Month: May 2024

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Helpful Articles Tax

When do valuable gifts to charity require an appraisal?

If you donate valuable items to charity and you want to deduct them on your tax return, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions.

How can you protect your deduction?

First, be aware that in order to deduct charitable donations, you must itemize deductions. Due to today’s relatively high standard deduction amounts, fewer taxpayers are itemizing deductions on their federal returns than before the Tax Cuts and Jobs Act became effective in 2018.

If you clear the itemizing hurdle and donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must:

  • Get a “qualified appraisal,”
  • Receive the qualified appraisal before your tax return is due,
  • Attach an “appraisal summary” to the first tax return on which the deduction is claimed,
  • Include other information with the return, and
  • Maintain certain records.

Keep these definitions in mind. A “qualified appraisal” is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An “appraisal summary” is a summary of a qualified appraisal made on Form 8283 and attached to the donor’s return.

While courts have allowed taxpayers some latitude in following these rules, you should aim for exact compliance.

The qualified appraisal isn’t submitted to the IRS in most cases. Instead, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor’s tax return. However, a copy of the appraisal must be attached for gifts of art valued at $20,000 or more and for all gifts of property valued at more than $500,000, other than inventory, publicly traded stock and intellectual property. If an item of art has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.

What if you don’t comply with the requirements?

The penalty for failing to get a qualified appraisal and attach an appraisal summary to the return is denial of the charitable deduction. The deduction may be lost even if the property was valued correctly. There may be relief if the failure was due to reasonable cause.

Are there exceptions to the requirements?

A qualified appraisal isn’t required for contributions of:

  • A car, boat or airplane for which the deduction is limited to the charity’s gross sales proceeds,
  • Stock in trade, inventory or property held primarily for sale to customers in the ordinary course of business,
  • Publicly traded securities for which market quotations are “readily available,” and
  • Qualified intellectual property, such as a patent.

Also, only a partially completed appraisal summary must be attached to the tax return for contributions of:

  • Nonpublicly traded stock for which the claimed deduction is greater than $5,000 and doesn’t exceed $10,000, and
  • Publicly traded securities for which market quotations aren’t “readily available.”

What if you have more than one gift?

If you make gifts of two or more items during a tax year, even to multiple charitable organizations, the claimed values of all property of the same category or type (such as stamps, paintings, books, stock that isn’t publicly traded, land, jewelry, furniture or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.

The bottom line is you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. Contact us if you have any further questions or want to discuss your charitable giving plans. © 2024

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General Helpful Articles Tax

Timelines: 3 Ways Business Owners Should Look at Succession Planning

Business owners are rightly urged to develop succession plans so their companies will pass on to the next generation, or another iteration of ownership, in a manner that best ensures continued success.

Ideally, the succession plan you develop for your company will play out over a long period that allows everyone plenty of time to adjust to the changes involved. But, as many business owners learned during the pandemic, life comes at you fast. That’s why succession planning should best be viewed from three separate but parallel timelines:

1. Long Term

If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.

As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.

2. Short Term

Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially.

In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.

3. In Case of Emergency

As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability.

If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed.

As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for your company. Contact us. © 2024

Categories
Helpful Articles Tax

The Tax Advantages of Including Debt in a C Corporation Capital Structure

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So, for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

  • Some third-party debt (owed to outside lenders), and/or
  • Some owner debt.

Tax rate considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-party debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.

When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.

Owner debt

If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.

An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.

An example to illustrate

Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.

This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.

This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings. © 2024

Categories
General

Tax Tips When Buying the Assets of A Business

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways: Buy the assets of the business, or Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC. In this article, we’re going to focus on buying assets.

Asset purchase tax basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset. For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software, and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions. When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset purchase results with a pass-through entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses, and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset purchase results with a C corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.

A tax-smart purchase price allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired. To the extent allowed, you want to allocate more of the price to: Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables), Assets that can be depreciated relatively quickly (such as furniture and equipment), and Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years. You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated. You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another. Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase. Contact us. © 2024

Categories
News

Pay Attention to the Tax Rules if you Turn a Hobby into a Business 

Many people dream of turning a hobby into a regular business. Perhaps you enjoy boating and would like to open a charter fishing business. Or maybe you’d like to turn your sewing or photography skills into an income-producing business. You probably won’t have any tax headaches if your new business is profitable over a certain period of time. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return?

You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses. By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses are deductible, generally on Schedule C, even if they exceed income from the enterprise. Important: Before 2018, deductible hobby expenses could be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.

How to NOT be deemed a hobby:

There are two ways to avoid the hobby loss rules: Show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing or racing horses). Run the venture in such a way as to show that you intend to turn it into a profit maker rather than a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective. How can you prove you have a profit-making objective? You should operate the venture in a businesslike manner.

The IRS and the courts will look at the following factors: How you run the activity, Your expertise in the area (and your advisors’ expertise), The time and effort you expend in the enterprise, Whether there’s an expectation that the assets used in the activity will rise in value, your success in carrying on other activities, your history of income or loss in the activity, the amount of any occasional profits earned, your financial status, and whether the activity involves elements of personal pleasure or recreation. Case illustrates the issues in one court case, partners operated a farm that bought, sold, bred and raced standardbred horses. It didn’t qualify as an activity engaged in for profit, according to a U.S. Appeals Court. The court noted that the partnership had a substantial loss history and paid for personal expenses. Also, the taxpayers kept inaccurate records, had no business plan, earned significant income from other sources and derived personal pleasure from the activity. (Skolnick, CA 3, 3/8/23)

Contact us for more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do to avoid tax problems. © 2024

Categories
News

When Partners Pay Expenses Related to the Business 

It’s not unusual for a partner to incur expenses related to the partnership’s business. This is especially likely to occur in service partnerships such as an architecture or law firm. For example, partners in service partnerships may incur business expenses in developing new client relationships. They may also incur expenses for: transportation to get to and from client meetings, professional publications, continuing education and home office.

What’s the tax treatment of such expenses?

Here are the answers. Reimbursable or not as long as the expenses are the type a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct the expenses on Schedule E of Form 1040. Conversely, a partner can’t deduct expenses if the partnership would have honored a request for reimbursement. A partner’s unreimbursed partnership business expenses should also generally be included as deductions in arriving at the partner’s net income from self-employment on Schedule SE.

For example, let’s say you’re a partner in a local architecture firm. Under the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in unusual cases where attracting a large potential new client is deemed to be a firm-wide goal. In attempting to attract new clients this year, you spend $4,500 of your own money on meal expenses. You receive no reimbursement from the firm. On your Schedule E, you should report a deductible item of $2,250 (50% of $4,500). You should also include the $2,250 as a deduction in calculating your net self-employment income on Schedule SE. So far, so good, but here’s the issue: a partner can’t deduct expenses if they could have been reimbursed by the firm. In other words, no deduction is allowed for “voluntary” out-of-pocket expenses.

The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written firm policy that clearly states what will and won’t be reimbursed. That way, the partners can deduct their unreimbursed firm-related business expenses without any problems from the IRS. Office in a partner’s home subject to the normal deduction limits under the home office rules, a partner can deduct expenses allocable to the regular and exclusive use of a home office for partnership business. The partner’s deductible home office expenses should be reported on Schedule E in the same fashion as other unreimbursed partnership expenses.

If a partner has a deductible home office, the Schedule E home office deduction can deliver multiple tax-saving benefits because it’s effectively deducted for both federal income tax and self-employment tax purposes. In addition, if the partner’s deductible home office qualifies as a principal place of business, commuting mileage from the home office to partnership business temporary work locations (such as client sites) and partnership permanent work locations (such as the partnership’s official office) count as business mileage.

The principal place of business test can be passed in two ways:

First, the partner can conduct most of partnership income-earning activities in the home office. Second, the partner can pass the principal place of business test if he or she: Uses the home office to conduct partnership administrative and management tasks and doesn’t make substantial use of any other fixed location (such as the partnership’s official office) for such administrative and management tasks.

To sum up when a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, the partner should turn them in. Otherwise, the partner can’t deduct the expenses. On the partnership side of the deal, the business should set forth a written firm policy that clearly states what will and won’t be reimbursed, including home office expenses if applicable. This applies equally to members of LLCs that are treated as partnerships for federal tax purposes because those members count as partners under tax law. © 2024

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General

7 Common Payroll Risks for Small to Midsize Businesses

If your company has been in business for a while, you may not pay much attention to your payroll system so long as it’s running smoothly. But don’t get too complacent. Major payroll errors can pop up unexpectedly — creating huge disruptions costing time and money to fix, and, perhaps worst of all, compromising the trust of your employees. For these reasons, businesses are well-advised to conduct payroll audits at least once annually to guard against the many risks inherent to payroll management. Here are seven such risks to be aware of:

1. Inaccurate recordkeeping. If you don’t keep detailed and accurate records, it will probably come back to haunt you. For example, the Fair Labor Standards Act (FLSA) requires businesses to maintain records of employees’ earnings for at least three years. Violations of the FLSA can trigger severe penalties. Be sure you and your staff know what records to keep and have sound policies and procedures in place for keeping them.

2. Employee misclassification. Given the widespread use of “gig workers” in today’s economy, companies are at high risk for employee misclassification. This occurs when a business engages independent contractors but, in the view of federal authorities, the company treats them like employees. Violating the applicable rules can leave you owing back taxes and penalties, plus you may have to restore expensive fringe benefits.

3. Manual processes. More than likely, if your business prepares its own payroll, it uses some form of payroll software. That’s good. Today’s products are widely available, relatively inexpensive, and generally easy to use. However, some companies — particularly small ones — may still rely on manual processes to record or input critical data. Be careful about this, as it’s a major source of errors. To the extent feasible, automate as much as you can.

4. Privacy violations. You generally can’t manage payroll without data such as Social Security numbers, home addresses, birth dates, and bank account numbers. Unfortunately, possessing such information puts you squarely in the sights of hackers and those pernicious purveyors of ransomware. Invest thoroughly in proper cybersecurity measures and regularly update these safeguards.

5. Internal fraud. Occupational (or internal) fraud remains a major threat to businesses. Schemes can range from “cheating” on timesheets by rank-and-file workers to embezzlement by those higher on the organizational chart. Among the most fundamental ways to protect your payroll function from fraud is to require segregation of duties. In other words, one employee, no matter how trusted, should never completely control the process. If you don’t have enough employees to segregate duties, consider outsourcing.

6. Legal compliance. As a business owner, you’re probably not an expert on the latest regulatory payroll developments affecting your industry. That’s OK; laws and regulations are constantly evolving. However, failing to comply with the current rules could cost you money and hurt your company’s reputation. So, be sure to have a trustworthy attorney on speed dial that you can turn to for assistance when necessary.

7. Tax compliance. Employers are responsible for calculating tax withholding on employee wages. In addition to deducting federal payroll tax from paychecks, your organization must contribute its own share of payroll tax. If you get it wrong, the IRS could investigate and potentially assess additional tax liability and penalties. That’s where we come in. For help conducting a payroll audit, reviewing your payroll costs, and, of course, managing your tax obligations, contact us.

© 2024

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Press Releases

ATA NAMES NEW PARTNER

ATA, a leading tax, accounting, and advisory firm, announces the addition of Beth Garner to its partner group. Garner brings with her an impressive track record of over 25 years in the accounting industry, with an emphasis on employee benefit plan audits.

Prior to joining ATA, Garner was the national practice leader for the employee benefit plan audit practice for BDO, a top-five accounting firm in the nation. Beth has significant experience auditing defined contribution, defined benefit, and health and welfare plans. Additionally, she has provided consulting on plan improvements, mergers and acquisitions, plan terminations, frozen plans and correction of compliance failures.

“ATA is glad to welcome Beth to our leadership. Beth’s experience in the specialized field of employee benefit plan audits, aligns perfectly with our commitment to expand our ERISA practice area,” said Chief Manager John Whybrew. “Her expertise and leadership in the field will be a valuable addition to ATA.”

As a Certified Public Accountant licensed in Georgia, Garner’s credentials are bolstered by her involvement with the American Institute of Certified Public Accountants, where she previously served as a member of the AICPA Employee Benefit Plan Audit Quality Committee. She is also a member of the Georgia Society of CPAs. Garner has been a frequent speaker on various technical issues for the EBP industry and professional organizations.  She has also written numerous articles and been quoted in professional publications regarding the employee benefit plan industry.

“This opportunity allows me to leverage my expertise as a contribution to ATA’s overall success but specifically in the ERISA audit practice,” said Garner.  “This partnership with ATA brings a fresh chapter to my professional journey. I am looking forward to being able to contribute to their already strong leadership team and look to positively impact innovation within the firm”

About ATA

ATA is an advisory firm that works with clients on all aspects of their business needs. ATA guides its clients towards success by providing consulting services that are not traditionally associated with the accounting industry. For example, Revolution Partners, ATA’s wealth management entity provides financial planning expertise; ATA Technologies provides trustworthy IT solutions; ATA Digital focuses on growth through the design and development of marketing and digital products as well as offers video, social media, and digital content for small businesses; ATA Capital is an investment banking firm dedicated to providing clients with M&A brokerage services; and lastly, ATA Employment Solutions is a comprehensive human resource management agency.

ATA has 16 office locations in Tennessee, Arkansas, Kentucky and Mississippi. Recognized as an IPA Top 150 regional accounting firm, it provides a wide array of accounting, auditing, tax and consulting services for clients ranging from small family-owned businesses to publicly traded companies and international corporations. ATA is also an alliance member of BDO USA LLP, a top five global accounting firm, which provides additional resources and expertise for clients.