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What Pass-Throughs Need to Know About the Entity-Level Tax Election

In a significant shift across American tax policy, thirty-six states and New York City have adopted measures allowing businesses to fundamentally change how they pay taxes.

The change affects "pass-through" businesses - typically smaller firms where profits flow directly to the owners - who can now opt to pay taxes at the company level rather than as individuals.

This represents a seismic shift in how American businesses approach their tax strategy. What began as a simple workaround has evolved into a complex business decision with far-reaching implications.

The reform reflects the increasingly complex nature of US state-level taxation, as local governments adapt to federal tax policy changes while competing to attract and retain businesses.

The Federal Limit

The Tax Cuts and Jobs Act imposed strict limits on what individual taxpayers can deduct from their federal tax bills - capping state and local tax deductions at $10,000 (£7,900) for individuals, or half that amount for married couples filing separately.

The measure, which took effect in 2018, marked a dramatic departure from previous tax policy, where both individuals and corporations could claim unlimited deductions for these taxes.

Notably, the legislation created a two-tier system, as corporate taxpayers were exempted from the new restrictions and could continue to claim full deductions.

However, the reform came with a built-in expiration date. Unless Congress takes action, these restrictions will automatically lift in 2026, potentially triggering another significant shift in America's tax landscape.

The temporary nature of these changes has left many online tax preparation experts and financial planners grappling with long-term strategy decisions for their clients.

Invention of the workaround

In a complex game of legislative chess, US states have devised innovative ways to help residents overcome federal tax restrictions.

Initial attempts focused on charitable giving schemes, but these were swiftly blocked by the Internal Revenue Service through regulatory changes.

Connecticut then pioneered a different approach in April 2018, becoming the first state to introduce what tax experts call a "pass-through entity tax." This mechanism effectively shifts tax payments from individuals to businesses, circumventing federal restrictions.

This Connecticut model has since inspired similar reforms across dozens of states.

Election limitations and exceptions

In a maze of varying regulations across the US, states have created intricate rules determining which businesses can take advantage of new tax arrangements.

The reforms generally target two types of businesses - partnerships and the so-called S corporations - but each state has crafted its own specific requirements.

Arkansas, for instance, only allows profit-seeking businesses that already file state returns to participate. Louisiana has banned businesses using certain existing tax arrangements from adopting the new system.

Minnesota's approach is particularly nuanced. The state requires businesses to have at least one qualifying owner, which could be an individual, estate, certain trusts, or since 2023, specific types of single-owner businesses.

New Jersey requires at least one business owner to pay state income tax, while South Carolina demands all owners meet specific criteria, excluding various types of corporate and tax-exempt entities.

These varying requirements highlight the growing complexity of America's state-level tax system, as local governments attempt to balance tax efficiency with regulatory oversight.

Multistate Trends

While most states have made their tax reforms permanent, several have tied them directly to federal tax limitations set to expire in 2026. Some states have even included automatic repeal clauses that would trigger if federal restrictions are lifted.

Years election can be made

The rules around when and how businesses can opt into these arrangements show striking differences across states. In Arizona, for instance, businesses must give owners two months' notice before making the tax change, allowing them to opt out. Meanwhile, Louisiana and Mississippi have adopted a more rigid approach - once businesses opt in, the decision stands until explicitly reversed.

Louisiana has added a particularly strict condition: if a business opts out, it cannot rejoin the scheme for five years.

Variable applicability periods and revocation rules

The mechanics of how businesses make these tax elections also differ markedly. Some states require the decision to be made on annual tax returns, others demand specific forms, and in some cases, simply paying the tax is considered an election to participate.

Varying rates

Perhaps most striking are the different tax rates applied. While many states use their highest individual tax rate, others have developed unique approaches. Arkansas offers reduced rates for capital gains, while New Jersey and New York have implemented variable rates. South Carolina stands out with a straightforward 3% flat rate.

Divergent base calculation rules

The calculation of taxable income adds another layer of complexity. Each state defines its tax base differently, with some including all business income while others exclude specific categories. California focuses on pro-rata shares and guaranteed payments, while South Carolina only taxes active business income, leaving other income to be taxed at the individual level.

Credits and adjustments to prevent double taxation

To prevent double taxation, states have implemented various credit systems. California allows unused credits to be carried forward for five years, while Hawaii offers no carry-forward option. Massachusetts takes a unique approach, offering refundable credits at 90% of the tax paid.

Estimated tax payment compliance

While these reforms were intended to help taxpayers work around federal limitations, they have created a complex web of regulations that businesses must carefully navigate. Tax experts suggest this complexity might increase costs for businesses but could also create opportunities for tax savings if managed correctly.

As the 2026 deadline approaches for the expiration of federal tax limitations, experts are watching to see how states will adapt their systems, potentially adding another layer of complexity to an already intricate tax landscape.

Conclusion

The widespread adoption of new business tax arrangements across US states has not brought the clarity many hoped for.

While most states have now implemented these complex tax reforms, experts warn that the varying rules create significant challenges for businesses and their advisers.

The reforms face an uncertain future, as many are set to expire in 2025 alongside federal tax restrictions. This temporary nature has left businesses grappling with long-term planning decisions.

Adding to the uncertainty, the US Congress continues to debate modifications to the original tax restrictions that sparked these reforms. Current proposals include doubling the deduction cap to $20,000 (£15,800) for married couples earning less than $500,000 (£395,000).

The analysis suggests that despite the widespread adoption of these reforms, businesses face ongoing challenges in navigating the complex and evolving tax landscape.

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Crypto Accounting Services: Why Crypto Tax Matters

Cryptocurrency is the new buzzword around town. This new technology is both intriguing and mysterious for many. That is because the masses are still largely uneducated about this revolutionary new technology. In its essence, cryptocurrency is a decentralized ledger of transactions. Every transaction record is embedded in the blocks of data that make up the currency. This makes it easy for anyone to verify any crypto deal.

But since cryptocurrency is now officially recognized as currency in many countries, it is taxable. Tax laws and regulations differ for crypto as compared to normal currencies. A new market for crypto accounting has sprung up as a result. Accountants and bookkeepers must adjust to a new reality and update their knowledge fast.

Luckily, Indian Muneem already offers great crypto accounting services for crypto enthusiasts. From tax calculation to planning, we cover all the tax requirements under one roof.

So, without further ado, let us dive into the fascinating world of crypto accounting. We will start by defining what exactly blockchain is.

So, what is blockchain?

Simply put, blockchain is a digital chain of blocks of data. This is what gives it its name. It uses a fair bit of cryptography (hence the name crypto coins). This is necessary because the validity of each transaction depends upon its security. Blockchain achieves this by making every node solve a complicated math puzzle to verify any transaction. 

But who maintains this global ledger of transactions that handles millions of dollars? The answer is all of us. Well, all of us who participate in the transactions. Every crypto user is a node that enables the vast network of crypto transactions. The lack of any central authority means the transactions are non-fungible (cannot be tampered with). 

This technology is still in development and applies not only to cryptocurrency, but to finance and healthcare too.

Decentralized Finance (DeFi)

You might have heard of Bitcoin or Ethereum, but the term “Decentralized Finance” might come as something new. What is it? DeFi, as it is called, is more of a social movement. Traditional financial systems are criticized for being centralized, outdated, error-prone, and often inaccessible. They impose high costs and limitations based on customer data. The Decentralized Finance movement addresses these issues by leveraging blockchain technology. The new financial applications offer greater accessibility, reduced costs, and user control over finances. This novel concept of financial freedom has drawn a host of admirers as well as detractors. But the popularity of cryptocurrency shows little signs of waning. It is abundantly clear that the technology is here to stay and the world must evolve accordingly.

How does accounting fit into all this?

While crypto is on the tongue of every toddler and adult alike, the tax implications present an interesting problem. The borderless nature of cryptocurrency makes it harder to regulate and tax. Don’t get us wrong– cryptocurrency transactions have long been taxed just like normal income. The rules and regulations vary by country though. A global standard is not agreed yet and accountants must read every bit of fine print carefully. Caution on the side of erring is the way to go for now.

Outsourcing accounting for cryptocurrency is beneficial for several reasons. Firstly it helps you break down where your finances are going wrong. Then you can fix it before it becomes a problem. With effective tax planning strategies, users can align their financial goals and minimize liabilities. Detailed reporting of all crypto activities—ranging from payments to staking and mining rewards—ensures audit readiness and legal compliance. For businesses in the crypto space, the tax preparation services company also covers revenue tracking, expense management, and payroll. Overall, crypto accounting services deliver essential tools to manage finances effectively, navigate regulations, and maximize the benefits of cryptocurrency investments.

New Tech, New Challenges

Crypto accounting, just like blockchain, is an evolving field. The rules of the game are yet to be framed properly. Before it goes mainstream, a few challenges must be overcome. Let us go through them at length:

Lack of crypto knowledge: Complexities in DeFi transactions (trading, staking, lending) have vague tax implications.

Unclear tax guidance: ITD clarity is limited to certain transactions; others like staking and NFTs remain ambiguous.

Confusing international rules: Attempts by tax offices to update guidance often lead to more confusion for investors.

Difficulty exporting data: Some platforms lack export options, complicating cost-basis calculations.

Volatile market value: Crypto’s fluctuating value makes tracking fair market value for transactions complex.

High logistical effort: Combining and interpreting transaction data is time-consuming.

Several challenges, one solution: Indian Muneem

Indian Muneem has emerged as the top Crypto Auditing Firm  in the country. Our best Crypto Accounting Outsourcing Services  make your crypto journey seamless. Expert accountants specialize in buying and trading to staking and DeFi activities, we ensure every transaction is accurately tracked. File taxes correctly while reducing liabilities and avoiding penalties. Stay audit-ready with detailed, transparent financial records. Whether you’re an individual investor or a business, Indian Muneem provides reliable, tailored solutions for your crypto accounting needs.

Our full catalogue of services:

Crypto Accounting System Setup: Track transactions with accurate, up-to-date crypto accounting systems.

Crypto Tax Calculations: Minimize errors, reduce liabilities, and avoid tax penalties.

Crypto Tax Planning: Strategically plan to reduce taxes and meet financial goals.

Reporting Crypto Activity: Stay audit-ready with detailed reports of all crypto activities.

Calculating Crypto Cost Basis: Ensure accurate reporting by tracking activities across platforms and wallets.

Business Accounting: Comprehensive solutions for revenue tracking, expenses, and payroll in crypto businesses.

Conclusion

Crypto Accounting can take your crypto investment to the next level. Accurate predictions, reliable planning and regular reporting– it puts the onus back in your hands and allows you to take charge of your financial operations. Indian Muneem simplifies this journey by offering tailored solutions for crypto enthusiasts and businesses. With the expertise to navigate this evolving landscape, Indian Muneem empowers you to focus on leveraging the potential of cryptocurrency while leaving the complexities of accounting and tax compliance to seasoned professionals.

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Unlocking End-to-End Bookkeeping's Potential for Your Business

Effective financial management is crucial for success in today's fast-paced business environment. One approach gaining traction is end-to-end bookkeeping—an integrated process that streamlines financial operations from start to finish. This method enhances accuracy and frees up valuable time for entrepreneurs and managers to focus on growth.

What is End-to-End Bookkeeping?

From the initial entry of financial data to the final production of financial reports, end-to-end bookkeeping refers to the thorough management of all financial transactions within an organization. This comprehensive strategy includes:

Data entry: Precisely documenting all transactions, from wages and taxes to sales and costs.

Bank Reconciliation: To guarantee accuracy, compare your bank statements and financial data regularly.

Accounts Payable and Receivable: Managing payables and receivables to maintain healthy cash flow.

Financial Reports: Producing necessary reports to track financial health, including balance sheets and income statements.

Tax Preparation: Arranging documents all year long to make filing taxes easier.

Implementing end-to-end bookkeeping offers numerous advantages:

Increased Accuracy: Businesses reduce the possibility of mistakes and inconsistencies by keeping a continuous process for financial transactions. Because automated methods eliminate the need for human data entry, accuracy is further improved.

Efficiency of Time: Conventional bookkeeping might take a lot of time. Business leaders can refocus their efforts on strategic projects rather than becoming mired in tedious duties by streamlining operations using an end-to-end approach.

Improved Financial Insights: Thorough bookkeeping offers a more profound understanding of how well a business is performing. Owners may monitor progress, pinpoint areas for improvement, and make well-informed decisions with the help of regular reports.

Improved Cash Flow Control: Businesses may better manage their cash flow and make sure they have the money on hand when they need it by closely monitoring their payables, receivables, and bank transactions.

Implementing End-to-End Bookkeeping

Businesses have two options for successfully implementing end-to-end bookkeeping: outsourcing to experts or doing it internally. To get started, follow these steps:

Select the Appropriate Software: Purchase trustworthy bookkeeping software that facilitates end-to-end procedures. To ensure smooth functioning, look for features that interact with your current systems.

Standardize processes: To guarantee accuracy and efficiency, establish standardized bookkeeping procedures, including precise rules for data entry, reporting, and reconciliation.

Frequent Exercise: Make sure your staff has received adequate training in software usage and bookkeeping procedures. Maintaining current knowledge of evolving legislation and best practices is facilitated by regular training.

Review on a Regular Basis: Plan to review your financial records and bookkeeping procedures on a regular basis to find areas for improvement and resolve any possible problems.

Seek Professional Assistance: If handling end-to-end bookkeeping seems too much to handle, think about working with a professional bookkeeper or an outsource accounting firm that has experience with this method.

Conclusion

When it comes to companies trying to improve their financial management, end-to-end bookkeeping is revolutionary. You may improve your operations' accuracy, efficiency, and intelligence by implementing this all-encompassing strategy. Whether you run a small business or oversee a larger organization, adopting end-to-end bookkeeping can help you achieve long-term success and growth. Take the first step toward improved money management right now!

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Year-End Accounting: A New Beginning Is Here! 

As the year draws to a close, it's time to change gears and concentrate on year-end accounting, an essential procedure that establishes the foundation for the financial stability of your company in the coming year!

For what reason is year-end accounting so important? It's your opportunity to think, evaluate, and plan—it's not just about keeping the books balanced.

1️. Year-end: Verify that every transaction is documented and balanced. In addition to giving you a clear picture of your company, organizing your finances also gets you ready for tax season.

2. Enhance Financial Insights: Examine your financial records to spot patterns, achievements, and opportunities for development. Setting goals for the upcoming year and making wiser decisions are both possible with this study.

3️. Tax Preparation: Start your taxes early! You can save money by maximizing deductions and avoiding liabilities with proper year-end accounting.

4️. Build Connections: Provide investors, partners, or stakeholders with your financial knowledge. Transparency promotes cooperation and increases trust.

So pull out your spreadsheets, compile your receipts, and seize the chance! A little work today can pay off handsomely in the coming year. Let's toast to new beginnings and prosperity! 

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Streamline your year-end accounting services with our expert services. Accurate financial reports and tax preparation to end your fiscal year effortlessly

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Outsourced accounting service, Indian Muneem handles essential A/R, A/P, payroll, reporting, analysis, and other tasks effectively and efficiently. Similarly, all our services scale as needed without compromising on cost.

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Financial Reporting: Get the Best out of Your Financial Statements

Financial Reporting is crucial for companies and investors. It evaluates financial performance of a company over time. For governments and private regulatory bodies, it provides a way to track fair trade, compensation and financial activities. Financial Reporting mainly consists of recording financial activities over some key statements. In this article we will understand what financial reporting is and its importance. We will also see some common types of financial statements and who monitors them.

What is Financial Reporting?

Financial Reporting mainly consists of recording and documenting financial activities and performance over a period of time. It may be done 4 times a year or even once a year. Companies use these reports to turn data into accounting insights that shed light on financial status. Companies with great financial reports can make promises on future profitability and growth. This makes them appealing to investors. For the same reason, many financial reports are available for public review. Financial reports include several primary statements that must meet some regulatory requirements. 

Importance of Financial Reporting

Monitor Income and Expenses: Financial Reporting supports the process of tracking income and expenses. Profit and loss statement is important for debt management and effective budget allocation. It also makes companies more transparent in a competitive market.

Compliance: Complying with accounting regulations is crucial and financial reporting allows us to do that. Every document is closely checked, by both government and independent regulatory bodies. This makes it paramount that all the reporting is sufficiently watertight. Additionally, companies also enjoy perks like simplified tax, valuation and auditing process. Finally, we save time and effort that gives us the edge over the competitors.

Essential Data: Shareholders, executives, investors and professionals rely on data revealed in financial reports to make decisions. Specifically, planning budget and monitoring performance is crucial for healthy functioning of any decently sized organization. A culture of transparent growth monitoring encourages investment and financial review.

Analysis: Proper and detailed analysis of financial statements is behind every well-thought business strategy. Financial Reporting allows us to analyze in detail the optimal opportunities for fastest business growth. It also helps us in building cutting-edge data models.

What are the Different Types of Financial Reports?

Most companies are primarily concerned with 3 key statements in their financial reports but sometimes include shareholder equity separately. Here are some of the most important aspects of a financial report:

Balance Sheet: The purpose of a balance sheet is to record the assets, liabilities and equity a company has. Companies typically create balance sheets on a quarterly basis and also include this data in year-end reports. Companies can also easily track asset liquidity and debt coverage via a well-crafted balance sheet.

Income Statement: While the balance sheet is a short-term statement, Income Statement covers a longer period of time. Companies track these quarterly to find how much progress they have made throughout the year. Revenue, net income, expenses and earnings are some of the common metrics used.

Cash Flow Statement: These are important for measuring the financial efficiency of cash flow for debt repayments. These are the barometers of a company’s financial health. Consequently, they show various ongoing activities that generate revenue for operational expenses.

Statement of Shareholder Equity: These typically appear on the balance sheet. But larger corporations do record them separately. Its purpose is to show the amount various key stakeholders and owners invest in the company.

How Indian Muneem Streamlines Your Financial Statements

Indian Muneem is your ideal partner for handling financial statements, especially year-end accounting. With a personalized approach, Indian Muneem understands that each business has unique financial needs. Our professional team manages the details of your accounting, allowing you to focus on business growth. Leveraging cutting-edge software, we ensure accuracy and efficiency in every report. Beyond just meeting current financial needs, Indian Muneem offers strategic insights, tax-saving opportunities, and regulatory compliance. Ultimately, positioning your business for future success with year-end financial planning and reporting.

Financial Review

Tax Planning

Year-End Reporting

Compliance Assurance

Strategic Advice

Seamless Process

Conclusion

Financial reporting is how businesses communicate financial data to internal as well as external stakeholders. Therefore, Financial Reporting is the most concrete indicator of a company’s current and future health. While internal Financial Reporting is less rigid and meant for organizational decision making, external reporting must adhere to regulatory standards set by the government. Fortunately, accounting departments can provide accurate and timely Financial Reports using integrated Financial Reporting software.