Our Accounting Articles
Installment Sales Offer Both Pluses and Minuses
A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate. But an installment sale can backfire on the seller. For example:
- Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
- If tax rates increase, the overall tax could wind up being more.
Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.
© 2014 Thomson Reuters/Tax & Accounting
Is a Roth IRA conversion right for you this year?
If you have a traditional IRA, you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.
There’s no income-based limit on who can convert to a Roth IRA. But the converted amount is taxable in the year of the conversion. Whether a conversion makes sense for you depends on factors such as:
- Your age,
- Whether the conversion would push you into a higher income tax bracket or trigger the 3.8% net investment income tax,
- Whether you can afford to pay the tax on the conversion,
- Your tax bracket now and expected tax bracket in retirement, and
- Whether you’ll need the IRA funds in retirement.
Please click here to contact us if you would like us to help you to decide if a conversion is right for you this year. We can run the numbers for you so you make an informed decision.
© 2014 Thomson Reuters/Tax & Accounting
Give and Receive with a Charitable Remainder Trust
Would you like to benefit charity while reducing the size of your taxable estate yet maintain an income stream for yourself? Would you also like to divest yourself of highly appreciated assets and diversify your portfolio with minimal tax consequences? Then consider a Charitable Remainder Trust (CRT). Here’s how it works:
- When you fund the CRT, you receive a partial income tax deduction and the property is removed from your estate.
- For a given term, the CRT pays an amount to you annually.
- At the term’s end, the CRT’s remaining assets pass to charity.
If you fund the CRT with appreciated assets, it can sell them without paying tax on the gain and then invest the proceeds in a variety of stocks and bonds. You’ll owe capital gains tax when you receive CRT payments, but much of the liability will be deferred. Plus, only a portion of each payment will be attributable to capital gains. This also may help you reduce or avoid exposure to the 3.8% net investment income tax and the 20% top long-term capital gains rate.
For more ideas on tax-smart gifts to charity, minimizing estate taxes, maintaining an income stream or diversifying your portfolio tax efficiently, contact us.
© 2014 Thomson Reuters/Tax & Accounting
2 Tax Pitfalls of Mutual Funds
Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these two tax pitfalls:
- Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
- Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.)
If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, we’d be pleased to help you assess the potential tax impact and suggest ways to minimize your tax liability.
© 2014 Thomson Reuters/Tax & Accounting
Have you misclassified employees as independent contractors?
An employer enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws. However, there’s a potential downside: If the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties.
To determine whether a worker is an employee or an independent contractor, the IRS considers three categories of factors related to the degree of control and independence:
1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?
2. Financial. Does the employer control the business aspects of the worker’s job? Does the employer reimburse the worker’s expenses or provide the tools or supplies to do the job?
3. Type of relationship. Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?
Determining the proper classification under these factors may not be easy. If you’re concerned you may have misclassified workers, please contact us.
© 2014 Thomson Reuters/Tax & Accounting
Do you know the value of your assets?
With the gift and estate tax exemptions currently at $5.34 million, you might think that estate valuations are less important. But even if you believe that your estate’s value is under the exemption amount, it’s still important to know the value of your assets.
First, your estate might be worth more than you think. For example, if you own an insurance policy on your life, the death benefit will be included in your estate, which may be enough to trigger estate tax liability.
Second, obtaining a qualified appraisal can limit the IRS’s ability to revalue your assets. If you make gifts that exceed the $14,000 annual gift tax exclusion, you’ll need to file a gift tax return, even if the gift is within your lifetime exemption. Generally, the IRS has three years to audit gift tax returns and challenge reported values for gifted assets. But that period doesn’t begin until the gift has been “adequately disclosed.”
For assets that are difficult to value — such as closely held business interests or real estate — the best way to satisfy the adequate-disclosure requirements and avoid an IRS challenge is to include a qualified professional appraisal with your return.
Please contact us for more information on properly valuing your assets. We can help you comply with IRS requirements and keep taxes to a minimum.
© 2014 Thomson Reuters/Tax & Accounting