When the leadership teams of many companies engage in strategic planning, they may be inclined to play it safe. And that’s understandable; sticking to strengths and slow, measured growth are often safe pathways to success.

But substantial growth — and, in some industries, just staying competitive — calls for innovation. That’s why, as your business looks to the future, be sure you’re creating an environment where you and your employees can innovate in ways big or small.

Encourage ideas

It’s sometimes assumed that innovation requires limitless resources or is solely the province of those in technical or research roles. But every department, from accounting to human resources, can come up with ways to work more efficiently or even devise a game-changing product or service concept.

Developing an innovative business culture typically calls for actively encouraging employees to come up with ideas and explore their feasibility without fear of making mistakes. As part of your strategic plan every year, challenge staff to identify problems, ask questions, and seek out solutions and answers. In addition, build and maintain a strong structure for innovation. Doing so includes:

• Establishing policies that promote research and development,
• Incorporating discussions about innovation into performance reviews,
• Allowing some or all employees to occasionally shift from their usual responsibilities to focus on innovative processes or new product or service ideas, and
• Allocating funds to innovation in the company budget.

Ideas can come from other sources, too. For example, what do your customers complain about or ask for? Customer feedback can be an excellent source of innovative concepts. Encourage employees to engage in conversations with customers about what new products or services they may be looking for, as well as about ways to improve your current ones.

Hold brainstorming sessions

Innovation is rarely a straight shot. Outrageous, seemingly unworkable ideas may be the genesis of concepts that ultimately prove both viable and profitable. Employees need to be confident they can propose ideas without fear of ridicule or adverse employment actions. One way to make this happen is through regularly scheduled strategic innovation brainstorming sessions. The goal of these meetings is to help staff get comfortable suggesting bold ideas without censoring themselves or harshly criticizing others. Make it clear to participants that there are no bad ideas.

Be sure to include employees from throughout the business. People tend to feel comfortable with co-workers they know well and work with regularly, but “echo chambers” may develop that limit the feasibility of ideas. Staff members from other departments are often able to provide different perspectives. They can help employees with ideas question their assumptions and view concepts from different angles. In other words, when pursuing prospective innovations, it’s helpful to assemble cross-functional teams that can cover more ground.

Find your next breakthrough

Waiting around for the next big breakthrough in your business or industry to fall in your lap is a huge gamble. By making room for innovation in your strategic planning, you’ll increase the likelihood that you’ll find it.

© 2024

Believe it or not, there are ways to collect tax-free income and gains. Here are some of the best opportunities to put money in your pocket without current federal income tax implications:

1. Roth IRAs offer tax-free income accumulation and withdrawals. Unlike withdrawals from traditional IRAs, qualified Roth IRA withdrawals are free from federal income tax. A qualified withdrawal is one that’s taken after you’ve reached age 59½ and had at least one Roth IRA open for over five years, or you are disabled or deceased. After your death, your heirs can take federal-income-tax-free qualified Roth IRA withdrawals, with proper planning.
2. A large amount of profit from a home sale is tax-free. In one of the best tax-saving deals, an unmarried seller of a principal residence can exclude (pay no federal income tax on) up to $250,000 of gain, and a married joint-filing couple can exclude up to $500,000. That can be a big tax-saver, but you generally must pass certain tests to qualify. For example, you must have owned the property for at least two years during the five-year period ending on the sale date. And you must have used the property as a principal residence for at least two years during the same five-year period. Note: To be eligible for the larger $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test.
3. People with incomes below a certain amount can collect tax-free capital gains and dividends. The minimum federal income tax rate on long-term capital gains and qualified dividends is 0%. Surprisingly, you can have a pretty decent income and still be within the 0% bracket for long-term gains and dividends — based on your taxable income. Single taxpayers can have up to $47,025 in taxable income in 2024 and be in the 0% bracket. For married couples filing jointly, you can have up to $94,050 in taxable income in 2024.
4. Gifts and inheritances receive tax-free treatment. If you receive a gift or inheritance, the amount generally isn’t taxable. However, if you’re given or inherit property that later produces income such as interest, dividends, or rent, the income is taxable to you. (There also may be tax implications for an individual who gives a gift.) In addition, if you inherit a capital gain asset like stock or mutual fund shares or real estate, the federal income tax basis of the asset is stepped up to its fair market value as of the date of your benefactor’s demise, or six months after that date if the estate executor so chooses. So, if you sell the inherited asset, you won’t owe any federal capital gains tax except on appreciation that occurs after the applicable date.
5. Some small business stock gains are tax-free. A qualified small business corporation (QSBC) is a special category of corporation. Its stock can potentially qualify for federal-income-tax-free treatment when you sell for a gain after holding it for over five years. Ask us for details.
6. You can pocket tax-free income from college savings accounts. Section 529 college savings plan accounts allow earnings to accumulate free of any federal income tax. And when the account beneficiary (typically your child or grandchild) reaches college age, tax-free withdrawals can be taken to cover higher education expenses. Alternatively, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (CESA) set up for a beneficiary who hasn’t reached age 18. CESA earnings are allowed to accumulate free from federal income tax. Then, tax-free withdrawals can be taken to pay for the beneficiary’s college tuition, fees, books, supplies, and room and board. The catch: Your right to make CESA contributions is phased out between modified adjusted gross incomes of $95,000 and $110,000, or between $190,000 and $220,000 if you’re a married joint filer.

Advance planning may lead to better results

You may be able to collect federal-income-tax-free income and gains in several different ways, including some that aren’t explained here. For example, proceeds from a life insurance policy paid to you because of an insured person’s death generally aren’t taxable. So, don’t assume you’ll always owe taxes on income. Also, check with us before making significant transactions because advance planning could result in tax-free income or gains that would otherwise be taxable.

© 2024

Do you own your principal residence? If so, you’re likely aware that you can benefit from the home’s build-up in equity, realize current tax breaks and pocket a sizable tax-exempt gain when you sell it.

And from an estate planning perspective, it may be beneficial to transfer ownership of your home to a qualified personal residence trust (QPRT). Using a QPRT, you can continue to live in the home for the duration of the trust’s term. When the term ends, the remainder interest passes to designated beneficiaries.

A QPRT in action

When you transfer a home to a QPRT, it’s removed from your taxable estate. The transfer of the remainder interest is subject to gift tax, but tax resulting from this future gift is generally reasonable. The IRS uses the Section 7520 rate, which is updated monthly, to calculate the tax. For September 2024, the rate is 4.8%, down from the year’s high thus far of 5.6% in June.

You must appoint a trustee to manage the QPRT. Frequently, the grantor will act as the trustee. Alternatively, it can be another family member, friend or professional advisor.

Typically, the home being transferred to the QPRT is your principal residence. However, a QPRT may also be used for a second home, such as a vacation house.

What happens if you die before the end of the trust’s term? Then the home is included in your taxable estate. Although this defeats the intentions of the trust, your family is no worse off than it was before you created the QPRT.

There’s no definitive period of time for the trust term, but the longer the term, the smaller the value of the remainder interest for tax purposes. Avoid choosing a term longer than your life expectancy. Doing so will reduce the chance that the home will be included in your estate should you die before the end of the term. If you sell the home during the term, you must reinvest the proceeds in another home that will be owned by the QPRT and subject to the same trust provisions.

So long as you live in the residence, you must continue to pay the monthly bills, including property taxes, maintenance and repair costs, and insurance. Because the QPRT is a grantor trust, you’re entitled to deduct qualified expenses on your tax return, within the usual limits.

Potential drawbacks

When a QPRT’s term ends, the trust’s beneficiaries become owners of the home, at which point you’ll need to pay them a fair market rental rate if you want to continue to live there. Despite the fact that it may feel strange to have to pay rent to live in “your” home, at that point, it’s no longer your home. Further, paying rent generally coincides with the objective of shifting more assets to younger loved ones.

Note, also, that a QPRT is an irrevocable trust. In other words, you can’t revise the trust or back out of the deal. The worst that can happen is you pay rent to your beneficiaries if you outlive the trust’s term, or the home reverts to your estate if you don’t. Also, the beneficiaries will owe income tax on any rental income.

Contact us to determine if a QPRT is right for your estate plan.

© 2024

A key decision you must make when drafting your estate plan is who to appoint as the executor. In a nutshell, an executor (called a “personal representative” in some states) is the person who will carry out your wishes after your death. Let’s take a look at the specific duties and how to choose the right person for the job.

Overview of duties

Typically, your executor shepherds your will through the probate process, takes steps to protect your estate’s assets, distributes property to beneficiaries according to the will, and pays the estate’s debts and taxes.

Most assets must pass through probate before they can be distributed to beneficiaries. (Note, however, that assets transferred to a living trust are exempt from probate.) When the will is offered for probate, the executor also obtains “letters testamentary” from the court, authorizing him or her to act on the estate’s behalf.

It’s the executor’s responsibility to locate, manage and disburse your estate’s assets. In addition, he or she must determine the value of property. Depending on the finances, assets may have to be liquidated to pay debts of the estate.

Also, your executor can use estate funds to pay for funeral and burial expenses if you didn’t make other arrangements to cover those costs. In addition, your executor will obtain copies of your death certificate. The death certificate will be needed for several purposes, including closing financial accounts, canceling certain benefit payments and filing the final tax return.

Right person for the job

So, whom should you choose as the executor of your estate? Your first inclination may be to name a family member or a trusted friend. But this can cause complications.

For starters, the person may be too grief-stricken to function effectively. And, if the executor stands to gain from the will, there may be conflicts of interest that can trigger contests of your will or other disputes by disgruntled family members. Furthermore, the executor may need more financial acumen for this position. Frequently, a professional advisor you know and trust is a good alternative.

Don’t forget to designate an alternate

An executor can renounce the right to this position by filing a written declaration with the probate court. This further accentuates the need to name a backup executor.

Without a named successor in the executor role, the probate court will appoint one for the estate. If you have additional questions regarding the role of an executor, please contact us.

© 2024

The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year.

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for 2025

In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024.

In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year.

High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024).

Heath Reimbursement Arrangements

The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024).

Collect the benefits

There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us.

© 2024

Surviving spouses are faced with many financial and tax-related decisions. One critical issue to consider is whether to file a joint or separate tax return for the year of the spouse’s death.

Timing of the final tax return

When a person dies, his or her personal representative (called an executor in some states) is responsible for filing an income tax return for the year of death (as well as any unfiled returns for previous years). For purposes of the final return, the tax year generally begins on January 1 and ends on the date of death. The return is due by April 15 of the following calendar year.

Income that’s included on the final return is determined according to the deceased’s usual tax accounting method. So, for example, if he or she used the cash method, the income tax return will only report income actually or constructively received before death and only deduct expenses paid before death. Income and expenses after death are reported on an estate tax return.

The surviving spouse, together with the personal representative, may file a joint return. And the surviving spouse alone can elect to file a joint return if a personal representative hasn’t yet been appointed by the filing due date. (However, a court-appointed personal representative may later revoke that election.)

Filing a joint tax return

In the year of death, the surviving spouse is generally deemed to be married for the entire calendar year, so he or she can file a joint return with the estate’s cooperation. If a joint return is filed, it’ll include the deceased’s income and deductions from the beginning of the tax year to the date of death, and the surviving spouse’s income and deductions for the entire tax year.

Here are some possible advantages of filing a joint return:

• Depending on your income and certain other factors, you may enjoy a lower tax rate.
• Certain tax credits are larger on a joint return or are unavailable to married taxpayers filing separately.
• IRA contribution limits, as well as the amounts allowed as deductions, may be higher for joint filers.

Bear in mind that there may be disadvantages to filing jointly. For example, higher adjusted gross income (AGI) may reduce the tax benefits of expenses, such as medical bills, that are deductible only to the extent they exceed a certain percentage of AGI.

Turn to us for help

If you’ve lost your spouse recently, before you make a final decision on whether to file a joint return, contact us. We can calculate tax liability based on both a joint and separate return. Other filing options may also be available depending on your circumstances, such as qualifying widow(er) and head of household.

© 2024

For many business owners, choosing a successor is the most difficult task related to succession planning. Owners of family-owned businesses, who may have multiple children or other relatives to consider, particularly tend to struggle with this tough choice.

What’s worse, many business owners’ initial picks for successor don’t work out. Over time, the chosen person can prove to be unqualified, incapable or unwilling to fulfill a leadership role. If you find yourself in this situation, don’t panic. There are some measured steps you can take to resolve the matter.

Ask around

Before you dismiss your chosen successor, discuss the situation with several objective parties. These might include professional advisors, such as your CPA and attorney, as well as trusted family members, friends or colleagues with business experience.

Your goal is to determine whether your perception is off the mark. You may think, for instance, that your successor lacks the necessary skills to run your company. But the person might simply have a different leadership style than you do. Talking with others may help you put things in perspective.

Look for ways to help

If you come to believe that, with some work, your successor may still be capable of running the business after all, meet with the person. State your concerns and outline what must change.

And don’t forget to listen. Ask why your successor is having the difficulties you’ve pointed out. Perhaps it’s a lack of formal training in one aspect of the job. In such cases, there may be a class that can help provide the needed education, or maybe more mentoring from you might solve the problem.

It’s also possible your successor is facing personal issues that are getting in the way of work. For example, the person may be having financial problems, battling an addiction, or struggling in a marriage or other personal relationship. By listening, you can find out what the specific issues are and how you may be able to help.

Avoid past mistakes

After talking with others, and perhaps your successor, you may still feel the person needs to be replaced. If you decide to move on to someone else, tell your successor as soon as possible and explain why. Being honest and forthright, though difficult, will help settle the matter efficiently. As part of the conversation, ask whether there’s anything you could’ve done differently to avoid the impasse that developed.

Following that discussion, reconstruct the succession planning process to determine what led you to choose your initial successor. Review personal notes, memos and emails. Speak again with your professional advisors as well as trusted employees, family members, friends and colleagues about picking someone new. Ultimately, you want to develop objective criteria for your new successor and eliminate the impediments that kept your initial choice from working out.

Finally, if your second choice also doesn’t work out, stay open to the possibility that the problem may not lie with your prospective successors. It’s possible that the demands you’re placing on a successor may be somewhat unreasonable, or that you’re inadequately communicating your wishes and expectations.

Prepare for contingencies

Many business owners choose successors, work diligently to mentor them and transition smoothly into retirement with their companies in safe hands. But, as you well know, rarely does everything go exactly as planned in the business world. Preparing for contingencies is key in succession planning. As part of that effort, we can help you integrate savvy tax and financial strategies into your plan.

© 2024

Navigating the complexities of tax law can be difficult, especially when faced with an unexpected tax bill due to the errors of a spouse or ex-spouse. The reason for such a bill has to do with the concept of “joint and several” liability. When a married couple files a joint tax return, each spouse is liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest.

There may be relief

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves an individual who was unaware of a tax understatement that was attributable to his or her spouse. To qualify, you must show that you didn’t know about the understatement and that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax.

This relief is available even if you’re still married and living with your spouse. In addition, individuals may be able to get relief for tax deficiencies on joint returns if they’re divorced, widowed, legally separated or living apart.

Recent court cases

Not surprisingly, the issue of innocent spouses is frequently litigated. Here are some cases from this year:

• Taxpayer wins. In one case, it was undisputed that a married couple’s joint tax return included an understatement of tax. The IRS and the wife agreed that she didn’t know, or have reason to know, that the correct amount of taxes wasn’t paid. She wasn’t involved in her now ex-husband’s employment or business activities. He concealed his finances from her and kept separate bank accounts. The U.S. Tax Court weighed all factors and found it would be inequitable to hold her liable for the deficiency. Her request for innocent spouse relief was granted. (TC Memo 2024-26)
• Taxpayer loses. In another case, a widow argued that if she paid the taxes owed by her deceased husband, she’d suffer economic hardship. Her annual income, she testified, was far below the poverty line and her assets were insufficient to pay the taxes. However, she failed to provide evidence to support her income or the value of her two homes. Records showed that while her income taxes remained unpaid, she enjoyed significant benefits, including several expensive vacations and the purchase of a luxury vehicle. The U.S. Tax Court denied her request for relief. (162 TC No. 2)

An “injured spouse”

In addition to innocent spouse relief, there’s also relief for an “injured spouse.” What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, all or part of an injured spouse’s refund from a joint return is applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be able to recoup your share of the refund.

A challenging process

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain you’re responsible only for your own tax. Contact us with any questions or concerns.

© 2024

With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act soon.

Estimated taxes

Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

Bonus depreciation

For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

Upcoming tax law changes

These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.

© 2024