Experience is the Difference®

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for some businesses, choosing a fiscal tax year can make more sense.

What’s a fiscal tax year?

A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30 of the following year. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March.

Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their return by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they would need to file their return by June 15. (Fiscal-year C corporations generally must file their return by the 15th day of the fourth month following the fiscal year close.)

When a fiscal year makes sense

A key factor to consider is that if you adopt a fiscal tax year you must use the same time period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.

For example, a snowplowing business might make the bulk of its revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of performance over a single season difficult.

In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.

Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.

It can make a difference

If your company decides to change its tax year, you’ll need to obtain permission from the IRS. The change also will likely create a one-time “short tax year” — a tax year that’s less than 12 months. In this case, your income tax typically will be based on annualized income and expenses. But you might be able to use a relief procedure under Section 443(b)(2) of the Internal Revenue Code to reduce your tax bill.

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business.

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Clip-art image of magnifying glass, glasses, calculator, pencil and other office supplies.  Delaware Accountant, Wilmington CPASome business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time. 

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process. 

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Your company probably offers its employees a retirement plan. If so, can you identify all of your plan fiduciaries? From a risk management perspective, it’s critical for business owners to know who has fiduciary status — and the associated liability. Here are some common, though in some cases overlooked, plan fiduciaries:

Named fiduciaries. The Employee Retirement Income Security Act (ERISA) requires a plan to have named fiduciaries. The plan document identifies the corporate entity or individual serving as the named fiduciary. If they aren’t immediately identified, the plan document will set the requirements for naming them.

Plan trustees. These are people who have exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary. These plan fiduciaries have a broad scope of responsibility.

Board of directors and committee members. The individuals who choose plan trustees and administrative committee members are considered under ERISA to be fiduciaries. Typically these are the members of the corporate board of directors. The scope of their fiduciary duty focuses on how they fulfill that specific function, and not on everything that happens with the plan itself. The law also sees as fiduciaries people who exercise discretion in key decisions about plan administration, including members of the administrative committee, if such a committee exists. 

Investment managers and advisors. The named fiduciary can appoint one or more investment managers for the plan’s assets. People or firms who manage plan assets are plan fiduciaries. However, individuals employed by third party service providers can fall into different fiduciary categories. The investment manager who has complete discretion over plan asset investments has the greatest fiduciary responsibility. In contrast, a corporation or individual who offers investment advice, but doesn’t actually call the shots, has a lesser fiduciary responsibility. 

These are just a few examples. Anyone who exercises discretionary authority over any vital facet of plan operations may be considered a “functional fiduciary.” Please contact our firm for a review of your retirement plan and its fiduciaries.
 
 
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Gifting Company StockEveryone needs a solid estate plan to distribute assets according to their wishes and benefit their heirs. But this necessity is especially keen for business owners, many of whom have spent years working hard to build up the values of their companies.

If you can relate to this statement, one effective way to reduce estate taxes is to limit the amount of appreciation in your estate — and your company may provide just the ticket for doing so.

Why appreciation?

You’ll save the most in estate taxes by giving away assets with the highest probability of future appreciation. Why? Because gifting these assets today will keep future appreciation on those assets out of your taxable estate. Thus, there may be no better gift than your company stock, which could be the most rapidly appreciating asset you own.

For example, assume your business is worth $5 million today but is likely to be worth $15 million in several years. By giving away some of the stock today, you’ll keep a substantial portion of the future appreciation out of your taxable estate.

What are the limits?

Naturally, there are limits to how much you can give without tax consequences. Each individual is entitled to give as much as $14,000 per year per recipient without incurring any gift tax or using any of his or her $5.45 million lifetime gift, estate or generation-skipping transfer tax exemption amount.

Also be aware that, because you’re giving away company stock, the IRS may challenge the value you place on the gift and try to increase it substantially. The agency is required to make any challenges to a gift tax return within the normal three-year statute of limitations — even when no tax is payable with the return. But the statute of limitations applies only if certain disclosures are made on the gift tax return. Generally, for gifts of stock that isn’t publicly traded, a professional business valuation is highly recommended.

Who can help?

If the idea of giving away portions of your business to reduce estate tax exposure intrigues you, please contact us. We can help you fully assess the feasibility of this strategy as it pertains to your specific situation.

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Things to do list: Review Business Tax Strategy, Update Succession plan,...

If you own or manage your own business, you are probably busy monitoring operations and dealing with everyday problems. But there are a few things that you should make time to do every year. These are important for your long-term business and personal success.

Review your business tax strategy.

A month or so after you've filed your tax return, make an appointment with your tax advisor. Go over your return together and identify opportunities for tax savings. Question everything, starting with whether you're using the right form of business entity. Ask about recent changes in the tax code and how they might benefit your business. Make your advisor a "partner" in your business strategy.

Update succession planning for your business.

Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan might mean promoting from within or recruiting externally. An up-to-date plan can be invaluable if you have an unexpected vacancy.

Review and update your personal estate planning.

If you're a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass a business on to your heirs. But your company, your personal circumstances, and the tax laws are continually changing. You should meet with your estate planner annually to make sure your plans are current.

Review your business insurance coverage.

Don't just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. Ask about new developments in business insurance. Use your agent's expertise to identify risk areas and suggest suitable coverage.

Review your business banking relationships.

Annually, you should go over your cash balances and banking relationships with your controller or CFO. Then both of you should meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had. Look for ways to reduce idle cash, boost interest earned, and improve cash flows.

Let us and your attorney assist you with the reviews and planning necessary to your business's long-term success. Give our office a call at 302.225.5000. 

 

 

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Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming. Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire. If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at 302.225.5000 your earliest convenience to make an appointment.

 

 

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Experience is the Difference®

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