4 Estate Planning Documents Your College-aged Child Should Have

Does your college-aged child have a basic estate plan? In more cases than not, the answer is “no.” The good news is that the summer months are the perfect time to enlist the help of an estate planning advisor to create a plan, as your child will be available to sign the documents before heading to school in the fall.

Here are the four critical estate planning documents college-bound students should have:

Will. Although your child is still in his or her upper teens or early twenties, he or she isn’t too young to have a will drawn up. The will specifies the disposition of his or her assets and can tie up other loose ends of the estate.
Health care power of attorney. With a health care power of attorney, your child appoints someone to act as his or her proxy or surrogate for health care decisions. Typically, a parent is designated as the attorney-in-fact for this purpose.
HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you and your spouse. Absent a HIPAA authorization, making health care decisions could be more difficult.
Financial power of attorney. This legal document enables you and your spouse to conduct financial activities on your child’s behalf. A “durable” power of attorney, which is the most common form, continues in the event that your child becomes incapacitated.

If you and your child are ready to create a basic estate plan, please don’t hesitate to contact us. We’d be pleased to help give your family the peace of mind that comes with having an estate plan.

Accounts payable is a critical area of concern for every business. However, as a back-office function, it doesn’t always get the attention it deserves. Once in place, accounts payable processes tend to get taken for granted. Following are some tips and best practices for improving your company’s approach.

Be strategic

Too often, businesses take a reactive approach to payables, simply delaying payments as long as possible to improve short-term cash flow. But this approach can backfire if it puts you on bad terms with vendors.

Poor vendor relationships can affect delivery times, service quality and payment terms. A proactive, strategic approach to payables can help you strike a balance between optimizing short-term cash flow and getting along well with vendors.

It’s also critical to explore the potential benefits of early payment discounts, volume discounts or other incentives that can eventually improve cash flow. That doesn’t mean you should accept every available discount. Obviously, the decision hinges on whether the long-term benefits of the discount outweigh the immediate cost of, for example, paying early or buying in bulk.

Strengthen selection and review

Implement policies, procedures and systems to ensure that you properly vet vendors and negotiate the best possible prices and payment terms. Create preferred vendor lists so staff members follow established procedures and don’t engage in “maverick” buying — that is, purchasing from unauthorized vendors.

Review vendor contracts regularly, too. Create and maintain a database of key contractual terms that’s readily accessible to everyone. With an understanding of payment terms and other important contractual provisions, employees can use it to double-check vendor compliance and avoid errors that can result in overpayments or duplicate payments.

Leverage technology

Automating accounts payable with the right software offers many benefits. For one thing, an automated, paperless system can increase efficiency, reduce costs and speed up invoice processing. And, of course, the ability to pay invoices electronically makes it easier to take advantage of available discounts.

In addition, automation can provide greater visibility of payables and better control over payments. For instance, cloud-based systems provide immediate access to account information, allowing you to review and approve invoices from anywhere at any time. The best automated systems also contain security controls that help prevent and detect fraud and errors.

Naturally, there’s an upfront cost to buying good accounts payable software and training your staff to use it. You’ll need to find a solution that suits your company’s size, needs and technological sophistication. You’ll also incur ongoing costs to maintain the system and keep it updated.

Pay attention to payables

Don’t underestimate the impact of accounts payable on the financial performance of your business. Taking a “continuous improvement” approach can enhance cash flow and boost profitability. Let us help you devise strategies for the optimal tracking and handling of outgoing payments.

If your manufacturing company is like many others in the industry, you’re having difficulty finding top-notch new hires to expand your workforce as well as to replace employees who are retiring or quitting. At the same time, you’d like to reduce your tax liability for 2022.

Practical solution: Kill two birds with one stone by hiring workers from certain “target” groups. This move can help close the skilled labor gap, and you may qualify for a tax credit — the Work Opportunity Tax Credit (WOTC) — at the same time. What’s more, if your company employs certain teenagers during the next few months, it may be in line for a special “summertime” version of the WOTC.

WOTC rules and the target groups

The WOTC is designed to encourage employers like manufacturers to hire workers from several disadvantaged groups. Generally, the credit equals 40% of a worker’s first-year wages of up to $6,000, for a maximum credit of $2,400 per qualified worker. However, the WOTC may be larger in certain situations. For instance, it may be claimed for the first $24,000 of wages paid to certain disabled veterans, for a maximum credit of $9,600 per qualified worker.

There’s no limit on the number of credits a manufacturer can claim. For example, let’s say that you hire 10 eligible workers to ramp up operations this year. As a result, you may be able to claim a total credit of $24,000 if each eligible employee is paid at least $6,000 in wages in 2022.

Each employee must complete at least 120 hours of service. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of the business (such as a maid working in the employer’s home). In addition, the credit generally can’t be claimed for employees who’ve previously worked for the employer.

The WOTC has expired and been reinstated multiple times in the past, mostly for only a year or two. But in 2021 it was extended for five years, through 2025.

The list of target groups eligible for the WOTC has remained relatively stable in recent years with just a couple of tweaks. Currently, it covers the following groups:

Qualified IV-A Temporary Assistance for Needy Families recipients,
Qualified veterans (including disabled veterans),
Ex-felons,
Designated Community Residents,
Vocational rehabilitation referrals,
Supplemental Nutrition Assistance Program recipients,
Supplemental Security Income recipients,
Long-term family assistance recipients, and
Qualified long-term unemployment recipients.

Calculating the credit

A manufacturer can count $6,000 of first-year wages per employee beginning from the employee’s start date. This amount increases to $10,000 for long-term family assistance recipients and $12,000, $14,000 or $24,000 for certain veterans. If the employee completed at least 120 hours but less than 400 hours of service, the wages are multiplied by 25%. If the employee completed 400 or more hours, all the wages are multiplied by 40%.

Thus, as previously noted, the maximum credit available for first-year wages generally is $2,400, but it can be as high as $9,600 for certain veterans. In addition, for long-term family assistance recipients, a 50% credit may be available for up to $10,000 of second-year wages, resulting in a total maximum credit over two years of $9,000 per qualified worker ($10,000 × 40% plus $10,000 × 50%).

3 key limits

Be aware that three key limits apply to employers claiming the WOTC:

No income tax deduction is allowed for the portion of wages equal to the amount of the credit determined for the tax year.
Other employment-related credits generally are reduced with respect to an employee for whom a WOTC credit is allowed.
The credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year. (However, a one-year carryback and 20-year carryforward of unused business credits is allowed.)

Because of these limits, there may be times when a manufacturer might elect not to have the WOTC apply. Also, other rules may prohibit the credit or require an allocation of the credit under certain circumstances.

Basking in a summertime WOTC

There’s still time to take advantage of a special version of the WOTC for hiring certain disadvantaged youths during the summer months. The summertime WOTC is available if you employ individuals who are age 16 or 17 and reside in an empowerment zone, enterprise community or renewal community.

Under this version of the WOTC, only wages paid for services performed between May 1 and September 15 can be counted. The credit amount generally equals 25% of a worker’s qualified first-year wages up to $3,000, for a maximum credit of $750 per worker.

However, the summertime credit increases to 40% of a worker’s first-year wages up to $3,000 if the youth works 400 hours or more. In this case, the maximum credit per qualified worker is $1,200. Be aware that if your company employed the youth prior to this summer, you can’t claim the credit for that worker.

Contact us for details

It’s important to be aware that your manufacturing company must comply with a complex certification process before it can claim a WOTC. We can help you coordinate these activities as well as answer any questions.

How often does your company generate a full set of financial statements? It’s common for smaller businesses to issue only year-end financials, but interim reporting can be helpful, particularly in times of uncertainty. Given today’s geopolitical risks, mounting inflation and rising costs, it’s wise to perform a midyear check-in to monitor your year-to-date performance. Based on the results, you can then pivot to take advantage of emerging opportunities and minimize unexpected threats.

Appreciate the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that have been struggling during the pandemic.

For example, you might compare year-to-date revenue for 2022 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. It’s also important to track costs during an inflationary market. If your business is starting to lose money, you might need to consider 1) raising prices or 2) cutting discretionary spending. For instance, you might need to temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. A low stock of key inventory items might foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Recognize potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might result from informal accounting practices that are common midyear (but are corrected by you or your CPA before year-end statements are issued).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, tend to paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked finance managers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact us to help with your interim reporting needs. We can fix any shortcomings by performing additional procedures on interim financials prepared in-house — or by preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.

Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.

The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible and has limited redemption and liquidation rights.

If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)

Holding period requirement

The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.

Taxable income limitation

The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.

Illustrative example

Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).

Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.

The Internal Revenue Service issued Announcement 2022-13, increasing the optional standard mileage rate for the final six months of 2022 from 58.5 cents per mile to 62.5 cents per mile. The new rate will be effective from July 1, 2022, through December 31, 2022. The old rate of 58.5 cents per mile will remain in effect through June 30, 2022.

The new rate for deductible medical or moving expenses for active-duty members of the military will be 22 cents for the remainder of 2022, up 4 cents from the rate at the start of the year. The 14 cents-per-mile rate for charitable organizations, set by statute, remains unchanged.

In the IRS press release, IRS Commissioner noted: “The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices. We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

Employers should ensure that they properly account for the rate increase beginning July 1, 2022.

Business owners and investors are understandably concerned about skyrocketing inflation. Over the last year, consumer prices have increased 8.3%, according to the latest data from the U.S. Bureau of Labor Statistics. The Consumer Price Index (CPI) covers the prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. This was a slightly smaller increase than the 8.5% figure for the period ending in March, which was the highest 12-month increase since December 1981.

Meanwhile, the producer price index (PPI) is up 11% over last year. This was a smaller increase than the 11.2% figure for the period ending in March, which was the largest increase on record for wholesale inflation. PPI gauges inflation before it hits consumers.

Key impacts

For your business, inflation may increase direct costs and lower customer demand for discretionary goods and services. This leads to lower profits — unless you’re able to pass cost increases on to customers. However, the possible effects aren’t limited to your gross margin. Here are seven other aspects of your financial statements that might be impacted by today’s high rate of inflation.

1. Inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is measured at the lower of 1) cost and 2) market value or net realizable value. Methods that companies use to determine inventory cost include average cost, first-in, first-out (FIFO), and last-in, first-out (LIFO). The method you choose affects profits and the company’s ending inventory valuation. There also might be trickle-down effects on a company’s tax obligations.

2. Goodwill. When estimating the fair value of acquired goodwill, companies that use GAAP are supposed to apply consistent valuation techniques from period to period. However, the assumptions underlying fair value estimates may need to be revised as inflation increases. For instance, market participants typically use higher discount rates during inflationary periods and might expect revised cash flows due to rising expenditures, changes in customer behaviors and modified product pricing.

3. Investments. Inflation can lead to volatility in the public markets. Changes in the market values of a company’s investments can result in realized or unrealized gains or losses, which ultimately impact deferred tax assets and liabilities under GAAP. Concerns about inflation may also cause a company to revise its investment strategy, which may require new methods of accounting or special disclosures in the financial statement footnotes.

4. Foreign currency. Inflation can affect foreign exchange rates. As exchange rates fluctuate, companies that accept, hold and convert foreign currencies need to ensure they’re capturing the correct rate at the appropriate point in time.

5. Debts. If your company has variable-rate loans, interest costs may increase as the Federal Reserve raises interest rates to counter inflation. The Fed already raised its target federal funds rate by 0.5% in May and is expected to increase rates further over the course of 2022. Some businesses might decide to convert variable-rate loans into fixed-rate loans or apply for additional credit now to lock in fixed-rate loans before the next rate hike. Others may restructure their debt. Depending on the nature of a restructuring, it may be reported as a troubled debt restructuring, a modification or an extinguishment of the debt under GAAP.

6. Overhead expenses. Long-term lease agreements may contain escalation clauses tied to CPI or other inflationary measures that will lead to increased lease payments. Likewise, vendors and professional service providers may increase their prices during times of inflation to preserve their own profits.

7. Going concern disclosures. Each reporting period, management must evaluate whether there’s substantial doubt about the company’s ability to continue as a going concern. Substantial doubt exists if it’s probable that the entity will be unable to meet obligations as they become due within 12 months of the financial statement issuance date. Soaring rates of inflation can be the downfall of companies that are unprepared to counter the effects, causing doubt about their long-term viability.

We can help

Inflation can have far-reaching effects on a company’s financial statements. Contact us for help anticipating how inflation is likely to affect your company’s financials and brainstorming ways to manage inflationary risks.

During the early stages of the COVID-19 pandemic, many cash-short small businesses turned to their banks, while others sought help from family and friends. Unfortunately, these sources weren’t enough in all cases. When government aid arrived, it was too late for some companies. For others, government loans and grants helped but didn’t fill the cash shortfall.

The resulting crunch provided an opening for organized crime enterprises to infiltrate the corporate world. Of course, organized crime has always represented a threat to legitimate businesses. But the increasing number of fraud schemes perpetrated by criminal gangs means you should examine your company’s transactions more closely.

Common schemes

Organized crime has several ways of inserting itself into your business. Look out for the following common scenarios:

Extortionate loans. When faced with a lack of cash, desperate owners may be willing to accept any form of financing — no matter the strings attached. However, rates and terms offered by organized crime can cripple and even destroy a business.

Instead of seeking any form of black-market financing, contact banks with which you do business, your credit card company and alternative lenders. Although traditional lenders generally require high credit scores and extensive financial documentation to underwrite a loan, some alternative lenders rely on eCommerce activity alone to issue debt.

Substandard suppliers. Organized crime sometimes forces companies to buy products and services from vendors the criminals control. Initially, they may offer competitive or below-market terms. But over time, they typically raise prices and may enforce payment with threats of violence. In exchange, you’ll probably receive inferior goods.

If a prospective supplier presents a compelling case for switching, exercise caution. Be particularly wary if the company is under new ownership and the new owners appear unfamiliar with the products and services they ostensibly sell. If in doubt, stick with your original vendor until you have the time to research suitable replacements.

Government loan “partnerships.” An organized crime group may offer to facilitate quick access to government funds disbursed via financial institutions. To make this happen, criminals corrupt a bank loan by paying a bank employee to quickly rubber stamp an application and approve the disbursement of funds within days. In return for loan facilitation, the criminals require a portion of the loan proceeds.

Know that applying for government aid can take time. However, early in the pandemic, banks appointed to disburse COVID-19 relief funds generally processed most requests within 10 days.

Cheap business acquisitions. Sometimes, the only option available to businesses short on funds is to sell. Troubled companies can attract the attention of criminals because they can buy assets for a fraction of their value and use a business to launder proceeds of illegal activity.

If you intend to sell your company, work with reputable M&A, tax and valuation advisors. The process may take longer than selling on the black market, but an aboveboard transaction will help you avoid legal headaches involving criminals who will likely wish to conceal their identities and the nature of the transaction. With a legitimate sale, you can also be certain you’ll receive the price and terms negotiated with the buyer.

Consider other options

Although organized crime is an ever-present threat, financial and social emergencies can aid criminals and fraudsters. You might be tempted by easy capital offered by these shady characters. But given the potential repercussions to your business, there are almost always better options available. Contact us today if you have questions about protecting your business.

The best laid plans can go awry. After your death, events may transpire that you hadn’t anticipated or couldn’t have reasonably foreseen. There’s no way of predicting the future, but you may want to supplement your existing estate plan with a trust provision that gives a designated beneficiary a “power of appointment” over some or all of the trust property. Essentially, this person will have the discretion to change distributions from the trust or even add or subtract beneficiaries.

Assuming the holder of this power fulfills the duties properly, he or she can make informed decisions when all the facts are known. This can create more flexibility and adaptability within your estate plan.

2 types of powers

There are two types of powers of appointment:

“General” power of appointment. A general power of appointment allows the holder to distribute assets to anyone, including him- or herself, his or her estate or the estate’s creditors. The property is usually included in a trust but may be given to the holder outright. Also, this power of appointment can be transferred to another person.

“Limited” or “special” power of appointment. Here, the person holding the power of appointment can give the property to a select group of people who’ve specifically been identified by the deceased. For example, it might provide that a surviving spouse can give property to surviving children, as he or she chooses, but not to anyone else. Thus, this power is more restrictive than a general power of appointment.

Whether you should use a general or limited power of appointment depends on your circumstances and expectations.

Tax impacts

The resulting tax impact may also affect your decision to use a general or limited power of appointment. The rules are complicated, but property subject to a general power of appointment is typically included in the taxable estate of the designated holder of the power. However, property included in the deceased’s estate currently receives a step-up in basis to fair market value on the date of death. Therefore, your heirs can sell property that was covered by a general power of appointment with little or no income tax consequences.

In contrast, property covered by a limited power isn’t included in the holder’s estate. However, the heirs inherit the property with a carryover basis and no step-up in basis. So, if the heirs sell appreciated property, they may be liable for high capital gains taxes.

Generally, if estate tax isn’t a concern, a general power of appointment may be preferable. We can help you determine if adding a power of appointment is right for your situation.

Every business wants to engage in strategic planning that will better position the company to sell more to current customers — and perhaps expand into new markets. Yet the term “strategic planning” is so broad. It’s easy to get overwhelmed by all the possible directions you could go in and have a hard time choosing a path. Here are a few simple ways to make strategic planning a reality.

Focus on who you already know

One cost-effective strategy is to work more closely with current customers by strengthening and expanding those relationships. After all, they’re presumably satisfied with the products or services you’re currently offering, so they’re likely willing to try others. Ask about their needs, listen to their responses and look for ways to better serve them and boost revenue.

Another strategy is to partner with other compatible businesses, perhaps locally or in your industry. You might not be able to produce certain complementary products or services, but you could team up with another company that can and, together, both businesses could see their bottom lines grow.

Dig deeper into social media

By now, most companies have dipped their respective and figurative toes into social media. These online platforms can be a cost-effective way to highlight specific products or services, as well as to familiarize the buying public with your brand and culture. Of course, you’ve got to handle social media promotions carefully — customers tend to be turned off by a barrage of posts that basically shout, “Buy this!”

Nonetheless, digging deeper into the use and analytics of social media can play a viable role in a broader strategic plan. Many professionals recommend alternating posts that focus on specific products or services with those providing helpful, informative content to followers. For example, a cybersecurity firm might offer tips on staying safe online.

Reevaluate your pricing strategy

Although increasing prices might boost revenue if sales remain steady, scattershot price jumps can prompt customers to go elsewhere. That’s why a critical component to any strategic plan must be designing a pricing strategy that boosts revenue without simply slapping on a higher price tag.

One option is bundling products or services and then offering the bundle at a lower price than what customers would pay in total for each item individually. Customers enjoy the savings while the company boosts sales, often with minimal additional effort.

Another way might be to offer a subscription service. Customers get uninterrupted access to the products or services they need, and the business establishes an ongoing revenue source.

Don’t hesitate

A good strategic plan first addresses broad objectives and then narrows down to specific steps. The next time you and your leadership team get stuck, don’t hesitate to back up and look at some big picture issues. Let us assist you in assessing the profitability impact of any of the strategic planning ideas you come up with.

Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.

Here are some answers to questions about the option.

Why is the election important?

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Which businesses are eligible?

To qualify for the election a taxpayer:

Must have gross receipts for the election year of less than $5 million and
Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.

Are there limits on the election?

Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.

The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.

The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.

Numbers tell only part of the story. Comprehensive footnote disclosures, which are found at the end of reviewed and audited financial statements, provide valuable insight into a company’s operations. Unfortunately, most people don’t take the time to read footnotes in full, causing them to overlook key details. Here are some examples of hidden risk factors that may be unearthed by reading footnote disclosures.

Related-party transactions

Companies may give preferential treatment to, or receive it from, related parties. Footnotes are supposed to disclose related parties with whom the company conducts business.

For example, say a tool and die shop rents space from the owner’s parents at a below-market rate, saving roughly $120,000 each year. Because the shop doesn’t disclose that this favorable related-party deal exists, the business appears more profitable on the face of its income statement than it really is. If the owner’s parents unexpectedly die — and the owner’s brother, who inherits the real estate, raises the rent to the current market rate — the business could fall on hard times, and the stakeholders could be blindsided by the undisclosed related-party risk.

Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as that change’s effect on the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

Unreported and contingent liabilities

A company’s balance sheet might not reflect all future obligations. Detailed footnotes may reveal, for example, a potentially damaging lawsuit, an IRS inquiry or an environmental claim. Footnotes also spell out the details of loan terms, warranties, contingent liabilities and leases.

Significant events

Outside stakeholders appreciate a forewarning of impending problems, such as the recent loss of a major customer or stricter regulations in effect for the coming year. Footnotes disclose significant events that could materially impact future earnings or impair business value.

Transparency is key

In today’s uncertain marketplace, it’s common for investors, lenders and other stakeholders to ask questions about your disclosures and request supporting documentation to help them make better-informed decisions. We can help you draft clear, concise footnotes and address stakeholder concerns. Contact us for more information.

Under some circumstances, an employer that sponsors a 401(k) might wish to amend its plan to exclude part-time employees and offer the benefit only to full-time staff members. Is such an approach allowed under the rules for qualified plans?

Coverage and service rules

Employers have considerable freedom to decide which categories of employees can participate in their 401(k) plans. However, this freedom isn’t unlimited.

For example, eligibility restrictions must avoid violating the minimum coverage rules. And service-based exclusions cannot violate the minimum service rules.

Under those rules, employees generally can’t be required to have more than 1,000 hours of service in a designated 12-month period before being eligible to participate in a 401(k) plan. In addition, long-term part-time employees can’t be required to have more than three consecutive 12-month periods of at least 500 hours of service before they can make elective deferrals.

Note: Deferrals aren’t required under the three-year rule before 2024, however, because only 12-month periods after 2020 must be counted.

Tricky thresholds

So, let’s say you’d like to exclude all part-time employees regardless of their actual service. This sort of categorical exclusion might seem different from an hours-of-service requirement, but part-time status is typically based on anticipated or scheduled service. And, in the IRS’s view, a service-based eligibility threshold that doesn’t count actual hours of service will fail the hour-counting rules if, in operation, it excludes employees whose actual service satisfies an applicable hour-counting threshold.

For instance, if your plan were to define part-timers as employees who are “regularly scheduled” to work 20 or fewer hours a week, the plan might end up excluding employees who work 20 hours a week for 52 weeks and, therefore, have 1,040 hours of service for the year.

In that event, your plan would be using a service-based threshold to exclude employees who, in fact, have satisfied the 1,000-hour minimum service rule. Beginning in 2024, employees with even fewer hours won’t be excludable from elective deferrals on account of their service if they work at least 500 hours in three consecutive 12-month periods.

A potential solution

One potential approach to excluding employees who aren’t full-timers is to look for a common, non–service-based denominator among them that you wish to exclude, such as job function or job location.

For example, let’s say most of your part-time employees are performing the same job function or work at the same location, and you’re willing to exclude all other employees who perform the same job function or work at the same location. In this case, you might be able to craft a plan eligibility rule that excludes those part-timers without violating the minimum service rules.

Be careful, though, because at least one IRS representative has indicated that even criteria that aren’t service-based could violate the rules if they merely disguise an improper plan eligibility rule.

Clear language

Finally, bear in mind that errors in applying the 401(k) plan eligibility rules to part-time employees frequently turn up in voluntary compliance and IRS audits. It’s critical that your plan’s terms clearly state your design choices — especially when excluding certain classes of employees. Moreover, you should routinely review plan language to ensure it reflects changing employment practices. Contact us for more information.

For many business owners, estate planning and succession planning go hand in hand. As the owner of a closely held business, you likely have a significant portion of your wealth tied up in the business. If you don’t take the proper estate planning steps to ensure that the business lives on after you’re gone, you may be placing your family at risk.

Separate ownership and management succession

One reason transferring a family business can be a challenge is the distinction between ownership and management succession. When a business is sold to a third party, ownership and management succession typically happen simultaneously. But in the context of a family business, there may be reasons to separate the two.

From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes due after your death. On the other hand, you may not be ready to hand over the reins or you may feel that your children aren’t ready to take over.

There are strategies family business owners can use to transfer ownership without immediately giving up control, including:

Transferring ownership to the next generation in the form of nonvoting stock,
Placing business interests in a trust, family limited partnership or other vehicle that allows the owner to transfer substantial ownership interests to the younger generation while retaining management control, or
Establishing an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing heirs outside the business with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth while allowing those who work in the business to take over management.

Work around conflicts

Another unique challenge presented by a family business is that the older and younger generations may have conflicting financial needs. Fortunately, there are strategies available to generate cash flow for the owner while minimizing the burden on the next generation.

For example, you may want to structure an installment sale of the business to your heirs. This option can provide you liquidity while easing the burden on your adult children or other heirs. It may also improve the chances that the purchase can be funded by cash flows from the business. Plus, as long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate tax.

Get an early start

Regardless of your strategy, the earlier you start planning the better. Transitioning the business gradually over several years or even a decade or more gives you time to educate family members about your succession planning philosophy. It also allows you to relinquish control over time, and to implement tax-efficient business structures and transfer strategies. Because each family business is different, work with us to identify appropriate strategies in line with your objectives and resources.

Businesses with multiple owners generally benefit from a variety of viewpoints, diverse experience and strategic areas of specialization. However, there’s a major risk: the company can be thrown into tumult if one of the owners decides, or is compelled by circumstances, to leave.

A logical and usually effective solution is to create and implement a buy-sell agreement. This is a legal document that spells out how an owner’s share in the business will be valued and transferred following a “triggering event” such as voluntary departure, divorce, disability or death.

Buy-sell benefits

A well-designed “buy-sell” (as it’s often called for short) manages risk in various ways. For starters, it helps keep ownership of the business within the family or another select group — for example, people actively involved in the enterprise rather than outsiders. In the case of a divorce, an agreement can prevent an owner’s soon-to-be former spouse from acquiring a business interest.

The death of an owner is a particularly difficult and often complex situation. A buy-sell can establish the value of the business for gift and estate tax purposes so long as certain requirements are met. The agreement is then able to play a role in providing the owner’s family with liquidity to pay estate taxes and other expenses.

Tax impact

Generally, buy-sell agreements are structured as either:

Cross-purchase, under which the remaining owners buy the departing owner’s shares, or
Redemption, under which the business entity itself buys the departing owner’s shares.

From a tax perspective, cross-purchase agreements are generally preferable. The remaining owners receive the equivalent of a “stepped-up basis” in the purchased shares. That is, their basis for those shares will be determined by the price paid, which is the current fair market value.

Having this higher basis will reduce their capital gains if they sell their interests down the road. Also, if the remaining owners fund the purchase with life insurance, the insurance proceeds are generally tax-free.

Redemption agreements, on the other hand, can trigger a variety of unwanted tax consequences. These include corporate alternative minimum tax, accumulated earnings tax or treatment of the purchase price as a taxable dividend.

However, there’s a disadvantage to cross-purchase agreements. That is, the owners, rather than the company, are personally responsible for funding the purchase of a departing owner’s interest. And if they use life insurance as a funding source, each owner will need to maintain policies on the life of each of the other shareholders — a potentially cumbersome and expensive arrangement.

Worth the effort

As you can see, the tax and legal details of a buy-sell agreement can get quite technical. But don’t let that discourage you from establishing one or occasionally reviewing a buy-sell you already have in place. We can help you in either case.

The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax.

Four methods

The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of the following four methods:

Under the current year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The due dates are generally April 15, June 15, September 15 and January 15 of the following year.
Under the preceding year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on a corporation with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
Under the annualized income method, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assuming income will be received at the same rate over the full year.
Under the seasonal income method, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that their income is earned seasonally and that they therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.

Also, note that a corporation can switch among the four methods during a given tax year.

We can examine whether your corporation’s estimated tax bill can be reduced. Contact us if you’d like to discuss this matter further.

The downturn in the stock market may have caused the value of your retirement account to decrease. But if you have a traditional IRA, this decline may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional vs. Roth

Here’s what makes a traditional IRA different from a Roth IRA:

Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred.

On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.

Roth IRA. Roth IRA contributions are never deductible. But withdrawals — including earnings — are tax free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.

However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.

Your tax hit may be reduced

This is where the “benefit” of a stock market downturn comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.

It’s important to think through the details before you convert. Here are some of the issues to consider when deciding whether to make a conversion:

Having enough money to pay the tax bill. If you don’t have the cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

Your retirement plans. Your stage of life may also affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.

There are also other issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss whether a conversion is right for you.

Disclosure of contingent liabilities — such as those associated with pending litigation or government investigations — is a gray area in financial reporting. It’s important to keep investors and lenders informed of risks that may affect a company’s future performance. But companies also want to avoid alarming stakeholders with losses that are unlikely to occur or disclosing their litigation strategies.

Understanding the GAAP requirements

Under Accounting Standards Codification (ASC) Topic 450, Contingencies, a company is required to classify contingent losses under the following categories:

Remote. If a contingent loss is remote, the chances that a loss will occur are slight. No disclosure or accrual is usually required for remote contingencies.

Probable. If a contingent loss is probable, it’s likely to occur and the company must record an accrual on the balance sheet and a loss on the income statement if the amount (or a range of amounts) can be reasonably estimated. Otherwise, the company should disclose the nature of the contingency and explain why the amount can’t be estimated. In general, there should be enough disclosure about a probable contingency so the disclosure’s reader can understand its magnitude.

Reasonably possible. If a contingent loss is reasonably possible, it falls somewhere between remote and probable. Here, the company must disclose it but doesn’t need to record an accrual. The disclosure should include an estimate of the amount (or the range of amounts) of the contingent loss or an explanation of why it can’t be estimated.

Making judgment calls

Determining the appropriate classification for a contingent loss requires judgment. It’s important to consider all scenarios and document your analysis of the classification.

In today’s volatile marketplace, conditions can unexpectedly change. You should re-evaluate contingencies each reporting period to determine whether your previous classification remains appropriate. For example, a remote contingent loss may become probable during the reporting period — or you might have additional information about a reasonably possible or probable contingent loss to be able to report an accrual (or update a previous estimate).

Outside expertise

Ultimately, management decides how to classify contingent liabilities. But external auditors will assess the company’s existing classifications and accruals to determine whether they seem appropriate. They’ll also look out for new contingencies that aren’t yet recorded. During fieldwork, your auditors may ask for supporting documentation and recommend adjustments to estimates and disclosures, if necessary, based on current market conditions. Contact us for more information.

You can’t stop it; you can only hope to use it to your best business advantage. That’s right, summer is on the way and, with it, a variety of seasonal marketing opportunities for small to midsize companies. Here are three ideas to consider.

1. Support summer camps and local sports

Soon, millions of young people will be attending summer camps, both the “day” and “overnight” variety. Do some research into local options and see whether your business can arrange a sponsorship. If the cost is reasonable, you can get your name and logo on camp t-shirts and other items, where both campers and their parents will see them nearly every day for weeks.

Look into using the same strategy with summer sports. Baseball teams sponsored by local businesses are a time-honored tradition that can still pay off. There might be other, similar options as well.

2. Attend outdoor festivals or other public events

The warmer months mean parades, carnivals, outdoor musical performances and other spectacles of summertime bliss. Investigate the costs and logistics of setting up a booth with clear, attention-grabbing signage. Give out product samples or brochures to inform attendees about your company. You might also hand out small souvenirs, such as key chains, pens or magnets with your contact info.

And don’t just stay in the booth — dispatch employees into the crowd. Have staff members walk around outdoor events with samples or brochures. Just be sure to train them to be friendly and nonconfrontational. If appropriate, employees might wear distinctive clothing or even costumes or sandwich boards to draw attention.

3. Heat up your social media strategy

You probably knew this one was coming! For many, if not most, businesses today, using some form of social media to get the word out and interact with customers is a necessity. But hammering the same message 365 days a year isn’t likely to pay off. Tailor your social media strategy to celebrate summer and inspire interaction.

For example, launch a summertime travel photo contest. Come up with a catchy hashtag, preferably involving your company name, and invite followers to share pics from their summer vacation spots. Offer a nominal prize or enticing discount for the top three entries.

Alternatively, look around for some charitable events or activities that you, your leadership team and employees could participate in this summer. Post a narrative and pictures on your social media channels.

Make the most of midyear

As people head outside and on summer trips, raising awareness of your brand could mean a bump in sales and strong midyear revenues. We can help you assess the costs of potential marketing strategies and measure the return on investment of any you pursue.

Many people own Series E and Series EE bonds that were bought many years ago. They may rarely look at them or think about them except on occasional trips to a file cabinet or safe deposit box.

One of the main reasons for buying U.S. savings bonds (such as Series EE bonds) is the fact that interest can build up without the need to currently report or pay tax on it. The accrued interest is added to the redemption value of the bond and is paid when the bond is eventually cashed in. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. The difference between the bond’s purchase price and its redemption value is taxable interest.

Series EE bonds, which have a maturity period of 30 years, were first offered in January 1980. They replaced the earlier Series E bonds.

Currently, Series EE bonds are only issued electronically. They’re issued at face value, and the face value plus accrued interest is payable at maturity.

Before January 1, 2012, Series EE bonds could be purchased on paper. Those paper bonds were issued at a discount, and their face value is payable at maturity. Owners of paper Series EE bonds can convert them to electronic bonds, posted at their purchase price (with accrued interest).

Here’s an example of how Series EE bonds are taxed. Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020.

A $1,000 Series EE bond (paper) bought in January 1990 for $500 was worth about $2,073.60 in January of 2020. It won’t increase in value after that. The entire difference of $1,573.60 ($2,073.60 − $500) was taxable as interest in 2020. This interest is exempt from state and local income taxes.

Note: Using the money from EE bonds for higher education may keep you from paying federal income tax on the interest.

If you own bonds (paper or electronic) that are reaching final maturity this year, action is needed to assure that there’s no loss of interest or unanticipated current tax consequences. Check the issue dates on your bonds. One possible place to reinvest the money is in Series I savings bonds, which are currently attractive due to rising inflation resulting in a higher interest rate.