A Cost Segregation Study May Cut Taxes and Boost Cash Flow

Is your business depreciating over 30 years the entire cost of constructing the building that houses your enterprise? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. Depreciation basics Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). In most cases, a business depreciates a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — including equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years. Frequently, businesses allocate all or most of...

Beware of Fixed-Value Provisions and Other Business Valuation Faux Pas in Buy-Sell Agreements

Buy-sell agreements are a critical tool for closely held businesses and professional practices. The valuation provisions of these agreements play a significant role when buyouts happen. Unfortunately, shareholders in a New York law firm recently learned a hard lesson: While a fixed-value provision has the benefit of simplicity, failure to tie that formula to the business’s current fair market value can prove costly. Lawyers sue In Laurilliard v. McNamee Lochner, P.C. (No. 904245-22, N.Y. Supr. Ct. June 29, 2023), a New York trial court forced two law firm shareholders, who had practiced with the firm for decades, to surrender their shares for only $100 each. The court denied the terminated shareholders’ claim, which alleged their old firm and nine of its shareholders had anticipatorily breached the shareholders’...

What You Need to Know About Restricted Stock Awards and Taxes

Restricted stock awards are a popular way for companies to offer equity-oriented executive compensation. Some businesses offer them instead of stock option awards. The reason: Options can lose most or all of their value if the price of the underlying stock takes a dive. But with restricted stock, if the stock price goes down, your company can issue you additional restricted shares to make up the difference. Restricted stock basics In a typical restricted stock deal, you receive company stock subject to one or more restrictions. The most common restriction is that you must continue working for the company until a certain date. If you leave before then, you forfeit the restricted shares, which are usually issued at minimal or no cost to you. To be clear, the...

Choosing a Business Entity: Which Way to Go?

If you’re planning to start a business or thinking about changing your business entity, you need to determine what will work best for you. Should you operate as a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation? There are many issues to consider. Currently, the corporate federal income tax is imposed at a flat 21% rate, while individual federal income tax rates currently begin at 10% and go up to 37%. The difference in rates can be alleviated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, and some estates and trusts. Individual rate caveats: The QBI deduction is scheduled to end in 2026, unless Congress acts to extend it, while...

What to Tell Employees About Your Anti-Fraud Efforts

Surveillance is common in many workplaces, yet companies monitoring employee activities may keep the practice under wraps. This may be a mistake, because when workers know they’re being watched, they’re generally less likely to be dishonest. For example, several surveys have shown that clearly visible security cameras discourage employees from stealing inventory. The challenge is to disclose enough information, without revealing too much. Frequently used controls and policies Honesty and trust are essential to a healthy, productive workplace. So you need employees to know you’re taking actions to prevent fraud. On the other hand, you don’t want to provide so many details about anti-fraud controls that thieves can work around them. Following are a few frequently employed anti-fraud policies and how you might communicate them to workers: Surprise audits....

How Business Valuation Pros Use Transaction Databases

Transaction databases contain the details of thousands of real-life public and private stock sales. They’re used by business valuators when they apply the guideline transaction method. This method — also known as the merger and acquisition method — is a subset of the market approach. It derives a company’s value from prices paid for companies engaged in the same, or similar, lines of business. Selection criteria Valuators start this methodology by filtering transaction databases based on specific selection criteria. These parameters affect which transactions the valuator analyzes. A minor change in the selection criteria can have a major impact on value. The most obvious selection criterion is the subject company’s Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) code. But valuators also might set parameters...

Facing a Future Emergency? Two New Tax Provisions May Soon Provide Relief

Perhaps you’ve been in this situation before: You have a financial emergency and need to get your hands on some cash. You consider taking money out of a traditional IRA or 401(k) account but if you’re under age 59½, such distributions are not only taxable but also are generally subject to a 10% penalty tax. There are exceptions to the 10% early withdrawal penalty, but they don’t cover many types of emergencies. Good news: Beginning in 2024, there will be new relief for some taxpayers facing emergencies. The SECURE 2.0 law, which was enacted late last year, contains two different relevant provisions: Pension-linked emergency savings accounts. Employers with 401(k), 403(b) and 457(b) plans can opt to offer these emergency savings accounts to non-highly compensated employees. For...

The Social Security Wage Base for Employees and Self-Employed People is Increasing in 2024

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $168,600 for 2024 (up from $160,200 for 2023). Wages and self-employment income above this threshold aren’t subject to Social Security tax. Basic details The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax. There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2024, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same...

How Some Taxpayers get Snared by Tax-Avoidance Scams

Although most tax preparers are ethical and help ensure their clients file timely and accurate tax returns, a small percentage abuse their position of trust. They may, for example, engage in fraudulent activities that harm taxpayers. The IRS has warned about tax “promoters,” which the agency defines as entities that “undermine voluntary compliance by marketing improper methods to reduce the amount of taxes legally owed.” Such promoters can expose businesses and individuals to financial and legal risk. Wide variety of schemes Some shady tax preparers and promoters encourage clients to submit fraudulent returns and engage in aggressive tax-avoidance schemes. Some tax schemes that you should be aware of include: Employee Retention Tax Credit (ERTC) claims. In September, the IRS announced an immediate moratorium through at least the end...

Are Scholarships Tax-Free or Taxable?

With the rising cost of college, many families are in search of scholarships to help pay the bills. If your child is awarded a scholarship, you may wonder about how it could affect your family’s taxes. Good news: Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or an accredited vocational school. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition. Requirements for tax-free treatment Despite this generally favorable treatment, scholarships aren’t always tax-free. Certain requirements must be met. A scholarship is tax-free only if it’s used to pay for: Tuition and fees required to attend the school, and Fees, books, supplies and equipment required of all...