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Assets with sentimental value require extra planning

Tax Prep, Planning & Strategy|August 20, 2019

When planning your estate, you’re likely focused on major assets, such as real estate, investments and retirement plans. But it’s also important to “sweat the small stuff” — your tangible personal property. Examples include jewelry, antiques and photographs.

These personal items — which often have modest monetary value but significant sentimental value — may be more difficult to deal with, and more likely to result in disputes, than big-ticket items. Squabbling over these items can lead to emotionally charged disputes and even litigation. In some cases, the legal fees and court costs can eclipse the monetary value of the property itself.

Prepare a personal property memorandum

Spelling out every gift of personal property in your will or trust can be cumbersome. Perhaps you want to leave your son a painting he’s always enjoyed and give your daughter your prized first-edition copy of your favorite book. You may want to leave your coin collection, which has never interested your children, to an old friend. And so on.

If you wish to make many small gifts like these, your will or trust can get long in a hurry. Plus, any time you change your mind or decide to add another gift, you’ll have to amend your documents. Often, a more convenient solution is to prepare a personal property memorandum to provide instructions on the distribution of tangible personal property not listed in your will or trust.

In many states, a personal property memorandum is legally binding, provided it’s specifically referred to in your will and meets certain other requirements. Check with your attorney. You can change your memorandum or add to it at any time without the need to formally amend your will. Even if it’s not legally binding in your state, however, a personal property memorandum can be an effective tool for expressing your wishes and explaining the reasons for your gifts, which can go a long way toward avoiding disputes.

If you use a personal property memorandum, it’s advisable to include certain property in your will or trust, such as high-value items, gifts to nonfamily members or other gifts that are susceptible to challenge.

Little things mean a lot

As you plan your estate, don’t overlook tangible personal property. The dollar value of these items may be relatively low, but their emotional value demands careful planning to avoid hurt feelings, misunderstandings and disputes.

Nonprofits: Harness the power of cause marketing

Accounting & Assurance|August 18, 2019

Not-for-profits with multiple sources of support generally are less likely to have budget shortfalls and are better able to grow and expand their services. If you’re looking for new funding sources, consider cause marketing. Made possible via a partnership with a for-profit business, cause marketing can boost your budget, your public profile and even your volunteer base.

Businesses and charities benefit

Cause marketing is different from a tax-deductible donation or corporate charitable giving program. When a cause marketing partner provides your organization with funds or services, it’s ideally rewarded with an enhanced public image, greater customer loyalty and other marketing advantages.

How do such partnerships benefit charities? With corporate financing and business expertise backing your nonprofit, you might be able to increase your visibility and educate new audiences about your cause. As members of the public become acquainted with your mission, you can probably expect your volunteer and donor ranks to grow. And new connections with your corporate partner’s customers, vendors, employees and other stakeholders can open up all kinds of avenues for growth.

Many forms

Cause marketing takes many forms. For example, transactional giving programs typically involve online platforms such as iGive and Browse for a Cause that enable shoppers to donate a dollar amount or percentage of each purchase to their chosen charities. Or donors may be able to convert customer-loyalty program rewards (such as airline miles) into cash contributions.

Another form is message promotion, where a company uses its resources to promote a cause-focused message — usually one related to its own products. For instance, Nissan’s truck campaign “Calling all Titans” featured a donation page to help people affected by Hurricanes Florence and Michael. Nissan also partnered with the American Red Cross and other organizations to discuss on Facebook how the public could help the hurricanes’ victims.

Licensing agreements are another option. A company may pay to use your not-for-profit’s name and branding on its products. Because these partnerships can have legal complications, they’re recommended for larger, more sophisticated nonprofits.

Choose carefully

If you decide that cause marketing makes sense for your organization, research potential partners and partnership forms. Unless your nonprofit has nationwide reach, it’s better to partner with a local business — preferably one that’s established and well known in your community.

Also, don’t forget to consider legal or tax consequences of a cause marketing partnership. An attorney and a CPA should thoroughly review any proposed agreement.

Is your business stuck in the mud with its marketing plan?

Tax Prep, Planning & Strategy|August 15, 2019

A good marketing plan should be like a network of well-paved, clearly marked roads shooting out into the world and leading back to your company. But, all too easily, a business can get stuck in the mud while trying to build these thoroughfares, leaving its marketing message ineffective and, well, muddled. Here are a few indications that you might be spinning your wheels.

Still the same

If you’ve been using the same marketing materials for years, it’s probably time for an update. Customers’ demographics, perspectives and expectations change over time. If your materials appear old and outdated, your products or services may seem that way too.

Check out the marketing and advertising of competitors, as well as perhaps a few companies that you admire. What about their efforts grabs you? Discuss it with your team and come up with a strategy for refreshing your look. You might need to do something as drastic as a total rebranding, or a few relatively minor tweaks might be sufficient.

Overreliance on one approach

While a marketing plan should take many avenues, sometimes when a business finds success via a certain route, it gets overly reliant on that one approach. Think of a company that has advertised in its local phonebook for years and doesn’t notice when a competitor starts pulling in customers via social media.

This is where data becomes key. Use metrics to track response rates to your various initiatives and regularly reassess the balance of your marketing approach. Unlike the business in our example, many companies today become too focused on social media and ignore other options. So, watch out for that.

Inconsistent message

Ask yourself whether your various marketing efforts complement — or conflict with — one another. For example, is it obvious that an online ad and a print brochure came from the same business? Are you communicating a consistent, easy-to-remember message to customers and prospects throughout your messaging?

In addition, be careful about tone and taking unnecessary risks — particularly when using social media. It’s a difficult challenge: You want to get noticed, and sometimes that means pushing the envelope, but you don’t want to end up being offensive. Generally, you shouldn’t run the risk of alienating customers with controversial material. If you do come up with an edgy idea that you believe will likely pay off, gather plenty of feedback from objective parties before launching.

Reconstruction work

A marketing plan going nowhere will likely leave your sales team lost and your bottom line suffering. Maybe it’s time to do some reconstruction work on yours. Contact us for more information and further suggestions.
© 2019

Naming a trustee may be one of the most important decisions of your life

Tax Prep, Planning & Strategy|August 13, 2019

When it comes to estate planning, trusts are appealing for many reasons. They can enable you to hold and transfer assets for beneficiaries, avoid probate and reduce estate tax exposure. But they can be complicated to set up. One of the major decisions you’ll need to make when establishing a trust is who will act as your trustee. As the name implies, this individual or financial institution must be above reproach. But that’s just one quality of many that your trustee requires.

Both mundane and significant duties

Trustees have significant legal responsibilities, primarily related to administering the trust for the benefit of beneficiaries according to the terms of the trust document. But the role can require many different types of tasks. For example, even if a tax expert is engaged to prepare tax returns, the trustee is responsible for ensuring that they’re completed and filed correctly and on time.

One of the more challenging trustee duties is to accurately account for investments and distributions. When funds are distributed to cover a beneficiary’s education expenses, for example, the trustee should record both the distribution and the expenses covered by it. Beneficiaries are allowed to request an accounting of the transactions at any time.

The trustee needs to invest assets within the trust reasonably, prudently and for the long-term benefit of beneficiaries. And trustees must avoid conflicts of interest — that is, they can’t act for personal gain when managing the trust.

Finally, trustees must be impartial. They may need to decide between competing interests, while still acting within the terms of the trust document.

A tall order

Several qualities help make someone an effective trustee, including:

A solid understanding of tax and trust law,
Investment management experience,
Bookkeeping skills,
Integrity and honesty, and
The ability to work with all beneficiaries objectively and impartially.

And because some trusts continue for generations, trustees may need to be available for an extended period. For this reason, many people name a financial institution or professional advisor, rather than a friend or family member, as trustee.

Naming a friend or family member as a trustee may seem appealing because it appears to be a way to reduce or avoid the fees associated with an institutional trustee. But it’s important to recognize that taking on the responsibilities of a trustee requires an investment of time, energy and expertise, and that trustees deserve compensation. Even if trust documents don’t provide a fee for the trustee, many states allow for a “reasonable fee.” Before engaging a trustee, make sure you understand what services are included in the fee. But it’s generally not a good idea to try to avoid paying a trustee fee.

Consider all options

Naming a trustee is an important decision, as this person or institution will be responsible for carrying out the terms outlined in the trust documents. We can help you weigh the options available to you.

Which entity is most suitable for your new or existing business?

Tax Prep, Planning & Strategy|August 11, 2019

The Tax Cuts and Jobs Act (TCJA) has changed the landscape for business taxpayers. That’s because the law introduced a flat 21% federal income tax rate for C corporations. Under prior law, profitable C corporations paid up to 35%.

The TCJA also cut individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and LLCs (treated as partnerships for tax purposes). However, the top rate dropped from 39.6% to only 37%.

These changes have caused many business owners to ask: What’s the optimal entity choice for me?

Entity tax basics

Before the TCJA, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.

Although C corporations are still potentially subject to double taxation, their current 21% tax rate helps make up for it. This issue is further complicated, however, by another tax provision that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, that deduction is available only through 2025.

Many factors to consider

The best entity choice for your business depends on many factors. Keep in mind that one form of doing business might be more appropriate at one time (say, when you’re launching), while another form might be better after you’ve been operating for a few years. Here are a few examples:

Suppose a business consistently generates losses. There’s no tax advantage to operating as a C corporation. C corporation losses can’t be deducted by their owners. A pass-through entity would generally make more sense in this scenario because losses would pass through to the owners’ personal tax returns.
What about a profitable business that pays out all income to the owners? In this case, operating as a pass-through entity would generally be better if significant QBI deductions are available. If not, there’s probably not a clear entity-choice answer in terms of tax liability.
Finally, what about a business that’s profitable but holds on to its profits to fund future projects? In this case, operating as a C corporation generally would be beneficial if the corporation is a qualified small business (QSB). Reason: A 100% gain exclusion may be available for QSB stock sale gains. Even if QSB status isn’t available, C corporation status is still probably preferred — unless significant QBI deductions would be available at the owner level.

As you can see, there are many issues involved and taxes are only one factor.

For example, one often-cited advantage of certain entities is that they allow a business to be treated as an entity separate from the owner. A properly structured corporation can protect you from business debts. But to ensure that the corporation is treated as a separate entity, it’s important to observe various formalities required by the state. These include filing articles of incorporation, adopting by-laws, electing a board of directors, holding organizational meetings and keeping minutes.

The best long-term choice

The TCJA has far-reaching effects on businesses. Contact us to discuss how your business should be set up to lower its tax bill over the long run. But remember that entity choice is easier when starting up a business. Converting from one type of entity to another adds complexity. We can help you examine the ins and outs of making a change.

Beware if your estate plan leaves specific assets to specific heirs

Tax Prep, Planning & Strategy|August 8, 2019

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as homes, cars or stock — to specific people, you may inadvertently disinherit them.

Illustrating the problem

Let’s say Debbie has three children — Abbie, Mary Kate and Lizzie — and wishes to treat them equally in her estate plan. In her will, Debbie leaves a $500,000 mutual fund to Abbie and her home valued at $500,000 to Mary Kate. She also names Lizzie as beneficiary of a $500,000 life insurance policy.

When Debbie dies years later, the mutual fund balance has grown to $750,000. In addition, she had sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. But she neglected to revise her will. The result? Abbie receives the mutual fund, with a balance of $1.5 million, and Mary Kate and Lizzie are disinherited.

Even if Debbie continued to own the home, it could have declined in value after she drafted her will (rather than increased), leaving Mary Kate with less than her sisters.

Avoiding this outcome

It’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Debbie, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to avoid undesired consequences. For example, your trust might provide for your assets to be divided equally but also provide for your children to receive specific assets at fair market value as part of their shares. If you have questions regarding the division of your assets to your heirs, contact us. We can review your plan and address your concerns.

Estate Planning Pitfall: You’re Not Making Direct Payments of Tuition and Medical Expenses

Tax Prep, Planning & Strategy|August 6, 2019

Now that the unified gift and estate tax exemption has jumped to $11.18 million in 2018, you may no longer have to worry about gift and estate taxes. On top of that, you can still use the annual gift tax exclusion of $15,000 per recipient in 2018.

In other words, you can give each recipient gifts valued up to $15,000 a year, thereby reducing the size of your taxable estate. For example, if you have three children and seven grandchildren, you can give each one $15,000, for a total of $150,000. If your spouse joins in the gifts, the tax-free total is doubled to $300,000. And, if you continue this pattern for five years, you’ll have reduced your taxable estate by $1.5 million gift tax free.

But there are no guarantees that estate tax laws won’t be revised in the future or that your accumulated assets won’t eventually exceed the available exemption. Investigate other tax-saving possibilities.

Notably, be aware of this unique tax break: If you pay medical expenses on behalf of someone directly to a health care provider, those payments are exempt from gift tax above and beyond any amount covered by the annual gift tax exclusion. The same is true for paying the tuition expenses of a student directly to the school. For example, if you give your granddaughter $15,000 in 2018 and then pay her $35,000 tuition bill at an elite private college, the entire $50,000 is sheltered from gift tax. But remember that the gift must be made directly to the educational institution (or health care provider). You can’t use your granddaughter as a go-between.

Associations: Avoid certain activities to preserve tax-exempt status

Tax Prep, Planning & Strategy|August 6, 2019

Nonprofit trade associations, or 501(c)(6) organizations, exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Whether the association is a local chamber of commerce, a real estate board or a large professional group, associations’ tax-exempt status is contingent on their sponsoring certain types of activities — and avoiding others. When they fail to do so, the IRS may take action.

Misinterpreting terms

Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.

Differentiating between activities

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, it’s acceptable to attempt to influence legislation relating to the common business interests of your members. You can also test and certify products and establish industry standards; publish statistics on industry conditions to promote your members’ line of business; and research effective business practices and share that information with your members.

But you should limit activities if they benefit specific members rather than the industry or profession as a whole. These might include:

Selling advertising in member publications,
Facilitating the purchase of supplies for members,
Providing workers’ compensation insurance to members.

Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common business interests. But these activities generally should be limited in scope and number.

Avoiding UBIT

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might form a separate for-profit organization to offer those services.

Keeping your focus

The IRS is on the lookout for 501(c)(6) associations that don’t promote common business interests. If yours doesn’t, it may be time to review and revise your offerings. Contact us for help.

Hire your children this summer: Everyone wins

Tax Prep, Planning & Strategy|August 4, 2019

If you’re a business owner and you hire your children (or grandchildren) this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. And you may be able to:

Shift your high-taxed income into tax-free or low-taxed income,
Realize payroll tax savings (depending on the child’s age and how your business is organized), and
Enable retirement plan contributions for the children.

It must be a real job

When you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say a business owner operates as a sole proprietor and is in the 37% tax bracket. He hires his 16-year-old son to help with office work on a full-time basis during the summer and part-time into the fall. The son earns $10,000 during 2019 and doesn’t have any other earnings.

The business owner saves $3,700 (37% of $10,000) in income taxes at no tax cost to his son, who can use his 2019 $12,200 standard deduction to completely shelter his earnings.

The family’s taxes are cut even if the son’s earnings exceed his or her standard deduction. The reason is that the unsheltered earnings will be taxed to the son beginning at a rate of 10%, instead of being taxed at his father’s higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners.

Start saving for retirement early

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA. For the 2018 tax year, a working child can contribute the lesser of his or her earned income, or $6,000 to an IRA or a Roth.

Raising tax-smart children

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. If you have any questions about how these rules apply to your situation, don’t hesitate to contact us.

Congress acts to reform the IRS, enhance taxpayer protections

Tax Prep, Planning & Strategy|August 1, 2019

The U.S. Senate has passed, and President Trump is expected to sign into law, a broad package of reforms aimed at the IRS. Among other things, the Taxpayer First Act contains several new protections for taxpayers, along with provisions intended to improve the IRS’s customer service.

Stronger safeguards against identity theft

Several of the bill’s provisions address tax-related identity theft. For example, the bill generally requires the IRS to notify a taxpayer as soon as practicable when it suspects or confirms an unauthorized use of the individual’s identity. The IRS also must:

Provide the taxpayer instructions on how to file a report with law enforcement on the unauthorized use,
Identify any steps the individual should take to permit law enforcement to access his or her personal information during the investigation,
Provide information regarding the actions the taxpayer can take to protect him- or herself from harm, and
Offer identity protection measures, such as the use of an “identity protection personal identification number” (IP PIN).

The bill also requires the IRS to establish a program within five years that allows all taxpayers to request IP PINs to better secure their identity when filing their tax returns. This protection currently is available only to victims of tax-related identity theft.

The IRS must provide a suspected victim with additional notifications regarding whether it has initiated an investigation into the unauthorized use and whether the investigation has substantiated such unauthorized use. It also must notify the individual of whether any action has been taken against someone relating to the unauthorized use or whether any referral for criminal prosecution has been made.

And the IRS must ensure that victims of tax-related identity theft have a single point of contact at the agency throughout the processing of their cases. That contact must track the taxpayer’s case to completion and coordinate with other IRS employees to resolve the taxpayer’s issues as quickly as possible.

Greater appeals rights

The Taxpayer First Act codifies into law the IRS’s already-existing, independent Office of Appeals. It also expands taxpayers’ rights of appeal regarding tax matters.

For example, under the law, the IRS must provide certain taxpayers who request a conference with the Office of Appeals with access to the nonprivileged portions of the case file on the disputed issues no later than 10 days before the scheduled conference date. Currently, taxpayers must file a Freedom of Information Act request to gain access to their case files.

The resolution process available through the appeals office generally is available to all taxpayers. If a taxpayer’s request to appeal an IRS notice of deficiency is denied, the IRS must give the taxpayer a written notice with a detailed description of the facts involved, the basis for the denial and a detailed explanation of how the basis applies to the facts. The notice also must describe the procedures for protesting the denial.

Customer service improvements

The bill gives the IRS one year to develop and submit to Congress a comprehensive customer service strategy. The strategy must include a plan to extend assistance to taxpayers that’s secure and designed to meet reasonable taxpayer expectations. The plan must adopt appropriate customer service best practices from the private sector, including online services, telephone callback services and training of customer service employees.

Separately, the bill requires the IRS to supply helpful information to taxpayers who are on hold during a telephone call to any IRS help line. That information includes common tax scams, where and how to report tax scams, and additional advice on how taxpayers can protect themselves from identity theft and tax crimes.

Additional provisions

The Taxpayer First Act tackles many other areas, including:

Structuring. The bill establishes new protections from IRS enforcement abuses of so-called “structuring laws.” Those laws let the agency seize taxpayer assets when a taxpayer appeared to make bank deposits in amounts just under the $10,000 trigger for bank reporting requirements.

Whistleblower reforms. The bill permits the IRS to disclose to a whistleblower tax return information related to the investigation of any taxpayer about whom the whistleblower has provided information (to the extent necessary to obtain information that isn’t otherwise reasonably available). It also mandates certain updates to whistleblowers on investigations and adds antiretaliation provisions.

Electronic filing. The IRS generally must eventually require individuals filing 10 or more returns — down significantly from the current 250-return threshold — to file electronically. The lower threshold will be phased in, falling to 100 returns for 2021 and 10 returns in 2022. Special rules apply to partnerships.

And that’s not all

The far-reaching bill will affect a variety of other areas, such as cybersecurity, innocent spouse relief, private debt collection and misdirected tax refund deposits. We’ll keep you abreast of these and other relevant tax developments.

Assets with sentimental value require extra planning

Nonprofits: Harness the power of cause marketing

Is your business stuck in the mud with its marketing plan?

Naming a trustee may be one of the most important decisions of your life

Which entity is most suitable for your new or existing business?

Beware if your estate plan leaves specific assets to specific heirs

Estate Planning Pitfall: You’re Not Making Direct Payments of Tuition and Medical Expenses

Associations: Avoid certain activities to preserve tax-exempt status

Hire your children this summer: Everyone wins

Congress acts to reform the IRS, enhance taxpayer protections

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