Roberts CPA | Accounting & Tax Blog

Valuing Your Estate’s Assets

by

In estate planning, you often come across the term “fair market value.” However, some assets are easier to value than others.

The IRS defines fair market value as “the value at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Some assets are easily valued. A stock, for example, that is listed on a major exchange can be valued simply by averaging the highest and lowest quoted selling price for that day. That price, multiplied by the number of shares you own, gives you the value of your stock on that day. Establishing value on most other property is not quite as easy, though. Let’s look at other forms of property and how they might be valued for estate tax purposes.

  • Real property. There are numerous factors that have to be considered, such as the size, shape, and location of the property, zoning restrictions, its potential use, and the value of surrounding property. The value of the buildings depends on whether they are rental properties, the present cost of reproducing them, and their loss of value because of depreciation. Also, certain properties, such as farm or business property, have special valuation issues that must be considered for estate tax purposes.
  • Personal property. Property such as your car, furniture, jewelry, etc., will be valued according to the definition mentioned above. If you have a house full of possessions, each object will be valued separately. Professional appraisals may be necessary for items such as collectibles or one-of-a-kind possessions.
  • Life insurance. Whether or not life insurance will be included in your estate depends on a number of factors. Do you own the policy or policies? Did you hold any incidents of ownership at the time of your death or did you transfer the ownership or incidents of ownership within three years of your death? Also, any insurance proceeds payable to your estate will be included in your estate for estate tax purposes. The value of the insurance is generally the lump-sum amount of the insurance proceeds.
  • Stock of closely held corporations. A professional appraisal is usually required. This stock is not often traded and, as a result, is difficult to value. Factors in valuation include: the nature and history of the business, its financial condition, its future outlook, its goodwill, and the market price of the stock of corporations in a similar business.
  • Professional practice. This is more difficult to value than other types of businesses because so much is dependent on the professional’s expertise. If, for example, a dentist dies, his or her family can’t simply take over the practice unless a family member happens to be a licensed dentist. The valuation will depend to a great degree on the practice’s client base, fee structure, competition, source of payments, strength of staff, location, and assets.

Regularly putting a value on your estate is a good idea because it allows you to plan for the payment of bequests, debts, and estate taxes. But it is only one step in the estate planning process. Your legal, tax, and financial professionals can help you understand the steps you need to take.

Handling Inflation’s Impact On Your Business

by

Small businesses are feeling the pinch. When consumers find that their dollars don’t buy as much as they did when inflation rates were low, they are forced to pick and choose what they spend their money on. To pay for essentials, they often cut back on entertainment, travel, sporting events, personal care services, and other nonessential items. They may postpone buying autos and big-ticket household items such as refrigerators and stoves, and hold off on home remodeling projects.

As their customers readjust their spending habits, owners of small businesses typically see their revenues drop off, sometimes sharply. It can help to have a series of steps that you can implement in response to ongoing inflationary pressures. Here are some strategies you might consider.

Draw Up “What-if” Scenarios

Use financial forecasts to create “what-if” scenarios that will test where and how inflation will potentially affect your business. For example, forecast the impact on your business if your labor costs increase by 10% or if certain raw materials jump in cost by 50%. With each scenario, gauge the effect on your cash flow and try to identify measures you can take to minimize the impact or lower the risks.

Improve Cash Flow

Look for ways to potentially reduce what you are paying for supplies, energy, rent, banking services, and other items. Determine if you can improve the time between when you bill a customer and when you receive payment. Renegotiate outdated contracts and increase spending on existing contracts whose prices are not indexed for inflation. Consider eliminating or reducing discounts and promotions and removing free shipping if you offer it. Cash flow is the lifeblood of your business and increasing it positions your business to withstand inflationary and other business-related pressures.

Reevaluate Expansion Plans

Identify nonstrategic spending and consider whether it continues to make sense in an inflationary environment. Identify your business’s strengths that give you an advantage in reaching and sustaining your most important customer relationships. Then, focus on spending that amplifies those strengths, whether it is adding staff or upping your investment in technology.

Technology can be a huge plus for businesses committed to growth. Invest in technology to boost productivity and help control overhead costs. Your business could potentially add to its bottom line by investing in technologies such as intelligent document processing, barcoding or radio frequency identification for inventory control, and robotic process automation. If you operate stores or restaurants, you could consider self-service kiosks.

Raise Prices

You may have no choice but to pass your higher labor and materials costs on to your customers. However, instead of simply raising prices across the board, it may make more sense to raise prices on those products and services that impact your margins the most.

Build Inventory

If your business has the financial resources available, it can make sense to stock up on supplies and raw materials with low holding costs since their prices may continue to rise. On top of lowering costs and giving your business an advantage over competitors, having enough inventory available to fulfill customer orders can allow you to be strategic about pricing.

Focus on Debt Levels

You may want to reconsider adding more debt to your balance sheet since you may have trouble making the additional payments. If you do borrow, borrow only for revenue-generating purposes and negotiate with multiple lenders to obtain the best conditions possible.

A financial professional can help you identify and evaluate measures to position your business to meet the challenges presented by rising rates of inflation.

What Your Last Tax Return Can Tell You About Your Finances

by

Just as coaches look back at their prior season to identify their team’s strengths and weaknesses, it can be helpful for taxpayers to review their most recent tax return to assess what they did right and what they did wrong when it came to their taxes and overall finances. Your federal income tax return might provide valuable insights in the following areas.

Your Investments

If you are long-term investor and your return shows multiple investment sales and the related gains and losses within a compressed time frame, it may indicate that you are trading too frequently. You should consider the fees associated with excessive trading as well as whether your portfolio is structured in a way that meets your goals and your tolerance for risk.

You may have a capital loss carryforward that represents an unused loss you are carrying over to offset future capital gains. If you intend to rebalance your taxable account investments, see if there will be taxable capital gains that can be offset by the loss you are carrying forward.

Consider municipal bonds as a way to reduce taxes. The interest you earn on municipal bonds is generally exempt from federal income taxes and possibly state and local income taxes. Just be sure to carefully review the credit ratings of any municipals you may be thinking about buying. While the higher yields offered by bonds with lower credit ratings may initially appear very attractive, these bonds typically carry a higher risk of default.

Your Retirement Strategies

Increase the amount you contribute to your tax-favored retirement plan (limits apply) and you could potentially lower your current year’s income tax liability. If you are taking distributions from a retirement plan still held with a former employer, you may want to consider a rollover into one account to consolidate accounts and simplify your recordkeeping. Consider consolidating accounts also if you have multiple individual retirement accounts (IRAs).

Business-Related Tax Saving Opportunities

If you are self-employed as a sole proprietor and filed a Schedule C, check to see if a different business form could make sense. For example, an S corporation can limit a business owner’s personal liability. Consider establishing a retirement plan if you do not already have one in place. A retirement plan established through your business allows you to save for your future financial security and deduct your contributions. You may also be able to take advantage of some income-shifting opportunities by employing family members in the business.

Charitable Contributions

If you support various charities with financial gifts, it may make sense to donate appreciated publicly traded stock to charity instead of cash. You can deduct the full fair market value of appreciated securities you have held for more than one year as an itemized deduction without having to pay capital gains tax on the appreciation.

You could also look into establishing a charitable remainder trust. Doing so allows you to make a gift to charity, retain an income from the donated assets for life, and possibly claim a partial charitable deduction based on the value of the charitable interest in the trust.

Other Considerations

If you have experienced a major life change, such as marriage or divorce, that has impacted your filing status, make certain that any change is reflected when you file this year’s tax return. Remember also that you should keep your beneficiary designations on your retirement accounts and insurance policies current so that they accurately reflect your present status. If you have children, you may want to check out several tax-advantaged college savings opportunities that are available. These opportunities can help you set money aside for their future education.

A review of your tax return and your investment transaction statements can help you identify areas where you may be able to lower the taxes you’ll have to pay next year. Your financial and tax professionals will be able to assist you in that effort.

What Are Tax Credits?

by

Taxes are an integral part of running a business, and they often represent a substantial portion of your expenses. However, there’s good news for businesses looking to reduce their tax burden and stimulate growth – business tax credits. These credits provide financial incentives for companies to invest in various activities, from research and development to promoting renewable energy. In this article, we’ll explore what business tax credits are, how they work, and how they can benefit your company.

What Are Business Tax Credits?

Business tax credits are financial incentives offered by governments at the federal, state, or local level to encourage businesses to engage in certain activities that benefit society, the environment, or the economy. These credits work by reducing a company’s tax liability, effectively lowering the amount of taxes they owe. They serve as a reward for businesses that invest in activities that align with the government’s policy objectives.

Types of Business Tax Credits

There are various types of business tax credits available, each with its own set of eligibility criteria and benefits. Here are some common types:

1. Research and Development (R&D) Tax Credit: This credit is designed to encourage businesses to invest in innovation and research activities. It can help offset the costs associated with developing new products, processes, or technologies.

2. Renewable Energy Tax Credits: These credits are intended to promote the use of renewable energy sources, such as solar, wind, and geothermal energy. They can significantly reduce the cost of investing in clean energy initiatives.

3. Investment Tax Credits: These credits reward businesses for investing in specific projects or assets that promote economic growth or job creation. They are often used to stimulate investment in economically distressed areas.

4. Low-Income Housing Tax Credit: Aimed at promoting the development of affordable housing, this credit provides incentives for businesses to invest in housing projects for low-income individuals and families.

5. Work Opportunity Tax Credit: This credit encourages the hiring of individuals from specific target groups, such as veterans and individuals with disabilities. It can offset a portion of the costs associated with employing these individuals.

Benefits of Business Tax Credits

Business tax credits offer numerous advantages for companies:

1. Reduced Tax Liability: The most apparent benefit is the reduction of your company’s tax liability. This translates into cost savings that can be reinvested in your business, used for expansion, or allocated to other vital activities.

2. Encouragement for Investment: Tax credits provide a financial incentive to invest in areas such as research and development, clean energy, or affordable housing. This encourages businesses to participate in activities that contribute positively to society and the economy.

3. Competitive Advantage: By taking advantage of available tax credits, your business can gain a competitive edge. This is especially relevant in industries where innovation, sustainability, and social responsibility play a significant role.

4. Stimulated Growth: Many tax credits are designed to spur economic growth, create jobs, and improve local communities. By participating in these initiatives, your business can be a catalyst for positive change.

How to Access Business Tax Credits

To access business tax credits, follow these steps:

1. Identify Eligibility: Determine which tax credits your business may be eligible for. Consult with a tax professional to assess your eligibility accurately.

2. Document Activities: Keep meticulous records of the activities that make you eligible for the tax credits. Proper documentation is essential to substantiate your claims.

3. File Accurate Tax Returns: Ensure your tax returns accurately reflect the credits you are claiming. Mistakes can lead to delays and audits.

4. Consult with Professionals: Tax professionals, accountants, and legal experts can help you navigate the complex world of tax credits, ensuring you maximize your benefits while staying compliant with tax laws.

Business tax credits offer a valuable opportunity for businesses to reduce their tax liabilities and invest in activities that promote growth, innovation, and social responsibility. By understanding the available credits and working with professionals to access them, your business can not only thrive financially but also contribute to positive change in your community and beyond.