Business Valuation Archives - Page 14 of 33

Use Capital Losses to Offset Capital Gains

Tax Prep, Planning & Strategy|December 17, 2019

When is a loss actually a gain? When that loss becomes an opportunity to lower tax liability, of course. Now’s a good time to begin your year-end tax planning and attempt to neutralize gains and losses by year end. To do so, it might make sense to sell investments at a loss in 2018 to offset capital gains that you’ve already realized this year.

Now and later

A capital loss occurs when you sell a security for less than your “basis,” generally the original purchase price. You can use capital losses to offset any capital gains you realize in that same tax year — even if one is short term and the other is long term.

When your capital losses exceed your capital gains, you can use up to $3,000 of the excess to offset wages, interest and other ordinary income ($1,500 for married people filing separately) and carry the remainder forward to future years until it’s used up.

Research and replace

Years ago, investors realized it could be beneficial to sell a security to recognize a capital loss for a given tax year and then — if they still liked the security’s prospects — buy it back immediately. To counter this strategy, Congress imposed the wash sale rule, which disallows losses when an investor sells a security and then buys the same or a “substantially identical” security within 30 days of the sale, before or after.

Waiting 30 days to repurchase a security you’ve sold might be fine in some situations. But there may be times when you’d rather not be forced to sit on the sidelines for a month.

Fortunately, there’s an alternative. With a little research, you might be able to identify a security in the same sector you like just as well as, or better than, the old one. Your solution is now simple and straightforward: Simultaneously sell the stock you own at a loss and buy the competitor’s stock, thereby avoiding violation of the “same or substantially identical” provision of the wash sale rule. You maintain your position in that sector or industry and might even add to your portfolio a stock you believe has more potential or less risk.

If you bought shares of a security at different times, give some thought to which lot can be sold most advantageously. The IRS allows investors to choose among several methods of designating lots when selling securities, and those methods sometimes produce radically different results.

Good with the bad

Investing always carries the risk that you will lose some or even all of your money. But you have to take the good with the bad. In terms of tax planning, you can turn investment losses into opportunities — and potentially end the year on a high note.

Don’t flood email inboxes with excessive communications

Tax Prep, Planning & Strategy|December 17, 2019

Is your not-for-profit making the most of its email list? If you send every item to individual donors, corporate supporters, volunteers and the media — regardless of their interests or investment in your organization — you probably aren’t. Email segmentation can help you communicate with everyone more efficiently and effectively.

Keep them tuned in

There are many reasons to think about sending particular emails to only specific slices of your email list. For starters, too many irrelevant emails from your nonprofit will cause some recipients to tune out or unsubscribe.

Segmentation can also increase your response rates and strengthen engagement. Recipients will get more information they value and less that doesn’t interest them, fostering greater trust in your organization and its communications. And segmentation lets you experiment with different tones, writing styles, subject lines and visual presentations to determine which work best. You may learn that different groups respond differently based on the message.

Review historical activity

If you already have the data, you may want to begin tailoring emails according to such demographic factors as age, gender, location and income. If you don’t already possess this information, though, gathering it can prove delicate. You need to be careful not to turn off potential supporters with your inquiries.

Try segmenting your list on the basis of past activity. For example, track event attendance, volunteer work, donations or membership renewal. Further narrow the segment by setting a date parameter (for example, activity within the past quarter or year).

Or create subgroups based on donation amounts or specific campaigns. “Super donors” whose giving exceeds a certain threshold, “super attendees” who attend a specified number of events in a year and “super volunteers” who donate a certain number of hours in a year might receive every email, while others receive fewer.

Maximize value of assets

Supporter data, including email addresses, is probably one of your organization’s most valuable resources. For more information on maximizing the potential of your assets, contact us.

Expanded 529 plans offer unique estate planning benefits

Tax Prep, Planning & Strategy|December 15, 2019

If you’re putting aside money for college or other educational expenses, consider a tax-advantaged 529 savings plan. Also known as “college savings plans,” 529 plans were expanded by the Tax Cuts and Jobs Act (TCJA) to cover elementary and secondary school expenses as well. And while these plans are best known as an educational funding vehicle, they also offer estate planning benefits.

What do 529 plans cover?

529 plans allow you to contribute a substantial amount of cash (lifetime contribution limits can reach as high as $350,000 or more, depending on the plan) to a tax-advantaged investment account. Like a Roth IRA, contributions are nondeductible, but funds grow tax-deferred and earnings may be withdrawn tax-free provided they’re used for “qualified education expenses.”

Qualified expenses include tuition, fees, books, supplies, equipment, room and board and, under the TCJA, up to $10,000 per year in elementary or secondary school expenses. Earnings used for other purposes are subject to income tax and a 10% penalty.

What are the estate planning benefits?

These plans are unique among estate planning vehicles. Ordinarily, to shield assets from estate taxes, you must permanently relinquish all control over them. But contributions to a 529 plan are considered “completed gifts” — which means the assets are removed from your taxable estate, together with all future earnings on those assets — even though you retain considerable control over the money. For example, unlike most other estate planning vehicles, you can control the timing of distributions, change beneficiaries, move the funds into another 529 plan, or even cancel the plan and get your money back (subject to taxes and penalties).

As a completed gift, a 529 plan contribution is eligible for the annual gift tax exclusion (currently $15,000). But unlike other vehicles, you can bunch up to five years’ worth of annual exclusions into one year. This allows you to contribute up to $75,000 in one year, without triggering gift or generation-skipping transfer (GST) taxes and without using up any of your lifetime exemption. There are implications, however, if you don’t survive the five years.

Why does it matter?

You might think that these benefits are of little value now that the TCJA has temporarily doubled the lifetime gift and estate tax exemption to an inflation-adjusted $10 million ($20 million for married couples who design their estate plans properly). This year, the exemption amount is $11.4 million ($22.8 million for married couples).

After all, few families are currently affected by these taxes. But it’s still a good idea to shield wealth from potential estate taxes and to make the most of your annual exclusion. This is because the new exemptions are scheduled to return to their previous levels after 2025 and there’s nothing to stop lawmakers from reducing the exemption in the future. 529 plans and other traditional estate planning tools provide some insurance against future estate tax changes.

A poorly worded apportionment clause can upend an estate plan

Tax Prep, Planning & Strategy|December 12, 2019

Federal estate tax liability is no longer an issue for many families, now that the gift and estate tax exemption stands at $11.4 million for 2019. But there are still affluent individuals whose estates may be subject to hefty estate tax bills. If you expect your estate to have significant estate tax liability at your death, it’s critical to include a tax apportionment clause in your will or revocable trust.

An apportionment clause specifies how the estate tax burden will be allocated among your beneficiaries. Omission of this clause, or failure to word it carefully, may result in unintended consequences.

How to apportion estate taxes

There are many ways to apportion estate taxes. One option is to have all of the taxes paid out of assets passing through your will. Beneficiaries receiving assets outside your will — such as IRAs, retirement plans or life insurance proceeds — won’t bear any of the tax burden.

Another option is to allocate taxes among all beneficiaries, including those who receive assets outside your will. And yet another is to provide for the tax to be paid from your residuary estate — that is, the portion of your estate that remains after all specific gifts or requests have been made and all expenses and liabilities have been paid.

Omission of an apportionment clause

What if your will doesn’t have an apportionment clause? In that case, apportionment will be governed by applicable state law (although federal law covers certain situations).

Most states have some form of an “equitable apportionment” scheme. Essentially, this approach requires each beneficiary to pay the estate tax generated by the assets he or she receives. Some states provide for equitable apportionment among all beneficiaries while others limit apportionment to assets that pass through the will or to the residuary estate.

Often, state apportionment laws produce satisfactory results, but in some cases, they may be inconsistent with your wishes.

Avoid surprises

If you ignore tax apportionment when planning your estate, your wealth may not be distributed in the manner you intend. To avoid unpleasant surprises for your beneficiaries, be sure to include an apportionment clause that clearly spells out who will bear the burden of estate taxes. Contact us with any questions regarding taxes or estate planning.

Understanding the contents of a will

Tax Prep, Planning & Strategy|December 10, 2019

You probably don’t have to be told about the need for a will. But do you know what provisions should be included and what’s best to leave out? The answers to those questions depend on your situation and may depend on state law.

Basic provisions

Typically, a will begins with an introductory clause, identifying yourself along with where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.

After the introductory clause, a will generally explains how your debts and funeral expenses are to be paid. The provisions for repaying debt generally reflect applicable state laws.

Don’t include specific instructions for funeral arrangements. It’s likely that your will won’t be accessed in time. Spell out your wishes in a letter of instructions, which is an informal letter to your family.

A will may also be used to name a guardian for minor children. To be on the safe side, name a backup in case your initial choice is unable or unwilling to serve as guardian or predeceases you.

Specific bequests

One of the major sections of your will — and the one that usually requires the most introspection — divides up your remaining assets. Outside of your residuary estate, you’ll likely want to make specific bequests of tangible personal property to designated beneficiaries.

If you’re using a trust to transfer property, make sure you identify the property that remains outside the trust, such as furniture and electronic devices. Typically, these items won’t be suitable for inclusion in a trust. If your estate includes real estate, include detailed information about the property and identify the specific beneficiaries.

Once you’ve covered real estate and other tangible property, move on to intangible property, such as cash and securities. Again, you may handle these items through specific bequests where you describe the property the best you can.

Finally, most wills contain a residuary clause. As a result, assets that aren’t otherwise accounted for go to the named beneficiaries, often adult children, grandchildren or a combination of family members.

Naming an executor

Toward the end of the will, name the executor — usually a relative or professional — who is responsible for administering it. Of course, this should be a reputable person whom you trust. Also, include a successor executor if the first choice is unable to perform these duties. Frequently, a professional is used in this backup capacity.

Cross the t’s and dot the i’s

Your attorney will help you meet all the legal obligations for a valid will in the applicable state and keep it up to date. Sign the will, putting your initials on each page, with your signature attested to by witnesses. Include the addresses of the witnesses in case they ever need to be located. Don’t use beneficiaries as witnesses. This could lead to potential conflicts of interest. Contact us with questions.

What’s the difference between the two types of power of attorney?

Tax Prep, Planning & Strategy|December 8, 2019

When drafting your estate plan, you and your attorney must account for what happens to your children and your assets after you die. But your plan must also spell out your wishes for making financial and medical decisions if you’re unable to make those decisions yourself. A crucial component of this plan is the power of attorney (POA).

ABCs of a POA

A POA appoints a trusted representative to make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Without it, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions.

POAs in action

A POA is a document under which you, as “principal,” authorize a representative to be your “agent” or “attorney-in-fact,” to act on your behalf. Typically, separate POAs are executed for health care and finances.

A health care POA authorizes your agent — often, a spouse, child or other family member — to make medical decisions on your behalf or consent to or discontinue medical treatment when you’re unable to do so. Depending on the state you live in, the document may also be known as a medical power of attorney or health care proxy. Be aware that a POA for health care is distinguishable from a “living will.”

A POA for property appoints an agent to manage your investments, pay your bills, file tax returns, continue your practice of making annual charitable and family gifts, and otherwise handle your finances, subject to limitations you establish.

To spring or not to spring

Generally, POAs come in two forms: nonspringing, or “durable” — that is, effective immediately — and springing; that is, effective on the occurrence of specified conditions. Typically, springing powers take effect when the principal becomes mentally incapacitated, comatose, or otherwise unable to act for himself or herself.

Nonspringing POAs offer several advantages. Because they’re effective immediately, they allow your agent to act on your behalf for your convenience, not just if you become incapacitated. Also, they avoid the need to make a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation.

A potential disadvantage to a nonspringing POA is the concern that your agent may be tempted to abuse his or her authority or commit fraud.

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, it’s usually preferable to use the nonspringing type and to make sure the person you name as agent is someone you trust unconditionally.

If you’re still uncomfortable handing over a POA that takes effect immediately, consider signing a nonspringing POA but have your attorney hold it and deliver it to your agent when needed. Contact us with questions.

A buy-sell agreement can provide the liquidity to cover estate taxes

Tax Prep, Planning & Strategy|December 5, 2019

If you own an interest in a closely held business, it’s critical to have a well-designed, properly funded buy-sell agreement. Without one, an owner’s death can have a negative effect on the surviving owners.

If one of your co-owners dies, for example, you may be forced to go into business with his or her family or other heirs. And if you die, your family’s financial security may depend on your co-owners’ ability to continue operating the business successfully.

Buy-sell agreement and estate taxes

There’s also the question of estate taxes. With the federal gift and estate tax exemption currently at $11.4 million, estate taxes affect fewer people than they once did. But estate taxes can bring about a forced sale of the business if your estate is large enough and your family lacks liquid assets to satisfy the tax liability.

A buy-sell agreement requires (or permits) the company or the remaining owners to buy the interest of an owner who dies, becomes disabled, retires or otherwise leaves the business. It also establishes a valuation mechanism for setting the price and payment terms. In the case of death, the buyout typically is funded by life insurance, which provides a source of liquid funds to purchase the deceased owner’s shares and cover any estate taxes or other expenses.

3 options

Buy-sell agreements typically are structured as one of the following agreements:

Redemption, which permits or requires the business as a whole to repurchase an owner’s interest,
Cross-purchase, which permits or requires the remaining owners of the company to buy the interest, typically on a pro rata basis, or
Hybrid, which combines the two preceding structures. A hybrid agreement, for example, might require a departing owner to first make a sale offer to the company and, if it declines, sell to the remaining individual owners.

Depending on the structure of your business and other factors, the type of agreement you choose may have significant income tax implications. They’ll differ based on whether your company is a flow-through entity or a C corporation. We can help you design a buy-sell agreement that’s right for your business.

Deducting Business Losses for Pass Through Entities

Tax Prep, Planning & Strategy|December 3, 2019

Deducting business losses for pass-through entities

It’s not uncommon for businesses to sometimes generate tax losses. But the tax law limits deductible losses in some situations. And the Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can now deduct. If your company operates under one of these business structures, it’s important to bear all these limitations in mind as the year rolls along.

Before and after

Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless the passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome. Another restriction was if the business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL).

The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year.

An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of your aggregate business income and gains for the tax year, plus $250,000 ($500,000 if you’re a married taxpayer filing jointly). The excess business loss is carried forward to the following tax year and can be deducted under the rules for NOLs.

What it means

For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year.

Keep in mind that the new loss limitation rules kick in after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules.

Practical impact

The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains.

The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses.

Potential effect

If you’re expecting your business to generate a tax loss in 2019, we can help you determine whether you’ll be affected by the new loss limitation rules.

4 tough questions to ask about your sales department

Tax Prep, Planning & Strategy|December 3, 2019

Among the fastest ways for a business to fail is because of mismanagement or malfeasance by ownership. On the other hand, among the slowest ways is an ineffective or dysfunctional sales department.

Companies suffering from this malady may maintain just enough sales to stay afloat for a while, but eventually they go under because they lose one big customer or a tough new competitor arrives on the scene. To ensure your sales department is contributing to business growth, not just survival, you’ve got to ask some tough questions. Here are four to consider:

1. Does our sales department communicate customers’ needs to the rest of the company? Your sales staff works on the front lines of your industry. They’re typically the first ones to hear of changes in customers’ needs and desires. Make sure your sales people are sharing this information in both meetings and written communications (sales reports, emails and the like).

It’s particularly important for them to share insights with the marketing department. But everyone in your business should be laser-focused on what customers really want.

2. Does the sales department handle customer complaints promptly and satisfactorily? This is related to our first point but critical enough to investigate on its own. Unhappy customers can destroy a business — especially these days, when everyone shares everything on social media.

Your sales staff should have a specific protocol for immediately responding to a customer complaint, gathering as much information as possible and offering a fair resolution. Track complaints carefully and in detail, looking for trends that may indicate deeper problems with your products or services.

3. Do our salespeople create difficulties for employees in other departments? If a sales department is getting the job done, many business owners look the other way when sales staff play by their own rules or don’t treat their co-workers with the utmost professionalism. Confronting a problem like this isn’t easy; you may unearth some tricky issues involving personalities and philosophies.

Nonetheless, your salespeople should interact positively and productively with other departments. For example, do they correctly and timely complete all necessary sales documents? If not, they could be causing major headaches for other departments.

4. Are we taking our sales staff for granted? Salespeople tend to spend much of their time “outside” a company — either literally out on the road making sales calls or on the phone communicating with customers. As such, they may work “out of sight and out of mind.”

Keep a close eye on your sales staff, both so you can congratulate them on jobs well done and fix any problems that may arise. Our firm can help you analyze your sales numbers to help identify ways this department can provide greater value to the company.

Dashboard software helps you keep your eyes on the prize

Tax Prep, Planning & Strategy|December 1, 2019

Like most business owners, you’ve probably been urged by industry experts and professional advisors to identify the most important key performance indicators (KPIs) for your company. So, just for the sake of discussion, let’s say you’ve done that. A natural question that often follows is: Now what? You know you’re supposed to keep an eye on these metrics every day but … how?

The right technology has you covered. There’s a specific type of software — commonly referred to as a “business dashboard” — that allows business owners to create customized views of all their chosen KPIs. And these applications don’t just lay out numbers like a spreadsheet. They provide an easy visual experience that allows you to keep your eyes on the prize: a cost-controlled, profitable company.

Cloud-based knowledge

Business dashboards have been around for a decade or two in various forms. But today’s solutions have the advantage of being cloud-based, meaning the data driving them is typically stored on a secure server off-site. And you can access the dashboard from anywhere at any time on an authenticated device. (You can also still run a dashboard from your company’s own servers, if you prefer.)

If you’ve never used a dashboard before, you might wonder what one looks like. The name says it all. Ideally, a dashboard is a single screen of data — like the panel of gauges in your car — that displays various KPIs in the form of pie charts, bar graphs and other graphic elements.

A few must-haves

When shopping for a product, there are a few “must-haves” to insist on. The software should:

Support your chosen KPIs,
Present itself in a visually pleasing, logical manner that allows you to easily, intuitively follow those KPIs, and
Update itself in real time, enabling you to react quickly to sudden swings in your company’s financial performance.

Be wary of vendors that over-promise “otherworldly” knowledge of your industry or try to upsell you on bells and whistles. The simpler the dashboard, the better. There will always be more complex financial issues regarding your business that can’t be put into simple terms on a dashboard.

Also, the rise of artificial intelligence (AI) is causing many to question the long-term viability of business dashboards. AI gathers and shapes data so quickly, and in such massive amounts, that some experts argue that a business owner’s chosen KPIs can rapidly become outmoded.

Nonetheless, dashboard software is still widely used in many industries. Just be prepared to regularly reassess and, if necessary, update your KPIs.

Shop carefully

If you decide to invest in a business dashboard (or upgrade your current one), you’ll need to go about it carefully. We can help you set a budget and compare prices and functionalities to get an optimal return on investment.

Use Capital Losses to Offset Capital Gains

Don’t flood email inboxes with excessive communications

Expanded 529 plans offer unique estate planning benefits

A poorly worded apportionment clause can upend an estate plan

Understanding the contents of a will

What’s the difference between the two types of power of attorney?

A buy-sell agreement can provide the liquidity to cover estate taxes

Deducting Business Losses for Pass Through Entities

4 tough questions to ask about your sales department

Dashboard software helps you keep your eyes on the prize

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