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A power of attorney for property is included in many estate plans because it allows you to appoint another person to pay your bills, file your tax returns, manage your investments, and handle your property in the event that you’re unable to do so. However, some powers of attorney are less powerful and effective than others, so it can be worthwhile to review your power of attorney periodically with your advisor and check to see if it continues to serve its intended purpose. 

Things to consider: 

How old is your power of attorney?

Your attorney-in-fact won’t be able to act on your behalf unless the relevant third parties agree to honor your power of attorney. If the power of attorney is several years old, banks and other third parties are often hesitant about following it. As such, it’s a good idea to sign a new one every two or three years.

How durable is your power of attorney?

“Durable” means that a power of attorney will continue in force if you become incapacitated. Not all states’ laws presume that powers of attorney are durable, so your power of attorney may become unenforceable unless it explicitly states that it’s durable.

Is your power of attorney powerful enough?

You’ll want to specifically include certain powers that your attorney-in-fact is authorized to use in the event that you become incapacitated. Otherwise, they may not have the authority to carry out your wishes as you intended. For example, if you want your attorney-in-fact to make gifts or estate planning decisions, such as transferring assets to a trust, you’ll need to specify that your attorney-in-fact has this authority.

When does your power of attorney take effect? 

If the state you live in allows “springing” powers of attorney, the specific event stated in the power of attorney must occur before your attorney-in-fact (the person you’ve appointed to hold your power of attorney) is authorized to act. In most cases, the power of attorney will be designed to “spring” in the event that you become incapacitated. If the state you live in doesn’t allow for “springing” powers of attorney, your attorney-in-fact can act at any time once the document is executed. 

Please contact us if you have questions or need assistance regarding power of attorney.

Managers need timely access to financial reporting in order to make informed business decisions and respond promptly to new developments. Unfortunately, preparing financial statements under U.S. Generally Accepted Accounting Principles (GAAP) usually takes several weeks, and many companies wait until the end of the quarter or year to produce GAAP financial statements. Simple “flash” reports are one tool managers can use to stay up to date in the meantime. 

How flash reports are used

Flash reports aren’t prepared according to any official standard, but they’re usually a single page or less and can be prepared in less than an hour. Their intended purpose is to give managers a weekly snapshot of important financial figures such as cash balances, collections, payroll, and accounts receivable aging. Some metrics like sales, shipments, and deposits may even be tracked daily. Flash reports are especially useful during seasonal peaks and for recently restructured companies.

A useful flash report will be customized to the needs of the specific company. A law firm may have more reason to track billable hours, for example, while a manufacturer might track machine utilization rates instead.

Flash reports are designed to draw managers’ attention to the items that are most important to the company. A restaurant’s flash reports might break down revenues by day of the week or distinguish between sales for alcohol and food. Restaurateurs will also want to carefully track food and liquor costs, labor, and gross margins.

Limitations of flash reports

Companies can identify problematic trends or exceptions by using comparative flash reports. For instance, the numbers in the current report can be compared to the previous week, compared to budgeted amounts, or compared to the same week in a previous year.

Investors and lenders may ask for copies of a company’s flash reports when the company is first starting up, rapidly expanding, or struggling—particularly if the company hasn’t always met projections for growth and profitability in the past. 

However, it’s vital for shareholders to understand that flash reports are designed for internal use only—while they provide a rough estimate of current performance, they are rarely 100% accurate. It’s common for cash to fluctuate throughout the month due to billing cycles, and adjustments are often made when preparing GAAP financials.

Contact us for assistance

If you’re relying on dated financial reporting, you might be surprised by unexpected threats or miss out on possible opportunities. Flash reports can help you make more informed decisions while waiting for your GAAP statements, as long as you’re aware of their limitations. If you need help implementing flash reporting that’s suited to the needs of your business, contact us. 

According to financial data provider Refinitiv, global merger and acquisition (or M&A) activity is expected to set new records in 2021 in response to low interest rates and other factors.

This year, the United States alone has already accounted for $2.14 trillion worth of transactions.

If you’re in the process of an M&A transaction or are considering buying or selling a business, you need to make sure the transaction is reported to the IRS in the same way by both parties. Failure to do so may increase your risk of being audited. 

Generally speaking, the buyer and the seller must report the purchase price allocations that they both use to the IRS if a sale involves business assets, rather than stock or ownership interests. In order to do this, both the buyer and seller need to attach IRS Form 8594, “Asset Acquisition Statement,” to their respective federal income tax returns when they file for the tax year in which the transaction took place.

What you need to report

When business assets are bought through an M&A transaction, the total purchase price must be allocated to those specific acquired assets. Each asset’s initial tax basis will be the amount that was allocated to it. 

After the acquisition, the initial tax basis of depreciable and amortizable assets will then determine the depreciation and amortization deductions for those assets. The following are examples of depreciable and amortizable assets:

• Buildings and improvements
• Equipment
• Furniture and fixtures
• Software
• Intangibles such as patents, licenses, customer lists, copyrights, and goodwill

You will need to report the items above on form 8594, in addition to disclosing whether the parties entered into a management contract, noncompete agreement, or other similar agreement, and the monetary consideration paid under such an agreement.

Points of focus for the IRS

The IRS may check to make sure that the buyer and seller use the same allocations by comparing the forms that are filed. If auditors discover that different allocations are used, they may decide to conduct a further examination that goes beyond the transaction itself. As such, you’ll want to make sure that both parties use the same allocations, and it may be worthwhile to make this a requirement of your asset purchase agreement.

Buying or selling a business comes with complex tax implications, and you’ll need to be careful in your reporting to avoid unwanted attention. Before you finalize a sale or purchase, contact us. We can help you ensure the best results after your acquisition.

Many people focus on issues of tax and asset-protection when planning their estate—but there’s good reason to plan ahead for your long-term health care needs. The costs of long-term care (LTC) can add up quickly and eat through the savings you rely on to maintain your lifestyle in retirement. They may also deplete the resources you plan to pass on to your children or other heirs. These insurance options can help you cover the costs of long-term care.

Long-term care insurance policies

As a supplement to your traditional health insurance, LTC insurance policies help to cover services that assist with activities of daily living, or ADLs, such as eating, dressing, bathing, and transferring in and out of bed.

Although LTC coverage tends to be relatively costly, purchasing a tax-qualified policy may allow you to reduce the cost. Benefits are typically tax-free when paid in accordance with an LTC, and tax-qualified policies may allow you to deduct your premiums as medical expenses up to a specified limit.

Tax-qualified policies require a physician’s certification that you either have severe cognitive impairment that has lasted or is expected to last at least 90 days or are unable to perform at least two of six ADLs. Policies must also be guaranteed renewable and noncancelable regardless of health in order to qualify. In addition, tax-qualified policies must not delay coverage of pre-existing conditions by more than six months, condition eligibility on prior hospitalization, or exclude coverage based on a diagnosis of dementia, Alzheimer’s disease, or similar conditions or illnesses.

While tax-qualified policies offer the advantage of a premium deduction, it’s worthwhile to consider their pros and cons. Since medical expenses are only deductible if you itemize and can only be deducted to the extent they exceed 7.5% of your adjusted gross income, or AGI, those who do not have enough medical expenses may not see any benefit. 

You should also compare the potential tax benefits of tax-qualified policies against the benefits of nonqualified policies, as nonqualified policies may have less stringent requirements for eligibility.

Employer-provided group LTC policies

Group LTC insurance plans may also be provided by employers and offer certain advantages over individual policies. For instance, employer-provided plans allow for discounted premiums and “guaranteed issue” coverage, which guarantees that eligible employees—as well as their spouse and dependents in some cases—will be covered regardless of their health status. Businesses are allowed to offer employer-paid coverage to a select group of employees, since group plans don’t fall under nondiscrimination rules.

There are also tax advantages to employer-provided plans. C corporations paying LTC premiums for employees are usually able to deduct the entire amount as a business expense, even if these payments exceed the deduction limit for individuals.

Asset-based policies

Hybrid (or “asset-based”) policies provide LTC benefits combined with whole life insurance or annuity benefits, and offer a number of advantages over standalone LTC policies. They typically have less stringent requirements for health-based underwriting, and the premiums for these policies are usually guaranteed, meaning that they won’t increase over time. Even more importantly, hybrid policies fund the tax-free LTC benefits from the death benefit or annuity value—which means that if the LTC benefits are never needed, those amounts will be preserved for your beneficiaries.

If you have further questions about the various LTC insurance options, contact us.

The rules governing depreciation tax deductions for business automobiles are complicated, and vehicles that are classified as passenger autos—such as SUVs and many pickups—fall under special limitations that may result in full depreciation taking longer than expected.

Here is a quick guide to some of the rules governing tax depreciation and deductions for business vehicles.

Calculating deductions

If you use the standard mileage rate when calculating deductions (for 2021 this rate is 56 cents per business mile driven), you won’t need to worry about any separate depreciation calculations, as the rate includes a built-in depreciation allowance.

If you choose to calculate deductions for your passenger auto using the actual expense method, however, you will need to make a separate depreciation calculation for every tax year until your business vehicle is fully depreciated. 

Under this general rule, depreciation is calculated as follows over a six-year span: 

• 20% for year 1
• 32% for year 2
• 19.2% for year 3
• 11.52% for years 4 and 5
• 5.76% for year 6

The straight-line method—rather than the percentages listed above—must be used to calculate depreciation deductions if your vehicle is used 50% or less for business purposes.

Specified annual depreciation ceilings apply for passenger autos whose cost is greater than the applicable amount for the year the vehicle is placed in service. These depreciation ceilings may change annually and are indexed for inflation.

If a passenger auto that cost more than $59,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows: 

• $18,200 for year 1 if you choose to deduct $8,000 of first-year bonus depreciation 
• $16,400 for year 2
• $9,800 for year 3
• $5,860 until the vehicle is fully depreciated

If a passenger auto that cost more than $51,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows: 

• $10,200 for year 1 if you don’t choose to deduct $8,000 of first-year bonus depreciation
• $16,400 for year 2 
• $9,800 for year 3
• $5,860 until the vehicle is fully depreciated

These ceilings are reduced proportionately for any nonbusiness use of the vehicle, and the straight-line method will need to be used to calculate depreciation deductions for any vehicle that is used 50% or less for business purposes.

Depreciation rules for larger vehicles

Vans, SUVs, and pickups that are used over 50% for business and have a gross vehicle weight rating (GVWR) of over 6,000 pounds may be eligible for much more favorable depreciation rules since they’re classified as transportation equipment for depreciation purposes. Many SUVs and pickups are heavy enough to meet this specification—check the label on the inside edge of your vehicle’s driver-side door to find the vehicle’s GVWR rating.

Depreciation limits affect after-tax values

These depreciation limits are important to keep in mind because the tax savings from related depreciation deductions reduce the true cost of a business asset—thus changing the after-tax cost of your business vehicle. And due to time-value-of-money considerations, the value of the related tax savings is reduced to the extent depreciation deductions are reduced and therefore deferred to future years.

If you lease an expensive, business-owned passenger auto, different rules will apply. For more information, contact us.

The Newly Expanded Employee Retention Credit provides immediate cash-flow relief to eligible employers that have been impacted by the COVID-19 pandemic. Employers can receive as much as $5,000 per impacted employee for 2020 and up to $28,000 per impacted employee for 2021!

Wondering what it means for you and how to take advantage of it? We have all the information you need. 

What is the Employee Retention Credit?

The American Rescue Plan Act of 2021 (“ARPA”) extends and expands the Employee Retention Credit (“ERC”) through December 31, 2021. The ERC was originally enacted in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The Consolidated Appropriations Act of 2021 (CAA) previously extended and enhanced the ERC, most notably by retroactively allowing employers to claim the ERC even if they took a PPP loan. Under the CARES Act, you could take a PPP loan or claim the ERC, but not both. Eligibility for the ERC is based on a significant decline in gross receipts (further explained below), or fully or partially suspended operations due to a government order related to COVID-19.

What you Need to Know

The enhanced ERC under ARPA follows the more favorable 2021 rules originally enacted as part of the CAA. These rules include:

• Lowering the threshold for meeting the “eligible employer” standard under the gross receipts test (requiring only a 20% decline in gross receipts compared to a 50% decline required for the 2020 ERC);
• Raising the credit rate to 70% (from 50% in 2020);
• Raising the maximum qualified wages to $10,000 per quarter (from $10,000 aggregate for all of 2020);
• Raising the “small employer” limit to 500 full-time employees (compared to 100 full-time employees for the 2020 ERC)—a small employer is allowed to claim all wages paid during the eligibility period; while large employers can only claim the ERC for wages paid to employees not providing services.

As a result, the maximum ERC per employee for 2021 is now $28,000, compared to $5,000 for the 2020 version of the ERC.

Plus: New in 2021

ARPA provides additional expanded benefits for the ERC—these two changes are only applicable to the third and fourth calendar quarters of 2021.

First, the ERC is now available for “Recovery Startup Businesses.” This provision is applicable to startup companies that opened a trade or business after February 15, 2020, and have average annual gross receipts that do not exceed $1M. Start-up companies that meet these criteria are eligible to claim the ERC even if they don’t meet the significant decline in gross receipts or suspension of operations tests outlined above. The amount of ERC available per employer under this provision is capped at $50,000 per quarter.

Secondly, ARPA also provides an expanded ERC benefit to “Severely Financially Distressed Employers.” To qualify under this provision, an employer must suffer at least a decline of 90% gross receipts in the quarter compared to the same quarter in 2019. Large employers (over 500 full time employees) that meet this threshold are eligible to claim the ERC for all wages paid (not limited to wages being paid when no services are being provided).

How we can help you

There’s a lot of pieces involved in the ERC. To make sure you get the maximum benefit possible while staying compliant, we can help you with:

Analysis. Help you collect payroll information, gross receipts, partial suspension facts, and qualifying PPP expense data.

Monetization. Provide you with an estimate of your ERC benefits and work with your payroll personnel to obtain your benefits quickly.

Documentation. Prepare a detailed ERC tax study to support your ERC claim. This will include technical documentation of your specific qualification and ERC calculation.

We also provide a complete spectrum of services from the computation of the ERC, assistance with realization of benefit through your payroll tax filing process, documentation of your ERC in a detailed tax credit study and IRS audit representation if necessary.

Need help with claiming your ERC benefits? Get in touch – we’re here to help. 

Despite being a normal and sometimes necessary part of operating a business, related-party transactions have developed a bad reputation because they’re sometimes used to disguise poor performance or dishonest activities. Because of this, it’s important for your external audit process to identify related parties and evaluate your interactions with them—especially when market conditions are as volatile as they are today.

How related parties are defined

When it comes to accounting, the term “related parties” is used to refer to “any party that controls or can significantly influence the management or operating policies of the company to the extent that the company may be prevented from fully pursuing its own interests.” 

The following are some examples of related parties:

• Affiliates and subsidiaries
• Trusts for the benefit of employees
• Principal owners, officers, directors and managers
• Immediate family members of owners, directors or managers
• Investees accounted for by the equity method

Auditing and related parties

Auditing standards have three main areas of focus when it comes to related parties:

• Related-party transactions
• Major transactions that fall outside the company’s normal course of business or appear to be unusual due to their size, nature, or timing
• Any additional financial relationships involving the company’s owners, managers, directors, or officers

Auditors will attempt to arrive at an in-depth understanding of any related-party financial transactions or relationships and will attempt to ascertain their nature, terms, and business purpose (or, as the case may be, lack of business purpose). During the audit, auditors will gather information that may reveal undisclosed related parties, such as tax filings, information contained on a company’s website, corporate life insurance policies, contracts, and organizational charts.

Bill-and-hold arrangements, contracts for below-market goods or services, subsequent repurchase of goods sold, and uncollateralized loans are also questionable transactions which may suggest unusual or undisclosed related-party transactions to auditors.

Executive compensation

Executives have both the power and the incentive to influence financial reporting in order to meet financial targets. Because of this, auditors apply heightened scrutiny to executive compensation. The auditing standards demand an in-depth assessment of executive compensation, including stock options and performance-based bonuses.

Auditors aren’t required to make recommendations or determinations concerning the reasonableness of compensation arrangements—but they will test the completeness and accuracy of the disclosures and reporting surrounding these transactions. 

Contact us for assistance

Presenting your related-party transactions and relationships openly and completely is appreciated by lenders, investors, and other stakeholders. Even if you aren’t sure that a related-party transaction needs to be disclosed or consolidated on your company’s financial statements, you can still help facilitate the audit process by being up-front with auditors about these transactions.

For more information on how related-party accounting rules might apply to your financial relationships and transactions, contact us. 

The Small Business Administration has declared the week of September 13-17 to be National Small Business Week. Here are three tax breaks you should consider as we celebrate small businesses this week.

Tax breaks for asset additions

Qualified new and used property that is acquired and placed into service by your business this year is eligible for 100% first-year bonus depreciation under current law. Because of this, you may want to consider making new acquisitions by December 31, as you may be able to write off the full cost of some or all of these asset additions on this year’s return. 

However, it’s worth noting that claiming a 100% bonus depreciation deduction in the first year you place a qualifying property in service isn’t always the best idea. For instance, it might be better to depreciate your 2021 asset acquisitions over time instead of taking the bonus depreciation if you have reason to suspect that tax rates will rise in the future due to a change in income or tax law.

Certain asset purchases may also be eligible for a Section 179 deduction. For qualifying property that is placed in service in 2021, the maximum deduction available through Section 179 is $1.05 million. 

Although both Section 179 and bonus depreciation have been enhanced by recent tax laws, most businesses will see more benefit by claiming bonus depreciation. You don’t have to decide which to claim until you file this year’s tax return, and we can help guide you through the details of these tax breaks so you can decide which is right for your business.

Tax breaks for heavy vehicles

Heavy vehicles are treated as transportation equipment for federal tax purposes, which means that new and used heavy SUVs, pickups, and vans qualify for 100% first-year bonus depreciation as long as they’re used for over 50% for business. 

This tax break can only be claimed for vehicles with a gross vehicle weight rating (GVWR) of above 6,000 pounds. The manufacturer’s label, which is usually located on the inside edge of the driver’s side door, should state the GVWR for the vehicle.

Your business may be able receive a significant write-off on this year’s tax return if you invest in an eligible heavy vehicle and place it in service before the end of 2021. We can help you decide what’s best for your business prior to signing a sales contract.

Pass-through business QBI deductions

Qualified business income (QBI) from pass-through entities is eligible for another valuable deduction. Up to 20% of a pass-through entity owner’s QBI can be deducted for tax years through 2025, although some restrictions may apply based on the owner’s taxable income at higher income levels.

For the purposes of QBI deductions, pass-through entities include sole-proprietorships, partnerships, single-member LLCs that are treated as sole proprietorships for tax purposes, and LLCs that are treated as partnerships for tax purposes. Taxpayers that qualify for these deductions can also claim a deduction for up to 20% of qualified income from publicly traded partnerships and 20% of income from qualified real estate investment trust dividends.

Due to various limitations on QBI deductions, certain tax planning moves might unexpectedly increase or decrease them. For instance, strategies that reduce your taxable income for this year might have the unwanted consequence of reducing your QBI deduction. 

Contact us for assistance

There are also many other tax breaks that may be available to your small business. If you need assistance optimizing your tax results or evaluating your options, contact us.

The need for social distancing is likely to continue as COVID-19 cases surge in many states—and that may cause additional complications when it comes to estate planning. While planning your estate is as important as it’s ever been, putting a plan together and executing critical documents can be a challenge if you’re trying to avoid in-person meetings or if you need to self-quarantine.

Thankfully, it’s possible to do much of your estate planning from home. Different states have significantly different requirements, and it’s important to consult with an estate planning advisor prior to putting a plan into action, but these strategies may help you plan your estate while social distancing guidelines are still in effect.

Remote planning is possible

While meeting in person with your advisor has its advantages, it’s also possible to discuss creating or updating an estate plan using video conferences or phone calls. You can also  transmit and review document drafts via email, traditional mail, or secure online portals.

Under normal circumstances, estate planning documents are usually executed in an attorney’s office with witnesses and a notary public present. You may still be able to sign the necessary documents in person by taking the appropriate precautions—but there are also available alternatives that may allow you to execute documents outside the attorney’s office.

Options for remotely executing documents

Your options for executing a given document will depend at least partially on the type of document being signed:

Wills 

Most states require that at least two witnesses be physically present at the signing of typewritten wills (or the signing of modifications or codicils to existing wills). Typically, there is also an additional requirement that these witnesses be “disinterested,” meaning that they won’t receive an inheritance through the will or otherwise benefit from it. 

The rules governing acceptable witnesses vary by state, however. You may still be able to conduct your will signing at home (after consulting with your attorney) if you live in a state that allows family members and other interested parties to serve as witnesses. In this case, you can simply have your family members witness the signing.

Notarizing your will may present another issue. Although most states don’t require it, wills are usually notarized as a best practice, and the self-proving affidavit that is attached to many wills also requires notarization.

Some states may offer an additional alternative in the form of “holographic,” or handwritten, wills. Unlike typewritten wills, handwritten will typically don’t require notarization of the presence of witnesses.

Trusts

Many states allow for the signing of trust documents without witnesses or notarization, and you may even be able to sign a trust electronically. One way to avoid the typical signing requirements for a will is to transfer all assets to a revocable trust by signing a holographic “pour over” will—this strategy may allow you to accomplish many of the goals of a traditional will without requiring an in-person signing.

Monitor legal developments

In recent years, certain changes have been made to the requirements for signing estate planning documents, and future changes may be accelerated by the COVID-19 pandemic. 

A handful of states permit online notarization and electronic wills (e-wills), meaning that you may be able to execute these documents without being required to physically interact with anyone. While these technologies are relatively new, their adoption is being considered by lawmakers in several states. 

If you have questions about your estate planning documents, contact us today. 

As the economy reopens, many businesses have started to resume business-related travel and entertainment (T&E) activities—but you should be aware that these expense categories can be vulnerable to incomplete recordkeeping and even fraud. To ensure that reporting is complete, detailed, and accurate, your company will want to implement formal T&E policies.

T&E expenses: reporting and reimbursements

Expense reports enable workers who travel or entertain customers to receive reimbursement for expenses they pay personally. Traditionally, salespeople, executives, and other workers who incur such expenses must submit expense reports either at the end of each trip or by the end of the month the expenses are incurred in, then have these reports approved by supervisors. As an alternative, some companies may issue corporate credit cards which employees can use to cover approved T&E expenses.

Expense reports are typically required to include the following information in order to comply with financial reporting and tax rules:

• The time and place of the expense
• The business purpose of the expense
• The amount of the expense

If the expense is for meals or entertainment, the report must also include the business relationship between the taxpayer and any person fed or entertained.

When expense reports are submitted for T&E items that are above a predetermined limit (typically $25 or $50), most companies require employees to submit copies of original receipts instead of using credit card statements.

Airfare, lodging, rental cars, auto mileage, gas and tolls, taxis and ride-sharing services, business phone calls, wi-fi access charges, tips, and meals are a few common examples of costs that might qualify for reimbursement.

Entertainment expenses including sporting event tickets, fishing excursions, and green fees are typically eligible for reimbursement if the company’s T&E policy permits it. Under U.S. Generally Accepted Accounting Principles (GAAP), these expenses are deductible for book purposes, although they aren’t deductible under current tax law.

Common issues with expense reports

Many employees dread completing expense reports—but there’s good reason to avoid the temptation to procrastinate. Submitting expense reports at the very end of the reporting period can cause significant problems, as it may be hard to locate the right receipts or recall the details of a business trip weeks or months later. You’ll want to fill out and submit expense reports quickly after a trip to help avoid errors and omissions.

It’s also not uncommon for employees to “cheat” on expense reports. A dishonest employee may overstate expenses, for example—or they may change numbers on a receipt, request multiple reimbursements, or use other methods to falsify their expense reports. Mischaracterizing expenses by using legitimate receipts for nonbusiness-related activities is one of the most common methods of this kind of fraud.

Implement the right T&E policies

It may be a good idea to review your T&E reporting practices and implement formal policies where needed. For instance, your company can take the time to remind employees what expenses are considered reimbursable, as well as how often they should submit expense reports. These policies can help you avoid misunderstandings and make it easier to punish infractions when they do occur.

Expense tracking software may also be a worthwhile investment for your company, as it can help managers spot inconsistencies in expense reporting. In addition, you’ll want to keep an eye out for managers who override T&E policies to ensure that everyone in your organization is held to the same standards.

If you’d like more information on best practices for T&E expense reporting, contact us. We can help you reduce your chances of omissions, errors, and fraud.