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Smaller companies: Explore pooled employer plans for retirement benefits
Most businesses today need to offer a solid benefits package. Failing to do so could mean falling behind in the competition to hire and retain talent in today’s tight job market.
When it comes to retirement benefits, however, smaller companies may struggle with the financial and administrative burdens of sponsoring their own plans. The good news is, thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019, a relatively new solution is available: pooled employer plans (PEPs).
Meet the MEP
PEPs are a variation on an existing retirement plan model: multiple employer plans (MEPs). MEPs are qualified defined contribution plans, typically 401(k)s, maintained by two or more employers. MEP sponsors may be one of the participating employers or a third party, such as a trade association or professional employer organization.
MEPs offer several advantages. Group purchasing power and other economies of scale tend to lower plan sponsorship costs. Also, participating employers avoid time-consuming and often disruptive administrative tasks. Plus, they can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.
MEP sponsors are responsible for plan design and day-to-day management. This includes:
Coordinating with various third-party service providers,
Handling compliance issues, and
Overseeing annual audit and reporting requirements.
Sponsors can also provide participating employers with access to expertise and advanced technology that the participants might otherwise be unable to afford.
MEP drawbacks
However, traditional MEPs have some drawbacks. For one thing, to be treated as a single employer plan for reporting, audit and administrative purposes, a MEP must be “closed.” That is, its members must share some “commonality of interest,” such as being in the same industry or geographical location.
Employers that join “open” MEPs, which don’t require a commonality of interest, are treated as if they maintained separate plans with their own reporting, audit and other compliance responsibilities. (Note: Certain smaller plans — generally, those with fewer than 100 participants — aren’t subject to audit requirements.)
Another drawback of traditional MEPs is the “one-bad-apple” rule. Under this rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.
PEPs step up
Properly designed PEPs avoid both the commonality-of-interest requirement and the one-bad-apple rule. PEPs are treated like single employer plans for reporting, audit and other compliance purposes — even if they allow unrelated employers to join. One participating employer’s compliance failure won’t jeopardize a PEP’s qualified status so long as the plan contains certain procedures for dealing with a participant’s noncompliance.
PEPs are available from “pooled plan providers,” which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. Although PEPs eliminate some of the obstacles that make traditional MEPs impractical for many companies, they’re not without disadvantages. For instance, PEPs have limited flexibility to customize plan designs or investment options to meet the needs of specific employers.
Also, while one of the advantages of PEPs is cost savings, they may increase one type of cost for some participants. That is, though small employers generally aren’t subject to annual audit requirements, PEPs are. So, small businesses that join a PEP will have to bear annual audit costs they otherwise wouldn’t. These costs can, however, be spread out among participants.
Dip your toes in
If you’re intrigued by the prospect of a PEP, dip your toes in slowly. Discuss the idea with your leadership team and professional advisors before you dive in. We’d be happy to help you estimate the costs and potential cost savings involved.
© 2023
Some businesses may have an easier path to financial statements
There’s no getting around the fact that accurate financial statements are imperative for every business. Publicly held companies are required to not only issue them, but also have them audited by an independent CPA. Audited financial statements provide the highest level of assurance to third-party users that the documents in question are free of material misstatements.
The good news for privately held companies — particularly small businesses — is you may not need to incur the cost or undertake the effort that goes with formally audited financial statements. There are other less expensive and less arduous paths to follow.
The most basic: Preparations
True to its name, a financial statement preparation is simply the product of an accountant preparing a set of financial statements in accordance with an acceptable financial reporting framework. It’s usually done as part of bookkeeping or tax-related work.
A preparation provides no assurance of the accuracy and completeness of the financial statements in question. And assurance is typically critical if you plan to share the financial statements with third parties such as lenders and investors.
That said, some lenders may accept preparations in support of small lending arrangements. However, more often than not, preparations are used only for internal purposes to provide a business’s leadership with information on the company’s current financial condition and as a basis of comparison against future accounting periods. In fact, professional standards don’t even require a CPA to be independent of a business to perform a preparation.
To avoid misleading any third parties who might eventually receive a preparation, each page of the financial statements should include a disclaimer or legend stating that no CPA provides any assurance on the accuracy of the documents. In addition, a preparation must adequately refer to or describe the applicable financial reporting framework that’s used and disclose any known departures from that framework.
The next step up: Compilations
If you want to fortify the trust of potential third-party financial statement users a little more, consider a compilation. Like a preparation, a compilation is simply a set of financial statements generated in accordance with an acceptable financial reporting framework that provides no assurance of the documents’ accuracy and completeness.
The primary difference is a compilation includes a formal report by a CPA attesting that this professional has fully read the financial statements and evaluated whether they’re free from obvious material errors. If the CPA isn’t independent of the business, this fact must be disclosed in the report as well.
The use of a compilation can extend beyond the business’s leadership to third parties such as lenders, investors and collaborative partners who may view the input of a CPA as reassuring. However, many third parties might still insist on some level of formal assurance to accept your company’s financial statements.
The right level
We’d be remiss if we didn’t mention there’s another level in between audit (highest assurance) and preparation and compilation (no assurance). That would be a financial statement review. A review is performed by an independent CPA, who provides limited assurance that no material modifications should be made to the financial statements in question. If you need help deciding which level of financial statement services is right for your business, please contact your FMD advisor.
© 2023
Owning assets jointly with a child may not be the right estate planning strategy
There’s a common misconception that owning assets jointly with a child or other heir is an effective estate planning shortcut. While this strategy has a certain appeal, it can invite a variety of unwelcome consequences that may quickly outweigh any potential benefits.
Owning an asset — such as real estate, a bank or brokerage account, or a car — with your child as “joint tenants with right of survivorship” offers some advantages. For example, when you die, the asset automatically passes to your child without the need for more sophisticated estate planning tools and without going through probate.
But it can also create a variety of costly headaches, including:
Avoidable transfer tax exposure. If you add your child to the title of property you already own, it may be considered a taxable gift of half the property’s value. And when you die, half of the property’s value will be included in your taxable estate.
Increased income tax. As a joint owner, your child loses the benefit of the stepped-up basis enjoyed by assets transferred at death, exposing him or her to higher capital gains tax.
Exposure to creditors. The moment your child becomes a joint owner, the property is exposed to claims of the child’s creditors.
Loss of control. Adding your child as an owner of certain assets, such as bank or brokerage accounts, enables him or her to dispose of them without your consent or knowledge. And joint ownership of real property prevents you from selling it or borrowing against it without your co-owner’s written authorization.
Unintended consequences. If your child predeceases you, the assets will revert back in your name alone, requiring you to come up with another plan for their disposition.
Unnecessary risk. When you die, your child receives the property immediately, regardless of whether he or she has the financial maturity and ability to manage it.
These problems may be mitigated or avoided with one or more properly designed trusts.
© 2023
Two estate planning documents working in tandem: A living trust and a pour-over will
At the very least, your estate plan should include a legally valid will governing the disposition of assets upon your death. But comprehensive estate planning often goes much further. For instance, you may provide for transfers of assets to a living trust (also known as a revocable trust) to supplement your will. For many, the best part of using a living trust is that the trust assets don’t have to pass through probate.
You can take an additional step by creating a pour-over will. In a nutshell, a pour-over will specifies how assets you didn’t transfer to a living trust during your life will be transferred at death.
Complementary documents
As its name implies, any property that isn’t specifically mentioned in your will is “poured over” into your living trust after your death. The trustee then distributes the assets to the beneficiaries under the trust’s terms.
The main purpose of a pour-over will is to maximize the benefits of a living trust. But attorneys also tout the merits of using a single legal document — a living trust — as the sole guiding force for an estate plan.
To this end, a pour-over will serves as a conduit for any assets that aren’t already in the name of the trust or otherwise distributed. The assets will be distributed to the trust.
This setup offers the following benefits:
Convenience. It’s easier to have one document controlling the assets than it is to “mix and match.” With a pour-over will, it’s clear that everything goes to the trust, and then the trust document is used to determine who gets what.
Completeness. Generally, everyone maintains some assets outside of a living trust. A pour-over will addresses any items that have fallen through the cracks or that have been purposely omitted.
Privacy. In addition to the convenience of avoiding probate for the assets that are titled in the name of the trust, this type of setup helps to keep a measure of privacy that isn’t available when assets are passed directly through a regular will.
There is, however, one disadvantage to consider. As with any will, your executor must handle specific bequests included in the will, as well as the assets being transferred to the trust through the pour-over provision, before the trustee takes over. (Exceptions for pour-over wills may apply in certain states.) While this may take months to complete, property transferred directly to a living trust can be distributed within weeks of the testator’s death.
The role of trustee
After the executor transfers the assets to the trust, it’s up to the trustee to do the heavy lifting. The executor and trustee may be the same person and, in fact, they often are.
The responsibilities of a trustee are similar to those of an executor with one critical difference: they extend only to the trust assets. The trustee then adheres to the terms of the trust.
Account for all your assets
The benefits of using a living trust are many. Pairing it with a pour-over will may help wrangle any loose assets that you purposely (or inadvertently) didn’t transfer to the living trust. Contact the FMD team for more information.
© 2023
Consider providing your beneficiaries with the power to remove a trustee
To ensure that a trust operates as intended, it’s critical to appoint a trustee that you can count on to carry out your wishes. But to avoid protracted court battles in the event the trustee isn’t doing a good job, consider giving the trust beneficiaries the right to remove and replace the trustee.
What’s the role of a trustee?
A 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.
What’s considered “cause?”
If you don’t provide the trust’s beneficiaries the option to remove the trustee, their only recourse would be to petition a court to remove the trustee for cause. The definition of “cause” varies from state to state, but common grounds for removal include:
Fraud, mismanagement or other misconduct,
A conflict of interest with one or more beneficiaries,
Legal incapacity,
Poor health, or
Bankruptcy or insolvency if it would affect the trustee’s ability to manage the trust.
Not only is it time consuming and expensive to go to court, but most courts are hesitant to remove a trustee that was chosen by the trust’s creator. That’s why including a provision in the trust document that allows your beneficiaries to remove a trustee without cause if they’re dissatisfied with his or her performance may be a good idea. Alternatively, you may want to authorize your beneficiaries to remove a trustee under specific circumstances outlined in the trust document.
Other options
If you’re concerned about giving your beneficiaries too much power, you may want to include a list of successor trustees in the trust document. That way, if the beneficiaries end up removing a trustee, the next person on the list takes over automatically, rather than the beneficiaries choosing a successor.
Alternatively, or in addition, you could appoint a “trust protector” with the power to remove and replace trustees and make certain other decisions regarding management of the trust. Contact the FMD team for more information on the role a trustee plays.
© 2023
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:
exercises substantial control over the entity, including CEO, CFO, and COO, OR
owns or controls not less than 25% of the ownership interests of the entity.
The following individuals are not beneficial owners for this purpose:
an individual acting as a nominee, intermediary, custodian, or agent of another individual
an individual acting solely as an employee of the entity
an individual whose only interest in the entity is through a right of inheritance
a creditor of the entity, unless the creditor is also a beneficial owner
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.