Consider Borrowing From Your Corporation but Structure the Deal Carefully

If you own a closely held corporation, you can borrow funds from your business at rates that are lower than those charged by a bank. But it’s important to avoid certain risks and charge an adequate interest rate.
Basic of this Strategy

Interest rates have increased over the last couple years. As a result, shareholders may decide to take loans from their corporations rather than pay higher interest rates on bank loans. In general, the IRS expects closely held corporations to charge interest on related-party loans, including loans to shareholders, at rates that at least equal applicable federal rates (AFRs). Otherwise, adverse tax results can be triggered. Fortunately, the AFRs are lower than the rates charged by commercial lenders.

It can be advantageous to borrow money from your closely held corporation to pay personal expenses. These expenses may include your child’s college tuition, home improvements, a new car or high-interest credit card debt. But avoid these two key risks:

  • Not creating a legitimate loan. When borrowing money from your corporation, it’s important to establish a bona fide borrower-lender relationship. Otherwise, the IRS could reclassify the loan proceeds as additional compensation. This reclassification would result in an income tax bill for you and payroll tax for you and your corporation. (However, the business would be allowed to deduct the amount treated as compensation and the corporation’s share of related payroll taxes.)
    • Alternatively, the IRS might claim that you received a taxable dividend if your company is a C corporation. That would trigger taxable income for you with no offsetting deduction for your business.
    • Draft a formal written loan agreement that establishes your unconditional promise to repay the corporation a fixed amount under an installment repayment schedule or on demand by the corporation. Take other steps such as documenting the terms of the loan in your corporate minutes.
  • Not charging adequate interest. The minimum interest rate your business should charge to avoid triggering the complicated and generally unfavorable “below-market loan rules” is the IRS-approved AFR. (There’s an exception to the below-market loan rules if the aggregate loans from a corporation to a shareholder are $10,000 or less.)
Current AFRs

The IRS publishes AFRs monthly based on market conditions. For loans made in July 2024, the AFRs are:

  • 4.95% for short-term loans of up to three years,
  • 4.40% for mid-term loans of more than three years but not more than nine years, and
  • 4.52% for long-term loans of over nine years.

These annual rates assume monthly compounding of interest. The AFR that applies to a loan depends on whether it’s a demand or term loan. The distinction is important. A demand loan is payable in full at any time upon notice and demand by the corporation. A term loan is any borrowing arrangement that isn’t a demand loan. The AFR for a term loan depends on the term of the loan, and the same rate applies for the entire term.

An Example

Suppose you borrow $100,000 from your corporation with the principal to be repaid in installments over 10 years. This is a term loan of over nine years, so the AFR in July would be 4.52% compounded monthly for 10 years. The corporation must report the loan interest as taxable income.

On the other hand, if the loan document gives your corporation the right to demand full repayment at any time, it’s a demand loan. Then, the AFR is based on a blended average of monthly short-term AFRs for the year. If rates go up, you must pay more interest to stay clear of the below-market loan rules. If rates go down, you’ll pay a lower interest rate.

Term loans for more than nine years are smarter from a tax perspective than short-term or demand loans because they lock in current AFRs. If rates drop, a high-rate term loan can be repaid early and your corporation can enter into a new loan agreement at the lower rate.

Avoid Adverse Consequences

Shareholder loans can be complicated, especially if the loan charges interest below the AFR, the shareholder stops making payments or the corporation has more than one shareholder. Contact us about how to proceed in your situation.

© 2024


 

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TR means the turnover rate equals the number of participants who were terminated (A) divided by the number of participants at the end of the prior year plus any added during the plan year (X+Y). For example, if 20 employees were terminated at a company that had 80 participants, the turnover rate would be 25%. If it appears that a company’s workforce has dropped or is expected to drop by 20% or more, employers, HR professionals, and plan administrators should closely scrutinize 401(k) plan documents and the laws and regulations governing such retirement plans. Workforce Reductions and the 401(k) Plan How does the termination of employee participants affect a company’s 401(k) plan? Between the complexity of 401(k) plan regulations and vigorous IRS oversight, it’s crucial to understand that significant employee turnover and other workforce-related events can have an impact on retirement plan operations and forfeiture accounts. If it is determined that a partial 401(k) termination occurred, employers must fully vest the affected employees regardless of plan requirements. For example, plan documents might require an employee to work six years to become fully vested in the employer’s contributions to the 401(k) plan. A layoff occurs which includes employees with less than six years of service. The employer must vest these employees at 100%, in part because they were not given the opportunity to meet that six-year benchmark. The same is true for other events, such as business restructuring and plan amendments that affect employee eligibility. Immediate vesting of a large number of departing employees could potentially create financial hardship for the business. The plan’s forfeiture accounts may be available to fund the vesting of employees without a significant immediate impact on cash flow. However, any required adjustments to vesting must occur whether the forfeiture accounts will cover the cost or not. It’s important to identify and plan for any event that could jeopardize the 401(k) plan. Failing to recognize a partial 401(k) plan termination is common, but companies can enhance their monitoring procedures and increase awareness. Avoiding Partial Termination Missteps The IRS can completely disqualify a 401(k) plan if vesting is not handled properly after a partial termination. Consider the following best practices to help mitigate the risk: Learn the rules. Rules and regulations surrounding partial terminations tend to be complex, consider consulting with an employee benefit plan professional or ERISA attorney to understand the rules. Know your plan. Become familiar with plan document provisions related to partial plan terminations, vesting provisions and the use of forfeiture accounts. Establish oversight policies and procedures. Monitoring employee voluntary and involuntary terminations by the plan sponsor and management should be ongoing. Consider turnover trends during the plan year as well as across multiple years. Document all terminations. It may be necessary to prove to the IRS whether a departure was voluntary or involuntary for the turnover calculation. The IRS may classify voluntary terminations as involuntary terminations if the employer cannot provide support for the nature of the employee’s departure. Manage forfeiture accounts. The balance of the forfeiture account can include a variety of sources, including funds previously forfeited from participant accounts that are affected by a partial plan termination. The funds in the forfeiture account may be needed to reinstate the accounts of the affected participants. Correct vesting failures. The IRS offers the IRS Employee Plans Compliance Resolution Systems that can be used to correct this compliance failure.   [...] Read more...
June 12, 2024  Audit committees act as gatekeepers over the accounting and financial reporting processes, including the effectiveness of the company’s control environment. However, as the regulatory landscape becomes increasingly complex and organizations face evolving risks, the scope of an audit committee’s responsibilities may extend beyond traditional financial reporting. Top-of-mind list In March 2024, a survey entitled “Audit Committee Practices Report: Common Threads Across Audit Committees” was published by Deloitte and the Center for Audit Quality, an affiliate of the American Institute of Certified Public Accountants. The survey analyzed 266 responses, including many from people who served on audit committees of public companies. Respondents identified the following five priorities over the next 12 months: 1. Cybersecurity. This was listed as a top-three concern by a majority (69%) of audit committee members surveyed. The focus on cybersecurity is, in part, caused by a new regulation from the U.S. Securities and Exchange Commission. It requires public companies to 1) report material cybersecurity incidents, 2) disclose cybersecurity risk management and strategy, and 3) explain their board and management oversight processes. Surprisingly, only 24% of respondents said their audit committees had sufficient levels of expertise in this area. So additional resources may be needed to hire external cybersecurity advisors or invest in educational programs to bridge the knowledge gap. 2. Enterprise risk management (ERM). Nearly half (48%) of respondents listed ERM as a top-three concern. This refers to the processes an organization uses to identify, monitor and assess enterprise-wide risks. Audit committees have been tasked with ERM for many years, but extra attention may be warranted as new threats emerge. Examples include pandemics, large natural and climate-related disasters, and global conflicts. It’s important for audit committees to evaluate whether their organizations’ ERM processes can handle new threats efficiently and effectively. 3. Finance and internal audit talent. More than one-third (37%) of respondents put this concern on their top-three list. Audit committees frequently work closely with in-house finance and internal audit teams. While most respondents (89%) agree or strongly agree that their internal auditors possess high-level understandings of the companies’ operations, there may be opportunities to upskill in-house staff and use artificial intelligence (AI) to streamline routine tasks, eliminate redundancies and identify opportunities to operate more efficiently. Audit committees should oversee succession planning for finance and internal audit teams, particularly if their companies’ CFOs are planning to soon retire. 4. Compliance with laws and regulations. More than one-third (36%) of respondents are focused on the heightened complexity of the regulatory environment. Compliance issues are especially prevalent in heavily regulated industries, such as banking, food services and aviation. 5. Finance transformation. Listed as a top-three concern by 33% of respondents, finance transformation refers to revamping the finance department to better align with the company’s overall strategy. It may entail changes to the department’s operating model, staffing, processes and accounting systems. The goals are to simplify, streamline and optimize the organization’s finance function. Audit committees can help finance teams implement transformation initiatives by understanding the human and technological resources needed. Many are considering possible AI solutions, for example, to expedite closing the books at the end of the reporting period, improve financial planning and detect impending risks. Collaborative approach External auditors communicate frequently with audit committees about top concerns, emerging risks, impending regulations and other matters, so they can help each other in performing their respective roles. Contact us. We design audit procedures, draft financial statement disclosures and provide guidance to help address the challenges audit committees face today. © 2024   [...] Read more...
June 12, 2024  Four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration, according to “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). They are financial statement audits, reporting hotlines, surprise audits and proactive data analysis. However, the ACFE study also found that two of these — surprise audits and proactive data analysis — are among the least commonly implemented controls. Here’s how your organization might benefit from conducting periodic surprise audits. Financial statement audits vs. surprise audits Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. But financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism. By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets. Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit. The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence. Big benefits The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits. Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help. Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim-organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees). We can help Your organization can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, and the median loss caused by fraud is a whopping $145,000. If your organization doesn’t already conduct surprise audits, contact us to discuss how they can be used to fortify its defenses against occupational theft and financial misstatement. © 2024   [...] Read more...
June 12, 2024  Accurate bookkeeping is essential to operating a successful small business. The problems created by inadequate bookkeeping practices can have significant, long-lasting consequences. Here are four common pitfalls — and how to avoid them with the right knowledge and tools. 1. Commingled bank accounts It’s important to maintain a separate dedicated bank account for business transactions. Using the owner’s personal accounts for business purposes can have legal and tax implications. Separate accounts also make it easier to track business expenses and prepare tax returns. With a separate bank account, you can set up payments for recurring business expenses. It’s also important to review and reconcile your business records to bank statements on a regular basis. 2. Overreliance on spreadsheets Excel is a user-friendly, versatile tool for many business purposes. But without extensive programming, it lacks automation and the ability to provide real-time updates. And using spreadsheets for bookkeeping purposes can lead to inconsistent treatment of similar transactions and data entry errors. Excel should never be a substitute for dedicated accounting software, such as QuickBooks®, NetSuite® or Xero™. These cost-effective solutions streamline a small business’s financial reporting processes. Most programs integrate with bank and credit card accounts — and cloud-based platforms provide access from anywhere with the owner’s (or manager’s) laptop, tablet and smartphone. 3. The use of personal credit for business expenses Drawing from personal credit sources provides quick access to funds when you’re launching a new venture. However, they often come with high interest rates and fees. Using personal credit for business expenses also makes it harder to separate personal and business expenses for accounting and tax purposes. To get a business credit line, you’ll need to contact your bank and complete an application. While the application process may take some time, it’s worth the effort. Credit lines help establish a credit history in the company’s name, which is essential as the business grows and needs additional capital to purchase major assets and pursue investment opportunities. 4. Lax recordkeeping practices Accountants dread when a small business owner shows up to tax preparation meetings with a shoebox of receipts — or no documentation at all. Well-prepared owners have organized records, including paper filing systems, digital storage, and backup solutions, to substantiate expenses for tax and accounting purposes. By retaining original source documents — such as receipts, invoices, bank statements and contracts — you can track the business’s financial performance and file state and federal tax forms with ease. And you’re prepared if the IRS challenges any deductions or credits you claim for business-related items. Without source documents, the IRS is more likely to disallow business tax breaks and assess penalties and fines. In general, business records must be retained for a period ranging from three to seven years, depending on the nature of the record. Contact us for specific record retention guidelines. We can help Implementing sound bookkeeping practices can empower you to improve your business’s financial management and increase confidence in your financial reporting. It reduces the stress of running a business and provides essential information for your business to thrive in today’s competitive markets. Contact us for help building a solid bookkeeping foundation. © 2024   [...] Read more...
June 12, 2024The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year. Fundamentals of HSAs An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance). Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation. Inflation adjustments for 2025 In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows: Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024. In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year. High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024). Heath Reimbursement Arrangements The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024). Collect the benefits There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us. © 2024     [...] Read more...
June 12, 2024There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in your partnership interests is sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your basis to zero. More complex than it seems Although adding a new partner may appear to be simple, it’s important to plan the new person’s entry properly to avoid various tax problems. Here are two issues to consider: 1. If there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change will be treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. To avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner. 2. The tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. In general, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted. The upshot of these rules is that the new partner must be allocated a portion of the depreciation equal to his or her share of the depreciable property, based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other outcome is that the built-in gain or loss on the partnership assets must be allocated to the current partners when the partnership assets are sold. The rules that apply in this area are complex, and the partnership may have to adopt special accounting procedures to cope with the relevant requirements. Follow your basis When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s important to keep proper track of your basis because it can have an impact on these areas: • Gain or loss on the sale of your interest, • How partnership distributions to you are taxed, and • The maximum amount of partnership loss you can deduct. We can help Contact us if you’d like assistance in dealing with these issues or any other issues that may arise in connection with your partnership. © 2024   [...] Read more...
June 12, 2024Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure: • Some third-party debt (owed to outside lenders), and/or • Some owner debt. Tax rate considerations Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest. On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations. Third-party debt The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money. Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends. When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part. Owner debt If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company. An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit. An example to illustrate Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation. This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply. This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings. © 2024   [...] Read more...
June 12, 2024After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways: Buy the assets of the business, or Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC. In this article, we’re going to focus on buying assets. Asset purchase tax basics You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset. For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions. When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization). Asset purchase results with a pass-through entity Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold. Asset purchase results with a C corporation If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%. A tax-smart purchase price allocation With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired. To the extent allowed, you want to allocate more of the price to: Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables), Assets that can be depreciated relatively quickly (such as furniture and equipment), and Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years. You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated. You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another. Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable. Plan ahead Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase. © 2024   [...] Read more...
May 28, 2024If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000). Other Possibilities: There are more small business retirement plan options, including: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older. Watch the Calendar Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year. Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made. For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year. While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that, if your business has employees, you may have to make contributions for them, too. © 2024       [...] Read more...
May 28, 2024According to the Association of Certified Fraud Examiners’ (ACFE’s) Occupational Fraud 2024: A Report to the Nations, not-for-profits suffer roughly half the median loss per fraud scheme of for-profit businesses and government entities — $76,000 vs. $150,000. That may sound like good news, except for the fact that most nonprofits are on tight budgets and can’t afford to lose anything. To help keep your nonprofit’s losses at $0, you need to establish and enforce compliance with internal controls that directly address your organization’s risks. Stakeholder training The 2024 ACFE report contains what should be an alarming stat for nonprofits: Nonprofits have the lowest implementation rate of fraud awareness training — 52% for staffers and 49% for management (vs. 82% and 81%, respectively, for public companies). According to the ACFE, organizations without fraud awareness training suffer two times the financial losses of organizations with it. So make sure you include fraud prevention and reporting instruction in your orientation of new staffers and executives, as well as volunteers with financial responsibilities. Also provide periodic refreshers for existing employees. Tips that fraud may be occurring are twice as likely to come from trained staffers than untrained staffers. To boost potential reporting, ensure that all stakeholders — including clients and vendors — know how to report fraud suspicions. The existence of an anonymous tipline or web portal is associated with a 50% reduction in the cost and duration of fraud schemes. Financial statement reviews Nonprofit boards or audit committees typically review financial statements annually or semi-annually. However, the longer fraud goes undetected, the greater the financial loss for the victim organization. Therefore, your organization’s leaders should review financial statements at least quarterly, if not monthly. Board members should also receive regular budget reports that show variances between budget and actual figures, because significant variations can indicate potential fraud. Indeed, with strong management reviews in place, organizations reduce financial losses from fraud by a median 60%, says the ACFE. Segregation of duties Almost all types of organizations benefit from a segregation of duties. This means that no individual should have control over more than one phase of a financial transaction or function. Staffers or board members with access to assets shouldn’t be responsible for accounting for those assets. Nor should an individual have the ability to both initiate and approve a transaction, such as paying a vendor invoice. Don’t let individuals who receive checks also deposit them. Finally, don’t allow anyone who writes checks to also reconcile monthly bank statements. Segregation of duties can be challenging for nonprofits with few staff or those that have shifted to remote work arrangements. If accounting staffers primarily fulfill these roles, try assigning some duties to board members or consider outsourcing functions such as payroll and accounts payable. Also consider using cloud solutions to overcome hurdles related to employees working remotely. Other controls Credit cards have become increasingly common in nonprofits — but they come with the risk of unauthorized usage. If you give credit cards to staffers, board members or volunteers, limit the number of cards in use. Also require a receipt for each purchase (along with documentation of the business purpose). Someone who isn’t an authorized card user should scrutinize card statements and supporting documentation every month for unusual or questionable activity. Another internal control that can reap real benefits is a mandatory vacation policy (generally associated with a 23% reduction in losses). Required time off helps prevent would-be fraudsters from hiding their schemes from colleagues. Not surprisingly, an unwillingness to share duties or take vacation are some of the most common red flags for fraud. Evolving threats Depending on your organization’s size, mission and other factors, you may have other or new threats that should be addressed by internal controls. For example, have you recently reduced your workforce and turned more tasks over to volunteers? Do you have a big fundraising event coming up? These can increase fraud risk. Contact us to discuss your needs. © 2024       [...] Read more...
May 2, 2024Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to? One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates. If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial. To Fast-Track Income Consider these options if you want to accelerate revenue recognition into the current tax year: Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year. Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale. For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale. Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction. Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets. For construction companies with long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts: Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed. Limitations To Postpone Deductions Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value: Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions. Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years. Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time. Buy bonds at a discount this year to increase interest income in future years. If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate. Delay charitable contributions into a year with a higher tax rate. If allowed, delay accounts receivable charge-offs to a year with a higher tax rate. Delay payment of liabilities where the related deduction is based on when the amount is paid. Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation. © 2024       [...] Read more...
May 2, 2024  If you operate a business, or you’re starting a new one, you know records of income and expenses need to be kept. Specifically, you should carefully record expenses to claim all the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS. Be aware that there’s no one way to keep business records. On its website, the IRS states: “You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” But there are strict rules when it comes to deducting legitimate expenses for tax purposes. And certain types of expenses, such as automobile, travel, meal and home office costs, require extra attention because they’re subject to special recordkeeping requirements or limitations on deductibility. Ordinary and Necessary A business expense can be deducted if a taxpayer establishes that the primary objective of the activity is making a profit. To be deductible, a business expense must be “ordinary and necessary.” In one recent case, a married couple claimed business deductions that the IRS and the U.S. Tax Court mostly disallowed. The reasons: The expenses were found to be personal in nature and the taxpayers didn’t have adequate records for them. In the case, the husband was a salaried executive. With his wife, he started a separate business as an S corporation. His sideline business identified new markets for chemical producers and connected them with potential customers. The couple’s two sons began working for the business when they were in high school. The couple then formed a separate C corporation that engaged in marketing. For some of the years in question, the taxpayers reported the income and expenses of the businesses on their joint tax returns. The businesses conducted meetings at properties the family owned (and resided in) and paid the couple rent for the meetings. The IRS selected the couple’s returns for audit. Among the deductions the IRS and the Tax Court disallowed: Travel expenses. The couple submitted reconstructed travel logs to the court, rather than records kept contemporaneously. The court noted that the couple didn’t provide “any documentary evidence or other direct or circumstantial evidence of the time, location, and business purpose of each reported travel expense.” Marketing fees paid by the S corporation to the C corporation. The court found that no marketing or promotion was done. Instead, the funds were used to pay several personal family expenses. Rent paid to the couple for the business use of their homes. The court stated the amounts “were unreasonable and something other than rent.” Retirement Plan Deductions Allowed The couple did prevail on deductions for contributions to 401(k) accounts for their sons. The IRS contended that the sons weren’t employees during one year in which contributions were made for them. However, the court found that 401(k) plan documents did mention the sons working in the business and the father “credibly recounted assigning them research tasks and overseeing their work while they were in school.” Thus, the court ruled the taxpayers were entitled to the retirement plan deductions. (TC Memo 2023-140) Lesson Learned As this case illustrates, a business can’t deduct personal expenses, and scrupulous records are critical. Make sure to use your business bank account for business purposes only. In addition, maintain meticulous records to help prepare your tax returns and prove deductible business expenses in the event of an IRS audit. Contact us if you have questions about retaining adequate business records. © 2024       [...] Read more...
May 2, 2024It’s not unusual for a partner to incur expenses related to the partnership’s business. This is especially likely to occur in service partnerships such as an architecture or law firm. For example, partners in service partnerships may incur entertainment expenses in developing new client relationships. They may also incur expenses for: transportation to get to and from client meetings, professional publications, continuing education and home office. What’s the tax treatment of such expenses? Here are the answers. Reimbursement or Not As long as the expenses are the type a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct the expenses on Schedule E of Form 1040. Conversely, a partner can’t deduct expenses if the partnership would have honored a request for reimbursement. A partner’s unreimbursed partnership business expenses should also generally be included as deductions in arriving at the partner’s net income from self-employment on Schedule SE. For example, let’s say you’re a partner in a local architecture firm. Under the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in unusual cases where attracting a large potential new client is deemed to be a firm-wide goal. In attempting to attract new clients this year, you spend $4,500 of your own money on meal expenses. You receive no reimbursement from the firm. On your Schedule E, you should report a deductible item of $2,250 (50% of $4,500). You should also include the $2,250 as a deduction in calculating your net self-employment income on Schedule SE. So far, so good, but here’s the issue: a partner can’t deduct expenses if they could have been reimbursed by the firm. In other words, no deduction is allowed for “voluntary” out-of-pocket expenses. The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written firm policy that clearly states what will and won’t be reimbursed. That way, the partners can deduct their unreimbursed firm-related business expenses without any problems from the IRS. Office in a Partner’s Home Subject to the normal deduction limits under the home office rules, a partner can deduct expenses allocable to the regular and exclusive use of a home office for partnership business. The partner’s deductible home office expenses should be reported on Schedule E in the same fashion as other unreimbursed partnership expenses. If a partner has a deductible home office, the Schedule E home office deduction can deliver multiple tax-saving benefits because it’s effectively deducted for both federal income tax and self-employment tax purposes. In addition, if the partner’s deductible home office qualifies as a principal place of business, commuting mileage from the home office to partnership business temporary work locations (such as client sites) and partnership permanent work locations (such as the partnership’s official office) count as business mileage. The principal place of business test can be passed in two ways. First, the partner can conduct most of partnership income-earning activities in the home office. Second, the partner can pass the principal place of business test if he or she: Uses the home office to conduct partnership administrative and management tasks and Doesn’t make substantial use of any other fixed location (such as the partnership’s official office) for such administrative and management tasks. To Sum Up When a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, the partner should turn them in. Otherwise, the partner can’t deduct the expenses. On the partnership side of the deal, the business should set forth a written firm policy that clearly states what will and won’t be reimbursed, including home office expenses if applicable. This applies equally to members of LLCs that are treated as partnerships for federal tax purposes because those members count as partners under tax law. © 2024     [...] Read more...
May 2, 2024Construction projects are inherently fraught with risk. That’s why having the right insurance in place is critical for all parties involved. For contractors, however, adequate coverage typically comes at a high price and with abundant red tape when dealing with insurers. One potential solution is a contractor-controlled insurance program (CCIP). What is it? CCIPs are a type of “wrap-up” policy that’s managed by the general contractor and covers most parties to a construction project. However, design professionals, such as architects and engineers, usually aren’t covered. Typically, CCIPs include general liability, workers’ compensation and excess liability coverage. There may also be an option to add other coverage, such as builder’s risk, professional liability or pollution liability. Insurance for commercial vehicles and equipment generally isn’t included. What are the Advantages? Ordinarily, the general contractor and each subcontractor on a project buy their own policies. Then, each subcontractor names the general contractor and owner as “additional insureds,” and each subcontract contains complex indemnity provisions. Multiple insurers and policies may lead to coverage gaps. In turn, claims can lead to costly disputes and delays as the parties sort out their respective responsibilities. By wrapping up coverage under a single policy, a CCIP can help parties avoid coverage gaps and minimize disputes and litigation over who’s at fault or responsible for damages if incidents occur. And the general contractor may be able to negotiate broader coverage, higher limits and lower premiums than the subcontractors could on their own. Plus, by eliminating the need for subcontractors to secure their own insurance coverage, a CCIP can expand the pool of potential bidders. This can be an important advantage given today’s shortage of skilled labor. When work gets underway, the general contractor wields great control over all aspects of risk management on a project, including insurance of course. Because CCIPs are highly loss-sensitive, most general contractors are strongly motivated to minimize claims through a comprehensive, centralized and well-enforced safety program. If a claim does arise, having only one administrator tends to accelerate the claims process and reduce the cost thereof. And the Disadvantages? As you might expect, there are risks and costs for the general contractor setting up the CCIP. Although the program can eventually streamline insurance administration, the initial burden of finding and negotiating coverage can be daunting. In fact, given the complexity of CCIPs, many contractors find them suitable only for larger projects. Managing subcontractor enrollment can also be an arduous task, and the subcontractors who sign up may present risks all their own. Because subcontractors aren’t operating under their own insurance policies, there’s less incentive for them to limit their losses. Also, because CCIPs are essentially “no-fault” policies — that is, coverage is provided regardless of who’s at fault — subcontractors may be more likely to submit false claims. There’s also financial risk. In the unlikely event that claims exceed a CCIP’s coverage limits, the general contractor might be financially responsible for the difference. Who can Help? If you’re looking to enhance project risk management, reduce insurance costs and streamline claims, consider a CCIP. Just bear in mind that we’ve given examples of only a few of the potential disadvantages; there may be others. Contact our firm for help weighing all the pros and cons. © 2024   Construction & Engineering Page   Real Estate Page   [...] Read more...
May 2, 2024  Accurate, timely financial information is key to making good decisions for executives, board members, investors and other stakeholders. But not everyone who reads your financial statements will really understand the numbers they receive and what they mean to your organization. Here are some ways to present your financial results in a reader friendly manner. Consider your Audience The people who rely on your organization’s financial statements probably come from different walks of life and different positions. Some may have financial backgrounds, but others might not. And it’s this latter group you need to keep in mind as you supply financial data. This is especially true for nonprofits, such as charities, religious organizations, recreational clubs and social advocacy groups. Their stakeholders may include board members, volunteers, donors, grant makers, watchdog groups and other people in the community. But it also may apply to for-profit businesses that share financial data with their boards, employees and investors who don’t have a controlling interest in the organization. Don’t assume all your stakeholders understand accounting jargon. It may be helpful to provide definitions of certain financial reporting terms. For example, a nonprofit might explain that “board-designated net assets” refers to items set aside for a particular purpose or period by the board. Examples include safety reserves or a capital replacement fund, which have no external restriction by donors or by law. While this definition might seem obvious to a nonprofit’s management team, stakeholders might not be familiar with it. You could also provide internal stakeholders with some basic financial training by bringing in outside speakers, such as accountants, investment advisors and bankers. Add Pictures to Get Your Message Across In addition to providing numerical information from your company’s income statement, balance sheet and statement of cash flows, consider presenting some information in a graphical format. Long lists of numbers can have a dizzying effect on financial statement readers. Pictures may be easier for laypeople to digest than numbers and text alone. For instance, you might use a pie graph to show the composition of your company’s assets. Likewise, a line or bar graph might be an effective way to communicate revenue, expenses and profit trends over time. Present Financial Ratios Financial ratios show relationships between key items on your financial statements. While ratios don’t appear on the face of your financial statements, you can highlight them when communicating results to stakeholders. For instance, you might report the days in receivables ratios (accounts receivable divided by annual revenue times 365 days) from the current and prior reporting periods to demonstrate your efforts to improve collections. Or you might calculate gross margin (revenue minus cost of goods sold) as a percentage of revenue from the current and prior reporting periods to show how increases in raw materials and labor costs have affected your business’s profitability. Another useful tool is the “current ratio.” A comparison of current assets to current liabilities is commonly used as a measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash. It may also be helpful to provide industry benchmarks to show how your company’s performance compares to others in your industry. This information is often available from industry trade publications and websites. Be Transparent About Non-GAAP Metrics One area of particular concern is how your organization presents financial information that doesn’t conform to U.S. Generally Accepted Accounting Principles (GAAP), such as earnings before interest, taxes, depreciation and amortization (EBITDA). The use of non-GAAP metrics has grown in recent years. While non-GAAP metrics can provide greater insight into the information that management considers important in operating the business, take care not to mislead stakeholders by putting greater emphasis on non-GAAP metrics than the GAAP data provided in your financial statements. For instance, EBITDA is often adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. If you report EBITDA, you should clearly disclose how it was calculated, including any adjustments, and how it compares to earnings before tax on your GAAP income statement. Use Plain English Regardless of your industry, stakeholders want accurate, transparent information about your organization’s financial performance. It’s up to you to supply them with information they fully understand so they can make informed decisions. Contact us for help communicating your results more effectively to give stakeholders greater confidence and clarity when reviewing your financial reports. © 2024       [...] Read more...
April 12, 2024Two significant regulatory changes to retirement plans require immediate attention from plan sponsors, both to ensure current operational compliance and to comply with upcoming deadlines. Many long-term, part-time (LTPT) employees are now eligible for 401(k) retirement plans; there is also a new method of counting defined contribution retirement plan participants on Form 5500 Annual Return/Report. It’s important to note that a retirement plan’s audit status could be affected as these changes take effect. In addition to understanding the far-reaching implications that could help avoid missteps with LTPT employee eligibility and revised participant headcounts, we will explore how to correct any missteps that have already occurred. New Eligibility Opportunities for Long-Term, Part-Time Employees Prior to the SECURE Act of 2019 and SECURE 2.0 Act of 2022 (collectively SECURE), employers could exclude employees from their tax-qualified defined contribution plans based on the number of hours they worked per year. Typically, this meant that part-time employees were ineligible to contribute to their employer’s retirement plan — no matter how many years they had worked for their employer. An IRS Employee Plans Newsletter issued on January 26, 2024, defined LTPT employees as workers who have worked at least 500 hours per year in three consecutive years, although the consecutive year condition will be reduced to two years in 2025. SECURE expanded LTPT employee access to employer retirement plans by requiring 401(k) plans to allow employees that meet the LTPT requirements to make elective deferrals starting with the first plan year beginning on or after January 1, 2024. Employers are not required to make employer contributions for LTPT employees. However, the burden of identifying, notifying, and enrolling these newly eligible LTPT employees falls on the employers. Failing to inform LTPT employees of their eligibility as of January 1, 2024, may have resulted in non-compliance. To rectify any compliance issues, employers can consider using the IRS amnesty program known as the Employee Plans Compliance Resolution System (EPCRS). It is essential to understand this new requirement because LTPT employee eligibility may affect two other administrative functions for plan sponsors: Form 5500 filing and the annual employee benefit plan audit requirement. A Key Change When Counting Participants for Form 5500 Prior to 2023, IRS Form 5500 — an essential part of ERISA’s reporting and disclosure framework — required defined contribution retirement plan sponsors to include employees who were eligible to make elective deferrals on the first day of the plan year. In most organizations, LTPT employees would be excluded from this headcount unless the employer’s plan allowed them to make contributions to the retirement plan. Now, employers need only include participants with an account balance in the defined contribution retirement plan as of the first day of the plan year (but, for new plans, the participant account balance count is determined as of the last day of the first plan year). This may sound like a simple change, but the potential increase in participants who are LTPT employees complicates the matter. The Impact on a Plan’s Audit Requirement An organization’s obligation to have an annual audit of its retirement plan is dependent on the number of plan participants as of the first day of the plan year. Beginning with the 2023 plan year, defined contribution plans that have more than 100 participant accounts as of the first day of the 2023 plan year generally must have an annual independent audit. Before 2023, all plan participants who were eligible to make salary deferrals were included in headcounts as participants even if they had not made any plan contributions. The DOL changed the rules starting in 2023 to include only those with account balances as participants. Keep in mind that the number of participants can be decreased by taking advantage of rules that allow distributions of small account balances (accounts valued at less than $7,000 starting in 2024) to former participants, if the defined contribution plan adopted these provisions. The audit requirement of plans with 100 or more employees may change since employees without account balances are no longer counted. An organization may find that the defined contribution plan no longer requires an audit if eligible employees have not contributed to the 401(k) plan, but the audit requirement may be triggered when previously excluded LTPT employees begin to make elective deferrals. Navigating the New Normal For Certain Retirement Plans The LTPT employee rules take effect for plan years beginning on or after January 1, 2024 (for calendar-year end plans). If your organization missed the deadline to allow LTPT employees to participate in your plan, the good news is that there is a path to compliance. However, implementing these complicated changes in the law requires in-depth knowledge of the complex issues surrounding tax-qualified retirement plans. Experienced consultants can provide guidance and support throughout the process in the following ways: Analyze plan documents and employee data to identify any compliance gaps or issues that need to be addressed Engage in detailed discussions with plan sponsors to explain the intricacies of the changes and helping them understand the necessary steps to ensure compliance Facilitate communication with service providers to aid in a smooth transition and implementation of any required changes Calculate corrective actions required to rectify any non-compliance issues and confirm future compliance Guide the employer in enrolling in the IRS’s amnesty program (EPCRS), if necessary, to self-report non-compliance issues Help plan sponsors track the path taken to incorporate the necessary changes into the plan documents, to ensure ongoing compliance and avoid future issues Discuss Form 5500 preparation considerations, including participant head count     [...] Read more...
April 10, 2024For construction businesses, financial management is notoriously complex. Contractors have to deal with the ebbs and flows of their respective markets, project-based pricing and collections, rising operating costs, and various other factors — not the least of which is bad weather! Yet effective financial management is essential for your company to thrive. Here are some ways to better manage your money. Follow Strong Billing Procedures Healthy cash flow — one of the most important aspects of financial management — depends on your business’s ability to both meet contractual obligations and receive timely payments. To this end, establishing a standard billing schedule for every job will make managing accounts less complicated and help you keep track of monthly revenue. When drafting contracts, clearly include payment amounts and when they’re due — as well as penalties for late payments. Equally important, clearly outline a process for change order approvals and invoicing that allows you to bill for additional work as soon as possible. Diligently follow the billing schedule as projects or project phases are completed. To help ensure prompt payment, make sure invoices are well-designed, detailed and include any necessary proof-of-work documentation. If you don’t already, offer electronic payment options to make paying quicker and easier. Last, be sure to set up automated reminders to regularly follow up on unpaid invoices. Excel at Materials Management Effective financial management also depends largely on how cost-efficiently you procure, store and use construction materials. Implement strategies to optimize all three of these actions while minimizing waste. Begin by taking a hard look at how you capture, organize and share materials-related data across your projects. Do you have a centralized system for doing so? Are you tracking losses and proactively addressing how to prevent theft, mistakes and mismanagement? With the right system in place and technology supporting it, you can minimize excessive and unnecessary spending on materials. From there, be sure you’re addressing the timely delivery of materials. Supply chain slowdowns or disruptions aren’t in the news as much anymore, but they’re still a challenge for many contractors. Some construction companies maintain inventories of critical and long-lead items to ensure they’ll have the necessary materials as jobs come up. But doing so entails paying for storage facilities and investing time and resources into inventory management. Another strategy is to diversify your supplier base and include alternative local suppliers who can deliver materials of similar type and quality. Keep a Close Eye on Labor Nearly all businesses need to confront the tricky issue of “rightsizing” their workforces and paying employees competitively. Construction companies have the added challenge of doing all this in the midst of a seemingly never-ending skilled labor shortage. One thing that can help is quantifying your labor needs as precisely as possible. Determine how many workers are needed to complete each typical job task or how many are needed to work on each phase of the types of projects you usually perform. Obviously, you’ll need historical data to make such determinations, so be sure you’re capturing this information. Compensation, benefits and taxes are also major factors. Indeed, knowing your true labor costs — often referred to as labor burden rate — is a mission-critical financial-management activity for construction businesses. Embrace Technology Using up-to-date and secure financial management software and mobile devices tailored to the construction industry can help streamline financial activities related to estimating, job costing, payroll and invoicing. The right combination of tech assets can help: Automate calculations and processes, Create more accurate estimates, Track a variety of costs and accurately allocate them to projects, and Generate the necessary documentation for your records, as well as for financial reporting. As always, however, selecting the right tech tools for your construction business’s distinctive needs and comfort level is the hard part. Choose your purchases and upgrades carefully — always with the goal of improving the clarity of your finances and your control of them. Lay the Foundation Managing cash flow, materials, labor and technology costs for your hardworking construction company may seem as difficult as laying a solid foundation on unstable soil. But with the right personnel, policies, procedures and computing tools in place, it can be done. We’d be happy to help you review your construction company’s approach to financial management and target areas for improvement.© 2024   Construction & Engineering Page   Real Estate Page   [...] Read more...
April 10, 2024The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver. Deduction Basics The QBI deduction is written off at the owner level. It can be up to 20% of: QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation. How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums. Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals. Limitations At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively. If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property. The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business. Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Unfavorable Rules for Certain Businesses For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB. Other Factors Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately. There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result. Use it Or Potentially Lose it © 2024       [...] Read more...
April 10, 2024Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results. Sec. 179 Deduction Basics Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction. Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems. The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.) Bonus Depreciation Basics Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer. For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023. Sec. 179 vs. Bonus Depreciation The current Sec. 179 deduction rules are generous, but there are several limitations: The phase-out rule mentioned above, A business taxable income limitation that disallows deductions that would result in an overall business taxable loss, A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations. First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively. So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can. Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 . That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year. Managing Tax Breaks As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have. © 2024       [...] Read more...
April 10, 2024If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses. However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. Fair Market Value Here are some examples of an exchange of services: A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising. An electrical contractor does repair work for a dentist in exchange for dental services. In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence. In addition, if services are exchanged for property, income is realized. For example: If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. Joining a Club Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members. In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income. If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate. Tax Reporting By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. Exchanging Without Exchanging Money By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information. © 2024       [...] Read more...
April 10, 2024Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 15th If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records. For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due. For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES). April 30th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due. May 10th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due. May 15th Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies. June 17th Corporations pay the second installment of 2024 estimated income taxes. © 2024       [...] Read more...

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