Author Archives: CN Staff

Asset Sales Versus Stock Sales: What You Need to Know

Selling a business is never a decision that should be made lightly. A business is something that you’ve likely worked hard to build from the ground up into the entity that you always hoped it could be – you don’t want to sell yourself short now that you’re moving onto bigger and better things. When it comes to selling a business, one of the most important decisions that you’ll have to make has to do with how the sale itself will be structured. In this situation, there are two main types that you have to decide between – an asset sale and a stock sale. What is the difference between these two options? Who benefits the most from each type of scenario? Thankfully, the answers are relatively straightforward.

What is an Asset Sale?

When selling a business as an asset sale, the important thing to understand is that the seller actually retains possession of the legal entity that represents the business. What the buyer is purchasing are the individual assets that the company holds. Those can include things like equipment and fixtures, but also extends all the way up to trade secrets, telephone numbers of customers and business contacts, inventory items and more.

An asset sale usually does not include any cash-based assets and the seller actually retains any long-term debt obligations that the business holds along with the legal entity of the business itself. However, normalized net working capital is also usually one of the assets that is handed over from seller to buyer in this type of a sale. This can include certain elements like accounts receivable, accounts payable, accrued expenses and more.

What is a Stock Sale?

With a stock sale, on the other hand, the buyer is really purchasing the shareholder’s stock of the seller directly. Even though the assets and liabilities that are transferred as a result of this type of sale tend to be very similar to an asset sale, the seller is also getting the legal entity or stake in the business at the exact same time. In a stock sale, any particular asset or liability that the buyer doesn’t expressly want will either be distributed (in the case of assets) or paid off entirely (in the case of liabilities) prior to the sale being completed.

An important difference between an asset sale and a stock sale is that in a stock sale, no separate conveyance of individual assets is required for the sale itself to be completed. This is largely due to the fact that the original title of each asset rests within the corporation, meaning that both are transferred from seller to buyer at the exact same time.

Who Benefits From Each Type of Sale?

Once you understand a little more about the differences between an asset sale and a stock sale, you must also understand which benefits in each type of situation. As is common with most business decisions, the different parties involved will usually favor one or the other depending on which side of the fence they fall on. Buyers tend to prefer asset sales, for example, as it affords them certain tax benefits that they won’t get from a stock sale. Sellers, on the other hand, tend to prefer stock sales because it often makes them less responsible for certain future liabilities that may present themselves like product liability claims, employee lawsuits and even benefit plans.

Perhaps the biggest reason why an asset sale is preferred from the point of view of the buyer is because the company’s depreciable basis regarding its assets is highly accelerated. An asset sale typically gives a higher value for assets that depreciate quickly. A particular piece of equipment that the business owns, for example, likely has a three- to seven-year shelf life. At the same time, lower values are given to certain assets that amortize much more slowly. Goodwill, for example, is generally considered to have a 15-year shelf life. This generates additional tax benefits on behalf of the buyer, doing a lot to reduce taxes as quickly as possible and thus improving the overall cash flow of the company during the first few years of its life. Buyers also tend to prefer asset sales because it’s much, much easier to avoid any potential liabilities like contract disputes or product warranty issues as a result.

This doesn’t mean that asset sales are universally easier for buyers, however. Certain types of assets are inherently hard to transfer due to certain issues like legal ownership and any third party consent that may be required. Intellectual property, for example, would likely require the seller to obtain some type of consent that can slow down the process of a sale dramatically.

One of the major reasons why sellers tend to prefer stock sales is because all of the proceeds they get from the sale are taxed at a much lower capital gains rate. When dealing with C-corporations, corporate level taxes are avoided entirely. Also, in a stock sale the seller is usually less responsible for any future liabilities – a products liability claim officially becomes the problem of the buyer at that point.

The Popularity of Asset Sales versus Stock Sales

According to research, approximately 30 percent of all business sales in the last few years were stock sales. It’s important to keep in mind, though, that this number varies wildly based on the size of the company that is being sold. Larger companies have a much higher chance of being stock sales than asset sales.

Regardless of whether you’re a buyer or a seller, it is always important to consult with your business partners, your legal representatives and your accounting professionals throughout all points of the process to help make sure that you’re making the most informed decision possible. The need to understand exactly what you’re buying, how you’re buying it and what it means for the future is of paramount importance, regardless of which party you belong to.

 

Was Your Refund Too High or Did You Owe Taxes? You Probably Need to Adjust Your W-4

If you are a wage earner and that is your primary source of income and you received a very large refund—or worse, if you owed money—then your employer is not withholding the correct amount of tax (but it probably isn’t your employer’s fault). Sure, you like a big refund, but you have to remember you are only getting your own money back that was over-withheld in the first place. Why not bank it and have access to it all year long instead of providing Uncle Sam with an interest-free loan?

Employers withhold tax based upon the information you provide them on Form W-4, and to adjust your withholding you will need to provide your employer with an updated W-4. Although the W-4 appears to be an easy form to fill out, this is where many taxpayers go wrong because they have other income, itemize their deductions or qualify for various tax credits.

You can solve this problem by using the IRS’s online W-4 calculator that helps taxpayers determine the correct amount of allowances to claim on their W-4. It takes into account a variety of issues, including itemized deductions, other income, tax credits, and tax already withheld.

You will need the following available before using the IRS calculator:

  • Your (and your spouse’s if you file jointly) most recent pay stub
  • A copy of your most recent income tax return

You will be required to estimate some values, so remember the results are only going to be as accurate as the input you provide.

Once you have determined the filing status and allowances to claim using the IRS calculator, download a copy of Form W-4, Employee’s Withholding Allowance Certificate, fill it in and give it to your employer.

Caution: If you are uncomfortable using the IRS’s online calculator, don’t understand some of the terminology, or have multiple jobs or a working spouse, you may need professional help to determine the correct number of W-4 allowances. Also the federal W-4 allowances may not translate properly for your state withholding.

Tip: Once your employer has implemented the new W-4 allowance, double-check the withholding to make sure it is approximately what you had intended. It is not uncommon for errors to occur in an employer’s payroll department that could lead to unpleasant surprises at tax time.

If you are self-employed, you generally pay estimated taxes instead of having payroll withholding. You may be self-employed and also have salaried employment, or your spouse may have payroll income or be self-employed. There are a multitude of possible combinations. If so, the IRS withholding calculator is not suitable for your needs, and you will probably need professional assistance in determining a combination of estimated taxes and payroll withholding.

Please call this office for assistance in preparing your W-4s and determining your estimated tax payments.

Time-Share Use as a Charitable Contribution

If you have ever attended a charity auction, it is not uncommon to see a week’s use of a time-share included in the items donated for auction. The time-share owners who donate these weeks generally do so in anticipation of being able to take charitable donation deduction on their tax returns.

How does one determine how much one can deduct for such a donation? The answer may come as a surprise. Per an IRS revenue ruling(1), the use of a property, or the permission to use and occupy a property, does not constitute a gift of property. In addition, the Internal Revenue Code does not allow a charitable deduction for a gift of a partial interest in a property unless this is done in trust(2). Therefore, no charitable contribution deduction is allowed for the use of a time-share property.

Time-share owners are generally required to pay an annual maintenance fee that covers the pro rata upkeep of the resort itself, plus housekeeping services. The question arises: Can the time-share owner deduct the maintenance fee for the week donated?

IRS regulations (3) allow deductions for expenses incurred in connection with personally rendered services to a qualified organization. However, services provided by others, even if paid for by the taxpayer, are not personally rendered to the charity and thus are not deductible. Since this includes the services provided by the time-share management company that are paid for with the taxpayer’s maintenance fees, the time-share’s maintenance fees for the donated period are not deductible.

However, if the taxpayer incurred other expenses in connection with the donated use of the time-share, such as driving to the time-share property to let the winning bidder into the unit, a deduction for those expenses would be allowed under IRS regulations (3). This is because the time-share owner would be performing the service directly for the charitable organization; a mileage deduction at the rate of 14 cents per mile would be allowed.

As a bottom line, the donation of the use of a time-share does not constitute a charitable contribution. If you have questions related to charitable contributions please give this office a call.

Most Overlooked Tax Deduction

One of the most overlooked tax deductions is what is referred to as the IRD deduction. IRD is the acronym for income in respect of a decedent. So what is IRD income? It is income that is taxable to the decedent’s estate and also taxable to the beneficiaries of the estate.

Estate tax is a tax on property transfers. Thus, when an individual dies, the value of all of his property is added up and the amount that exceeds the lifetime estate tax exclusion (currently at $5.45 million) less any prior taxable gifts is subject to estate tax. In some cases the estate includes items that are taxable both to the estate and to the beneficiaries, such as a traditional IRA, uncollected business income, and accrued bond interest. To make up for this double taxation, the beneficiaries are allowed an itemized deduction for the portion of the estate tax attributable to the double-taxed income.

The problem is that the beneficiaries do not receive anything from the estate to make them aware of an IRD deduction or the amount of the deduction, if one exists. A beneficiary must recognize when there is an IRD and a possibility of a deduction and make further inquiries.

The first clue is, did you as a beneficiary of the estate receive a Form 1099-R or Schedule K-1 with taxable income from the estate? If so, you need to inquire whether a Form 706 Estate Tax Return was filed, and if so, whether it resulted in tax due. If there was a tax due, then there is a good chance you are entitled to an IRD deduction. Request a copy of the 706 Estate Tax Return and provide it to this office so we can determine whether you are entitled to a deduction and if so, how much it is worth.

The deduction is generally the difference in the estate tax figured with and without the double-taxed income. Please call this office if you need additional information.

Big Business Write-Offs Available

With the enactment of the Protecting Americans from Tax Hikes (PATH) Act, Congress made two significant business-friendly changes in the tax law, extending bonus depreciation and making the Section 179 deduction’s higher expensing amount permanent. This article examines these changes so that you can take full advantage of them in your trade or business.

Section 179 Deduction – This provision allows a business owner or entity to immediately expense, rather than capitalize (depreciate), the cost of new or used tangible property—both personal property and certain real property—placed in service during the tax year. The maximum amount is adjusted annually for inflation and is $500,000 for 2016. However, based on Code Section 179, the maximum amount is reduced dollar-for-dollar by the cost of property placed in service during the tax year in excess of $2,010,000 (for 2016; this is also inflation-adjusted annually).

The PATH Act also dealt with the option to revoke the Section 179 election without the consent of the IRS, making it permanent as well; however, once an election is made and revoked, it becomes irrevocable.

In addition, the PATH Act permanently allows the ability to apply Section 179 expensing to off-the-shelf computer software and qualified real property, which is defined as qualified leasehold or restaurant property and retail improvements. In addition, the $250,000 expense limitation and the carryover limitations have been removed. Finally, air conditioning and heating units are eligible for expensing after December 31, 2015.

Bonus Depreciation – Although the PATH Act did not make bonus depreciation permanent, it extended it through 2019 by slowly phasing it out by reducing the bonus percentage. Bonus depreciation allows businesses to take a depreciation deduction in the first year that the property, which must be acquired new, is placed in service. This depreciation can be for as much as 50% in the years 2012 through 2017 before phasing out in 2018 and 2019; it will no longer be available after 2019 without further Congressional action. The following are the bonus depreciation percentage rates through 2019:

  • 50% through 2017,
  • 40% for 2018 and
  • 30% for 2019.

Bonus depreciation generally applies to property with a class life of no more than 20 years. It also applies to:

  • Qualified leasehold property (qualified interior improvement to nonresidential property after the building is placed in service).
  • Certain fruit- or nut-bearing plants planted or grafted before January 1, 2020.

Luxury Automobile Rates – Bonus depreciation also impacts the firstyear deduction for automobiles and small trucks; in the past, this has added $8,000 to the firstyear allowable deduction. Now that the bonus depreciation is being extended and phased out, so is the bonus allowance for automobiles and small trucks. Thus, the luxury auto rates will increase based on the following bonus depreciation rates:

  • 2015 through 2017 – $8,000
  • 2018 – $6,400
  • 2019 – $4,800

If you need assistance regarding strategies for your business’s use of the Section 179 expense deduction or bonus depreciation, please call this office.

Oops, Did You Forget Something on a Tax Return?

If you have already filed your tax return and overlooked an item of income or forgot to claim a deduction or credit, it is not too late! An amended return can be filed to correct an already filed tax return. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. Therefore, it is best to file an amended return as soon as possible to avoid the headache of IRS correspondence and to minimize the interest and penalties on any additional tax you might owe.

On the flip side, if you overlooked a significant deduction or tax credit and you have a refund coming, you certainly don’t want that to go by the wayside.

The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit information from delayed K-1s, or anything else that should have been reported on the original return.

If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complications once the IRS determines something is missing, so it is best to take care of the issue right away.

Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.

If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you.

Better To Sell Or Trade A Business Vehicle?

From time to time business owners will replace vehicles used in their business. When replacing a business vehicle, the tax ramifications are different when selling the old vehicle and when trading it in for a new vehicle. If the vehicle is sold, the result is reported on the taxpayer’s return as an above-the-line gain or loss. Since a trade-in is treated as an exchange, any gain or loss is absorbed into the replacement vehicle’s depreciable basis, thereby avoiding any current taxable gain or reportable loss.

Thus, it is generally better to trade in a vehicle that would result in a gain if it were sold and to sell a vehicle if doing so would result in a loss.

Let’s say a taxpayer sells a 100%-business-use vehicle for $12,000. The original purchase price was $32,000, and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better to sell the vehicle and deduct the loss rather than trade in the vehicle.

Sale price $12,000

Original Cost $32,000

Depreciation Taken <$17,000>

Depreciated Basis $15,000 <$15,000>

Loss <$ 3,000>

On the other hand, had the business owner sold the vehicle for $16,000, the sale would result in a $1,000 taxable gain, and trading it in would be a better option.

Caution: Sales to the same dealer are treated as trade-ins.

If a vehicle is used for both business and personal purposes, the loss or gain must be prorated for the proportion of business use, as the personal portion of any loss is not deductible.

If you are considering trading a vehicle in, determine whether the tax benefits exceed the additional money received from selling the old business vehicle, as trade-in values are generally less than actual sales values. You should also consider the time and energy it will take to sell the vehicle on your own.

This concept can also be used when selling or disposing of other business assets. If you have questions about how this tax strategy might apply to your specific tax situation, please give this office a call

Receiving Cash Tips? The IRS Is Watching

Anyone who collects tips must include them in their taxable income. This requirement is not limited to waiters and waitresses; it applies to anyone who collects tips, including taxicab drivers, beauticians, porters, concierges, etc.

Tips are amounts freely given by a customer to a person providing a service. They are generally given as cash, but they include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer, with these exceptions:

 

  • Tip-splitting – Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement by you (the employee initially receiving them). You should report to your employer only the net tips you received.

 

  • Service (cover) charges – These are charges arbitrarily added by the business establishment (employer) — for example, a specific percentage of the bill for parties exceeding X in number — and are excluded from the tip-reporting requirements. If your employer collects service charges from customers, your share of these charges, as determined by your employer, is taxable to you and should already be included as part of your wages.

Keep a running daily log of tip income — Tips are a frequently audited item, and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income. 

Report tips to your employer — If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes. If the tips received are less than $20 in any month, don’t think you are off the hook; although they need not be reported to the employer, these tips are still taxable and must be reported on your tax return, as they are subject to income, Medicare and Social Security taxes.

Employer allocation of tips — If you work for a large restaurant, you may find when you get your W-2 form that you got tips you didn’t know about. Restaurants with a large serving staff report a total called “allocated tips” to the IRS. Here is what allocated tips are all about:

Tip allocation applies to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport,” which happens if an employee reports tips that are less than 8% of the employee’s share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8% amount.

If this situation applies to you, the allocation amount will be noted in a separate box on your W-2, and these allocated tips won’t be included in the total wages shown on your W-2 form. You will need to report the allocated tip amount as additional income on your tax return unless you have adequate records to show that the amount is incorrect. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

Self-Employed Individuals – If you are self-employed, you don’t have an employer to report tips to, and you simply include the tips you’ve received in your self-employed income on your tax return for the year you received the tips.

Because they are usually paid in cash, tips are a frequent audit item. If you are receiving tips and have any questions, please give this office a call.

Minimizing Tax on Social Security Benefits

Whether your Social Security benefits are taxable (and, if so, how much of them are) depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.

• For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.

• How much of your Social Security benefits are taxable (if any) depends on your total income and marital status.
o If Social Security is your only source of income, it is generally not taxable.
o On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.
o If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.

• The following quick computation can be done to determine if some of your benefits are taxable:
Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.
The base amounts are:

• $32,000 for married couples filing jointly;
• $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
• $0 for married persons filing separately who lived together during the year.

Where taxpayers can defer their “other” income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.
Individuals who have substantial IRAs—and who either aren’t required to make withdrawals or are making their post age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give this office a call.

Can You Deduct Employee Expenses?

If you are an employee, you may be curious about which expenses relating to your employment are deductible on your tax return. This is a complicated area of tax law, and many expenses are deductible only if the expense is a “condition of employment” or is for the “convenience of the employer,” two phrases that are effectively the same.

In addition, other factors affect an employee’s ability to deduct expenses incurred as part of employment:

1. If an employer would have paid for or reimbursed the employee for an expense, but the employee chooses not to apply for or take advantage of that reimbursement, the employee cannot take a tax deduction for the expense.

2. Only those employees who itemize their deductions can benefit from business expense deductions. Thus, if you are using the standard deduction, you cannot receive any tax benefit for your job-related expenses. In addition, even when itemizing, miscellaneous itemized deductions must be reduced by 2% of your adjusted gross income (AGI). Employee business expenses fall into the miscellaneous itemized deduction category. As an example: if your AGI is $80,000, the first $1,600 (2% x AGI) of your miscellaneous deductions provide no benefit.

3. Miscellaneous deductions are not included in the itemized deductions allowed for computing the alternative minimum tax (AMT). Thus, if you are unlucky enough to be subject to the AMT, you will not benefit from your miscellaneous deductions for the extent of the AMT.

The following includes a discussion of the various expenses that an employee might feel they are entitled to deduct and the IRS’s requirements for those deductions.

Home Office – An employee can deduct a home office only if his or her use of the home office is for the convenience of the employer. According to the U.S. Tax Court, an employee’s use of a home office is for the convenience of his employer only if the employee must maintain the home office as a condition of employment. In an audit, the auditor will require a letter from the employer to verify that fact. Most employers are reluctant to make a home office a condition of employment due to labor laws and liability. In addition, an employee would also have to comply with the IRS’s strict usage requirements for home offices.

Computer – An individual’s property, such as computers, TVs, recorders, and so on, that is used in connection with his or her employment is eligible for expense or depreciation deductions only if that property is required for the convenience of the employer and as a condition of employment. Even if the condition of employment requirement is satisfied, a computer’s usage must be prorated for personal and business use.

Uniforms and Special Work Clothes – The cost and maintenance of clothing is allowed if:
(1) The employee’s occupation is one that specifically requires special apparel or equipment as a condition of employment and
(2) The special apparel or equipment isn’t adaptable to general or continued usage (so as to take the place of ordinary clothing).
Generally, items such as safety shoes, helmets, fishermen’s boots, work gloves, oil clothes, and so on are deductible if required for a job. However, other work clothing and standard work shoes aren’t deductible—even if the worker’s union requires them.

Education – To qualify as job-related, courses must maintain or improve the skills required by the employee’s trade or business (such as by helping the employee to meet professional continuing education requirements) or be required as a condition of employment. However, these courses must not be necessary to meet the minimum requirements of the job and must not qualify the employee for a new trade or promotion. If a course meets this definition, its cost is considered deductible as an ordinary and necessary business expense, and as such, it may be excluded from an employee’s income if the employer reimburses the employee for its cost. Note: Some education expenses may qualify for more beneficial education credits or an above-the-line-deduction.

Impairment-Related Work Expenses – Taxpayers who have a physical or mental disability that limits their activities can deduct impairment-related work expenses. For example, an allowable expense would be the cost of attendant care at the place of the taxpayer’s work.

Job-Search Expenses – Expenses related to looking for a new job in the taxpayer’s current occupation are deductible even if a new job is not obtained. To be deductible, the expenses cannot be related to seeking a first job or a job in a new occupation. If there is a substantial time gap between the taxpayer’s last job and the time when he or she looks for a new job, the expenses are not deductible.

Of course, all sorts of employee situations exist, including those in which the employee works at his or her local employer’s office and those in which the employee lives and works in a remote location. The deductions available to each employee vary significantly based upon that individual’s unique situation.

For more information related to employee expenses and what might be deductible in your situation, please give this office a call.