre-disaster state, or
• Obtaining an appraisal of the property’s pre- and post-disaster value, or
• Using another acceptable method provided in Notice 2018-08.

If the insurance proceeds received exceed the cost basis in the property, you may face recognizing a casualty gain. You may be able to mitigate some of these gains.

Special Rules for Primary Home

Normally, when selling your personal home you can exclude up to $250,000 ($500,000 for married) of gain from the sale. If your home was destroyed in the disaster, you can apply this exclusion against gains from insurance proceeds. Additionally, if you sell the vacant land where the home stood within two years, any remaining gain exclusion may be applied to the gain from the land sale. You can also defer any remaining gain if you reinvest the proceeds in similar property within four years.

For previous disasters, such as Hurricanes Harvey and Irma, Congress has waived the $500/disaster and 10% of AGI reductions. While no such action has yet been taken, it may be considered during the upcoming lame duck session.

Get Help Navigating These Complex Rules

The IRS provides relief for a variety of disasters. For a full list of relief opportunities beyond Hurricanes Debby, Helene, and/or Milton, visit the IRS disaster relief website.

The professionals at Snyder Cohn are here to help you navigate these complex rules and strategize to ensure you’re getting the full benefit of the relief. Reach out to us today to start the conversation!

 

By: Zane Sanchez

One common question we receive from our clients, especially service businesses, is how to compensate the owners of the business and what considerations should be taken into account when determining such compensation.

Entity structure and owner compensation

There are a few different ways to compensate owners, depending on the type of entity. The form of entity and payment affects how you are taxed and can vary significantly.

One of the most common ways that owners receive compensation is with W-2 wages (wages), Compensation paid by wages is an expense for the company and is reported as income on the owners’ 1040. Wages require that the company pays the employer share of Social Security, Medicare, and unemployment taxes. Both C corporations and S corporations can pay owners wages; however partnerships, LLCs, and sole proprietors cannot.

Partnerships, LLCs, and sole proprietors instead pay owners by distributions. All owners pay income tax on their share of the company’s earnings, so when distributions are made to the owners, they do not pay additional income tax on those distributions, and they are not deductions for the company. Health insurance, retirement contributions, and other fringe benefits can also be provided to the owners but are considered distributions to the owners. These are deductible by the owners on their individual returns rather than by the company. In a service business, where the owners are doing the work, the income that is allocated to the owners is also subject to self-employment tax with the employer and employee portion paid by the owner.

S corporations are unique in that they can also payout distributions, in addition to any wages, but they must be paid out pro rata to its owners based on their shares in the corporation. If a different allocation is required, it must be paid as wages to the owner(s).

Partnerships and LLCs can also use guaranteed payments to compensate owners. A guaranteed payment is typically outlined in the operating agreement and is used to compensate an owner for providing additional services, such as managing the company. It is deductible by the company and considered income to the owner receiving the guaranteed payment.

Considerations in calculating compensation

In determining the amount of compensation, whether by wages, profit allocations and distributions, or guaranteed payments, there are several factors to consider. The biggest question is what feels “fair” which can look different, depending on the situation, and can mean something different to each of the decision makers making this an even more difficult discussion. Therefore, it is important to make sure that the owner compensation formula is well documented and that it aligns with the company’s culture and goals, while still motivating owners.

Many professional service companies such as doctors, engineers and lawyers may choose to determine compensation based on productivity which can be measured by number of patients/clients served, collections, client originations or other factors unique to their business. Often, base compensation is paid with bonus calculations done at the end of the year to account for various metrics. Others may choose to compensate everyone equally if everyone does a similar amount of work.

Some considerations to determining a fair compensation formula are:

• Does the compensation set up our company for future success and align with cash flow needs?
• How do we split revenues – equally or by collections, charges, hours, clients served, or other metrics?
• How do we split expenses? Should everyone cover an equal amount of expenses, or should some expenses be covered by those using more of the personnel, equipment, space, etc.?
• What other benefits are received, such as health insurance and retirement contributions, and how do we want to account for them?
• How are administrative duties split? Do one or two owners perform the administrative duties and should they receive additional compensation for that?
• Are there any buy-in considerations when bringing on a new owner?
• Is the compensation competitive with industry standards?

As you can imagine, there is not a one-size-fits-all answer to this question.  At Snyder Cohn, we work with a number of businesses to address these types of issues. If you would like to discuss this further, please do not hesitate to reach out to us.

By:  Melinda Kloster, CPA and Kaitlin Deimler, CPA

The Basics

A cost segregation study, commonly known as ‘cost seg,’ is a powerful strategic tool for residential and commercial property owners. A cost segregation study is a formal analysis that categorizes the various components of real property into different asset classes for depreciation purposes. Cost segregation studies are performed by a team of engineering and tax professionals with specialized experience in the field. The study includes an examination of various cost and property records, along with physical site inspections, to gather the necessary data to categorize the property components.

For income tax purposes residential property is typically depreciated over a 27.5-year useful life and commercial property is typically depreciated over a 39-year useful life. The acquisition cost of residential and commercial property is generally depreciated using a straight-line method and not eligible for accelerated bonus depreciation. However, certain components of a property, such as land improvements, plumbing equipment, fixtures, lighting components, and more, have a shorter useful life for income tax purposes and can be eligible for accelerated bonus depreciation.  A cost segregation study is used to breakdown the building asset and identify those various components in order to accelerate the timing of the depreciation expense for the property owner.

Look-Back Study

Cost segregation studies are typically conducted shortly after the acquisition of the property. However, properties that have already been placed into service still have an opportunity to pursue the benefits of a cost segregation study through what is known as a ‘look-back’ study.

In a look-back cost segregation study the depreciation deductions are caught up to what they would have been had a study been conducted in year one. More specifically, you look at the actual cumulative depreciation deductions taken since the acquisition of the property vs. what the depreciation deductions since acquisition would have been had a cost segregation study been completed in year one. These catch-up deductions are then taken in the current tax year without the need to amend a prior period tax return.

There are many instances where deductions from a cost segregation study would be worth more in one year versus another.  The timing and strategy of a cost segregation study is something that property owners and their tax advisors should discuss.

Look-Forward Planning

In the coming years there are certain elements of the tax law, directly related to the benefits of cost segregation studies, which are scheduled to change (as the law stands today). A few specific highlights:

• Bonus Depreciation Outlook – for tax year 2024, bonus depreciation is set at 60% of acquisition cost for eligible assets, and that is set to decrease to 40% in 2025, 20% in 2026, and phaseout completely by 2027.
• Section 199A Outlook – the 20% qualified business income deduction, commonly known as ‘QBI’, is scheduled to sunset in tax year 2025. Absent a change in the tax law, tax year 2026 will be the first tax year without this deduction that most have come accustomed to over the recent years. As a result, a tax deduction in 2026 could be worth more than a tax deduction in 2024 or 2025.

What does this mean for cost segregation studies and the timing of their implementation? Timing is critical – with the changing landscape of the Section 199A and bonus depreciation deductions, along with other areas of the tax law, it will make cost segregation decisions more involved. An experienced tax professional can guide you through the process and analyze the most beneficial strategy for your property.

Conclusion

Like most things there is a cost benefit analysis to consider and choosing to do a cost segregation study might not be appropriate in every situation. It is important to understand the mechanics and potential benefits that a cost segregation study can provide to property owners and investors, specifically over the next couple of years with the scheduled changes to the tax law on the horizon.

If you are considering a cost segregation study for your property our team at Snyder Cohn is here to assist you navigate this area and plan for the future!

 

By: Dustin Cutlip

Effective January 1, 2023, the DOL changed the methodology for determining whether a defined contribution plan is considered a “large plan” for Form 5500 purposes and would therefore be subject to an audit performed by a qualified independent accountant.

For Plan years beginning before January 1, 2023, a defined contribution plan was considered a large plan if there were at least 100 individuals who were eligible to participate in the plan as of the beginning of the plan year (individuals who have met the plan’s age and service requirements). Now, for 2023 Plan years and beyond, a defined contribution plan is considered a large plan if there are at least 100 participants with an account balance as of the beginning of the plan year.

What this means is that employees of a business who are eligible to participate in their employer’s retirement plan, but who do not actually contribute or keep money in the plan, are no longer counted for purposes of determining whether a defined contribution plan is subject to audit. The DOL passed this change with the expectation that several thousand plans which previously required an audit would no longer need one.

Considering this rule change, we recommend that businesses who find themselves slightly above the new audit threshold investigate and determine the number of terminated employees who still hold balances in their plans. Since these individuals are included in the count as long as their money remains in the plan, encouraging them to withdraw their balances may provide employers with the ability to forgo the annual audit.

However, businesses hovering around the audit threshold should also consider their outlook moving forward. If a business in this situation expects to hire more individuals in the near future, it may be advisable to still perform the annual audit for the 2023 plan year even if it is not technically required. The reason being that if, for example, the business elects to pass on the 2023 audit only to find that an audit is required again for 2024, that 2024 audit will require additional time and effort in order to gain assurance regarding the plan balances for both years.

Lastly, businesses need to be aware of the regulations within the SECURE and SECURE 2.0 Acts concerning part-time workers, and how they could affect their retirement plan participation numbers moving forward. Under the terms of the SECURE Act, starting with Plan years beginning on or after January 1, 2021, part-time employees who complete at least 500 hours of service in three consecutive years must be given the opportunity to participate in the Plan. Therefore, a part-time employee who works at least 500 hours in each of 2021, 2022 and 2023 must be given the opportunity to participate in the Plan as of January 1, 2024. Under the terms of the SECURE 2.0 Act, effective January 1, 2025, the service requirement for part-time employees is reduced from three years to two years. Therefore, a part-time employee who works at least 500 hours in each of 2023 and 2024 must be given the opportunity to participate in the Plan as of January 1, 2025.

What this means is that businesses with a significant number of part-time workers may soon reach the audit threshold if enough of them elect to participate in the retirement plan.

In summary, it is now critical that employers who sponsor defined contribution retirement plans closely monitor the number of participants with account balances in the plan, evaluate whether the audit threshold is met or could be met in the near future, and prepare accordingly. On the Form 5500, this number can be found on Line 6g of Page 2 of the form.

If you have any questions or concerns regarding these rule changes, please feel free to contact us.

 

 

By: Joe Bishop