Category: Uncategorized

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.

Preface: A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain – Mark Twain.

Umbrellas in Sunny Weather

In recent news, JPMorgan Chase CEO Jamie Dimon remarked that he is preparing the most prominent US bank for an economic hurricane on the horizon and advised listeners [investors] to do the same.

You know, I said there’s storm clouds, but I’m going to change it … it’s a hurricane, Dimon said. While [economic] conditions seem fine at the moment, nobody knows if the hurricane is a minor one or Superstorm Sandy, he added. Dimon continued to tell the roomful of analysts and investors; You’d better brace yourself. JPMorgan is bracing ourselves, and we’re going to be very conservative with our balance sheet. 

What was left unsaid in JPMorgan Chase’s publicized preparations for a financial hurricane is that some banks loan to borrowers on callable terms, i.e., the bank can call you and demand full payment of the remaining loan balance if they deem necessary.  A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. Mark Twain understands callable debt. What about you?

Before you become alarmed, this risk is more substantial for business loans and business real estate than home mortgages. So if you are an entrepreneur and haven’t checked the call features on your outstanding business bank debts, you’re advised to do so. Typically banks don’t call a loan if you’re meeting all the payment terms, but Jamie Dimon said he is preparing for significant financial risk(s). So it is plausible in the banking industry that it includes distressed business loans. 

If you pay your debt timely, the bank will likely never call your loan(s). So, for any entrepreneur who wants to plan for the imminent storm, here are a few suggestions. 

Firstly, do you know if you have any demand loans or term call options on your bank debt? Demand loans are often lines of credit that are renewed, say annually. This is the classic cause of business bankruptcy – a non-performing line of credit called when business cash flow is tight. After all, the bank needs to protect its equity. Typically, the prevention formula is to term or amortize your line of credits if unpayable in full after 6 to 9 months. 

A term call option loan is reviewed at specific intervals with a lender review process. If the review process occurs during exceptional cash flow duress, the bank can immediately demand full payment. The purchase of a loan call feature gives the bank protection of its asset(s). If the bank decides that having their money from you is safest, they can demand full payment when call provisions are in the loan terms. Often loans are called when your credit score is deteriorating, but could also remotely occur in an instance if a bank merely assesses your debt as perhaps a developing hurricane risk, to quote Jamie Dimon.

If you have callable debt, take extra precautions to keep your credit rating strong. Make all payments timely, and above all else, build a strong servant relationship with your banker(s). Proverbs 22:7 says, “the borrower is servant to the lender.” Servants have always benefited from a good or great master, so you will benefit from a good or great banker if your business has debt. 

Additionally, “The way to crush the bourgeoisie [middle class] is to grind them between the millstones of taxation and inflation” is a quote from Vladimir Lenin. In the Great Depression of 1929, when banks called loans, there wasn’t much of anything remaining after taxes were paid on the gains for some servants. Typically, inflation aligns with a higher tax environment, the likes of which would be a financial hurricane with present conditions. It’s not just interest rates. Higher taxes reduce cash flow for debt payments too.  

While home mortgage debt terms differ from business debt(s), this is written for entrepreneurs with any business debt level. As Jamie Dimon has warned, The US is approaching an economic environment of volatility and elevated risks. You now know what you should do to prepare. Invest the time to count the cost(s) of your business debt terms, and consult with necessary legal advisors if you have bank debt to assess any pending financial risk(s). 

Preface: Control your expenses better than your competition. This is where you can always find the competitive advantage. – Sam Walton

Arrangements that Recharacterize Taxable Wages as Nontaxable Reimbursements or Allowances

The IRS has provided guidance which clarifies that an arrangement that recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement for accountable expense reimbursement plans.

In general, employee business expense reimbursements that are paid through an employer’s accountable expense reimbursement plan are excluded from the employee’s adjusted gross income. An accountable plan basically requires employees to submit receipts for expenses and repay any advances that exceed substantiated expenses. Amounts paid to employees through an accountable plan are not taxable compensation. Thus, they are not subject to federal or state income taxes or Social Security taxes, or employer payroll taxes and withholding.

On the other hand, business expense reimbursements paid through a system that does not meet the specific requirements for accountable plans are considered paid under a nonaccountable plan, and are treated as taxable compensation. An employer can have a reimbursement plan that is considered accountable in part and nonaccountable in part.

A reimbursement plan must meet three requirements in order to be considered an accountable expense allowance arrangement:
• reimbursements must have a business connection;
• reimbursements must be substantiated; and
• employees must return reimbursements in excess of expenses incurred.

An arrangement satisfies the business connection requirement if it provides advances, allowances, or reimbursements only for business expenses that are allowable as deductions, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer. Therefore, not only must an employee actually pay or incur a deductible business expense, but the expense must arise in connection with the employment for that employer.

The business connection requirement will not be satisfied if a payor pays an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business expenses. Failure to meet this reimbursement requirement of business connection is referred to as wage recharacterization because the amount being paid is not an expense reimbursement but rather a substitute for an amount that would otherwise be paid as wages.

The IRS guidance includes four situations, three of which illustrate arrangements that impermissibly recharacterize wages such that the arrangements are not accountable plans. A fourth situation illustrates an arrangement that does not impermissibly recharacterize wages. In this arrangement, an employer prospectively altered its compensation structure to include a reimbursement arrangement.

Because of the difference in tax treatment of reimbursements under an accountable plan versus a nonaccountable plan, it is important to review your reimbursement policies. Please call our office with questions on your options under this IRS guidance.

Luncheon Invitation: Austrian Economics, Business Cycles, and the Theory and Practice of Money with Dr. Robert Batemarco

This luncheon presentation will have invaluable economic information that is more essential than ever before to the entrepreneurial community. With a practical focus and theme, Austrian Economics, Business Cycles, and the Theory and Practice of Money with Dr. Robert Batemarco will combine in-depth expertise from both academia and industry to equip attendees with a practical toolkit of understanding about the realities of economic truths.

Regardless of your economic and monetary knowledge, you will gain great insights from the brilliant splendor of economic truths illustrated in an easy-to-follow format from attending this presentation particularly relevant to business cycles and money.

Dr. Batemarco will explain, among a host of economic and monetary truths for entrepreneurship:

A) How does money benefit society?

B) Who is responsible for inflation?

C) How is the Fed destroying the Middle Class?

D) What does the Austrian theory of the business cycle teach us?

Dr. Batemarco has degrees in Economics from Princeton University (A.B, cum laude) and Georgetown University (M.A. and Ph.D.). He wrote his doctoral dissertation on Studies in the Austrian Theory of the Cycle and wrote the entry in the Elgar Companion to Austrian Economics on Austrian business cycle theory. He taught at Mises University, a week-long seminar in Austrian Economics, as well as at Fordham University and at Manhattan College.

He has had articles published in peer-reviewed journals such as the Review of Austrian Economics, Atlantic Economic Journal, Quarterly Journal of Austrian Economics, and Journal of Social, Political and Economic Studies; his online publications can be found on mises.org and fee.org.

When: Wednesday July 27th 2022
Time: 11:00AM – Segment 1
              12:00PM – Lunch
              1:15PM – Segment 2
             2:15PM – Wrap-up
Where: Shady Maple Smorgasbord

Register: This luncheon is free attendance for all firm clients and friends of the firm – email admin@saudercpa.com Seating limited

Preface: “Whether you come from a council estate or country estate, your success will be determined by your own confidence and fortitude” – Michelle Obama.

Charitable Remainder Trusts (CRT)

A charitable remainder trust (CRT) can be a powerful tax and estate planning vehicle. The technique works like this—a donor places appreciated assets, such as stock with growth potential or undeveloped real estate into a CRT. The donor receives an income-tax deduction in the year of the gift based on the present value of the remainder interest, as computed under certain IRS-provided tables. The charitable gift also removes the gifted assets from the donor’s estate and, thus, from exposure to estate taxes. The CRT, without direction from the donor, then sells the assets, incurring no capital-gains taxes for the donor. The CRT invests the proceeds in a new diversified portfolio, typically made up of income-producing assets such as high-dividend stocks, bonds, and real estate. The donor, or other person(s) designated by the donor, receives the annual income from the investments for either a set period of time, such as term of years, or for the life of an individual or individuals.

 The payout to the donor may be a fixed dollar amount or a fixed percentage of the fair-market value of the assets, so long as the dollar amount or the percentage is at least five percent of the value. When the donor dies, the remainder goes to the qualified charity designated in the CRT.

 CRTs are divided into two main types. The first is a charitable remainder annuity trust (CRAT) and the second is a charitable remainder unitrust (CRUT). They can be set up during life (inter vivos) or at death (testamentary).

 CRATs

 A CRAT is an irrevocable trust that pays a non-charitable beneficiary an annuity interest with the remainder interest going to a charity. The Internal Revenue Code requires that the annuity payout percentage be at least five percent, but not more than 50 percent of the initial value of the trust assets (as finally determined for federal tax purposes). In addition, the value of the remainder interest must be equal to at least 10 percent of the net fair market value of the property transferred to the trust (on the date of contribution to the trust). The latter requirement effectively eliminates the use of CRTs by younger donors. That’s because the longer life expectancy of the donor or other income beneficiary reduces the amount of the remainder (charitable) interest. If a CRT fails this 10-percent test, the trust is either voided or it must make appropriate changes to meet the 10-percent requirement.

 In the case of a lifetime transfer, the donor receives both an income tax and a gift tax deduction for the present value of the charitable interest. In addition, the gift tax annual exclusion  may be used to reduce the value of the lead interest. The amount of the gift, income, or estate tax deduction (in the case of a testamentary CRAT) is the fair market value of the property transferred to the trust, minus the value of the annuity interest. If the annuity payments are received by someone other than the donor, gift or estate tax will be payable on the present value of the lead interest.

The term of a CRAT will either be (1) for some number of whole years (term certain), not to exceed 20 years, (2) the life of one or more persons (life), or (3) the shorter of term or life. When first establishing a CRAT, the present value of the remainder interest may be calculated using the Code Sec. 7520 rate for the month of the transfer date or the rate for either of the two preceding months. The Code Sec. 7520 rate is 120 percent of the federal mid-term rate rounded to the nearest 0.2 percent. It is published monthly by the IRS in a revenue ruling. Which of the three rates you select could make an important difference. Note that the higher the interest rate selected, the larger the income, gift, or estate tax charitable contribution deduction. And, in those cases in which the lead annuity interest is subject to gift tax, the higher the interest rate, the lower the amount of the taxable gift.

 CRUTs

CRUTs are similar to CRATs in several ways, such as the fact that the payout rate in a CRUT must also be at least five percent, but not more than 50 percent of the net fair market value of its assets, valued annually and, with respect to each contribution of property to the trust, the value of the remainder interest must be at least 10 percent of the net fair market value of such property as of the date the property is transferred to the trust.

However, in a CRUT, the annual payments may instead be fixed at the lesser of a stated percentage or the amount of income the trust actually produces. Such trusts are sometimes referred to as income exception unitrusts or net income unitrusts (NICRUTs). When the income produced is less than the unitrust payment amount, a payment deficiency builds up. Then, if the trust later produces income in excess of the unitrust payment amount, the difference is distributed to the beneficiary until the deficiency buildup is gone.

CRATs vs. CRUTs—Advantages and Disadvantages

A CRAT is generally inferior to a CRUT if the trust assets are expected to appreciate rapidly. This is because in a CRAT, all of the trust return in excess of the payout rate accumulates and goes to the charity at the end of the trust term. However, in a CRUT, because the unitrust assets must be revalued each year, part of the growth in principal is paid to the holder of the unitrust interest in the form of higher annual payments. On the other hand, for this same reason, a CRUT may not be advantageous when asset values fall.

If the assets to be transferred to the charitable trust are difficult-to-value assets, such as closely held stock or real estate, a CRAT may be a better planning device than a CRUT. The fact that the assets in a CRUT must be re-valued each year adds expense and administrative inconvenience.

Another difference between CRATs and CRUTs is that it is possible to make additional contributions to a CRUT and receive a charitable deduction each year a gift is made. This could prove advantageous for investors with a large position in a stock that they wish to sell over a period of years. Alternatively, a CRAT cannot accept additional gifts.

For further information on how a charitable remainder trust may be a valuable tool to implement as part of your planning strategy, please contact our office for information on our alliance affiliates.