Learning Center for Tax and Financial Insights

Article HighlightsThe Importance of Business Succession PlanningThe Main IssuesThe People AspectThe Money AspectCross-Purchase AgreementsEntity-Purchase AgreementsSales, Gifts, and InheritancesSummaryThe Importance of Business Succession PlanningEvery business – large and small – needs a business succession plan. Just like Warren Buffett and Jeff Bezos prepared for the day that they would step away from the C-suite, every small and mid-sized business owner should plan ahead so that the transfer of the leadership and/or ownership of their businesses will be smooth and effective, whether a sudden change requires it or a planned change occurs.The Main IssuesThe main issues addressed by business succession planning relate to people and money.The People AspectThe people aspect deals with ensuring that the most qualified individuals are ready to take leadership roles when needed.With large corporations, a select pool of talent is generally available to take the reins when a CEO steps down. The Board of Directors and CEO will identify the people from within the company they believe are best qualified to assume top leadership roles. Industry leaders in the same or related industries can be added to the list so that the best talent will take charge of the company after a change.With small to mid-sized companies, the decision might not be so easy. As the hit TV show “Succession” demonstrates, there are often several people who consider themselves to be viable successors but, often, there are none who possess all the characteristics required to run the company. This can be especially true with family-run and other closely-held businesses. For example, if a business owner has three children running different aspects of the business, which one has the experience and character to lead the company into the future when the parent leaves the company? How will the siblings respond to this choice? Will they stay with the company and focus on its continued success or will they leave for a different challenge? How does the current owner incentivize each of them so that they see the benefit of staying with the company after the parent has left? The longer the issue remains undecided or unannounced, the greater the stress on all the parties and the business. Once a successor is announced, the owner can more freely share his or her knowledge with the designated individual so that the company can continue forward after the leadership change without missing a beat.The Money AspectWhile the people aspect is key to always having talented leadership in place, the money aspect of a change in ownership can also endanger the future of a business. This is not an issue with a corporation – especially when its stock is widely held. The outgoing leader often retains his or her stock but can also sell, gift, or otherwise transfer his or her shares. In most cases, what the outgoing leader does with his or her stock is inconsequential to the company’s future.With a partnership, however, a partner’s exit can dissolve the partnership or require a restructuring and/or refinancing of the business. If the outgoing partner has died, the disposition of his or her interest in the partnership must be addressed in one way or another. It’s important to have a written partnership agreement that specifies what is to happen when a partner leaves.Cross-Purchase AgreementsInsurance is one way to prepare for a partner’s exit. With cross-purchase agreements, the partners buy and own insurance policies on one another so that, if one partner dies, the remaining partners have the funds to buy out his or her interest at a previously-set price. The value of the insurance policies is based on the value of each partner’s interest. This is calculated by dividing the value of the business – preferably determined by a qualified appraisal – by the number of partners (or multiplying by their respective percentage interests if not equal). The insurance coverage is then equal to the value of the partner’s interest divided by the number of remaining partners (or multiplied by their ownership percentages if not equal). For example, if there are 5 equal partners and the business is valued at $6 million, the value of each partner’s interest is $1.2 million. Each partner would purchase an insurance policy on each of the other partners with a face value of $300,000. If one partner dies, the others would then have $1.2 million in insurance proceeds (4 remaining partners times $300,000) to buy out the deceased partner’s $1.2 million interest. Valuation of the business should be redetermined periodically so that the amount of the insurance coverage can be adjusted when needed.

Recently, the Internal Revenue Service (IRS) has markedly intensified its efforts to uncover instances of tax evasion, leaving no room for tax dodgers to go unnoticed. A striking case that serves as a stern reminder of this heightened scrutiny involves Dr. Fares J. Rabadi, a dedicated physician based in Los Angeles. Dr. Rabadi found himself entangled in legal troubles, having pleaded guilty to the offense of filing erroneous tax returns that deliberately misrepresented his income by an alarming margin surpassing $500,000.The repercussions of tax crimes resonate deeply within our society. These illicit acts compromise the availability of crucial government resources for essential sectors like healthcare, defense programs, and national security. As voiced by Special Agent in Charge Tyler Hatcher of the IRS Criminal Investigation (CI) Los Angeles Field Office, "Tax crimes harm everyone. Dr. Rabadi intentionally attempted to conceal his true income from his accountants and the IRS. CI special agents will always hold tax cheats accountable."However, the narrative could have taken a different course had Dr. Rabadi chosen to deploy well-established and lawful tax planning strategies. These strategies could have provided him with a legitimate means to substantially mitigate his tax liabilities while adhering to the boundaries of the law.Empowering Physicians: 10 Proven Tax Strategies for Financial SecurityPractice Incorporation: Physicians can incorporate their practice, enabling them to harness the advantages of reduced corporate tax rates. Additionally, this approach extends liability protection, a feature pivotal for safeguarding personal assets.Retirement Plan Contributions: Physicians can significantly impact their tax liability by contributing to retirement plans, such as 401(k)s, IRAs, and SEP IRAs. These contributions hold the potential to be tax-deductible, thereby effectively lowering their taxable income.Leveraging Family Resources: If a physician's practice has familial roots, enlisting the involvement of family members – such as a spouse or children – can yield favorable tax outcomes. This strategy operates on income distribution to individuals within lower tax brackets.Deductions for Medical Equipment: Physicians can legitimately deduct the expenses related to medical equipment used in their practice, encompassing equipment procured, leased, or financed.Home Office Expenses: For physicians operating out of a home office, the prospect of claiming a home office deduction exists. This provision covers a portion of mortgage payments, utility costs, and other pertinent home-based expenditures.Professional Advancement: Tax-deductible expenses can be derived from investments in professional growth, including expenditures on continuing education courses and other pertinent developmental activities.Harnessing Health Savings Accounts (HSAs): Physicians can direct funds towards Health Savings Accounts, creating a tax-advantaged vehicle tailored to future medical expenditures.Charitable Giving Deductions: Deductions can be claimed for charitable contributions to eligible organizations, permitting physicians to give back while benefiting from tax relief.Business Travel and Entertainment: Expenses related to business-related travel and entertainment engagements can be tax-deductible, provided they are demonstrably associated with professional endeavors. The S-Corporation Advantage: Should a physician's practice meet the criteria, electing for S-Corporation status can yield substantial tax benefits. This encompasses preventing double taxation and the transference of business losses into personal income calculations.

Article HighlightsStarting a BusinessWhat Expenses Qualify as Start-up and Organizational CostsTax Treatment of Start-up and Organizational CostsCommon Start-up and Organizational CostsSummaryStarting a business can seem daunting to the prospective entrepreneur. A step-by-step plan to get started can alleviate some of the angst. The cost of getting started is one of the first considerations. These costs can be identified and addressed in a solid business plan.Before getting into the details, let’s first define a couple of terms used extensively when discussing start-up and organizational costs:Amortize: Amortization is a method of deducting certain capital costs over a fixed period. It is like the straight-line method of depreciation.Capitalize: When capitalizing a cost or expense, the amount is entered on the business’s balance sheet and full recognition of the expense is delayed, until the business is closed or sold, although for tax purposes some assets can be depreciated (i.e., the cost is recovered over a specified period).What Expenses Qualify as Start-up and Organizational Costs - Per IRS Publication 535, “Startup costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.”An expense qualifies as an amortizable start-up cost if:It would be deductible if the business was already operating in the same field, andIt was paid or incurred before the business began operating.Costs incurred to investigate the purchase of an active trade or business are treated as amortizable start-up costs. Costs incurred to attempt to acquire an ongoing business are not considered start-up costs, and so must be capitalized.Referring again to IRS Publication 535, an expense qualifies as an amortizable organizational cost if:It was incurred for the purpose of creating the business structure,It is chargeable to a capital account,It would be amortizable over the life of the business if it had a fixed life,It was incurred by the end of a corporation’s first year of operations or prior to a partnership’s first tax filing date, excluding extensions, andAs to partnerships, it is the type of expense that would be expected to benefit the partnership over its lifetime.Tax Treatment of Start-up and Organizational Costs - Start-up and organizational costs generally must be capitalized and will only be recovered when you sell or close your business. Some assets can be depreciated but the rest are capitalized.You can, however, choose to amortize eligible start-up and organizational costs over 180 months. The 180-month period begins with the month in which you first operate your business. No election is required to amortize start-up costs. You just take the deduction on your tax return. However, you ARE required to attach a statement to your tax return if you choose NOT to amortize these costs.You can also elect to deduct up to $5,000 in eligible business start-up costs and $5,000 of eligible organizational costs in your first year of operations. These figures are reduced for every dollar by which your start-up or organizational costs exceed $50,000.Once filed, an election to deduct or capitalize start-up and organizational costs is irrevocable.Common Start-up and Organizational Costs - You can’t start a business without incurring some expense. Following are some common examples of business start-up and organizational costs. Remember, they are only considered start-up or organizational costs if they are incurred before you start business operations. Any expense you incur on or after the day you start your business is an operating expense, not a start-up or organizational cost.Organizational Costs including Licenses and Permits – Most new business owners create a business structure before operations begin. A corporate structure can limit your personal liability for the risks inherent in running a business. Partnership agreements define how multiple owners will work together if no corporation is created. Sole proprietorships do not require the formation of a separate entity.Regardless of business structure, most businesses need to obtain licenses and permits from the jurisdictions in which they will operate. These costs are considered organizational costs if incurred prior to the start of operations.

Generally, tax records should be kept for 3 years from the due date of the return to which they apply. Or if the return was filed after the due date, 3 years from the actual filing date. The statute of limitations can be longer if there is fraud, or a return was not filed. Add 2 years if your state statute is longer. Basis records for stock, property and other assets must be kept until the statute expires for the year of sale.

Getting a letter from the IRS can make some taxpayers nervous – but there’s no need to panic. The IRS sends notices and letters when it needs to ask a question about a taxpayer's tax return, let them know about a change to their account or request a payment.

Article Highlights:What is unclaimed property?How can you find unclaimed property?Is the unclaimed property you find taxable?What are your chances of finding unclaimed property in your name? Unclaimed property refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for a period of one year or longer (depending upon state law). It is estimated that one out of ten Americans have unclaimed property or money floating around somewhere.Common forms of unclaimed property include savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds, life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, contents of safe deposit boxes, and IRA or other types of retirement accounts. Even tax refunds from the IRS.Financial institutions and companies will turn these funds over to a state unclaimed property department where the funds are held until claimed by the owner. This process is termed escheatment. This typically occurs when you relocate, close a business address, misplace a check, etc. It can also occur if you are the beneficiary of an estate and the trustee is unable to locate you. You may even discover forgotten accounts of now deceased relatives if you take the time to search each one.There are various ways to locate these assets. There are commercial firms that may seek you out. However, you can perform a search for free in a number of ways. For instance, each state has a website for its unclaimed property department, allowing you to search state by state. Generally, you would only search the states where you (or a long-lost or deceased relative) has been a resident.There is also a website developed by the National Association of Unclaimed Property Administrators (NAUPA) that provides links from a map to each individual’s state’s search site, Canadian provinces, some foreign countries, and various government agencies.Each state has its own process – normally pretty straightforward – when you’re ready to claim your lost money. You need to be prepared to show proof of ownership of whatever you are claiming, such as a pay stub, utility bill or your Social Security number. You will also need to have proof of identity, like a copy of your driver’s license or passport. Processing times vary by state but some can take less than 30 days.Some other government sources with searchable databases include:The IRS website for any undeliverable tax refunds.The Pension Benefit Guaranty Corporation for unclaimed pension money.The U.S. Treasury Hunt for unclaimed savings bonds, registered Treasury notes or registered Treasury bonds.