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Accelerate Your Financial Retirement With Cash Balance Plans

How it Works

Cash balance plans offer owner-employees in professional practices a vehicle to defer tax on income more than the annual contribution limits of traditional Sec. 401(k) and profit sharing plans. Professional practices currently account for the highest use of cash balance plans, with the highest concentration in the medical field. Cash balance plans are appealing to this demographic of doctors, dentists, lawyers, and accountants because these professionals often larger annual salaries and get a later start in accumulating personal retirement savings.

Benefits

One valuable method of tax deferral is contributing to a retirement plan. Federal tax limits on contributions to Sec. 401(k) and profit sharing plans limit benefits that can be realized from this tax-planning strategy. The maximum contribution into defined contribution plans is $54,000 in 2017.

Since cash balance plans are considered defined benefit plans contributions are not subject to this federal tax limit. The limitation on cash balance plans is on the annual payout the plan participant may receive at retirement. To optimize tax deferral and retirement savings, a cash balance plan can be used in conjunction with a Sec. 401(k) plan and a profit sharing plan.

Additional Benefits

Cash balance plans offer the added benefit of allowing the taxpayer to make significant retirement contributions over a compressed period.

Important Considerations

Owner-employees of professional practices can realize significant tax savings by using a cash balance plan but should undertake a comprehensive retirement and business analysis with a top-tier firm like Camuso CPA to determine whether it is appropriate for them.

Entities with established cash balance plans must pay into them every year, so cash balance plans are more suitable for established practices with a steady cash flow.

Although the annual pay-in does not have to equal the sum of the principal credits, the business must still meet the same minimum funding requirements as other defined benefit plans.

Cash benefit plans can also be costly to administer since businesses bear the costs of working with actuaries to determine pay-in amounts in addition to costs of general fund management.

When establishing a cash balance plan, it is also important to consider the effect of participation by non-owner employees during financial planning.

Consult with a trusted CPA before executing investment decisions or initiating any substantial changes to your retirement and investment plans. CPAs know your finances better than any other advisor and should have the expertise and network to offer valuable, preemptive recommendations. Investors and business owners of all types should look for an advisor that serves as a partner; an ideal CPA is a financial expert with companies within your industry that can provide ongoing financial and business advice when you need it most.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients. Contact us today for financial and tax planning and get your finances in order: https://www.camusocpa.com/contact/#/

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Common Questions Regarding Charitable Remainder Trusts

Do I have to take the income now?

You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized.

Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts.

 

Sounds great for me. But if I give away the asset, what about my children?

If you are concerned about replacing the value of the assets that you place into the charitable remainder trust for your children you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust (ILIT) or what is referred to as a Wealth Replacement Trust. The trustee of the insurance trust could then purchase enough life insurance to replace the full value of the asset, or more, for your children or other beneficiaries from the income generated.

 

What are my income choices?

You can receive a fixed percentage of the trust assets which is referred to as a unitrust. The amount of your annual income will fluctuate depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income could increase assuming the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

 

Who can receive income from the trust?

Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

 

The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).

 

Do I have to take the income now?

No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

 

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.

 

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

 

What kinds of assets are suitable?

The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.

 

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

 

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

 

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

 

For more information on charitable remainder trusts, or questions about getting CPA tax help in Charlotte, give us a call today.

 

 

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How to Asses S-Corporation Tax Exposure to Built-In Gains

Built-In gain taxes apply to S Corporations that were once C-Corporations. If you never operated your business as a C corporation, your corporation will not be exposed to built-in gains tax.  Additionally, you face no built-in gains tax when you convert your S corporation to a C corporation since this tax applies only if you convert from C to S

The built-in gains concern many C-corporation owners who want to convert their business to an S-corporation. Built-in gains tax exposure depends on the book and fair market values of the assets in your C corporation. For some businesses, the built-in gains tax will be a big problem, for others it can pose virtually none at all.

If your corporation is exposed to built-in gains tax, your S corporation pays the built-in gains tax at the highest corporate rate. The percent of the gain remaining after payment of the built-in gains tax now comes to the shareholder via the S corporation, where the shareholder pays taxes at his or her personal rate.

The built-in gains tax is designed to prevent C corporation owners from avoiding corporate-level tax on the sale of assets by converting to an S corporation before making the sale.   Lawmakers responded to this strategy by enacting a punitive tax on S corporations that sell assets they owned while they were under C-corporation structure.

If you are going to convert your C corporation to an S corporation, you first need an appraisal, because appreciation that takes place after the conversion is not subject to the built-in gains tax. The burden of proof is on the taxpayer to prove the fair market value at the time of conversion.

The total amount of gain potentially subject to the built-in gains tax is the net unrealized built-in gain on all your C corporation’s assets. To reduce built-in gains taxes, taxpayers often sell built-in loss properties to offset built-in gain properties during the same taxable year.

Taxpayers face potential built-in gains taxes for ten years after the date of conversion from a C-Corporation to an S-Corporation. Another common tax planning strategy is to  wait eleven years to sell the old C-corporation assets to totally escape the built-in gains tax.

Be aware that the built-in gains tax applies if you liquidate your S corporation before the 10-year period expires, since liquidation is treated as a deemed sale of your assets.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

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Avoid Common Mistakes When Converting to an S Corporation

Your business must meet specific requirements when it operates as an S corporation. If you violate any of them, your S-corporation reverts into a C corporation for three years which will result in double taxation and potentially be a costly error:

  • The S corporation must be a domestic corporation.
  • The S corporation must have less than 100 shareholders
  • The shareholders can only be people, estates, and certain types of trusts
  • All stockholders must be U.S. residents
  • The S corporation can have only one class of stock

If you live in a community property state, your spouse may be an owner of the corporation whether the stock is in only one person’s name because of community property law. If your spouse is an owner, your spouse must meet the all the S-Corporation qualification requirements. Your spouse must consent to the S corporation election on Form 2553 and your spouse must be a US resident.

You can create an LLC and then convert that LLC into an S corporation by following “Check and Elect” procedures:

  • File IRS Form 8832 to check the box that converts your LLC to a C corporation
  • Then file Form 2553 to convert your C corporation into an S corporation

Taxpayers can make these elections within the first two months and fifteens days of the next year to have it effective on the first day of the year. In general, your business needs to meet the requirements for S-corporation status on the day it files the S corporation election. For a calendar-year business, this means it must file by March 15 to have the election effective on January 1. The business would be required to meet the requirements for S corporation status for the entire year, even the period before you filed the election. Business owners must also obtain the consent of everyone who held stock in your corporation for that year to complete the election.

Specific types of loans can have negative implications to S-Corporations status with the IRS. If business owners make the wrong type of loan to their S-corporation, the IRS will treat that loan as a second class of stock and disqualify the S corporation. If the loan is less than $10,000 and the corporation has a written promised to repay you in a reasonable amount of time the loan will not be treated as a second class of stock and the S-Corporation will maintain its status.

If you have a larger loan, your loan is not considered a second class of S if it meets the following requirements

  • The loan is in writing.
  • There is a firm deadline for repayment of the loan
  • You cannot convert the loan into stock
  • The repayment instrument fixes the interest rate so that the rate is outside your control

 

S-Corporations can have separate classes of stock, as long as the only difference between them is the voting rights of each class For example, you can create both voting stock and nonvoting stock, as long as all other aspects of the stock are the same.  This is useful if you want to give someone distributions but not let that person have any control over business decisions.  Nonvoting stock can be very useful tax planning tool if you want to give money to someone in a lower tax bracket, such as your retired parents. We cover this strategy in more detail in later articles.

If you previously operated your business as a C corporation, you face special issues when you convert to an S corporation. These can be complicated, and will be covered in later articles.

Below are some issues to keep in mind:

  • Built-in gains tax
  • Loss of tax attributes.
  • LIFO recapture.
  • Passive investment income

 

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

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Streamline Your Accounting System – A CPA’s Perspective

Maintaining records allows you to gain perspective on your company and provides a basis for business decision making. The level of documentation and systems that you invest time and money into utilizing will depend on your level of business development and financial sophistication.

Business owners and investors in earlier stages of business often do not keep records or have very poor recordkeeping systems which exposes their business to an unnecessary level of risk. The business owner or investor does not know how their business or investments are performing throughout the year and they cannot properly substantiate deductions.

The first step to implementing a proper system is to develop a better system for documenting all income and expenses and maintaining them properly.  Business owners and investors can do this by first establishing a separate business bank account and following best practices detailed in an earlier article regarding commingling funds: https://www.camusocpa.com/finance/commingling-funds-a-cpas-perspective/#/

All payments that are made to vendors or creditors should be paid by cash or credit to maintain a document trail to track payments. All receipts and miles driven for businesses should be tracked and recorded in apps that allow ease of use and accessibility.

Additionally, before allowing any contractor to perform work for your business, they should be required to complete a W-9. All work and payments that you make should be codified in a signed agreement.

All records should be maintained on a business computer, with two backup versions maintained on the cloud and a thumb drive with a folder hierarchy that allows you to easily find and sort data.

Following the above guidelines is the first step to developing a system that will allow you to gain value from utilizing comprehensive software as your business advances.

After business owners or investors have established and integrated a documentation system they can utilize technology to help organize and file applicable documents. This will allow greater freedom to generate financial information so that you can measure business or investment performance.

At this level of financial sophistication and business activity taxpayers do not need comprehensive automated accounting systems but do need timely and accurate financial information for personal and bank purposes. This can be accomplished through a combination of the use of spreadsheets and banking tools.

Business owners and investors should create separate checking accounts for each business, rental property, or investment that they own.

This streamlines the process of tracking expenses and developing financial statements. Each quarter take the time to analyze and log your income and expenses into an excel spreadsheet, reconcile your bank accounts, and review your financial position with your CPA. https://www.camusocpa.com/contact/#/

In the next article on upgrading your accounting system, we will discuss accounting automation and outsourcing your accounting function: http://bit.ly/CamusoAcctII

All investors, agents and business owners should implement best practices regarding business account segregation and general accounting practices.  Maintaining separate personal and business accounts is the first step to establishing foundational accounting practices for your finances.

 

Camuso CPA PLLC  offers a series of services to develop and tailor a first-rate accounting system for your business needs.  Reach out to our team regarding any questions about commingling funds or establishing a first-rate accounting system.

Contact Us Today: https://www.camusocpa.com/contact/#/

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Cost Segregation: Accelerated Cash Flows and Opportunities For Growth

Cost Segregation studies allow tax payers to capture accelerated depreciation deductions by reclassifying components of a building into accelerated recovery periods Most commercial properties are depreciated over 39 or 27.5 years. Cost segregation studies are an approved method from the IRS that requires engineers and CPAs to reclassify portions of commercial properties to shorter depreciation lives, as short as 5 years. These accelerated deductions apply to both federal and state income taxes, allowing for significant cash flow increases.

Any commercial property is eligible for a cost segregation study. For every dollar, a cost segregation reclassifies from 39-year property to 5-year property results in an estimated 22 cent benefit. Cost segregation studies can provide a substantial return on investment.  A top-quality CPA firm with high-quality cost segregation services will be able to provide a fee proposal and estimated tax savings to determine the cost/benefit of the analysis and compliance. Contact Camuso CPA PLLC (CamusoCPA.com) today for a free initial consultation regarding a comprehensive cost segregation study, if eligible you will receive a free quote.

Case Study:

An apartment building with a tax basis of $1.5 million, with one year of standard 27.5 year accumulated depreciation can accelerate $263,424 in tax deductions in just 4 years with $143,314 in year 1.

Take a look at the chart below for an illustration, the red represents the accelerated cash return from the cost segregation study while the yellow represents a conservative estimated rate of return you can get from the accelerated cash flows.

Technology Disruption Offers Opportunity to Small Investors and Small Businesses

Traditionally, many CPAs do not have the expertise and depth within their professional network to deliver cost segregation studies.

Our team (CamusoCPA.com) and systematic process takes a comprehensive approach to cost segregation, by leveraging our network of licensed professional civil engineers, cutting edge technology and top-tier knowledge our team can efficiently do properties of any size.

Cost Segregation is now cost effective for smaller properties by using cutting edge technology and online software designed for CPAs who are strategically aligned with engineers that are experts in cost segregation.

Traditionally, cost segregation studies would only be recommended for larger properties with a tax basis over $1,000,000. The cost segregation industry is being disrupted, offering a great opportunity to smaller investors and business owners who can recognize this opportunity and capitalize on it to accelerate cash flows to improve their business or secure an additional strategic investment on properties with a tax basis as lows as $100,000 to $200,000.

Here is an additional article regarding technology disruption in the cost segregation industry: https://www.linkedin.com/pulse/technology-disruption-offers-tax-maximazation-small-camuso-cpa

The Process

The cost segregation process utilizes an engineering approach to identify assets that can be reclassified for accelerated depreciation, evaluating all available information and presenting the conclusions in a professionally documented format.

  • Review of all cost detail for the property
  • Inspection of facilities
  • Review of all blue prints
  • Reconciliation of all construction costs and estimates to the actual amounts incurred by tax life
  • Pro-rata allocation of soft costs

Timing

Tax regulations allow for taxpayers to retrospectively capture missed deductions provided by a cost segregation study.

Cost segregation studies can be performed at any time but in order to maximize tax deductions one should be performed as soon as possible.

Estate Planning Opportunities

Cost segregation studies can be a powerful estate planning tool.  Cost segregation studies offer an additional opportunity to reduce the decedent’s original tax basis for real estate assets that are recorded on their tax depreciation schedule before death. A cost segregation study can be done after a death occurs, but must be completed before filing the decedent’s final income tax return.

This can generate accelerated depreciation that can eliminate tax owed on the final federal income tax return, while reducing the building’s pre-stepped up tax basis. Since the federal income tax basis of the building is reset to fair market value on the date of death, neither the decedent nor the heirs realize any offset to future deductions typically associated with cost segregation studies.

Additionally, the recapture tax that is paid upon sale of the property on the accelerated depreciation deductions does not occur in estate planning situations.

Additional Strategies

Cost segregation studies can be combined with 1031 exchanges as a powerful tax planning toolset, allowing investors to accelerate the growth of their portfolios by capturing large tax deductions and deferring gains on the sale of properties.

Additionally, cost segregations can be combined with other studies, incentives and tax planning strategies including bonus depreciation, 179D Deductions, 45L Energy Credits, Insurance Replacement Appraisals, Tangible Property, Repairs & Maintenance Studies and much more.

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Technology Disruption Offers Tax Maximazation Opportunity to Small Investors and Small Businesses

Cost Segregation is now cost effective for smaller properties by leveraging cutting edge technology and software designed for CPA’s to collaborate with engineers that are experts in cost segregation.

Traditionally, cost segregation studies would only be recommended for larger properties with a tax basis over $1,000,000. The cost segregation industry is being disrupted, offering a great opportunity to smaller investors and business owners who can recognize this opportunity and capitalize on it to accelerate cash flows to improve their business or secure an additional strategic investment on properties with a tax basis as lows as $100,000 to $200,000.

Traditionally, many CPA’s do not have the expertise and depth within their professional network to deliver cost segregation studies.

Our team and systematic process takes a comprehensive approach to cost segregation, by leveraging our network of licensed professional civil engineers, cutting edge technology and top-tier knowledge our team can efficiently do properties of any size without an in-house team of engineers and consultants.

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