Business Q & A
By: Financial Hotline
Winter 2025 (Vol. 42, No. 4)
Q: What are the 1099 filing requirements for my business for the 2024 tax year?
A: Businesses are required to complete a Form 1099- NEC by January 31, 2025 to report payments of $600 or more made in 2024 to each nonemployee (independent contractor) who performed services for them. You are also required to file a Form 1099 MISC by March 1 (paper) or March 31, 2025 if filing electronically to report payments of at least $10 in royalties or at least $600 for items such as rent and medical or health care payments made to nonemployees and certain vendors in 2024. Generally, you need to send these only to sole proprietors and LLCs that file as sole proprietors. In most cases this eliminates sending to, government agencies, C Corporations, S Corporations, and LLCs formed as corporations or S corps.
Q: I am looking at different benefit plans for employees in my small business. Can you give me information about the employee stock ownership plan (ESOP)?
A: Under an ESOP, employee participants gain partial ownership of the business through a retirement savings arrangement. Meanwhile, the company and its existing owner(s) can benefit from some tax breaks, an extra- motivated workforce and, potentially, a smoother path for succession planning.
To implement an ESOP, your business establishes a trust fund and either the company contributes shares of stock or money to buy the stock (an “unleveraged” ESOP) to the ESOP, or the ESOP borrows funds to buy the stock initially, and then the company contributes cash to the ESOP to enable it to repay the loan (a “leveraged” ESOP).
The shares in the trust are allocated to individual employees’ accounts, often tied to their compensation. The business must formally adopt the plan and submit documents and specific forms to the IRS.
Being a part owner adds the incentive for your employees to work as hard as you do but also, one of the significant benefits of an ESOP is that employer contributions to qualified retirement plans such as ESOPs are typically tax-deductible. However, employer contributions to all defined contribution plans, including ESOPs, are generally capped at 25% of covered payroll. One exception applies: C corporations with leveraged ESOPs can deduct all contributions used to pay interest on the ESOP loan. That means, the interest isn’t counted toward the 25% limit.
Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax- deductible for C corporations, provided the dividends are reasonable. Additionally, dividends voluntarily reinvested by employees in company stock in the ESOP are usually also deductible for the business. (Employees, however, should consider the tax implications for their situations.)
Another potential benefit arises for shareholders in some closely held C corporations: They can sell stock to the ESOP and defer federal income taxes on any gains from the sale. Several stipulations apply, including that the ESOP must own at least 30% of the company’s stock immediately after the sale. Also, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic corporations within a set period.
Finally, when a business owner is ready to retire or leave the company for another reason, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares. Alternatively, the ESOP can borrow money to buy the shares.
The tax implications of an ESOP differ for entity types other than C corporations, and these should be carefully evaluated before implementing an ESOP for another entity type. While an ESOP offers many potential benefits, it also presents risks, such as the complexity of setup and, in some situations, a strain on cash flow.
ESOPs typically involve high initial costs plus ongoing costs that grow with the plan’s size. Additionally, ESOPs can be burdensome to administer. Because they’re considered a type of retirement plan, they’re heavily regulated by federal and state governments. Compliance will require hiring various professionals, including a trustee. Implementing an ESOP can be complicated to set up, so if you think your company is a good candidate for an ESOP, it is strongly advised that you sort through the details with an experienced advisor.
Q: Does my small business need a Business Continuity Plan?
A: You may think you have a pretty good plan in place, but it’s quick and easy to write it down and good for morale and peace of mind to know you and your employees will be ready to act should the worst happen. Disasters such as storms, wildfires and earthquakes are unpredictable. However, companies can protect employees, safeguard data and recover costs through a business continuity plan. This plan reduces losses and speeds up recovery.
The depth of your business continuity plan should align with your company’s size, its location, the nature of your industry and the specific risks you face. Small companies may not need a sophisticated media relations plan.
However, even the smallest companies should have a plan for these three areas:
- People. Assign a primary contact and backups to ensure employee safety at work and home. This person should maintain an updated list of employee contact information and be ready to coordinate evacuation if needed. Designate an offsite meeting location and a central contact number for check-ins.
- Information technology. Create backups. Never store everything (including passwords) in one place only. To remain operational after a disaster, maintain a backup email, data and software offsite or in the cloud. Cloud services allow you to restore data securely from anywhere, keeping communication open with employees, customers and vendors during recovery.
- Insurance. Regularly review your insurance coverage to confirm it’s sufficient to replace assets, restore operations or relocate if necessary. Consider potential losses, such as lost sales. Check details carefully. Standard policies may not cover certain damages, such as flooding after a hurricane. Store a digital photo on your phone (that’s backed up and stored) of your policy numbers and claim contact information the physical copy is lost or you can’t get to it.
Once you have a plan in place, you will need to revise and test it periodically. Hold regular fire and other evacuation drills and ask employees to update personal contact information. At least once a year, ensure that your IT backup systems function correctly and that your insurance coverage keeps pace with your business’s value.
Q: Can a home I rent qualify for the home office deduction?
A: The home office deduction is calculated on Form 8829 and is available to both homeowners and tenants. According to the IRS, the term “home” for purposes of this deduction includes a house, apartment, condominium, mobile home, boat or similar property. This also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse. This doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:
- There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction. The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.