Business owners, help your estate by gifting company stock

Everyone needs a solid estate plan to distribute assets according to their wishes and benefit their heirs. But this necessity is especially keen for business owners, many of whom have spent years working hard to build up the values of their companies.

If you can relate to this statement, one effective way to reduce estate taxes is to limit the amount of appreciation in your estate — and your company may provide just the ticket for doing so.

Why appreciation?

You’ll save the most in estate taxes by giving away assets with the highest probability of future appreciation. Why? Because gifting these assets today will keep future appreciation on those assets out of your taxable estate. Thus, there may be no better gift than your company stock, which could be the most rapidly appreciating asset you own.

For example, assume your business is worth $5 million today but is likely to be worth $15 million in several years. By giving away some of the stock today, you’ll keep a substantial portion of the future appreciation out of your taxable estate.

What are the limits?

Naturally, there are limits to how much you can give without tax consequences. Each individual is entitled to give as much as $14,000 per year per recipient without incurring any gift tax or using any of his or her $5.45 million lifetime gift, estate or generation-skipping transfer tax exemption amount.

Also be aware that, because you’re giving away company stock, the IRS may challenge the value you place on the gift and try to increase it substantially. The agency is required to make any challenges to a gift tax return within the normal three-year statute of limitations — even when no tax is payable with the return. But the statute of limitations applies only if certain disclosures are made on the gift tax return. Generally, for gifts of stock that isn’t publicly traded, a professional business valuation is highly recommended.

Who can help?

If the idea of giving away portions of your business to reduce estate tax exposure intrigues you, please contact us. We can help you fully assess the feasibility of this strategy as it pertains to your specific situation.

© 2016

Get 2 tax benefits from 1 donation: Give appreciated stock instead of cash

If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.

More tax savings

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.

Tread carefully

Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).

And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.

© 2016

Boost your 2016 deductions by buying a business vehicle this year

If you’re looking to boost your deductions — and reduce your 2016 tax bill — you may want to consider purchasing a business vehicle before year end. Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your deduction will depend in part on the gross vehicle weight rating.

The limits

The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2016 is $500,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.01 million.

But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2016 the depreciation limit is $3,160. The amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.

In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.

Maximize your tax benefits

Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to learn what tax benefits you might enjoy if you make the purchase by December 31.

© 2016

Proper education can drive retirement plan participation

Employers who offer retirement savings plans are already helping their workforces. But not all employees take advantage of these plans. And many who do still don’t contribute enough to retire comfortably. As a business owner, you can help your employees even more — and drive plan participation — by providing proper education on retirement planning.

Here are five ways to go:

1. Teach them about the general concepts of investing. Many employees are unfamiliar with basic economic and investing concepts. Offer instruction on concepts such as:

• Compounding growth,
• Tax implications of different types of savings plans, and
• How much they need to save to reach a certain sum at retirement.

Providing such information can help your employees make informed decisions about their options.

2. Explain how the plan functions. For instance, do they need to enroll in the plan, or are they automatically enrolled? Once enrolled, how do they decide how much to contribute and how to allocate their money among different investments?

3. Provide information in various formats. Webinars or other online communication methods will resonate with some employees, while others will prefer printed material. By offering a mix of options, you’ll likely be effective in reaching different segments of your workforce.

4. Arrange face-to-face sessions. Even if your business offers printed and electronic materials, in-person sessions can go a long way in helping employees understand the plan. These sessions also provide an opportunity to reinforce the value of a retirement plan as part of the employee’s overall compensation package. If one-on-one sessions are impractical, consider small groups.

5. Offer information regularly. Providing consistent education is a great way to remind employees of the value of their retirement savings plans.

Remember, employees aren’t the only ones who benefit from proper retirement savings education. As participation increases, plan fees may diminish. And the more non–highly compensated employees sock away in a plan, the more its highly compensated employees can contribute. Please contact our firm for more ways to maximize the strategic value of your retirement plan.

© 2016

Prepaid tuition vs. college savings: Which type of 529 plan is better?

Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:

• Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred.
• Some states offer tax incentives for contributing in the form of deductions or credits.
• The plans usually offer high contribution limits, and there are no income limits for contributing.

Prepaid tuition plans

With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Savings plan

This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.

© 2016

Businesses can also be disrupted by tax identity theft

A great deal of attention is paid to individual tax identity theft — when a taxpayer’s personal information (including Social Security number) is used to fraudulently obtain a refund or commit other crimes. But businesses can also be victims of tax identity theft.

Significant consequences

Business tax identity theft occurs when a criminal uses the identifying information of a business, without permission, to obtain tax benefits or to enable individual identity theft schemes. For example, a thief could use an Employer Identification Number (EIN) and file a fraudulent business tax return to claim a refund or refundable tax credits. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for the “employees” to claim refunds.

In many cases, businesses don’t even know their information has been stolen until they’re contacted by the IRS. The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Signs your business could be a victim

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if you receive:

• A notice from the IRS about fictitious employees.
• An IRS letter stating that more than one tax return has been filed in your business name.
• A notice from the IRS that you have a balance due when you haven’t yet filed a return.

Steps to take

If you receive a letter or notice from the IRS that leads you to believe someone fraudulently has used your business EIN, respond immediately to the contact information provided. Contact us for more information about how to proceed.

© 2016

Forthcoming regs will identify two new foreign tax credit “splitter arrangements.”

In a Notice, IRS has announced that it intends to issue regs under Code Sec. 909 to address the separation of related income from foreign income taxes paid by a “section 902 corporation” pursuant to a foreign-initiated adjustment. The regs will identify two new “splitter arrangements,” one of which involves a change to ownership structure made in anticipation of the foreign-initiated adjustment, and the other of which involves making an extraordinary distribution before paying the adjustment so as to generate substantial amounts of foreign taxes deemed paid without a corresponding U.S. income inclusion. Notice 2016-52, 2016-40 IRB

Innovate or acquire? That’s the strategic question

Many companies reach a point in their development where they have to make an important decision: Innovate themselves or acquire a competitor? Of course, it isn’t always an either/or decision. Nonetheless, business owners should consider the pluses and minuses of both approaches.

Innovating to grow

Innovation is a broad term that encompasses many strategies — all of which are intended to help the company achieve goals such as boosting profits, improving cash flow, or diversifying products or services. Common strategies are:

• Research and development of new products,
• New market penetration via geographic expansion or enhanced product/service offerings, and
• Increased productivity resulting from internal improvements or enhancements.

Each strategy takes time, effort and capital. Understandably, business leaders can be hesitant to devote such vital resources to innovation initiatives and risk decreases in productivity and profitability.

Combining companies

For companies that don’t want to bet the farm on internal development, acquisitions can be appealing. If you’re looking to expand a product line, for example, it might be more time- and cost-effective to buy a competitor that already offers the goods you want.

Your acquisition target has already done the hard work — including funding, testing and creating the product or service and building a client base. By buying this competitor, you may incur less risk than you would by investing your own capital and building the product from scratch. The same holds true for geographic expansion and productivity improvements.

But business combinations come with their own risks. To fully benefit from any acquisition, your company needs to “stick the landing” — efficiently integrate operations and retain divisions and employees capable of ensuring that innovations continue to pay off. For many buyers, that’s a tall order.

Considering your options

In an ideal world, companies would devote resources to innovation and also make the occasional acquisition to bolster their standing in particular markets. But most companies don’t have the luxury to do both simultaneously. Please contact us for help examining the risks and potential rewards associated with each option.

© 2016

Time may be running out — again — for tax-free treatment of home mortgage debt forgiveness

Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.

Fortunately, since 2007, homeowners have been allowed to exclude from their taxable income up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion had been available only for debts forgiven through 2014, but last year Congress extended it. Now, however, that new expiration date — Dec. 31, 2016 — is rapidly approaching.

Ins and outs

Debt forgiveness is only one of the ways to generate COD income in relation to QPRI. You also can have COD income if a creditor reduces your interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.

QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).

Pluses vs. minuses

If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home.

Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it’s generally better to defer tax when possible.

If you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion in case lawmakers don’t extend it again.

© 2016

Documentation is the key to business expense deductions

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records

In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

The business owner said the travel expenses were incurred “caring for his business.” That isn’t enough. “The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,” the court stated. In addition, businesses must keep and produce “records sufficient to enable the IRS to determine the correct tax liability.” (TC Memo 2016-158)

Case 2: Documents destroyed

In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to “undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared

Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

© 2016

Climbing the “hierarchy of needs” to find employee engagement

In 1943, psychologist Abraham Maslow set out his “hierarchy of needs.” This theory suggested that human behavior is a response to a variety of needs ranging from physical survival to self-actualization.

At this point, you may be wondering, “What does any of this have to do with my business?” The answer is that truly engaged employees are motivated by needs other than just financial compensation.

5 tiers of needs

As mentioned, Maslow theorized that humans have various needs to live a fulfilling life. The hierarchy, beginning with the most basic needs, comprises the following five tiers:

1. Physiological needs, such as air, food, drink and shelter,
2. Safety needs, such as security, order and protection from the elements,
3. Social needs, such as relationships, family and affection,
4. Esteem needs, such as healthy self-esteem, achievement, independence and managerial responsibility, and
5. Self-actualization needs, such as realizing personal potential, self-fulfillment and personal growth.

Generally, compensation covers the first tier. Money allows people to nourish themselves and obtain a place to live. (Air is usually free.) Job security and stability, as well as benefits, contribute to the second tier, meeting a person’s safety needs and need for order. And many people are able to meet at least some of their belongingness and other social needs at work (Tier 3).

The last two

It’s the last two tiers that are often trickiest for employers. To empower employees to meet Tiers 4 and 5 at work, you’ll need to learn the specific motivations to which each person seems to respond.

For example, esteem needs could be satisfied by offering various forms of praise to strong performers and those who help others. Meanwhile, self-actualization needs can be met by establishing clear career paths that include promotions.

Critical component

Your employees have needs and motivations in common with most of the people on the planet. The key is creating a workplace that helps meet these needs and, in turn, produces that critical component of any successful organization — the engaged employee.

© 2016

Looking for a retirement plan for your business? Here’s one SIMPLE option

Has your small business procrastinated in setting up a retirement plan? You might want to take a look at a SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” If you decide you’re interested in a SIMPLE IRA, you must establish it by no later than October 1 of the year for which you want to make your initial deductible contribution. (If you’re a new employer and come into existence after October 1, you can establish the SIMPLE IRA as soon as administratively feasible.)

Pros and cons

Here are some of the basics of SIMPLEs:

• They’re available to businesses with 100 or fewer employees.
• They offer greater income deferral opportunities than individual retirement accounts (IRAs). However, other plans, such as SEPs and 401(k)s, may permit larger annual deductible contributions.
• Participant loans aren’t allowed (unlike 401(k) and other plans that can offer loans).
• As the name implies, it’s simple to set up and administer these plans. You aren’t required to file annual financial returns.
• If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Contribution amounts

Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE. An employee may defer up to $12,500 in 2016. This amount is indexed for inflation each year. Employees age 50 or older can make a catch-up contribution of up to $3,000 in 2016.

If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Consider your choices

A SIMPLE IRA might be a good choice for your small business but it isn’t the only choice. You might also be interested in setting up a simplified employee pension plan, a 401(k) or other plan. Contact us to learn more about a SIMPLE IRA or to hear about other retirement alternatives for your business.

© 2016

Tax impact of investor vs. trader status

If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?

Investors

Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.

That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.

Traders

Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.

Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.

Passing the trader test

What does it take to successfully meet the test for trader status? The answer is twofold:

1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.

2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.

If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.

© 2016

Speed up business decisions with dashboard reports

Would you drive a car without a functional dashboard? Perhaps once a month someone could tell you how fast you were going and how much fuel you had left. Sound good? Probably not. Yet this is how many business owners run their companies.

The good news is there’s a solution. With the right software and some help from our firm, you can regularly receive dashboard reports that provide a one- or two-page summary of key business performance metrics in a concise, visual format.

Good looking info

Similar to a car’s control panel, dashboard reports provide business owners and managers with timely, relevant input to make quick but informed decisions. Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format.

Believe it or not, the concept of dashboard reports has been around since at least the 1990s, when they originally gained popularity. But now, thanks to 21st century technology, these reports are even easier to generate and distribute. Many companies offer them to ownership and management via an internal website or weekly e-mail blasts.

The right metrics

The critical question to ask when creating a dashboard report is: Which metrics should we include? The right answer depends on, among other things, current economic conditions, your industry and the specifics of your business operations. Nonetheless, most dashboard reports include financial ratios such as:

• Gross margin [(revenues – cost of sales) / revenues],
• Current ratio (current assets / current liabilities), and
• Total asset turnover (sales / total assets).

From there, industry-specific performance metrics are typically added. For example, a warehouse might report daily shipments or inventory turnover, not just total asset turnover. Or a retailer might provide sales graphs that highlight product mixes, sales rep performance, daily units sold and variances over the same week’s sales from the previous year.

Here to help

The purpose of dashboard reports is to quickly identify trends that require corrective actions. Just remember that they’re no replacement for sound, well-maintained financial statements. Please contact us for help with both.

© 2016

New Procedure Helps People Making IRA and Retirement Plan Rollovers

IR-2016-113, Aug. 24, 2016

WASHINGTON — The Internal Revenue Service today provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement (IRA).

In Revenue Procedure 2016-47, posted today on IRS.gov, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

Normally, an eligible distribution from an IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60^th day after it was received. In most cases, taxpayers who fail to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.

The IRS encourages eligible taxpayers wishing to transfer retirement plan or IRA distributions to another retirement plan or IRA to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process. For more information about rollovers and transfers, check out the Can You Move Retirement Plan Assets? section in Publication 590-A or the Rollovers of Retirement Plan and IRA Distributions page on IRS.gov.