Author: dsauder

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.

Preface: “original, n. A thing of singular or unique character; a person who is different from other people in an appealing or interesting way; a person of fresh initiative or inventive capacity.” – Adam Grant

Book Report on “Originals” by Adam Grant

Introduction: “Originals: How Non-Conformists Move the World” by Adam Grant is a profound exploration of how individuals can champion new ideas and drive innovation. Grant, a renowned organizational psychologist, delves into the challenges of identifying and nurturing original ideas, the importance of producing a large volume of work, and the role of feedback and collaboration in refining those ideas. He also examines how birth order and parenting practices influence creativity and risk-taking and offers strategies for fostering originality in both individuals and organizations.

Generating and Selecting Original Ideas: Grant emphasizes that while people are capable of generating a substantial number of original ideas, they often struggle to identify which ones will be successful. This difficulty arises from our inherent bias towards our ideas and our misguided perceptions of their quality. Grant argues that conviction in our ideas can be dangerous, as it leaves us vulnerable to false positives and prevents us from generating the variety needed to reach our creative potential. To overcome this, he suggests turning to colleagues who have no particular investment in our ideas and enough distance to offer honest appraisals. These individuals, often other creators, are the most accurate forecasters of an idea’s potential.

The Importance of Quantity: One of the key insights from “Originals” is the importance of producing a large volume of work to increase the chances of hitting on successful ideas. Grant points out that even the most eminent creators, such as Thomas Edison and Mozart, produced a vast quantity of work, much of which was unremarkable. Edison filed nearly 1,100 patents, and Mozart composed 600 pieces of music, but they are remembered for only a handful of their creations. This highlights that producing a huge volume of work is the single most important thing someone can do to be original. By continually generating new ideas, individuals increase their chances of finding those that will be successful.

The Role of Feedback and Collaboration: Grant stresses the importance of seeking feedback from others to assess the merit of our ideas. Since we are not reliable judges of the quality of our own ideas, it is crucial to turn to colleagues who can provide objective evaluations. This feedback helps refine ideas and identify those with the most potential. Additionally, Grant warns against relying solely on intuition, especially when lacking experience in a particular domain. Intuition is only trustworthy when people have built up experience making judgments in a predictable environment. Therefore, analysis and feedback from experienced colleagues are far better sources of insight when considering new ideas.

Raising Original Children: Grant explores the impact of birth order and parenting practices on creativity and risk-taking. He notes that laterborns consistently show greater ease with taking risks, accepting radical ideas, and embracing societal progress compared to firstborns. However, Grant argues that these patterns are more influenced by parenting practices than birth order itself. Parents tend to be more flexible and relaxed with later borns, allowing them more freedom to explore and take risks. To raise original and creative children, Grant suggests giving them the freedom to take risks and encouraging constructive rebellion. This involves steering children towards honorable and proactive behaviors while avoiding destructive paths.

Combating Groupthink: Groupthink, the tendency to seek consensus instead of fostering dissent, is identified by Grant as the enemy of originality. He argues that traditional theories of cohesion breeding conformity are a myth and examines the real causes of groupthink. To prevent groupthink, leaders should hire and solicit input from a diverse set of team members. Dissenting viewpoints, even when wrong, stimulate divergent thinking and lead to innovative solutions. Grant also advises against relying too heavily on assigning a purposeful “devil’s advocate,” as this often lacks sincerity and fails to draw out a diversity of ideas. Instead, leaders should unearth genuine dissenters and create opportunities for open-minded debate.

Fostering Originality in Organizations: Grant discusses the concept of “commitment firms,” organizations that value culture over all and hire people who conform to established characteristics. While these firms may initially outperform others, they eventually suffer from a lack of diversity in thoughts and values, leading to stagnation and failure to adapt in volatile markets. To foster originality, leaders should promote the expression of original ideas and create an environment that values dissent and diverse perspectives. This involves moving away from the maxim that team members should only bring up problems when they have solutions. Instead, leaders should invite complaints and feedback, creating an invaluable safeguard for the organization.

Conclusion: “Originals” by Adam Grant provides a comprehensive guide to identifying, nurturing, and championing original ideas. By emphasizing the importance of producing a large volume of work, seeking feedback from others, and fostering a culture of dissent and diversity, Grant offers valuable insights for individuals and organizations looking to drive innovation and creativity. The book also highlights the role of parenting practices in raising original children and the dangers of groupthink in stifling originality. Overall, “Originals” is a must-read for anyone seeking to understand and cultivate the habits of successful non-conformists.

Preface: “The way to get started is to quit talking and begin doing.” — Walt Disney

Being a successful entrepreneur requires more than a great idea; it takes determination, resilience, and the ability to adapt to an ever-changing landscape. For those looking to understand what sets successful entrepreneurs apart, this insightful article from Harvard Business School outlines the key characteristics that drive entrepreneurial success. [Read more here].

Preface: “If you do not know how to ask the right question, you discover nothing.” – Clayton Christensen

Book Review: “Competing Against Luck” by Clayton M. Christensen

Summer is a perfect time to catch up on reading, and “Competing Against Luck” from Clayton M. Christensen has been a popular choice around our office.

Clayton M. Christensen was a renowned American academic and business consultant, best known for his groundbreaking work in business innovation. As a professor at Harvard Business School, he gained international fame for developing the theory of “disruptive innovation,” which describes how new entrants can disrupt established markets by offering simpler, more affordable alternatives to existing products or services.

In “Competing Against Luck,” Christensen delves into the intricacies of successful innovation and introduces the powerful “Jobs to Be Done” theory. This concept transforms the way businesses approach customer needs and product development, providing a framework for creating products that truly meet customer demands.

For an in-depth look, visit the page here.

Preface: “In the world of entrepreneurship, challenges are inevitable. But with faith, perseverance, and a reliance on God’s strength, you can overcome any obstacle.” — Craig Groeschel

Faith Driven Entrepreneur: What It Takes to Step Into Your Purpose and Pursue Your God-Given Call to Create is a compelling guide for entrepreneurs who seek to integrate their faith with their business endeavors. Authored by Henry Kaestner, J.D. Greear, and Chip Ingram, this book provides a roadmap for faith-driven individuals to navigate the challenges and opportunities of entrepreneurship while staying true to their spiritual beliefs.

Key Themes and Insights

Faith Driven Entrepreneur is structured around several key themes that are essential for integrating faith with entrepreneurship:

Purpose and Calling: The book emphasizes that every entrepreneur has a unique purpose and calling from God. It encourages readers to seek God’s guidance in their business ventures and to view their work as a form of worship and service to others.

Values and Ethics: The authors stress the importance of operating with integrity, fairness, and compassion. They argue that faith-driven entrepreneurs should be known for their ethical practices and their commitment to treating employees, customers, and stakeholders with respect and dignity.

Community and Support: Entrepreneurship can be a lonely journey, but the book highlights the importance of building a supportive community of like-minded individuals. It encourages entrepreneurs to join faith-driven business networks and to seek out mentors who share their values.

Impact and Legacy: The authors challenge readers to think beyond profit margins and to consider the broader impact of their businesses. They advocate for using business as a platform to address social and environmental issues and to make a positive difference in the world.

Practical Guidance: Throughout the book, the authors provide practical advice on various aspects of entrepreneurship, from developing a business plan to managing finances and scaling operations. They also share stories of successful faith-driven entrepreneurs who have navigated challenges and achieved their goals1.

Here are a few notable stories from the book.

1. The Ethical Dilemma

One of the compelling stories in the book involves an entrepreneur who faced a significant ethical dilemma. This business owner was presented with an opportunity that promised substantial financial gain but required compromising on their core values. Despite the potential for profit, the entrepreneur chose to uphold their principles, even though it meant turning down the deal. This decision ultimately led to greater trust and loyalty from customers and employees, demonstrating that integrity can be a powerful competitive advantage.

2. The Community Builder

Another inspiring story is about an entrepreneur who focused on building a strong community within their company. This individual believed that a supportive and values-driven work environment was crucial for success. By fostering open communication, collaboration, and mutual respect, they created a workplace where employees felt valued and motivated. This approach not only improved employee satisfaction and retention but also enhanced overall business performance.

3. The Social Impact Innovator

The book also highlights the journey of an entrepreneur who used their business as a platform to address social issues. This entrepreneur was passionate about education and decided to integrate this passion into their business model. They developed products and services that not only generated profit but also contributed to improving educational outcomes in underserved communities. This dual focus on profit and purpose helped the business attract like-minded partners and investors, amplifying its impact.

4. The Resilient Leader

A story of resilience is shared about an entrepreneur who faced numerous setbacks and challenges. Despite these obstacles, they remained steadfast in their faith and commitment to their vision. Through perseverance and reliance on their faith, they were able to overcome the difficulties and achieve success. This story underscores the importance of resilience and faith in the entrepreneurial journey.

5. The Mentor and Mentee

The book also includes a story about the powerful relationship between a mentor and a mentee. The mentor, a seasoned entrepreneur, provided guidance, support, and wisdom to a young, aspiring entrepreneur. This relationship not only helped the mentee navigate the complexities of starting a business but also reinforced the mentor’s own faith and purpose. This story illustrates the importance of community and support in the entrepreneurial journey.

These stories, among others, provide practical insights and inspiration for faith-driven entrepreneurs. They demonstrate that it is possible to achieve business success while staying true to one’s values and making a positive impact on society.

Conclusion

Faith Driven Entrepreneur is an inspiring and practical guide for anyone looking to merge their faith with their entrepreneurial pursuits. The authors provide a comprehensive framework for building a business that not only achieves financial success but also honors God and serves the community. By following the principles outlined in this book, faith-driven entrepreneurs can navigate the complexities of the business world while staying true to their spiritual convictions. This book is a valuable resource for anyone who believes that business can be a force for good and who seeks to make a meaningful impact through their work. Whether you are a seasoned entrepreneur or just starting out, Faith Driven Entrepreneur offers insights and encouragement to help you pursue your God-given call to create.

Preface: “Whatever you do, work at it with all your heart, as working for the Lord, not for human masters”  (Colossians 3:23)

Biblical Business Management: Timeless Wisdom for Thriving Amidst Inflationary Pressures

In the roaring 20’s volatile economic topography, businesses face the challenge of navigating inflationary pressures while maintaining ethical and sustainable practices. Today, entrepreneurs and leaders can draw inspiration from biblical principles that provide timeless Kingdom wisdom for business excellence. 

Let’s explore these principles, along with relevant examples from the Bible:

1. Integrity

“The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity.” (Proverbs 11:3)

Application in Business Life:

Transparent Business Practices: Operate with utmost transparency. Avoid hidden fees, misleading advertising, or deceptive practices.

Honesty in Communication: Encourage open and honest communication within your team.

Ethical Decision-Making: Seek ethical guidance when faced with difficult decisions.

Lead by Example: Set the highest standards of integrity as a leader.

Biblical Example: Joseph in Egypt (Genesis 39) Joseph resisted the advances of Potiphar’s wife, choosing integrity over personal gain. His unwavering commitment to honesty led to his eventual rise to power.

2. Honesty

“Honest scales and balances belong to the Lord; all the weights in the bag are of his making.” (Proverbs 16:11)

Application in Business Life:

Truthful Marketing and Advertising: Provide accurate information about your products or services.

Transparent Pricing: Clearly communicate pricing to customers.

Fair Employee Compensation: Be honest and fair in your treatment of employees.

Ethical Financial Practices: Maintain honest financial records and reporting.

Biblical Example: Zacchaeus (Luke 19:1-10) Zacchaeus, a tax collector, repented and pledged to repay those he had cheated. His commitment to honesty transformed his life and impacted his community.

3. Stewardship

“Moreover, it is required of stewards that they be found faithful.” (1 Corinthians 4:2)

Application in Business Life:

Resource Management: Use resources wisely, avoiding waste and extravagance.

Long-Term Vision: Consider the long-term impact of business decisions.

Environmental Responsibility: Care for God’s creation through sustainable practices.

Biblical Example: The Parable of the Talents (Matthew 25:14-30) The faithful stewards multiplied their talents, while the unfaithful one buried his. Effective stewardship leads to growth and blessings.

Chick-fil-A: A Modern-Day Example

Chick-fil-A, a fast-food chain, exemplifies these principles in its business model:

Customer Service: Chick-fil-A consistently ranks at the top in customer satisfaction. Employees walk through drive-thru lines to take orders via tablets, minimizing wait times.

Niche Focus: Unlike other restaurants with extensive menus, Chick-fil-A remains laser-focused on selling chicken sandwiches. This deliberate choice has propelled its success.

Franchise System: Chick-fil-A owns and operates its restaurants while offering franchise opportunities to qualified partners. This allows them to maintain quality and consistency across locations.

Closed on Sundays: Despite being closed on Sundays, Chick-fil-A outperforms competitors, averaging over $4 million in sales per store—the highest of any fast-food chain in the U.S..

Chick-fil-A’s commitment to integrity, honesty, and stewardship has made it a formidable competitor, even challenging McDonald’s dominance. As business leaders, let’s apply these biblical principles to thrive in any economic climate, honoring God in our endeavors.

Conclusion

As business leaders, let us anchor our practices in these biblical principles. By doing so, we not only thrive amidst inflationary pressures but also contribute to the testament of a just and stable economy. Remembering that our ultimate purpose is to honor God in all we do, both in business and beyond, helps to keep a Kingdom-first focus.

Preface: “Visionary companies display a remarkable ability to continue to grow and change while remaining true to their core ideology.” – Jim Collins, “Built to Last”

Exploring Timeless Success: Insights from Jim Collins’ “Built to Last”

Jim Collins, along with Jerry Porras, authored “Built to Last: Successful Habits of Visionary Companies,” a cornerstone in the realm of business literature since its publication in 1994. The book provides an in-depth analysis of what distinguishes visionary companies from their less enduring counterparts. It isn’t merely a manual of business strategies; it delves into the essence of organizational longevity, dissecting the core principles that enable some companies to thrive over decades, if not centuries.

The Essence of Core Ideology

At the crux of Collins and Porras’s argument is the notion that without a core ideology, a company cannot be visionary. A core ideology comprises the company’s core values and core purpose, forming the foundation upon which the organization builds its legacy. This ideology goes beyond financial performance and market share; it embodies the enduring character of the company.

Core values are the essential and enduring tenets of an organization—a small set of timeless guiding principles that require no external justification. Core purpose, on the other hand, is the organization’s fundamental reason for existence, beyond just making money. It is about making a difference and having a meaningful impact on the world.

The Cultures of Visionary Companies

Visionary companies often exhibit cult-like cultures, characterized by a passionate adherence to the core ideology. This strong cultural identity fosters a profound sense of belonging among employees. It’s a culture where you’re either in or out—there’s little room for those who don’t align with the core values and purpose.

The Misconception About Great Ideas

A significant revelation in “Built to Last” is the notion that you don’t need a great idea to start a great company. Or any idea, for that matter. Visionary companies often begin with a clear sense of purpose and core values rather than a singular, groundbreaking idea. The founders of these companies are usually more focused on building an enduring institution than on a specific product or market.

Take Hewlett-Packard (HP) as an example. HP didn’t start with a revolutionary product idea. Instead, it began with a strong set of values, encapsulated in the “HP Way,” and a commitment to innovation and excellence. Over time, this led to the development of numerous groundbreaking products, but the initial focus was on building a company that could endure and adapt.

Great Companies Produce Great Ideas

While a great idea isn’t necessary to start a great company, visionary companies consistently produce great ideas over their lifetimes. This continuous innovation is a byproduct of their strong core ideology and cult-like culture. These companies foster environments where creativity is nurtured, and innovation is a natural outcome.

3M is a prime example. The company’s culture encourages employees to spend a portion of their time on projects of their own choosing, leading to a steady stream of innovative products. This environment of trust and encouragement is rooted in 3M’s core values and commitment to progress, allowing the company to remain at the forefront of innovation in multiple industries.

Big Hairy Audacious Goals (BHAGs)

Another defining characteristic of visionary companies is their pursuit of Big Hairy Audacious Goals (BHAGs). These goals are bold, daunting, and serve as a catalyst for progress. They are long-term and often appear unattainable, yet they inspire and mobilize the organization towards achieving extraordinary outcomes.

A quintessential example is Boeing’s decision to build the 707, the first American jet airliner. This BHAG was a significant leap of faith at the time but ultimately revolutionized air travel and secured Boeing’s dominance in the aviation industry. BHAGs compel companies to push boundaries and achieve what might initially seem impossible.

Continuous Improvement and Adaptability

“Built to Last” also emphasizes the importance of preserving the core while stimulating progress. Visionary companies excel at maintaining their core values and purpose while continuously seeking ways to improve and adapt to changing environments. This dual approach ensures that while the company remains true to its identity, it also evolves and innovates.

Johnson & Johnson exemplifies this balance. The company’s credo, established in the 1940s, emphasizes a commitment to customers, employees, and communities. This core ideology has remained unchanged, even as the company has expanded and diversified its product offerings, demonstrating adaptability and a continuous drive for improvement.

The Enduring Impact of “Built to Last”

Jim Collins’ “Built to Last” offers timeless lessons for anyone seeking to build or sustain a successful organization. Its insights into the significance of core ideology, the power of cult-like cultures, the misconception of needing a great idea to start, and the relentless pursuit of innovation and BHAGs provide a robust framework for enduring success.

The book’s impact transcends business; it offers a philosophy for building institutions that stand the test of time. By adhering to core values, fostering strong cultures, and continuously striving for improvement, organizations can achieve greatness that endures for generations. “Built to Last” remains a vital resource for leaders and entrepreneurs aiming to create lasting legacies in an ever-changing world.

Preface: “The best inheritance a parent can give his children is a few minutes of his time each day. “– Orlando Aloysius Battista

Estate Planning and Power of Attorney: Managing Gift Giving

As people live longer, dementia and other mental disabilities become more common, posing challenges in estate planning. To manage this, elderly individuals often appoint an attorney-in-fact through a power of attorney (POA) to handle their financial and medical affairs. Typically, the attorney-in-fact is an adult child, which can lead to questions about the appropriateness of gift giving, especially when the attorney-in-fact is a recipient of the gifts.

IRS Ruling on Gift Giving

In a private letter ruling, the IRS allowed the annual gift tax exclusion amount ($18,000 for 2024) in cases where an attorney-in-fact made gifts to herself and her children. This can help reduce the taxable estate by the exclusion amount for each gift. However, the IRS requires certain conditions to be met, which may not be common for all taxpayers.

Example Scenario

A mother executed a durable power of attorney, naming her spouse as the agent and her daughter as the alternate. After the spouse died, the daughter, using the POA, created two trusts on her mother’s behalf:

• • • A qualified personal residence trust that would transfer the residence to the daughter after the trust term.
    • A trust for the benefit of the daughter’s children.

These transfers were reported on gift tax returns, and the applicable tax was paid.

The POA gave the daughter broad authority to perform any act her mother could do if personally present. The daughter was also the sole beneficiary of her mother’s estate. The mother had a history of making substantial gifts, exceeding the annual exclusion amount. When she died, her estate was much larger than the total value of the gifts made by her daughter.

IRS Criteria for Gift Authorization

The IRS’s decision on whether the gifts were complete for tax purposes depended on whether a state court would likely find the gifts authorized under the POA. The IRS considered the following:

Specific Authorization: Does the POA specifically authorize gift giving? If not, proving authorization is more challenging.

Beneficiaries’ Identity: Are the gift recipients also beneficiaries under the decedent’s will? This suggests the decedent’s intent to authorize such gifts.

Sufficient Assets: Did the person who executed the POA have enough assets to cover living expenses and avoid economic disadvantage after the gifts?

Previous Gift-Giving History: Was there a history of gift giving that aligns with the gifts made under the POA? Consistent past gift giving supports authorization.

Avoiding Tax Litigation

To avoid tax litigation, it’s beneficial to draft a POA that explicitly includes the power to make gifts and reflects the grantor’s intent to continue a gift-giving plan if appropriate. This is particularly useful for estates near or within the taxable range. However, if the grantor is less concerned about maximizing tax savings, as may be the case when the POA is granted, and the estate is not large, this situation may still attract IRS scrutiny.

Conclusion

Clear and specific provisions in a power of attorney help ensure that gift giving is authorized and consistent with the grantor’s intent, potentially reducing estate tax and avoiding IRS issues.

Preface: “Great things in business are never done by one person; they’re done by a team of people.” – Steve Jobs

When is a Partnership IRS Form 1065 Filing Required?

Understanding when to file IRS Form 1065 is crucial for anyone involved in a partnership. The Form 1065, also known as the U.S. Return of Partnership Income, is the form that partnerships use to report their income, deductions, gains, losses, and other financial details to the Internal Revenue Service (IRS). Knowing the requirements and deadlines for this form helps ensure compliance with federal tax laws and avoids potential penalties. Here’s a detailed look at when a partnership is required to file Form 1065.

What is a Partnership?

A partnership is a business entity where two or more people join together to carry on a trade or business. Each partner contributes money, property, labor, or skills and, in return, shares in the profits and losses of the business. There are different types of partnerships, including:

• • General Partnerships (GP)
  • Limited Partnerships (LP)
  • Limited Liability Partnerships (LLP)
  • Limited Liability Companies (LLC) treated as partnerships for tax purposes

Regardless of the type, these partnerships are considered pass-through entities for tax purposes, meaning they do not pay income tax themselves. Instead, income, deductions, credits, and other tax items pass through to the individual partners, who report these items on their personal tax returns.

When is Form 1065 Required?

A partnership must file Form 1065 if it meets the following criteria:

1. 1. 1. It is a Domestic Partnership: Any partnership formed in the United States must file Form 1065. This includes general partnerships, limited partnerships, and limited liability partnerships.
      2. It is a Foreign Partnership Engaged in Trade or Business in the U.S.: Foreign partnerships that are engaged in trade or business within the United States are also required to file Form 1065.
      3. It has Gross Income or Deductions to Report: Any partnership that has income or expenses to report must file Form 1065, even if it has no taxable income. This ensures that all financial activities are documented and reported to the IRS.
      4. It Meets Certain Other Specific Criteria: Certain partnerships, such as those with foreign partners or those involved in farming or other specific industries, may have additional filing requirements. For example, partnerships with foreign partners may need to file additional forms and schedules along with Form 1065.

Exceptions to Filing Form 1065

While the general rule is that all partnerships must file Form 1065, there are exceptions:

1. 1. 1. Qualified Joint Ventures: A qualified joint venture conducted by a married couple who file a joint return can elect not to be treated as a partnership for federal tax purposes. Instead, each spouse can report their respective share of income and expenses on their individual tax returns, thus avoiding the need to file Form 1065.
      2. Disregarded Entities: A single-member LLC that is treated as a disregarded entity for tax purposes does not need to file Form 1065. Instead, the sole owner reports the income and expenses on their individual tax return.
      3. Electing Large Partnerships: Large partnerships, those with 100 or more partners, may elect to file Form 1065-B, U.S. Return of Income for Electing Large Partnerships, instead of the standard Form 1065.

Filing Deadlines and Extensions

The deadline for filing Form 1065 is the 15th day of the third month following the end of the partnership’s tax year. For most partnerships operating on a calendar year, this means the due date is March 15. If the due date falls on a weekend or a legal holiday, the filing deadline is the next business day.

Partnerships can request a six-month extension by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. This extension moves the filing deadline to September 15 for calendar-year partnerships.

Consequences of Failing to File

Failing to file Form 1065 on time can result in significant penalties. The IRS imposes a penalty for each month or part of a month the return is late, multiplied by the number of partners in the partnership. This penalty can add up quickly, making timely filing essential.

Conclusion

Filing IRS Form 1065 is a crucial requirement for partnerships to report their financial activities accurately. Understanding when and why this form is required helps ensure compliance with tax laws and avoids unnecessary penalties. Partnerships should stay informed about their filing obligations and deadlines to maintain good standing with the IRS and ensure smooth business operations. Whether a partnership is domestic or foreign, has income or deductions to report, or falls under specific exceptions, staying on top of these requirements is essential for successful and compliant business management.