Your company’s balance sheet makes great reading this time of year

Year end is just about here. You know what that means, right? It’s a great time to settle in by a roaring fire and catch up on reading … your company’s financial statements. One chapter worth a careful perusal is the balance sheet. Therein may lie some important lessons.

3 ratios to consider

In a nutshell, a balance sheet summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. Its objective: To provide an accurate snapshot of the financial standing of the business.

Yet a balance sheet can do so much more. There are a number of ratios you can draw from this report, which can help you lay out strategic plans for next year. Here are three to consider:

1. The ratio of current assets to current liabilities. If this ratio falls below 1, the company may struggle to pay bills coming due. Some business experts believe a current ratio of less than 2:1 is problematic. But the ideal ratio varies from industry to industry.

2. Growth in accounts receivable compared to growth in sales. If receivables are growing faster than increases in sales, your company might be building up bad debts or you could be selling to large customers under disadvantageous terms. You may even be the victim of fraud. (Note: Sales are expressed on your income statement, so you’ll need to look at that statement, as well.)

3. Growth in inventory vs. growth in sales. When inventory levels increase at a faster rate than sales, a business is producing products faster than they’re being sold. Or, in the retail industry, a company may be overbuying — an inefficient use of working capital. There can be many mitigating circumstances, however, so it’s critical to determine exactly what’s going on.

Thrilling tales

These are just a few things you can learn from your balance sheet. And we haven’t even gotten into the thrilling tales lying within your income statement and statement of cash flow — the other two parts of your financial statements. Please contact our firm for help making the most of this important information.

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Why making annual exclusion gifts before year end can still be a good idea

A tried-and-true estate planning strategy is to make tax-free gifts to loved ones during life, because it reduces potential estate tax at death. There are many ways to make tax-free gifts, but one of the simplest is to take advantage of the annual gift tax exclusion with direct gifts. Even in a potentially changing estate tax environment, making annual exclusion gifts before year end can still be a good idea.

What is the annual exclusion?

The 2016 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free without using up any of your $5.45 million lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $28,000 per recipient. The gifts are also generally excluded from the generation-skipping transfer tax, which typically applies to transfers to grandchildren and others more than one generation below you.

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can also avoid gift and estate taxes.

Making gifts in 2016

The exclusion is scheduled to remain at $14,000 ($28,000 for split gifts) in 2017. But that’s not a reason to skip making annual exclusion gifts this year. You need to use your 2016 exclusion by Dec. 31 or you’ll lose it.

The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your daughter this year, you can’t add $14,000 to your 2017 exclusion to make a $28,000 tax-free gift to her next year.

While the President-elect and Republicans in Congress have indicated that they want to repeal the estate tax, it’s uncertain exactly what tax law changes will be passed, since the Republicans don’t have a filibuster-proof majority in the Senate. Plus, in some states there’s a state-level estate tax. So if you have a large estate, making 2016 annual exclusion gifts is generally still well worth considering.

We can help you determine how to make the most of your 2016 gift tax annual exclusion.

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Help prevent the year-end vacation-time scramble with a PTO contribution arrangement

Many businesses find themselves short-staffed from Thanksgiving through December 31 as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace a ghost town as workers scramble to use, rather than lose, their time off. A paid time off (PTO) contribution arrangement may be the solution.

How it works

A PTO contribution program allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

Getting started

To offer a PTO contribution arrangement, simply amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.

To learn more about PTO contribution arrangements, including their tax implications, please contact us.

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Keeping your family business in the family

A successful family business can provide long-term financial security for you as its owner, as well as for your loved ones. To improve the chances that your company will continue to benefit your heirs after you’re gone, take steps now to keep it in the family.

Staying in-house

Careful estate planning can ensure that a business continues to benefit family members and that ownership of the business isn’t diluted — at least until the business is ready to accept outside investors.

For example, a well-designed buy-sell agreement can prevent owners from transferring their shares outside the family, while providing the liquidity they need to exit the business. And prenuptial agreements can prevent married owners from losing a portion of their shares in a divorce.

Trusts or other mechanisms can also restrict the ability of your heirs to transfer shares. If shares are held in trust, however, it’s important to include mechanisms for providing beneficiaries with a say in the business’s affairs — particularly if they work in the business.

For instance, the trust agreement might give some or all of the beneficiaries control over how voting and other ownership rights associated with the underlying shares are exercised. Or, if the beneficiaries are minors or otherwise not ready to assume this responsibility, these rights might be exercised by a trustee, advisory board or other fiduciary (with or without input from the beneficiaries).

Considering many strategies

These are just a few broad concepts to think about when considering how your business fits into your estate plan. The important thing to bear in mind is there are many strategies to consider, some of which could become more or less appealing as time goes on and you close in on retirement. Please contact our firm to discuss your best options now — and in the future.

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Workers age 50 and up: Boost retirement savings before year end with catch-up contributions

Whether you didn’t save as much for retirement as you would have wished earlier in your career or you’d simply like to make the most of tax-advantaged savings opportunities, if you’ll be age 50 or older on December 31, consider making “catch-up” contributions to your employer-sponsored retirement plan by that date. These are additional contributions beyond the regular annual limits that can be made to certain retirement accounts.

401(k)s and SIMPLEs

Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

Self-employed plans

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution.

Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2016 tax liability. And keep in mind that catch-up contributions are available for IRAs, too, but the deadline for 2016 contributions is later: April 18, 2017. If you have questions about catch-up contributions or other retirement saving strategies, please contact us.

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Can you pay bonuses in 2017 but deduct them this year?

You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.

For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.

The all-events test

For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:

1. All events have occurred that establish the taxpayer’s liability,
2. The amount of the liability can be determined with reasonable accuracy, and
3. Economic performance has occurred.

Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.

How a bonus pool works

In a 2011 ruling, the IRS said that employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer. Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year, even though amounts allocated to specific employees aren’t determined until the payment date.

Additional rules and limits apply to this strategy. To learn whether your current bonus plan allows you to take 2016 deductions for bonuses paid in early 2017, contact us. If you don’t qualify this year, we can also help you design a bonus plan for 2017 that will allow you to accelerate deductions next year.

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Roth 401(k) conversions may suit your Millennial employees

Could your company’s benefits package use a bit of an upgrade? If so, one idea to consider is adding an option for employees to convert their regular 401(k)s to Roth 401(k)s.

Under a Roth 401(k), participants make after-tax contributions to a qualified plan and receive tax-free distributions, provided the funds are in the plan for at least five years from the date of the initial Roth contribution. Thus, while participants pay a tax on the income that was the source of the contribution, the earnings on the contributions are tax-free.

Penalties to consider

The ability to convert existing pretax balances within a 401(k) to Roth status was expanded by the American Taxpayer Relief Act of 2012. It’s generally easier for participants to start making after-tax contributions to Roth accounts within their 401(k) plans than it is to convert a significant existing pretax amount to the plan’s Roth component.

Why? Because, as with an IRA conversion, a Roth 401(k) conversion triggers tax liability that participants must pay on the conversion. If they need to raise the cash from retirement funds and they’re younger than age 59½, they get to keep only 90% of the amount after the 10% premature withdrawal penalty, less whatever amount regular income taxes take.

Millennial matters

The initial financial hit of a Roth 401(k) conversion might appear to be a deal-breaker. Yet more and more plan sponsors are offering the option. One possible explanation for this is the rising number of working Millennials (roughly defined as those born between the 1980s and 2000s).

Converting to a Roth 401(k) makes sense for these younger participants because they have a longer period to build tax-free earnings on their contributions — despite the initial penalty. They’re also less likely to face the prospect of a big tax hit by converting an existing pretax 401(k) plan balance to a Roth account, because their existing balances are generally lower.

An intriguing option

Giving employees the opportunity to participate in a Roth 401(k) plan may help them hedge their bets about the income tax environment they’ll face in retirement. And, as Millennials continue to hit the job market, you might draw better candidates when hiring. Please contact our firm for more information.

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