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Is now the time for your small business to launch a retirement plan?
Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not downright mandatory.
Is now the time for your small business to do so? More specifically, as you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly, and the good news is the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.
Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:
1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously only 50% of costs were allowed — this limit still applies to employers with 51 to 100 employees.
2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than three years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.
3. Enhancement of employer contributions. Perhaps the biggest change wrought by SECURE 2.0 is that certain employer contributions for a plan’s first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:
100% in the plan’s first and second tax years,
75% in the third year,
50% in the fourth year, and
25% in the fifth year.
For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.
In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.
To be clear, though the name of the tax break is the small employer pension plan start-up cost credit, it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine whether now is indeed the right time for your small business to launch a retirement plan and, if so, which one.
© 2023
Deciding whether to make lifetime gifts or bequests at death can be a deceptively complex question
One of your primary estate planning goals may be to pass as much of your wealth to your family as possible. That means sheltering your estate from gift and estate taxes. One way to do so is to make gifts during your lifetime.
Current tax law may make that an enticing proposition, given the inflation-adjusted $12.92 million gift and estate tax exemption. However, making lifetime gifts isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate and making bequests at death.
Tax consequences of gifts vs. bequests
The primary advantage of making lifetime gifts is that by removing assets from your estate, you shield future appreciation from estate tax. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.
An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)? The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.
Estate tax law changes ahead
Determining the right time to transfer wealth can be difficult because so much depends on what happens to the gift and estate tax regime in the future. (Indeed, without further legislation from Congress, the base gift and estate tax exemption amount will return to an inflation-adjusted $5 million in 2026.) The good news is that it may be possible to reduce the impact of this uncertainty with carefully designed trusts.
Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, and they’ll be subject to capital gains taxes when they sell them.
Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries will then enjoy a stepped-up basis and the higher exemption shields all or most of the assets’ appreciation from estate taxes.
Work with us to monitor legislative developments and adjust your estate plan accordingly. We can suggest strategies for building flexibility into your plan to soften the blow of future tax changes.
© 2023
A single parent’s estate plan should address specific circumstances
According to the Pew Research Center, nearly a quarter (23%) of U.S. children under the age of 18 live with one parent. This is more than three times the share (7%) of children from around the world who do so. If your household falls into this category, ensure your estate plan properly accounts for your children.
Choosing a guardian
In many respects, estate planning for single parents is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention.
One example is selecting an appropriate guardian. If the other parent is unavailable to take custody of your children if you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? Depending on the situation, you might want to preserve your wealth in a trust until your children are grown.
Trust planning is one of the most effective ways to provide for your children. Trust assets are managed by one or more qualified, trusted individual or corporate trustees, and you specify when and under what circumstances the funds should be distributed to your kids. A trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.
Addressing incapacitation
As a single parent, it’s particularly important for your estate plan to include a living will, advance directive or health care power of attorney. These documents allow you to specify your health care preferences in the event you become incapacitated and to designate someone to make medical decisions on your behalf.
You should also have a revocable living trust or durable power of attorney that provides for the management of your finances in the event you’re unable to do so.
If you’ve recently become a single parent, contact us because it’s critical to review and, if necessary, revise your estate plan. We’d be pleased to help.
© 2023
Getting into data analytics without breaking the bank
Most business owners would probably agree that, in today’s world, data rules. But finding, organizing and deriving meaning from the terabytes upon terabytes of information out there isn’t easy.
How can your company harness the power of data without throwing dollars into the technological void? By investing in a formal initiative to incorporate data analytics into your decision making and strategic planning. However, as is so often the case, this is much easier said than done.
What is it?
Data analytics is the science of collecting and analyzing sets of data to develop useful insights, make connections between data points, and identify trends or patterns.
The process incorporates research, computer programming and statistical analysis to produce various types of data analytics — such as predictive, prescriptive, diagnostic and descriptive. The information used can come from both internal and external sources. Internal sources typically include a company’s financial statements, sales records and customer database. External data may be obtained from government websites, industry associations, publicly distributed surveys and social media.
What are the advantages?
There are several potential advantages of data analytics for businesses. When done right, it will shed light on what could help or hinder you in fulfilling strategic objectives and improving performance in a cost-efficient way. More specifically, data analytics can enable you to:
Evaluate the feasibility of an expensive ad campaign or product development idea,
Narrow down who your most potentially valuable customers are and how to reach them,
Decide whether to obtain outside financing and, if so, how much, and
Streamline operations and/or cut costs with a clear idea of what the positive outcomes will be.
Perhaps best of all, data analytics facilitates fact-based discussions and planning. This can head off emotionally based arguments and diminish the impact of “office politics” on whether the company should make a major move.
Will I need special software?
Generally, a business will need to invest in data analytics software to reap the advantages. If you decide to do so, it’s important not to put the cart before the horse. That is, you don’t want to run out and buy an expensive product and then figure out how to use it. Your company’s informational needs should dictate what you buy.
Today’s software can produce thousands of metrics, so you’re best off first determining which ones you want to track — now and down the road. You also need to ensure that the solution you buy comes with strong cybersecurity protections and complies with any applicable privacy and security regulations.
Additionally, you should determine how well a prospective data analytics solution would integrate with your other applications and data. If the software can’t access vital information, or employees have to input data manually, it will likely be a poor investment.
Is it right for you?
Properly used, and supported by the right software, data analytics can give your business a competitive edge. But it can be a costly endeavor that may call for an outside consultant to get you up and running. Contact us for help identifying which metrics you should target as well as forecasting the requisite costs — both upfront and ongoing — likely to be involved.
© 2023
Run the numbers before donating appreciated assets to charity
Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy.
That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different.
Tax treatments by type of gift
All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.
But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30% of AGI, while cash donations are deductible up to 60% of AGI. In either case, excess deductions may be carried forward for up to five years.
Work the math
If you’re contemplating a donation of appreciated assets that’s greater than 30% of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax and donating cash up to 60% of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years and your ability to itemize deductions in each of those years.
Before making charitable donations, discuss your options with us. We can help you make charitable gifts at the lowest tax cost.
© 2023
Look forward to next year by revisiting your business plan
Businesses of all stripes are about to embark upon a new calendar year. Whether you’ve done a lot of strategic planning or just a little, a good way to double-check your objectives and expectations is to revisit your business plan.
Remember your business plan? If you created one recently, or keep yours updated, it might be fresh in your mind. But many business owners file theirs away and bust them out only when asked to by lenders or other interested parties.
Reviewing and revising your business plan can enable you and your leadership team to ensure everyone is on the same page strategically as you move forward into the new year.
6 traditional sections
Comprehensive business plans traditionally comprise six sections:
Executive summary,
Business description,
Industry and marketing analysis,
Management team description,
Implementation plan, and
Financials.
Business plans are a must for start-ups. And, as mentioned, they’re sometimes part of the commercial lending process. Yet business plans are often overlooked when leadership teams engage in strategic planning.
The best ones can be quite simple. In fact, long-winded business plans can wind up confusing everyone involved or simply go ignored. For a small business, the executive summary shouldn’t exceed one page, and the maximum number of pages of the entire plan should generally be fewer than 40.
Spotlight on financials
The executive summary is usually the first thing anyone looks at when reading a business plan, but it’s the last section you should write. Start with your company’s historic financial results, assuming it’s not a start-up. Then, identify key benchmarks that you want to achieve in the coming year — as well perhaps longer periods, such as three, five or even 10 years out.
Next, generate financial projections that support your strategic goals. For example, suppose your company has $10 million in sales in 2022 and expects to double that figure over a three-year period. How will you get from Point A ($10 million in 2023) to Point B ($20 million in 2025)?
Let’s say you and your leadership team decide to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These strategic objectives will drive the projected income statement, balance sheet and cash flow statement included in your business plan.
Be particularly sure you’ve discussed how you’ll fund any cash shortfalls that take place as the company grows. Cash flow projections are critical for fruitful strategic planning, as well as for applying for a loan.
Blueprint for the future
One could say that integrating your strategic planning objectives into your business plan is a way to make your strategic plan “official.” By putting it in writing, and including the necessary financial documentation, you’ll have a blueprint of how to build the future of the business. Contact us for help.
© 2022
Addressing IP in an estate plan can be tricky
Over your lifetime, you may have accumulated a wide variety of tangible assets, including automobiles, works of art and property, that you’ve accounted for in your estate plan. But intangible assets can easily be overlooked.
Consider intellectual property (IP), such as patents and copyrights. These assets can have great value, so, if you have them, it’s important to properly address them in your estate plan.
Common forms of IP
IP generally falls into one of these categories: patents, copyrights, trademarks or trade secrets. Here we’ll focus on patents and copyrights, which are protected by federal law to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to exploit the economic benefits of their work for a predetermined time.
Patents protect inventions, and the two most common are utility and design patents. A utility patent may be granted to someone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” A design patent is available for a “new, original and ornamental design for an article of manufacture.” To obtain patent protection, inventions must be novel, “nonobvious” and useful.
Utility patents protect an invention for 20 years from the patent application filing date. Design patents filed on or after May 13, 2015, last 15 years from the patent issue date. There’s a difference between the filing date and issue date. For utility patents, it takes at least a year and a half from date of filing to date of issue.
Copyrights protect the original expression of ideas that are fixed in a “tangible medium of expression.” These tangible mediums of expression typically take the form of written works, music, paintings and photographs.
Unlike patents, which must be approved by the U.S. Patent and Trademark Office, copyright protection kicks in as soon as a work is fixed in a tangible medium. For works created in 1978 and later, an author-owned copyright generally lasts for the author’s lifetime plus 70 years.
Estate planning for IP
For estate planning purposes, a key question is: What’s it worth? Valuing IP is a complex process. It’s best to obtain an appraisal from a professional with experience valuing IP. After you know the IP’s value, decide whether to transfer it to family members or charity through lifetime gifts or bequests after your death.
It’s important to plan the transaction carefully to ensure that your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.
Contact us to learn more on addressing IP in your estate plan.
© 2022