Tax Tips When Buying the Assets of a Business

Tax-Tips-When-Buying-the-Assets-of-a-Business

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

  1. Buy the assets of the business, or
  2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC.

Here, we’ll focus on the former. Keep reading to learn useful tax tips when buying the assets of a business.

Asset Purchase Tax Basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, and software and intangibles like customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset Purchase Results with a Pass-Through Entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes, or an S corporation. In those cases, post-acquisition gains, losses, and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset Purchase Results with a C Corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21 percent.

A Tax-Smart Purchase Price Allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

  • Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
  • Assets that can be depreciated relatively quickly (such as furniture and equipment), and
  • Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan Ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. The tax professionals at Ramsay & Associates can help you get the former instead of the latter. Getting your advisor involved early, preferably during the negotiation phase, is beneficial. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Pros and Cons of Turning Your Home into a Rental

Pros-and-Cons-of-Turning-Your-Home-into-a-Rental

If you’re buying a new home, you may have thought about keeping your current home and renting it out. But how much have you thought about this? Keep reading to learn some of the pros and cons of turning your home into a rental.

Becoming a Landlord

In April, average rents for one- and two-bedroom residences in the Twin Cities area were $1,150 and $1,792, respectively, according to the latest Zumper National Rent Report.

In other parts of the country, though, rents can be much higher or lower than the averages in this area. Becoming a landlord and renting out a residence comes with financial risks and rewards. However, you should also know that it carries potential tax benefits and pitfalls.

You’re generally treated as a real estate landlord once you begin renting your home. That means you must report rental income on your tax return. But you are also entitled to offsetting landlord deductions for the money you spend on utilities, operating expenses, incidental repairs, and maintenance (for example, fixing a leaky roof). Additionally, you can claim depreciation deductions for the home. And you can fully offset rental income with otherwise allowable landlord deductions.

Passive Activity Loss Rules

However, under the passive activity loss (PAL) rules, you may not be able to currently claim the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.

You should also be aware that potential tax pitfalls may arise from renting your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape tax on up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of your principal home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So, renting your home out for an extended time could jeopardize a big tax break.

Even if you don’t rent out your home long enough to jeopardize the principal residence exclusion, the tax break you would get on the sale (the $250,000/$500,000 exclusion) won’t apply to:

  • the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or
  • any gain allocable to a period of nonqualified use (any period during which the property isn’t used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse) after December 31, 2008.

A maximum tax rate of 25 percent will apply to this gain (attributable to depreciation deductions).

Selling Your Home at a Loss

What if you bought at the height of a market and ultimately sell at a loss? In such situations, the loss is available for tax purposes only if you can establish that the home was, in fact, converted permanently into income-producing property. Here, a longer lease period helps. However, if you’re in this situation, be aware that you may not wind up with much of a loss for tax purposes. That’s because basis (the cost, for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property.

So, if a home was purchased for $300,000, converted to a rental when it was worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

We Can Help

As with most things, there’s a lot to consider when weighing the pros and cons of turning your home into a rental. The details can be complicated, but the tax professionals at Ramsay & Associates are here to help. We can answer your questions and explain any tax implications to help you make the best and most informed decision. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Taking Your Spouse on a Business Trip? Can You Write Off the Costs?

Taking-Your-Spouse-on-a-Business-Trip-Can-You-Write-Off-the-Costs

A recent report shows that post-pandemic global business travel is going strong. The market reached $665.3 billion in 2022 and is estimated to hit $928.4 billion by 2030, according to a report from Research and Markets. If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips. Let’s look at what you can and cannot write off when taking your spouse on a business trip.

If Your Spouse is an Employee

The rules for deducting a spouse’s travel costs are very restrictive. First, to qualify for the deduction, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if their presence has a bona fide business purpose, unless the spouse is an employee of your business. This requirement prevents tax deductibility in most cases.

If your spouse is your employee, you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t enough for their presence to be “helpful” to your business pursuits — it must be necessary.

In most cases, a spouse’s participation in social functions, for example as a host, isn’t enough to establish a business purpose. That is, if their purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for their presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.

If your spouse’s travel satisfies these requirements, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

If Your Spouse Isn’t an Employee

Even if your spouse’s travel doesn’t satisfy the requirements, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50 percent of your travel costs to your spouse. You need only allocate any additional costs you incur for them. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid when traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.

And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse aren’t deductible.

We Can Answer Your Questions

You want to maximize all the tax breaks you can claim for your small business. So, if you’re taking your spouse on a business trip, the tax professionals at Ramsay & Associates can help iron out the details. Contact us if you have questions or need assistance with this or other tax-related issues.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

4 Reasons to Turn Down an Inheritance

4-Reasons-to-Turn-Down-an-Inheritance

Most people are happy to receive an inheritance. But there may be situations when you might not want one. You can use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause the asset to bypass your estate and go to the next beneficiary in line. Let’s take a closer look at why you might want to take this action with four reasons to turn down an inheritance.

Gift and Estate Tax Savings

This is often cited as the main incentive for using a qualified disclaimer. But make sure you understand the issue. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to non-spouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.

The exemption shelters a generous $13.61 million in assets for 2024. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $27.22 million in 2024 to their heirs, free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without them ever touching your hands can save gift and estate taxes for the family as a whole.

Generation-Skipping Transfer Tax

Disclaimers may also be useful in planning for the generation-skipping transfer (GST) tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $13.61 million for 2024.

If GST tax liability is a concern, you may want to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

Passing Down a Family Business

A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you can position stock ownership to your family’s benefit.

Charitable Deductions

In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance. But using a disclaimer can provide a deduction because the assets will pass directly to the charity.

We Can Help with the Details

Every situation is different, and there may be other reasons to turn down an inheritance, too. Additionally, be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received. In any case, before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, turn to the estate tax professionals at Ramsay & Associates. We can help you better understand the details and answer any questions. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

If Your Employees Get Tips, You May Qualify for a Tip Tax Credit

If-Your-Employees-Get-Tips-You-May-Qualify-for-a-Tip-Tax-Credit

Are gratuities routine in your industry? If you own a business in which your employees are tipped for providing customers with food and beverages, we have good news. You may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income. Keep reading to learn about this tip tax credit and how to claim it, should you choose to do so.

Credit Fundamentals

The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesn’t matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, they’re treated as if you paid them to your employees.

As you know, your employees are required to report their tips to you. You must:

  • Withhold and remit the employee’s share of FICA taxes, and
  • Pay the employer’s share of those taxes.

How to Claim the Credit

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

Let’s Look at an Example

Hypothetically, let’s say a server works at your restaurant and is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips, which she reports to you.

The server’s $2.13-an-hour rate is below the $5.15 rate by $3.02 per hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the server’s employer, you pay FICA taxes at the rate of 7.65 percent for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65 percent.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect to not take the credit, in which case you can claim the deduction.

Get the Credit You Deserve

If your business pays FICA taxes on tip income paid to your employees, this tip tax credit may be valuable to you. Other rules may apply. The tax professionals at Ramsay & Associates can help determine the best course of action for your business. Contact us with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.