Month: September 2024

Preface: “The Bible tells us that God ordains the powers that be. Our confidence is not in the outcome of an election, but in the unchanging purposes of God.”  – Alastair Begg

10 Best Words of Advice on Tax Planning for Business Owners During a Presidential Election

Presidential elections often bring significant shifts in policy, and tax laws are frequently at the forefront of these changes. For business owners, staying ahead of potential tax law changes and making informed financial decisions is crucial. A proactive approach to tax planning can help mitigate risks, optimize savings, and prepare your business for any eventual outcomes. Here are ten essential pieces of advice for business owners charting a course for tax planning during a presidential election cycle.

1. Stay Informed on Policy Proposals

During a presidential election, candidates often propose significant tax reforms that could impact businesses. These proposals might include changes to corporate tax rates, deductions, credits, or other tax-related incentives. Stay updated on each candidate’s tax platform, and consult with a tax professional to assess how potential changes might affect your business. Keeping an eye on these developments and the tax implications to you, helps you anticipate future scenarios and adjust your planning strategies accordingly.

2. Evaluate the Impact of Corporate Tax Rate Changes

One of the most common changes discussed during presidential elections is the corporate tax rate. These shifts can dramatically affect the bottom line for businesses, particularly corporations. If tax cuts are on the table, it could mean additional liquidity for reinvestment. On the other hand, if tax rates are set to rise, it might be wise to accelerate income or defer expenses to manage your tax burden efficiently. Planning for these tax scenarios can save you significant amounts in taxes.

3. Consider Accelerating Deductions or Income

In an uncertain political climate, consider adjusting the timing of income and deductions based on anticipated tax reforms. If you expect tax rates to increase in the near future, you might want to accelerate income recognition or delay certain expenses to reduce your taxable income under the current, lower rates. Conversely, if lower tax rates are likely, deferring income and accelerating expenses may be a sound strategy to take advantage of favorable future tax conditions.

4. Maximize Available Tax Credits

During an election cycle, many discussions center around tax credits and incentives for businesses. Potential changes could include new or expanded credits for research and development, clean energy investments, or hiring. It’s crucial to make full use of any credits you’re eligible for while they’re still available. Work closely with your accountant or tax advisor to identify and claim any credits or incentives that apply to your business before they potentially change or expire under a new administration.

5. Focus on Retirement Plan Contributions

Retirement plan contributions are a powerful tool for reducing taxable income while securing your financial future. Depending on the election outcome, retirement savings rules and limits could change. Maximizing contributions to retirement plans such as 401(k)s, SEP IRAs, or SIMPLE IRAs can reduce your current taxable income and prepare you for potential changes in contribution limits or tax treatment in the future. It’s a tax-saving strategy that also enhances your long-term financial health.

6. Keep an Eye on Payroll Taxes

Payroll taxes are often a topic of debate during election cycles, with proposals ranging from payroll tax holidays to increases in Social Security and Medicare taxes. These changes can significantly affect both your business and employees. If a candidate proposes increasing payroll taxes, be prepared for how this will impact your overall labor costs. On the other hand, if a payroll tax cut is imminent, you may want to strategize around how to best use the extra cash flow in your business.

7. Prepare for Possible Changes in Depreciation Rules

Tax rules around depreciation often change with new administrations, especially concerning the deduction of capital expenditures. Current rules under Section 179 and bonus depreciation allow businesses to deduct large portions of their capital investments in the year they’re made. If these rules are under threat, consider purchasing equipment or other qualifying assets before the laws change, allowing you to take advantage of more favorable deductions before they potentially disappear or are reduced.

8. Review Your Entity Structure

A presidential election is a good time to evaluate your business’s legal structure. Changes to tax rates for corporations, pass-through entities (like LLCs and S corporations), or sole proprietors may impact which structure is most advantageous for your business. Depending on the policy proposals, you may find that switching to a different business entity could result in significant tax savings. For instance, lower corporate tax rates could make a C corporation structure more appealing, while changes to pass-through taxation may impact LLCs and partnerships.

9. Understand the Impact of Estate and Gift Tax Proposals

Election cycles often bring discussions of estate and gift tax reforms, which can affect long-term wealth planning for business owners. If a candidate is proposing to lower the estate tax exemption or increase the estate tax rate, it may be wise to consider estate planning strategies such as gifting assets, transferring shares, or setting up trusts before these changes take effect. Understanding how estate tax policies could shift can help protect your business’s future and your family’s legacy.

10. Consult with a Tax Professional Regularly

Above all, work closely with a qualified tax professional who can guide you through these uncertain times. Tax law is complex, and election cycles can introduce significant changes in a short period. A tax advisor who stays updated on both current laws and potential future changes can help you make strategic decisions to optimize your tax position. They can assist with everything from entity restructuring to capital investments and retirement contributions, ensuring your business is prepared for any tax law changes that follow the election.

Conclusion

A presidential election introduces a period of change, particularly often regarding tax policy. By staying informed, reviewing your business’s tax strategies, and working closely with a tax professional, you can make proactive decisions that safeguard your financial well-being. Whether it’s adjusting your income and deductions, maximizing credits, or preparing for changes in payroll or corporate tax rates, strategic tax planning is essential to successfully navigating the tax landscape during an election cycle. Proper planning ensures your business remains resilient, no matter the political outcome.

Preface: “Giving does not only precede receiving; it is the reason for it. It is in giving that we receive.” – Israelmore Ayivor

What Every Generous Business Owner Should Know

Would you like to give more but simply don’t have the cash flow? What if your most valuable asset – your business – could be leveraged to dramatically increase, even double, your giving? This is the secret of business-interest giving. Explore this case study to discover how it works, and see if this strategy could be right for you.

Many Christian business owners have a heart for charitable giving. As men and women who view themselves as stewards, rather than owners, they see the assets they manage as God’s and believe profits should serve a higher purpose.

The good news is that, with the right strategy, owners are transforming millions of dollars from their business into vital support for ministry work … and their personal lives, families, employees, and communities have been changed in the process.

What’s the secret?

1. 1. Most business owners are not aware they can give a portion of their business to charity.
   2. Giving an interest in a business allows income from the gifted portion to flow directly to charity, which often results in more charitable giving and lower income tax for the giver.
   3. Giving an interest in a business may enable owners to double their current cash giving by giving from the tax savings produced by the business-interest gift to charity.

Successful business owners throughout the country are discovering the unique ways in which they can use their companies as engines for generosity. Let me explain it using an example, a real-life couple we’ll call the Keplers.

Bill and Katrina Kepler own and operate a water damage restoration company. The company produced about $1 million of net profit last year and was recently valued at $10 million. The business has grown by double digits from its inception 12 years ago, and it’s expected that the company’s performance will continue for the foreseeable future.

The Keplers are a generous family who give approximately $100,000 annually to various charities. In addition to supporting their local church, they are actively involved in supporting missions helping their city’s homeless community, and they have a deep passion for combating human rights abuses globally – especially human trafficking. They also give very generously of their time.

Considering their healthy annual income, Bill and Katrina live a relatively modest lifestyle. They live exclusively on the $200,000 salary that Bill receives from the company. Because of the high growth prospects the business has enjoyed from its inception, Bill has always reinvested most of his profits in the business. However, reinvestment has limited the Keplers’ capacity for charitable giving. They would love to give more, but they simply lack the available cash resources with which to do so. Or so they thought.

An engine that accelerates generosity

Then, a savvy advisor shared a strategy with the Keplers that allowed them to increase their annual giving dramatically, even doubling their current cash giving, by using their most valuable financial asset – their business.

The Keplers’ advisor explained how they could gift a minority interest in their business and take a charitable deduction for the fair market value of this gift. When giving both cash and non-cash assets to charity, taxpayers can generally deduct up to 50 percent of their income each year for their charitable contributions. Of that total allowable deduction, they may deduct up to 30 percent of their income for the non-cash gift portion of their giving.

So, the Keplers’ advisor encouraged them to make a charitable gift of an interest in their business equal to $300,000, which is 30 percent of their $1 million in income (including wages and income passed through to them from their business). Based on the value of their business, this represented a gift of a three-percent interest ($10 million divided by $300,000).

Why make a gift to benefit your Giving Fund (donor-advised fund)

The gift was made to NCF for two primary reasons:

1. 1. Because NCF is classified as a public charity under the tax rules, Bill and Katrina receive a full fair market value deduction for their gift. Had they made a gift to a private foundation, their deduction would have been limited to their income tax basis in the business – which is quite low compared to the value of the business.
   2. And NCF provides a mechanism allowing the Keplers to make a single charitable gift that ultimately supports numerous charities. As cash flows from the business to NCF – derived either from annual distributions of income from the business or proceeds from an eventual sale of business interest – it is distributed to the Keplers’ Giving Fund. Bill and Katrina can then recommend grants of cash from their fund to any number of charities.

By making a gift of business interests worth $300,000, the Keplers went from giving 10 percent to 40 percent of their income. With estimated tax savings of $111,000 resulting from this gift ($300,000 x 37 percent), the Keplers now have an additional 11 percent of retained income they could use to make an additional gift to charity.

Since the Keplers still had the opportunity to give and deduct an additional 10 percent of income, their advisor suggested they take a portion of the income tax savings that they had just realized from the business-interest gift and make an additional cash gift to maximize their charitable giving.

So, Bill and Katrina made an additional cash gift of $100,000 from the $111,000 of tax savings. The additional cash gift also provided a charitable deduction, saving $37,000 more in taxes and taking their total giving to the maximum deductible amount for that tax year, 50 percent of income.

The giving strategy described above had no adverse impact on the capitalization and cash flow of their business. In addition, although Bill and Katrina indeed gave away valuable assets to charity, their personal cash flow actually increased due to the tax savings they realized. After the Keplers gave an additional $100,000 to charity, they still had $48,000 ($11,000 + $37,000) of additional cash flow from making these gifts.

Combining a vacation and mission

The Keplers used some of this $48,000 to fund a two-week combined vacation and mission trip to Africa that had an unexpected, transformational impact on their lives. In addition to experiencing the beautiful sights and sounds of Africa, including an unforgettable safari, they had a unique opportunity to meet their “adopted” daughter, nine-year-old Christina, whom they’ve supported for years through a child sponsorship program with an international charity that combats child poverty. The Keplers’ trip marked the first time in more than 12 years that Bill had taken a full two-week reprieve from the demands of running a successful business.

Bill and Katrina are planning to continue this pattern of giving by combining cash and non-cash gifts to maximize their giving and fully utilize the opportunity to give 50 percent of their income every year. In fact, since their business has been growing at a rate higher than the three percent business interest they are now planning to give annually, they are actually giving their business interest from only a portion of the growth each year.

Coming alongside charities to transform lives

The Keplers’ greatest joy comes from witnessing the lives that are touched and transformed by the charities whose mission they share. The business-interest giving strategy they’ve implemented has enabled them to more than double their support for their charitable endeavors. Not only does charity receive a portion of the income from their business, but their current cash giving has correspondingly doubled as a result of giving the tax savings generated from their business-interest gift. The Keplers are also excited about the fact that at some point in the future, when their business is sold or liquidated, very significant additional assets will be available to support the charities they care about. This is a result they had never imagined possible until a creative advisor shared with them how their business could be a powerful engine, both now and into the future, for greater impact and generosity.

Connect with an NCF team near you.

Preface: “Forgiveness is the economy of the heart… forgiveness saves the expense of anger, the cost of hatred, the waste of spirits.” — Hannah More

What Does and Does Not Constitute Cancellation of Debt Income

This blog provides information about Cancellation of Debt (COD) income. If a lender forgives part or all of a debt you owe, you might have to pay income tax on the forgiven amount. This is because canceled or forgiven debt is considered taxable income, even if you didn’t receive any money directly.

Key Points:

Taxable Income: Generally, canceled debt must be included in your taxable income. This is known as COD income. Unless an exception applies, forgiven debt is considered income.

Form 1099-C: If the forgiven amount is $600 or more, the lender must issue Form 1099-C to you and the IRS, showing the canceled amount. You might be able to exclude this from income under certain conditions.

Exclusions from Income: COD income isn’t always taxable. Common exclusions include:

• • • Bankruptcy under Title 11
    • Insolvency (when your total debts exceed your total assets)
    • Qualified principal residence debt (up to $750,000, or $375,000 for married filing separately, forgiven before January 1, 2026)
    • Qualified farm debt
    • Qualified real property business debt

Other exclusions may apply to student loans, disaster victims, gifts, general welfare payments, and deductible payments.

Reduction of Attributes: If debt is excluded from income, you may need to reduce tax attributes, like the basis of property. This must be reported on Form 982 with your tax return.

Non-Recourse Loans: For non-recourse loans (where the lender can only repossess the property and not pursue you personally), forgiveness doesn’t result in COD income but may have other tax implications.

Mortgage Debt Forgiveness: Certain mortgage debt forgiven by the lender is excludable from COD income if it’s related to your principal residence and forgiven before January 1, 2026. This is limited to $750,000 ($375,000 for married filing separately).

Credit Card and Car Loan Debt: Forgiven credit card or car loan debt is generally taxable unless you’re bankrupt or insolvent. The lender will report this on Form 1099-C.

If you have questions about COD income, exclusions, or your reporting responsibilities, please contact our office.

Preface: “what we choose to focus on and what we choose to ignore—plays in defining the quality of our life.” ― Cal Newport

Book Report on “Deep Work” by Cal Newport

Introduction: “Deep Work: Rules for Focused Success in a Distracted World” by Cal Newport is a compelling exploration of the power of focused, distraction-free work. Newport, a professor and author, argues that the ability to concentrate deeply on demanding tasks is becoming increasingly rare and valuable in our modern economy. This book provides a comprehensive guide to understanding and cultivating the practice of deep work, which Newport believes is essential for achieving high levels of productivity and professional success.

The Concept of Deep Work: Newport defines deep work as professional activities performed in a state of distraction-free concentration that push cognitive capabilities to their limit. These efforts create new value, improve skills, and are hard to replicate. In contrast, shallow work consists of non-cognitively demanding tasks that are often performed while distracted and do not create much new value. Newport posits that deep work is like a superpower in the twenty-first-century economy, where the ability to focus intensely is increasingly rare and valuable.

The Importance of Deep Work: The book emphasizes that to produce the best work possible, one must commit to deep work. Newport argues that the ability to quickly master hard things and produce at an elite level, both in terms of quality and speed, is crucial for thriving in today’s competitive landscape. He explains that deep work allows individuals to learn complex skills quickly and produce high-quality work efficiently. Newport also highlights that deep work is not just a nostalgic concept but a skill with significant value in the modern world.

The Deep Work Hypothesis: Newport introduces the Deep Work Hypothesis, which states that the ability to perform deep work is becoming increasingly rare at the same time it is becoming more valuable in our economy. As a result, those who cultivate this skill and make it the core of their working life will thrive. Newport supports this hypothesis with examples from various fields, demonstrating how deep work has enabled individuals to achieve remarkable success.

Strategies for Cultivating Deep Work: To help readers develop a deep work habit, Newport provides several practical strategies. He emphasizes the importance of moving beyond good intentions and incorporating routines and rituals into one’s working life to minimize the willpower needed to transition into and maintain a state of unbroken concentration. Newport outlines different philosophies for integrating deep work into one’s schedule, including:

1. 1. The Monastic Philosophy: This approach involves eliminating or radically minimizing shallow obligations to maximize deep efforts. Newport cites the example of Donald Knuth, a computer scientist who avoids email and other distractions to focus on his work.
   2. The Bimodal Philosophy: This philosophy asks individuals to divide their time, dedicating some clearly defined stretches to deep pursuits while leaving the rest open to other activities. Carl Jung’s practice of retreating to a secluded tower to write is an example of this approach.
   3. The Rhythmic Philosophy: This approach argues that the easiest way to consistently start deep work sessions is to transform them into a simple, regular habit. Newport suggests scheduling deep work sessions at the same time each day to build a routine.
   4. The Journalist Philosophy: This philosophy involves fitting deep work wherever possible into one’s schedule, similar to how journalists work on stories whenever they have spare time. Newport acknowledges that this approach requires a high level of discipline and adaptability.

Overcoming Obstacles to Deep Work: Newport addresses common obstacles to deep work, such as task switching and attention residue. He explains that when individuals switch from one task to another, their attention does not immediately follow, leading to a residue of attention that can impair performance on the next task. Newport cites research by Sophie Leroy, which shows that people experiencing attention residue after switching tasks are likely to perform poorly on the next task. To mitigate this, Newport advises minimizing task switching and batching shallow work into smaller bursts at the peripheries of one’s schedule.

The Role of Willpower and Routines: Newport emphasizes that willpower is a finite resource that becomes depleted as it is used. Therefore, developing a deep work habit requires minimizing the amount of willpower needed to start and maintain deep work sessions. Newport suggests creating rituals and routines that specify a location, time frame, and structure for deep work efforts. By doing so, individuals can reduce the cognitive load associated with transitioning into deep work and maintain a state of unbroken concentration.

The Benefits of Deep Work: The book highlights the numerous benefits of deep work, including the ability to master complex skills quickly, produce high-quality work efficiently, and achieve greater satisfaction in one’s professional life. Newport argues that deep work allows individuals to experience a state of flow, where they are fully immersed in a challenging task and perform at their best. He also suggests that deep work can generate meaning and fulfillment, as individuals hone their abilities and apply them with respect and care.

Conclusion: “Deep Work” by Cal Newport is a thought-provoking and practical guide to achieving greater productivity and success through focused, distraction-free work. Newport’s insights and strategies provide valuable tools for anyone looking to cultivate the habit of deep work and thrive in today’s competitive economy. By committing to deep work and integrating it into their professional lives, individuals can unlock their full potential and achieve remarkable results.