Take action now to reduce your 2023 income tax bill

A number of factors are making 2023 a confounding tax planning year for many people. They include turbulent markets, stabilizing but still high interest rates and significant changes to the rules regarding retirement planning. While much uncertainty remains, the good news is that you still have time to implement year-end tax planning strategies that may reduce your income tax bill for the year. Here are some steps to consider as 2023 comes to a close.

Manage your itemized deductions

The standard deduction for 2023 is $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of households. Those levels are higher than they were before the Tax Cuts and Jobs Act (TCJA), which has reduced the number of taxpayers who itemize their deductions. But “bunching” certain outlays may help you qualify for a higher amount of itemized deductions.

Bunching involves timing deductible expenditures so they accumulate in a specific tax year and total more than the standard deduction. Likely candidates include:

• Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI),

• Mortgage interest,

• Investment interest,

• State and local taxes,

• Casualty and theft losses from a federally declared disaster, and

• Charitable contributions.

It’s worth noting that there’s been talk in Washington of capping the value of itemized deductions (for example, at 28%). This proposal could come up again if the expiration of several TCJA provisions at the end of 2025 prompts new tax legislation, making it wise to maximize the value of such deductions while you can.

Leverage your charitable giving options

Several strategies are available to increase the charitable contribution component of your itemized deductions. For example, you can donate appreciated assets that you’ve held for at least one year. In addition to avoiding capital gains tax — and, if applicable, the net investment income tax — on the appreciation, you can deduct the fair market value of donated investments and the cost basis for nonstock donations. (Remember that AGI-based limits apply to charitable contribution deductions.)

Although it won’t affect your charitable contribution deduction, you also might want to make a qualified charitable distribution (QCD) from a retirement account with required minimum distributions (RMDs). You can distribute up to $100,000 per year (indexed annually for inflation) directly to a qualified charity after age 70½. The distribution doesn’t count toward your charitable deduction, but it’s removed from your taxable income and is treated as an RMD.

Pay yourself, not the IRS

If possible, you generally should maximize the annual savings contributions that can reduce your taxable income, including those to 401(k) plans, traditional IRAs, Health Savings Accounts (HSAs) and 529 plans. The 2023 limits are:

• 401(k) plans: $22,500 ($30,000 if age 50 or older).

• Traditional IRAs: $6,500 ($7,500 if age 50 or older).

• HSAs: $3,850 for self-only coverage and $7,750 for family coverage (those 55 and older can contribute an additional $1,000).

• 529 plans: $17,000 per person (or $34,000 for a married couple) per recipient without implicating gift tax (individual states set contribution limits).

Contributing to 529 plans has become even more appealing now that, beginning in 2024, you can transfer unused amounts to the beneficiary’s Roth IRA (subject to certain limits and requirements).

Harvest your losses

The up-and-down financial markets this year may provide the opportunity to harvest your “loser” investments that are valued below their cost basis, and use the losses to offset your gains. If the losses exceed your capital gains for the year, you can use the excess to offset up to $3,000 of ordinary income and carry forward any remaining losses.

It’s vital, however, that you comply with the so-called wash-sale rule. The rule bans the deduction of a loss when you acquire “substantially identical” investments within 30 days before or after the sale date.

Execute a Roth conversion

Recent market declines also may make this a smart time to think about converting some or all of your traditional IRA to a Roth IRA — because you can convert more shares without increasing your income tax liability. Yes, you must pay income tax in 2023 on the amount converted, but you might be able to minimize the impact by, for example, converting only to the top of your current tax bracket.

Moreover, the long-term benefits can outweigh the immediate tax effect. After conversion, the funds will grow tax-free. You generally can withdraw “qualified distributions” tax-free as long as you have held the account for at least five years; and Roth IRAs don’t come with RMD obligations. Plus, you can withdraw from a Roth IRA tax- and penalty-free for a first-time home purchase (up to $10,000), qualified birth or adoption expenses (up to $5,000), and qualified higher education expenses (with no limit).

Bear in mind, though, that a Roth conversion may leave you with a higher AGI. That could limit how much you benefit from tax breaks that phase out based on AGI or modified adjusted gross income.

Review your estate plan

Your estate plan probably won’t affect your 2023 income taxes, but it makes sense to review it now in light of the expiration of certain TCJA provisions, including its generous gift and estate tax exemption, at the end of 2025. For example, the TCJA nearly doubled the exemption back in 2018, which is currently $12.92 million ($25.84 million for married couples). A return to a pre-TCJA level of $5 million (adjusted for inflation) could have dramatic implications to your estate plan.

In addition, the lingering high interest rate environment may make certain estate planning strategies more attractive. For example, the value of gifts to qualified personal residence trusts and charitable remainder trusts generally is lower when rates are high.

Cover your bases

And, of course, the tried-and-true methods for reducing your taxes — such as deferring income and accelerating expenses — are always worth considering. Of course, if you expect to be in a higher tax bracket in 2024, these methods aren’t helpful. Contact the FMD team for more information on how we can help you plot the right course for your circumstances.

© 2023

Is your business subject to the new BOI reporting rules?

The Corporate Transparency Act (CTA) was signed into law to fight crimes commonly associated with illegal business activities such as terrorist financing and money laundering. If your business can be defined as a “reporting company” under the CTA, you may need to comply with new beneficial ownership information (BOI) reporting rules that take effect on January 1, 2024.

Who’s who?

A reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A reporting company may also be any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.

Reporting companies must provide information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. A beneficial owner is someone who, directly or indirectly, exercises substantial control over a reporting company, or who owns or controls at least 25% of its interests. Indirect control is often exhibited by a senior officer or person with authority over senior officers.

The CTA does exempt a wide range of entities from the BOI reporting rules — including government units, nonprofit organizations and insurers. Notably, an exemption was created for “large operating companies” that:

• Employ more than 20 employees on a full-time basis,

• Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and

• Physically operate in the United States.

However, many of these businesses need to comply with other reporting requirements.

What info must be provided?

The BOI reporting requirements are extensive. Reporting companies must file a report with FinCEN that includes the entity’s legal name (or any trade or doing-business-as name), address, jurisdiction where the entity was formed and Taxpayer Identification Number.

Reporting companies must also submit the name, address, date of birth and “unique identifying number information” of each beneficial owner. A unique identifying number may be a U.S. passport or state driver’s license number. An image of the document containing the identifying number must be included in the filing.

In addition, the CTA requires reporting companies to provide identifying information about their “company applicants.” A company applicant is defined as someone who’s responsible for:

• Filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a U.S. state), or

• Directing or controlling the filing of the relevant formation or registration document by another individual.

Note: This rule often encompasses legal representatives acting in a business capacity.

When to file?

Reporting companies have either 30 days or one year from the effective date of January 1, 2024, to comply with the CTA. Reporting companies created or registered before the effective date have one year to file their initial reports with FinCEN. Those created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file initial reports.

After initially filing, reporting companies have 30 days to file an updated report reflecting any changes to previously reported BOI. In addition, reporting companies must correct inaccurate BOI in previously filed reports within 30 days after the date they become aware of the error.

Who can help?

With the effective date closing in quickly, now’s the time to determine whether your business is a nonexempt reporting company that must comply with the BOI reporting rules. The FMD team can help you make this determination in consultation with your legal advisors.

© 2023

IRS offers a withdrawal option to businesses that claimed ERTCs

Recent IRS warnings and announcements regarding the Employee Retention Tax Credit (ERTC) have raised some businesses’ concerns about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim. In response, the IRS has rolled out a new process that certain employers can use to withdraw their claims.

Fraudsters jump on the ERTC

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns), and receive credits worth up to $26,000 per retained employee.

With such potentially large payouts, fraudulent promoters and marketers were quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.

Invalid claims put taxpayers at risk of liability for credit repayment, penalties and interest, in addition to the promoter’s fees. And promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.

The IRS responds

The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced that it was shifting its ERTC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERTC claims.

The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.

According to the IRS, though, the moratorium isn’t deterring the scammers. It reports they’ve already revised their pitches, pushing employers that submit ERTC claims to take out costly upfront loans in anticipation of delayed refunds.

Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but haven’t yet received, cashed or deposited refunds. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest. (The IRS also is developing assistance for employers that were misled into claiming the ERTC and have already received payment.)

The withdrawal option is available if you:

• Claimed the credit on an adjusted employment return (for example, Form 941-X),

• Filed the adjusted return solely to claim the credit, and

• Requested to withdraw your entire ERTC claim.

The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified that you’re under audit, or have received a refund check that you haven’t cashed or deposited. Regardless of the applicable procedure, your withdrawal isn’t effective until you receive an acceptance letter from the IRS.

Taxpayers that aren’t eligible for the withdrawal process can reduce or eliminate their ERTC claim by filing an amended return. But you may need to amend your income tax return even if your claim is withdrawn.

Seek help

Throughout its warnings about potential ERTC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you’re having second thoughts about your ERTC claim, your FMD advisor can help you review your claim and, if appropriate, properly withdraw it.

© 2023

Keeping a trust a secret may not achieve the outcome you’d expect

When planning their estates, many affluent people agonize over the impact their wealth might have on their children. Bill Gates reportedly said, “I won’t leave a lot of money to my heirs because I don’t think it would be good for them.”

Even parents of more modest means worry about how the prospect of an inheritance might affect their kids and grandkids. Might it be a disincentive to staying in school, working or otherwise becoming productive members of society?

To address these concerns, some people establish “quiet trusts,” also known as “silent trusts.” In other words, they leave a significant sum in trust for their children; they just don’t tell them about it. It’s an interesting approach, but is it effective?

A questionable strategy

Many states permit quiet trusts, but arguably the risks associated with them outweigh the potential benefits. For one thing, it’s difficult — if not impossible — to keep your wealth a secret. If you live an affluent lifestyle, it’s likely that your children expect to share the wealth someday, and using a quiet trust won’t change that. Even if your children are unaware of the details of your estate plan, their expectations of a future inheritance may encourage the same irresponsible behavior the quiet trust was intended to avoid.

A quiet trust may also increase the risk of litigation. The trustee has a fiduciary duty to act in the beneficiaries’ best interests. If you create such a trust and your children become aware of it years or decades later, they may seek an accounting from the trustee and, with the help of counsel, may challenge any past decisions of the trustee that they disagree with.

A better alternative

The idea behind a quiet trust is generally to avoid disincentives for responsible behavior. But it’s not clear that such a trust will actually accomplish that goal. A better approach may be to design a trust that provides incentives to behave responsibly — sometimes referred to as an “incentive trust.” For example, the trust might condition distributions on behaviors you wish to encourage, such as obtaining a college degree, maintaining gainful employment, pursuing worthy volunteer activities, or avoiding alcohol or substance abuse.

A drawback to setting specific goals is that they may penalize a beneficiary who chooses an alternative, albeit responsible, lifestyle — for example, becoming a stay-at-home parent. To build flexibility into the trust, you may want to establish general principles for distributing trust funds to beneficiaries who behave responsibly, but give the trustee broad discretion to apply these principles on a case-by-case basis.

Keep quiet or provide incentive?

Perhaps the most important benefit of an incentive trust is that it provides an opportunity for you or the trustee to help shape the beneficiaries’ future behavior. With a quiet trust, you keep your beneficiaries’ inheritance a secret in hope that, without the negative influence of future wealth, they’ll behave responsibly. With an incentive trust, on the other hand, you can provide positive reinforcement by communicating the terms of the trust, letting beneficiaries know what they must do to receive their rewards, and providing them with the help they need to succeed.

The FMD team can answer any questions you have on the ins and outs of either of these trust types.

© 2023

Valuations can help business owners plan for the future

If someone were to suggest that you should have your business appraised, you might wonder whether the person was subtly suggesting that you retire and sell the company.

Seriously though, a valuation can serve many purposes other than preparing your business for sale so you can head to the beach. Think of it as a checkup that can help you better plan for the future.

Strategic planning

Today’s economy presents both challenges and opportunities for companies across the country. Chief among the challenges is obtaining financing when necessary — interest rates have risen, inflation is still a concern and many commercial lenders are imposing tough standards on borrowers.

A business valuation conducted by an outside expert can help you present timely, in-depth financial data to lenders. The appraisal will not only help them better understand the current state of your business, but also demonstrate how you expect your company to grow. For example, the discounted cash flow section of a valuation report can show how expected future cash flows are projected to increase in value.

In addition, a valuator can examine and state an opinion on company-specific factors such as:

• Your leadership team’s awareness of market conditions

• What specific risks you face

• Your contingency planning efforts to mitigate these risks

As you go through the valuation process, you may even recognize some of your business’s weaknesses and, in turn, be able to address those shortcomings in strategic planning.

Acquisitions, sales, and gifts

There’s no getting around the fact that, in many cases, the primary reason for getting a valuation is to prepare for a transfer of business interests of some variety — be it an acquisition, sale or gift. Even if you’re not ready to make a move like this right now, an appraiser can help you get a better sense of when the optimal time might be.

If you’re able to buy out a competitor or a strategically favorable business, a valuation should play a critical role in your due diligence. When negotiating the final sale price, an appraiser can scrutinize the seller’s asking price, including the reasonableness of cash flow and risk assumptions.

If you’re thinking about selling, most appraisers subscribe to transaction databases that report the recent sale prices of similar private businesses. A valuator also can estimate how much you’d net from a deal after taxes, as well as brainstorm creative deal structures that minimize taxes, provide you with income to fund retirement, and meet other objectives.

In the eyes of a potential buyer, a formal appraisal adds credibility to your asking price as well. And if you want to gift business interests to the next generation in your family, a written appraisal is a must-have to withstand IRS scrutiny.

Going the extra mile

You probably have plenty of other things on your plate as you work hard to keep your business competitive. However, obtaining an appraisal is a savvy way to go the extra mile to get all the information you need to wisely plan for the future. FMD can support your company throughout the valuation process and help you make the most of the information you receive.

© 2023

An art collection is a special asset to account for in an estate plan

Some assets pose more of a challenge than others when it comes to valuing and accounting for them in an estate plan. Take, for instance, an art collection. If you possess paintings, sculptures, or other pieces of art, they may represent a significant portion of your estate. Here are a few options available to address an art collection in your estate plan.

Sell, bequest, or donate

Generally, there are three options for handling your pieces of art in your estate plan: Sell them, bequest them to your loved ones, or donate them to a museum or charity. Let’s take a closer look at each option:

If you opt to sell, keep in mind that long-term capital gains on artwork and other “collectibles” are taxed at a top rate of 28%, compared with 20% for other types of assets. Rather than selling pieces of art during your lifetime, it may be preferable to include them in your estate to take advantage of the stepped-up basis. That higher basis will allow your heirs to reduce or even eliminate the 28% tax. For example, you might leave the collection to a trust and instruct the trustee to sell it and invest or distribute the proceeds for the benefit of your loved ones.

If you prefer to keep the artwork in your family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust, LLC, or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make selling and purchasing decisions.

Donating your artwork can be an effective way to avoid capital gains tax and estate tax and to ensure that your collection becomes part of your legacy. It also entitles you or your estate to claim a charitable tax deduction. To achieve these goals, however, the process must be handled carefully. For example, to maximize the charitable deduction, the artwork must be donated to a public charity rather than a private foundation. And the recipient’s use of the artwork must be related to its tax-exempt purpose. Also, if you wish to place any conditions on the donation, you’ll need to negotiate the terms with the recipient before you deliver the items.

If you plan to leave your collection to loved ones or donate it to charity, it’s critical to discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your artwork or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements.

Seek a professional appraisal

It’s vitally important to have your artwork appraised periodically by a professional. The frequency depends in part on the type of art you collect, but generally, it’s advisable to obtain an appraisal at least every three years, if not annually.

Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Also, most art donations, gifts, or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.

In addition, catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies, and other provenance documents. These items will be necessary for the recipient or recipients of your artwork to carry out your wishes.

Enjoy your collection

A primary goal of estate planning is to remove appreciating assets from your estate as early as possible to minimize gift and estate taxes. But for many, works of art are more than just assets. Indeed, collectors want to enjoy displaying these works in their homes and may be reluctant to part with them. Your FMD advisor can help you properly address your art collection in your estate plan.

© 2023

IRS suspends processing of ERTC claims

In the face of a flood of illegitimate claims for the Employee Retention Tax Credit (ERTC), the IRS has imposed an immediate moratorium through at least the end of 2023 on processing new claims for the credit. The reason the IRS cites for the move is the risk of honest small business owners being scammed by unscrupulous promoters who submit questionable claims on their behalf.

The fraud problem

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can receive credits worth up to $26,000 per retained employee. The ERTC can still be claimed on amended returns.

The requirements are strict, though. Specifically, you must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel, or group meetings due to COVID during 2020 or the first three quarters of 2021,

• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021, or

• Qualified as a recovery startup business — which could claim the credit for up to $50,000 total per quarter, without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021 (qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three years preceding the quarter for which they are claiming the ERTC).

Additional restrictions apply, too.

Nonetheless, the potentially high value of the ERTC, combined with the fact that some employers can file claims for it until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim refunds for the credit. They wield inaccurate information to generate business from innocent clients who may pay upfront fees in the thousands of dollars or must pay the promoters a percentage of the refunds they get.

Victims could end up on the hook for repayment of the credit, along with penalties and interest on top of the fees paid to the promoter. Moreover, as the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

The impact of the moratorium

Payouts on legitimate claims already filed will continue during the moratorium period. But taxpayers should expect a lengthier wait. The IRS has extended the standard processing goal of 90 days to 180 days and potentially much longer for claims flagged for further review or audit.

Increased fraud worries are prompting the agency to shift its review focus to compliance concerns. The shift includes intensified audits and criminal investigations of both promoters and businesses filing suspect claims.

The IRS also is working to develop new initiatives to aid businesses that have fallen prey to aggressive promoters. For example, it expects to soon offer a settlement program that will allow those who received an improper ERTC payment to avoid penalties and future compliance action by repaying the amount received.

If you claimed the credit, but your claim hasn’t yet been processed or paid, you can withdraw your claim if you now believe it was improper. You can withdraw even if your case is already under or awaiting audit. The IRS says this option is available for filers of the more than 600,000 claims currently awaiting processing.

Still considering claiming the credit?

The IRS urges taxpayers to carefully review the ERTC guidelines during the moratorium period. Legitimate claimants shouldn’t be dissuaded, but, as the IRS says, it’s best to confirm the validity of your claim with a “trusted tax professional — not a tax promoter or marketing firm looking to make money” by taking a “big chunk” out of your claim. And don’t count on seeing payment of your credit anytime soon. Contact FMD if you have questions regarding the ERTC.

© 2023

A refresher on the trust fund recovery penalty for business owners and executives

One might assume the term “trust fund recovery penalty” has something to do with estate planning. It’s important for business owners and executives to know better.

In point of fact, the trust fund recovery penalty relates to payroll taxes. The IRS uses it to hold accountable “responsible persons” who willfully withhold income and payroll taxes from employees’ wages and fail to remit those taxes to the federal government.

A matter of trust

The trust fund recovery penalty applies to employees’ share of payroll taxes, including withheld federal income taxes and the employee share of Social Security and Medicare taxes.

These monies are considered trust funds because they’re the property of the federal government, held in trust by the employer. The penalty amount is 100% of the unpaid taxes plus interest — it essentially serves as an alternative tax-collection method.

A responsible person

The trust fund recovery penalty is particularly dangerous because it can ensnare persons who ordinarily are protected against personal liability for business debts. As stated in the tax code, the penalty provides that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The IRS and courts take a broad view of who may be a responsible person under this provision. It has been interpreted to include a range of individuals, within or outside the business, who possess significant control or influence over the company’s finances.

Whether someone is a responsible person depends on the facts and circumstances of the case, but factors that may support that conclusion include ownership interest, title, check-signing authority, control over bank accounts or payment of debts, hiring and firing authority, control over payroll, and power to make federal tax deposits.

Thus, responsible persons may include shareholders, partners, and members of a limited liability company; officers; other employees; and directors. Responsible “persons” can also be payroll service providers and professional employer organizations, including individuals employed by those entities. Outside advisors may be deemed responsible persons as well.

Important note: If several responsible persons are identified, each may be held liable for the full amount of the penalty assessed.

Willful failure

As noted in the quote above, failure to pay trust fund taxes must be willful to trigger the trust fund recovery penalty. The IRS interprets this term broadly to include not only intentional acts but also a reckless disregard of obvious or known risks that taxes won’t be paid. The courts have described various scenarios that reflect a reckless disregard, including:

Relying on statements of a person in control of finances, despite circumstances showing that this person was known to be unreliable,

Failing to investigate or correct mismanagement after receiving notice that taxes weren’t paid, and

Knowing that the company is in financial trouble but continuing to pay other creditors without making reasonable inquiries into the status of payroll taxes.

Simply put, delegating the handling of payroll taxes to a certain individual or outside provider may not be enough to avoid liability.

Risky circumstances

Few business owners or executives wake up one morning and decide to disregard payroll taxes. However, circumstances can develop that put you at risk. Your FMD advisor is happy to explain the rules further and help you stay in compliance.

© 2023

Are you considering moving to a new state to minimize estate tax?

With the gift and estate tax exemption amount of $12.92 million for 2023, only a small percentage of families are subject to federal estate tax. While that’s certainly a relief, state estate tax also must be considered in estate planning.

Although many states tie their exemption amounts to the federal exemption, several states have exemptions that are significantly lower — in some cases $1 million or less. You may be considering retiring to a state with no (or a lower) state estate tax. However, doing so may not net the result you’re after.

Severing ties with your former state

Moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve sufficiently cut ties with your former state, there’s a risk that the state will claim you’re still a resident and subject to its estate tax.

Even if you’ve successfully established residency in a new state, you may be subject to estate tax on real estate or tangible personal property located in the old state (depending on that state’s tax laws). And don’t assume that your estate won’t be taxed on this property merely because its value is less than the exemption amount. In some states, estate tax is triggered when the value of your worldwide assets exceeds the exemption amount.

Taking steps to establish residency

If you’re relocating to a state with low or no estate tax, consult your estate planning advisor about the steps you can take to terminate residency in your old state and establish residency in the new one. Examples include acquiring a home in the new state, obtaining a driver’s license and registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing the old ones, and moving cherished personal possessions to the new state.

If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property.

The bottom line

Before putting up the “For Sale” sign and moving to lower-tax pastures, consult with us. FMD can help you address your current and future state estate tax in your estate plan.

© 2023

What are the pros and cons of custodial accounts for minors?

Setting up an investment account for your minor child can be a tax-efficient way of saving for college or other expenses. And one of the simplest ways to invest on your child’s behalf is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

These accounts — which are available through banks, brokerage firms, mutual fund companies and other financial institutions — are owned by the child but managed by the parent or another adult until the child reaches the age of majority (usually age 18 or 21).

Custodial accounts can be a convenient way to transfer assets to a minor without the expense and time involved in setting up a trust, but bear in mind that they have downsides, too. Let’s take a closer look at the pros and cons.

Pros

Convenience and efficiency. Establishing a custodial account is like opening a bank account. So it’s quicker, easier and cheaper to set up and maintain than more complex vehicles, such as trusts.

Flexibility. Unlike some savings vehicles, such as Coverdell Education Savings Accounts (ESAs), anyone can contribute to a custodial account, regardless of their income level. In addition, there are no contribution limits. Also, there are no restrictions on how the money is spent. In contrast, funds invested in ESAs and 529 plans must be spent on qualified education expenses, subject to stiff penalties on unqualified expenditures. (However, beginning in 2024, limited amounts held in a 529 plan may be rolled over to a Roth IRA for certain beneficiaries.)

Variety of investment options. Custodial accounts typically offer a broad range of investment options, including most stocks, bonds, mutual funds and insurance-related investments. UTMA accounts may offer even more options, such as real estate or collectibles. ESAs and 529 plans often have more limited investment options.

Estate and income tax benefits. Gifts to a custodial account reduce the size of your taxable estate. Keep in mind, however, that gifts in excess of the $17,000 annual exclusion ($34,000 for married couples) may trigger gift taxes or may tap some of your lifetime gift and estate tax exemption. Contributions to custodial accounts can also save income taxes: A child’s unearned income up to $2,500 per year is usually taxed at low rates (income above that threshold is taxed at the parents’ marginal rate).

Cons

Other vehicles offer greater tax benefits. Although custodial accounts can reduce taxes, ESAs and 529 plans allow earnings to grow on a tax-deferred basis, and withdrawals are tax-free provided they’re spent on qualified education expenses. In addition, 529 plans allow you to accelerate five years of annual exclusion gifts and make a single tax-free contribution of up to $85,000 for 2023 ($170,000 for married couples making joint gifts).

Impact on financial aid. As the child’s property, a custodial account can have a negative impact on financial aid eligibility. ESAs and 529 plans are usually treated as the parents’ assets, which have less impact on financial aid eligibility.

Loss of control. After the child reaches the age of majority, he or she gains full control over the assets and can use them as he or she sees fit. If you wish to retain control longer, you’re better off with an ESA, a 529 plan or a trust.

Inability to change beneficiaries. Once you’ve established a custodial account for a child, you can’t change beneficiaries down the road. With an ESA or parent-owned 529 plan, however, you can name a new beneficiary if your needs change and certain requirements are met.

Weigh your options

A custodial account can be an effective savings tool, but it’s important to understand the pros and cons. We can help you determine which tool or combination of tools is right for you given your financial circumstances and investment goals.

© 2023

Businesses must electronically file Form 8300, Report of Cash Payments Over $10,000, beginning January 1, 2024

The Internal Revenue Service today announced that starting Jan. 1, 2024, businesses are required to electronically file (e-file) Form 8300, Report of Cash Payments Over $10,000, instead of filing a paper return. This new requirement follows final regulations amending e-filing rules for information returns, including Forms 8300.

Businesses that receive more than $10,000 in cash must report transactions to the U.S. government. Although many cash transactions are legitimate, information reported on Forms 8300 can help combat those who evade taxes, profit from the drug trade, engage in terrorist financing, or conduct other criminal activities. The government can often trace money from these illegal activities through payments reported on Form 8300 that are timely filed, complete, and accurate.

The new requirement for e-filing Forms 8300 applies to businesses mandated to e-file certain other information returns, such as Forms 1099 series and Forms W-2. Electronic filing and communication options will be simpler and will make it easier to interact with the IRS. Beginning with calendar year 2024, businesses must e-file all Forms 8300 (and other certain types of information returns required to be filed in a given calendar year) if they're required to file at least 10 information returns other than Form 8300.

For example, if a business files five Forms W-2 and five Forms 1099-INT, then the business must e-file all their information returns during the year, including any Forms 8300. However, if the business files fewer than 10 information returns of any type, other than Forms 8300, then that business does not have to e-file the information returns and is not required to e-file any Forms 8300. However, businesses not required to e-file may still choose to do so.

Waivers

A business may file a request for a waiver from electronically filing information returns due to undue hardship. For more information, businesses can refer to Form 8508, Application for a Waiver from Electronic Filing of Information Returns PDF. If the IRS grants a waiver from e-filing any information return, that waiver automatically applies to all Forms 8300 for the duration of the calendar year. A business may not request a waiver from filing only Forms 8300 electronically.

The business must include the word "Waiver" on the center top of each Form 8300 (Page 1) when submitting a paper-filed return.

If a business is required to file fewer than 10 information returns, other than Forms 8300, during the calendar year, the business may file Forms 8300 in paper form without requesting a waiver.

If a business files less than 10 information returns, it can still choose to e-file Forms 8300 electronically if it chooses to do so.

Exemptions

If using the technology required to e-file conflicts with a filer's religious beliefs, they are automatically exempt from filing Form 8300 electronically. The filer must include the words "RELIGIOUS EXEMPTION" on the center top of each Form 8300 (page 1) when submitting the paper filed return.

Late returns

A business must self-identify late returns. A business must file a late Form 8300 in the same way as a timely filed Form 8300, either electronically or on paper. A business filing a late Form 8300 electronically must include the word "LATE" in the comments section of the return. A business filing a late Form 8300 on paper must write "LATE" on the center top of each Form 8300 (page 1).

Recordkeeping

A business must keep a copy of every Form 8300 it files, as well as any supporting documentation and the required statement it sends to customers, for five years from the date filed.

Filing electronically will provide a confirmation that the form was filed; however, e-file confirmation e-mails alone don't meet the record-keeping requirement. When e-filing, filers must also save a copy of the form prior to finalizing the form submission. They should associate the confirmation number with the saved copy. Prior to finalizing the form for submission, businesses should save a copy of the form electronically or print a copy of the form.

E-filing

Many businesses have already found the free and secure e-filing system to be a more convenient and cost-effective way to meet the reporting deadline of 15 days after a transaction. They get free email acknowledgment of receipt of the form when they e-file. Businesses can batch e-file their reports, which is especially helpful to those required to file many forms.

To file Forms 8300 electronically, a business must set up an account with the Financial Crimes Enforcement Network's BSA E-Filing System. The IRS will ensure the privacy and security of all taxpayer data.

For more information, call the Bank Secrecy Act E-Filing Help Desk at 866-346-9478 or email them at bsaefilinghelp@fincen.gov. For more information about the BSA E-Filing System, businesses can complete a technical support request at Self Service Help Ticket. The help desk is available Monday through Friday from 8 a.m. to 6 p.m. EST.

For more information about the reporting requirement, see E-file Form 8300: Reporting of large cash transactions on IRS.gov.

To help businesses prepare and file reports, the IRS created a video - How to Complete Form 8300 – Part I, Part II. The short video points out sections of Form 8300 for which the IRS commonly finds mistakes and explains how to accurately complete those sections.

Look carefully at three critical factors of succession planning

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

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

1. The involvement of your family

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

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

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

2. The market for your company

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

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

3. The structure of the transfer or sale

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

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

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

The specifics of stepping down

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

© 2023

Life insurance can be a powerful estate planning tool for nontaxable estates

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

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

Replacing income and wealth

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

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

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

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

Treating your children equally

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

Protecting your assets

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

Finding the right policy

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

© 2023

What businesses can expect from a green lease

With events related to climate change continuing to rock the news cycle, many business owners are looking for ways to lessen their companies’ negative environmental impact. One move you may want to consider, quite literally, is relocating to a commercial property with a “green lease.”

Increasing demand

Green leases are sometimes also known as “aligned,” “energy-efficient” or “high-performance” leases. Whatever the label, they generally use financial incentives to promote sustainable property management and energy usage. The leases typically include provisions related to cost recovery, submeters, data sharing, and minimum efficiency standards. Done right, they can cut energy costs, conserve critical resources, and improve building operations — offering benefits to property owners and tenants alike.

Businesses that sign on to green leases may gain several competitive advantages. Many customers and investors now prioritize visible commitments to environmentally friendly business practices. More and more job candidates do, too. Sustainability is particularly important to Millennials and members of Generation Z, who together now make up the largest subset of the U.S. workforce.

In addition, the pandemic boosted interest in so-called “healthy buildings,” which are often available through green leases. Healthy buildings feature more efficient lighting as well as pathogen-fighting heating, ventilation, and air conditioning (HVAC) systems. For example, they draw in fresh air, as opposed to recirculating indoor air. Some even use ultraviolet germicidal irradiation to kill bacteria and mold, as well as reduce the number of viral particles in the air.

A research study published by Harvard University in 2021 found that working in an office with higher air quality and better ventilation can raise employees’ cognitive functioning. Indeed, subjects’ decision-making performance improved when they were exposed to higher ventilation rates and lower chemical and carbon dioxide levels.

Lease provisions

If your company decides to explore environmentally friendly commercial properties, you’ll likely encounter standardized green leases. However, you may want to negotiate or at least double-check provisions regarding:

Certification. Many commercial properties are certified green under various standards, the most well-known of which is Leadership in Energy and Environmental Design (LEED). The standards usually require periodic recertification. To ensure renewal, property owners may require commercial tenants to use sustainable design components, construction materials, and office equipment.

Improvements. Property owners don’t want to jeopardize their buildings’ certifications with noncompliant tenant improvements. To substantially improve a property, you’ll need to ensure the project satisfies the relevant lease terms. If you install energy-saving improvements that benefit both you and the property owner, the lease should provide for how costs will be shared.

Renewable energy. If applicable, the lease should address how a conversion to a renewable energy source, such as solar panels, will be handled. For example, which party will be responsible for installation and maintenance? Who will receive any revenue from selling excess output to local utilities (where allowed)?

Green leases also may contain provisions related to:

• HVAC system design and components,

• Water usage,

• Energy management and monitoring,

• Irrigation and landscaping,

• Air quality,

• Lighting,

• Waste management and recycling, and

• Maintenance, including cleaning products used.

A lease may even include transportation components, such as requiring a tenant to provide bike racks or public transportation passes for employees.

Many positives

There are many positive reasons to consider signing a green lease. However, the costs of relocating and ongoing expenses related to the lease still must make sense for your business. FMD can assist you in analyzing the decision, including projecting the financial impact.

© 2023

Beneficial Ownership Reporting Required Under the Corporate Transparency Act

The Corporate Transparency Act (CTA) became law on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283). Effective January 1, 2024, certain U.S. and foreign entities doing business in the United States will be required to report their beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Comment: The CTA is generally intended to increase transparency, and thus discourage the use of shell companies, which is an important step in the fight against money laundering, terrorist finance, corruption, and other criminal behavior.

The Secretary of the Treasury has issued regulations implementing these reporting requirements effective January 1, 2024. The information reported under the CTA will not be available to the general public and may only be used for law enforcement, national security, or intelligence purposes.

Entities Subject to Beneficial Ownership Reporting

All corporations, S Corporations, limited liability companies, and partnerships or other similar entities created under the law of a State or Indian Tribe, or formed under foreign law and registered to do business in the United States (reporting companies) must disclose information regarding their beneficial owners to FinCEN.

Entities Exempt from Reporting

Certain entities do not have to report beneficial ownership under the CTA. These are generally heavily regulated entities that already report such information to other federal agencies or companies with real business activities that are not perceived to be a high risk for money laundering. Exempt entities include, among others:

• Companies that employ more than 20 people, report more than $5 million of revenue on their tax returns, and have a physical presence in the United States

• Public companies

• Financial institutions such as banks, bank holding companies, and credit unions

• Insurance companies

• Investment companies

• Broker-dealers

• Pooled investments

• Tax-exempt organizations

• Information required to be reported

Reporting companies must disclose the identity of each beneficial owner of the company and each applicant with respect to the company. The reported information must include:

• Full legal name

• Date of birth

• Current residential or business street address

• Unique identifying number from an acceptable identity document (such as a driver’s license or passport) or a unique identity number generated by FinCEN.

Beneficial owner and applicant

A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

1. exercises substantial control over the entity, including CEO, CFO, and COO, OR

2. owns or controls not less than 25% of the ownership interests of the entity.

The following individuals are not beneficial owners for this purpose:

1. an individual acting as a nominee, intermediary, custodian, or agent of another individual

2. an individual acting solely as an employee of the entity

3. an individual whose only interest in the entity is through a right of inheritance

4. a creditor of the entity, unless the creditor is also a beneficial owner

5. a minor child if the parent or guardian’s information is reported

An applicant with respect to a company is an individual who files an application to form an entity in the United States or to register a foreign entity to do business in the United States.

Effective date of reporting

The CTA reporting requirements take effect as of January 1, 2024. The initial report is due no later than January 1, 2025.

Entities formed or registered after January 1, 2024, must report beneficial ownership to FinCEN at the time of formation or registration. Existing entities must file a report within 30 days of any change to their beneficial ownership information.

Penalties

Failure to report or update beneficial ownership information or providing false information may result in civil penalties of up to $500 per day and criminal penalties of up to $10,000 and/or imprisonment of up to two years. An exemption may apply if an individual acting in good faith corrects any inaccurate information within 90 days of submitting the inaccurate report.

The unauthorized disclosure of reported information may also lead to a $500-per-day civil penalty and a criminal penalty of up to $250,000 and/or imprisonment of up to five years.

Contact the FMD team for more information.

Did your spouse’s estate make a portability election? If not, there may still be time.

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

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

The numbers don’t lie

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

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

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

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

Take action before time expires

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

© 2023

Cost containment: An important health care benefits objective for businesses

As the Fed continues to battle with inflation, and with fears of a recession not quite going away, companies have been keeping a close eye on the costs of their health insurance and pharmacy coverage.

If you’re facing higher costs for health care benefits this year, it probably doesn’t come as a big surprise. According to the National Survey of Employer-Sponsored Health Plans, issued by HR consultant Mercer in 2022, U.S. employers anticipated a 5.6% rise in medical plan costs in 2023. The actual percentage may turn out to be even higher, which is why cost containment should be one of the primary objectives of your benefits strategy.

Really get to know your workforce

To succeed at cost containment, you’ve got to establish and maintain a deep familiarity with two things: 1) your workforce, and 2) the healthcare benefits marketplace.

Starting with the first point, the optimal plan design depends on the size, demographics, and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their health care benefits. Determine which offerings are truly valued and which ones aren’t.

If you haven’t already, explore the feasibility of a wellness program to promote healthier diet and lifestyle choices. Invest in employee education so your plan participants can make more cost-effective healthcare decisions. Many companies in recent years have turned to high-deductible health plans coupled with Health Savings Accounts to shift some of the cost burden to employees.

As you study your plan design, keep in mind that good data matters. Business owners can apply analytics to just about everything these days — including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then adjust your plan design appropriately to close these costly gaps.

Consider expert assistance

Now let’s turn to the second critical thing that business owners and their leadership teams need to know about: the health care benefits marketplace. As you’re no doubt aware, it’s hardly a one-stop convenience store. Many companies engage a consultant to provide an independent return-on-investment analysis of an existing benefits package and suggest some cost-effective adjustments. Doing so will entail some expense, but an external expert’s perspective could help you save money in the long run.

Another service a consultant may be able to provide is an audit of medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Regarding pharmacy benefits, as the old saying goes, “Everything is negotiable.” The next time your pharmacy coverage contract comes up for renewal, explore whether your existing vendor can give you a better deal and, if not, whether one of its competitors is a better fit.

It’s doable … really

Cost containment for health care benefits may seem like a Sisyphean task — that is, one both laborious and futile. But it’s not: Many businesses find ways to lower costs by streamlining benefits to eliminate wasteful spending and better-fit employees’ needs. The FMD Team can help you identify and analyze each and every cost associated with your benefits package.

© 2023

To avoid confusion after your death, have only an original, signed will

The need for a will as a key component of your estate plan may seem obvious, but you’d be surprised by the number of people — even affluent individuals — who don’t have one. In the case of the legendary “Queen of Soul” Aretha Franklin, she had more than one, which after her death led to confusion, pain and, ultimately, a court trial among her surviving family members.

Indeed, a Michigan court recently ruled that a separate, handwritten will dated 2014, found in between couch cushions superseded a different document, dated 2010, that was found around the same time.

In any case, when it comes to your last will and testament, you should only have an original, signed document. This should be the case even if a revocable trust — sometimes called a “living trust” — is part of your estate plan.

Living trust vs. a will

True, revocable trusts are designed to avoid probate and distribute your wealth quickly and efficiently according to your wishes. But even if you have a well-crafted revocable trust, a will serves several important purposes, including:

Appointing an executor or personal representative you trust to oversee your estate, rather than leaving the decision to a court,

Naming a guardian of your choosing, rather than a court-appointed guardian, for your minor children, and

Ensuring that assets not held in the trust are distributed among your heirs according to your wishes rather than a formula prescribed by state law.

The last point is important because for a revocable trust to be effective, assets must be titled in the name of the trust. It’s not unusual for people to acquire new assets and put off transferring them to their trusts or they simply forget to do so. To ensure that these assets are distributed according to your wishes rather than a formula mandated by state law, consider having a “pour-over” will. It can facilitate the transfer of assets titled in your name to your revocable trust.

Although assets that pass through a pour-over will must go through probate, that result is preferable to not having a will. Without a will, the assets would be distributed according to your state’s intestate succession laws rather than the provisions of your estate plan.

Reason for an original will

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.

It’s possible to overcome this presumption — for example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family members can locate your original will when they need it.

Please don’t hesitate to contact FMD if you have questions about your will or overall estate plan.

© 2023

The IRS warns businesses about ERTC scams

The airwaves and internet are inundated these days with advertisements claiming that businesses are missing out on the lucrative Employee Retention Tax Credit (ERTC). While some employers do indeed remain eligible if they meet certain criteria, the IRS continues to caution businesses about third-party scams related to the credit.

While there’s nothing wrong with claiming credits you’re entitled to, those who claim the ERTC improperly could find themselves in hot water with the IRS and face cash-flow problems as a result. Here’s what you need to know to reduce your risks.

ERTC in a nutshell

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers could receive credits worth up to $26,000 per retained employee. The credit may still be available on an amended tax return.

The requirements are strict, though. Specifically, you must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,

• Experienced a significant decline in gross receipts during 2020 or in the first three quarters of 2021, or

• Qualified as a recovery startup business — which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021. (Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERTC.)

In addition, a business can’t claim the ERTC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness or it used to claim certain other tax credits. Also, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.

Prevalence of scams

The potentially high value of the ERTC, combined with the fact that employers can file claims for it on amended returns until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim the credit. These fraudsters wield inaccurate information and inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees in the thousands of dollars or commissions as high as 25% of the refund received.

The IRS has called the amount of misleading marketing around the credit “staggering.” For example, in recent guidance, the tax agency explained that contrary to the advice given by some promoters, supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.

ERTC fraud has grown so serious that the IRS has included it in its annual “Dirty Dozen” list of the worst tax scams in the country. In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as “1099 Tax Pros,” with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERTCs and COVID-related sick and family leave wage credits for their clients.

Fraudsters have been able to monopolize on the general confusion and uncertainty around the ERTC. A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.

Although it’s unclear how much progress the IRS has made on the backlog, the agency has announced that it has entered a new phase of intensified scrutiny of ERTC claims. It’s stepping up its compliance work and establishing additional procedures to deal with fraud in the program. The IRS already has increased its audit and criminal investigation work on ERTC claims, focusing on both the promoters and the businesses filing dubious claims.

If you fell into the trap and are among those businesses, you could end up on the hook for repayment of the credit, along with penalties and interest, on top of the fees you paid the promoter. That could make a substantial dent in your cash flow.

Even if you’re eligible for the credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. As the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

Moreover, providing your business and tax documents to an unscrupulous promoter could put you at risk of identity theft.

Red flags to watch for

The IRS has identified several warning signs of illegitimate promoters, including:

• Unsolicited phone calls, text messages, direct mail, or ads highlighting an “easy application process” or a short eligibility checklist (the rules for eligibility and computation of credit amounts are actually quite complicated),

• Statements that the promoter can determine your ERTC eligibility within minutes,

• Hefty upfront fees,

• Fees based on a percentage of the refund amount claimed,

• Preparers who refuse to sign the amended tax return filed to claim a refund of the credit,

• Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers), or

• Refusal to provide detailed documentation of how your credit was calculated.

The IRS also warns that some ERTC “mills” are sending out fake letters from nonexistent government entities such as the “Department of Employee Retention Credit.” The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.

Protect yourself

Taking several simple steps can help you cut your risk of being victimized by scammers. First, if you think you may qualify for the credit, work with a trusted professional — one who isn’t proactively soliciting ERTC work. Those who are aggressively marketing the credit (and in some cases, only the credit) are more interested in making money themselves and are unlikely to prioritize or protect your best interests.

You also should request a detailed worksheet that explains how you’re eligible for the credit. The worksheet should “show the math” for the credit amount as well.

If you’re claiming you suspended business due to a government order, ensure that you have legitimate documentation of the order. Don’t accept a generic document about a government order from a third party. Rather, you should acquire a copy of the actual government order and review it to confirm that it applies to your business.

Proceed with caution

No taxpayer ever wants to leave money on the IRS’s table, but skepticism is warranted whenever something seems too good to be true. If you believe your business might be eligible for the ERTC, we can help you verify eligibility, compute your credit, and file your refund claim. FMD can also help you determine how to proceed if you claimed the ERTC improperly.

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5 tips for more easily obtaining cyber insurance

Every business should dedicate time and resources to cybersecurity. Hackers are out there, in many cases far across the globe, and they’re on the prowl for vulnerable companies. These criminals typically strike at random — doing damage to not only a business’s ability to operate but also its reputation.

One way to protect yourself, at least financially, is to invest in cyber insurance. This type of coverage is designed to mitigate losses from a variety of incidents — including data breaches, business interruption and network damage. If you decide to buy a policy, here are five tips to help make the application process a little easier:

1. Be detail-oriented when filling out the paperwork. Insurers usually ask an applicant to complete a questionnaire to help them understand the risks facing the company in question. Answering the questionnaire fully and accurately may call for input from your leadership team, IT department, and even third parties such as your cloud service provider. Take your time and be as thorough as possible. Missed questions or incomplete answers could result in denial of coverage or a longer-than-necessary approval time.

2. Establish (or fortify) a comprehensive cybersecurity program. Your business has a better chance of obtaining optimal coverage if you have a formal program that includes documented policies for best practices such as:

• Installing software updates and patches,

• Encrypting data,

• Using multifactor authentication, and

• Educating employees about ongoing cyber threats.

Before applying for coverage, either establish such a program if you don’t have one or strengthen the one in place. Be sure to generate clear documentation about the program and all its features that you can show insurers.

3. Create and document a disaster recovery plan. An effective cybersecurity program can’t focus only on preventing negative incidents. It must also include a disaster recovery plan specifically focused on cyber threats, so everyone knows what to do if something bad happens.

If your company has yet to create such a plan, establish and implement one before applying for cyber insurance. Put it in writing so you can share it with insurers. Review your disaster recovery plan at least annually to ensure it’s up to date.

4. Prepare to be tested. Some insurers may want to test your company’s cyber defenses with a “penetration test.” This is a simulated cyberattack on your systems designed to uncover weak points that hackers could exploit. Before applying for cyber insurance, conduct a thorough assessment of your networks and, if necessary, train or upskill your employees to follow protocols and be wary of “phishing” schemes and other threats.

5. Consider a third-party assessment. To better uncover weaknesses that could result in a denial of coverage or unreasonably high premiums, you may want to engage a third-party consultant to assess your cybersecurity program, as well as your equipment, network, and users. Doing so can be beneficial before applying for cyber insurance because some IT security firms maintain relationships with insurers and can help streamline the application process.

Like most types of coverage, cyber insurance is a risk-management measure worth exploring with your leadership team and professional advisors. Contact FMD for help determining whether buying a policy is the right move and, if so, for assistance analyzing the costs involved and developing a budget.

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