Selling your business? Defer — and possibly reduce — tax with an installment sale

sell your business

You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it.
That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale.

Tax benefits

With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years.
This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.
For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).

Other benefits

An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer who lacks sufficient cash to pay the price you’re looking for in a lump sum.
Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Tax risks

An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.
It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With current tax rates quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.

Advantages and Disadvantages

As you can see, installment sales have both advantages and disadvantages. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us.

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.

Is a significant portion of your wealth concentrated in a single stock?

Reduce Your Investment Risk

Estate planning and investment risk management go hand in hand. After all, an estate plan is effective only if you have some wealth to transfer to the next generation. One of the best ways to reduce your investment risk is to diversify your holdings. But it’s not unusual for affluent people to end up with a significant portion of their wealth concentrated in one or two stocks.

There are many ways this can happen, including the exercise of stock options, participation in equity-based compensation programs, or receipt of stock in a merger or acquisition.

Sell the stock

To reduce your investment risk, the simplest option is to sell some or most of the stock and reinvest in a more diversified portfolio. This may not be an option, however, if you’re not willing to pay the resulting capital gains taxes, if there are legal restrictions on the amount you can sell and the timing of a sale, or if you simply wish to hold on to the stock.

To soften the tax hit, consider selling the stock gradually over time to spread out the capital gains. Or, if you’re charitably inclined, contribute the stock to a charitable remainder trust (CRT). The trust can sell the stock tax-free, reinvest the proceeds in more diversified investments, and provide you with a current tax deduction and a regular income stream. (Be aware that CRT payouts are taxable — usually a combination of ordinary income, capital gains and tax-free amounts.)

Keep the stock

To reduce your risk without selling the stock:

  • Use a hedging technique. For example, purchase put options to sell your shares at a set price.
  • Buy other securities to rebalance your portfolio. Consider borrowing the funds you need, using the concentrated stock as collateral.
  • Invest in a stock protection fund. These funds allow investors who own concentrated stock positions in different industries to pool their risks, essentially insuring their holdings against catastrophic loss.

If you have questions about specific assets in your estate, contact us. We can help you preserve as much of your estate as possible so that you have more to pass on to your loved ones

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.

3 traditional midyear tax planning strategies for individuals that hold up post-TCJA

tax planning strategies

With its many changes to individual tax rates, brackets and breaks, the Tax Cuts and Jobs Act (TCJA) means taxpayers need to revisit their tax planning strategies. Certain strategies that were once tried-and-true will no longer save or defer tax. But there are some that will hold up for many taxpayers. And they’ll be more effective if you begin implementing them this summer, rather than waiting until year end. Take a look at these three ideas, and contact us to discuss what midyear strategies make sense for you.

1. Look at your bracket

Under the TCJA, the top income tax rate is now 37% (down from 39.6%) for taxpayers with taxable income over $500,000 (single and head-of-household filers) or $600,000 (married couples filing jointly). These thresholds are higher than for the top rate in 2017 ($418,400, $444,550 and $470,700, respectively). So the top rate might be less of a concern.

However, singles and heads of households in the middle and upper brackets could be pushed into a higher tax bracket much more quickly this year. For example, in 2017 the threshold for the 33% tax bracket was $191,650 for singles and $212,500 for heads of households. For 2018, the rate for this bracket has been reduced slightly to 32% — but the threshold for the bracket is now only $157,500 for both singles and heads of households.

So a lot more of these filers could find themselves in this bracket. (Fortunately for joint filers, their threshold for this bracket has increased from $233,350 to $315,000.)
If you expect this year’s income to be near the threshold for a higher bracket, consider strategies for reducing your taxable income and staying out of the next bracket. For example, you could take steps to accelerate deductible expenses.

But carefully consider the changes the TCJA has made to deductions. For example, you might no longer benefit from itemizing because of the nearly doubled standard deduction and the reduction or elimination of certain itemized deductions. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for joint filers.

2. Incur medical expenses

One itemized deduction the TCJA has retained and — temporarily — enhanced is the medical expense deduction. If you expect to benefit from itemizing on your 2018 return, take a look at whether you can accelerate deductible medical expenses into this year.

You can only deduct expenses that exceed a floor based on your adjusted gross income (AGI). Under the TCJA, the floor has dropped from 10% of AGI to 7.5%. But it’s scheduled to return to 10% for 2019 and beyond.

Deductible expenses may include:

  • Health insurance premiums,
  • Long-term care insurance premiums,
  • Medical and dental services and prescription drugs, and
  • Mileage driven for health care purposes.

You may be able to control the timing of some of these expenses so you can bunch them into 2018 and exceed the floor while it’s only 7.5%.

3. Review your investments

The TCJA didn’t make changes to the long-term capital gains rate, so the top rate remains at 20%. However, that rate now kicks in before the top ordinary-income tax rate. For 2018, the 20% rate applies to taxpayers with taxable income exceeding $425,800 (singles), $452,400 (heads of households), or $479,000 (joint filers).

If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

You also may need to plan for the 3.8% net investment income tax (NIIT). It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income, or both.

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.

Does your business have to begin collecting sales tax on all out-of-state online sales?

collecting sales tax

You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax.

But for businesses with out-of-state online sales that haven’t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns.

What the requirements used to be

Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.

Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.

What has changed

In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is “unsound and incorrect,” and that the South Dakota tax satisfies the substantial nexus requirement.

The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes.

In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.

What the decision means

Wayfair doesn’t necessarily mean that you must immediately begin collecting sales tax on online sales to all of your out-of-state customers. You’ll be required to collect such taxes only if the particular state requires it. Some states already have laws on the books similar to South Dakota’s, but many states will need to revise or enact legislation.

Also keep in mind that the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The others weren’t argued in Wayfair, but the Court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.

Please contact us with any questions you have about sales tax collection requirements.

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.

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

virtual currency

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic, or cryptocurrency.

While most small businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more large businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be purchased for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date it was received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. Generally, the self-employment tax rules apply, based on the fair market value of the virtual currency on the date received, and payers must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors, or other service providers — contact us.

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.