Author: dsauder

Preface: “What you do makes a difference, and you have to decide what kind of difference you want to make.” —Jane Goodall

2022 Inflation Act: New Energy Efficient Home Credit

The Inflation Reduction Act of 2022 (2022 Inflation Act) extends the New Energy Efficient Home Credit through 2032, in addition to increasing and modifying energy-saving requirements effective for dwelling units acquired after December 31, 2022.

Extension of credit. The credit is extended for 11 years, through December 31, 2032.

Energy-saving requirements. The 2022 Inflation Act modifies the energy-saving requirements that must be met to qualify for the credit, including requirements for:

• single-family new homes;
• manufactured homes; and
• multifamily dwelling units.

Credit amounts. Additionally, the 2022 Inflation Act replaces the existing credit amounts with a $2,500 credit for new single-family homes that meet certain energy efficiency standards and a $5,000 credit for new single-family homes that are certified as zero-energy ready homes.

The credit for multifamily dwelling units is set at $500, or $1,000 for eligible multifamily units certified as zero-energy ready. Additionally, an enhanced bonus credit is available with respect to multifamily housing units if taxpayers satisfy prevailing wage requirements for the duration of the construction of such units. The bonus credit is equal to $2,500, or $5,000 for units that are certified as zero-energy ready.

Basis adjustment. Further, the 2022 Inflation Act clarifies that taxpayers claiming the credit do not have to reduce basis for purposes of calculating the low-income housing tax credit.

Call our office and we can discuss how these changes might affect your individual tax situation.

Preface: “Life is what happens to us while we are making other plans.”
― Allen Saunders

4 Reasons Why Planning for a Successful Future Isn’t DIY

Credit: Donald Feldman, CExP™, CPA, CVA, MBA

At their core, successful business owners like you are builders. Whether you founded your business, or purchased one and took it to new heights, doing it yourself runs through your veins. Why, then, would you need professional help to plan for a successful business future?

We could go on and on about all the reasons why, but let’s focus on four major elements of planning for a successful future that are typically complex and extremely challenging for even the most talented business owners to handle alone.

1. Your individual brilliance may not be scalable

Business owners are a special breed of ambition and brilliance. As you run the business, you may have methods that work well based on your individual talents and idiosyncrasies.

However, a key to a successful business future is building a business that doesn’t rely on you. Because if it relies on you, you can never leave it. And even if you never want to leave it during your lifetime, a business that lives by you may also die by you, which can have wide-ranging effects on others.
The true tragedy of individual brilliance is that when it comes naturally, it’s hard to explain to others. A classic example of this is Wayne Gretzky. Gretzky was the greatest hockey player in history, setting unbreakable records with ease. But when he tried his hand at coaching, he was much less successful because he struggled to explain how he did the things that made him so outstanding, which came so naturally to him.

So it goes in running a successful business. Having (a) documented operating systems that increase cash flow sustainability and (b) a way to scale those systems in ways that don’t involve you, are profoundly important for a successful future.

A professional advisor can help you distill your individual brilliance into something that doesn’t rely on you for success.

2. What does a successful future mean?

The idea of a successful future might seem easy to understand at first glance. Maybe you want enough money to retire with some left over to begin building generational wealth. Perhaps keeping the business in the family is your idea of success.

Whatever your vision of success is, do you know precisely what it takes to achieve it? And have you begun implementing a plan to pursue it?
Many business owners have two jarring experiences when they start considering the nuts and bolts of a successful future. First is the Misperception Spell. This is when a business owner becomes complacent because they believe they’re farther ahead in their planning than they truly are.

For example, you may think that having $3 million in retirement is enough for you. But how can you know that for sure? What happens if your estimate is wrong? What if you live longer than you expect? Would you be willing to go back to work for someone else if you were wrong about your estimates?
Second, and related to the Misperception Spell, is that many business owners have an Asset Gap. This is the difference between what you actually have and what you’ll actually need to achieve financial independence, whether you leave your business during your lifetime or die at your desk.
Without accurate information, planning for a successful business future is essentially a gamble. Professional advisors can help you obtain accurate information about your wants and needs, and then create plans that help you achieve them.

3. Best friends may not make best managers

A crucial element of planning for a successful business future is Next-Level Management. However, many business owners struggle with this because it could mean that longtime, loyal managers aren’t the best people to help them pursue future business success.

This doesn’t necessarily mean that you need to be starkly Machiavellian with your current managers. However, a professional advisor may be able to examine your talent pool more objectively. Then, they can help create a plan that allows you to maximize your business’ potential through Next-Level Management.

This may include incentivizing current managers to achieve more ambitious goals if they’re capable. It may also mean finding a more appropriate role for your current managers as you bring in next-level managers, if necessary.

4. Honesty is hard when it’s your baby

Finally, planning a successful business future is emotional. It often requires owners to confront the warty parts of their business to take the business to the next level.

For instance, business owners typically place a higher monetary value on their businesses because of how much the business means to them personally. It can be devastating, even financially harmful, to find that an objective valuation doesn’t agree.

Though many business owners believe they can handle the slings and arrows of building a successful business future, it’s much, much harder when their expectations fall short of reality. However, with the help of professional advisors, business owners can obtain accurate information; begin to act in ways that improve business performance; and gain a clearer path toward creating the business future they want, rather than a business future they’re forced into.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional.

Don Feldman is the founder of Keystone Business Transitions, LLC, a Lancaster, PA firm devoted to helping business owners smoothly exit their companies. He has been a CPA for over 25 years and a valuation professional for 20 years. For the last 15 years, Don’s practice has focused on succession and exit planning, including transfers of business interests to family members and key employees, as well as sales to outside buyers.

Preface: “History has not dealt kindly with the aftermath of protracted periods of low risk premiums.” – Alan Greenspan

Austrian Economics, Business Cycles, and the Theory and Practice of Money – Segment II  7.27.222 Austrian Economics Presentation Segment II

Preface: “People don’t realize that we cannot forecast the future. What we can do is have probabilities of what causes what, but that’s as far as we go. And I’ve had a very successful career as a forecaster, starting in 1948 forward. The number of mistakes I have made are just awesome. There is no number large enough to account for that.” – Alan Greenspan

Austrian Economics, Business Cycles, and the Theory and Practice of Money – Segment I     7.27.222 Austrian Economics Presentation Segment I

 

Preface: “Choose a job you love, and you will never have to work a day in your life.”—Confucius.

American Rescue Plan: Employee Retention Credit Extended

The American Rescue Plan Act of 2021 modifies the employee retention credit first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act then extended and expanded under the Consolidated Appropriations Act, 2021. This highly popular employment tax credit is designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits through the Coronavirus economic emergency.

Eligible employers may claim the credit against employment taxes equal to a percentage of qualified wages paid to employees beginning in 2020. The American Rescue Plan Act of 2021 modifies the rules for the employee retention credit for calendar quarters beginning after June 30, 2021 as follows:

Eligible Employers

An eligible employer is defined as:

• An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19);
• An employer that experiences at minimum a 20% decline in gross receipts for the calendar quarter compared to the same quarter in 2019; or
• A recovery startup business.
If the employer was not in existence at the beginning of the same calendar quarter in 2019, then the employer may use the same calendar quarter in 2020. Employers may also elect to determine if they meet the gross receipts test using the immediately preceding calendar quarter compared to the corresponding calendar quarter in 2019.

A “recovery startup business” means any employer that began carrying on any trade or business after February 15, 2020 with average annual gross receipts of $1,000,000 or less, and is otherwise not an eligible employer described in items 1 or 2 above.

Qualified Wages

Qualified wages are based on the business’s average number of full-time employees in 2019 (or 2020, if not in existence in 2019).

• Small employers, those that had 500 or fewer employees, may receive the credit for wages paid to employees whether or not they are providing services to the employer.
• Large employers, those that had more than 500 employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
• Severely financially distressed employers, those that are experiencing a minimum 90% decline in gross receipts for the calendar quarter compared to the same quarter in 2019, may receive the credit for wages paid to employees during any calendar quarter.

Credit Amount

In general, the amount of the credit is 70% of qualified wages paid to an employee up to $10,000 per quarter. Recovery startup businesses may claim a maximum credit of no more than $50,000 per quarter. Qualified wages may include amounts paid to provide and maintain a group health plan that are excluded from employees’ gross income.

Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit.

Small employers, those that had 500 or fewer employees, may elect for any calendar quarter to receive an advance payment of the credit not to exceed 70 percent of the average quarterly wages paid by the employer in calendar year 2019.

No Double Benefit

There are limitations when considering an eligible employer’s ability to claim the employee retention credit. A double tax benefit is not allowed. Other credits that impact the employee retention credit include, but are not limited to, the following:

• wages that are paid for with forgiven Payroll Protection Program (PPP) proceeds cannot qualify for the employee retention credit;
• qualifying wages for this credit cannot include wages for which the employer received a tax credit for paid sick and family leave; and
• employees are not counted for this credit if the employer is allowed a work opportunity tax credit.

Because of the enhancements and expansion of the employee retention credit, your business may now have an opportunity to take the advantage of this tax benefit. Please call our office to discuss the employee retention credit

Preface: “Central banks have made clear that after a sluggish start, they’re serious about putting a lid on inflation. Now, as prices soar even faster than expected, they’re weighing increasingly drastic options.” (London) CNN Business 7.14.22

Loans At Rates Below Market Interest 

When consideration of making an interest free loan certain tax rules are applicable. Interest free loans are considered a below-market loan and there are certain tax implications of making such loans of which you should be aware.

A below-market loan is a loan on which the interest charged is less than the applicable federal rate (AFR). The excess of interest computed using the AFR over the interest actually charged is treated as being transferred by the borrower to the lender as interest and also as being transferred back from the lender to the borrower. The amount and the timing of these deemed transfers depend upon the type of the loan. Deemed transfers are treated for all tax purposes as if actually made.

The deemed transfer from the lender to the borrower is treated as a gift, compensation, dividend, or contribution to capital depending on the relationship between the borrower and the lender. The deemed interest is then treated as transferred back to the lender as interest. These deemed transactions, of course, may have an income tax effect through the creation of income and deductions, a gift tax effect through the creation of a taxable transfer, or an estate tax effect through the creation of a taxable gift that becomes an adjusted taxable gift.

These rules apply only to loans of money. They specifically apply to gift loans, compensation-related loans, corporation-shareholder loans, tax avoidance loans, certain loans to continuing care facilities, and other below-market loans if the interest arrangement has a significant effect on the federal tax liability of the borrower or the lender. The IRS has authority to exempt any class of transactions from these rules if there is no significant effect on any federal tax liability of the borrower or the lender as a result of the interest arrangements.

For below-market loans other than demand or gift loans, the lender is treated as transferring and the borrower is treated as receiving, on the date of the loan, an amount equal to the excess of the loan amount over the present value of all principal and interest payments under the loan. All amounts are included by the lender and deducted by the borrower under original issue discount (OID) principles.

De minimis rules create exceptions for gift loans, compensation-related loans, and corporation-shareholder loans, if the aggregate amount of loans between the borrower and the lender does not exceed $10,000. In addition, in the case of a gift loan between individuals, the amount of the deemed transfers is limited to the net investment income of the borrower, if the aggregate amount of loans between the individuals does not exceed $100,000.

If a loan is subject to the rules discussed above, special tax reporting requirements apply to both the borrower and the lender.

Preface: In the first stage, the city is proposing to begin reviewing a zoning change for what it is calling the Vanderbilt corridor, from 42nd to 47th Streets along Vanderbilt Avenue. If approved, developers would be allowed to build taller and larger buildings than currently permitted in exchange for substantive transportation improvements. — Anonymous

2022 Tax Planning: Qualified Opportunity Zones

The Tax Cuts and Jobs Act included tax advantageous changes for businesses and individuals. One of these is the creation of the opportunity zones tax incentives, an type of economic development tool that allows taxpayers to invest in selected distressed areas with tax benefits. This incentive’s purpose is to spur economic development and job creation in distressed communities by providing tax benefits to investors. Low-income communities and certain contiguous communities qualify as opportunity zones if a state, the District of Columbia or a U.S. territory nominates them for that designation and the U.S. Treasury certifies that nomination.

A taxpayer may elect to defer the taxation of capital gain realized from the sale or exchange of property to an unrelated party by reinvesting the capital gain in a qualified opportunity zone fund (QOF). The taxpayer must reinvest the proceeds within 180 days of the sale or exchange. The reinvestment may be made by transferring cash or property to the qualified opportunity zone fund. A taxpayer may choose to defer taxation on only a portion of the capital gain. It is not necessary to reinvest all of the capital gain from the sale or exchange that generated the capital gain.

Qualified Opportunity Fund (QOF)

A qualified opportunity fund (QOF) is a corporation or a partnership that holds at least 90 percent of its assets in qualified opportunity zone property.

• if the investor holds the qualified opportunity fund investment for at least five years, the basis of the qualified opportunity fund investment increases by 10% of the deferred gain;
• if the investor holds the qualified opportunity fund investment for at least seven years, the basis of the qualified opportunity fund investment increases to 15% of the deferred gain;
• if the investor holds the investment in the qualified opportunity fund for at least 10 years, the investor is eligible to elect to adjust the basis of the qualified opportunity fund investment to its fair market value on the date that the qualified opportunity fund investment is sold or exchanged.

Qualified Opportunity Zone (QOZ) Property

QOZ business property is tangible property that a QOF acquired by purchase after 2017 and uses in a trade or business:

• the original use of the property in the Qualified Opportunity Zone commenced with the Qualified Opportunity Fund or Qualified Opportunity Zone business or the property was substantially improved by the Qualified Opportunity Fund or Qualified Opportunity Zone business; and
• for 90% of the holding period the Qualified Opportunity Fund or Qualified Opportunity Zone business held the property, substantially all (generally at least 70 percent) of the use of the property was in a Qualified Opportunity Zone.

Several hundred such tax advantaged zones have been designated by the IRS. A taxpayer does not need to live in the Qualified Opportunity Zone to invest in it.

If the taxpayer reinvests any capital gain into a Qualified Opportunity Fund within 180 days after the sale, tax on the gain is not due until December 31, 2026 or, if earlier, the date the taxpayer sells their investment in the fund. Additionally, if the taxpayer does not sell their investment for ten years, any appreciation in the value of the investment is not taxed at all.

Please call our office to learn more about the rules on the qualified opportunity zones to determine the ways you may qualify to defer the recognition of capital gain.

Preface: Future cash flows must be transferable and sustainable in order for the business to have value in the marketplace. – https://keystonebt.com/

Building an Advisor Team That Works for You (Not Against Each Other)

Credit: Don Feldman

Building a business is challenging enough as it is. With the right Advisor Team, you can focus on business challenges while your advisors create strategies that help you compound your success in the future. But how do you build an Advisor Team that works for you instead of against each other?
Consider the story of a fictional but representative owner who learned how important it is to have an advisor who can lead the charge.

Animus at AniMals

Annie Mahl was in a bind. Her company, AniMals, which produced specialty dog toys under the tagline “Tough Chew Toys for Rough-Chewing Boys,” had grown into a pet-care powerhouse over the last 20 years. Her financial advisor Grover and business-growth consultant Oscar had served her for most of the company’s history.

When Annie told each advisor that she wanted to sell her business in the near future, they had vastly different reactions. Grover began researching what Annie would need to sell her business within three years and gain financial independence. He presented Annie with spreadsheets of information about the best strategies to pursue, many of which Annie found overwhelming.

Oscar tried instead to convince Annie to stay at the business longer. “You’d be leaving right before the biggest boom. Let me show you how much more you could make if you stay longer.” The deeper Annie got into planning with each advisor, the less comfortable she became about their strategies. She loved her business and wanted to find a buyer who loved its mission just as much as she did, but she also wanted to sell for enough money to retire comfortably.

Grover and Oscar began openly butting heads, with Grover trying to help Annie sell as soon as possible and Oscar trying to help Annie make as much money as possible. Though she initially felt a little guilty (Grover and Oscar were always her go-to guys), she decided to seek the advice of a professional business-and-exit planning advisor, Burt.

Follow the Leader

Annie shared her goals with Burt. She wanted to sell within six years, but she wasn’t sure what her business was worth. She told Burt that it was hard to plan with her trusted advisors disagreeing about strategies so vehemently.  “I trust them and could never let them go. I want them to be a part of this planning. I think they have good intentions, but I’m not sure which strategy is the right one,” she said.

“The right strategy is the one that helps you achieve your goals, not what they assume is best for you,” Burt said.
Annie let out an exasperated laugh.
“Try telling them that,” she responded sarcastically.
“I’d love to,” Burt said. “Can I show you what I have in mind?”

Pulling the Advisor Team Together

Over the next month, Burt met with Annie, Grover, and Oscar. With Annie’s input, Burt laid out Annie’s goals and what it would take to help her pursue them.

“She wants to sell her business within six years. We need to figure out how to make that happen so she can achieve all of her goals.”
“We can do it in three if she would just . . .” Grover began.
“Three years? There’s so much more money to make!” Oscar interjected.
Before they began fighting again, Burt stepped in.
“Our job is to help Annie achieve her goals. And neither of you can help her do that if you think you know what she wants better than her.”
Grover and Oscar sat in silence before Burt continued.
“The first thing we need to do is figure out what this business is really worth. Then we can talk about timelines and payouts.”

Burt presented each step of his planning process, showing Grover and Oscar how they fit into it, and what they’d need to do to fulfill their obligations.
With Burt leading the charge and finding all of the appropriate advisors for Annie’s team, Annie felt more confident in her direction. She hired a business valuator, a tax professional, and an attorney based on Burt’s recommendations.

While she continued to run the business, Burt and the Advisor Team worked together toward Annie’s goals. Grover and Oscar focused on what they needed to do instead of trying to control the process themselves.
The result was a successful sale on Annie’s timeline to a buyer Annie trusted for the amount of money she needed and wanted.

You Aren’t Alone in This

Your advisors must work toward your goals to help you achieve your vision of success. One of the best ways to position your Advisor Team to do so is to work with a dedicated business-and-exit planning advisor. These advisors can guide the process based on what you want and need, and assure that your team works for you, not against each other.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

Don Feldman is the founder of Keystone Business Transitions, LLC, a Lancaster, PA firm devoted to helping business owners smoothly exit their companies. He has been a CPA for over 25 years and a valuation professional for 20 years. For the last 15 years, Don’s practice has focused on succession and exit planning, including transfers of business interests to family members and key employees, as well as sales to outside buyers.

Preface: “Don’t listen to what they say, go see” – Chinese Proverb

Revised IRS Mileage Rates July 1 to 62.5 Cents Per Mile

Effective July 1, 2022 “The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

US Senators. Catherine Cortez Masto, D-Nev., and Michael Bennet, D-Colo were both key influencers of the IRS decision. The belated mileage rate increase as of mid-year 2022 to $0.625 raises the deductible business expense per mile $.04 from the beginning year $0.585. The IRS sees the mileage rate increase necessary when cost accounting for a May average of $4.50 per gallon of gasoline, an increase of nearly 34% since December of 2021. The IRS business mileage rate data since 1991 has increased from $0.275 per mile to the most recent $0.625 per mile, effective July 1, 2022. Of note is 1991 gasoline priced at an average $1.14 per gallon.

The average driver in the US consumes approximately 650 gallons of fuel per year, so an estimated 2022 budget per auto owner for 2022 could be above $3,000 in gasoline purchases.

Although other factors include depreciation, insurance, tires, repairs, and maintenance are computed into this rate, it is noted that actual costs may be more reflective of true costs for business mileage. Rate increases have only occurred three times mid-year since the early 1990s. Taxpayers deducting business mileage rates must keep detailed records and a logbook, or use a mobile app to track beginning and ending mileages to obtain a tax deduction.