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Financial Guidance to Help Your Business Succeed

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Cost segregation studies can benefit business owners

Any business owner who’s acquired, constructed or substantially improved a building this year — or even in previous years — should read up on the tax benefits of a cost segregation study. Undertaking one may allow you to accelerate depreciation deductions, which reduce current taxes and boost cash flow.

Real vs. tangible

IRS rules generally allow you to depreciate commercial buildings over 39 years. Most times, you’ll depreciate a building’s structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building, and therefore over its same recovery period. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for accelerated depreciation, usually over five or seven years. And land improvements (fences, outdoor lighting and parking lots, for example) are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property.

Enhanced breaks

The Tax Cuts and Jobs Act enhanced certain depreciation-related tax breaks, which has in turn renewed interest in cost segregation studies. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

Furthermore, it increased first-year bonus depreciation from 50% to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.

Consider it

Under the right circumstances, a cost segregation study can yield substantial tax benefits. But every business may not need to undertake the time, energy and expense to conduct one. To find out whether a study would be worthwhile for your company, contact us.

Tax calendar

Posted by admin On October 7th

Tax calendar

 

October 15 — Personal federal income tax returns for 2018 that received an automatic six-month extension must be filed today and any tax, interest and penalties due must be paid.

 

 

  • The Financial Crimes Enforcement Network (FinCEN) Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR), must be filed by today, if not filed already, for offshore bank account reporting. (This report received an automatic extension to today if not filed by the original due date of April 15.)
  • If a six-month extension was obtained, calendar-year C corporations should file their 2018 Form 1120 by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in September for Social Security, Medicare, withheld income tax and nonpayroll withholding.

October 31 — The third quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is due today and any undeposited tax must be deposited. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.

  • If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through September exceeds $500.

November 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in October for Social Security, Medicare, withheld income tax and nonpayroll withholding.

December 16 — Calendar-year corporations must deposit the fourth installment of estimated income tax for 2019.

  • If the monthly deposit rule applies, employers must deposit the tax for payments in November for Social Security, Medicare, withheld income tax and nonpayroll withholding.

Installment sales: A viable option for transferring assets

 

 

Are you considering transferring real estate, a family business or other assets you expect to appreciate dramatically in the future? If so, an installment sale may be a viable option. Its benefits include the ability to freeze asset values for estate tax purposes and remove future appreciation from your taxable estate.

 

Giving away vs. selling

From an estate planning perspective, if you have a taxable estate it’s usually more advantageous to give property to your children than to sell it to them. By gifting the asset you’ll be depleting your estate and thereby reducing potential estate tax liability, whereas in a sale the proceeds generally will be included in your taxable estate.

But an installment sale may be desirable if you’ve already used up your $11.18 million (for 2018) lifetime gift tax exemption or if your cash flow needs preclude you from giving the property away outright. When you sell property at fair market value to your children or other loved ones rather than gifting it, you avoid gift taxes on the transfer and freeze the property’s value for estate tax purposes as of the sale date. All future appreciation benefits the buyer and won’t be included in your taxable estate.

Because the transaction is structured as a sale rather than a gift, your buyer must have the financial resources to buy the property. But by using an installment note, the buyer can make the payments over time. Ideally, the purchased property will generate enough income to fund these payments.

Advantages and disadvantages

An advantage of an installment sale is that it gives you the flexibility to design a payment schedule that corresponds with the property’s cash flow, as well as with your and your buyer’s financial needs. You can arrange for the payments to increase or decrease over time, or even provide for interest-only payments with an end-of-term balloon payment of the principal.

One disadvantage of an installment sale over strategies that involve gifted property is that you’ll be subject to tax on any capital gains you recognize from the sale. Fortunately, you can spread this tax liability over the term of the installment note. As of this writing, the long-term capital gains rates are 0%, 15% or 20%, depending on the amount of your net long-term capital gains plus your ordinary income.

Also, you’ll have to charge interest on the note and pay ordinary income tax on the interest payments. IRS guidelines provide for a minimum rate of interest that must be paid on the note. On the bright side, any capital gains and ordinary income tax you pay further reduces the size of your taxable estate.

Simple technique, big benefits

An installment sale is an approach worth exploring for business owners, real estate investors and others who have gathered high-value assets. It can help keep a family-owned business in the family or otherwise play an important role in your estate plan.

Bear in mind, however, that this simple technique isn’t right for everyone. Our firm can review your situation and help you determine whether an installment sale is a wise move for you.

Mortgage matters: To pay down or not to pay down

Posted by admin On October 7th

Mortgage matters: To pay down or not to pay down

If you’re a homeowner and manage your finances well, you might have extra cash after you’ve paid your monthly bills. What should you do with this extra money? Some would say make additional mortgage payments toward your principal to pay off your mortgage early. Others would say: No, invest those dollars in the stock market!

The decision is very much about risk vs. return. There’s little, if any, risk in prepaying a mortgage, because you already know what your rate of return will be: the interest rate on your mortgage. For instance, if your mortgage interest rate is 4.5%, this would be the return earned by every dollar that goes toward prepayment (not factoring in the mortgage interest deduction if you qualify).

However, if you invest the money in the stock market, you’ll assume much more risk. The level of risk depends on the assets you invest in, but there’s no such thing as a risk-free investment.

Your mortgage interest rate is indeed an important factor. If your rate is relatively low, so is the return from prepaying your mortgage. The final decision for many people comes down to whether they believe they can earn a higher return investing the money than they would prepaying their mortgage.

Clearly there’s the potential to outperform your mortgage interest rate by investing your money for the long term. Remember, though, that the stock market may be volatile in the short term and offers no guarantees.

There’s no single answer to the “pay down the mortgage or invest in the market?” question. We can provide additional, more specific guidance on making the right decision for you.

Is “bunching” medical expenses still feasible in 2019?

Some medical expenses may be tax deductible, but only if you itemize deductions and you have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage.

The Tax Cuts and Jobs Act (TCJA) made bunching such expenses beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the medical expense deduction in previous years might no longer benefit because of the TCJA’s increase to the standard deduction.

The changes

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example of a tax break with a floor is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible expenses into one year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5% of adjusted gross income (AGI).

However, beginning January 1, 2019, taxpayers may once again deduct only the amount of the unreimbursed allowable medical care expenses for the year that exceeds 10% of their AGI. Medical expenses that aren’t reimbursed by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

Itemized deductions

If your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2019 won’t save you tax. The TCJA nearly doubled the standard deduction. For 2019, it’s $12,200 for singles and married couples filing separately, $18,350 for heads of households, and $24,400 for married couples filing jointly.

If your total itemized deductions for 2019 will exceed your standard deduction, then bunching nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses, contact lenses, hearing aids, dental work, and some types of elective surgery.

Exploring the concept

As mentioned, bunching doesn’t work for everyone. For help determining whether you could benefit, please contact us.

Step carefully with loans betwixt a business and its owner

 

It’s common for owners of closely held businesses to transfer money into and out of the company. But it’s critical to make such transfers properly. If you don’t, you might hear from the IRS.

Why loans are better

When an owner withdraws funds from the company, the transfer can be characterized as compensation, a distribution or a loan. Loans aren’t taxable, but compensation is and distributions may be taxable.

If the company is a C corporation, distributions can trigger double taxation — in other words, corporate earnings are taxed once at the corporate level and then again when they’re distributed to shareholders (as dividends). Compensation is deductible by the corporation, so it doesn’t result in double taxation. (But it will be subject to payroll taxes.)

If the business is an S corporation or other pass-through entity, there’s no entity-level tax, so double taxation won’t be an issue. Still, loans are advantageous because compensation would be taxable to the owner (and incurs payroll taxes), and distributions, even though maybe not taxable themselves, would reduce an owner’s tax basis, which makes it much harder to deduct business losses.

There are also some advantages to treating advances from owners as loans. If they’re treated as contributions to equity, for example, any reimbursements by the company may be treated as distributions and possibly be taxable in a C corporation situation.

Loan payments, on the other hand, aren’t taxable, apart from the interest, which is deductible by the company. A loan may also give the owner an advantage in the event of the company’s bankruptcy, because debt obligations are paid before equity is returned.

How to define it

Establishing that an advance or a withdrawal is truly a loan is important. If you don’t make that distinction, and the IRS determines that a payment from the business is really a distribution or compensation, you (and, possibly, the company) could end up owing back taxes, penalties and interest.

Whether a transaction is a loan is a matter of intent. It’s a loan if the borrower has an unconditional intent to repay the amount received and the lender has an unconditional intent to obtain repayment.

Unfortunately, even if you intend for a transaction to be a loan, the IRS and the courts aren’t mind readers. So, it’s critical that you document any loans and treat them like other arm’s-length transactions. Among other things, you should execute a promissory note and charge a commercially reasonable rate of interest — generally, no less than the applicable federal rate.

Set and follow a fixed repayment schedule and secure the loan using appropriate collateral. (This will also give the lender bankruptcy priority over unsecured creditors.) And you must treat the transaction as a loan in the company’s books. Last, you must ensure that the lender makes reasonable efforts to collect in case of default. Also, for borrowers who are owner-employees, you need to ensure that they receive reasonable salaries, to avoid a claim by the IRS that loans are disguised compensation.

Looking good

The IRS keeps a wary eye on business owners who borrow from themselves. Our firm can guide you through the process to withstand the scrutiny of the agency’s gaze.

Laying the groundwork for your 2018 tax return

Posted by admin On January 25th

Laying the groundwork for your 2018 tax return

 

The Tax Cuts and Jobs Act (TCJA) made many changes to tax breaks for individuals. Let’s look at some specific areas to review as you lay the groundwork for filing your 2018 return.

 

 

Personal exemptions

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.

Standard deduction

Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

The TCJA nearly doubles the standard deduction for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

Child credit

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 for joint filers, $75,000 for singles and heads of households, and $55,000 for marrieds filing separately. The TCJA also includes, for 2018 through 2025, a $500 tax credit for qualifying dependents other than qualifying children.

Assessing the impact

Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond. For help assessing the impact on your situation, contact us.

How to trim the fat from your inventory

Posted by admin On January 25th

How to trim the fat from your inventory

Inventory is expensive, so it needs to be as lean as possible. Here are some ways to trim the fat from your inventory without compromising revenue and customer service.

 

 

Objective inventory counts

Effective inventory management starts with a physical inventory count. Accuracy is essential to knowing your cost of goods sold — and to identifying and remedying discrepancies between your physical count and perpetual inventory records. A CPA can introduce an element of objectivity to the counting process and help minimize errors.

The next step is to compare your inventory costs to those of other companies in your industry. Trade associations often publish benchmarks for:

  • Gross margin ([revenue – cost of sales] / revenue),
  • Net profit margin (net income / revenue), and
  • Days in inventory (annual revenue / average inventory × 365 days).

Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply purchased from the manufacturer. But the inventory account is more complicated for manufacturers and construction firms. It’s a function of raw materials, labor and overhead costs.

The composition of your company’s cost of goods will guide you on where to cut. In a tight labor market, it’s hard to reduce labor costs. But it may be possible to renegotiate prices with suppliers.

And don’t forget the carrying costs of inventory, such as storage, insurance, obsolescence and pilferage. You can also improve margins by negotiating a net lease for your warehouse, installing antitheft devices or opting for less expensive insurance coverage.

Product mix

To cut your days-in-inventory ratio, compute product-by-product margins. Stock more products with high margins and high demand — and less of everything else. Whenever possible, return excessive supplies of slow-moving materials or products to your suppliers.

Product mix should be sufficiently broad and in tune with consumer needs. Before cutting back on inventory, you might need to negotiate speedier delivery from suppliers or give suppliers access to your perpetual inventory system. These precautionary measures can help prevent lost sales due to lean inventory.

Reality check

Often management is so focused on sales, HR issues and product innovation that they lose control over inventory. Contact us for a reality check.

7 ways to prevent elder financial abuse

Posted by admin On January 25th

7 ways to prevent elder financial abuse

 

 

As tax season ramps up, so do the efforts of scam artists looking to steal people’s financial data and money. Such fraudulent activities often target older adults. Whether you’re in this age bracket or worry about senior parents and other relatives, here are seven ways to prevent elder financial abuse:

 

Keep both paper and online financial documents in a secure place. Monitor accounts and retain statements.

  1. Exercise caution when making financial decisions. If someone exerts pressure or promises unreasonably high or guaranteed returns, walk away.
  2. Write checks only to legitimate financial institutions, rather than to a person.
  3. Be alert for phony phone calls. The IRS doesn’t collect money this way. Another scam involves someone pretending to be a grandchild who’s in trouble and needs money. Don’t provide confidential information or send money until you can verify the caller’s identity.
  4. Beware of emails requesting personal data — even if they appear to be from a real financial institution. After all, shouldn’t your banker or financial professional already know these things? Ignore contact information provided in the email. Instead, contact the financial institution through a known telephone number.
  5. As much as possible, maintain a social network. Criminals target isolated people because often they’re less aware of scams and lack trusted confidants.
  6. Work only with qualified professionals, including accountants, bankers and attorneys.

Tax calendar

Posted by admin On January 25th

 

 

 

 

January 15 — Individual taxpayers’ final 2018 estimated tax payment is due.

January 31 — File 2018 Forms W-2 (“Wage and Tax Statement”) with the Social Security Administration and provide copies to your employees.

  • File 2018 Forms 1099-MISC (“Miscellaneous Income”) reporting nonemployee compensation payments in box 7 with the IRS and provide copies to recipients.
  • Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (“Employer’s Annual Federal Tax Return”).
  • File Form 940 (“Employer’s Annual Federal Unemployment [FUTA] Tax Return”) for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 943 (“Employer’s Annual Federal Tax Return for Agricultural Employees”) to report Social Security, Medicare and withheld income taxes for 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28 — File 2018 Forms 1099-MISC with the IRS.

March 15 — 2018 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return isn’t extended, this is also the last day for those types of entities to make 2018 contributions to pension and profit-sharing plans.