byfadmin

What’s Your Business’s Fallback Plan?

July 12, 2023 by byfadmin

Like many small business owners, you may plan on working until you are ready to retire. And, once you reach that point, you may expect to sell your business and live off the proceeds. Or, you may have partners or children who can keep the business operating once you are ready to step away.

However, smart business owners plan for all eventualities. They plan for success but they have a fallback plan in case their efforts don’t bear fruit. As a business owner whose business is probably by far your biggest asset, it makes sense to think about those things that could go wrong and take steps to protect yourself now.

What steps should you consider taking that can protect your future financial security? Consider these contingency strategies:

Put a Retirement Plan in Place

The only constant in business is change. And many changes can harm a business’s financial viability. What would happen to your retirement dreams if your business experienced a serious setback? New technologies come along and make some businesses obsolete. New competitors erase older, established firms and economic downturns impact consumer and business spending. Natural disasters can seriously damage a business’s operations and cause widespread financial loss.

Funding a retirement plan during your working years can help protect your future financial well-being. Additionally, a retirement plan can provide important tax benefits. For example, your contributions to your retirement plan are typically tax deductible while earnings on investments in your retirement plan account grow tax deferred until you begin taking distributions.

As a small business owner, you can choose from a variety of tax-advantaged retirement plans. Each option has distinct advantages and disadvantages when it comes to costs and the burden involved in plan administration. The input from your financial professional can be helpful when reviewing the appropriateness of a particular retirement plan with regard to your business’s specific situation.

Establish a Buy-Sell Agreement

If you have one or more partners or co-owners, it makes sense to have a buy-sell agreement. A buy-sell agreement helps ensure that you (or your beneficiaries) will receive fair compensation for your ownership interest. The agreement also facilitates the orderly transfer of ownership and management. A buy-sell agreement can be drafted among shareholders of an S corporation, partners of a partnership or an LLC, or even between an owner and a key employee.

When carefully crafted, a buy-sell agreement can:

Help provide a smooth transition of control, management, and ownership to those who wish to continue running the business
Spell out the financial aspects of the transition
Establish a fair and reasonable price
Help ensure the financial security of your family and other beneficiaries in the event of your unexpected death
Create a built-in buyer for your interest in the business
Establish, under certain circumstances, an estate tax value for the stock.

There are two basic types of buy-sell agreements: cross purchase and entity purchase (stock redemption). With a cross purchase agreement, the remaining owners agree to buy the departing owner’s interest in the business individually. With an entity purchase agreement, the business itself agrees to buy the selling partner’s ownership interest.

Life insurance is a common way of funding a buy-sell agreement. The proceeds of the policy are used to buy out the departing owner’s interest in the business.

Develop a Disaster Plan

No matter where your business is located, it is a wise precaution to assume that a natural disaster will impact it at some point. Adequate preparation can minimize damage to your systems, your equipment, and your physical plant, and may even protect you and your employees from harm. A key component in preparing for a natural disaster is a disaster plan.

Your disaster plan should include sections on personnel safety, management succession, and data preservation. It should outline the steps employees and managers must take in the event of a disaster.

Top Tax Benefits of Real Estate Investing

June 1, 2023 by byfadmin

Real estate investing comes with significant tax benefits. Find out how to identify the top tax strategies for maximum benefit and how to use them to your advantage come tax time.

As with all deductions, consult your tax accountant for the most up-to-date on what is/is not allowed regarding tax deductions related to real estate investing.

Self-Employment / FICA Tax

First and most straightforward, you can avoid payroll tax if you own rental property. That’s because the income from your rental property is not considered earned income. In addition to avoiding tax outright, there are numerous deductions available to real estate investors.

Expense Deductions

Real estate expenses directly related to your investment, such as property tax, insurance, mortgage interest, and maintenance or management fees, are deductible. These actual expenses are typical deductions the IRS considers “ordinary and necessary” to sustaining your real estate investment. However, a few deductions to which you may be entitled are often overlooked.

If you spend time traveling to and from your investment property, those miles may be deductible.

You also may be able to deduct non-mortgage interest fees related to your investment property. For example, loan or credit card interest incurred in connection with your investment property are deductible business expenses. Legal and other professional fees directly associated with the investment property are also deductible.

Depreciation

Suppose you have real estate investment property that produces income. In that case, you can deduct depreciation of that property as an expense. The depreciation deduction lowers your taxable income.

The IRS sets the life expectancy of real estate – 27.5 years for residential property and 39 years for commercial property – which determines the deduction to which you are entitled.

Incentive Programs

Some incentive programs make it possible to defer real estate taxes. For example, a 1031 exchange allows real estate investors to avoid paying capital gains taxes when selling an investment property and reinvesting in a replacement property. Investors can reinvest proceeds from the sale of one property into another property. This transaction must occur within a specified time to avoid capital gains taxes (the taxes on the growth of an investment when it is sold).

Suppose your real estate property qualifies as an “opportunity zone,” a low-income or disadvantaged parcel. You may be able to further defer capital gains tax, grow your capital gains, or entirely avoid capital gains.

These perks are time-dependent, which is something your qualified accountant can help you navigate.

Capital Gains

So, what if you sell your real estate investment property? Suppose you can wait until you’ve held the property for at least one year. In that case, you may be able to pay a much lower capital gains tax than if you sold sooner, or you could avoid capital gains altogether. That’s because holding onto a property for more than one year makes it a long-term investment. With that, you will pay a lower capital gains tax rate. If your income is under a certain amount (check with your accountant because these rates tend to change year to year), you may be able to avoid the tax entirely.

Qualified Business Income (QBI) Deduction

More commonly known as the pass-through deduction, this tax break encourages entrepreneurship. This deduction allows certain entities to deduct up to 20 percent of their business income. So, businesses like LLCs, S-corps, and sole proprietorships benefit. You may be wondering how this type of deduction helps real estate investors. If you own rental properties, you technically operate a small business by IRS standards. Therefore, you are entitled to the pass-through deduction. The deduction also benefits real estate investment trust investors (REITs) because REITs are technically considered pass-through entities. The deduction is not scheduled to end until 2025, so there’s still time to take advantage of this deduction.

Deductions like QBI and others on this list, such as depreciation and expense deductions, mean that real estate investment can significantly reduce tax liability. Speak to your qualified accountant or CPA to help you navigate the often tricky waters of tax deductions. The professionals make it their business to be in the know about the latest tax law changes, updates, and deductions. With the right professional on your side, you’ll be able to take full advantage of all the tax breaks you’re legally entitled to.

Troubleshoot Your Business

May 12, 2023 by byfadmin

Small business owners who conduct regular reviews of their business’ operating health are more likely to detect potential issues before they develop into major problems. Some areas should be monitored regularly since they hold the greatest potential for harming a company’s long-term financial health.

Cash Flow

You should be concerned if your cash flow is insufficient to cover expenses because payments for goods or services are slow in coming. Beware also if your cash reserves accumulate rather than being put to work. Excess funds may be parked in short-term investment accounts, but ideally, they should be put to work growing the business.

Gross Profit Margin

If it is shrinking over several quarters, your production costs may be rising at a faster pace than your prices. Or, it may because you are charging less than in the past. Either way, declining gross profit margins are a threat to the financial health of your business.

Receivables

If they are growing faster than sales, it is a sign that your customers are not paying what they owe you in a timely manner. You may need to take steps to improve your collection procedures. Be proactive and consistent about issuing invoices and providing any necessary supporting documentation. In addition, contact customers as soon as you detect any delays in payment and stay on top of accounts that are past due.

Debt

Almost every business carries some debt. It’s generally not a problem as long as it is kept under control. Too much debt is a different matter in that it can eat up your cash, cut into your profits, and reduce the return you’re getting on your investment in the company.

Assets

Turnover rates are an important measure if your business carries inventory. When inventory turns over slowly, cash flow suffers. Your best approach is to determine how many days’ worth of product you’d ideally like to have on hand and adapt your purchasing to meet that goal. Additionally, keep an eye on fixed assets. If you have equipment that’s not being fully utilized, you may be able to repurpose it. If not, it may be time to sell or donate it.

Professional Input Can Be Valuable

Business owners should evaluate a broad range of financial information when making decisions. The input of a financial professional can be helpful in the assessment of a business’s overall financial health

What to Do if Your Business Owes Back Taxes

April 12, 2023 by byfadmin

If you missed a tax deadline or simply couldn’t afford your small business tax bill and got behind, you could face penalties and other issues. This article provides vital information to help you get your financials back on track.

What can happen to your small business if you owe back taxes?

Depending on your business type, any small business taxes you owe are due by the standard tax deadlines of either March 15 or April 15 each year. Failure to pay your tax liability by the appropriate deadline results in owing back taxes.

Many issues can arise if you fail to pay. Here are five of the most common consequences:

1. Penalties and Interest Rack Up

The longer you owe back taxes, the greater the tax debt will become. The IRS compounds most tax debts at 14% interest, so the fees add up fast! There are penalties for late filing and additional penalty fees for late payment. Those fees can be as much as 25% of your debt.

2. Levies, Seizures, and Liens, Oh my!

The Federal Payment Levy Program (FPLP), started in 2000, gives the IRS the right to collect back taxes from a variety of sources such as federal employee retirement annuities, federal payments such as defense contracts, federal employee travel advances or reimbursements, certain social security benefits, some federal salaries, and more. The IRS can also seize property, equipment, and cars or levy business assets. The federal government could also place a lien against your business. If you attempt to sell assets, the IRS can collect those funds before they get to you.

3. Foreclosure

If you do not pay your tax notice within 10 days of receiving it from the IRS, they can place a lien against your business or personal property (if you are an unincorporated business).

4. Revoked Passport

Seriously delinquent tax debt is certified to the State Department by the IRS. The IRS considers “seriously delinquent” tax debt as unpaid legally enforceable debt totaling more than $55,000, including penalties and fees after filing a lien. All administrative remedies under that law are exhausted, and a levy has been issued.

5. Jail Time

In extreme situations, criminal action could ensue if the IRS determines that your business purposely avoided filing or paying taxes. Willful failure to pay taxes is considered tax evasion or fraud. It is a felony punishable by a $10,000 fine, up to five years in prison, or both.

What to Do if Your Business Owes Back Taxes

Suppose your business is behind on paying back taxes. In that case, you must take immediate action to attempt to mitigate the damages. Here are our top tips for what to do when you owe back taxes:

1. File an extension

If you need more time, have your tax preparer file for an extension. That will allow you to file later in the year instead of in the spring. While this will not reduce the amount you owe or stop the compounded interest and hefty penalties from accruing, it will give you more time to prepare and meet the deadline.

2. Payment Plan

If you know you cannot pay your tax debt in full immediately, set up a short- or long-term payment plan with the IRS. Some businesses can set up a payment plan online.

3. Offer in Compromise

An offer in compromise is a negotiation with the IRS where the agency settles your tax debt for less than what you owe. For consideration, taxpayers must present a valid offer based on their ability to pay.

4. Request Currently Not Collectible Status

Suppose the taxes you owe cause significant hardship. In that case, the IRS may grant a temporary hold on your account and place it in “currently not collectible” status. While the tax is still owed and penalties and interest continue to pile up, collection efforts from the IRS are temporarily suspended. Your tax situation will be reviewed annually, and the IRS will determine when you can pay.

5. Contact a Professional

The best defense when dealing with the IRS is to have a qualified CPA or accountant on your side. These professionals can deal directly with the IRS on your behalf, which is a huge bonus since they are up to date on tax laws and regulations regarding back taxes. It can be money well spent to relieve the anxiety and stress that accompanies paying back taxes.

And, of course, you want to be sure to respond to all IRS notices. Communication is essential when dealing with a back tax situation. As soon as you receive any notifications, turn them over to your tax professional and let them advise you on how to proceed. Even when you can’t pay, it is critical to communicate that so that the IRS knows you are willing and making an honest attempt to remedy your tax situation to get back in good standing.

Take the Pulse of Your Tax Health

March 12, 2023 by byfadmin

Regular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Small Business Retirement Plans

February 12, 2023 by byfadmin

Does your business offer a retirement plan? Whether you’ve recently started a business or have been operating one for some time, setting up a retirement plan can be beneficial to both you and your employees. Besides providing tax incentives to defer income and save for retirement, retirement plans can help you reward and retain employees. Employer contributions are tax deductible, within certain limits.

SEP Plans

A Simplified Employee Pension (SEP) plan is relatively easy and inexpensive to set up and administer. You have complete discretion in determining whether or not to make annual contributions. To set up a SEP plan, you establish SEP individual retirement accounts (IRAs) for yourself and your employees. Qualifying contributions are tax deductible and not included in the employees’ current income. Taxes are deferred until money is withdrawn from the plan.

The maximum amount of your contribution for each employee is the lesser of 25% of annual compensation or $61,000, and no more than $305,000 of compensation may be considered (for 2022). There is a special computation for figuring the maximum contribution to a self-employed individual’s own SEP account. Additionally, contributions may not discriminate in favor of highly compensated employees.

Solo 401(k) Plans

A solo 401(k) plan may be a suitable option if you work alone or employ only your spouse. The chief advantage of a solo 401(k) plan is that it allows you to save as both the employee and the employer. As an employee, you may defer the first $20,500 of your compensation (or $27,000 if you’re age 50 or older). As the employer, you may also make a profit sharing contribution (subject to tax law limits). The combination of all contributions — including deferrals, profit sharing, and any others — may not exceed the lesser of (1) 100% of your compensation or (2) $61,000 ($67,500 if you’re age 50 or older). Contribution limits are adjusted annually for inflation.

SIMPLE IRAs

Like a SEP, a SIMPLE IRA plan entails setting up IRAs for yourself and each participating employee. You and your employees can elect to defer compensation to the plan (no more than $14,000 in 2022; $17,000 if age 50 or older). Additionally, employers must make an annual contribution by either (1) matching employee contributions up to 3% of pay (a lower 1% match is allowed in certain years) or (2) contributing 2% of pay for each employee who’s eligible to contribute, even if the employee chooses not to contribute.

A SIMPLE plan generally isn’t an option if you have another retirement plan or more than 100 employees.

Defined Benefit Plans

The chief advantage of a defined benefit plan is the high deduction ceiling, which allows owners to rapidly build up their retirement benefits. For 2022, deductible contributions may allow for an annual benefit that will, when the participant reaches age 65, equal the lesser of $230,000 per year or 100% of the participant’s average compensation for his or her three highest consecutive years of active plan participation.

The disadvantages of this type of plan include the funding and administrative requirements. Complicated actuarial formulas must be used to calculate the contributions to be made each year.