When many business owners see the term “financial reporting,” they immediately think of their year-end financial statements. And, indeed, properly prepared financial statements generated at least once a year are critical.

But engaging in other types of financial reporting more frequently may help your company stay better attuned to the nuances of running a business in today’s inflationary and competitive environment.

Spot trends and trouble

Just how often your company should engage in what’s often referred to as “interim” financial reporting depends on factors such as its size, industry and operational complexity. Nevertheless, monthly, quarterly and midyear financial reports can enable you to spot trends and get early warnings of potential trouble.

For example, you might compare year-to-date revenue for 2023 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 or change your marketing strategy.

It’s also important to more closely track costs in light of the current level of inflation. If your business is starting to lose money, you might need to consider raising prices or cutting discretionary spending. You could, for instance, temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Your balance sheet is important as well. Reviewing major categories of assets and liabilities can help you detect working capital problems before they spiral out of control. For example, a buildup of accounts receivable could signal troubles with collections. A low stock of key inventory items may 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.

Don’t panic

If interim financial reports do uncover inconsistencies, they may not indicate a major crisis. Some anomalies might be attributable to more informal accounting practices that are common during the calendar year. Typically, either your accounting staff or CPA can correct these items before year-end financial statements are issued.

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

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. So, 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 might lack the time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Glean more insights

Many business owners have had an “aha moment” or two when studying their year-end financial statements. Why not glean those insights more often? We can help you decide how frequently to engage in interim financial reporting and assist you in designing the reports that provide the information you need.

© 2023

Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

1. You must have owned the property for at least two years during the five-year period ending on the sale date.
2. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

• Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
• You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

© 2023

The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments. And due to high inflation, the adjustments for 2023 were big. Here are the numbers that small business owners need to know.

Section 179 deductions

For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software.

Sec. 179 deductions can also be claimed for real estate qualified improvement property (QIP), up to the maximum allowance of $1.16 million. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years. There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.

Deduction for heavy SUVs

There’s a special limitation on Sec. 179 deductions for heavy SUVs, meaning those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.

First-year bonus depreciation has been cut

For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.

However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it’s scheduled to drop to 60% (40% in 2025, 20% in 2026 and 0% in 2027 and beyond).

Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software. First-year bonus depreciation can also be claimed for real estate QIP.

Exception: For certain assets with longer production periods, these percentage cutbacks are delayed by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.

Passenger auto limitations

For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:

• $12,200 for Year 1 ($20,200 if bonus depreciation is claimed),
• $19,500 for Year 2,
• $11,700 for Year 3, and
• $6,960 for Year 4 and thereafter until fully depreciated.

These allowances assume 100% business use. They’ll be further adjusted for inflation in future years.

Advantage for heavy vehicles

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations because they’re considered transportation equipment. As such, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.

Here’s the catch: Heavy vehicles must be used over 50% for business. Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method and it’ll take six tax years to fully depreciate the cost.

Consult with us for the maximum depreciation tax breaks in your situation.

© 2023

Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it’s scheduled to return to an inflation-adjusted $5 million on January 1, 2026.

Unfortunately, portability isn’t automatically available; it requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return (Form 706). And many executors fail to make the election because the estate isn’t liable for estate tax and, therefore, isn’t required to file a return.

The numbers don’t lie

When there’s a surviving spouse, estates that aren’t required to file an estate tax return should consider filing one for the sole purpose of electing portability. The benefits can be significant, as the following example illustrates:

Bob and Carol are married. Bob dies in 2023, with an estate valued at $3.92 million, so his unused exemption is $9 million. His estate doesn’t owe estate tax, so it doesn’t file an estate tax return.

Carol dies in 2026, with an estate valued at $15 million. For this example, let’s say the exemption amount in 2026 is $6 million. Because the exemption has dropped to $6 million, her federal estate tax liability is $3.6 million [40% x ($15 million – $6 million)].

Had Bob’s estate elected portability, Carol could have added his $9 million unused exemption to her own for a total exemption of $15 million, reducing the estate tax liability on her estate to zero. Note that, by electing portability, Bob’s estate would have locked in the unused exemption amount in the year of his death, which wouldn’t be affected by the reduction in the exemption amount in 2026.

Take action before time expires

If your spouse died within the last several years and you anticipate that your estate will owe estate tax, consider having your spouse’s estate file an estate tax return to elect portability. Ordinarily, an estate tax return is due within nine months after death (15 months with an extension), but a return solely for purposes of making a portability election can usually be filed up to five years after death. Contact us with any questions regarding portability.

© 2023

An estimated 190 million Americans have recently been under heat advisory alerts, according to the National Weather Service. That may have spurred you to think about making your home more energy efficient — and there’s a cool tax break that may apply. Thanks to the Inflation Reduction Act of 2022, you may be able to benefit from an enhanced residential energy tax credit to help defray the cost.

Eligibility rules

If you make eligible energy-efficient improvements to your home on or after January 1, 2023, you may qualify for a tax credit up to $3,200. You can claim the credit for improvements made through 2032.

The credit equals 30% of certain qualified expenses for energy improvements to a home located in the United States, including:

• Qualified energy-efficient improvements installed during the year,
• Residential “energy property” expenses, and
• Home energy audits.

There are limits on the allowable annual credit and on the amount of credit for certain types of expenses.

The maximum credit you can claim each year is:

• $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600 total) and home energy audits ($150), as well as
• $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

In addition to windows and doors, other energy property includes central air conditioners and hot water heaters.

Before the 2022 law was enacted, there was a $500 lifetime credit limit. Now, the credit has no lifetime dollar limit. You can claim the maximum annual amount every year that you make eligible improvements until 2033. For example, you can make some improvements this year and take a $1,200 credit for 2023 — and then make more improvements next year and claim another $1,200 credit for 2024.

The credit is claimed in the year in which the installation is completed.

Other limits and rules

In general, the credit is available for your main home, although certain improvements made to second homes may qualify. If a property is used exclusively for business, you can’t claim the credit. If your home is used partly for business, the credit amount varies. For business use up to 20%, you can claim a full credit. But if you use more than 20% of your home for business, you only get a partial credit.

Although the credit is available for certain water heating equipment, you can’t claim it for equipment that’s used to heat a swimming pool or hot tub.

The credit is nonrefundable. That means you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years. However, there’s no phaseout based on your income, so even high-income taxpayers can claim the credit.

Collecting green for going green

Contact us if you have questions about making energy-efficient improvements or purchasing energy-saving property for your home. The Inflation Reduction Act may have other tax breaks you can benefit from for making clean energy purchases, such as installing solar panels. We can help ensure you get the maximum tax savings for your expenditures. Stay cool!

© 2023

Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

1. You must have owned the property for at least two years during the five-year period ending on the sale date.
2. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

• Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
• You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

© 2023

If you’re getting a divorce, you know the process is generally filled with stress. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.

Transferring property tax-free

In general, you can divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding period for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:

• A year after the date the marriage ends, or
• Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Additional future tax issues

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid surprises by planning ahead

Like many major life events, divorce can have significant tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Contact us. We can help you minimize the adverse tax consequences of settling your divorce.

© 2023

There’s a common misconception that only married couples with children need estate plans. In fact, estate planning may be even more important for single people without children. Why? Because for married couples, the law makes certain assumptions about who should make financial or medical decisions on their behalf should they become incapacitated and who should inherit their property if they die.

Who’ll inherit your assets?

It’s critical for single people to execute a will that specifies how, and to whom, their assets should be distributed when they die. Although certain types of assets can pass to your intended recipient(s) through beneficiary designations, absent a will, many types of assets will pass through the laws of intestate succession.

Those laws vary from state to state, but generally they provide for assets to go to the deceased’s spouse or children. For example, the law might provide that if someone dies intestate, half of the estate goes to his or her spouse and half goes to the children. If you’re single with no children, however, these laws set out rules for distributing your assets to your closest relatives, such as your parents or siblings. Or, if you have no living relatives, your assets may go to the state.

By preparing a will, you can ensure that your assets are distributed according to your wishes, whether to family, friends or charitable organizations.

Who’ll make financial decisions on your behalf?

It’s a good idea to sign a durable power of attorney. This document appoints someone you trust to manage your investments, pay your bills, file your tax returns and otherwise make financial decisions should you become incapacitated.

Although the law varies from state to state, typically, without a power of attorney, a court would have to appoint someone to make these decisions on your behalf. Not only will you have no say in who the court appoints, but the process can be costly and time consuming.

Who’ll make medical decisions on your behalf?

You should prepare a living will, a health care directive (also known as a medical power of attorney), or both to ensure that your wishes regarding medical care — particularly resuscitation and other extreme lifesaving measures — are carried out in the event you’re incapacitated. These documents can also appoint someone you trust to make medical decisions that aren’t expressly addressed.

Absent such instructions, the laws in some states allow a spouse, children or other “surrogates” to make these decisions. In the absence of a suitable surrogate, or in states without such laws, medical decisions are generally left to the judgment of health care professionals or court-appointed guardians.

Contact us if you fall into the category of being single without children. We can help draft an estate plan that’s best suited for you.

© 2023

For years, life insurance has played a critical role in estate planning, providing a source of liquidity to pay estate taxes and other expenses. It’s been particularly valuable for business owners, whose families might not have the liquid assets they need to pay estate taxes without selling the business.

Because the federal gift and estate tax exemption has climbed to $12.92 million (for 2023), estate tax liability generally is no longer a concern for the vast majority of families. But even for nontaxable estates, life insurance continues to offer significant estate planning benefits.

Replacing income and wealth

If you die unexpectedly, life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).

CRTs are irrevocable trusts that work like this: You contribute property to a CRT during your life or upon your death and the trust makes annual distributions to you or your beneficiary (typically, your spouse) for a specified period of time. When that period ends, the remainder goes to a charity of your choice.

These instruments are particularly useful when you contribute highly appreciated assets and want to reduce capital gains tax exposure. Because the CRT is tax-exempt, it can sell the assets and reinvest the proceeds without currently triggering the entire capital gain.

Here’s where life insurance comes in. Because CRT assets eventually go to charity — usually after both you and your spouse have died — you won’t have as much to leave to your children or other heirs. A life insurance policy can replace that “lost” wealth in a tax advantaged way.

Treating your children equally

If much of your wealth is tied up in a family business, treating your children fairly can be a challenge. It makes sense to leave the business to those children who work in it, but what if your remaining assets are insufficient to provide an equal inheritance to children who don’t? For many families, the answer is to purchase a life insurance policy to make up the difference.

Protecting your assets

Depending on applicable state law, a life insurance policy’s cash surrender value and death benefit may be shielded from creditors’ claims. For additional protection, consider setting up an irrevocable life insurance trust to hold your policy.

Finding the right policy

These are just a few examples of the many benefits provided by life insurance. We can help determine which type of life insurance policy is right for your situation.

© 2023

The day-to-day demands of running a business can make it difficult to think about the future. And by “future,” we’re not necessarily talking about how your tax liability will look at year-end or how you might grow the bottom line over the next five years. We’re referring to the future in which you no longer own your company.

Succession planning is an important task for every business owner. And it’s never too early to start thinking about three of the most critical factors.

1. The involvement of your family

Among the primary questions you’ll need to answer is whether you want to transfer ownership of the company to a family member or sell it to either someone already in the business or to an outside party.

If your children are involved in the business, or there’s another logical successor from within the family, you’ll want to start mentoring this person long before you want to step down. An intrafamily successor should be someone who objectively has the education, training, experience and temperament to fill your shoes. Depending on the amount of support your replacement needs, it may take years for this individual to be truly ready.

Also bear in mind that succession planning and estate planning are linked. You’ll want to create a clear, legally defensible ownership transfer plan while you also fund your retirement or next stage of life. In addition, you need an estate plan that equitably divides your wealth among family members who participate in the business and those who don’t.

2. The market for your company

If it appears unlikely that you’ll transfer ownership to a family member, you’ll probably want to sell your company. The primary question then becomes: Will there be a market for it when you’re ready to leave? If mergers and acquisitions are relatively common in your industry, you may have little to worry about. But if companies like yours tend to be a tough sell, you might be in for a long and perhaps frustrating process.

To put yourself in a better position, start developing a list of potential buyers well before you’re ready to depart. These may include competitors, business associates and private equity firms. Essentially, you need to get a good idea of the “size and shape” of the market for your company so you can fine tune your succession plan.

3. The structure of the transfer or sale

If you do decide to name a family member as your successor, you’ll need to work with an attorney, CPA and perhaps other advisors to transfer ownership in a legally secure, tax-savvy manner that also accounts for your estate plan.

On the other hand, if you’re going to sell the company (or ownership shares) to someone outside your family, you’ll need to structure the deal carefully. One option is to sell the business to your employees over time via an employee stock ownership plan (ESOP). But ESOPs come with many rules and complexities.

Alternatively, you might set up a purchase via an internal buy-sell agreement that stipulates your partners (if you have them) must buy your shares. Or you could sell to one of the potential buyers mentioned above — again, typical parties include competing businesses, perhaps someone you know through networking or private equity firms.

The specifics of stepping down

Granted, these three factors are general in nature. There will be many specifics that your succession plan will need to cover as you get closer to stepping down. Contact us for further information.

© 2023