Among the biggest long-term concerns of many business owners is succession planning — how to smoothly and safely transfer ownership and control of the company to the next generation.

From a tax perspective, the optimal time to start this process is long before the owner is ready to give up control. A family limited partnership (FLP) can help you enjoy the tax benefits of gradually transferring ownership while you continue to run the business.

How it works

To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children or other beneficiaries.

You retain the general partnership interest, which may be as little as 1% of the assets. However, as general partner, you still run day-to-day operations and make business decisions.

Tax benefits

As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.

Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.

The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, let’s say the discount is 25%. That means, in 2022, you could gift an FLP interest equal to as much as $21,333 (on a controlling basis) tax-free because the discounted value wouldn’t exceed the $16,000 annual gift tax exclusion.

There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.

Some risks

Perhaps the biggest downside is that the IRS tends to scrutinize how FLPs are structured. If it determines that discounts are excessive or that your FLP has no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.

The IRS also pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for instance, can indicate that an FLP was set up solely as a tax-avoidance strategy.

Not for everyone

An FLP can be an effective succession and estate planning tool but, as noted, it’s far from risk free. We can help you determine whether one is right for you and advise you on other ways to develop a sound succession plan.

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The number of people engaged in the “gig” or sharing economy has grown in recent years. In an August 2021 survey, the Pew Research Center found that 16% of Americans have earned money at some time through online gig platforms. This includes providing car rides, shopping for groceries, walking dogs, performing household tasks, running errands and making deliveries from a restaurant or store.

There are tax consequences for the people who perform these jobs. Basically, if you receive income from an online platform offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.

Traits of gig workers

Gig workers are those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb, Angi, Instacart and DoorDash.

Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.

Tax obligations

If you’re part of the gig or sharing economy, here are some considerations.

• You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year. (If a deadline falls on a Saturday or Sunday, the deadline is extended to the next business day.)
• You should receive a Form 1099-NEC, Nonemployee Compensation, a Form 1099-K or other income statement from the online platform.
• Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.

Diligent recordkeeping

It’s critical to keep good records tracking income and expenses in case you are audited by the IRS or a state/local tax authority. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an expensive surprise when you file your tax return next year.

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Business owners, year end is officially here. It may even be over by the time you read this. (If so, Happy New Year!) In any case, the end of one year and the beginning of another is always an optimal time to look back on the preceding 12 calendar months and ask a deceptively simple question: How’d we do?

Large companies tend to have thoroughly documented strategic plans in place, some stretching years into the future, that include various metrics for measuring whether they’ve achieved the growth intended. For them, reviewing a calendar year’s success in terms of strategic planning is relatively easy. They mostly just crunch the numbers.

For small to midsize businesses, the strategic planning process may be a little more informal and less precise. Yet even if your strategic plan isn’t a detailed document replete with spreadsheets and pie charts, you can still review actual performance against it and use this assessment to look ahead to 2022.

Areas that inform

Generally, there are three areas of most businesses that inform the success of a strategic plan. They are:

HR. Your people are your most valuable asset. So, how does your employee turnover rate for 2021 compare with previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

Much has been written this year about “the Great Resignation,” the trend of employees leaving their jobs for various reasons. How has it affected your company? Has it stymied your efforts to meet strategic goals? You may need to make hiring and retention efforts a focal point of your 2022 strategic plan.

Sales and marketing. Did you meet your monthly goals for new sales, in terms of both revenue and number of new customers? Did you generate an adequate return on investment (ROI) for your marketing dollars?

If you can’t clearly answer the latter question, enhance your tracking of existing marketing efforts so you can better gauge ROI going forward. And set reasonable but growth-oriented sales goals for 2022 that will make or keep your business a competitive force to be reckoned with.

Production. If you manufacture products, what was your unit reject rate over the past year? Or, if yours is a service business, how satisfied were your customers with the level of service provided?

Again, if you’re not sure, you may need to establish or enhance your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals. Many companies now use customer satisfaction scores or a customer satisfaction index to establish objectives and benchmark their success.

Flexibility and the right adjustments

By now, you should probably have at least the framework of a 2022 strategic plan in place. However, if you’re not that far along, don’t worry. Strategic plans are best when they’re flexible and open to adjustment as economic conditions and buying trends change.

This is particularly true when the year ahead looks as uncertain as this one, given the continuing impact of the pandemic. We can help you review your 2021 financials and use the right metrics to develop a cohesive, realistic strategic plan for the next 12 months.

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After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).

The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.

Don’t want to keep track of actual expenses?

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

How is the rate calculated?

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.

When can the cents-per-mile method not be used?

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return. 

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Year-end is a good time to plan to save taxes by carefully structuring your capital gains and losses.

Consider some possibilities if you have losses on certain investments to date. For example, suppose you lost money this year on some stock and have other stock that has appreciated. Consider selling appreciated assets before December 31 (if you think their value has peaked) and offsetting gains with losses.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. You may use up to $3,000 ($1,500 for married filing separately) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income (AGI).

Individuals are subject to federal tax at a rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most investments receive favorable treatment. They’re taxed at rates ranging from zero to 20% depending on your taxable income (inclusive of the gains). High-income taxpayers pay an additional 3.8% net investment income tax on their net gain and certain other investment income.

This means you should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they’re used to offset short-term capital gains or up to $3,000 per year of ordinary income. This requires making sure that the long-term capital losses aren’t taken in the same year as the long-term capital gains.

However, this isn’t just a tax issue. Investment factors must also be considered. You don’t want to defer recognizing gain until next year if there’s too much risk that the investment’s value will decline before it can be sold. Similarly, you wouldn’t want to risk increasing a loss on investments you expect to decline in value by deferring a sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, take steps to prevent those losses from offsetting those gains.

If you’ve yet to realize net capital losses for 2021 but expect to realize net capital losses next year well in excess of the $3,000 ceiling, consider accelerating some excess losses into this year. The losses can offset current gains and up to $3,000 of any excess loss will become deductible against ordinary income this year.

For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year. But suppose the stock is also an investment worth holding for the long term. You can’t sell stock to establish a tax loss and buy it back the next day. The “wash sale” rule precludes recognition of a loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale).

However, you may be able to realize a tax loss by:

• Selling the original holding and then buying the same securities at least 31 days later. The risk is interim upward price movement.
• Buying more of the same stock, then selling the original holding at least 31 days later. The risk is interim downward price movement.
• Selling the original holding and buying similar securities in different companies in the same line of business. This trades on the prospects of the industry, rather than the particular stock.
• Selling an original holding of mutual fund shares and buying shares in another fund with a similar investment strategy.

Careful handling of capital gains and losses can save tax. Contact us if you have questions about these strategies.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 17 (The usual deadline of January 15 is a Saturday)

• Pay the final installment of 2021 estimated tax.
• Farmers and fishermen: Pay estimated tax for 2021.

January 31

• File 2021 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• Provide copies of 2021 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
• File 2021 Forms 1099-MISC, reporting nonemployee compensation payments in Box 7, with the IRS.
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2021. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2021 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

• File 2021 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 15

• If a calendar-year partnership or S corporation, file or extend your 2021 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2021 contributions to pension and profit-sharing plans.

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In Notice 2021-61, the IRS recently announced 2022 cost-of-living adjustments to dollar limits and thresholds for qualified retirement plans. Here are some highlights:

Elective deferrals. The annual limit on elective deferrals (employee contributions) will increase from $19,500 to $20,500 for 401(k), 403(b) and 457 plans, as well as for Salary Reduction Simplified Employee Pensions (SARSEPs). The annual limit will rise to $14,000, up from $13,500, for Savings Incentive Match Plans for Employees (SIMPLEs) and SIMPLE IRAs.

Catch-up contributions. The annual limit on catch-up contributions for individuals age 50 and over remains at $6,500 for 401(k), 403(b) and 457 plans, as well as for SARSEPs. It also stays at $3,000 for SIMPLEs and SIMPLE IRAs.

Annual additions. The limit on annual additions — that is, employer contributions plus employee contributions — to 401(k)s and other defined contribution plans will increase from $58,000 to $61,000.

Compensation. The annual limit on compensation that can be taken into account for contributions and deductions will increase from $290,000 to $305,000 for 401(k)s and other qualified plans. This includes Simplified Employee Pensions (SEPs) and SARSEPs.

Highly compensated employees (HCEs). The threshold for determining who is an HCE will increase from $130,000 to $135,000.

Key employees. The threshold for determining whether an officer is a “key employee” under the top-heavy rules, as well as the cafeteria plan nondiscrimination rules, will increase from $185,000 to $200,000.

Participation in a SEP or SARSEP. The threshold for determining participation in either type of plan will remain $650.

Business owners, along with their HR and benefits staff or providers, should carefully note when the new limits and thresholds apply. Sometimes the answer isn’t obvious. For example, the 2022 compensation threshold used to identify HCEs will be generally used by 401(k) plans for 2023 nondiscrimination testing, not 2022.

Review your employee communications, plan procedures and administrative forms, updating them as necessary to reflect these changes. Whether your company offers a 401(k) or another type of defined contribution plan, we can provide further information on the applicable tax rules.

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Graphs, performance dashboards and other visual aids can help managers, investors and lenders digest complex financial information. Likewise, auditors also use visual aids during a financial statement audit to quickly identify trends and anomalies that warrant attention.

Powerful tool

Your auditor uses many tools and techniques to validate the accuracy and integrity of your company’s financial records. Data visualization — using a picture to show a relationship between two accounts or how a metric has changed over time — can help improve the efficiency and effectiveness of your audit.

Microsoft Excel and other dedicated data visualization software solutions can be used to generate various graphs and charts that facilitate audit planning. These tools can also help managers and executives understand the nature of the auditor’s testing and inquiry procedures — and provide insight into potential threats and opportunities.

4 Examples

Here are four examples of how auditors might use visualization to leverage your company’s data:

1. Employee activity in the accounting department. Line graphs and pie charts can help auditors analyze the number, timing and value of journal entries completed by each employee in your accounting department. Such analysis may uncover an unfair allocation of work in the department — or employee involvement in adjusting entries outside of their assigned area of responsibility. Managers can then use these tools to reassign work in the accounting department, pursue a fraud investigation or improve internal controls.

2. Activity in accounts prone to fraud and abuse. Auditors closely monitor certain high-risk accounts for fraud and errors. For example, data visualization can shine a spotlight on the timing and magnitude of refunds and discounts, highlight employees involved in each transaction and potentially uncover anomalies for additional scrutiny.

3. Journal entries prior to the end of the accounting period. Auditors analyze and confirm the timing and magnitude of your journal entries leading up to a month-end or year-end close. Timeline charts and other data visualization tools can help auditors understand trends in your company’s activity during a month, quarter or year.

4. Forecast vs. actual. Line graphs and bar charts can show how your company’s actual performance compares to budgets and forecasts. This can help confirm that you’re on track to meet your goals for the period. Conversely, these tools can also uncover significant deviations that require further analysis to determine whether the cause is internal (for instance, fraud or inefficiency) or external (for instance, cost increases or deteriorating market conditions). In some cases, management will need to revise budgets based on the findings of this analysis — and potentially take corrective measures.

Show and tell

Data visualization allows your data to talk. Auditors use these tools to better understand your operations and guide their risk assessment, inquiries and testing procedures. They also use visual aids to explain complex matters and highlight trends and anomalies to management during the audit process. Some graphs and charts can even be added to financial statement disclosures to communicate more effectively with stakeholders. Contact us for more information about using data visualization in your audit and beyond.

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Are you thinking about merging with or acquiring a business? CPA-prepared financial statements can provide valuable insight into historical financial results. But an independent quality of earnings (QOE) report can be another valuable tool in the due diligence process. It looks beyond the quantitative information provided by the seller’s financial statements.

These reports can help buyers who want more detailed information — and help justify a discounted offer price for acquisition targets that face excessive threats and risks. Conversely, when these reports are included in the offer package, it can add credibility to the seller’s historical and prospective financial statements. They may also help justify a premium asking price for businesses that are positioned to leverage emerging opportunities and key strengths.

Deep dive

QOE analyses can be performed on financial statements that have been prepared in-house, as well as those that have been compiled, reviewed or audited by a CPA firm. Rather than focus on historical results and compliance with U.S. Generally Accepted Accounting Principles (GAAP), QOE reports focus on how much cash flow the company is likely to generate for investors in the future.

Examples of issues that a QOE report might uncover:

• Deficient accounting policies and procedures,
• Excessive concentration of revenue with one customer,
• Transactions with undisclosed related parties,
• Inaccurate period-end adjustments,
• Unusual revenue or expense items,
• Insufficient loss reserves, and
• Overly optimistic prospective financial statements.

A QOE report typically analyzes the individual components of earnings (that is, revenue and expenses) on a month-to-month basis. This helps determine whether earnings are sustainable. It also can identify potential risks and opportunities, both internal and external, that could affect the company’s ability to operate as a going concern.

EBITDA vs. QOE

It’s common in M&A due diligence for buyers to focus on earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing 12 months. Though EBITDA is often a good starting point for assessing earnings quality, it may need to be adjusted for such items as nonrecurring items, above- or below-market owners’ compensation, discretionary expenses, and differences in accounting methods used by the company compared to industry peers.

In addition, QOE reports usually entail detailed ratio and trend analysis to identify unusual activity. Additional procedures can help determine whether changes are positive or negative.

For example, an increase in accounts receivable could result from revenue growth (a positive indicator) or a buildup of uncollectible accounts (a negative indicator). If it’s the former, the gross margin on incremental revenue should be analyzed to determine if the new business is profitable — or if the revenue growth results from aggressive price cuts or a temporary change in market conditions.

Flexible tool

Fortunately, the scope and format of QOE reports can be customized, because they’re not bound by prescriptive guidance from the American Institute of Certified Public Accountants. Contact us for more information about how you can use an independent QOE report in the M&A process.

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The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Background information

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 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).

2022 updates

For 2022, an employee will pay:

• 6.2% Social Security tax on the first $147,000 of wages (6.2% of $147,000 makes the maximum tax $9,114), plus
• 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), 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 a separate return).

For 2022, the self-employment tax imposed on self-employed people is:

• 12.4% OASDI on the first $147,000 of self-employment income, for a maximum tax of $18,228 (12.4% of $147,000); 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 a separate return).

More than one employer

What happens if an employee works for your business and 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? Unfortunately, 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 can help 

Contact us if you have questions about payroll tax filing or payments. We can help ensure you stay in compliance.

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