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Will Your Favorite Charity Accept Your Donation?

Posted by Admin Posted on Apr 04 2017

 

If your estate plan includes charitable donations, be sure to discuss any planned gifts with the intended recipients before you finalize your plan. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other illiquid assets.

Why a Charity May Reject Your Gift

Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other noncash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.

If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries aren’t other charities, rejection of the gift may create estate tax liability.

Reconsider Donating Real Estate

Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — can generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.

Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.

Call First — Then Revise Your Plan

If you’d like to make charitable gifts through your estate plan, contact the organization to ensure it would be willing to accept your donation. If the answer is yes, we can help make the proper revisions to your plan.

2017 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

Posted by Admin Posted on Apr 03 2017

 

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

Offer Plan Loans? Be Sure to Set a Reasonable Interest Rate

Posted by Admin Posted on Mar 30 2017

 

Like many businesses, yours may allow retirement plan participants to take out loans from their accounts. Such loans are governed by many IRS and Department of Labor (DOL) rules and regulations. So if your company offers plan loans, your plan document must comply with current laws — including setting a “reasonable” interest rate.

Agency Perspectives

Neither the IRS nor DOL provides a set percentage for plan sponsors to use. Yet both require the rate to be “reasonable.” The IRS asks if the interest rate is similar to local interest rates and to what local banks charge individuals for similar loans with similar credit and collateral. Meanwhile, DOL regulations say that an interest rate is reasonable if it’s equal to commercial lending interest rates under similar circumstances.

The DOL provides several examples of how to determine the interest rate. For example, suppose the plan loan interest rate is set at 8%, but local banks offer between 10% and 12% for similar circumstances. In this example, the loan will fail to meet the reasonable standard.

Keep in mind that the plan participant pays the interest to his or her own retirement plan account. That’s one reason why charging an interest rate that’s lower than what local banks are charging isn’t considered reasonable. The purpose of charging interest on retirement plan loans is to help prevent long-term harm to the participant’s retirement nest egg.

Ill Consequences

If your plan fails to assess a reasonable interest rate, participant loans may result in a prohibited transaction. What does this mean? Prohibited transactions are certain transactions between a retirement plan and a disqualified person. Disqualified persons taking part in a prohibited transaction must pay a tax.

A prohibited transaction includes the lending of money or other extension of credit between a plan and a disqualified person. However, the laws specifically exempt plan loans from the prohibited transaction list as long as they comply with applicable rules. If your interest rate isn’t reasonable, the plan loan may lose its exempt status and become subject to the prohibited transaction tax.

Ongoing Task

Ensuring you’re offering a reasonable plan loan interest rate is an ongoing task. Review your plan document and loan policy statement to determine whether the plan sets an interest rate. You may need to update the document to comply with the more recent regulations and interest rates. We can help you with this review, as well as in calculating a reasonable rate.

Who Can — and Who Should — Take the American Opportunity Credit?

tax
Posted by Admin Posted on Mar 29 2017

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The Limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the Numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

Getting Your Money’s Worth out of a Company Retreat

Posted by Admin Posted on Mar 21 2017

Company retreats can cost enormous amounts of time and money. Are they worth it? Sometimes. Large-scale get-togethers can involve considerable out-of-pocket costs. And if the retreat is poorly planned or executed, participants’ wasted time is the biggest expense.

But a properly budgeted, planned and executed retreat can be hugely profitable, producing fresh ideas, renewed enthusiasm and heightened employee morale. Here are a few ways to get your money’s worth out of a company retreat.

Create specific objectives

First, nail down your goals and objectives. Several months ahead of time, determine and prioritize a list of the important issues you want to address. But include only the top two or three on the final agenda. Otherwise, you risk rushing through some items without adequate time for discussion and formalized action plans.

If one of the objectives is to include time for socializing, recreation or relaxation, great. Mixing fun with work keeps people energized. But if staff see the retreat as merely time away from the office to party and golf, don’t expect to complete many work-related agenda items. One successful way to mix work and pleasure is to schedule work sessions for the morning and more fun, team-building exercises later in the day.

Set limits, allow flexibility

Next, work on the budget. Determining available resources early in the planning process will help you set limits for such variable costs as location, accommodations, food, transportation, speakers and entertainment.

Instead of insisting on certain days for the retreat, select a range of possible dates. This openness helps with site selection and makes it easier to negotiate favorable hotel and travel rates. Keep your budget as flexible as possible, building in a 5% to 10% safety cushion. Always expect unforeseen, last-minute expenses.

Have fun

Company retreats are serious business in the sense that you’re sacrificing time and productivity to identify strategic goals and improve teamwork. But these events should still be fun experiences for you and your staff. We can help you establish a reasonable budget to help ensure an enjoyable, productive and cost-effective retreat.

Make Sure the IRS Won’t Consider Your Business to Be a “Hobby”

Posted by Admin Posted on Mar 21 2017

If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby.

The hobby loss rules

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

If you haven’t earned a profit from your business in three out of five consecutive years, including the current year, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. But if this profit test can be met, the burden falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:

  • Do you carry on the activity in a business-like manner?
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Dangers of reclassification

If your enterprise is reclassified as a hobby, you can’t use a loss from the activity to offset other income. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.

Divorce Necessitates An Estate Plan Review

Posted by Admin Posted on Mar 21 2017

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family to contend with, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or controlling your wealth, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the many states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final — even if you’re legally separated — your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, typically, the laws in these states treat your estate plan as if your former spouse had predeceased you. If you’ve named contingent or residual beneficiaries, any property your spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be dangerous.

Finally, keep in mind that, in many states, as long as you’re legally married, your spouse will retain elective share or community property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, contact us. We can help review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

The Section 1031 Exchange: Why It’s Such a Great Tax Planning Tool

Posted by Admin Posted on Mar 16 2017

Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely.

How it works

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Executing the deal

Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.

Listen and Trust: The Power of Collaborative Management

Posted by Admin Posted on Mar 14 2017

Many business owners are accustomed to running the whole show. But as your company grows, you’ll likely be better off sharing responsibility for major decisions. Whether you’ve recruited experienced managers or developed “home grown” talent, you can empower these employees by taking a more collaborative approach to management.

Not employees — team members

Successful collaboration starts with a new mindset. Stop thinking of your managers as employees and instead regard them as team members working toward the same common goals. To promote collaboration and make the best use of your human resources, clearly communicate your strategic objectives. For example, if you’ve prioritized expanding into new territories, make sure your managers aren’t still focusing on extracting new business from current sales areas.

You also must be willing to listen to your managers’ ideas — and to act on the viable ones. Relinquishing control can be hard for business owners, but keep the advantages in mind. A collaborative approach distributes the decision-making burden, so it doesn’t fall on just your shoulders. This may relieve stress and allow you to focus on areas of the company you may have neglected.

Confidence and development

Even as you move to a more collaborative management model and include employees in strategic decisions, don’t forget to recognize their individual skills and talents. You and other managers may have uncertainties about a new marketing plan, for instance, but you should trust your marketing director to carry it out with minimal oversight.

To ensure that managers know they have your confidence, conduct regular performance reviews where you note their contributions and accomplishments and explore opportunities for growth. Moreover, help them grow professionally by providing constructive, ongoing training to develop their leadership and teamwork skills.

An open mind

As you learn to trust your management team with greater responsibility, keep in mind that the process can be bumpy. In a crisis, your instinct may be to take charge and brush off your managers’ advice. But it’s critical to keep your mind open and be receptive to input from people who may one day run your company. Let our firm assist you in assessing the profitability impact of your management team

Make Health Care Decisions While You’re Healthy

Posted by Admin Posted on Mar 07 2017

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it will be too late.

Without a plan that expresses your wishes, your family may have to make medical decisions on your behalf or petition a court for a conservatorship. Either way, there’s no guarantee that these decisions will be made the way you would want, or by the person you would choose.

2 documents, 2 purposes

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” or “health care directives.” And HCPAs may also be known as “durable powers of attorney for health care” or “health care proxies.”

Regardless of terminology, these documents serve two purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

Put your plan into action

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Contact us with questions.

Don’t Make Hunches — Crunch the Numbers

Posted by Admin Posted on Mar 03 2017

 

Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time.

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process.

When It Comes to Charitable Deductions, All Donations Aren’t Created Equal

tax
Posted by Admin Posted on Mar 01 2017

As you file your 2016 income tax return and plan your charitable giving for 2017, it’s important to keep in mind the available deduction. It can vary significantly depending on a variety of factors.

What you give

Other than the actual amount you donate, one of the biggest factors that can affect your deduction iswhat you give:

Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.

Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.

Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

Tangible personal property. Your deduction depends on the situation:

  • If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis.
  • If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), you can deduct the fair market value.

Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.

Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other factors

Your annual charitable donation deductions may be reduced if they exceed certain income-based limits. And if you receive some benefit from the charity, your deduction generally must be reduced by the benefit’s value.

In addition, various substantiation requirements apply. And the charity must be eligible to receive tax-deductible contributions. Finally, keep in mind that tax law changes could be passed later this year that might affect your 2017 charitable deductions.

If you have questions about how much you can deduct on your 2016 return, let us know. We also can keep you apprised of the latest information on any tax law changes.

Tangible property safe harbors help maximize deductions

Posted by Admin Posted on Feb 27 2017

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

2 safe harbors

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

Use an ILIT as a Wealth Preserver

Posted by Admin Posted on Feb 24 2017

If you’re concerned about your family’s financial well-being after you’re gone, life insurance can provide peace of mind. Going a step further and setting up an irrevocable life insurance trust (ILIT) to hold the policy offers additional estate planning benefits.

Asset protection

If you’re concerned about your heirs’ money management skills, an ILIT may be the answer. Why? Your loved ones won’t receive the proceeds directly, as they would if they were the policy beneficiaries. Rather, they’re the beneficiaries of the trust, and the trust controls when they receive proceeds.

You can also establish conditions for distributing funds from an ILIT. For example, you might instruct the trustee to withhold funds from a beneficiary who drops out of school or develops a substance abuse problem.

A properly drafted ILIT can also protect trust assets against your and your beneficiaries’ creditors, particularly if it’s established in a state with favorable asset protection laws.

Estate tax savings

Placing your life insurance policy in an ILIT removes it and its proceeds from your taxable estate. Contributing an existing life insurance policy to an ILIT constitutes a taxable gift to the trust beneficiaries of the policy’s fair market value (which generally approximates its cash value). With the combined gift and estate tax exemption currently at $5.49 million, now may be a good time to make such a gift.

Future ILIT contributions to cover premium payments will be taxable gifts. You may, however, be able to apply your annual gift tax exclusion to reduce or eliminate the tax — provided the ILIT is structured appropriately and certain other requirements are met.

Bear in mind that a repeal of the federal estate tax has been proposed by President Trump and the Republican-led Congress. A repeal or other estate tax law changes could have a significant impact on an ILIT’s estate tax benefits.

Drawbacks

An ILIT does have some significant limitations you need to be aware of. After you transfer a policy to the trust, you can no longer:

  • Change or add beneficiaries,
  • Assign, surrender or cancel the policy, or
  • Borrow against or withdraw from the policy’s cash value.

In addition, you’re not allowed to alter the ILIT’s terms or act as trustee.

Nevertheless, you can design the trust to adapt to changing circumstances and provide that children or grandchildren born after you establish the trust be automatically added as beneficiaries.

Contact us for additional details if you’re considering using an ILIT.

What Can a Valuation Expert Do for Your Succession Plan?

Posted by Admin Posted on Feb 23 2017

Most business owners spend a lifetime building their business. And when it comes to succession, they face the difficult decision of whether to sell, dissolve or transfer the business to family members (or a nonfamily successor).

Many complicated issues are involved, including how to divvy up business interests, allocate value and tackle complex tax issues. Thus, as you put together your succession plan, include not only your financial and legal advisors, but also a qualified valuation professional.

Various value factors

When drafting a succession plan, a valuation expert can help you put a number on various factors that will affect your company’s value. Just a few examples include:

Projected cash flows. According to both the market and income valuation approaches, future earnings determine value. To the extent that a business experiences decreasing, or increasing, demand and rising (or falling) prices, expected cash flows will be affected. Historical financial statements may require adjustments to reflect changes in future expectations.

Perceived risk. Greater risk results in higher discount rates (under the income approach) and lower pricing multiples (under the market approach), which translates into lower values (and vice versa). When selecting comparables, the transaction date is an important selection criterion a valuator considers.

Expected growth. Greater expected revenue growth contributes to value. In addition, there’s a high correlation between revenue growth and earnings (and thus, cash flow) growth.

Other determinants of discounts

In many cases, valuation discounts are applied to a company’s value. For example, decreased liquidity translates into higher marketability discounts, while increased liquidity reduces marketability discounts. Other factors that affect the magnitude of valuation discounts include:

  • Type of assets held,
  • Financial performance of the underlying assets,
  • Portfolio diversification,
  • Leverage,
  • Owner rights and restrictions,
  • Distribution history, and
  • Personal characteristics of the general partners or managing members.

Discounts vary significantly, but can reach (or exceed) 40% of the entity’s net asset value, depending on the specifics of the situation.

For best results

An accurate and timely value estimate can facilitate the succession process and prevent costly and time-consuming conflicts. Please contact our firm for more information.

Deduct All of the Mileage You’re Entitled to — But Not More

tax
Posted by Admin Posted on Feb 22 2017

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

Can the WOTC Save Tax for Your Business?

Posted by Admin Posted on Feb 21 2017

Employers that hire individuals who are members of a “target group” may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2016 and obtained proper certification, you can claim the WOTC on your 2016 tax return. Whether or not you’re eligible for 2016, keep the WOTC in mind in your 2017 hiring, because the credit is also available for 2017.

In fact, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended the WOTC through 2019. The PATH Act also expanded the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

What are the “target groups’?

Besides the long-term unemployed, target groups include:

  • Designated community residents who live in Empowerment Zones or rural renewal counties,
  • Long-term family assistance recipients,
  • Qualified ex-felons,
  • Qualified recipients of Temporary Assistance for Needy Families (TANF),
  • Qualified veterans,
  • Summer youth employees,
  • Supplemental Nutrition Assistance Program (SNAP) recipients,
  • Supplemental Security Income benefits recipients, and
  • Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

How much is the credit worth?

Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

  • Target group of the individual hired,
  • Wages paid to that individual, and
  • Number of hours that individual worked during the first year of employment.

The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if there are 10 individuals that qualify, the credit can be 10 times the amount listed.

Certification requirement

Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

But if you hired long-term unemployment recipients between January 1, 2016, and May 31, 2016, the IRS extended the deadline to June 29, 2016, as long as the individuals started work for you on or after January 1, 2016, and before June 1, 2016.

The WOTC can lower your company’s tax liability when you hire qualified new employees. We can help you determine whether an employee qualifies, calculate the applicable credit and answer other questions you might have.

Are You Leaving Your IRA to Someone Other Than Your Spouse?

Posted by Admin Posted on Feb 16 2017

An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.

“Inherited IRA” stretches tax benefits

Surviving spouses who inherit IRAs are permitted to roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they’re withdrawn in retirement or after age 70½. Beneficiaries other than your spouse, such as your children, are treated differently.

To take full advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.

Your children or other nonspouse beneficiaries won’t have this option, however, unless you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your remaining actuarial life expectancy).

If you name multiple nonspousal beneficiaries (several children, for example), they’ll have to establish separate inherited IRA accounts by the end of the year after the year of your death in order to take distributions over their own life expectancies. If they miss the deadline, they’ll have to use the oldest beneficiary’s life expectancy.

Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.

Inherited IRA rules

The following special rules apply to an inherited IRA:

  • The IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
  • The IRA must be specially titled in the deceased account owner’s name.
  • No other contributions may be made to the IRA.
  • No other amounts may generally be rolled into or out of the IRA.
  • Required minimum distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

 

Please contact us if you have questions about how to address your IRA in your estate plan.

Posted by Admin Posted on Sept 09 2016

How to Free Up Cash by Reducing Receivables

Posted by Admin Posted on Aug 02 2016

The most effective way to manage receivables is to put into place a system that allows management the ability to:

  1. Provide credit to eligible customers only
  2. Keep track of receivables in a timely manner
  3. Trigger follow-up calls/emails/letters for reminders/past due/legal action and
  4. Trigger when management intervention or legal recourse becomes the next action.  

This allows for the majority of receivables to be managed in an orderly and efficient manner, while allowing problem accounts to surface immediately.  If the system does not adequately address each step then receivables may become a major issue for the business.

Convenient purchasing

Providing credit is a cash flow draining strategy for any business and should be viewed as a privilege provided to customers.  A business may be able to expand revenue very quickly by extending lines of credit to customers that would have otherwise not been able to pay for items. Providing credit then becomes a risk-based decision and businesses should be aware that the risk may be passed on to external agencies such as credit card companies and financing institutions. 

A business should make the payment experience as painless as possible for both the buyer and the business itself.  If available, apply for credit card, debit card purchase, EFTPOS or PayPal as payment options.

Extending credit is therefore a decision that the business provides as a special case.  To formalize this, assume that all customers that request credit terms first fill out a credit application form.

Creating a credit judgement criteria checklist

Once the business accepts the credit application form, a system will need to be put in place that allows for an evaluation of the potential customer’s ability to pay on credit terms.  The business should therefore create a credit judgment criteria list.

Credit references

One of the crucial points of the credit application form is the inclusion of credit references.  It’s important to follow up each with a phone call to the referee.  A lot of credit checking systems fail due to human error when credit referees are not followed up.  Make sure this is part of the system and is adhered to by completing the credit judgment criteria checklist.

 

Advertising credit terms

If a business is putting itself in a position to shoulder the cost of providing credit then it should think carefully about using credit terms as a advertising or marketing tool.  Doing so may have the unfortunate effect of draining cash reserves and the business should only do so if it is acutely aware of the net cash flow loss that providing credit terms will entail.

Certain industries may have their own peculiar ways of using credit terms as marketing tools. Here are some examples:

Retail Businesses

A retail business should outline its different forms of payment at the point of sale, on the website, and in brochures (where applicable).  Small retail shops with larger competitors may have to contend with “store credit cards” and “gift vouchers”.  To counter, make sure that all major credit cards are accepted and ensure that gift voucher checks are sold in the store as well.  A small business may not be able to match store credit to retail customers and will probably not have the infrastructure required to do so.  That said, a smaller business will be able to differentiate in other ways.

Professional and Service Industries

One of the major hurdles of professional and service firms is the charge per hour framework that so many businesses find themselves in.  Turn this around by providing fixed price agreements and pricing up front as a marketing tool.  This alleviates the seamlessly endless struggle of getting customers to agree to pay for hourly work and minimizes the need to write-down invoices.   

Manufacturing Firms

Credit terms are probably used most as a marketing tool in the manufacturing arena.  This is where credit application forms have the most use and where businesses should take the most care in screening potential clients.  Because capital requirements may be large with working capital tied up primarily in raw materials, receivables days becomes a crucial financial KPI to watch as well.  If credit terms becomes the only way a manufacturing firm is able to differentiate itself from the competition, then the business is putting itself at great risk.  Work with the business to establish another point of differentiation such as delivery time, product customization options, quality assurance.  A business that does not differentiate in any of these arenas is purely a commodity and will be forced to fight on price and credit terms alone.  A double hit as the first depletes net profit while the other depletes cashflow and working capital.

 

What's Your Purpose?

Posted by Admin Posted on July 01 2016

If you don’t know, your customers surely don’t. More importantly, if you don’t know, you won’t be able to tell your customers why they should choose you over your competitors. Answering this simple question is critical to forming a purpose statement and creating your marketing strategy.

What was your purpose in starting your business?

Undoubtedly when you decided to start your business you had an inspiration. Was it to provide a service or product better, faster or cheaper than what was currently available? Was it to fill a gap in the marketplace? Perhaps you were inspired to run a business that people enjoyed working for or that maintained environmentally and socially responsible ethical standards or that surpassed existing companies in providing superior customer service. Whatever your mission, find it and then write it down.

The Power of Why

Experience shows that companies with a clear and ever-present purpose statement surpass their competition and last in the marketplace. Purpose (or Why) statements define and preserve and strengthen a company’s unique competitive advantages. Additionally, companies who are clear about who they are and what they do are less likely to make irrational decisions in response to competition and fluctuations in the marketplace. However, that does not mean your purpose statement should be inflexible. A good purpose statement can lead a company for 10 to 20 years if time and effort were spent in creating it. However, re-evaluating your why from time to time to see if it is still relevant, significant and appropriate is advised.

Be Specific

 

You want to create a statement that you and your team can look to every day and ask “Am I fulfilling the company’s mission?” For example, one statement could be “to be the leading game software developer for teens”. A more actionable purpose statement would be “Surpass XYZ games developer in sales, customer experience and speed to market”. The second purpose statement has clear goals and direction, while the more abstract version would be more appropriate for a vision statement than a purpose statement. The second statement clearly supports the vision statement.

Include a Call to Action

 

You can distinguish your purpose statement by including a call to action. This is missing in most company purpose statements and has several defining and distinguishing characteristics:

  • It motivates and generates an emotional reaction from your team
  • It is easy to understand and translates into what your employees do every day
  • It states a goal that can be measured and identified easily
  • It reflects and is rooted in the competitive environment in which your company functions

Think back to this statement: “Surpass XYZ games developer in sales, customer experience and speed to market”, if you run this statement through the above four qualifications, you will get a yes every time.

Creating a Purpose Statement that Fits Your Business

 

When creating your purpose statement, consider these aspects of your business:

  • What is your company’s history and tradition? How does it influence what you want to accomplish today and in the long term?
  • How do you characterize the management philosophy of the company? What input does management have in the direction of the company?
  • What distinguishes your company from all of the other companies that perform the same service or function? How do you already surpass the competition? What can you do to continue surpassing them?
  • What goals are realistic when considering the available resources?
  • Where do you need to improve in order to beat the competition? What are your competitors doing that you can imitate and improve upon?
  • And perhaps most importantly – what impact do you have on your customers’ lives?

 

Create A Remarkable Experience!

Posted by Admin Posted on July 01 2016

7 out of 10 people change vendors or suppliers because they feel unloved. What can you do to create a remarkable experience for your customers? Click the following link and enjoy a short video! Create a Remarkable Experience!

 

Set Goals and Hold Yourself Accountable!

Posted by Admin Posted on June 10 2016

Not enough people set goals for their business and personal lives and then align those goals to ensure their business fuels what they would love to achieve. Get tips tips and tricks on how to do that  in this short video. 

Set Goals and Hold Yourself Accountable!

Posted by Admin Posted on June 10 2016

What a Business Plan Can Do for You and How to Use It!

Posted by Admin Posted on June 10 2016

Running a business without a business plan is like rock climbing blindfolded. Your chances of making it successfully to the top are slim. And the process will surely be a death-defying one.

Contrary to popular practice, a business plan is not a means to securing financing. Instead it is a step-by-step guide to running your business and creating the product or service that will make it in the marketplace. And like any other map, your plan will have to be adjusted according to your vision for the company, conditions and opportunities in the marketplace and your business’ current condition.

Whether it’s formal or informal, every business has a plan. The local hair salon may not have formally written down the plan, but before setting up shop, a smart owner would have assessed the need for a shop in that area of town, the ability to attract clients there, the appropriate amount of chairs, whether to hire someone to do the shampooing and sweeping, the cost of utilities, the parking availability for clients. The owner who waits to figure these things out using trial and mostly error will be lucky to be left with his/her wits, much less any customers. A business plan helps to minimizes those pitfalls.

 

To many people, the concept of writing a business plan for their own business is a daunting one. Perhaps it would appear less daunting to view the process as simply writing the answer to three questions, namely:

  1. Where are you now?
  2. Where do you want to be at a future date?
  3. How will you get there?

THE FIRST QUESTION – ‘Where are you now?

 – must be your starting point. This question seeks to provide a planning base. It looks at your business to establish such things as: „

  • your business idea „
  • your current level of sales „
  • your customer groups „
  • your products and services „
  • your pricing policy „
  • your distribution policy „
  • your promotional activity „
  • your overall operation „
  • your team members „
  • your finances

Answering the question, “Where are you now?” is often a major stumbling block because most people don’t know where to start. However, the answer is surprisingly simple if you divide your business planning into four key areas: Operational, Marketing, Employees and Finance. Such a division allows you to analyze your business (or assumed business) to create a solid planning base.

THE SECOND QUESTION – “Where do you want to be at a future date?”

- is simply asking you to visualize your business operation at a set date in the future. This visualization process is almost identical to the exercise of setting personal objectives. The difference, however, is that the focus here is on business objectives.

THE THIRD QUESTION – “How will you get there?”

- asks about the steps you need to take in order to achieve the business objectives you have set. These steps, or strategies, can be identified, written down and programmed. Additional things a business plan should consider:

  1. What is a reasonable expectation of profitability and when?
  2. How will the business pay you and any team members?
  3. What are estimated expenses?
  4. What is the pricing strategy?
  5. What is the need for what you are offering and what profit margins can you expect?

While much of this may have occurred to you informally, it is very import to write it down. If you ever need to approach a bank or investors, you will need it. Writing it down will reinforce your vision, give you a reference point for checking your business’ progress and will most likely bring up factors you did not consider when creating the plan in your head.

 

Writing your business plan down:

  1. Helps you determine and coordinate all aspects of business operations
  2. Gives you a means to analyze and determine what might be the best change to boost your business out of a stagnant situation
  3. Assists you in determining the risks and benefits associated with any changes
  4. Decreases your chances of making a mistake or not considering important factors in your business, and most importantly,
  5. Dramatically increases your chances of success.

Business plans are not only for those just setting out their journey in the marketplace. They are useful when acquiring a new business, forecasting growth, introducing a new product or service, entering a new market, responding to changes in the market or changing a significant aspect of your business.

How to Create a Promotions Strategy That Works

Posted by Admin Posted on June 10 2016

You may have the greatest product ever but if you don’t tell the world, it will sit on the shelves collecting dust until you finally have to close your business. Remember, you know what is great about your business because you created it. The rest of the world is not thinking about you and what you have to offer. So you have to tell them and you have to tell them in a way that makes them want what you have to offer. 

Many small businesses shy away from promotions thinking they can’t compete with the advertising, public relations and promotions budgets of their large competitors. But good promotions do not have to be expensive. And if you stay focused and create a clear plan, they don’t have to be time-consuming either.

First develop a plan. This should be included in your business plan. Here are the steps to developing a strong promotional plan:

Identify your target buyer

Consider what kind of customer you want to do business with and to whom your product or service is most likely to appeal. Take into account demographic (i.e. age, gender, location, marital status), lifestyle (i.e. athletes, club goers, outdoor enthusiasts) and psychographics (i.e. personality traits and emotions that affect buying decisions) information.

Make Them Want What You Have to Offer

Distinguish your product or service from all the rest. This has to be meaningful and accurate, otherwise you will lose credibility with your consumers. First you will need to know what features, benefits and brand attributes your target buyers consider when making a purchase. For example, if you are a local nursery, your target buyers might take into account return policies on plants that don’t survive, quality of plants in store and availability of informed people who can assist them with plant choices and directions for caring for the plants.

Create a strategy and make it clear

 

Write down who your target buyers are, what your competitive environment is and what your meaningful differences are. This is called your positioning strategy statement. You must develop a consistent message and look and feel in all of your promotional campaigns.

Think about the personality of your business in relationship to your target buyers. Is it a young, hip, friendly, casual environment? Or is it a more reserved, traditional and slightly more conservative environment? These characteristics will inform the look, feel and tone of your business, as well as promotions.

Create a clear, concise and memorable message that impacts your target buyers

This can be a challenge but doesn’t have to be. Think about your business value proposition (BVP). If you have clearly identified the unique features and benefits of your product/service that truly matter to your target buyers, you will be well on your way. Take this information and brainstorm potential slogans, keywords in all marketing messages and visual images that correspond to your BVP.

Consider your budget

 

When promoting your products, services and business there may never seem to be enough money. However, not all promotion costs money. Creating a mix between word-of-mouth, customer referral programs, public relations and advertising will save you a lot of money. Imagination and relationship building are the keys.   

 

Welcome to Our Blog!

Posted by Admin Posted on Aug 14 2012
This is the home of our new blog. Check back often for updates!