Brooke Chase

January 17, 2024 | IWF News |  Warren Shoulberg

New data from the Producer Price Index suggests that costs are coming down on things like softwood lumber as part of an overall decline in material costs.

The wild ride up in construction materials in 2023 may have peaked as the year ended and going into 2024 we could see some declines in those costs, new statistics indicate. 

An analysis of the Producer Price Index by the Associated Builders and Contractors organization shows encouraging news for builders going into the new year. “Construction input prices declined for the second straight month in November,” ABC’s chief economist Anirban Basu said in a statement. “While much of the recent decline is due to record domestic oil production and the resulting precipitous decline in gas and diesel prices, other commodities like iron and steel and lumber products are currently more affordable than they were at the same time last year.”

Softwood lumber prices dropped by almost 6% in November and have declined by nearly 20% versus the same period a year ago. Construction input prices overall decreased 0.3% in November.

Prices of materials going forward, according to Basu in the statement, are equally as encouraging. “This is a welcome development for an industry still dealing with extraordinarily elevated financing costs and rising labor costs due to ongoing worker shortages.”

Businesses and individuals concerned about the confusing 1099-K reporting requirements can breathe a sigh of relief: On November 21, 2023, the IRS announced that the deadline for the new $600 reporting threshold won’t go into effect for the 2023 tax year — and it’s expected to increase the threshold less than expected for 2024. Here’s what third-party settlement organizations and taxpayers need to know.

Changes to the Reporting Threshold

Third-party settlement organizations must report payments in a trade or business to the IRS and recipients. This is done on Form 1099-K, “Payment Card and Third-Party Network Transactions.” Examples of third-party settlement organizations include Venmo and Cash App, as well as gig economy facilitators, such as Uber, Lyft, Etsy and TaskRabbit.

The American Rescue Plan Act of 2021 lowered the minimum threshold to file Form 1099-K for a taxpayer from $20,000 of reportable payments made to the taxpayer and more than 200 transactions to $600 (the same threshold applicable to other Forms 1099) starting in 2022. In late 2022, the IRS temporarily delayed the reduced threshold for the 2022 tax year.

Following additional feedback from taxpayers, tax professionals and payment processors, it’s been delayed again for 2023, and the IRS is planning for a threshold of $5,000 for 2024. This will give taxpayers more time to prepare their systems and procedures for when the $600 1099-K threshold is scheduled to go into effect in 2025.

“Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040. It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area,” said IRS Commissioner Danny Werfel.

Looking Ahead

The lower threshold for filing 1099-K forms will mean many participants in the gig economy will receive these forms for the first time. The IRS estimates that the reduced threshold, if it had gone into effect in 2023, would have resulted in the distribution of 44 million 1099-Ks sent to many taxpayers who wouldn’t expect one and might not have a tax obligation. This could have caused significant confusion among individuals and businesses.

Important: The 1099-K reporting requirements don’t apply to personal transactions, such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another person for a household bill. These payments aren’t taxable and don’t require 1099-Ks. However, the sale of goods and services, including selling used personal items — such as clothing, furniture and other household items — could generate a Form 1099-K for many people, even if the seller doesn’t have a tax liability from those sales.

Members of Congress have introduced bills to raise the threshold back to $20,000 and 200 transactions, but there’s no guarantee that they’ll pass. In addition, taxpayers should generally be reporting income from their side employment engagements, whether it’s reported to the IRS or not. For example, freelancers who make money selling products on Etsy or driving for Uber should have been paying taxes all along. However, Congress and the IRS have said this responsibility is often ignored. In some cases, taxpayers may not even be aware that income from these sources is taxable.

In the meantime, businesses should prepare in 2024 to minimize the tax consequences of the gross amount of Form 1099-K reportable payments. And taxpayers should review gig and other reportable activities to ensure payments are recorded accurately. Payments received in a trade or business should be reported in full so that workers can withhold and pay taxes accordingly. If you receive income from certain activities, you may want to increase your tax withholding or, if necessary, make estimated tax payments or larger payments to avoid penalties.

In addition, taxpayers who haven’t been reporting all their income from gig work may not have been documenting expenses that result in deductions. It’s important to start doing so now to minimize the taxable income recognized due to the gross receipts reported on Form 1099-K. The IRS is likely to take the position that all of a taxpayer’s gross receipts reported on Form 1099-K are income and won’t allow deductions unless the taxpayer substantiates them. Deductions will vary based on the nature of the taxpayer’s work.

For More Information

The expanded 1099-K reporting requirement is complex and will affect many businesses and individuals. “The IRS will use this additional time to continue carefully crafting a way forward to minimize burden,” said Commissioner Werfel. Contact your tax advisor for questions about your Form 1099-K responsibilities.

Eight strategies for boosting profits, cutting costs, and reducing risk.

Sound cash management practices are essential for any business. However, businesses in a cyclical industry have unique issues that require special diligence.

A cyclical industry—like construction, airlines, oil and gas—is sensitive to the business cycle, meaning its revenue is generally higher in periods of economic prosperity and lower in periods of economic downturn.

“Cyclical industries need to plan meticulously for downturns, ensuring they have adequate cash reserves, whereas noncyclical industries may have more consistent revenue flows,” says Jack McCullough, president of the CFO Leadership Council. “Feast or famine is a reality, more so in cyclical industries.”

Consider these eight strategies for cutting costs, saving money and reducing risk—some of which might be useful for noncyclical businesses as well.

1. Plan for the Worst

Eric Kraft, Dallas/Fort Worth commercial banking executive for First Horizon Bank, says conducting a strategic planning session at least once a year is important for all businesses and critical for a cyclical business. Companies should produce an operating plan, complete with financial projections, that considers three potential outcomes: a best-case scenario, when the economy performs well and all other factors fall into place; a worst-case scenario, when the economy falters; and a likely scenario, when things go as expected.

The cyclical companies that do the best job of planning are able to withstand difficult economic times. One best practice is to invite employees from several organizational layers to take part in the early-stage planning sessions. “Front-line employees can offer significant insight into customers’ and suppliers’ operating resilience,” Kraft says. “The companies that fail at planning don’t get the right people in the room, or they don’t allow them to freely share their thoughts.”

He recommends having a third-party consultant supervise the planning process, so the business owner is freed up to take part in the planning.

2. Cushion Yourself for Downturns

Companies in cyclical industries should have significantly greater capitalization and liquidity than companies that don’t cycle often; they should position the company during peak times to allow a cushion for downturns, according to Kraft.

“You need to be able to withstand these downturns and absorb losses for a certain period of time without materially cutting your fixed overhead,” he says. “If you find yourself in a situation where you need to cut costs, there are only so many levers you can pull, like laying off employees. We saw that in the pandemic, where restaurants closed locations and then when business returned, they weren’t able to get their employees back.”

When asked their priorities for 2024, more than half (51%) of midmarket business leaders put growth at the top in a recent WSJ Intelligence survey. Growth, like customer experience and increasing operational efficiency—ranking second and third, respectively—hinges on effective cash management.

3. Reduce Balance Sheet Leverage

Cyclical companies should generally have lower balance sheet leverage. “When they do borrow, it’s prudent to shorten the term of the debt to a period that is well less than the useful life of the underlying asset. By doing this, they will deleverage more quickly, relieving interest costs and creating the potential to refinance in a downturn,” Kraft says.

4. Factor in the Changing Interest Rates

Dana Moore, director of treasury management sales for First Horizon Bank, says companies should reevaluate the value of their cash in light of recent interest rate increases.

“Prior to the recent rate hikes, we were in an ultralow interest rate environment for over a decade. Debt was cheap and invested cash earned less than 1%. During this period, businesses lost discipline around cash management because the time-value of money was almost irrelevant. Now is the time to revisit that discipline; this higher interest rate environment creates opportunities to apply idle cash to pay down revolving credit or park in short-term investments,” she explains. “The markets right now are offering extremely favorable interest rates for liquid instruments, so companies are really missing out on an income opportunity or a savings opportunity if they are not using their cash in the most effective way.”

5. Use Lines of Credit as a Buffer

A line of credit should be used as a buffer during downturns, not as a primary source of funding, McCullough says. “It’s essential to avoid maxing it out; instead, maintain a balance to ensure availability during unexpected challenges,” he cautions. “Regularly review the terms and conditions of the credit line to ensure they remain favorable and meet the company’s needs.”

6. Consider Purchasing Cards

Moore notes that businesses may not realize the benefits of using purchasing cards, which are payable in full each month and available to commercial entities. “These cards usually have larger credit limits and are best used to pay suppliers,” she says. “The suppliers receive their money in a timely manner, while letting the company extend those payables up to an additional 45 days.”

7. Keep on Top of Cash Management

McCullough says some of the most common mistakes he sees among cyclical businesses are not diversifying revenue sources, overextending during peak times and neglecting to regularly revise and update financial forecasts.

“To avoid these mistakes, companies should maintain a conservative financial stance, regularly review their cash flow projections and aim for flexibility in both operations and financial commitments,” he says.

8. Focus on Business Efficiency

Cash management cycles have changed considerably over the past five or six years, Moore says. “When people started to work from home during the pandemic, everyone was forced to become more nimble,” she says. “Businesses moved from paper to electronic transactions to be more effective—for both receivables and payables. Traditionally, cash management has been about accelerating receivables and delaying payables to the extent possible, while having visibility into the organization’s cash flow. The next evolution is to use advancing technology to take on the more mundane accounting tasks, freeing staff to perform higher-value functions. It’s time to embrace cash management again as part of the strategic business plan.”

Brooke Chase Associates, Inc. was not involved in the creation of this content.

By Paul Cachero | Bloomberg

The Internal Revenue Service recently bumped the income thresholds for its tax brackets by 5.4% for 2024, its latest adjustment to account for elevated rates of inflation.

The move is unlikely to produce a material change on most Americans’ tax burdens, according to financial advisers. Rather, it is designed to keep earners in their current tax bracket if their additional income is only keeping up with higher living costs. The standard deduction for income tax filings in 2024 will also be 5.4% higher.

A number of other IRS thresholds have also been raised for next year, including contribution limits on tax-deferred retirement accounts, limits on gifts and estate tax exemptions.

Below is a review of those key changes, which may help taxpayers lower their tax liability in a few areas, experts say.

Income Tax Changes
The standard deduction, or amount that the IRS allows taxpayers to deduct from their income, is increasing 5.4%. That means the figure for single taxpayers and married individuals filing separately will rise to $14,600, while that for head of households and married couples filing jointly will increase to $21,900 and $29,200, respectively.

In tax year 2024, there will also be a higher income threshold for each tax bracket, meaning Americans will get a “grace period” before additional income is taxed at a higher levy, said Ryan McKeown, a financial advisor at Wealth Enhancement Group. For example, single filers with an income over $100,525 and couples earning $201,050 will be hit with a 24% tax in 2024, up from $95,375 and $190,750 this year.

Retirement Accounts
The 2024 adjustments for inflation will also provide an opportunity for savers to contribute more to tax-deferred 401(k) accounts, allowing some to reduce their income tax liability, said Dana McCartney, a CPA with AICPA.

The IRS hiked contribution limits for 401(k)s by $500 to $23,000 in 2024, in addition to a $500 bump for IRA contributions to $7,000.

Older workers who can make “catch-up” contributions on these types of accounts should note the limit did not increase in 2024, however, remaining at $7,500 for 401(k)s and $1,000 for IRAs.

Family Planning
If you plan to transfer wealth to the next generation, gifts of up to $18,000 will be tax free in 2024, up from $17,000 in 2023, and the lifetime estate tax exemption will be $13.6 million, up from the $12.9 million.

Wealthy taxpayers should take advantage of these higher limits, advisers say, as the Trump-era tax cut that doubled the federal estate tax exemption will sunset in 2025; meaning the exemptions will effectively be cut in half.

Annual contribution limits for 529 savings accounts, meant for a child’s education, will also increase by $1,000 to $18,000 in 2024. 529 contributions are considered gifts for federal tax purposes, but they don’t count against the lifetime gift tax exemption.

Additionally, starting in 2024, 529 account holders will be able to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary. So if the next generation changes their higher education plans, the money you saved for college can be used for their retirement instead, said McKeown.

“Grandparents can save away, and rest assured that their money won’t go to waste,” he said.