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Inbound vs. outbound: Balancing your company’s sales strategies
It might sound like the lingo of air traffic controllers — inbound vs. outbound. But businesses of all types must grapple with these concepts and their associated challenges when developing sales strategies.
Inbound sales originate when someone contacts your company to inquire about buying a product or service, whereas outbound sales arise from members of your sales team reaching out to customers and prospects.
Like many businesses, yours may not have the luxury of choosing one approach over the other. You probably have to find the right balance.
Inbound sales: Marketing your brand
Inbound sales are all about marketing your brand. Customers and prospects need to know who you are and what you offer, otherwise they won’t be in touch.
Thus, you’ll need to invest in a strong brand-based, content-driven marketing strategy that establishes and maintains your reputation as a “destination business” in your industry. Interested parties who encounter your marketing materials should wind up thinking, “I want to go there.”
If you can accomplish that, you’ll need a well-trained, patient inside sales team who are experts on your products or services. The word “patient” is key. One of the downsides to inbound sales is that they can take longer to close than outbound sales. They’re also less targeted. You have to deal with whoever contacts you. Some prospects might show up with unrealistic expectations or turn out to be difficult customers.
On the plus side, inbound sales are typically less labor-intensive and expensive because the buyer is coming to you and your customer base is generally more concentrated. What’s more, inside sales teams may incur less turnover because of lower rejection rates and a greater emphasis on technical know-how over a traditional “make your numbers or else” mindset.
Outbound sales: Lots of work, big potential
Outbound sales are largely based on intensive market research. You need to know the demographics and other key data points of those most likely to buy from you — and then you’ve got to go out and get ’em.
The downside to outbound sales is they tend to entail much more work (cold calls, follow-up, virtual and/or in-person meetings) and typically incur a higher rejection rate. In addition, this approach is often more expensive. You’ll need to cast a much wider net in terms of marketing and advertising. Outside salespeople tend to work longer hours, and they may incur substantial travel expenses and have a higher turnover rate. You might need more of them to cover your sales territories, too.
All that said, under the right circumstances and when properly executed, outbound sales can generate more revenue than inbound sales. You can target a large number of precisely the types of customers who will most likely buy from you, and sales are often quicker and easier to close.
Assess your position
Has your company been running on autopilot when it comes to balancing inbound vs. outbound sales? Now’s a good time to address the issue as we head into the new year.
If, for example, you’re waiting around for inbound sales that aren’t showing up, maybe it’s time to pivot to an outbound sales strategy. On the other hand, if you’ve emerged as a major player in your market, perhaps you can cut back on the outreach, beef up your brand and rely more on inbound sales. Contact us for help evaluating your sales numbers, as well as identifying the costs and forecasting the potential revenue of both approaches.
© 2022
In your own words: A letter of instruction complements a will
A smart estate plan should leave no doubt as to your intentions. Writing a letter of instruction can go a long way toward clearly communicating all of your thoughts and wishes. Even though the letter, unlike a valid will, isn’t legally binding, it can be valuable to your surviving family members.
The devil is in the details
Although the content can vary from person to person, one of the main purposes of a letter of instruction is to provide details on final wishes that haven’t been conveyed in the will. Think of the letter as a way to fill in some of the “gaps” or resolve matters that may be left open to interpretation.
For example, your letter can detail vital financial information that was omitted or glossed over in your will. Typically, this can include an inventory of real estate holdings, investment accounts, bank accounts, retirement plan accounts and IRAs, life insurance policies, and other financial assets.
Along with the account numbers, list the locations of the documents, such as a safe deposit box or file cabinet. And don’t forget to provide the contact information for your estate planning team. Typically, this will include your attorney, CPA, investment advisor and life insurance agent. These professionals can assist your family during the aftermath.
Many people also use a letter to lay out their wishes for personal possessions. Keep in mind that without spelling out your intentions, bitter disputes may erupt over items that have more sentimental value than monetary worth, including furniture, photographs, jewelry and artwork.
Content is up to you
There are no hard-and-fast rules for writing a letter of instruction. The basic elements are outlined above, but the choices are ultimately up to you. Remember that the letter isn’t legally binding, so there is no obligation to include any particular item. Conversely, you can say pretty much whatever else you want to say.
Rewrite if necessary
Completing your letter of instruction shouldn’t be the end of the story. You may have to revisit it for rewrites or edits you didn’t accommodate before. For example, you may have neglected to specify certain accomplishments you want to be mentioned in an obituary.
In addition, it’s likely that some of your personal information will change over time, such as bank account numbers and passwords. Update the letter when warranted. Think of it as an ongoing process.
Finally, make sure that the letter is secured in a safe place. Any printed version should accompany your will or be located somewhere else that’s accessible to trusted family members. At the same time, you must be able to update the letter whenever you need to.
Clarity counts
If you haven’t done so already, draft a letter of instruction and, most important, make sure that your family knows where to locate it. We can help fill in the blanks if you need help.
© 2022
Timing is everything when it comes to accounting software upgrades
“Well, it still works, and everyone knows how to use it, but….”
Do these words sound familiar? Many businesses stick with their accounting software far too long for these very reasons. What’s important to find out and consider is everything that comes after the word “but.”
Managers and employees often struggle with systems that don’t provide all the functionality they need, such as being able to generate certain types of reports that could help the company better analyze its financials. Older software might constantly freeze up or crash. In some cases, the product may even be so old that support is no longer provided.
When it comes to accounting software upgrades, timing is everything. You don’t want to spend money unnecessarily if your system is fully functional and secure. But you also don’t want to wait too long and risk losing a competitive edge, suffering data loss or corruption, or incurring a security breach.
Building a knowledge base
The first question to ask yourself is: When was the last time we meaningfully upgraded our accounting software?
Many more products may have hit the market since you bought yours — including some that were developed specifically for your industry. Although most accounting software has the same essential features, it’s these specialized functions that hold the most potential value for certain types of companies.
To make an educated choice, business owners and their leadership teams need to gain a detailed understanding of their specific needs and the technological savvy of their employees. You can go about this knowledge-building effort in various ways, including conducting a user survey and putting together a comprehensive, detailed comparison of three or four accounting software products that appear best suited to your business.
If it appears highly likely that a new accounting system would markedly improve your financial tracking and reporting, you’ll be able to make a confident and well-advised purchasing decision.
Preparing for the transition
Bear in mind that buying the software will be the easy part. Transitioning to the new system will probably be much more challenging. When changing or significantly upgrading their accounting software, companies have to walk a fine line between:
Rushing the timeline, potentially mishandling setup issues and not providing sufficient training, and
Dragging their feet, potentially falling behind on financial reporting.
You might need to engage an IT consultant to help oversee the data transfer from the old system to the new, catch and clean up errors, and ensure strong cybersecurity measures are in place.
It’s a big decision
Moving onward and upward from a long-used accounting system is a big decision. Let us help you determine what software features would be most beneficial to your business, identify which current products would best fulfill your needs, and develop a sensible budget for the purchase.
© 2022
What’s the difference between a springing and a nonspringing power of attorney?
Estate planning typically focuses on what happens to your children and your assets when you die. But it’s equally important (some might say even more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.
A crucial component of this plan is the power of attorney (POA). A POA appoints a trusted representative to make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Without it, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions.
A question that people often struggle with is whether a POA should be springing, that is, effective when certain conditions are met or nonspringing, that is, effective immediately.
A POA defined
A POA is a document under which you, as “principal,” authorize a representative to be your “agent” or “attorney-in-fact,” to act on your behalf. Typically, separate POAs are executed for health care and property.
A POA for health care authorizes your agent — often, a spouse, an adult child or other family member — to make medical decisions on your behalf or consent to or discontinue medical treatment if you’re unable to do so. Depending on the state you live in, the document may also be known as a medical power of attorney or health care proxy.
A POA for property appoints an agent to manage your investments, pay your bills, file tax returns, continue making any annual charitable and family gifts, and otherwise handle your finances, subject to limitations you establish.
To spring or not to spring
Typically, springing powers take effect when the principal becomes mentally incapacitated, comatose, or otherwise unable to act for himself or herself.
Nonspringing POAs offer a few advantages over springing POAs:
Because they’re effective immediately, nonspringing POAs allow your agent to act on your behalf for your convenience, not just when you’re incapacitated.
They avoid the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.
A potential disadvantage to a nonspringing POA — and the main reason some people opt for a springing POA — is the concern that your agent may be tempted to abuse his or her authority or commit fraud. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re deemed incapacitated solve the problem?
Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, it’s usually preferable to use a nonspringing POA and to make sure the person you name as agent is someone you trust unconditionally. If you’re still uncomfortable handing over a POA that takes effect immediately, consider signing a nonspringing POA but have your attorney or other trusted advisor hold it and deliver it to your agent when needed.
Contact us if you have additional questions regarding a springing or nonspringing POA.
© 2022
Don’t overlook foreign assets when planning your estate
You’d be surprised how often people fail to disclose foreign assets to their estate planning advisors. They assume that these assets aren’t relevant to their “U.S.” estate plans, so they’re not worth mentioning. But if you own real estate or other assets outside the United States, it’s critical to address these assets in your estate plan.
Watch out for double taxation
If you’re a U.S. citizen, you’re subject to federal gift and estate tax on all of your worldwide assets, regardless of where you live or where the assets are located. So, if you own assets in other countries, there’s a risk of double taxation if the assets are subject to estate, inheritance or other death taxes in those countries.
You may be entitled to a foreign death tax credit against your U.S. gift or estate tax liability — particularly in countries that have tax treaties with the United States. But in some cases, those credits aren’t available.
Keep in mind that you’re considered a U.S. citizen if 1) you were born here, even if your parents have never been U.S. citizens and regardless of where you currently reside (unless you’ve renounced your citizenship), or 2) you were born outside the United States but at least one of your parents was a U.S. citizen at the time.
Even if you’re not a U.S. citizen, you may be subject to U.S. gift and estate tax on your worldwide assets if you’re domiciled in the United States. Domicile is a somewhat subjective concept — essentially it means you reside in a place with an intent to stay indefinitely and to always return when you’re away. Once the United States becomes your domicile, its gift and estate taxes apply to your assets outside the United States, even if you leave the country, unless you take steps to change your domicile.
One will may not be enough
To ensure that your foreign assets are distributed according to your wishes, your will must be drafted and executed in a manner that will be accepted in the United States as well as in the country or countries where the assets are located. Often, it’s possible to prepare a single will that meets the requirements of each jurisdiction, but it may be preferable to have separate wills for foreign assets. One advantage of doing so is that separate wills, written in the foreign country’s language (if not English) can help streamline the probate process.
If you prepare two or more wills, work with local counsel in each foreign jurisdiction to ensure that they meet each country’s requirements. And it’s critical for your U.S. and foreign advisors to coordinate their efforts to ensure that one will doesn’t nullify the others.
Trust issues
Your U.S. estate plan may use one or more trusts for a variety of purposes, including tax planning, asset management and asset protection. And your U.S. will may provide for all assets to be transferred to a trust.
Be aware, however, that many countries don’t recognize trusts. So, if your estate plan transfers foreign assets to a trust, there could be unwelcome consequences, including higher foreign taxes or even obstacles to transferring the assets as intended.
If you own foreign assets, talk to us about steps you can take to ensure that those assets are distributed in accordance with your wishes and in the most tax-efficient manner possible.
© 2022
Take a look at stock options as a recruitment tool
According to the U.S. Bureau of Labor Statistics, the U.S. unemployment rate rose slightly to 3.7% in October. Seeing as how that’s still a relatively low number, your business may be struggling to fill its open positions.
Offering equity-based compensation to job candidates is one recruitment strategy to consider. Many companies have used stock options to attract, retain and motivate executives and other key employees.
The finer points of ISOs
Stock options confer the right to buy a certain number of shares at a fixed price for a specified time. Typically, they’re subject to a vesting schedule. This requires recipients to stay with the company for a certain amount of time or meet stated performance goals.
Incentive stock options (ISOs) offer attractive tax advantages for employees. Unlike nonqualified stock options (NQSOs), which we’ll discuss below, ISOs don’t generate taxable compensation when they’re exercised. The employee isn’t taxed until the shares are sold. And if the sale is a “qualifying disposition,” 100% of the stock’s appreciation is treated as capital gain and is free from payroll taxes.
To qualify, ISOs must meet certain requirements:
They must be granted under a written plan that’s approved by shareholders within one year before or after adoption,
The exercise price must be at least the stock’s fair market value (FMV) on the grant date (110% of FMV for more-than-10% shareholders), and
The term can’t exceed 10 years (five years for more-than-10% shareholders).
Additionally, the options can’t be granted to nonemployees. What’s more, employees can’t sell the shares sooner than one year after the options are exercised or two years after they’re granted.
And the total FMV of stock options that first become exercisable by an employee in a calendar year can’t exceed $100,000.
How NQSOs differ
NQSOs are stock options that don’t qualify as ISOs. Typically, the exercise price is at least the stock’s FMV on the grant date. (Various tax complications may ensue, which we won’t get into here.) The NQSO itself generally isn’t considered taxable compensation because there’s no taxable event until exercise. At that time, the spread between the stock’s FMV and the exercise price is treated as compensation.
Although NQSOs are taxed as ordinary income upon exercise, they have several advantages over ISOs. First, they’re not subject to the ISO requirements listed above, so they’re more flexible. For example, they can be granted to independent contractors, outside directors or other nonemployees. Second, they generate tax deductions for the employer and don’t expose recipients to liability for the alternative minimum tax.
Look before you leap
If you’re considering equity-based compensation, it’s important to review the pros, cons and tax implications before offering either type of stock option. Contact us for help evaluating the cost vs. benefit impact of this or any other recruitment strategy you’re considering.
© 2022
Act Now to Reduce Your Business’s 2022 Tax Bill
It’s been a tumultuous year for many businesses, and the current economic climate promises more uncertainty for the short term, if not longer. Regardless of how your company has fared so far in 2022, there’s still time to make moves that may reduce your federal tax liability. Read on for some strategies worth your consideration.
Time your income and expenses
When it comes to year-end tax reduction strategies, the granddaddy of them all — for businesses that use cash-basis accounting — is probably the practice of accelerating deductions into the current tax year and deferring income into the next year. You can accelerate deductions by, for example, paying bills or employee bonuses due in 2023 before year end and stocking up on supplies. Meanwhile, you can defer income by holding off on invoicing until late December or early January.
You should consider this strategy only if you don’t expect to see significantly higher profits next year. If you think you will, flip the approach, accelerating income and pushing deductions into the future when they’ll be more valuable. Also, bear in mind that reducing your income could reduce your qualified business income (QBI) deduction, depending on your business entity.
Maximize your QBI deduction
Pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) can deduct up to 20% of their QBI, subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income. The deduction, created by the Tax Cuts and Jobs Act (TCJA), is set to expire after 2025, absent congressional action, so make the most of it while you can.
You could increase your deduction by increasing wages (for example, by converting independent contractors to employees or raising pay for existing employees) or purchasing capital assets. (Of course, these moves usually have other consequences, such as higher payroll taxes, that you should weigh before proceeding.) You can avoid the income limit by timing your income and deductions, as discussed above.
If the W-2 wage limitation doesn’t limit the QBI deduction, S corporation owners can increase their QBI deductions by reducing the wages the business pays them. (This won’t work for sole proprietorships or partnerships, which don’t pay their owners salaries.) Conversely, if the wage limitation does limit the deduction, S corporation owners might be able to take a greater deduction by boosting their wages.
Accelerate depreciation — while you can
The TCJA also increased the Section 168(k) first-year bonus depreciation to 100% of the purchase price, through 2022. Beginning next year, the allowable deduction will drop by 20% each year until it evaporates altogether in 2027 (again, absent congressional action). Combining bonus depreciation with the Section 179 deduction can produce substantial tax savings for 2022.
Under Sec. 179, you can deduct 100% of the purchase price of new and used eligible assets in the year you place them in service — even if they’re only in service for a day or two. Eligible assets include machinery, office and computer equipment, software, and certain business vehicles. The deduction also is available for improvements to nonresidential property.
The maximum Sec. 179 deduction for 2022 is $1.08 million and it begins phasing out on a dollar-for-dollar basis when your qualifying property purchases exceed $2.7 million. The maximum deduction also is limited to the amount of your income from the business, although unused amounts can be carried forward indefinitely.
Alternatively, you can claim excess amounts as bonus depreciation, which is subject to no limits or phaseouts in 2022. Bonus depreciation is available for computer systems, software, vehicles, machinery, equipment, office furniture and qualified improvement property (generally, interior improvements to nonresidential property).
For all their immediate appeal, bonus depreciation and Sec. 179 expensing aren’t always advisable. You may, for example, want to skip accelerated depreciation if you claim the QBI deduction. The deduction is limited by your taxable income, and depreciation reduces such income.
It might be wise to have some depreciation available to offset your income in 2023 through 2025 so you can claim the QBI deduction while it’s still around. You might think twice, too, if you have expiring net operating losses, charitable contributions or credit carryforwards that are affected by taxable income.
The good news is that you don’t have to decide now. As long as you place qualified property in service by December 31, 2022, you have the option of choosing the most advantageous approach when you file your tax return in 2023.
Get real about your bad debts
Business owners are sometimes slow to accept that they’re going to go unpaid for services rendered or goods delivered. If you use accrual-basis accounting, though, facing the facts can land you a bad debt deduction.
The IRS allows businesses to deduct “worthless” debts, in full or in part, that they’ve previously included in their income. To show that a debt is worthless, you need to show that you’ve taken reasonable steps to collect but without success. You aren’t required to go to court if you can show that a judgment from a court would be uncollectible.
You still have time to take reasonable steps to collect outstanding debts. It’s important to keep detailed records of these efforts. If you determine you can’t collect, you may be able to deduct some or all of those debts for 2022.
Start or replace your retirement plan
If you’ve put off establishing a retirement plan, or simply outgrown the plan you started years ago, you have time to possibly trim your taxes this year — and likely improve your employee recruitment and retention at the same time — by starting a new plan. Eligible employers can claim a tax credit of up to $5,000, for the first three years, for the costs of starting a SEP IRA, SIMPLE IRA or a qualified plan such as a 401(k) plan.
The credit is 50% of your costs to set up and administer the plan and educate your employees about it. You can claim up to the greater of $500 or the lesser of:
$250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
$5,000.
You can begin to claim the credit in the tax year before the year the plan becomes effective. And, if you add an auto-enrollment feature, you can claim a tax credit of $500 per year for a three-year period beginning in the first taxable year the feature is included.
Leverage your startup expenses
If you launched a new business this year, you might qualify for a limited deduction for certain costs. The IRS allows you to deduct up to $5,000 of startup costs and $5,000 of organizational costs (such as the costs of creating a partnership). The deduction is reduced by the amount by which your total startup or organizational costs exceed $50,000. You must amortize any remaining costs.
An eligible cost is one that you could deduct if it were paid or incurred to operate an existing business in the same field. Eligible costs also must be paid or incurred before the active business begins. Examples include business analysis costs, advertisements for the business’s opening, travel and other costs related to lining up prospective distributors, suppliers or customers, and certain salaries, wages and fees.
Turn to us for planning advice
Many of the strategies detailed here involve tradeoffs that require thoughtful evaluation and analysis. We can help you make the right choices to minimize your company’s tax bill.
© 2022
Understand Your Spouse’s Inheritance Rights If You’re Getting Remarried
If you’re taking a second trip down the aisle, you may have different expectations than you did when you got married the first time — especially when it comes to estate planning. For example, if you have children from a previous marriage, your priority may be to provide for them. Or perhaps you feel that your new spouse should have limited rights to your assets compared to those of your spouse from your first marriage.
Unfortunately, the law doesn’t see it that way. In nearly every state, a person’s spouse has certain property rights that apply regardless of the terms of the estate plan. And these rights are the same, whether it’s your first marriage or your second. Here’s an introduction to spousal property rights and strategies you may be able to use to limit them.
Defining a spouse’s “elective share”
Spousal property rights are creatures of state law, so it’s critical to familiarize yourself with the laws in your state to achieve your planning objectives. Most, but not all, states provide a surviving spouse with an “elective share” of the deceased spouse’s estate, regardless of the terms of his or her will or certain other documents.
Generally, a surviving spouse’s elective share ranges from 30% to 50%, though some states start lower and provide for progressively larger shares as the duration of the marriage increases. Perhaps the most significant variable, with respect to planning, is the definition of assets subject to the surviving spouse’s elective share rights.
In some states, the elective share applies only to the “probate estate” — generally, assets held in the deceased spouse’s name alone that don’t have a beneficiary designation. In other states, it applies to the “augmented estate,” which is the probate estate plus certain nonprobate assets. These assets may include revocable trusts, life insurance policies, and retirement or financial accounts that pass according to a beneficiary designation or transfer-on-death designation.
By developing an understanding of how elective share laws apply in your state, you can identify potential strategies for bypassing them.
Using planning strategies
Elective shares are designed to protect surviving spouses from being disinherited. But there may be good reasons for limiting the amount of property that goes to your spouse when you die. For one thing, your spouse may possess substantial wealth in his or her own name. And you may want most of your estate to go to your children from a previous marriage.
Strategies for minimizing the impact of your spouse’s elective share on your estate plan include making lifetime gifts. By transferring property to your children or other loved ones during your lifetime (either outright or through an irrevocable trust), you remove those assets from your probate estate and place them beyond the reach of your surviving spouse’s elective share. If your state uses an augmented estate to determine a spouse’s elective share, lifetime gifts will be protected so long as they’re made before the lookback period or, if permitted, your spouse waives the lookback period.
Seeking professional help
Elective share laws are complex and can vary dramatically from state to state. If you’re remarrying, we can help you evaluate their impact on your estate plan and explore strategies for protecting your assets.
© 2022
Instill family values with a FAST
You create an estate plan to meet technical objectives, such as minimizing gift and estate taxes and protecting your assets from creditors’ claims. But it’s also important to consider “softer,” yet equally critical, goals.
These softer goals may include educating your children or other loved ones on how to manage wealth responsibly. Or, you may want to promote shared family values and encourage charitable giving. Using a family advancement sustainability trust (FAST) is one option to achieve these goals.
Fill the leadership gap
It’s not unusual for the death of the older generation to create a leadership gap within a family. A FAST can help fill this gap by establishing a leadership structure and providing resources to fund educational and personal development activities for younger family members.
For example, a FAST might finance family retreats and educational opportunities. It also might outline specific best practices and establish a governance structure for managing the trust responsibly and effectively.
Form a common governance structure
Typically, FASTs are created in states that 1) allow perpetual, or “dynasty,” trusts that benefit many generations to come, and 2) have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters. A directed trust statute makes it possible for both family members and trusted advisors with specialized skills to participate in governance and management of the trust.
A common governance structure for a FAST includes four decision-making entities:
An administrative trustee, often a corporate trustee, that deals with administrative matters but doesn’t handle investment or distribution decisions,
An investment committee — consisting of family members and an independent, professional investment advisor — to manage investment of the trust assets,
A distribution committee — consisting of family members and an outside advisor — to help ensure that trust funds are spent in a manner that benefits the family and promotes the trust’s objectives, and
A trust protector committee — typically composed of one or more trusted advisors — which stands in the shoes of the grantor after his or her death and makes decisions on matters such as appointment or removal of trustees or committee members and amendment of the trust document for tax planning or other purposes.
Explore funding options
Establish a FAST during your lifetime. Doing so helps ensure that the trust achieves your objectives and allows you to educate your advisors and family members on the trust’s purpose and guiding principles.
FASTs generally require little funding when created, with the bulk of the funding provided upon the death of the trust holder. Although funding can come from the estate, a better approach is to fund a FAST with life insurance or a properly structured irrevocable life insurance trust. Using life insurance allows you to achieve the FAST’s objectives without depleting the assets otherwise available for the benefit of your family.
Is a FAST right for you?
If your children or other family members are in line to inherit a large estate, a FAST may be right for you. Properly designed and implemented, this trust type can help prepare your heirs to receive wealth and educate them about important family values and financial responsibility. We can help you determine if a FAST should be part of your estate plan.
© 2022
Choosing a Retirement Plan for Your Small Business
Most growing small businesses reach a point where the owner looks around at the leadership team and says, “It’s time. We need to offer employees a retirement plan.”
Often, this happens when the company is financially stable enough to administer a retirement plan and make substantive contributions. Other times it occurs when the business grows weary of losing good job candidates because of a less-than-impressive benefits package.
Whatever the reason, if you don’t have a retirement plan and see one in your immediate future, you’ll want to carefully select the one that will work best for your company and its employees. Here are some basics about three of the most tried-and-true plans.
1. 401(k) plans offer flexibility
Available to any employer with one or more employees, a 401(k) plan allows employees to contribute to individual accounts. Contributions to a traditional 401(k) are made pretax, reducing taxable income, but distributions are taxable.
Both employees and employers can contribute. For 2023, employees can contribute up to $22,500 (up from $20,500 in 2022). Participants who are age 50 or older by the end of the year can make an additional “catch-up” contribution of $7,500 (up from $6,500 in 2022). Within limits, employers can deduct contributions made on behalf of eligible employees.
Plans may offer employees a Roth 401(k) option, which, on some level, is the opposite of a traditional 401(k). This is because contributions don’t reduce taxable income currently but distributions are tax-free.
Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. With a “safe harbor” 401(k), however, the plan isn’t subject to discrimination testing.
2. Employers fully fund SEP plans
Simplified Employee Pension (SEP) plans are available to businesses of any size. Establishing one requires completing Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement,” but there’s no annual filing requirement.
SEP plans are funded entirely by employer contributions, but you can decide each year whether to contribute. Contributions immediately vest with employees. In 2023, contribution limits will be 25% of an employee’s compensation or $66,000 (up from $61,000 in 2022).
SIMPLEs target small businesses
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of plan available only to businesses with no more than 100 employees. It’s up to employees whether to contribute. Although employer contributions are required, you can choose whether to:
Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or
Make a 2% nonelective contribution, including to employees who don’t contribute.
Employees are immediately 100% vested in contributions, whether from themselves or their employers. The contribution limit in 2023 will be $15,500 (up from $14,000 in 2022).
A big step forward
Obviously, choosing a retirement plan to offer your employees is just the first step in the implementation process. But it’s a big step forward for any business. Let us help you assess the costs and tax impact of any plan type that you’re considering.
© 2022
Annual Gift Tax Exclusion Amount Increases for 2023
Did you know that one of the most effective estate-tax-saving techniques is also one of the simplest and most convenient? By making maximum use of the annual gift tax exclusion, you can pass substantial amounts of assets to loved ones during your lifetime without any gift tax. For 2022, the amount is $16,000 per recipient. In 2023, the amount will increase by $1,000, to $17,000 per recipient.
Maximizing your gifts
Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. But gifts can generally be structured so that they’re — at least to a limited degree — sheltered from gift tax. More specifically, they’re covered by the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for amounts above the exclusion. (Using the unified exemption during your lifetime, however, erodes the available estate tax shelter.)
For 2022, you can give each family member up to $16,000 a year without owing any gift tax. For instance, if you have three adult children and seven grandchildren, you may give each one up to $16,000 by year end, for a total of $160,000. Then you can turn around and give each one $17,000 beginning in January 2023, for $170,000. In this example, you could reduce your estate by a grand total of $330,000 in a matter of months.
Furthermore, the annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $32,000 per recipient in 2022 ($34,000 in 2023).
Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, each spouse must file an individual gift tax return for the year in which they both make gifts.
Coordinating with the lifetime exemption
The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion. Under current law, the exemption effectively shelters $10 million from tax, indexed for inflation. In 2022, the amount is $12.06 million, and in 2023 the amount will increase to $12.92 million. However, as mentioned above, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.
Exceptions to the rules
Be aware that certain gifts are exempt from gift tax, thereby preserving both the full annual gift tax exclusion amount and the exemption amount. These include gifts:
From one spouse to the other,
To a qualified charitable organization,
Made directly to a healthcare provider for medical expenses, and
Made directly to an educational institution for a student’s tuition.
For example, you might pay the tuition for a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.
Planning your gifting strategy
The annual gift tax exclusion remains a powerful tool in your estate-planning toolbox. Contact us for help developing a gifting strategy that works best for your specific situation.
© 2022
How Should Your Marketing Strategy Change Next Year?
The current calendar year is winding down and a fresh 12 months lie ahead. That makes now a good time to think about how you should present yourself to customers and prospects next year.
The U.S. economy has undergone notable change in 2022. Namely, rising inflation and persistent supply chain challenges have forced companies to really contemplate how they want to do business. Your marketing strategy for 2023 should reflect “the new you” — a business that’s nimbly adjusted to the revised playing field and can still offer customers great value.
Address the audience
A good place to start is with your audience. To whom will you market your business? Consider each prospect, existing customer, or targeted group as an investment. Estimate your net profit after subtracting production, sales, and customer service costs.
More desirable customers will buy a sizable volume with enough frequency to provide a steady revenue stream rather than serve as just a one-time or infrequent buyer. They’ll also be potential targets for cross-selling other products or services to generate incremental revenue.
Bear in mind that you must have the operational capacity to fulfill prospects’ and customers’ demands. If not, you’ll have to expand your operations, costing you more in resources and capital.
Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.
Confront the pricing conundrum
Another key factor to address is pricing. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.
What’s worse, inflation has thrown a wild card into this conundrum. Your expenses have likely risen, which could very well mean you have to adjust prices upward. But if customers and prospects get the impression you’re raising prices unreasonably, business could suffer. Your marketing strategy — specifically, communicating price adjustments to customers and prospects — is key to mitigating this risk.
In addition, think about what kind of payment terms you’re prepared to offer and promote in your marketing materials. Sitting on large accounts receivable can strain your cash flow. Strive to establish timely, feasible payment schedules that allow you to sustain your operational capacity and support the bottom line.
Get started
Of course, there are many other aspects of a marketing strategy to consider. But scrutinizing your customer/prospect base and thoroughly analyzing your pricing are good places to start. Contact us for help evaluating the cost impact of marketing, as well as calculating viable price points for your products or services.
© 2022
5 Steps to Take Now to Cut Your 2022 Tax Liability
It has been quite a year — high inflation, rising interest rates and a bear stock market. While there’s not a lot you can do about any of these financial factors, you may have some control over how your federal tax bill for the year turns out. Here are some strategies to consider executing before year end that may reduce your 2022 or future tax liability.
1. Convert your traditional IRA to a Roth IRA
The down stock market could make this an especially lucrative time to convert all or some of the funds in a traditional pre-tax IRA to an after-tax Roth IRA. Although you must pay income tax on the amount converted in 2022, Roth accounts hold some significant advantages over their traditional counterparts.
Unlike traditional IRAs, for example, Roths aren’t subject to required minimum distributions (RMDs). The funds in a Roth will appreciate tax-free. Qualified future distributions also will be tax-free, which will pay off if you’re subject to higher tax rates at that time, whether due to RMDs or other income.
How does the poorly performing stock market incentivize a Roth conversion? If your traditional IRA contains stocks or mutual funds that have lost significant value, you can convert more shares than you could if they were worth more, for the same amount of tax liability.
Roth conversions are also advisable if you have lower income and therefore are in a lower tax bracket this year. Perhaps you lost your job at the end of 2021 and didn’t resume working until this past summer, or you’re retired but not yet receiving Social Security payments. You may be able to save by converting before the end of the year.
Currently, you can use a Roth conversion as a workaround for the income limits on your ability to contribute to Roth IRAs — what’s known as a backdoor Roth IRA — because converted funds aren’t treated as contributions. But be aware that, if you’re under age 59½, you can’t access the transferred funds without penalty.
Further, be aware that a Roth conversion will likely increase your adjusted gross income (AGI). As such, it could affect your eligibility for tax breaks that phase out based on AGI or modified adjusted gross income (MAGI).
2. Defer or accelerate income and deductions
A common tax reduction technique is to defer income into the next year and accelerate deductions into the current year. Doing so can allow you to make the most of tax breaks that phase out based on income (such as the IRA contribution deduction, child tax credits and education tax credits). If you’re self-employed, for example, you might delay issuing invoices until late December (increasing the odds they won’t be paid until 2023) and make equipment purchases in December, rather than January (assuming you use cash-basis accounting).
On the other hand, you might want to defer deductions and accelerate income if you expect to land in a higher tax bracket in the future. You can accelerate income by, for example, realizing deferred compensation, exercising stock options, recognizing capital gains or engaging in a Roth conversion.
High-income individuals should think about income deferral from the perspective of the 3.8% net investment income tax (NIIT), too. The NIIT kicks in when MAGI is more than $200,000 for single and head of household filers, $250,000 for married filing jointly and $125,000 for married filing separately. Deferring investment income could mean escaping that potentially hefty tax bite.
3. Manage your itemized deductions wisely
Accelerating deductions generally is helpful only if you itemize your deductions, of course. If you don’t think you’ll qualify to itemize, think about “bunching” itemized deductions so that they exceed the standard deduction (in 2022, $12,950 for single filers, $25,900 for married filing jointly and $19,400 for heads of household). If you claim itemized deductions this year and the standard deduction next year, you could end up with a larger two-year total deduction than if you took the standard deduction both years.
Potential expenses ripe for bunching include medical and dental expenses (if you qualify to deduct eligible expenses that exceed 7.5% of your AGI), charitable contributions, and state and local tax (SALT). For example, you could get dental services before year end, make your 2022 and 2023 charitable donations in December of this year, and pre-pay property taxes due next year, if possible.
The deduction for SALT-like property tax generally is subject to a $10,000 cap. Check, though, to determine if you might be able to take advantage of a pass-through entity (PTE) tax. More than two dozen states and New York City have enacted these laws, which permit a PTE to pay state tax at the entity level, rather than the individual taxpayer level. PTEs aren’t subject to a federal limit on SALT deductions.
4. Give to charity
The AGI limit for deductible cash donations has returned to 60% of AGI for 2022. But the possibility for substantial savings from making a charitable donation remains. For example, if you donate appreciated assets that you’ve held at least one year, you can deduct their fair market value and avoid income tax on the amount of appreciation if you itemize.
A qualified charitable distribution (QCD) from your IRA may confer tax benefits. Taxpayers who are age 70½ years or older can make a direct transfer of up to $100,000 per year from their IRAs to a qualified charity — and exclude the transferred amount from their gross income. (Note that transfers to a donor-advised fund or supporting organization don’t qualify). If you’re age 72 or older, a QCD can count toward your RMDs, as well.
You also may want to explore establishing a donor-advised fund. You can set it up and contribute assets in 2022 to claim a deduction for this year, while delaying your selection of the recipient charity and the actual contribution until 2023.
5. Harvest your capital losses
This is another way to leverage the poor market performance in 2022 — selling off your investments that have lost value to offset any capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 for married filing separately) a year from your ordinary income and carry forward any remaining excess indefinitely.
You could further juice the benefit of loss harvesting by donating the proceeds from the sale to charity. You’ll offset realized gains while boosting your charitable contribution deduction (subject to AGI limitations on the charitable contribution deduction).
Take heed of the wash-rule, though. It says you can’t write-off losses if you acquire “substantially identical” securities within 30 days before or after the sale.
Act now
It’s been a rocky financial year for many people, and uncertainty about the economy will continue into next year. One thing is certain, though — everyone wants to cut their tax bills. Contact us to help you with your year-end tax planning.
© 2022
Estate Planning Vocab 101: Executor and Trustee
Among the many decisions you’ll have to make as your estate plan is being drafted is who you will appoint as the executor of your estate and the trustee of your trusts. These are important appointments, and, in fact, both roles can be filled by the same person. Let’s take a closer look at the duties of an executor and a trustee.
Duties of an executor
The executor (called a “personal representative” in some states) is the person named in a will to carry out the wishes of the deceased. Typically, the executor shepherds the will through the probate process, takes steps to protect the estate’s assets, distributes property to beneficiaries according to the will and pays the estate’s debts and taxes.
Most assets must pass through probate before they can be distributed to beneficiaries. (Note, however, that assets transferred to a living trust are exempted from probate.) When the will is offered for probate, the executor will also obtain “letters testamentary” from the court, authorizing him or her to act on the estate’s behalf.
It’s the executor’s responsibility to locate, manage and disburse the estate’s assets. In addition, he or she must determine the value of property. Depending on the finances, assets may have to be liquidated to pay debts of the estate.
Also, the executor can use estate funds to pay for funeral and burial expenses if no other arrangements have been made. The executor will obtain copies of the death certificate, which will be needed for several purposes, including closing financial accounts, canceling certain benefit payments and filing the final tax return.
So, whom should you choose as the executor of your estate? Your first inclination may be to name a family member or a trusted friend. But this can cause complications.
For starters, the person may be too grief-stricken to function effectively. And, if the executor stands to gain from the will, there may be conflicts of interest that can trigger contests of your will or other disputes by disgruntled family members. Furthermore, the executor may lack the financial acumen needed for this position. Frequently, a professional advisor whom you know and trust is a good alternative.
Duties of a trustee
The trustee is the person who has legal responsibility for administering a trust on behalf of the trust’s beneficiaries. Depending on the trust terms, this authority may be broad or limited.
Generally, trustees must meet fiduciary duties to the beneficiaries of the trust. They must manage the trust prudently and treat all beneficiaries fairly and impartially. This can be more difficult than it sounds because beneficiaries may have competing interests. The trustee must balance out their needs when making investment decisions.
The decision about naming a trustee is similar to the dilemma of choosing an executor. The responsibilities require great attention to detail, financial acumen and dedication. Because of the heavy reliance on investment expertise, choosing a professional over a family member or friend is often recommended. At the very least, make it clear to the trustee that he or she may — and should — rely on professionals as appropriate.
Designating alternates
An executor can renounce the right to this position by filing a written declaration with the probate court. Along the same lines, a designated trustee may decline to accept the position or subsequently resign if permission is allowed by the trust or permitted by a court. This further accentuates the need to name backups for these important positions.
Without a named successor in the executor role, the probate court will appoint one for the estate. For a trustee, the trust will often outline procedures to follow. As a last resort, a court will appoint someone else to do the job.
If you have additional questions regarding the roles of a trustee or an executor, please contact us.
© 2022
What Do the 2023 Cost-of-Living Adjustment Numbers Mean for You?
The IRS recently issued its 2023 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, many amounts increased considerably over 2022 amounts. As you implement 2022 year-end tax planning strategies, be sure to take these 2023 adjustments into account.
Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax-bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.
Individual Income Taxes
Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $725, to $1,450, depending on filing status, but the top of the 35% bracket increases by $22,950 to $45,900, again depending on filing status.
The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2023, the standard deduction will be $27,700 (married couples filing jointly), $20,800 (heads of households), and $13,850 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.
Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.
AMT
The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2023, the threshold for the 28% bracket will increase by $14,600 for all filing statuses except married filing separately, which increased by half that amount.
The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2023 will be $81,300 for singles and $126,500 for joint filers, increasing by $5,400 and $8,400, respectively, over 2022 amounts. The inflation-adjusted phaseout ranges for 2023 will be $578,150–$903,350 (singles) and $1,156,300–$1,662,300 (joint filers). Amounts for married couples filing separately are half of those for joint filers.
Education and child-related breaks
The maximum benefits of certain education and child-related breaks generally remain the same for 2023. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.
The MAGI phaseout ranges will generally remain the same or increase modestly for 2023, depending on the break. For example:
The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.
The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.
The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2023 — by $15,820, to $239,230–$279,230 for joint, head-of-household and single filers. The maximum credit will increase by $1,060, to $15,950 for 2023.
(Note: Married couples filing separately generally aren’t eligible for these credits.)
These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.
Gift and estate taxes
The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2023, the amounts will be $12.92 million (up from $12.06 million for 2022).
The annual gift tax exclusion will increase by $1,000 to $17,000 for 2023.
Retirement plans
Nearly all retirement-plan-related limits will increase for 2023. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:
Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2023.
Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:
For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
For a spouse who participates, the 2023 phaseout range limits will increase by $7,000, to $116,000–$136,000.
For a spouse who doesn’t participate, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2023 phaseout range limits will increase by $5,000, to $73,000–$83,000.
Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,500 contribution limit for 2023 (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:
For married taxpayers filing jointly, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
For single and head-of-household taxpayers, the 2023 phaseout range limits will increase by $9,000, to $138,000–$153,000.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)
Crunching the numbers
With the 2023 cost-of-living adjustment amounts soaring higher than 2022 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2023 numbers.
© 2022
Supplementing Your Company’s Healthcare Plan with an EBHRA
Is your business ready to take its healthcare benefits to the next level? One way to do so is to supplement group health coverage with an Excepted Benefit Health Reimbursement Arrangement (EBHRA). Here are some pertinent details.
Rules to Follow:
Under a traditional HRA, the employer owns and funds the tax-advantaged account up to any chosen amount. However, traditional HRAs are subject to mandates under the Public Health Service Act (PHSA), which was amended by the Affordable Care Act (ACA).
Because employer contributions to EBHRAs are limited, these accounts qualify as “excepted benefits” and aren’t subject to the PHSA mandates. EBHRAs can be offered by companies or other employers of any size, but they must follow certain rules, such as:
Limited-dollar benefits. In 2022, up to $1,800 can be newly allocated to each participant per plan year to reimburse eligible medical expenses. This amount will rise to $1,950 for plan years beginning in 2023 — the first time the limit has increased since these arrangements were launched in 2020.
Carryovers, which are permitted under both traditional HRAs and EBHRAs, are disregarded when applying the limit. Amounts made available under other HRAs or account-based plans provided by the employer for the same period will count against the dollar limit unless those arrangements reimburse only excepted benefits.
Qualified reimbursements. An EBHRA may reimburse any qualifying, out-of-pocket medical expense other than premiums for individual health coverage, Medicare or non-COBRA group coverage. Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term limited-duration insurance (STLDI). However, under certain circumstances, federal agencies may prohibit small employer EBHRAs in particular states from allowing STLDI premium reimbursement.
Required other coverage. The employer must make other nonexcepted, non–account-based group health plan coverage available to EBHRA participants for the plan year. Thus, participants in the EBHRA couldn’t also be offered a traditional HRA.
Uniform availability. An EBHRA must be made available under the same terms and conditions to all similarly situated individuals, as provided by applicable regulations.
HIPAA and ERISA
An EBHRA’s status as an excepted benefit means only that it’s not subject to the ACA’s PHSA mandates or the portability and nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA).
However, EBHRAs are subject to HIPAA’s administrative simplification requirements. This includes the law’s privacy and security rules unless an exception applies — such as for certain small self-insured, self-administered plans.
And, like traditional HRAs, EBHRAs are subject to the Employee Retirement Income Security Act (ERISA) unless an exception applies — such as for church or governmental plans. Thus, reimbursement requests must be handled in accordance with ERISA’s claim and appeal procedures; EBHRA participants must receive a summary plan description; and other ERISA requirements apply.
Finally, EBHRAs must comply with nondiscrimination rules. These generally prohibit discrimination in favor of highly compensated individuals regarding eligibility and which benefits are offered.
Various Factors
When deciding whether to offer an EBHRA at your business, you’ll need to consider various factors. These include the impact on existing benefits, which employees will be covered, how much you’ll contribute and which expenses you’ll reimburse. We can help you assess the costs, advantages and risks of this or any other employee benefit you’re considering.
© 2022
Reinforce Your Cybersecurity Defenses Regularly
If you’ve been in business for any amount of time, you probably don’t need anyone to tell you about the importance of cybersecurity. However, unlike the lock to a physical door, which generally lasts a good long time, measures you take to protect your company from hackers and malware need to be updated and reinforced much more regularly.
Two common categories
Most of today’s business cyberattacks fall into two main categories: ransomware and social engineering.
In a ransomware attack, hackers infiltrate a company’s computer network, encrypt or freeze critical data, and hold that data hostage until their ransom demands are met. It’s become a highly common form of cybercrime. Just one example, which occurred in October 2022, involved a major health care system that had recently executed a major M&A deal.
On the other hand, social engineering attacks use manipulation and pressure to trick employees into granting cybercriminals access to internal systems or bank accounts. The two most common forms of social engineering are phishing and business email compromise (BEC).
In a typical phishing scam, cyberthieves send fake, but often real-looking, emails to employees to entice them into downloading attachments that contain malware. Or they try to get employees to click on links that automatically download the malware.
In either case, once installed on an employee’s computer, the malware can give hackers remote access to a company’s computer network — including customer data and bank accounts. (Also beware of “smishing,” which is when fraudsters use text messages for the same purpose.)
BEC attacks are similar. Here, cyberthieves send fake emails mainly to accounting employees saying the company’s bank accounts have been frozen because of fraud. The emails instruct employees to reply with account usernames and passwords to supposedly resolve the problem. With this information, thieves can wreak financial havoc — including initiating unauthorized wire transfers — which can be difficult, if not impossible, to reverse.
Preventative measures
Here are a few things you can do to guard against cyberattacks:
Continually train employees. Conduct mandatory training sessions at regular intervals to ensure your employees are familiar with your cybersecurity policies and can recognize the many possible forms of a cyberattack.
Maintain IT infrastructure. Instruct and remind employees to download software updates when they’re available. Enforce a strict policy of regular password changes. If two-factor authentication is feasible, set it up. This is particularly important with remote employees.
Encrypt and back up data. All company data should be encrypted and regularly backed up on a separate off-site server. In the event of a ransomware attack, you’ll still be able to access that data without paying the ransom.
Restrict access to your Wi-Fi network. First and foremost, it should be password-protected. Also, move your router to a secure location and install multiple firewalls. If you offer free Wi-Fi to customers, use a separate network for that purpose.
Consider insurance coverage. Insurers now sell policies that will help pay costs associated with data breaches while also covering some legal fees associated with cyberattacks. However, you’ll need to shop carefully, set a reasonable budget and read the fine print.
Defend your data
None of the measures mentioned above are one-time activities. On a regular basis, businesses need to determine what new training employees need and whether there are better ways to secure IT infrastructure and sensitive data. Let us help you assess, measure and track the costs associated with preserving your company’s cybersecurity.
© 2022
Should You File a Joint Tax Return for the Year of Your Spouse’s Death?
The death of a spouse is a devastating, traumatic experience. And when it happens, dealing with taxes and other financial and legal obligations are probably the last things on your mind. Unfortunately, many of these obligations can’t wait and may have to be addressed in the months to follow. One important issue for the surviving spouse to consider is whether to file a joint or separate income tax return for the year of death.
Final tax return
When someone dies, his or her personal representative is responsible for filing an income tax return for the year of death (as well as any unfiled returns for previous years). For purposes of the final return, the tax year generally begins on January 1 and ends on the date of death. The return is due by April 15 of the following calendar year.
Income that’s included on the final return is determined according to the deceased’s usual tax accounting method. So, for example, if he or she used the cash method, the income tax return would only report income actually or constructively received before death and only deduct expenses paid before death. Income and expenses after death are reported on an estate tax return.
The surviving spouse, together with the personal representative, may file a joint return. And the surviving spouse alone can elect to file a joint return if a personal representative hasn’t yet been appointed by the filing due date. (However, a court-appointed personal representative may later revoke that election.)
Pros and cons of a joint return
In the year of death, the surviving spouse is generally deemed to be married for the entire calendar year, so he or she can file a joint return with the estate’s cooperation. If a joint return is filed, it’ll include the deceased’s income and deductions from the beginning of the tax year to the date of death, and the surviving spouse’s income and deductions for the entire tax year.
Possible advantages of filing a joint tax return include:
Depending on your income and certain other factors, you may enjoy a lower tax rate.
Certain tax credits are larger on a joint return or are unavailable to married taxpayers filing separately.
IRA contribution limits, as well as the amount allowed as a deduction, may be higher for joint filers.
There may also be disadvantages to filing jointly. For example, higher adjusted gross income (AGI) may reduce the tax benefits of expenses, such as medical bills, that are deductible only to the extent that they exceed a certain percentage of AGI.
Crunch the numbers
To determine the best approach, let us assess your tax liability based on both joint and separate returns. While married filing separately might be the only filing option available to you, other possibilities — depending on the facts — include qualifying widow(er) and head-of-household status.
© 2022
Drafting Your Estate Plan Isn’t a Do-It-Yourself Project
There’s no shortage of online do-it-yourself (DIY) tools that promise to help you create an “estate plan.” But while these tools can generate wills, trusts and other documents relatively cheaply, they can be risky except in the simplest cases. If your estate is modest in size, your assets are in your name alone, and you plan to leave them to your spouse or other closest surviving family member, then using an online service may be a cost-effective option. Anything more complex can expose you to a variety of costly pitfalls.
Your plan’s details count
Part of the problem is that online services can help you create individual documents — the good ones can even help you comply with applicable laws, such as ensuring the right number of witnesses to your will — but they can’t help you create an estate plan. Putting together a plan means determining your objectives and coordinating a collection of carefully drafted documents designed to achieve those objectives. And in most cases, that requires professional guidance.
For example, let’s suppose Ken’s estate consists of a home valued at $500,000 and a mutual fund with a $500,000 balance. He uses a DIY tool to create a will that leaves the home to his daughter and the mutual fund to his son. It seems like a fair arrangement. But suppose that by the time Ken dies, he’s sold the home and invested the proceeds in his mutual fund. Unless he amended his will, he will disinherit his daughter. An experienced estate planning advisor would have anticipated such contingencies and ensured that Ken’s plan treated both children fairly, regardless of the specific assets in his estate.
Professional experience vs. technical expertise
DIY tools also fall short when a decision demands a professional’s experience rather than mere technical expertise. An online service makes it easy to name a guardian for your minor children, for example, but it can’t help you evaluate the many characteristics and factors that go into selecting the best candidate.
FMD will gladly any of your estate planning questions and help draft your documents.
© 2022
M&A on the Way? Consider a QOE Report
Whether you’re considering selling your business or acquiring another one, due diligence is a must. In many mergers and acquisitions (M&A), prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers get their own QOE reports to spot potential problems that might derail a transaction and identify ways to preserve or even increase the company’s value. Here’s what you should know about this critical document.
Different from an audit
QOE reports are not the same as audits. An audit yields an opinion on whether the financial statements of a business fairly present its financial position in accordance with Generally Accepted Accounting Principles (GAAP). It’s based on historical results as of the company’s fiscal year end.
In contrast, a QOE report determines whether a business’s earnings are accurate and sustainable, and whether its forecasts of future performance are achievable. It typically evaluates performance over the most recent interim 12-month period.
EBITDA effects
Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Many buyers and sellers believe this metric provides a better indicator of a business’s ability to generate cash flow than net income does. In addition, EBITDA helps filter out the effects of capital structure, tax status, accounting policies and other strategic decisions that may vary depending on who’s managing the company.
The next step is to “normalize” EBITDA by:
Eliminating certain nonrecurring revenues and expenses,
Adjusting owners’ compensation to market rates, and
Adding back other discretionary expenses.
Additional adjustments are sometimes needed to reflect industry-based accounting conventions. Examples include valuing inventory using the first-in, first-out (FIFO) method rather than the last-in, first-out (LIFO) method, or recognizing revenue based on the percentage-of-completion method rather than the completed-contract method.
Continued viability
A QOE report identifies factors that bear on the business’s continued viability as a going concern, such as operating cash flow, working capital adequacy, related-party transactions, customer concentrations, management quality and supply chain stability. It’s also critical to scrutinize trends to determine whether they reflect improvements in earnings quality or potential red flags.
For example, an upward trend in EBITDA could be caused by a positive indicator of future growth, such as increasing sales, or a sign of fiscally responsible management, such as effective cost-cutting. Alternatively, higher earnings could be the result of deferred spending on plant and equipment, a sign that the company isn’t reinvesting in its future capacity. In some cases, changes in accounting methods can give the appearance of higher earnings when no real financial improvements were made.
A powerful tool
If an M&A transaction is on your agenda, a QOE report can be a powerful tool no matter which side of the table you’re on. When done right, it goes beyond financials to provide insights into the factors that really drive value. Let us help you explore the feasibility of a deal.
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