Author Archives: Nicola Neilon

IDEAS TO HELP YOU GET THE MOST FROM THE NEW TAX LAWS BEFORE YEAR-END

Some Of These Require Immediate Action – Before The End Of 2017

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Congress has passed the biggest tax reform bill in thirty years.  These new tax laws will make fundamental changes in the way you, your family and your business calculate your federal income tax bill.  They will also likely change the amount of federal tax you will pay.

Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to take advantage of strategies to lessen your overall tax burden. Here’s a quick rundown of last-minute moves you should think about making.

 

Lower Tax Rates Coming

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-throughs, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year.  Some possibilities follow:

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA.  This way, the original conversion to a Roth IRA will be cancelled out.  But you must complete the recharacterization before year-end.  Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

 


Key Take-Away

The general plan of action to take advantage of lower tax rates next year is to defer income into next year.


 

Changes To Deductions

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently okay.
  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

 

Other Tax Strategies To Consider

Here are some other last-minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

 

Next Steps

Please keep in mind that I’ve described only some of the year-end moves that should be considered in light of the new tax laws.  If you would like more details about any aspect of how the new law may affect you, please reach out to us to setup a conversation.

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POSTED BY

Nicola Neilon – CPA Partner
As a partner, Niki has assisted firms in restructuring their organization, minimizing tax obligations and providing for long-term growth and stability. Niki’s comfortable style and diligence in finding a suitable answer have quickly gained the confidence of our clients, as she works with them to meet their tax and accounting needs. Niki specializes in accounting, tax and auditing services for captive insurance companies, as well as business and tax consulting for small to medium sized businesses and individuals.
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WHY FEAR IS THE ENEMY OF ENTREPRENEURS

HOW TO GET PAST IT

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Investors who play the markets are often torn between fear and greed.  When stocks go up, they buy, sometimes taking on more risk than is wise.  When stocks go down, they sell, usually out of concern for losing it all.  Typically these investors follow trends because they fear they are missing out on opportunities.  Fear and greed.  These two shape the mindset and behavior of a certain type of investor.

I’ve also seen entrepreneurs oscillate between fear and greed.  When things are going well, they tend to take on more risk than they should.  Their confidence soars and they forget about the hard times.  But when things go wrong…  This can leave an indelible mark, a lasting sensibility that prevents them from taking necessary risks.

Neither fear nor greed are healthy for entrepreneurs.  Both cloud the vision and make it difficult to see real market opportunities in all their candor.  But of these two, fear and greed, I often find that fear is the most debilitating for entrepreneurs.  This inhibits them from taking reasonable risks, based on the best available information.  If you are struggling with fear and know it’s holding you back from achieving your full potential, I’d like to offer some insights about how to get past it.

 

Fear Produces Constriction

Franklin Delano Roosevelt famously said: “the only thing we have to fear is fear itself.”  He said this at a time when the future of the world was rather uncertain.  Global war and fascism threatened our very way of life.  Families huddled around radios at the end of the day to listen to war reports and wonder if their sons were okay.  FDR’s fire-side chats gave people hope, faith really, in a future that they could not see.

This faith was critical to stimulating action.  An entire nation mobilized in the face of uncertainty and took definitive action.  Factories sprang up and began cranking out machines.  Copper and paper drives produced stock-piles of materials used in the war effort.  Women who had been housewives went to work driving rivets into airplanes.  Action in the face of fear – this is what FDR produced.

But it’s an interesting statement: “the only thing we have to fear is fear itself.”    Why did FDR say fear is what we must fear?  Sounds strange, doesn’t it?  Here is what I’ve come to believe.

Fear causes people to lose sight of opportunities – of the potential victories.  Fear freezes us.  Fear produces constriction, a narrowing of vision.  Scientists tell us that a fight or flight instinct takes hold when we feel threatened.  The options are binary: fight or flee.

At a time when entrepreneurs most need information, options and a rational decision-making process, fear limits them.  It forces their hand, potentially causing them to make poor decisions.  Some of these decisions may have irreversible consequences.  The stakes are high.  This is why fear is the enemy of entrepreneurs – your enemy.

 


Key Take-Away

One of the worst things an entrepreneur can do is move ahead with half-hearted conviction.


 

What Entrepreneurs Fear

At Casey Neilon we are CPAs, but we are also entrepreneurs.  In fact I would say we are entrepreneurs first and accountants second.  For more than a decade we have seen the ups and downs of entrepreneurship.  We have taken many risks, some of which have turned out well and others not so much.

I believe entrepreneurs must take risks.  There is no reward without risk.  But when I work with clients who are facing a big decision or who are going through adversity, fear can stymie risk-taking.  Fear can make them feel boxed in, as if there is little hope for a way forward.  What sorts of things do entrepreneurs tend to fear?

  • Getting hit with a huge tax bill
  • Going through an exhaustive and disruptive audit
  • Losing wealth
  • Adverse economic headwinds that make growth seem impossible
  • Making the wrong or poor decisions at a critical moment
  • The power of the Federal and State governments
  • Dealing with complexities of all sorts that they do not understand
  • Being wiped out by situations they cannot see coming or control

These fears are real and so are the risks.  The professionals in our firm work with many entrepreneurs who face these fears.  Our managing partner worked with a client who endured the perfect storm a few years ago.  The real estate industry, in which his businesses were situated, tanked and nearly wiped him out.  An advisor gave him poor counsel.  Audits kicked in because of the poor advice.  A loved one passed away.  His business was on the edge of going under.  It seemed like everything was going wrong for him and his family.

But he didn’t panic.  It’s taken time and a lot of effort on his part, but he is back.  The audits are over.  Business has rebounded.  He gets better advice now.  The storm has passed.  He is not unscathed, that’s for sure.  But he loves what he does every day and looks forward to work.  He is a better entrepreneur today and has high hopes for the future.

 

How To Get Past Fear And Achieve Your Potential

After working with dozens of entrepreneurs who are facing adversity, and after watching my colleagues at Casey Neilon advise clients in similar situations, I’ve learned a few lessons.   If you want to get past fear and become a stronger and more confident entrepreneur, an entrepreneur who boldly takes advantage of real market opportunities, I believe you need 3 things:

  1. You need a trusted partner who can serve as your guide
  2. You need good information and reliable data
  3. You need a vision and a plan that you really believe in and are willing to risk everything to achieve

Let’s explore these a bit.

 

You Need A Trusted Partner

In the accounting industry, we are often thought of as technicians – as if the machinery of taxation is already set on the factory floor and we simply turn the knobs.  I believe that is a woefully inadequate picture of what we do.  At Casey Neilon, we are not simply tax technicians.  We are also business advisors.  The implications of our advice are far reaching, potentially life-altering.

For instance, a few years ago a client came to us with a big decision.  They had some available cash and felt that they could expand their business operations and achieve potentially exponential growth if they built a new facility and added new equipment.  But it was a big expense and a huge risk.

There were so many things to consider:

  • Were they investing in a growth industry with long-term potential?
  • Was it a better use of cash to buy land and build on it or was it better to rent a building and invest cash in more machinery? Which approach produced more profit, more scalable growth, more fixed costs that could be hard to unload if the market tanked?
  • Was it better to buy with cash, finance or some combination of both? For instance, was it better to buy the land and finance the equipment?
  • What were the tax implications of the various options?
  • How much cash did they need to keep in reserve for unplanned expenses?
  • How did the venture impact the valuation of the business? How did it impact credit standing with suppliers whose confidence was critical?
  • How did the venture impact the net worth of the business owners?

Behind it all, however, was the fierce belief in this entrepreneurial family that they could bet on themselves and win.  They could have taken that cash and invested it in a traditional portfolio of securities with a 30-year horizon.  But that was not even a consideration for them.

They wanted to take the risk.  They could envision that new building with its manufacturing facilities and the efficiencies and growth it would produce.  That vision excited them.  It seemed to be all they could think about.

We modeled out the various scenarios and the tax implications of each.  We looked at cash-flows and made projections on future sales based on a history of invoices and clients.  This helped them understand better their cash-on-hand requirements for operating expenses and reserves for the unexpected.

It was a tough decision with no perfectly clear answer about the best way to proceed.  Ultimately, the client chose to move ahead and we got to witness their dreams taking flight.  They chose a path, rolled the dice and dove in without looking back.  I love that about entrepreneurs.

But along the way, we helped them think through a lot of different things.  We spent a lot of time listening to them and understanding where they were coming from.  They told us stories about their family and childhoods and how these experiences shaped their values and their willingness to take risk.  They trusted us.

If you want to get past fear and achieve your potential as an entrepreneur, you need a trusted partner who gets you and can help you in those critical times when the outcomes really matter.

 

You Need Good Information And Reliable Data

It is an unfortunate reality for many entrepreneurs.  The information and data they rely on to make decisions is not accurate or up to date.  This takes several forms.

Numerous clients have retained us to provide oversight for internal bookkeepers and to find material inaccuracies and fix them.  If your financials are wrong, any models of future projections you build based on those financials will also be wrong.  This is like building sand castles on a beach all day in the hot sun only to have the tides wash them away in the evening.

It’s not just financial data that that can be troublesome.  The greater the complexity of your business and personal financial situation, the more options you have to mitigate taxes.  Some of these options can become quite complex.  Tax codes, regulations and laws change fairly frequently.  This is a major reason you need to be working with an entrepreneurially-oriented advisor who is experienced at navigating these complexities.

If you want to get past fear and achieve your potential as an entrepreneur, you need good information and reliable data.

 

You Need A Vision You Can Believe In

Fear limits vision.  But the right visioning process can put fear on the run.  Entrepreneurs are born dreamers.  But not all dreams are realistic or based on hard data.  This is where data-driven planning can be very helpful.

Business owners are faced with a barrage of decisions almost daily.  From staffing choices to inventory management to cash-flow planning to whether or not to take on that next big contract you’re not quite sure about.  Too many entrepreneurs make decisions by the seat of their pants, sometimes not even recognizing that they are making important decisions that could have long-term consequences.

While taking risk is necessary, not all risks are worth taking.  On more than one occasion, we’ve had clients inform us about decisions they’ve already made that they regret.  Had they come to us proactively and told me what they were thinking about, we could very likely have helped them arrive at a better decision.

If you want to move ahead with the utmost confidence, I believe you need both a vision and a plan.  The plan needs to be informed by and based on accurate and realistic data.  The plan should include multiple scenarios and your anticipated responses to those outcomes – before they ever happen.  Why should you do this?

Here is what I’ve noticed.  One of the worst things an entrepreneur can do is move ahead with half-hearted conviction.  Running any business is hard and requires sacrifice: long hours, financial risks, not to mention the impact on family life and the often-justified complaints that your body might be home, but your mind is still at work.  Heard that one?

If you’re going to endure all of that, do you really want to add self-doubt to the list?  Constantly second-guessing yourself because you didn’t do enough planning is like adding insult to injury.  Trust me – you don’t want to be there.

If you want to get past fear and achieve your potential as an entrepreneur, you need a vision and a plan that you really believe in and are willing to risk everything to achieve.

 

Why I Do What I Do

I love what I do.  I thoroughly enjoy working with entrepreneurs to help breathe life into their dreams.  But one of the most important things I do is to help my clients manage fear.  I give them clarity where uncertainty reigned.  That makes me very proud.

If you believe the horizon is dark, the goal is to circle the wagons and ride out the storm.  This mind-set causes you to miss opportunities – the very opportunities you need.  But if you have the right partner and the right plan based on hard data, you can move ahead with confidence about your future.

If there is anything I can do to help you achieve clarity and confidence, let’s talk.

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Nicola_Neilon-blog-author-image

POSTED BY

Nicola Neilon – CPA Partner
As a partner, Niki has assisted firms in restructuring their organization, minimizing tax obligations and providing for long-term growth and stability. Niki’s comfortable style and diligence in finding a suitable answer have quickly gained the confidence of our clients, as she works with them to meet their tax and accounting needs. Niki specializes in accounting, tax and auditing services for captive insurance companies, as well as business and tax consulting for small to medium sized businesses and individuals.
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