Solving the riddles of succession planning for family businesses

Every established company will encounter challenges when confronting the thorny issue of succession planning. Family-owned businesses, however, often face particularly complex issues. After all, their owners may have to consider both family members who work for the company and those who do not.

If yours is a family business, you may run into some confounding riddles as you develop your succession plan. As difficult as it may seem, always bear in mind that there are solutions to be found.

Divergent financial needs

One tough quandary for many family businesses is that the financial needs of older and younger generations conflict. For instance, the business owner is counting on the sale of the company to serve as a de facto retirement fund while the owner’s family wants to take over the business without a significant investment.

Fortunately, several strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. For example, an installment sale of the business to children or other family members can provide liquidity for owners while easing the burden on children and grandchildren. An installment sale may also increase the chance that cash flows from the business can fund the purchase. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.

Trust alternatives

Alternatively, owners may transfer business interests to a grantor retained annuity trust (GRAT) to obtain a variety of gift and estate tax benefits, provided they survive the trust term. They’ll also enjoy a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s beneficiaries. GRATs are typically designed to be gift-tax-free.

Similarly, a properly structured installment sale to an intentionally defective grantor trust (IDGT) allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.

The answers are out there

There’s no doubt that every family business is a little bit different. Nevertheless, there are probably answers out there to your distinctive questions. We can help you put together a succession plan that’s right for you and your family.


Could value-based sales boost your company’s bottom line?

If your company sells products or services to other businesses, you’re probably familiar with the challenge of growing your sales numbers. At times, you might even struggle to maintain them. One way to put yourself in a better position to succeed is to diversify your approaches, so you’re not limited to a single method by which salespeople interact with customers.

Have you ever considered value-based sales? Under this method, sales reps act as sort of business consultants, working closely with customers or prospects to identify specific needs or solve certain problems. The objective is to provide as much value as possible from the sales that result. This approach has its risks but, under the right circumstances, it can pay off.

What is value?

Before embarking on a value-based sales initiative, you’ll need to identify what kinds of value you may be able to provide. This can’t be a fuzzy concept; sales reps should be able to put dollars and cents to their value-based sales propositions or at least build a compelling case. Value generally takes four forms:

  1. Dollars gained; your product or service will lead to an increase in revenue for the subject based on a reasonable financial projection,
  2. Dollars saved; your product or service will demonstrably save the customer or prospect money,
  3. Risk reduced; your product or service will address and help minimize one or more identifiable threats to the business in question, and
  4. Qualitative; if you can’t make a case for one of the other three value types, you may still be able to argue that your product or service improves the quality of the subject’s operations in some way.

At least one of these four types of value will be the ultimate objective when salespeople engage customers or prospects. However, to identify that objective, your sales team will need to put in considerable effort.

How does the process work?

Perhaps the biggest downside of a value-based sales approach is that it’s labor-intensive. As opposed to, say, making cold calls with a product or service list and a series of talking points, your salespeople will need to do a “deep dive” into targeted businesses. They’ll need to learn details such as each company’s mission, history, management structure, financial status, strengths and weaknesses.

Then, when interacting with customers or prospects, they’ll need to focus on education — both their own and the subject’s. In other words, a sales rep will need to ask the right questions to learn as much as possible about the customer’s or prospect’s business needs and challenges. Meanwhile, the salesperson will need to act much like a consultant, informing the subject about industry trends, potential solutions and perhaps how comparable companies have overcome similar issues.

As you can see, value-based sales is more about relationship building and knowledge sharing than straight selling. Because of this, it can be a gamble. Some sales reps may spend extensive time and effort with a customer or prospect, even helping that business in certain ways, only to reap little to no sales revenue. On the other hand, when the approach works well, your company may be able to build a dynamic, long-lasting relationship with a lucrative customer.

Are there such sales in your pipeline?

If value-based sales sounds like something that could benefit your business, discuss it with your leadership team and sales staff. You’ll likely want to review your sales pipeline and determine which customers or prospects would be good fits for the approach. Contact us for help tracking, organizing and analyzing your sales numbers.


The tax implications of renting out a vacation home

Many Americans own a vacation home or aspire to purchase one. If you own a second home in a waterfront community, in the mountains or in a resort area, you may want to rent it out for part of the year.

The tax implications of these transactions can be complicated. It depends on how many days the home is rented and your level of personal use. Personal use includes vacation use by you, your family members (even if you charge them market rent) and use by nonrelatives if a market rent isn’t charged.

Short-term rentals

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce revenue and significant tax benefits. Any rent you receive isn’t included in your income for tax purposes. On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. This includes maintenance, utilities, depreciation allowance, interest and taxes for the property. The personal use portion of taxes can be deducted separately. The personal use part of interest on a second home is also deductible (if eligible) when it exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

Losses may be deductible

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. But if the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.

Here’s the test: if you use it personally for more than the greater of 14 days or 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t claim are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order:

  • Interest and taxes,
  • Operating costs, and
  • Depreciation.

If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. However, in this case, if your rental deductions exceed your rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under passive loss rules.)

Navigate a plan

These are only the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results.


How IRS auditors learn about your business industry

Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues unique to certain taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guide titles that have been revised or added in recent years:

  • Entertainment Audit Technique Guide (March 2023), which covers income and expenses for performers, producers, directors, technicians and others in the film and recording industries, as well as in live performances;
  • Capitalization of Tangible Property Audit Technique Guide (September 2022), which addresses potential tax issues involved in capital expenditures and dispositions of property.
  • Oil and Gas Audit Technique Guide (February 2023), which explains the complex tax issues involved in the exploration, development and production of crude oil and natural gas;
  • Cost Segregation Audit Technique Guide (June 2022), which provides IRS examiners with an understanding of why and how cost segregation studies are performed in order for businesses to claim refunds related to depreciation deductions.
  • Attorneys Audit Technique Guide (January 2022), which covers issues including retainers, contingent fees, client trust accounts, travel expenses and more;
  • Child Care Provider Audit Technique Guide (January 2022), which enables IRS examiners to audit businesses that provide care in homes or day care centers; and
  • Retail Audit Technique Guide (March 2021), which details tax issues unique to businesses that purchase items from a supplier or wholesaler and resell them at a profit.

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website.


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 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 inquiry 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. We’d be happy to explain the rules further and help you stay in compliance.


Business automobiles: How the tax depreciation rules work

Do you use an automobile in your trade or business? If so, you may question how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.

Depreciation is built into the cents-per-mile rate

First, be aware that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (65.5 cents per business mile driven for 2023), a depreciation allowance is built into the rate.

If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.

For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually. For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.

Reminder: Under the Tax Cuts and Jobs Act, bonus depreciation is being phased down to zero in 2027, unless Congress acts to extend it. For 2023, the deduction is 80% of eligible property and for 2024, it’s scheduled to go down to 60%.

Heavy SUVs, pickups and vans

Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.

What matters is the after-tax cost

What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.

The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.


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 students in a particular course.

For example, expenses that don’t qualify include the cost of room and board, travel, research and clerical help.

A scholarship award is taxable to the extent it isn’t used for qualifying items. The recipient is responsible for establishing how much of an award is used to pay for tuition and eligible expenses. Therefore, you should maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.

Taxable and nontaxable amounts

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, are an employee of an educational institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

Payments reported and not reported on tax returns

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. Contact us if you wish to discuss these or other tax matters further.


Valuations can help business owners plan for the future

If someone was 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, and
  • 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. But 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. We can support your company throughout the valuation process and help you make the most of the information you receive


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 as in 2023).

2024 updates

For 2024, an employee will pay:

  • 6.2% Social Security tax on the first $168,600 of wages (6.2% x $168,600 makes the maximum tax $10,453.20), plus
  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
  • 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).

For 2024, the self-employment tax imposed on self-employed people will be:

  • 12.4% Social Security tax on the first $168,600 of self-employment income, for a maximum tax of $20,906.40 (12.4% x $168,600), plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
  • 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

Employees with more than one employer

You may have questions if an employee who works for your business has a second job. That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

We’re here to help

Do you have questions about payroll tax filing or payments? Contact us. We’ll help ensure you stay in compliance.


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:

1. 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 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee. Here are some more details of these new type of accounts:

  • Contributions to the accounts will be limited to up to $2,500 a year (or a lower amount determined by the plan sponsor).
  • The accounts can’t have a minimum contribution or account balance requirement.
  • Employers can offer to enroll eligible participants in these accounts beginning in 2024 or can automatically enroll participants in them.
  • Participants can make a withdrawal at least once per calendar month and such withdrawals must be made “as soon as practicable.”
  • For the first four withdrawals from an account in a plan year, participants can’t be subject to any fees or charges. Subsequent withdrawals may be subject to reasonable fees or charges.
  • Contributions must be held as cash, in an interest-bearing deposit account or in an investment product.
  • If an employee has a pension-linked emergency savings account and is not highly compensated, but becomes highly compensated as defined under tax law, he or she can’t make further contributions but retains the right to withdraw the balance.
  • Contributions will be made on a Roth basis, meaning they are included in an employee’s taxable income but participants won’t have to pay tax when they make withdrawals.

2. Penalty-free withdrawals for emergency expenses. This new provision is another way to get money for emergencies. As mentioned earlier, taking a distribution from an IRA or 401(k) before age 59½ generally results in a 10% penalty tax unless an exception exists. SECURE 2.0 adds a new exception for certain distributions used for emergency expenses, which are defined as “unforeseeable or immediate financial needs relating to personal or family” emergencies.

Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions made beginning in 2024.

Guidance likely coming soon

These are just the basic details of the two new emergency-related provisions. Other rules apply and the IRS will need to issue guidance to address certain details. Contact us if you have questions or need cash and want to explore the most tax-efficient ways to tap one of your accounts.