5 valuation terms that every business owner should know
Getting a company professionally appraised is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. Here are five key valuation terms: 1) Fair market value; a relatively common term with a surprisingly long definition. 2) Fair value; a term often confused with fair market value but not the same thing. 3) Going concern value; the estimated worth of a company expected to remain operational. 4) Valuation premium; an increase in a company’s value due to certain factors. 5) Valuation discount; a decrease in a business’s value because of specified circumstances. Contact us for more info.
Paperwork you can toss after filing your tax return
Once you file your 2022 tax return, you may wonder what tax papers you can throw away. You may have to produce records if the IRS audits your return. It’s a good idea to keep the actual returns indefinitely. But what about supporting records such as receipts and canceled checks? In general, except in cases of fraud or substantial understatement of income, the IRS can only assess tax within three years after the return for the year was filed (or three years after the return was due). For example, if you filed your 2019 return by April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency against you. If you file late, the IRS generally has three years from the date you filed.
Retirement saving options for your small business: Keep it simple
If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Take a look at a SEP or a SIMPLE plan. When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s SEP-IRA. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of 25% of compensation and $66,000 for 2023. SIMPLE deferrals are up to $15,500 this year plus an additional $3,500 catch-up contributions for employees ages 50 and older.
ACA penalties will rise in 2024
The IRS recently announced 2024 indexing adjustments to the applicable dollar amount used to calculate employer shared responsibility penalties under the Affordable Care Act (ACA). Applicable large employers (ALEs) must offer minimum essential coverage that’s affordable and provides minimum value to full-time employees and their dependents. An ALE may incur a penalty if at least one full-time employee receives a premium tax credit for buying coverage through a Health Insurance Marketplace. For failures occurring in 2024, the penalties will be $2,970 for not offering coverage and $4,460 for offering coverage that doesn’t meet the affordability and minimum essential coverage requirements.
The tax advantages of hiring your child this summer
Summer is around the corner so you may be thinking about hiring young people at your small business. At the same time, you may have a child looking to earn money. Consider putting your child on the payroll. It’s a win-win! You may be able to turn high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child for services performed. In order to deduct the wages as a business expense, the work done must be legitimate and the child’s salary must be reasonable. You also may be able to achieve Social Security tax savings (depending on how your business is organized) and even make retirement plan contributions for your child. Contact us if you have any questions.
Choosing an entity for your business? How about an S corporation?
If you’re starting a business with some partners and wondering what type of entity to form, an S corporation may be the most suitable form of business for your new venture. Here are some of the reasons why.
A big benefit of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that:
• The corporation be adequately financed,
• The existence of the corporation as a separate entity be maintained, and
• Various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).
Dealing with losses
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of losses on your personal tax return to the extent of your basis in the stock and in any loans you made to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you in the future when there’s sufficient basis.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes. To the extent the income is passed through to you as qualified business income (QBI), you’ll be eligible to take the 20% pass-through deduction, subject to various limitations.
Note: Unless Congress acts to extend it, the QBI deduction is scheduled to expire after 2025.
If you’re planning to provide fringe benefits such as health and life insurance, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Protecting S status
Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfer stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election was terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect against this risk, it’s a good idea for each shareholder to sign an agreement promising not to make any transfers that would jeopardize the S election.
Before finalizing your choice of entity, consult with us. We can answer any questions you have and assist in launching your new venture.
© 2023
Some taxpayers qualify for more favorable “head of household” tax filing status
When preparing your tax return, we’ll check one of the following statuses: Single, married filing jointly, married filing separately, head of household (HOH) or qualifying widow(er). Filing as HOH is more favorable than filing as single. For example, the 2023 HOH standard deduction is $20,800 while it’s $13,850 for singles. To be eligible, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent. You’re considered to maintain a household if you live in the home for the tax year and pay over half the cost of running it. We can answer any questions you have about your situation.
How businesses can use stress testing to improve risk management
If you’ve been following the news, you’re probably aware of the sudden rise in concern about the banking industry. One way that banks are advised to guard against catastrophic failure is to regularly perform “stress testing.” This entails using analytical techniques to ascertain whether and how the institution would be affected by specified events. Businesses can use this approach, too. First, identify specific risks of four major types: operational, financial, compliance and strategic. Next, meet with your leadership team to improve your collective understanding of the threats, including the financial impact. Finally, develop a game plan to mitigate each risk. Contact us for help.
The tax rules for donating artwork to charity
If you’re an art collector, you may wonder about the tax breaks available for donating a work of art to charity. Several different tax rules may come into play. Your deduction for a charitable contribution of art is subject to be reduced if the charity’s use of it is unrelated to the purpose or function that’s the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity. There are also substantiation rules that depend on the amount of a deduction and other rules may apply. Contact us for guidance on large charitable gifts. We can help ensure the best tax outcome.
It’s happening: Using social media for customer service
Whether many businesses realize it or not, customer service happens on social media. And perhaps the worst thing you can do is leave it to chance. You and your leadership team should make a conscious decision about whether to offer customer service on social media. If you do, you’ll need to determine what level of service to provide and on which platform (Facebook, Twitter, etc.) to provide it. Establish a social media policy that covers items such as appropriate tone and language, standard responses to FAQs and when to escalate issues to private interactions. You may even want to set up a dedicated account for customer service. Contact us for help evaluating the costs involved.