In commercial litigation, it is common for business valuation experts to measure damages based on lost profits, diminished business value, or both. Here’s an introduction to these concepts.

The Basics
Generally, it’s appropriate to estimate lost profits when a plaintiff suffers an economic loss for a discrete period and then returns to normal. On the other hand, diminished business value is typically reserved for businesses that are completely destroyed or suffer a permanent loss, such as the destruction of an entire division or product line.

In rare situations, lost profits may fail to adequately capture a plaintiff’s damages. For example, suppose a defendant’s wrongful conduct damages a plaintiff’s reputation but doesn’t directly affect the plaintiff’s expected profits. Nevertheless, the defendant’s actions have rendered the plaintiff’s business less marketable and, therefore, less valuable. In this situation, diminished business value may be an appropriate measure of damages, even though the plaintiff’s business will survive.

Double Dipping
There are important similarities between how lost profits and diminished business value are measured. Typically, lost profits are a function of lost revenue caused by the defendant’s wrongful conduct and avoided costs that otherwise would have been incurred to generate the revenue. Once lost profits have been estimated, the amount is adjusted to present value.

Alternatively, business value is generally determined using one or more of the following three techniques:

Cost (or asset-based) approach
Market approach
Income approach

Because value is generally a function of a business’s ability to generate future economic benefits, awarding damages based on both lost profits and diminished business value is usually considered double dipping. A possible exception is the “slow death” scenario: A defendant’s wrongful conduct initially causes the plaintiff’s profits to decline, but the plaintiff continues operating. Eventually, however, the plaintiff succumbs to its injuries and goes out of business. In these cases, it may be appropriate for the plaintiff to recover lost profits for the period following the injury along with diminished business value as of the “date of death.”

There’s a Difference
Both lost profits and diminished business value involve calculating the present value of future economic benefits. However, the two approaches have distinct nuances, and the calculations used for each to determine damages will, in most cases, not yield the same result. For example, lost profits are typically measured on a pretax basis, while business value is often determined based on after-tax cash flow.

The fair market value of a business may include adjustments such as discounts for lack of marketability and key person risks, which are often not considered when estimating lost profits. Additionally, business value is based on what is “known or knowable” as of the valuation date, whereas lost profits calculations may sometimes account for developments that have occurred up to the time of trial.

Another differentiating factor lies in each approach’s perspective. Fair market value is generally based on the perspective of a hypothetical buyer, while lost profits consider the specific plaintiff’s perspective.

For example, while lost profits are typically measured on a pre-tax basis, business value is generally determined by after-tax cash flow. Often, a business’s value may include adjustments such as discounts for lack of marketability and key person risks. These may not be considered when estimating lost profits.

Moreover, business value is based on what’s “known or knowable” on the valuation date, but lost profits calculations may sometimes consider developments that have occurred up to the time of trial. Another differentiating factor is each approach’s perspective. Fair market value is generally based on the perspective of a hypothetical buyer, while lost profits can consider the specific plaintiff’s perspective.

Which Way to Go?
Lost profits and diminished business value are closely related, but they’re not identical. Contact us to discuss which measure is appropriate for your situation and how it might affect the outcome.

This material has been prepared for informational purposes only and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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On the campaign trail, Trump vocally championed American business interests and vowed to support corporate America and draw business back into the U.S. Now it’s showtime, and one area where we may see Trump’s plans begin to emerge is in changes to business tax law and policy. While no detailed tax plan has been issued yet, Trump has hinted at how tax policy may take shape next year.

Trump has proposed a 1% decrease in the corporate income tax rate, which presently stands at 21%, and he is suggesting a more substantial 15% rate for companies that manufacture in the U.S. This tax cut is relatively modest, but it will increase corporate profits and give businesses more resources to reinvest and grow. Unless the changes also address pass-through tax rates or deductions, there will likely be no significant benefits for small businesses organized as pass-through entities. There is the possibility that the tax cut could improve global competitiveness and tempt international corporations to return or transfer operations to the U.S., potentially stimulating modest economic growth.

Though a 1% decrease seems insignificant, given the scale of U.S. corporate earnings, it could have a noteworthy and negative impact on U.S. tax revenues and may increase the country’s deficit. Much will depend on how businesses use their 1% savings, where they allocate them, and how the broader economic environment reacts to the adjustment.

Trump also proposes to repeal the limitation on excess business losses for non-corporate taxpayers. The limitation, created by the American Rescue Plan Act of 2021 and extended through 2028 by the Inflation Reduction Act of 2022, prevents non-corporate taxpayers from deducting excess business losses above $578,000 (2023-married filing jointly) or $289,000 (other), with any excess losses treated as net operating loss carryforward (subject to indexed thresholds).

Repealing this limitation would mean more deductions available for non-corporate taxpayers, including S Corps, partnerships, and sole proprietors. It would enable them to offset their business losses against other types of income, like wages or investment income, and overall, it would reduce their tax burden. Critics may claim that this tax cut favors the rich, who have multiple income streams and are more likely to have large business losses and other income to offset.

Besides tax relief, the injection of additional cash into businesses could spur growth and reinvestment. As above, this tax cut would also reduce federal tax revenues and may raise the deficit unless other revenue-generating measures are implemented.

Even with the possibility of a Republican-controlled Congress, it is uncertain whether Trump will be successful in pushing through tax cuts and policy changes. He may face backlash from the public for seemingly favoring the wealthy, or lawmakers may question whether his tax initiatives can benefit the overall economy. The Fed will be cautious of any changes impacting inflation and, by extension, interest rates. With so many economic moving parts, it is hard to predict whether or how Trump’s intentions will be realized.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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As we stepped into 2024, the investment landscape was filled with uncertainty. Several significant challenges loomed, posing threats to financial stability. Some of these challenges included:

Persistently high inflation
Widespread predictions of a recession by economists and strategists
Uncertainty surrounding the Federal Reserve’s next steps
A rapidly escalating national debt
Historically high interest rates
An imminent housing crash fueled by those high rates

These menacing issues were further intensified by the pending election, with its highly charged public sentiments and the expectation of political unrest and chaos.

Despite these challenges, the stock market has shown remarkable resilience, surging 27.56% year-to-date in 2024. This performance underscores an important lesson: attempting to time the market based on macroeconomic conditions or political developments is a futile exercise.

You might be thinking, “If the market weathered all these storms, doesn’t that mean it never goes down? Maybe investing is smooth sailing.” But that assumption couldn’t be further from the truth. Historically, the market experiences a 30% correction approximately once every five years, in addition to many smaller intermittent corrections. It’s far from a smooth ride. The takeaway is that predicting when the ups and downs will occur is incredibly difficult—arguably impossible.

Instead of getting caught up in fear or trying to anticipate market movements, a prudent investor focuses on maintaining a diversified portfolio and committing to their long-term financial goals. By tuning out the noise and staying invested, you can position yourself to benefit from the market’s resilience and the power of compounding your investment over time.

2024’s stock market resilience, despite a seemingly endless array of concerns, serves as a powerful reminder that time in the market—not timing the market—is the key to investment success. As we navigate the unpredictable road ahead, remain disciplined, stay invested, and trust in the long-term potential of the U.S. stock market to deliver substantial returns.

his material has been prepared for informational purposes only and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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They say a cluttered desk is a sign of a cluttered mind. For businesses, messy or inaccurate financial records signify more than disorder; they reflect a company in chaos—one that is likely flying blind financially. Outsourcing Client Accounting Services (CAS) is an effective way to turn financial chaos into clarity.

For small businesses with revenues under $10 million, maintaining a full-time CFO can cost anywhere from 2% to 5% of annual revenue. If the expense of a full-time executive is too steep for your business, outsourced CAS services offer essential solutions to help you operate effectively and remain compliant. CAS services typically include accounting operations, strategic financial planning, cash flow management, budgeting, forecasting, and expert financial guidance.

Why Does a Business Need Accurate and Timely Financial Statements?

Financial statements are the building blocks of any well-run company. Accurate and timely financials are essential for:

Tax reporting and compliance
Financial planning and budgeting
Securing financing or attracting investors
Managing operations efficiently

Poorly executed financial reporting can invite tax audits, compromise financing opportunities, and damage a company’s prospects for a potential sale. On a practical level, not knowing the state of your finances leads to losing control over cash flow and expenses. Management cannot set or implement long-term business goals or develop effective strategies. Decision-making becomes impaired.

Bottom line? Bad books mean management will make bad decisions.

What is Financial Reporting?

Financial statements consist of three key components that provide insights into a company’s assets, liabilities, and equity:

Balance Sheet: This snapshot of a company’s financial standing at a specific point in time shows assets, liabilities, and the difference between them—known as shareholders’ equity (also referred to as net worth or owner’s equity).
Income Statement: Also called a profit and loss statement, this document reflects a company’s financial performance over a given period. It identifies revenues, expenses, and the resulting net income or loss.
Cash Flow Statement: This statement tracks the movement of cash in and out of a business during a specific period, showing how well a company generates and uses cash.

How Do Bad Reporting Habits Play Out?

Consider XYZ Corp., a company plagued by constant turnover in its finance department. Its CEO, more focused on improving his golf handicap than reviewing financials, ignored ambiguous and incomplete records.

The consequences were severe. The company couldn’t track cash flow; payments to suppliers were missed; employees’ salaries were issued late; and the company underreported taxable income, inviting an IRS audit.

The CEO was mid-swing on the fourth hole when the office manager called to inform him of the audit. The result? Fines, penalties, and reputational damage. Eventually, when XYZ Corp. tried to sell, buyers were unwilling to move forward because the company could not demonstrate consistent financial health. The company went bankrupt, and the CEO’s golf handicap remained depressingly high.

What Are the Two Most Essential Rewards of Sound Financial Reporting?

Informed Decision-Making
Accurate financial records are vital for making informed decisions. They enable management to assess company goals, forecast future revenues, and allocate resources effectively. Financial data can help identify internal trends: Are costs rising? Are revenues declining?

With this insight, management can make proactive adjustments to “right the ship.” They can prioritize expenditures, focus on strategic investments, and ensure long-term stability.

Improved Cash Flow Management
Cash flow describes the inflow and outflow of funds used for daily operations, such as taxes, payroll, inventory, and other expenses. By analyzing cash flow data, management can anticipate and prepare for periods of low cash flow. They can then prudently decide whether to postpone non-essential expenditures or perhaps secure short-term financing, if needed.

Efficient cash flow management ensures stability, prevents debilitating shortfalls, and gives management the flexibility to focus on growth and success.

Watch Your Bottom Line

Financial statements provide management with a clear view of future investments and expenditures while serving as benchmarks for performance assessment. They can also instill confidence in investors who need assurance before allocating capital.

For organizations that lack the size or capacity to staff in-house personnel for financial reporting, outsourcing CAS services can make a significant difference. Professionally managed back-office accounting operations allow management to focus on operations, strategy, and growth objectives.

Neglecting financial accuracy can result in missed opportunities, poor decision-making, and even legal consequences. Can your business afford the risk?

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With Trump’s recent victory, real estate professionals are counting on seeing significant rate cuts and enjoying potential benefits. These include a more vigorous market, relief for buyers, and more favorable financing conditions, by way of lower interest rates for investors. Bus this rosy forecast may be met with rain clouds.

Trump’s proposed tax cuts are meant to create a more business-friendly economic environment and may mildly stimulate the economy by increasing business investment. However, the Federal Reserve (Fed) exercises a dual mandate: to control employment and keep inflation down. If the economy weakens, the Fed usually responds by stepping in and lowering rates to stimulate growth. Conversely, when the economy heats up, more money is circulating in the system and inflationary conditions can develop. To manage inflation the Fed may raise rates to control and stabilize the economy. When the economy is healthy, the Federal Reserve is less inclined to lower interest rates, to prevent the risk of the economy overheating.

Trump also proposes to impose tariffs on imports; a move that unlikely to prompt the Fed to lower rates and may even have the opposite effect. Tariffs are inherently inflationary, as they raise the cost of imported goods; and that cost ultimately finds its way to the consumer in the form of higher sticker prices. When prices rise, the Fed would be careful to avoid further rate cuts and instead would consider moving rates upward to counter inflationary pressures.

Based on the above, the environment created by Trump’s proposals, while beneficial to businesses and taxpayers, is at odds with conditions that would motivate the Federal Reserve to lower interest rates. Improving the economy will benefit the country – but are unlikely to warrant a decrease in interest rates.

That said, there’s room for an alternative perspective. A strong economy is a double-edged sword when it comes to interest rates. In a stable and non-volatile economy, Treasury rates fall. Investors are seeking safer assets, the increased demand for Treasury bonds drives their prices higher and yields lower. This decline in Treasury rates creates a ripple effect throughout the financial system, influencing other rates. As Treasury rates decline the global lending environment reacts. International borrowers are drawn to the US’s favorable market rates and increasing demand for US debt drives down lending rates further, including consumer and mortgage rates. Treasury rates, global lending, and consumer rates share a reciprocal relationship. The ‘zero risk rate’ set by the Treasury becomes the baseline for lending, when it is at a low, borrowing becomes cheaper for everyone.

Potential chain reactions from fluctuations in the 10-year Treasury bond market and the Federal Funds Futures remain uncertain and may have broader economic benefits. Lower consumer and mortgage rates spur growth by increasing disposable income. More disposable income translates into more discretionary purchasing – a boost for the retail and service industries. Businesses will take advantage of more affordable lending terms and can invest in big-ticket projects, expansion, and technology – which promotes employment across many sectors.

Additionally, a potential inflation buster that could lead to lower rates is Trump’s proposal to ease drilling restrictions to boost domestic oil and gas production. Energy prices are a significant driver of inflation. Lower energy costs will also result in reduced price increases and more disposable income for taxpayers to spend on consumer goods.

While on the campaign trail, Trump proposed that the president should have influence over the Federal Reserve’s interest rate decisions. In response, Chairman Powell, a Presidential Appointee, made clear that he would continue to run the Fed as an independent entity. Trump may be motivated to dismiss Powell and replace the Fed Board with more dovish appointees who are more sympathetic to lowering rates. However, there is no legal mechanism to remove an appointee, and the President cannot directly discharge the Fed Chair without legal cause. Trump may contend that Powell was appointed by a president and therefore, a president can remove him. Alternately, he may attempt to publicly pressure Powell to resign. I believe that both alternatives would fail and would provoke market instability and public criticism.

What can we conclude from our current combination of economic and political landscape? Optimists can stay hopeful, but even while market predictors prophesize a steady gradual decline in interest rates, I believe it is improbable that the Trump administration will be the catalyst for steeper cuts than those already built into market predictions. My advice to clients is to refrain from making assumptions or business decisions based on the expectations of drastically lower rates. Exercise caution when underwriting or investing in deals that depend heavily on significant rate declines. Instead, investors should focus on making decisions that prioritize long-term growth and remain sustainable across a variety of economic scenarios.

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The Medicare Advantage Plan is an alternative to traditional Medicare that allows eligible participants to access their benefits through private insurance plans within Medicare. Medicare Advantage (MA) Plans have become an increasingly popular choice for participants because of the lower rates and added benefits offered. But for the skilled nursing homes responsible for delivering the services covered by MA plans, the fallout is far more unfavorable. Will MA plans irreparably damage the SNF industry?

Skilled nursing facilities generally receive lower reimbursement rates under MA plans than under traditional Medicare. The Federal government, through CMS, pays MA plans a fixed, or ‘capitated’, monthly amount per beneficiary – a per person, per month rate to cover health care services for each individual participant. Because the payments are fixed, there is the inherent risk that costs for a participant will exceed the capitated payment. If there’s a deficit, the SNF has to absorb it.

Managed care reduces the average revenue per patient day, but the staffing and administrative requirements to deliver the same level of care remain the same. The result? Tighter profit margins resulting from the shortfall put pressure on facilities to control expenses and avoid providing excess services. To effectively tackle this challenge, my colleague, Shulem Rosenbaum CPA/ABV, partner with Roth&Co’s Advisory division, shares that “SNFs must rethink their cost structures. Many SNFs have historically relied on a per-patient-day (PPD) variable cost model, where expenses fluctuate with occupancy and patient demand. This approach leaves facilities exposed to the instability of fixed or inconsistent reimbursement rates frequently seen with Medicare Advantage.”

One of our clients, a long-time SNF operator with over 50 facilities, shared his perspective about how MA plans have disrupted the financial landscape for skilled nursing facilities. “We’re left juggling to meet patient needs while navigating a system that doesn’t account for the real costs of care. It’s a challenge to stay financially viable.” The numbers prove him right. According to calculations made by Zimmet Healthcare, the dollar amount of SNF Medicare reimbursements lost this year to MA comes to over $10 billion nationally, with Pennsylvania losing almost $500 million and New York out by $634 million.

While SNFs revenues will always be restricted by federal and state requirements, there are ways to alleviate concerns about MA reimbursement and reduce volatility through strategic initiatives. SNF’s can maximize their revenues by building strong relationships with MA plan providers to negotiate better reimbursement rates or value-based contracts. They can work to reduce their reliance on MA plans and improve profitability by diversifying their patient base and attracting more self-pay and private insurance patients. As with any business operation, they can optimize efficiency by streamlining administrative practices, integrate technology, and brainstorm for additional cost-saving measures that won’t compromise the quality of care.

“A compelling solution is to adopt a fixed-expense model that reduces reliance on operational leverage,” Rosenbaum adds. “By reassessing and standardizing specific cost centers, SNFs can establish a more stable financial framework that is less affected by patient volume.” Another of our clients, a small, local SNF owner, had a different take on current challenges. “MA plan participation is growing, and we must learn to work with that. The evolution of the industry has made us take a hard look at how we manage our resources, pushing us to reassess and work smarter— which is something every operation needs to do from time to time.”

Ultimately, while Medicare Advantage plans may effectively help participants manage their healthcare costs, they restrict revenues and patient care options for SNFs. Will the rise in MA plans push the SNF industry to its breaking point? Times may be lean for SNF’s, but we believe that agile and creative facilities can effectively modify operations, maintain patient care, and adapt to working with MA plans to achieve a sustainable business model for the long term.

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Non-profit organizations are always on the lookout for new and innovative ways to raise funds to support their mission. Accepting donations of appreciated stock is a game-changing strategy that deserves a place in every non-profit’s toolbox.

Fundraising managers may wonder, “Stocks? Isn’t that more of an investor thing?”, and they would be correct. However, accepting donations of stock or securities offers much more than an investment opportunity. It’s a tax-saving strategy that results in a win-win-win for the non-profit, its donors, and the causes it supports.

With the bull market in stocks celebrating its second birthday, many potential donors have likely seen sizable gains in their investment accounts, especially those who have invested heavily in the tech and AI sectors. While that’s great for their personal wealth, it also creates a tricky tax situation when the time comes to sell those investments, and they are often exposed to hefty capital gains taxes.

Enter the beauty of donating appreciated stock. By gifting those shares directly to your non-profit, your donors can:

Avoid paying capital gains tax on the appreciation of stocks or securities
Become eligible to claim a charitable deduction, sometimes for the full fair market value of those assets
Continue to support the causes they care about

Receiving stock donations is a transformative opportunity for non-profits. Unlike individual investors, non-profit organizations don’t have to worry about capital gains taxes when selling donated shares. This strategy allows them to retain the full value of the donation and boosts the impact of the gift on the organization’s mission. Many donors are actively seeking tax-efficient ways to support the causes they believe in. Offering this donation option makes your organization an attractive choice and differentiates it from other charities.

What practical steps can a non-profit take to implement this strategy? By simply opening a brokerage account to accept stock donations, your organization can unlock a powerful new fundraising channel that benefits everyone involved.

The process is surprisingly simple:

Open a brokerage account specifically for accepting stock donations
Promote this giving option to your donor base, highlighting its tax benefits
Provide clear instructions on how donors can initiate the transfer

The donor handles the stock transfer, while the organization receives the full value of the investment asset; both come out ahead. If the donor is being serviced by a financial advisor, this strategy can be implemented as easily as a cash donation. If they do not have a capable advisor, suggest that they reach out to our affiliate wealth management group, Equinum, to receive professional, white glove service.

In a market flush with investor gains, tapping into donated appreciated stock can be a powerful fundraising strategy for non-profits. It allows donors to maximize the impact of their gift, while the non-profit retains its full value to drive its mission forward. Potential donors should consult with their tax advisors to ensure this strategy aligns with their goals and that they are prepared to meet all legal requirements.

Why should your organization wait any longer? Open a brokerage account and start spreading the word. Your donors – and your bottom line – will thank you.

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When you peek under the hood at inflation data and the latest cost-of-living trends, you might feel some relief upon noticing that, while some high prices still sting, costs are stabilizing overall. All except for one notable, stubborn exception: housing.

Since the pandemic, home prices have shot up dramatically, pushing the dream of homeownership further out of reach for many Americans. Every market has its quirks, but on the whole, the median home price across the U.S. tells the same story – prices are up, and they aren’t trending downward.

To add insult to injury, interest rates were raised in 2022 and 2023 as a mechanism to quell inflation. The natural result should have been a downswing in housing prices. Yet, despite the hikes, home prices didn’t budge. So, now we’re getting hit with the classic one-two punch: higher home prices are prevailing and interest rates have been climbing.

Here’s a typical real-world example: Imagine you had your eye on a $600,000 house back in 2021. With a 30-year mortgage at a 3% rate and a $200,000 down payment, your mortgage bill would have come to an estimated $1,686 a month. Fast forward and today, that same house would likely be priced closer to $800,000, with mortgage rates now hovering around 6.5%. Assuming that the same down payment was applied, the monthly mortgage cost would jump from $1,686 to $3,792 – a staggering difference.

The Fed-fund rate is regulated by the Federal Reserve, while Treasury and Bond rates tend to be controlled by the market – and the rates typically align. However, when the Fed announced a recent half-percent rate cut on September 18th — intended to signal economic stability and control over inflation—many hoped it would signal some relief, especially with the Feds projection of more cuts on the horizon. But ironically, the market has pushed back and treasury bond yields and mortgage rates have actually risen. Economists are practically falling over each other to explain this strange turn of events.

At Equinum, we believe that, while rates might dip a little, the only way we’re likely to see a meaningful drop in home prices or mortgage rates, would be through a recession. In a recession, employment drops and there is less money circulating in the economy; people cannot afford homes and real estate prices fall. The Fed generally responds by cutting interest rates, hoping to stimulate the economy and pull it out of its inertia. While a period of recession may be good news for those seeking to purchase real estate, it comes at the expense of joblessness and unemployment. This solution presents a difficult dilemma: choosing between affordable housing and job stability, an uneasy balancing act that none of us wants to experience.

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Global crises and natural disasters are on the rise and in response, people all over the country are opening their hearts and their wallets to support those in need. But this rise in altruism has its challenges. In the wake of Hurricanes Milton and Helene, the Internal Revenue Service recently warned taxpayers to beware of scammers who exploit public generosity by creating fake charities that gather donations and steal sensitive personal and financial information. According to recent data from the Federal Trade Commission, in 2023, nearly 10,000 reports of charitable solicitation fraud were filed in the United States, resulting in a loss of approximately $22.5 million to donors. Scammers commonly take advantage of peoples’ generosity during the holiday season, and when natural disasters or other tragic events occur; and their victims are often the easier marks – seniors and groups with limited English proficiency.

Scammers are imaginative and don’t limit themselves to pulling on heartstrings only as a response to a natural crisis. In a shameful example of fake charity fraud, in 2023, student Madison Russo, fraudulently raised nearly $40,000 by claiming to have multiple cancers, including stage 2 pancreatic cancer and leukemia. She publicized her story on TikTok and set up a GoFundMe page for donations. Ultimately, she was challenged and, after failing to provide medical records or proof of her diagnosis, was convicted and sentenced to probation and restitution to her donors.

Sham charities can go corporate too. In a March 2024 announcement, the Federal Trade Commission, along with ten other states, brought suit against Cancer Recovery Foundation International, also known as Women’s Cancer Fund, and its operator, Gregory B. Anderson. The suit alleges that from 2017 to 2022, the organization collected more than $18 million from donors to support women cancer patients. It only spent 1.1%, or approximately $196,000, on financial support to patients, while a cool $775,139 went to pay Anderson, its operator.

The FBI warns citizens to avoid making financial contributions to groups that support terrorism. Foreign Terrorist Organizations (FTOs) are foreign organizations that are designated by the Secretary of State in accordance with section 219 of the Immigration and Nationality Act (INA). The US Department of State provides a public list of Designated Foreign Terrorist Organizations and warns donors to keep their distance.

“We all want to help innocent victims and their families,” said IRS Commissioner Danny Werfel. “Knowing we’re trying to aid those who are suffering, criminals crawl out of the woodwork to prey on those most vulnerable – people who simply want to help. Especially during these challenging times, don’t feel pressured to immediately give to a charity you’ve never heard of. Check out the charity first and confirm it is authentic.”

To that end, the IRS offers the Tax-Exempt Organization Search (TEOS) tool, which taxpayers can access on the IRS website to help them find or verify qualified, legitimate charities. Beyond this, how can a donor make sure that his or her charitable donations reach their intended recipients? The wise donor will do their research and will stick with charities they know and trust. It’s best to make targeted donations, designated towards specific purposes instead of to a general fund. Cyber-safety should always be paramount; never click on links or open attachments in unsolicited e-mails, texts, or social media posts. Also know that most legitimate charity websites end in “.org” rather than “.com.” Charities that ask for cash or wire payments raise a red flag. It is always more prudent to pay by credit card or write a check directly to a charity; and never make a charitable donation check out to an individual.

As charitable scams continue to evolve, it is vital for donors to stay vigilant and informed about how to identify potential fraud. Always verify the legitimacy of a charity through reliable resources, such as the Tax-Exempt Organization Search, Better Business Bureau or Charity Navigator, and be wary of unsolicited requests for donations. By staying aware and conducting due diligence, you can ensure that your contributions reach those who genuinely need support, while safeguarding yourself against scammers.

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Excel and Power BI are both powerful Microsoft tools used in data analysis and reporting, but each has its distinct strengths and applications.

Excel, as a spreadsheet program, offers strong capabilities used for basic analysis and reporting; it features detailed, manual data entry and calculations. Excel is suitable for small to medium datasets for use in financial analysis, and it’s a comfortable choice for users who are already familiar with its functions and formulas. The program is commonly used by businesses and students for creating budgets, tracking expenditures, calculations and analyses, and other statistical functions.

Power BI is the go-to choice for advanced analytics and visualization. It offers more automation and scalability for large datasets and its interactive functions are used for advanced data analysis, forecasting, tracking key metrics and other tasks that require manipulating and sharing data.

Power BI vs. Excel: Why Power BI Stands Out

While Excel remains a popular tool for data analysis, Power BI offers several advantages that make it a superior choice for modern businesses:

Enhanced Visualizations: Power BI’s advanced visual tools make it easier to present complex data in a visually appealing and interactive way.
Real-Time Data Integration: Unlike Excel, which often requires manual data refreshes, Power BI can connect to live data sources for continuous updates.
Scalability: Power BI handles large datasets more effectively than Excel, making it ideal for businesses that deal with high volumes of data.
Seamless Integration: Power BI supports a wide range of data sources, including cloud services like Azure, and enterprise systems like SAP and Salesforce, making it more versatile than Excel.

Who’s got the Advantage?

Whereas Excel is the workhorse we all know and love, Power BI provides attractive bells and whistles. Its extensive features for formatting, natural language queries, and editing and filtering are visually appealing – with a customized dashboard offering a 360-degree view. Users can more easily drill down into data with Power BI and automate and share interactive reports across teams and organizations. Ultimately, these capabilities can help businesses make better-informed, data-driven decisions. While Excel’s calculation and spreadsheet functionalities make it ideal for studying data, Power BI is a better choice for performance and sharing.

Why Choose?

Excel and Power BI, both created by Microsoft, can complement each other effectively and integrate well. There’s no real need to choose between them – they can be used together for optimal results.

Data created in Excel can easily be shared with Power BI without transition glitches. The same goes for other Microsoft Office applications, like Power Query and Power Pivot. An amalgam of these tools can save a business time, automate its processes, and allow it to optimize and upgrade its data management.

Ask us about how RothTech can help your organization leverage the full potential of Power BI for deeper insights and better decision-making.

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Cost segregation is a key tool that allows a business to reclassify certain property components and potentially reduce its tax burden through accelerated depreciation. Property owners who have developed, acquired, expanded, or renovated real estate can optimize their depreciation deductions and defer income taxes at both federal and state levels. While cost segregation is common in office, hotel, and retail spaces, it can benefit any type of commercial property.

For tax purposes, residential rental properties typically depreciate over 27.5 years, while commercial properties depreciate over 39 years. However, properties include more than the building structure itself—elements like plumbing, flooring, and sidewalks can be depreciated on accelerated timelines. By separating specific property components, investors can fast-track depreciation deductions, cut taxable income, and improve cash flow. This method is especially valuable in commercial real estate, where larger investments yield substantial tax savings. Cost segregation is one way private-market real estate provides unique tax advantages, making it a particularly appealing asset class.

When selling property used in your business, understanding the sale’s tax implications is essential, especially given the complex rules involved.

Basic rules

As an example, consider a property for sale that is either land or depreciable property used in your business and has been held for more than a year. Under tax law, gains and losses from sales of business property are netted against each other. The tax treatment is as follows:

If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.
If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules. Under these rules, amounts are treated as ordinary income, rather than capital gain, because of previous ordinary loss or deduction treatment.

The beauty of utilizing cost segregation to accelerate depreciation is that it offsets income – until it is time to sell. That’s when the recapture rule kicks in. There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of long-term capital gain.

Different types of property

Under the Internal Revenue Code, different provisions address different types of property. For example:

Section 1245 property. This consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually real property that performs specific functions). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
Section 1250 property. In general, this consists of buildings and their structural components. If you sell Section 1250 property that’s placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% plus the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules apply to, respectively, Section 1250 property that you placed in service after 1980 and before 1987, and Section 1250 property that you placed in service before 1981.

Even with the simple assumptions presented in this article, the tax treatment of the sale of business assets can be complex. Tools like cost segregation, combined with a solid grasp of tax rules, can make a significant difference in tax outcomes and improve a business’ overall financial strategy when it sells business property.

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On September 18, 2024, for the first time in over four years, the Federal Reserve cut interest rates by 0.5%. Will this cut relieve the borrowing chokehold crippling the commercial real estate (CRE) industry? Opinions are mixed. Some say that it buys time for CRE holders, and that with the additional future cuts alluded to by the Fed, they will be able to hold out until refinancing becomes viable. Others claim that a rate cut will barely make a dent in the challenges that highly- leveraged CRE holders and investors are facing, and that banks will no longer wait patiently for them to address their debts.

According to CRE data firm Trepp, an estimated $2.2 trillion in commercial-property debt will be maturing between this year and 2027. CRE holders that invested using the artificially low, pre-pandemic interest rates are now seeking refinancing and find themselves in a very tight spot. The inevitable result is defaults and receiverships. Jeff Krasnoff, CEO of Rialto Capital, a real estate investment and asset management firm based in Florida, recently brought over fifteen foreclosure suits against borrowers from Signature Bank, which collapsed in 2023, alleging defaults exceeding $300 million. Other examples include investment firm Ashkenazy Acquisitions, multifamily syndicator GVA, and landlord Steve Croman, who account for approximately $751 million in defaults in 2024.

Until now, banks have been resorting to the “extend and pretend” game, where they’ve extended loan terms for struggling borrowers to help them avoid default, while waiting and hoping to see property values rebound. This unsustainable strategy is wearing thin, and, according to the Federal Reserve’s senior loan officer opinion survey released in May 2024, banks reported tightening their CRE lending policies during the first quarter of 2024. Banks are making efforts to reduce their exposure and have been quietly divesting troublesome portfolios of CRE loans in order to cut their losses – a reasonable move in light of 2023’s collapse of First Republic and Signature Bank, both of which were major commercial real estate lenders.

An analysis by S & P Global found that approximately 10% of the CRE mortgages maturing in 2024 are office properties. The post-pandemic shift toward remote and hybrid work arrangements have hit the office sector hard, generating vacancies and delinquencies. Trepp estimates that the U.S. office market has lost nearly a quarter of its value since the Federal Reserve began raising rates. Many of these office space owners are highly- leveraged or locked into floating rate debt and are struggling to stay viable. According to Shulem Rosenbaum CPA/ABV, Partner and business valuation expert at Roth&Co, the takeaway is that “overleveraging can be beneficial in stable markets, but carries significant risks in more turbulent times.”

What can we expect for the future? In a September 2024 press conference, Federal Reserve Chair Jerome Powell indicated that the Fed would consider additional cuts, by, “making decisions meeting by meeting, based on the incoming data, the evolving outlook, the balance of risks.”

Powell expects that the economy will continue its trend towards falling inflation and rising unemployment – a trend that prompted this first rate cut. The consensus among analysts and central bank officials is that more interest rate cuts will be forthcoming in 2024 and into 2025. A drop in the interest rate means that borrowing costs will ease and capital will free up. This will make financing new deals more attractive to investors and developers. More transaction activity will spur competition, and increased demand will bring up property prices. While many analysts believe most lenders and real estate owners can hold out until rates drop enough for refinancing, the support from the Fed won’t be sufficient for some of the country’s most heavily leveraged property investors.

Will rate cuts pull the CRE industry out of its pandemic-induced coma? U.S. economist and Nobel laureate Milton Friedman was no fan of central banking practices and its manipulation of interest rates. He believed, “cutting interest rates doesn’t create capital” nor increase real wealth, “it just shifts it around,” redistributing existing capital within the economy.

Rosenbaum asserts, “We have yet to see the positive effects of the Federal Reserve’s recent rate cuts on the CRE industry.” Initial rate increases occurred during a period when the CRE sector was already grappling with high vacancies and rent forbearances, while key COVID relief programs, such as the Paycheck Protection Program (PPP) were unavailable to many landlords. Other resources, like the Employee Retention Credit (ERC), were limited to businesses with small workforces. “While the Fed’s current actions may provide some temporary relief,” Rosenbaum contends, “we believe it is unlikely to deliver the comprehensive solution that the CRE industry urgently requires.”

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In today’s data-driven world, businesses of all sizes—from small startups to large conglomerates—collect vast amounts of data. However, the true challenge lies in transforming this raw data into actionable insights that drive informed decision-making. Microsoft’s Power BI is a powerful business intelligence tool designed to help organizations convert data into meaningful reports and visualizations, making data analysis more accessible, insightful, and actionable.

Why Power BI is Essential for Modern Businesses

1) Data Consolidation Across Multiple Sources: Power BI allows businesses to integrate data from multiple sources, such as Excel, cloud services, databases, and even the web. This unified data access means that businesses can analyze sales, operations, finance, and customer data all in one place, enabling cohesive decision-making across departments.

2) Real-Time Analytics: Power BI provides real-time data streaming, meaning businesses can track key performance indicators (KPIs) and metrics as they happen. This allows companies to respond proactively to changes in market conditions or internal performance issues, rather than relying on static, outdated reports.

3) Advanced Data Visualization: While tools like Excel can visualize data to a degree, Power BI takes this a step further with interactive, highly customizable dashboards. These dashboards provide a clear view of complex datasets and help users easily identify trends, outliers, and opportunities through modern visuals like heatmaps, treemaps, and geographic maps.

4) Self-Service Business Intelligence: One of the greatest advantages of Power BI is its ease of use. Users across the organization, not just those in IT, can create their own reports and dashboards. This empowers all team members to make data-driven decisions and fosters a culture of data literacy throughout the organization.

5) Scalability and Affordability: Power BI is built on scalable data engines capable of handling large datasets without performance degradation. Additionally, its pricing structure is progressive, offering free options for small organizations using Power BI Desktop, and affordable licensing for larger enterprises that need cloud sharing and collaboration.

How to Set Up Power BI for Success

To maximize the potential of Power BI, proper setup and ongoing optimization are critical. Here’s a step-by-step approach:

1) Define Clear Objectives: Before jumping into Power BI, businesses should outline their goals. What key metrics are you tracking? What decisions do you hope to influence with your data? Aligning Power BI with these objectives ensures you are focused on the right data and insights.

2) Data Integration and Cleaning: Power BI excels when data is clean and consistent. Use tools like Power Query to prepare data from various sources, ensuring accuracy and reliability before analysis. Once cleaned, Power BI can pull in data from sources such as SAP, Oracle, Azure, and even websites.

3) Establish Roles and Permissions: To protect sensitive data, businesses should set up appropriate user roles in Power BI. The platform allows administrators to grant different permissions, ensuring that data is secure while still enabling collaboration across departments.

4) Foster a Data-Driven Culture: Training employees to use Power BI is essential for unlocking its full potential. Encourage team members to build their own reports and dashboards, fostering a culture where data literacy thrives.

Best Practices for Power BI Optimization

Even after setting up Power BI, ongoing refinement is essential to ensure the tool evolves alongside your business. Here are some optimization tips:

– Automate Data Refreshes and Alerts: Set up automatic data refreshes to ensure your dashboards always display the latest information. Use alerts to notify key stakeholders when KPIs reach critical thresholds, enabling faster responses to emerging trends.

– Optimize Report Performance: As data volumes grow, it’s important to optimize reports for performance. Techniques like DirectQuery and incremental refreshes can help keep reports running smoothly, even with large datasets.

– Design with Simplicity: Power BI dashboards should be clear and concise. Avoid overloading users with too much information, and focus on the most critical data points. Use consistent visualizations, round numbers, and clean layouts to enhance readability.

– Security and Governance: Power BI offers robust data security features, such as row-level security, allowing businesses to protect sensitive data while still leveraging the platform’s collaborative features.

Conclusion: Unlock the Power of Your Data with Power BI

Power BI transforms data into actionable insights, making it a critical tool for businesses looking to gain a competitive edge in today’s data-driven world. By integrating data across multiple sources, offering real-time insights, and enabling self-service reporting, Power BI helps businesses make informed decisions that drive growth, efficiency, and profitability.

With proper setup, ongoing optimization, and a commitment to fostering a data-driven culture, your organization can fully unlock the power of Power BI and harness the full potential of your data.

Ask us about how RothTech can help your organization leverage the full potential of Power BI for deeper insights and better decision-making.

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The IRS defines voluntary disclosure as “a way for taxpayers with previously undisclosed income to contact the IRS and resolve their tax matters.” It’s their way of offering remiss taxpayers the opportunity to mitigate potential penalties.

This new program refers specifically to the COVID-era Employee Retention Credit (ERC). If you claimed and received the Employee Retention Credit (ERC) for 2021 tax periods, but you are, in fact, ineligible, you will need to repay the credit. The Voluntary Disclosure Program, or VDP, may be your chance to regroup.

An analysis conducted by the IRS found that a whopping 60% to 70% of applications for the ERC show an unacceptable “level of risk.” This is IRS lingo for claims they believe have a high likelihood of being ineligible for the credit. Tens of thousands of these are slated to be denied in the coming months. This high percentage of erroneous filings has inspired the IRS to temporarily reopen the Voluntary Disclosure Program and give businesses the chance to repair or retract their improperly filed claims to avoid potential civil penalties, audit costs and possible litigation.

Round two of the Voluntary Disclosure Program (VDP) was launched on August 15, 2024 and will close soon – on November 22, 2024. The VDP offers a 15% discount on the repayment of a claimant’s errant claim and the opportunity to avoid penalties, audits, or fees associated with that incorrect claim.

The IRS is marketing this “discount” as defraying the high expenses that many businesses needed to pay their (overly aggressive) advisors or promoters in order to get the ERC in the first place. Couched in another way, the IRS is willing to pay 15% of the claim in order to get their hands on the other 85% and to get the business to rat on the promoters of ineligible claims.

The first ERC VDP earlier this year offered a more generous 20% discount, but that offer is gone. If a taxpayer believes that it is eligible for the ERC, but wants to recalculate to claim a different amount, it will have to file an amended return to report that reduced amount.

Only those who have claimed ERC for 2021 (not 2020) and have received the refund or the credit against their employment taxes, are eligible to take advantage of VDP 2.0. If a claimant has already received an IRS “clawback” notice demanding repayment, they’re out of luck. If they are in the middle of an employment tax exam for the credit period or are under criminal investigation, they have also lost their chance. When a claimant is accepted to the Voluntary Disclosure Program, they must execute a closing agreement explicitly stating that they are not entitled to the ERC – and the IRS doesn’t stop there. In its efforts to identify potentially abusive ERC promotors, the claimant will have to provide the names and contact information of the preparer or advisor who helped them submit the claim.

If you’ve applied for the ERC but have not yet received a credit or refund or have received a check but have left it uncashed, then you are not eligible for this program. Instead, the IRS offers a withdrawal process. This process effectively reverses your claim, treating it as if it was never filed. The IRS will graciously hold back from imposing penalties or interest as well. However, you won’t get the 15% “discount.” To date, the claim withdrawal process has led to more than 7,300 entities withdrawing $677 million.

The IRS continues hunting for erroneous or fraudulent ERC claims and has already mailed out thousands of letters disallowing unpaid ERC claims to businesses in these last few months. This deluge of letters represents more than $1 billion in ERC claims.

It is interesting to note that the IRS seems to be targeting only those that have already received their credits. For many businesses that have already received (and in most cases, spent) the monies, it would be very hard to part with what they already have in hand.

Do you need to rethink your ERC claim? Was your preparer above board? Was he or she knowledgeable about your business and informed about ERC qualifications? Was your eligibility based on “general supply chain disruptions?”

Our recent experience handling numerous ERC audits have shown us that the IRS has been operating under a policy of “deny first, ask questions later.” Your claim may deserve a revisit, and the Voluntary Disclosure Program may be your return ticket to proper compliance.

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“Democracy is the theory that the common people know what they want and deserve to get it good and hard.”

— H. L. Mencken

It’s that season again — when those running for public office start making promises of all shapes and sizes, even those that defy the laws of economics. But let’s not forget their ultimate goal: to get more votes. As Churchill lamented, “The best argument against democracy is a five-minute conversation with the average voter.”

Let’s examine a few recent examples:

Vice President Harris, in her “economic plan” released on August 15th, promised to ban price gouging. This term usually refers to sellers exploiting market power to unfairly raise prices. With grocery prices up 26% since 2020, addressing this issue sounds appealing. However, even The New York Times felt compelled to critique this proposal, quoting economist Jason Furman: “This is not sensible policy, and I think the biggest hope is that it ends up being a lot of rhetoric and no reality.” Harris’s economic advisers surely know that price gouging bans have never and will never work, but they’re banking on voters not noticing.

Then there’s former President Trump’s tariff proposal: a 10% tariff on all imported goods. While this might appeal to voters who favor “America First” policies and resist globalization, these tariffs would ultimately raise prices for consumers. Although certain adverse measures can be justified in certain areas like computer chips (national security) or medicine (as seen during COVID), they ignore the fact that importing cheaper goods has long kept American lifestyles more affordable.

A final example is the bipartisan silence on the solvency of Social Security and the national debt. Telling seniors they might face pay cuts, or juniors that they need to pay more into the system, doesn’t win votes. As a result, these topics remain taboo until they become ticking time bombs.

Historian Niall Ferguson recently highlighted his “personal law of history:” “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Habsburg Spain, t ancient régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year.” Tackling this issue isn’t politically advantageous, so it’s conveniently ignored.

While were not here to predict the future, it is important to recognize the incentives driving political stances. To draw from the Churchill well once again, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” It’s high time for voters to wake up to economic reality – politics is often a game of fantasy.

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Non-compete agreements have always been considered a valuable business tool, especially after a merger or acquisition. However, these agreements have become more complicated in the wake of a new and controversial final rule, issued in April 2024, by the Federal Trade Commission (FTC) proposing a ban on noncompete agreements for most employees and independent contractors. The rule would have gone into effect in September 2024.

To counter the FTC’s effort, the U.S. Chamber of Commerce and several business groups filed federal lawsuits challenging the final rule, arguing that the FTC lacked the authority to enact the ban and that it violated the Constitution. By August 20, 2024, they prevailed, and the rule was struck down. The Court concluded that the FTC’s decision was “arbitrary and capricious,” stating that the Non-Compete Rule was “unreasonably overbroad.” The Court was specifically offended by the rule’s “one size fits all” solution to the potential hazards of a non-compete.

This ruling will not impact state laws on non-competes. Several states have already limited their use. Minnesota banned workplace non-competes in July 2023, and New York nearly passed a similar ban before it was vetoed. States like Indiana have also restricted non-competes in specific cases.

Non-compete agreements have been around for decades. Some are required at the get-go, as a prerequisite for employment, and some kick in upon termination of employment. The employer will require an employee to sign a non-compete agreement to protect the employer’s business interests, guard against disclosure of trade secrets, and prevent the employee from poaching customers or clients. These agreements will generally limit employment activities in the same field, for a specified period, and their goal is to protect the employer.

Non-competes also may come into play in business combinations. These agreements typically prevent the seller from competing with the buyer within a specified geographic area for a certain time period (usually five years or less).

A non-compete agreement may be estimated in various circumstances, including legal disputes, mergers, financial reporting and tax matters. The most common approach to valuing a non-compete agreement is the ‘with-and-without’ method. Without a non-compete agreement, the worst-case scenario is that competition from the employee or seller will drive the company out of business. Therefore, the value of the entire business represents the highest ceiling for the value of a non-compete.

The business’ tangible assets possess some value and could be liquidated if the business failed, and it is unlikely that the employee or seller will be able to steal 100% of a business’s profits. So, when valuing non-competes, experts typically run two discounted cash flow scenarios — one with the non-compete in place, and the other without.

The valuation expert computes the difference between the two expected cash flow streams and includes consideration of several other factors:

The company’s competitive and financial position
Business forecasts and trends
The employee’s or seller’s skills and customer relationships

Next, each differential must be multiplied by the probability that the individual will subsequently compete with the business. If the party in question has no incentive, ability, or reason to compete, then the non-compete can be worthless. Factors to consider when predicting the threat of competition include the individual’s age, health, financial standing and previous competitive experience. When valuing non-competes related to mergers and acquisitions, the expert will also consider any post-sale relocation and employment plans.

A critical factor to consider when valuing non-competes is whether the agreement is legally enforceable. The restrictions in the agreement must be reasonable. For example, some courts may reject non-competes that cover an unreasonably large territory or long period of time. What is “reasonable” varies from business to business, and is subject to the particulars of the business, the terms of the agreement, state statutes and case law.

What does this mean for your business? The legal battle over non-competes has drawn attention to their use, prompting the corporate world to reconsider work relationships without restrictive covenants. Non-competes will likely be viewed differently moving forward. As with all business-related legislation, businesses should stay updated and informed of changes and revisions that may affect its employment practices and its bottom line.

Back to real estate right now

Real Estate Right Now is a video series covering the latest real estate trends and opportunities, and how you can make the most of them. Below, we talk about the benefits of investing in a Self-Directed IRA (SDIRA).

If you’re an independent-minded investor looking to diversify, an SDIRA, or Self-Directed IRA, might be the way to go.

An SDIRA is an individual retirement account that can hold alternative investments. Besides for standard investments – like stocks, bonds, cash, money market funds and mutual funds, an investor can hold assets that aren’t typically part of a retirement portfolio, like investment real estate. A custodian or trustee must administer the account, but SDIRAs are directly managed by the account holder, which is why they’re called self-directed.

SDIRAs come with complex rules and carry some risk, but they offer the opportunity for higher returns and greater diversification.

Self-directed IRAs are generally only available through specialized firms, like trust companies and certain banks. As custodians, these entities are not allowed to give financial or investment advice about your SDIRA. The account holder is responsible for all research, due diligence, and asset management within the account. Some downsides of maintaining an SDIRA include custodial fees and – if you’re not a savvy investor – exposure to fraud.

When investing in real estate through an SDIRA, the IRA’s funds are used to purchase the property. That means that the IRA will own the property, and it can only be used for investment purposes. Know that there are potential tax consequences when an SDIRA carries debt – like a mortgage – and the SDIRA will probably get taxed at a higher rate.

The upsides of investing in an SDIRA are its flexibility, diversification and the control it gives to the investor. SDIRAs offer a wide range of investment options, so the investor is not limited to stocks, bonds and mutual funds. SDIRA holders may also invest in real estate, private debt, privately held companies or funds, or even cryptocurrency. SDIRAs give the investor control to choose which specific assets he believes will perform the most advantageously based on his own research, due diligence and risk tolerance. And similarly to any IRA, investors benefit from tax-deferred or tax-free growth on their investments.

There are a number of rules an investor must be aware of when considering investing in real estate through an SDIRA, like steering clear of “prohibited transactions” and not engaging in transactions with “disqualified persons.”

Disqualified persons are people or entities that cannot be involved in any direct or indirect deals, investments, or transactions with the SDIRA. These persons include the investor, any beneficiaries of the IRA, all family members, any of the IRA’s service providers, any entities (corporations, partnerships etc.) that are owned by a disqualified person, or officer, shareholder or employee of those entities. The investor cannot transfer SDIRA income, property, or investments to a disqualified person, or lend IRA money or to a disqualified person.

Prohibited transactions are those that earn the investor personal financial gain on the investment. The investor may not sell, exchange or lease their personal property to the SDIRA as an investment (a.k.a “double dealing”). Moreover, the investor cannot supply goods, services or facilities to disqualified persons or allow fiduciaries to use the SDIRA’s income or investment(s) for their own interest. In practicality, this means that if you own a construction company or are another type of service provider, the SDIRA cannot contract with your company to do work on the property or provide it with any service. All income from SDIRA assets must be put back in the IRA and the investor must make sure that all rental income from an investment property owned by the SDIRA is deposited in the SDIRA account, and not in his personal account. The investor is not even allowed to spend the night in their SDIRA-owned rental property.

The consequences of breaking these rules are immediate. If an IRA owner or their beneficiaries engage in a prohibited transaction, the account stops acting as an IRA as of the first day of that year. The law will look at it as if the IRA had distributed all its assets to the IRA holder at fair market value as of the first day of the year. When the total value of the former-SDIRA is more than the basis in the IRA – which was the investor’s goal – the owner will show a taxable gain that will be included in their income. Depending on the infringement, they may even be subject to penalties and interest.

Reach out to your financial advisor to learn if an SDIRA is the right tool for you.

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Roth&Co is pleased to welcome Alice Lerman, JD, MBA as its new Chief Growth Officer. This new role reflects Roth&Co’s dedication to driving strategic growth and innovation, while enhancing the delivery of premium, value-added services and customized solutions to clients nationwide.

Alice has over twenty years of experience as an innovator of strategic growth strategies through industry specialization. She has led industry strategies at two of the nation’s top-10 accounting firms, and managed client experience at two of the top-20 CPA firms. Most recently, at Marcum, a top-15 CPA firm, Alice served as Chief of Industries and led firm-wide growth initiatives, including building out eight nationally-known industry practice groups with leadership teams, and achieving 16% year-over-year organic growth from 2018 to 2022.

Zacharia Waxler, CPA, Managing Partner at Roth&Co, expressed confidence in Alice and Roth&Co’s future trajectory. He said, “Alice Lerman’s role as Chief Growth Officer is not only an inspiring choice in terms of the skill and expertise she offers; it is a crucial step towards driving and shaping the future of Roth&Co. It will lead to substantial growth and will accomplish bold objectives. We are confident that Alice’s strategic vision will propel Roth&Co’s success to new levels.”

As CGO, Alice will partner with Roth&Co leadership to implement its strategic vision for market positioning and growth. She will work alongside Roth&Co’s industry and service line leaders, business development group, and marketing team to increase revenue, discover new business opportunities, expand market presence, establish strategic partnerships, and optimize client experience.

About Roth&Co

Roth&Co is a top-150 U.S. accounting and advisory firm specializing in tax compliance, tax controversy, accounting services and advisory services. With over 250 team members spanning five locations around the globe, Roth&Co was ranked by Inside Public Accounting as one of the fastest growing firms of 2022 and named by Accounting Today as a 2024 Mid-Atlantic Regional Leader and ’Firm to Watch.’

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Partnerships, and some multi-member LLCs, are a popular choice for businesses and investments because of the federal income tax advantages they offer – particularly pass-through taxation. In return, they must also follow specific, and sometimes complex, federal income tax rules.

Governing documents
A partnership is governed by a partnership agreement, which specifies the rights and obligations of the entity and its partners. Similarly, an LLC is governed by an operating agreement, which specifies the rights and obligations of the entity and its members. These governing documents address certain tax-related issues that dictate how profits and losses are allocated, outline tax responsibilities, and ensure compliance with relevant tax laws.

Partnership tax basics
The tax numbers of a partnership are allocated to the partners. The entity issues an annual Schedule K-1 to each partner to report his or her share of the partnership’s tax numbers for the year. The partnership itself doesn’t pay federal income tax. This arrangement is called pass-through taxation because the tax numbers from the partnership’s operations are passed through to the partners who then take them into account on their own tax returns (Form 1040 for individual partners). Partners can also deduct partnership losses passed through to them, subject to various federal income tax limitations, such as the passive loss rules.

Special tax allocations
Partnerships are allowed to make special tax allocations. This is an allocation of partnership loss, deduction, income or gain among the partners that’s disproportionate to the partners’ overall ownership interests. The best measure of a partner’s overall ownership interest is the partner’s stated interest in the entity’s distributions and capital, as specified in the partnership agreement.

An example of a special tax allocation is when a 50% high-tax-bracket partner is allocated 80% of the partnership’s depreciation deductions while the 50% low-tax-bracket partner is allocated only 20% of the depreciation deductions. All unique tax allocations should be set forth in the partnership agreement and must comply with complicated rules in IRS regulations.

Distributions to pay partnership-related tax bills
Partners must recognize taxable income for their allocations of partnership income and gains — whether those income and gains are distributed as cash to the partners or not. Therefore, a common partnership agreement provision is one that calls for the partnership to make cash distributions to help partners cover their partnership-related tax liabilities. Of course, those liabilities will vary, depending on the partners’ specific tax circumstances.

The partnership agreement should specify the protocols that will be used to calculate distributions intended to help cover partnership-related tax bills. For example, the protocol for long-term capital gains might call for distributions equal to 15% or 20% of each partner’s allocation of the gains. Such distributions may be paid out in early April of each year to help cover partners’ tax liabilities from their allocations of income and gains from the previous year.

When creating a partnership or LLC, it’s crucial to document tax considerations in a formal agreement to avoid future complications. This includes clearly outlining how income, losses, and deductions will be allocated among members, as well as specifying the tax responsibilities each member will bear. By addressing these tax issues upfront, partners and members can avoid potential conflict and ensure compliance with federal tax regulations.

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Political passions run deep but allowing them to dictate investment decisions can be perilous. A 2020 UBS poll revealed that nearly half (46%) of American investors planned to adjust their portfolios based on the outcome of the presidential election. This highlights a concerning trend: letting political affiliation influence financial strategy. Beyond the inherent difficulties of market timing, throwing political aspects into the mix can lead to even greater risk.

Then there’s the research that exposes a more insidious enemy: confirmation bias.

Confirmation bias is the cognitive tendency to seek out, interpret, and favor information that confirms our pre-existing beliefs, while disregarding or downplaying contradictory evidence. In simpler terms, we often see what aligns with our established views, and readily reinforce them while dismissing anything that may challenge them. The thinking is always that if the “other guy” wins, markets will crash.

Even more concerning, party affiliation often colors perceptions of the national economy, with the party in power typically receiving higher approval ratings.

This chart illustrates a persistent trend: we tend to feel good about the economy if our party is in power, and vice versa. So it’s not only a divide in regard to what will happen in the future, we can’t even agree on what is happening right now! The last time public opinion was in agreement regarding the economy was during the Clinton administration, when strategist James Carville famously declared, “It’s the economy, stupid!” Apart from that, there’s always been a clear divide.

What may be surprising is that historically, investing only under a democratic president yielded a much higher return than investing under only republican administrations. The growth of a $10,000 investment in 1950 would have been $405,540 under the Democrats, versus only $77,770 under the Republicans. But here’s the kicker – had you remained invested the whole time, the growth of that $10,000 investment would have come to $3.15 million dollars!

Does the president actually have any sway on this? Or are market cycles the main actor? It’s hard to say that President Bush was at fault for the great recession and housing crisis of 2008, and it was definitely good luck for President Obama, to be in office during the recovery. Markets and business cycles sing to their own tune, and don’t care who is warming the chair in the oval office.

Despite being informed and educated, investors will often still want to base their “thematic investing” decisions, where they invest in a certain sector or theme, on their projected election outcome.

Consider someone who believed President Trump’s “drill, baby, drill” slogan would boost the oil and gas industry. Despite this expectation, the SPDR Fund Energy Select Sector (ticker XLE) plummeted by 48% during his tenure. Similarly, those who assumed natural gas would thrive under President Biden have been disappointed, with most ETFs tracking natural gas being down by about 70% during his time in office.

The takeaway? When it comes to your investment accounts, leave confirmation bias at the login screen. Focus on what truly matters: your financial goals. By employing a well-defined strategy tailored to your individual needs and risk tolerance, you can navigate the markets with greater clarity and avoid the pitfalls of political influence.

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Maximizing current-year depreciation write-offs for newly acquired assets is a must for every business. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1.

Here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 deduction basics

Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software, and fixtures — qualify for the first-year Sec. 179 deduction.
Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.
Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP).

QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework.
The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus depreciation basics
Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. bonus depreciation
The current Sec. 179 deduction rules are generous, but there are several limitations:

- The phase-out rule mentioned above,
- A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
- A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
- Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations but, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000.

- You can deduct the $300,000 on your corporation’s 2024 federal income tax return.
- You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation.

So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage tax breaks
Coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea and a useful tool in a business’ tax strategy toolbox. Applied correctly, this strategy may allow your business to potentially write off some or all of its qualifying asset expenses in Year 1. That’s good for your books and good for your business.

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Taxpayers and practitioners agree that attempting to contact the IRS by phone can be a frustrating endeavor. Every year, millions of taxpayers seek IRS assistance by reaching out to the IRS’ toll-free and international telephone lines with their federal tax questions, requests for tax forms, to check on the status of their refunds, or to follow up with IRS correspondence or notices. All too often, they are met with long wait times, disconnected calls and general anxiety. The Taxpayer Advocate Service, an independent organization within the IRS, was created to champion the taxpayers’ cause by mediating between taxpayers and the IRS to help resolve tax issues. But a recent study of TAS phone lines conducted by the Treasury Inspector General for Tax Administration (TIGTA), found that catching TAS for a heart to heart talk is equally as challenging as contacting the IRS directly.

With the Inflation Reduction Act (IRA) of 2022, $80 billion in supplemental funding was allocated to help the IRS up its game. One area of improvement focused on increasing the level of service via IRS telephone lines. In November of 2023, the Treasury Inspector General issued a report on the quality of customer service with the objective of determining whether IRS help lines were operational and able to provide taxpayers simple, fast, and accessible customer service.

Testers called 102 IRS customer service telephone numbers during the 2023 tax filing season to evaluate the quality of customer service and found that 21 of them placed the caller on hold for more than 30 minutes, before the caller ultimately ended the call. Other flaws emerged; taxpayers were referred to incorrect phone lines, the offer to provide messages in either English or Spanish was inconsistent, taxpayers did not always receive a return call as promised and hold times were excessive. In its Objectives Report to Congress for fiscal year 2025, the National Taxpayer Advocate service cited flaws in IRS taxpayer communications and advocated for the IRS to, “do a more comprehensive measure of phone service that includes the quality of the caller’s experience.”

Despite the Advocates Service’s best intentions, when TIGTA turned its spotlight on TAS itself, it didn’t fare much better. In July of 2024, TIGTA issued an evaluation report about how ready and responsive TAS phone lines were; the results sounded familiar.

TAS telephone lines were found to be inconsistent in providing taxpayers with the ability to speak with a TAS representative. TIGTA called all 76 local TAS telephone lines in the United States, using the telephone numbers listed on the TAS and IRS websites. Some telephone lines were found to be out of service, voicemail boxes were often full and unable to address the call, and recorded scripted messaging and callback times were inconsistent. Of the 76 calls made, only two were answered by a TAS representative. Automatic voicemail prompts promised that callbacks would be received anywhere between one business day to as long as four weeks. TIGTA also compared contact information for telephone numbers, fax lines, and local addresses between what was listed on the TAS and the IRS website and found several discrepancies. It identified voicemail messaging that had significant differences in the information being communicated.

After reviewing TIGTA’s draft report, TAS stepped up to the plate and agreed with much of its results and recommendations. TAS took corrective actions to make changes to voicemail messages, made updates to the IRS and TAS websites, and is striving to provide more consistent information to taxpayers. However, as claimed by its compatriot, the IRS, TAS management contends that it is short staffed and cannot adopt all of TIGTA’s recommendations.

Despite ongoing efforts to improve, IRS-taxpayer communications remain a messy business. In our experience, communicating with the IRS is best achieved by utilizing their call-back feature; which we have found to be fairly dependable and helpful. Nevertheless, when attempting to work out your issues with the IRS, patience and perseverance must rule the day.

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The commercial real estate industry is heading towards a financing chokehold and that may translate into overwhelming stress for traditional sources of credit – namely banks and commercial mortgage-backed securities (CMBS). CREnews.com, in its “Year-End 2023: CRE at a Crossroads”, reports that about $2.8 trillion in commercial real estate (CRE) loans are maturing over the next five years, with $544.3 billion coming due this year, the majority of which are owned by banks and commercial mortgage-backed securities. Commercial real estate owners are experiencing a weakened demand for office space and a softening of property values. Previously low interest rates will be unobtainable, making refinancing untenable, and receiverships and defaults are looming. Lenders will look to unload defaulted properties at a much lower value. Lender’s CRE exposure, coupled with rising deposit costs, high levels of uninsured deposits, and declining asset values, have left commercial real estate owners – specifically, those holding maturing debt – in a very dangerous space.

Nomura analyst Greg Hertrich, quoted in a recent Reuters report, says, “Almost 50 U.S. lenders could fail in the coming years under pressure from higher interest rates and operational problems.” This projection is strongly supported by the FDIC’s published list of “problem banks” which listed fifty-two banks totaling $66.3 billion in assets experiencing financial, operational, or managerial weaknesses. In another analysis, conducted by Consulting firm Klaros Group, a review of 4,000 banks found that 282 banks face the threat of commercial real estate loans and potential losses tied to higher interest rates.

Earlier this year, the Federal Reserve published its Financial Stability Report, disclosing its assessment of the stability of the U.S. financial system as of Q1 2024. The study solicited views from a range of broker-dealers, investment funds, research and advisory firms, and academics concerned about the risks to U.S. financial stability. The study reported that banks with a significant exposure to commercial real estate loans could be headed for substantial losses if the trend towards remote work, high vacancy rates and slow rent growth continues. Funding tensions were also attributed to high levels of uninsured deposits and declines in the fair value of assets. The report’s respondents also noted that because interest rates may stay higher for longer than expected, there is a higher potential for “renewed deposit outflows,” or to use the colloquial term, “a run on the bank.”

Should borrowers worry? Some say not. In testimony in a May 15 Capitol Hill hearing on bank oversight, regulators opined that the banking industry is resilient, despite last years’ spate of bank failures. Martin J. Gruenberg, Chairman of the FDIC Board of Directors, testifying for the House Committee on Financial Services, said that banks have sufficient capital on hand, and sufficient liquidity to weather the storm. Gruenberg tempered his prognosis by noting that the banking industry continues to face significant downside risks from inflation, volatile interest rates, and global instability. The economic outlook is uncertain and “these risks could cause credit quality and profitability to weaken, loan growth to slow, provision expenses to rise, and liquidity to become more constrained.”

Lenders are walking a tightrope and that tightrope could easily be snapped by a change in interest rates, a global crisis, or borrower panic. In response, borrowers should stay aware, and start thinking about upcoming refinancing often and early. Traditional lending sources are sure to be compromised in the immediate future, and their available funds constrained and reserved for the best performing properties. By staying informed, property owners can strategically position themselves to address their refinancing needs.

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Most not-for-profit entities are familiar with the hazards of excess benefit transactions, but this brief refresher may enhance vigilance and compliance. The stakes are high. 501(c)(3) organizations determined by the IRS to have violated the rules governing excess benefit transactions can be liable for penalties of 25% to 200% of the value of the benefit in question. They may also risk a revocation of their tax-exempt status — endangering both their donor base and community support.

Private inurement

To understand excess benefit transactions, you also need to comprehend the concept of private inurement. Private inurement refers to the prohibited use of a nonprofit’s income or assets to benefit an individual that has a close connection to the organization, rather than serving the public interest. A private benefit is defined as any payment or transfer of assets made, directly or indirectly, by your nonprofit that is:

• Beyond reasonable compensation for the services provided or goods sold to your organization, or

• For services or products that don’t further your tax-exempt purpose.

If any of your organization’s net earnings privately benefit an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

Private inurement rules extend the private benefit prohibition to “insiders” or “disqualified persons” — generally any officer, director, individual or organization (including major donors and donor advised funds) in a position to exert significant influence over your nonprofit’s activities and finances. The rules also cover their family members and organizations they control. A violation occurs when a transaction that ultimately benefits the insider is approved.

Examples of violations could include a nonprofit director receiving an excessive salary, significantly higher than what is typical for similar positions in the industry; a nonprofit purchasing supplies at an inflated cost from a company owned by a trustee, or leasing office space from a board member at an above-market rate.

Be reasonable

The rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind.

It is wise for an organization to ensure that, if challenged, it can prove that its transactions were reasonable, and made for valid exempt purposes, by formally documenting all payments made to insiders. Also, ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith; in your organization’s best interest; and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties. One best practice is to ask all board members to review and sign a conflict-of-interest policy.

Appearance matters

Some states prohibit nonprofits from making loans to insiders, such as officers and directors, while others allow it. In general, you’re safer to avoid such transactions, regardless of your state’s law, because they often trigger IRS scrutiny. Contact your accounting professional to learn more about the best ways to avoid excess benefit transactions, or even the appearance of them, within your organization.

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One of the most pressing financial questions facing the United States today is about its outstanding national debt, which recently crossed the $35 trillion mark. That translates into about $270,000 per taxpayer—a figure that many say is downright terrifying. What will happen when this debt “comes home to roost”? How will it all end? These are critical questions, and the answers are far from simple.

Some people subscribe to Modern Monetary Theory (MMT), a macroeconomic theory suggesting that a country issuing its own currency can never run out of money in the same way a business or individual can. Without diving too deeply into this view, it’s important to note that this theory is highly controversial and has more critics than supporters. Just because you can print more money doesn’t mean you will never need to pay it back. At the very least, issuing more dollars could lead to inflation and in a dire scenario, might cause the dollar to lose its global reserve currency status.

While MMT economists advocate for a calm and collected couch-potato approach to this predicament, others take a more extreme stance. Let’s call these preppers “The Three G’s” Squad—those who are hoarding “Gold, Groceries, and Guns” for when the wheels of the U.S. system come off. These folks are preparing for something as drastic as a proper zombie invasion, focusing on stockpiling tangible assets and ensuring self-sufficiency in case of a severe scenario.

While there may be some merit to stockpiling canned food in your basement, we’d prefer a more strategic and less doomsday-oriented approachThis isn’t the first time the U.S. has been in a difficult spot. The great experiment known as the U.S.A., established by the Founding Fathers, has faced its share of challenges before, but it has always pulled through.

So, while you might feel the urge to “do something” and potentially overprepare, our strategy focuses on investing in the largest, most efficient companies in the U.S. These companies are well-equipped to navigate financial crises due to their resources, experience, and operational efficiencies. While the possibility of an extreme event leading to total chaos always exists, it’s more likely that circumstances will create a financial crisis requiring robust and adaptive responses. And who better to manage these challenges than the most capable and resourceful companies?

Consider this: In January 1980, an ounce of gold was trading at $800. Today, that same ounce is worth about $2,400. However, to have merely kept pace with inflation since 1980, gold would need to be priced at $3,200 an ounce. By contrast, $800 invested in the S&P 500 in January 1980, and left to compound (with taxes paid from another source), would be worth about $117,000 today. While noisy preparation might provide comfort now, it has historically come at a steep cost to our long-term serenity.

So, although no one can claim to know how the national debt situation will play out—it’s a complex and daunting issue—what may feel like underpreparing today can be the best preparation. You can choose to take dramatic steps and watch events unfold on TV from your basement (with all the baby corn, of course), but true preparation might actually lie in betting on a brighter future and on those that are best suited to realize it.

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When valuing a business, experts often go beyond the company’s financial statements and will interview management and request relevant documents to gain insight into the owners’ perceived value of the business. While this information should not replace a comprehensive valuation analysis, it can help identify discrepancies that need to be reconciled.

There are alternative indicators of value that experts may consider when valuing a business, and they are more common than one would think:

1. Buy-sell agreements

Owners often protect their business interests with buy-sell agreements. These agreements can provide a specific value for the business and may even contain valuation formulas to be used on an owner’s death or termination.

2. Prior sales

Arm’s-length transfers of ownership interests and offers to buy the company (or a portion of it) can shed light on a company’s value. Courts tend to give significant weight to prior sales and offers, especially when evaluating fair value for dissenting or oppressed shareholder claims. In some cases, courts may even consider transactions that happen after the valuation date. For data to be meaningful, the transaction should occur within a reasonable time frame; involve unrelated, credible buyers; and include business interests of comparable size and rights.

3. Past valuation reports

Valuation reports prepared for other purposes can provide insight into a company’s value. Comparability and timeliness are imperative.

4. Life insurance policies

Life insurance coverage can provide a useful indicator of value. When selecting adequate life insurance coverage amounts, most companies estimate the costs of buying out the owner or of losing a key individual.

5. Personal loan applications

Personal loan applications may be subpoenaed to provide evidence of a business interest’s value for owner disputes and marital dissolutions. When borrowers list personal assets on loan applications, they want to appear as creditworthy as possible. Conversely, when buying out another shareholder or obtaining a divorce, owners have a financial incentive to undervalue their business interests. When the amounts shown on loan applications and valuation reports differ substantially, the data may need further review.

Reliance

Though these indicators are a valuable tool in a valuation analysis, relying on them without a proper review of the terms and context may lead to inaccuracies. These metrics may not reflect current market conditions, financial health, or operational changes of the business. Buy-sell agreements could be outdated, prior sales may have been driven by unique, one-time circumstances, and life insurance policies might not reflect a true measure of a business’s worth. In Connelly v. United States, the court emphasized the importance of context, noting that these indicators must be carefully examined to ensure they represent a fair and accurate valuation.

Transparency is Key

Most valuation reports address these indicators of value, but sometimes they are overlooked, unavailable, or even withheld by the valuator’s client. It’s important to share all relevant information with your valuation professional. Alternative indicators of value may can be used to corroborate or refute a value conclusion. Analyzing financial statements, making time to review alternative indicators of value, and a good dose of common sense are invaluable in calculating accurate business value.

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In April 2023, taxpayers and tax professionals were elated by news that the U.S. Tax Court had ruled in favor of businessman Alon Farhy in his suit against the IRS. Farhy asserted that the IRS had no authorization to assess and impose penalties for failure to file foreign information returns. Their collective joy was tempered a year later when in May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling.

Farhy failed to report his ownership in two foreign entities in Belize and was assessed hefty Section 6038(b) penalties. The penalty scale for infringements under Section 6038(b) includes initial penalties of $10,000 for each annual accounting period, for every foreign entity for which the required information is not provided. Additional penalties include $10,000 for each 30-day period that the infraction occurs, up to a maximum of $50,000.

Farhy’s argument to the courts was unique; he did not deny his lack of compliance. Rather, he challenged the IRS’ authority to independently assess and issue Section 6038(b) penalties directly, for failing to file certain foreign tax information. If the IRS sought to collect penalties, he contended, it would have to pursue civil action by filing a lawsuit in federal court under Title 28 of the U.S. Code. In its surprising ruling, the Tax Court agreed with Farhy’s position, and acknowledged that Section 6038(b), unlike other penalty sections, does not include a provision authorizing assessment of penalties.

Farhy’s victory didn’t last long. A year later, the Washington, D.C. Circuit Court of Appeals reversed the decision, based on context and history. “… penalties imposed under section 6038(b) … are assessable. This conclusion is buttressed by more than forty years of congressional acquiescence to the IRS’s practice of assessing section 6038(b) penalties.”

Apparently, silence is acquiescence. The court decided that the responsibility to clarify, change, or reinterpret a statute falls upon Congress. If Congress hasn’t revisited this statute in forty years, it must have no objection to its interpretation. The Court of Appeals utilized the “tools of statutory interpretation” and looked “to contextual clues” to assess whether this specific penalty provision could be challenged. It concluded that that Congress meant for Section 6038(b) penalties to be assessable, “Read in light of its text, structure, and function, section 6038 itself is best interpreted to render assessable the fixed-dollar monetary penalties subsection (b) authorizes.” On June 4, 2024, Farhy filed a petition for a rehearing, but it was denied.

While Farhy v Commissioner was on appeal, the ruling was successfully applied in Raju J. Mukhi v. Commissioner. Mukhi racked up $11 million of foreign reporting penalties and brought several claims to court, a fraction of which were Section 6038(b) penalties. In regard to those penalties, the Tax Court reaffirmed its decision in Farhy, finding that the IRS lacked authority to assess the penalties under Section 6038(b). Farhy was heard in U.S. Tax Court and deals with tax law interpretation, while Mukhi was heard by the U.S. Court of Appeals for the Second Circuit and involves immigration law. The overlap between the two cases highlights how rulings in one area can simultaneously impact decisions in other areas, influencing both IRS enforcement practices and federal law.

Litigation revolving around the IRS’ assessment authority for Section 6038(b) is likely to continue; but until there is a conclusive decision by the Supreme Court, taxpayers and practitioners can and should challenge IRS authority to assess these penalties in US Tax Court cases, where they fall outside of the D.C. Circuit. Ultimately, regardless of the courts’ decisions, the requirement to file still remains. Serious players in the international business space must be scrupulous in their tax compliance and stay mindful and aware of changing judicial interpretations of tax law.

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In a May 24, 2024, press release the American Health Care Association (AHCA) announced that, in conjunction with the Texas Health Care Association (THCA) and several Texas long term care facilities, it has filed suit against the U.S. Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS). In June, trade association LeadingAge, which represents more than 5,400 nonprofit aging service providers, joined the fray and announced that it has joined as co-plaintiff with AHCA. No surprises here. Since CMS’ April 22 release of its final mandate establishing new requirements for nursing homes staffing, healthcare associations and operators have been gearing up for a fight.

“We had hoped it would not come to this; we repeatedly sought to work with the Administration on more productive ways to boost the nursing home workforce,” said Mark Parkinson, President and CEO of AHCA. “We cannot stand idly by when access to care is on the line and federal regulators are overstepping their authority. Hundreds of thousands of seniors could be displaced from their nursing home; someone has to stand up for them, and that’s what we’re here to do,”

AHCA’s complaint argues that the agencies’ decision to adopt the one-size-fits-all minimum staffing standards is “arbitrary, capricious, or otherwise unlawful in violation of the APA.” Further, the lawsuit argues that the rule exceeds CMS’s statutory authority and imposes unrealistic staffing requirements.

The final mandate demands a minimum of 3.48 hours per resident per day (HPRD) of total staffing, with specific allocations for registered nurses (RN) and nurse aides. The allocations call for significant HPRD of direct RN care, and direct nurse aide care, and require the presence of an RN in all facilities at all times. Nursing home operators around the country claim that these requirements are unattainable, unsustainable, and unlawful; they could lead to widespread closures that will put the country’s most vulnerable population at risk.

Partnering with Texas nursing home industry leaders was a fitting move by AHCA as more than two-thirds of Texas facilities cannot meet any of the new requirements and suffer from a nursing shortage that is not expected to abate. The lawsuit emphasizes that, “Texas simply does not have enough RNs and NAs to sustain these massive increases. On the other hand, Texas has a relatively high proportion of licensed vocational nurses (“LVNs”) but the Final Rule largely ignores their important contributions to resident care.”

LeadingAge, with a membership spanning more than 41 states, represents the aging services continuum, including assisted living, affordable housing, and nursing homes. Katie Smith Sloan, president and CEO of LeadingAge, was vociferous in LeadingAge’s stance on the mandate. “The entire profession is completely united against this rule,” she said in a statement. LeadingAge voiced its opposition to the proposed mandate back in 2022, at the outset of Biden’s administration, and now joins the legal battle against its implementation, claiming that, “it does not acknowledge the interdependence of funding, care, staffing, and quality.”

At inception, the new mandate triggered strong opposition from industry leaders and lawmakers. Industry leaders claim the rural areas will take a harder hit than urban areas. Rural facilities are grappling with an unprecedented and acute shortage of registered nurses (RNs), rising inflation, and insufficient reimbursement. Additionally, both Republican and Democratic Congressmen joined in protest of the mandate and threw their support behind the Protecting Rural Seniors’ Access to Care Act (H.R. 5796) which would have effectively suspended the proposal. Ultimately, the staffing mandate was finalized before the House of Representatives took it up.

On the other side of the courtroom, the Centers for Medicare & Medicaid Services’ (CMS) officials maintain that facilities will be able to comply with the mandate because the three phase plan will “allow all facilities the time needed to prepare and comply with the new requirements specifically to recruit, retain, and hire nurse staff as needed.” The lawsuit counters this assertion stating that a delay in deadlines will do nothing to fix the underlying problem.

“To be clear, all agree that nursing homes need an adequate supply of well-trained staff,” the lawsuit states. “But imposing a nationwide, multi-billion-dollar, unfunded mandate at a time when nursing homes are already struggling with staffing shortages and financial constraints will only make the situation worse.”

In conversations with our healthcare clients, the consensus that seems to be forming is that the new staffing mandate’s attempt to address healthcare staffing issues is simply not feasible. The mandate only exacerbates the post-Covid, turbulent environment of the healthcare industry. It is most likely that the legal assault against the mandate has only just begun as nursing home owners and healthcare companies turn to the courts to mitigate the effects of the mandate and to strongarm CMS into drafting a more equitable ruling. How the mandate will ultimately be implemented, which of its components may be reversed, and what adjustments and policy updates will arise, is yet to be seen. Stay ready for updates as the situation evolves.

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While bankruptcies are widely publicized and must follow the established governing codes, there is much more privacy and procedural flexibility when it comes to receiverships. And as we see more portfolios struggling in the current environment of higher interest rates, it’s critical to understand what receivership is and more importantly what it means for you.

Whereas bankruptcy is a method used by debtors to protect themselves from collection; receivership is a remedy that creditors employ to preserve interest upon a breach of contract i.e loan default. Once a breach has occurred, and the parties are unable to come to an agreement otherwise, the creditor will submit a claim to seek receivership in their state court. While a creditor also has the authority to file for involuntary bankruptcy, the receivership process is timelier, less expensive and more importantly, allows the creditor to nominate a receiver of their choice, albeit with the court’s ultimate approval. All these factors are crucial in accomplishing the lender’s goal of restoring their asset’s value.

The responsibilities, rights and compensation of the receiver are subject to the discretion of the court and not bound by strict procedures as seen in bankruptcies. Once finalized, the appointed receiver assumes complete management of the distressed company, controlling all its financial and operating functions. Depending on the litigation proceedings, as the business stabilizes, the lender will look to return the property to the debtor or transition the asset to a new permanent operator. While the company retains its principals in the interim, their authority and insight is limited, to their detriment. Should the business return to profitability or be sold for a gain, they will ultimately be responsible for any taxable income without the ability to proactively tax plan.

Courts view receivership as a drastic step and will encourage the lender and borrower to come to an equitable agreement instead. Should a portion of the debt be forgiven as part of such an agreement, this may result “cancellation of debt” income reported by the borrower. The additional tax liability can be a crushing blow for an already struggling taxpayer.

The two most popular exclusions under Code Section108 are to demonstrate that the company is insolvent or, more commonly, utilizing the ‘qualified real property business indebtedness exclusion.’ This exclusion can apply when real property that secures a debt is held for use in a trade or business and not primarily held for sale. The downside of utilizing this exclusion is that the taxpayer must reduce the tax basis of its depreciable real property by the amount of income he is aiming to exclude; resulting in a decrease in depreciation expense. While this is a worthy trade-off in the short term and can provide necessary breathing room, there are long-term ramifications the taxpayer needs to be aware of. A deteriorated tax basis translates into a higher capital gain should the property eventually be sold. All said, diligent tax compliance and strategic planning are essential to minimize adverse tax consequences during receivership.

While receivership might be perceived as a company’s death knell, it can also present unique opportunities for the company itself, as well as for entrepreneurs and other industry players. Economist Joseph Schumpeter introduced the economic principle of “creative destruction,” which describes how failures or disruptions in income for one entity or sector can create success for others. An entity that enters receivership has the chance to recover, redevelop and thrive. If it does not, others will take full advantage. Those looking to quickly repay creditors present savvy entrepreneurs with an opportunity to acquire assets that can significantly appreciate in value, at discounted prices, and under favorable terms. In business, there are always winners and losers, but opportunities are ever-present. Recognize them and position yourself as a winner.

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The usual question posed by business owners and their leadership teams when they meet to discuss strategic planning is something along the lines of, “How can we safely grow our company to reach the next level of success?” While that is certainly a good launching point, there are other basics to consider. One of them is the environmental, social and governance (ESG) concept.

3 critical components of ESG

ESG generally refers to how companies handle three critical activities:

• Environmental practices. This includes the use of energy, production of waste and consumption of resources.

• Social practices. This includes fair labor practices; worker health and safety; diversity, equity and inclusion. It’s all about a company’s relationships with people, institutions and the community.

• Governance practices. This refers to business ethics, integrity, openness, transparency, legal compliance, executive compensation, cybersecurity, and product or service quality and safety.

Missteps or miscommunications in these areas can spell disaster for a company if it draws public scrutiny or raises compliance issues with regulatory agencies; while integrating robust ESG practices into a company’s strategic planning and daily operations addresses this possible danger and offers many potential advantages.

Benefits

Strong ESG practices could lead to stronger financial performance and offers the following benefits:

• Higher sales. Many customers — particularly younger ones — consider ESG when making purchasing decisions. Some may even be willing to pay more for products or services from businesses that declare their ESG policies.

• Reduced costs. A focus on sustainability can help companies reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently. Conversely, bad publicity associated with government intervention, discrimination or harassment claims, can be costly and damaging.

• Improved access to capital. Clear and demonstrable ESG practices can provide growing companies with access to low-cost capital. Some investors consider a company’s ESG when making additions to their portfolios and may perceive those with ESG initiatives as lower-risk investments.

• More success in hiring and retaining employees. As climate change remains in the public eye, certain job candidates may favor companies that can clearly demonstrate sound environmental practices. Once hired, these employees will likely be more inclined to stay loyal to businesses that are addressing the issue.

Other aspects of ESG also speak to the current concerns and values of workers. Many of today’s employees want more than a paycheck. They expect employers to care for their well-being and protect them from threats such as corruption, unethical behavior and cybercriminals. Comprehensive ESG practices may reassure such employees and keep them close.

Your choice

The importance of ESG practices is not universally agreed upon in the business world. Some approach ESG formally and diligently, while others slide through potential issues. ESG practices are unique to each business and are subject to a company’s leadership team’s judgement. Nonetheless, as a business engages in strategic planning, taking time to consider the impact of ESG-related practices is time well spent. Its potential benefits can only add value in the long run.

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When it comes to investment discussions, it often seems as if the “bearish” voices have the upper hand. They sound smarter, more cautious, and more in tune with potential risks. It’s easy to feel that by dismissing their concerns, you look like you’re ignoring the data.

The same negative tone is also prevalent in financial media reporting. For example, the first two headlines that popped up in my search for this article were: “Nvidia’s Ascent to Most Valuable Company Echoes Dot-Com Boom” and “Megacap Stocks Are Extremely Overbought and Could Be Due for a Near-Term Pullback.” The news tends to be painted with a broad, negative brush – always highlighting the next big worry.

Financial blogger Michael Batnick has an insightful chart he calls, “Reasons to Sell.” The chart plots major news stories that have pushed the market down, alongside the S&P 500. It is fascinating that, while these stories did cause the market to drop for a week, or even a few months, they appear as only blips on the long-term chart. This demonstrates a crucial point: the market tends to recover from short-term shocks and continues its upward trajectory over the long haul.

Negative new stories that yell “Sell!” are ever present, but if you were to attempt to create a chart titled “Reasons to Buy,” the news stories in this category would be few and far between. The steady, long-term belief in the American economy, and its robust ability to rebound (potentially titled “Belief in Human Innovation”), rarely makes headlines. Yet, this enduring strength is the true reason to ‘Buy’.”

Believing that the economy will continue to grow over time may not be a strong counterargument when faced with short-term crises, but for long-term optimists, it means that the timing is always right. This thought is rooted in the concept of economic resilience and human ingenuity. The economy, particularly the American economy, has shown a remarkable ability to recover from downturns, and to innovate and grow. From the Great Depression to the 2008 financial crisis, every major economic setback has been followed by periods of significant growth and innovation.

The “bearish” team may sound more convincing and more focused on risks, but remember that while the market might dip due to legitimate concerns, history shows it tends to bounce back. Maintaining a long-term perspective, and faith in the economy’s growth and in human innovation, can provide a solid foundation for your investment decisions. Investing is not about timing the market; it’s about time in the market. The longer you stay invested, the more you benefit from the economy’s natural growth and the compounding effect of your investments.

While it’s crucial to be aware of risks and to stay informed, it’s equally important to maintain a balanced view. The negative headlines will always be there, but so will the underlying strength and potential of the economy. Trusting in long-term growth and human innovation can help you stay focused on your financial goals, even when the market feels uncertain.

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Back in September of 2023, the IRS declared a moratorium on the processing of new ERC claims, declaring that a substantial portion of the new claims were ineligible and were a product of clueless businesses lured in by promises from aggressive promoters and ‘ERC mills’. Aggressive promotion campaigns by ERC mills instigated a surge of problematic claims, ultimately obstructing IRS’ processing of legitimate claims for deserving businesses. Fast forward to June 2024 and, after coming under pressure from Congress, the IRS has announced that, in an attempt to crawl through the enmired, fraud-ridden ERC program, it will step up its processing and payments of older ERC claims.

Beleaguered IRS Commissioner Danny Werfel clarified that, “We decided to keep the post-September moratorium in place because we continue to be deeply concerned about the substantial number of claims coming in so long after the pandemic. We worry that ending the moratorium might trigger a renewed marketing push by aggressive promoters that could lead to a new round of improper claims. That would be a bad result to taxpayers and tax administration. By continuing the moratorium, we will use this time to consult with Congress and seek additional help from them on the ERC program. Based on what we are seeing, we believe closing the ERC program down to additional applicants would be the right thing to do.”

Werfel says that the IRS continues to be deluged by 17,000 new claims a week, despite the moratorium, and its inventory of claims stands at 1.4 million. According to the law, businesses can still apply for the credit until April 15, 2025, despite the fact that the pandemic is history. The IRS anticipates that tens of thousands of improper high-risk claims for the ERC will be denied. It conducted a review to assess a group of over 1 million ERC claims representing more than $86 billion filed and found that 10% to 20% of claims fell into the highest-risk group, with clear signs of ineligibility or possible fraud. Another 60% to 70% of the claims showed, “an unacceptable level of risk” which will draw extra analysis and scrutiny from the IRS.

Red flags tagging a claim as high risk are those that declare too many employees and wrong ERC calculations, claims based on a supply chain disruption, businesses that claim the ERC for too much of a tax period, or claims from businesses that did not pay wages or did not exist during the eligibility period. Claiming the ERC for partial shutdowns, where a segment of a business was partially shutdown, is also suspect.

Werfel assures taxpayers that the situation is not completely bleak. “For those with legitimate claims, this review helps the IRS with a path forward, and we’re taking action to help. Our review showed between 10% and 20% of the ERC claims show a low risk of red flags. So, for those with no eligibility warning signs, and received before last September, the IRS will begin judiciously processing more of these claims.” The IRS will work on a first-in-first-out basis, with older claims addressed first. It will not process claims that were submitted after Sept. 14, 2023, post-moratorium. Werfel advises taxpayers to lay low and wait for the IRS to sort things out instead of inundating the IRS toll-free line or contacting their accounting professionals to try to speed up the payment process.

While Werfel’s team sorts out its processing issues, the IRS Criminal Investigation unit is hard at work. It has already initiated 450 criminal cases of potentially fraudulent claims totaling a dollar value of almost $7 billion. Of these cases, 36 have resulted in federal charges. At the same time, the IRS has thousands of audits in the pipeline. “So, the bottom line for us on ERC is that we’re continuing to work on many different angles.” Werfel says. “And today’s announcement illustrates that we have a slow but steady path forward to help small businesses with no red flags on their claims, while denying clearly incorrect claims to continuing your work on those claims with question marks.”

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The 485x is a newly enacted tax credit recently unveiled in Governor Hochul’s FY 2025 Budget. This tax credit, also referred to as the “Affordable Neighborhoods for New Yorkers” program, replaces the 421-a tax incentive program which was created in 1971 to provide a partial real estate tax exemption for newly constructed housing. 421-a required that developers provide a certain percentage of affordable units to middle or low-income tenants in exchange for a 35-year tax credit. Over the years, the 421-a has been periodically suspended, reactivated, restructured, and has now reached its final expiration date. Like its predecessor, the 485x offers developers a long-term tax credit in exchange for the development of a percentage of affordable units; in addition, it seeks to secure fair wages for construction workers at projects benefiting from the program.

Both programs’ goals may be the same but the terms are different. The new program provides an up to 40-year exemption on taxes, an increase from the 35 years offered by the 421-a program. Additionally, the legislature gives the 485x a longer life than the previous initiative, setting it to expire by June 15, 2034. Provisions for the 485x demand a larger proportion of housing project units to be designated as affordable housing, which makes requirements for affordability more stringent, and also includes mandatory sustainability requirements.

For all projects over one hundred units, construction crew wages must start at a base wage rate of $40 an hour. For projects of more than 150 units, depending on location, the program demands construction workers’ total compensation range be the lesser of $63 to $72.45 per hour, or 60 to 65% of the prevailing wage. To keep up with inflation, these rates will increase 2.5% every year. Projects with more than one hundred units must reserve 25% of the units for tenants earning a weighted average of no more than 80% of the area median income, going down to 60% for projects with 150 units or more, depending on their location. If a developer takes it down a notch, buildings developed with 6 to 99 units will have to provide 20% percent of the units for tenants earning 80% percent of the area median income. Condominium and co-op projects are also eligible if they are located outside Manhattan and are valued at an average assessed value of $89 per square foot or less. Developers currently approved under the 421a program have been given an extended deadline and have until 2031 to complete their projects.

The 421a was unpopular and left to languish because developers complained that it was too stringent, while tenant advocates and unions grumbled that it did not do enough. Will the 485x fare better? It’s hard to say. Developers will have to dig deep and make definitive calculations to decide if the 485x credit will prove profitable with its added labor costs and rental income limitations. This is especially applicable to larger developments as the 485x’s tiered scale raises the required base pay per unit built.

Despite these constraints, brokers are reporting that the new law has awakened interest in qualified properties, and values have responded, showing a slow rise. In today’s troubled financing landscape, developers need an incentive to plunge into new projects. The 485x may provide that push. Lawmakers are hoping that the creation of the 485x will serve the dual purpose of wooing developers back into construction mode and helping the city achieve a fair balance between wages and affordability.

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Yogi Berra famously quipped, “Nobody goes there anymore; it’s too crowded.” That pretty much sums up how many people view living in New York. Long time residents are leaving New York in droves. However, although people are trying to escape high taxes, cold weather and congestion, they often want to keep some of the benefits and conveniences that New York has to offer. They often want to keep their (former) home in New York.

If you’ve moved away from New York but still have a home there, you may think you’ve abandoned the Empire state. But New York State might not have abandoned you (at least not your money). If you maintain a permanent home in New York, you may still be considered a resident for tax purposes.

This article will address the frequently asked question of “How do I get Albany’s hands out of my pocket?” Taxpayers often think that if they buy a Florida home and change their driver’s license and voter’s registration to Florida, they are no longer NYS residents for tax purposes. That doesn’t fly according to the NYS tax dept.

Like many states, New York has strict residency laws that will determine your tax obligations. If you’ve recently moved out of NY or are considering moving you should be aware of the legalities dictating residency and be prepared to defend your position in case of audit.

NYS has two tests to determine whether you are a NY taxpayer – the Domicile Test and the Statutory Residency Test. They can get you on either one.

One’s domicile is his place of permanent legal residence. It’s the place where one has the most family and professional ties and that one considers their home.

Five factors define whether a person is considered domiciled in NY State. None of these factors stand alone in determining what a domicile is, rather, they are considered in their totality. It is all about intention, as evidenced by your actions.

The first factor considered is your physical home. What location do you intend to use as your personal home? Where do you return to after you’ve been away? What is the size of your NY home as opposed to your non-New York home? Is one owned and one rented?

The second criterion revolves around your active business involvement. Where is your primary workplace? Where do you work from on a day-to-day basis? Working from a second home is still considered as though one is working in New York for tax purposes, unless a separate business location is established in the secondary location.

The third factor that NYS will review is how the taxpayer spends his or her time. Taxpayers are expected to spend more time in his or her new home state rather than in New York. A location tracker App like Monaeo can be helpful to support this.

The fourth criteria is ‘near and dear’. One’s domicile is the place where one keeps significant possessions. Where are your significant monetary and sentimental possessions located? New York State will not be convinced that you’ve moved if you keep your Picasso in your former home.

One’s family is the final factor. Where do your family members reside? Where do you host significant events and holidays? Are your children registered for school in your new hometown or in NY State?

Under law, one can only have one domicile. A New York domicile does not change until it is established that it has been abandoned and that a new domicile outside New York State has been established.

A “statutory resident” is defined as one who is not domiciled in NY State but maintains a permanent place of abode (regardless of ownership) in the state, and spends, in the aggregate, more than 183 of the taxable year there. Under audit, NYS will review calendars, expense reports, credit card statements, passports, cell phone records, and EZ PASS activity to make an accurate count of how many days you’ve spent in NY State. Partial days will count as a full day when making the count, with only very limited travel and medical exceptions.

If an auditor determines that a taxpayer is not domiciled in NY State, he will still attempt to establish that the Taxpayer is a statutory resident. In either case, whether being domiciled in NY State or being a statutory resident of NY State, the taxpayer is considered a NY State resident for tax purposes. If you are preparing to move out of NYS, but still plan to have some kind of continuing relationship with your former home, it would be wise to confer with your accountant and develop a preventative strategy to defend yourself in case your residential tax obligations are challenged.

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The Evolution and Impact of Artificial Intelligence
Artificial Intelligence (AI) has transitioned from a niche area of academic research to an essential tool that is transforming how businesses operate. For accountants and other business professionals, AI represents a powerful ally in streamlining operations, improving accuracy, and enhancing decision-making processes.

Understanding AI in Business
AI refers to the ability of machines to perform tasks that typically require human intelligence. This includes understanding language, recognizing patterns, solving problems, and making decisions. Over the past few years, AI has become more accessible and practical, particularly with the rise of tools like ChatGPT and other AI assistants. These tools can automate repetitive tasks, provide quick answers to queries, and even generate insightful reports, all of which are invaluable in the business world.

The Role of AI in Business Operations
AI is not a futuristic concept; it is already making a significant impact in various business operations. For instance, AI can assist in:
• Financial Analysis and Reporting: AI tools can sift through large datasets to identify patterns and generate detailed reports, helping businesses make informed financial decisions.
• Risk Management: AI systems can analyze historical data to predict potential risks and recommend mitigation strategies, thereby enhancing the overall risk management framework.
• Customer Service: AI chatbots can handle customer inquiries round-the-clock, providing timely and accurate responses that improve customer satisfaction.

The Practical Benefits of AI for Accounting
For business professionals, the integration of AI can bring several tangible benefits:
• Efficiency and Automation: AI can handle routine tasks such as data entry, invoice processing, and reconciliation. This frees up time for professionals to focus on more strategic activities, like financial planning and analysis.
• Accuracy and Consistency: AI systems reduce the risk of human error in data processing and calculations, ensuring that records are accurate and consistent. This is crucial for maintaining compliance and preparing precise financial statements.
• Enhanced Decision-Making: AI can analyze vast amounts of data quickly, uncovering trends and insights that might not be immediately obvious. This supports better decision-making and strategic planning.
• Improved Client Interaction: AI-powered chatbots can provide instant support to clients, answering common questions and performing basic tasks. This enhances the client experience and allows human staff to handle more complex inquiries.

Challenges and Considerations
While AI offers numerous benefits, its implementation comes with challenges, particularly in sensitive fields like healthcare. In these areas, AI must be used with caution due to privacy concerns, the need for regulatory compliance, and the critical importance of accuracy. Businesses must ensure that their AI systems are secure, reliable, and compliant with all relevant regulations.

Transformative AI Solutions
Part of the suite of AI-driven software solutions that RothTech has developed caters specifically to the needs of modern businesses. Here’s a closer look at how these technologies work and some of the benefits they deliver:

1. Advanced User Support with AI Chatbots
Our chatbots utilize Retrieval-Augmented Generation (RAG) models, which combine the best of retrieval-based and generative AI systems. Here’s how it works: when a customer query comes in, the RAG model first retrieves relevant information from a vast database of knowledge. This knowledge is usually kept private by organizations using the tool, so “ordinary” AI models like ChatGPT have no access to it. It then uses this information to generate a response that is not only accurate but contextually aware. This process enhances the chatbot’s ability to conduct complex, multi-turn conversations and provide responses that feel natural and intuitive, thereby improving customer service interactions and efficiency. In addition, this type of chatbot can recognize user’s intents and perform actions ranging from simple API calls to orchestrated and complex workflows.

2. Revolutionizing Knowledge Management
Our knowledge exchange platform transforms how information is curated, accessed, and utilized within an organization. It acts much like an AI-driven mentor that is available round-the-clock. It can ingest data from a variety of sources, including internal reports, emails, databases, and even external publications, to build a comprehensive knowledge base. Real-time analytics on user queries and the system’s responses help identify gaps in information and areas for improvement, ensuring that every team member has the most accurate and relevant information at their fingertips. If needed, this system can seamlessly transfer control to a human operator, resulting in enhanced user experience.

3. AI-Driven Recruitment: Enhancing HR Efficiency
Using deep learning, we employ HR systems which are able to analyze a multitude of data points from job descriptions and resumes to match candidates with job opportunities. This AI-driven approach not only expedites the hiring process but also improves the quality of matches, which can enhance workforce stability and satisfaction.

4. Automated Monitoring of Web Applications
Our automated systems proactively monitor the health and performance of web applications, ensuring they deliver a seamless user experience. By identifying and addressing issues before they affect users, these tools maintain high standards of application reliability and security.

5. AI in Fraud Detection and Financial Auditing
Our AI systems analyze transactional data for patterns indicative of fraud and scrutinize financial documents using natural language processing to detect inconsistencies. These capabilities enhance the security and accuracy of financial operations.

6. Streamlining Insurance Processes
AI-driven automation in insurance workflows helps manage claims, underwriting, and customer service tasks more efficiently, reducing the burden on staff and improving client satisfaction.

7. Enhanced Reporting and Business Analytics
Our tools use advanced LLMs to process both structured and unstructured data, enabling comprehensive business analysis, database querying and insight generation, which supports informed decision-making.

8. AI in Medicine
We have successfully implemented an advanced computer vision project for MRI analysis. This project aims to assist clinicians in analyzing MRI scans more accurately and efficiently by leveraging AI to interpret medical imaging nuances.

The Future of AI: Agents and Agency

As AI technology continues to evolve, the concept of AI agents — semi-autonomous systems that can perform a variety of business functions — and AI agency, where AI represents businesses in interactions, is becoming more prominent. In addition, the newest Large Language Models presented just days ago are making a big step towards much more natural human-computer interaction—for example, GPT 4o accepts as input any combination of text, audio, image, and video and generates any combination of text, audio, and image outputs. Such advances of AI development will further redefine the boundaries of what machines can do in a business context, offering new opportunities for innovation and efficiency.

As AI technology continues to evolve, its potential to redefine business operations grows exponentially, promising unprecedented innovation and efficiency. However, businesses must also navigate the associated risks, including data privacy concerns and the need for robust regulatory compliance, to fully leverage AI’s transformative power while mitigating potential downsides.

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Private credit funds have exploded recently, with billions of dollars raised for private credit from U.S. investors in 2023 alone, following a decade of strong growth. According to PitchBook, the market grew from roughly $500 billion in 2012 to $1.75 trillion in 2022. Last year, Harbor Group International (HGI), a real estate investment and management firm, announced that its multifamily credit fund had reached a new milestone of $1.6 billion in capital commitments.

The rise in popularity of private credit funds can be attributed to a surge in businesses seeking new and alternative avenues to capital in a high interest rate environment. HGI’s fund invests in US multifamily credit opportunities, including senior mortgage loans, Freddie Mac K-series bonds, preferred equity and mezzanine debt investments, and investments in securitized multifamily mortgage products.

Private credit funds offer investors access to non-public markets and present a range of benefits not offered by traditional and public market investments, and through strong recent fundraising, have been able to enter the lending market with a focus on high‑yield deals.

While traditional banks are required to hold comparatively higher levels of capital to what they lend and are subject to rigorous regulatory scrutiny, private credit has greater flexibility in these areas. Private credit funds have also been outperforming traditional private equity ventures. In 2023, the private credit portfolios of seven listed private equity managers achieved a median gross return of 16.4%, compared to 9.8% for their private equity strategies, making private credit an attractive investment opportunity.

Private credit funds’ popularity is also due to the advantages they offer investors, especially at a time when markets are uncertain and overall dealmaking has slowed to the point where many private equity firms are struggling to get funding for leveraged buyouts. Some of these advantages include:

• Diversification – Spreading exposure across multiple sectors and credit profiles is key to mitigating portfolio risk. Private credit funds work across a diverse range of credit instruments, including senior secured loans, mezzanine, and distressed debt, to offer higher yields than other types of investments.

• Risk Mitigation – Private credit funds can take advantage of the risk mitigation strategies many companies have in place when they assess the viability of an investment. Asset managers can consider a company’s reputation, position in the market, longevity, risk mitigation and response strategies, and past financial performance when considering offering private credit. To take on the appropriate amount of risk and capture returns, long-term, fund managers must put each investment prospect through rigorous due diligence and risk management testing before committing.

• Custom Structures – Private credit funds can be highly flexible, creating customized investment structures to generate alpha for investors. Often, private credit funds can offer value-added features that traditional banks cannot, including warrant coverage, equity kickers, revenue or profit-sharing agreements, and performance-based incentives. Investors concerned with preserving capital can opt for senior secured loans, for example, while those seeking higher returns may opt for higher risk alternatives like distressed debt.

• Conversion to Equity – Credit facilities and loans provided to companies by private credit funds often come with covenants setting out terms for the lender in case of a breach. In certain circumstances within a private credit fund, when a borrower defaults on a loan or breaches a covenant, the credit facilities can be turned into equity.

Financial firms considering private credit funds as part of their overall investment strategy should seek to establish an investment strategy, develop a sound strategic approach to the size of companies the fund will target, and establish risk management and compliance protocols.

In April 2024, the International Monetary Fund (IMF) published the second chapter of its Global Financial Stability Report, which called for greater regulation and oversight of the private credit market. Consulting regularly with legal and tax advisors can help asset managers head off risk from potential regulatory overhaul while maintaining the flexibility that makes private credit attractive. Sound management remains the key to driving return on investment by addressing potential tax implications and avoiding the fines, litigation, and reputational harm that may arise from non-compliance.

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Healthcare entities regularly seek out merger and acquisition (M&A) opportunities to expand and diversify, but M&A becomes more expensive and less attractive when rising interest rates make the cost of borrowing prohibitive. Vacillating interest rates invite fluctuating costs of capital, disrupt valuations, and strain financing opportunities. Throw in the newly released staffing mandates and the combination of factors affects the overall volume of M&A transactions.

Interest rates and valuations generally work inversely. When interest rates climb, discount rates also rise. This brings on lower present values of future cash flows, which lowers valuations for companies. Fluctuating valuations affect the pricing of M&A transactions. Low valuations translate into potentially higher returns for investors and more M & A activity.

According to a recent report by Forbes, despite forecasts of reduced interest rates, the Federal Open Market Committee has not moved to cut them. Currently, it seems most likely that the FOMC will cut rates in September and December, according to the CME’s FedWatch tool. Lower rates will mean lower valuations and will lead to a higher volume of M&A activity.

Where do staffing mandates come in? The nursing home industry is in an uproar in reaction to the Centers for Medicare & Medicaid Services new staffing mandate that will demand that nursing homes provide residents with approximately 3.5 hours of nursing care per day, performed by both registered nurses and nurse aides. This is the first time nursing homes are looking at staffing requirements set by the federal government and they are none too pleased. The mandate has been widely opposed by the nursing home operators, claiming that it is unreasonable, and more importantly, unrealizable.

Over the next three to five years, as the mandate’s requirements are phased in, providers will be faced with threatening staffing costs. According to the American Healthcare Association (AHCA), the proposed mandate would require nursing homes to hire more than 100,000 additional nurses and nurse aides at an annual cost of $6.8 billion. This signals inevitable closures and sell-outs in the coming years. The new staffing mandates threaten the healthcare industry as a whole, especially the activity of mergers and acquisitions. The saving grace may come in the form of a marked lowering of interest rates which can more likely than not keep M&A activity active and even trigger a robust year for healthcare in general.

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In November 1938, 1.1 million Californians voted to enact the first pension plan, known as the “Ham and Eggs” program. While this referendum failed by a few thousand votes, it was one of the many ideas floated in the tumultuous 1930s. Another famous plan was Francis Townsend’s proposal, advocating for a national sales tax that would furnish every American aged 60 or older with a $200 monthly pension payment.

Amid this era of throwing spaghetti at the pension wall, one program stuck: Social Security. As part of Roosvelt’s New deal, the plan’s inaugural check, a modest $22.54, went to Ida May Fuller on January 31, 1940. It marked the genesis of a system that has since burgeoned into a cornerstone of retirement planning.

Over the decades, Social Security has garnered not only widespread acclaim but also robust political fortitude. Its popularity among seniors, with over 90% actively receiving its benefits, has rendered it a cherished institution in the eyes of voters. Consequently, politicians have been wary of wielding reformative influence, fearing the formidable backlash from this sizable voting bloc.

However, despite its popularity, the program faces an ominous specter: the impending depletion of its trust funds by 2033. Potential remedies, such as raising the retirement age or reducing benefits, evoke memories of France’s tumultuous response last year to its attempt at reforming its retirement system, which was marked by months of fervent protests. More importantly though, due to its popularity among its greatest voting bloc, senior citizens, it’s become the third rail in politics. It’s pretty much political suicide to try to make changes. One level after killing your puppy (IYKYK😉).

As a result, Social Security resembles a driverless car hurtling towards an unavoidable collision, bereft of self-driving software to steer it away from calamity.

Our goal is not to succumb to hyperbole or indulge in doomsday predictions. Instead, we advocate for a proactive approach to retirement planning. Take the reins of your financial future; make sure to save diligently and invest astutely. If Social Security remains a reliable safety net, it will merely enhance your retirement journey, serving as a supplemental boon rather than a sole lifeline.

As President J.F. Kenedy famously said at his inaugural address, “Ask not what your country can do for you; ask what you can do for your country”. By saving enough for retirement, you will be removing the government’s burden to support you in your retirement, and what is more patriotic than that?

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Inventory is a critical component of most businesses’ Balance Sheet, but managing inventory effectively is often a challenging balancing act. A business needs to keep enough inventory on hand to meet its customers’ needs – but holding on to too much inventory can be costly. What are some smart ways to manage inventory more efficiently, without compromising revenue and customer service?

Reliable counts

Effective inventory management starts with a physical inventory count. An accurate count of inventory provides a snapshot of how much your company has on hand at any one point in time. This is easier said than done. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value as of the reporting day, companies may “freeze” business operations while counting inventory. For larger organizations with multiple locations, it may not be possible to count everything at once; so, they often break down their counts by physical location.

Accuracy is essential to calculating cost of goods sold, and to identify and remedy discrepancies between a physical count and inventory records. And there are always discrepancies. Errors made in data entry, shipping errors, inaccurately labeled products, theft, and sometimes even intentional misstatements are all common factors that can throw off an accurate inventory count.

Benchmarking studies

After a business has calculated its inventory as accurately as possible it can compare its inventory costs to those of other companies in its industry. Benchmarking is the process of measuring key business metrics and comparing them against other companies in the industry to see how the business is faring and how to improve performance. Trade associations often publish benchmarks for gross margin, net profit margin, or days in inventory, and a business should strive to meet — or beat — industry standards.

Efficiency measures

What can you do to improve your inventory metrics? The composition of your company’s cost of goods will guide you as to where to cut and what to modify. Consider the carrying costs of inventory, such as storage, insurance, obsolescence, and pilferage. You may be able to improve margins by negotiating a net lease for your warehouse, installing antitheft devices, or opting for less expensive insurance coverage.

To cut your days-in-inventory ratio, compute product-by-product margins. You might stock more products with high margins and high demand — and less of everything else. Consider returning excessive supplies of slow-moving materials or products to your suppliers, whenever possible. In today’s tight labor market, it may be difficult to reduce labor costs. But it may be possible to renegotiate prices with suppliers.

Inventorying your inventory

Management usually directs its greatest efforts into the growth of its business, which is appropriate; but this focus often puts inventory management on the back burner. This can be a costly mistake. Speak to your accounting professional for help in researching industry benchmarks and calculating inventory ratios to help minimize the guesswork in managing your inventory.

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Last month, the world mourned the loss of Nobel laureate Daniel Kahneman, a pioneer in behavioral economics. His work shed light on the complex workings of our minds, where emotions often influence financial decisions, sometimes with negative consequences.

For instance, Eli Whitney, the man credited with revolutionizing the cotton industry, invented the cotton gin. This machine, as Wikipedia describes it, “quickly and easily separates cotton fibers from their seeds,” significantly increasing productivity. However, Whitney’s business decisions entangled him in a web of issues. Instead of opting for a sustainable approach, like selling the machines with a modest royalty, Whitney and his partner demanded an exorbitant one-third cut of any harvest using their gin. This excessive fee proved unacceptable to plantation owners and legislators and led to widespread piracy and imitation of their invention. Whitney, rather than becoming immensely wealthy, spent his days in court battles, barely breaking even.

Financial history is filled with similar stories of individuals succumbing to greed.

The Duality of Risk: Fear and Greed in the Herd

Shifting gears for a moment, let’s consider zebras. These fascinating animals typically graze in large groups called dazzles. Zebras who graze in the center of the dazzle have access to less desirable, matted grass but enjoy relative safety from lion attacks. Conversely, those on the periphery feast on lush green grass but are more exposed to predators.

This behavior exemplifies the interplay of fear and greed that influences our own decisions. The “greedy zebras” venture out for better food, while the fearful ones remain in the safer center.

When Emotions Take the Reins: Investing and the Fear/Greed Cycle

These same fear/greed emotions significantly impact investment decisions. When the market flourishes, and others seem to be profiting effortlessly, greed often takes hold, luring us into riskier investments.

The period between 2020 and 2022 serves as a prime example. With exceptionally low interest rates, many risky ventures appeared successful. This fueled envy among some investors and caused greed to cloud their judgment. Consequently, many made high-risk investments right before the Federal Reserve raised interest rates. This action, akin to a “lion attack” in our analogy, devastated many investors who had been “grazing outside the dazzle” at those risky investments.

The Kahneman Compass: Mitigating Emotional Biases

The key takeaway is that an investor must develop a broad perspective and identify potential risks. Are you venturing too far from the safety of the dazzle?

The insights of Daniel Kahneman offer invaluable guidance in this regard. He emphasized the importance of understanding cognitive biases, which can lead to poor decision-making. By taking a step back, critically evaluating initial reactions, and considering different viewpoints, individuals can lessen the influence of emotional impulses and make more informed choices. Additionally, Kahneman recommended seeking feedback from others and establishing frameworks for decision-making to counteract these biases.

While no method is foolproof, and even experienced investors make mistakes, being aware of these biases and attempting to assess risks is a crucial first step.

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CFOs and Tax Leaders share responsibilities and goals – but need to do a better job collaborating. These two pivotal business roles share responsibility for the financial stability, profitability, and growth of their businesses, but when they are not aligned on the strategic value of the tax function, the company will suffer the consequences.

BDO’s Tax Strategist Survey found that 78% of CFOs believe that the tax function offers strategic value to the broader business, and 75% believe the tax function is invited to weigh in on business decisions before they are made. In both instances, there is a clear signal that CFOs see the merits of fully engaging with the tax function.

However, tax leaders’ responses to the same survey seemed to tell a different story. Only 27% of tax leaders say that they were sufficiently involved in a wide enough range of business decisions to meet the threshold of a “tax strategist” — the type of tax leader who regularly takes a seat at the table to provide strategic input outside the traditional areas of responsibility of the tax function.

This disconnect creates an interesting challenge: if CFOs believe tax leaders are already adding sufficient strategic value, they may fail to include them in the wider decision-making process. This oversight could prevent leveraging the full potential of a tax team, leading to missed tax opportunities or even increased tax risk or liability. Tax leaders, for their part, believe they can be more involved, so something appears to be lost in translation. How can CFOs and tax leaders work together to enable a more strategic tax function?

Expanding Roles: CFOs and Strategic Tax Functions

The tax function’s role is expanding and becoming more complicated. Tax leaders must navigate increasing regulatory complexity, as major domestic U.S. tax policy changes occur with greater frequency. International trade treaties and regulations have changed markedly due to new presidential administrations and expanding geopolitical conflicts.

Tax leaders are increasingly involved in reputation management amid heightened demand for tax transparency from regulators and other stakeholders. Tax leaders and CFOs must work together to manage competing priorities of maximizing shareholder value and ensuring the company is not overpaying tax, while at the same time managing public scrutiny related to total tax contribution.

Tax Leaders: Learn to Speak the Same Language

In turn, tax leaders need to understand how the CFO’s role is evolving. Learning to speak the language of business and finance beyond tax means understanding the strategic priorities of the CFO and the business and how the tax function can positively impact those goals. Tax leaders must make sure that their highly technical tax language translates across the business so that tax planning strategies can be effectively communicated to the C-suite and accurately deployed.

Expanding the range of metrics and key performance indicators (KPIs) used to measure the tax function’s impact on the company can also help align goals and foster communication. Alongside essential benchmarks like effective tax rate or accuracy of tax returns, new benchmarks may dovetail with the CFO’s other goals – like capital allocation and risk management, helping to bring the tax function’s insights to a wider audience.

Developing the ability to calculate and communicate the tax implications of business decisions and policy shifts in terms that matter to the broader business is key to the tax leader becoming a trusted advisor to the CFO. Showing leaders across the company that the tax team can focus on bottom-line impacts while attending to technical tax details can demonstrate how the tax function’s abilities extend beyond compliance and into strategic value.

CFOs: Keep the Lines of Communication Open and Provide the Right Support

For CFOs, keeping the lines of communication open with tax leaders is essential to successful strategic tax planning. Inviting tax leaders to the table when major decisions are made is important, but will be merely symbolic if tax leaders do not have the resources they need to make strategic contributions. The CFO should work closely with tax leaders to ensure the tax team is equipped with the necessary resources, including skilled personnel, an effective staffing model, advanced technology, and ongoing training and development. This kind of support simplifies dealing with complex tax situations and allows tax leaders to focus on strategic contributions by automating routine tasks and providing actionable data insights.

CFOs and Tax Leaders: Foster Alignment in Action

When CFOs and tax leaders set goals together, communicate, and keep each other accountable, the magic can start to happen. Their alignment will drive better business outcomes, enhance decision-making, mitigate tax risk, and improve operational resilience. When well-aligned CFOs and tax leaders are strategic partners, they can unlock the full potential of the tax team and leverage highly technical knowledge to provide bottom-line value to the entire business.

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The IRS’ annual “Dirty Dozen” list informs taxpayers about current tax scams, schemes, and dodges that could put their money, personal data, and security at risk. The purpose of the IRS’ Dirty Dozen is to warn taxpayers away from tax traps designed for them by corrupt promoters and shifty tax practitioners.

What schemes made the list for 2024? Here are some areas of impropriety that the IRS wants you to know about:

Social media: Not the ideal place for solid tax advice

Want some bad tax advice? There’s a lot to be found on social media. Scouring social media for answers to your tax problems could lead to identity theft and onerous tax debts.

Two of the recent schemes circulating online relate to the misuse of your W-2 wage information. One scheme involves encouraging people to use Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals) to claim a credit based on income earned as an employee and not as a self-employed individual. This credit was valid for Covid years 2020 and 2021 but is no longer operative. The second scheme encourages the invention of fictional household employees and the filing of Schedule H’s (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages that they never paid. The IRS is on the lookout for these deceptions and will work with payroll companies, employers, and the Social Security Administration to verify W-2 information.

Beware of ghost preparers

“Ghost preparers” are a common scourge that emerges during tax season. These are unqualified, and sometimes unscrupulous preparers, without valid preparer tax identification numbers (PTINs), who offer filing services. They will often encourage taxpayers to take advantage of tax credits and benefits for which they do not qualify.

“By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions,” says IRS Commissioner Danny Werfel. “But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS.”

The IRS encourages taxpayers to check their tax preparer’s credentials and qualifications. A qualified preparer will always ask for the taxpayer’s receipts, records, and tax forms to determine his or her total income, and proper deductions and tax credits. Stay on top of your own data; an unethical tax preparer may try to boost your refund by taking false deductions or creating bogus income to claim more tax credits. E-filing a tax return using a pay stub instead of a Form W-2 is against IRS e-file rules and should serve as a bright red flag to the taxpayer.

The IRS warns taxpayers to beware of preparers that utilize shady payment terms like ‘cash-only’ payments or fees based on a percentage of the taxpayer’s refund. Taxpayers should also be suspicious if a tax preparer encourages them to have their refund deposited with them, instead of depositing it directly into their own personal bank account.

Beware of offer in compromise “mills”

Internal Revenue Service also renewed its warning to taxpayers regarding Offer in Compromise (OIC) “mills”. These are the unscrupulous preparers you’ve heard all over the media promising to make your tax debts disappear.

“These mills try to pull in steep fees while raising false expectations and exploiting vulnerable individuals with promises that tax debt can magically disappear,” says IRS Commissioner Danny Werfel.

The IRS’ Offer in Compromise is a viable option for the taxpayer who can’t meet his tax obligations, provided that he is able to justify financial hardship. The IRS evaluates every OIC application on a case-by-case basis and considers each taxpayer’s unique circumstances, factoring in the taxpayer’s income, expenses, asset equity, future earning potential and ability to pay. Taxpayers must be able to support and document their claim and pay an application fee to start the process. To confirm eligibility and prepare a preliminary proposal, taxpayers can use the IRS’ online OIC Pre-Qualifier Tool found here: https://irs.treasury.gov/oic_pre_qualifier/

While the OIC offers a chance for negotiation with the IRS, allowing taxpayers to present reasons for their inability to pay their full tax debt, it is a complex and time-consuming procedure governed by IRS guidelines. Aggressively marketed OIC mills that promise to resolve outstanding tax debts for pennies on the dollar are deceptive. Taxpayers who fall victim to these schemes may find themselves in even worse financial situations, facing increased debt and legal repercussions.

If you need to reduce your tax liability, reach out to your accounting professional and steer clear of predatory OIC mills.

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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If you’re a confident investor, this might be your moment. High interest rates, tighter financing options and general economic uncertainty have banks worried. Defaults and distressed properties are on the horizon, but surprisingly, banks seem more inclined to sell off their loan portfolios rather than dive into the real estate game. This may be the time for investors to move in and take advantage of bargains and buy-offs.

As the Federal Reserve continues to battle inflation, the resultant high rates have become worrisome to a broad range of investment sectors. The commercial real estate (CRE) industry’s $4.5 trillion of outstanding mortgage debt means that there’s what to worry about. According to research conducted by Ernst & Young LLP , the average reported mortgage rate exceeded the average reported property cap rate in Q4 2022 and Q2 2023. The last time this occurred was during the 2008 financial crisis.

The market’s high volume of distressed debt that is approaching maturity leaves investors operating in loss positions. According to Trepp, a financial data and analytics company that provides information, analytics, and technology solutions to the real estate industry, approximately $2.81 trillion of debt is coming due by 2028. It is likely that banks will be looking to generate workouts with needy borrowers to unload that debt.

Higher interest rates, stiffer financing options and high and rising operating costs have created a sluggish CRE market, negatively affecting real estate valuations. Despite the market’s uncertainty, experts agree that confident buyers, looking for long term results, may find worthwhile opportunities by buying out bank debt.

In an effort to minimize risk and avoid exposure banks are taking a more restrained approach and avoiding foreclosing and repossessions. They are opting instead to unload troubled assets by selling debt. This makes it a good time for the knowledgeable investor to step in. Because banks are looking to dispose of loan books, investors need to be prepared to act quickly. “Investors need to begin planning in advance for transactions in terms of how they plan to mobilize, how they get data, how they are going to underwrite the property cash flows and loan cash flows and ultimately arrive at a price for the portfolio,” says EY’s Kevin Hanrahan

How can the investor take up Hanrahan’s advice? Robust tech capabilities can ensure that the investor is able to pull data, and process and aggregate it swiftly, leaving a clear path for the underwriting process. An investor that can access his or her information efficiently will be able to jump into negotiations quickly with realistic pricing and valuation data.

The continued uncertainty in the real estate industry will be felt uniquely by banks, borrowers, and investors. Experts agree that, as banks make more moves to unload debt, and more loan books enter the marketplace, investors should make sure to be prepared to respond quickly to win deals.

Investors who’ve had the foresight to build relationships with banks, who are able to effectively rely on their technology to access data, and who have the know-how to use their data to calculate realistic pricing, will be in the driver’s seat when an opportunity presents itself. Do your homework and be there with them.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In the episode below, we cover the main advantages of investing in student rental properties.

Student housing properties have earned a significant niche in the commercial real estate market, and while they may evoke a natural reluctance on the part of the investor, they actually offer several unique investment advantages.

Investing in student housing properties often carries less risk than investing in traditional multi-family properties. The need for student housing is on the rise, with a projected 46 million people falling into the college age-range by 2031. In response, off-campus rentals have been attracting capital from savvy investors.

Universities and colleges are historically unaffected by recession or economic flux. Education is always a commodity in demand. By association, student housing properties are also less susceptible to economic downswings. College enrollment runs in continuous cycles, so new housing is needed every semester. This means that demand for this type of property remains stable and cash flows are predictable, albeit the downside of constant turnover.

Because student spaces are usually shared by multiple renters, student housing offers the investor higher returns. It also offers opportunities to generate ancillary income by supplying amenities like parking, bike storage or a gym.

In terms of risk, student rentals have lower default rates than most multi-family units because parents are often the ones to cosign on their kids’ rentals.

Student housing is considered residential, and therefore qualifies for a 27.5-year depreciation schedule, as opposed to industrial and retail real estate, which has a 39-year depreciation schedule. This means there are more deductions to shelter the property income.

Of course there are some disadvantages to consider when you’re thinking of investing in a student rental property. These include lower cash flow in summer months and the high potential for damages. Investors in student housing must also be equipped to deal with an inexperienced renter population and should be prepared to communicate with renters’ parents, who are often involved in the rental process.

To identify lucrative investment opportunities in the student housing market, the investor should stay informed about which universities are growing in enrollment. Higher enrollment means the demand for off-campus housing will increase. A property’s location is an essential factor in assessing the property’s success. Student housing located near a main campus will attract renters more easily than one further away and can demand higher rents. Amenities are important to the student population, with Wi-Fi, gyms, and communal spaces acting as a heavy draw. Lastly, look out for college towns with a stable economy, or an economy that’s on the rise. Colleges and universities in growing towns will look to expand and attract more students – and those students will need housing.

Diversifying your investments to include student housing properties can insulate your investment portfolio from risk and may offer a profitable option for optimizing its value. Speak to your investment advisors to learn more about this promising investment.

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The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed individuals and small-business owners to deduct up to 20% of their qualified business income on their taxes. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025 – so be sure to take advantage of this big tax saver while it’s around.

Deduction basics

Pass-through business entities report their federal income tax items to their owners, who then take them into account on their owner-level returns. So the QBI is written off at the owner level. It can be up to 20% of:

QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, and
QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.

QBI is calculated by taking income and gains and reducing it by the following related deductions.

deductible contributions to a self-employed retirement plan,
the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.

Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.

Limitations

At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.

If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.

Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

Unfavorable rules for certain businesses

For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.

Other factors

There are other rules that apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.

There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.

Use it or potentially lose it

Time is running out for self-employed and business owners to take advantage of the QBI; and while Congress could extend it, it’s doubtful that they will. Maximizing the deduction for 2024 and 2025 is a goal worth pursuing. Speak to your accounting professional to find out more.

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High-income earners who have not been filing their tax returns are in the crosshairs. A recent IRS news release announced an extensive plan to root out high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017. The agency estimates that this campaign will involve hundreds of millions of dollars in unpaid taxes.

The IRS hasn’t had the funds to pursue non-filers since 2016, but with the new Inflation Reduction Act, passed into law in 2022, and a directive from Treasury Secretary Janet Yellen, the IRS now has the resources to address this pervasive compliance issue – and it’s pulling out the stops.

At the start of March 2024, the IRS began its campaign by sending noncompliance letters to more than 25,000 people who earned more than $1 million per year, and 100,000 people with incomes falling between $400,000 and $1 million, who have failed to pay their taxes between 2017 and 2021. All of these cases have shown up on the IRS’ radar through third party sources – like Forms W-2 and 1099s – which show they have earned income but haven’t followed up with a filing. Since the IRS is not aware of any possible credits or deductions these filers may have, they have no clear estimate of the potential revenue that they hope to earn through this initiative. However, the third party information points to financial activity of more than $100 billion and the IRS estimates that hundreds of millions of dollars of unpaid taxes are in question. Conversely, because the IRS does not have all the details of the potential filings in hand, some of these non-filers may not owe the IRS anything at all and may even be due a refund.

The IRS expects taxpayers to take immediate action upon receipt of its compliance letter, formally known as the CP59 notice. Ignoring them means additional follow-up notices, higher penalties, and the potential for stronger enforcement measures. The IRS also advises non-compliant taxpayers to consult with their tax professionals for help filing late tax returns and paying delinquent tax, interest, and penalties. The failure-to-file penalty amounts to 5% of the amount owed every month – up to 25% of the tax bill.

For high-end non-filers, your time may be up. If the IRS’ manhunt applies to you, be sure to reach out to a tax professionals to refile, address your tax balance, and regroup.

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Did you donate to charity last year? Acknowledgment letters from the charities you gave to may have already shown up in your mailbox. But if you didn’t receive such a letter, can you still claim a deduction for the gift on your 2023 income tax return? It depends.

What the Law Requires

To prove a charitable donation for which you claim a tax deduction, you must comply with IRS substantiation requirements. For a donation of $250 or more, this includes obtaining a contemporaneous written acknowledgment from the charitable organization stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.

“Contemporaneous” means the earlier of: The date you file your tax return or the extended due date of your return. Therefore, if you made a donation in 2023 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2023 return. Contact the charity now and request a written acknowledgment. Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is adequate. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you with a written acknowledgment as described earlier.

No Longer a Tax Break for Nonitemizers

Currently, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under previous COVID-19 relief laws, an individual who didn’t itemize deductions could claim a limited federal income tax write-off for cash contributions to IRS-approved charities for the 2020 and 2021 tax years. Unfortunately, the deduction for nonitemizers isn’t available for 2022 or 2023.

More Requirements for Certain Donations

Some types of donations require additional substantiation. For example, if you donate property valued at more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return. For donated property with a value of more than $5,000, you generally must obtain a qualified appraisal and attach an appraisal summary to your tax return.

Donor Advised Charitable Giving

Many donors opt for effectuating their charitable giving through a donor-advised fund (DAF). Giving to charity through a DAF offers an immediate tax deduction and affords strong support documentation to ward off trouble should a donor be challenged by the IRS.

Contact your accounting professional at Roth&Co if you have questions about whether you have the required substantiation for the donations you hope to deduct on your 2023 tax return. We can also advise on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2024 return.

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Picture this: Two buddies hiking through the woods, when suddenly, out pops a massive bear. One guy takes off like a rocket – survival instincts kicking in. The other, oddly composed, yells after him, “What’s the point? You can’t outrun a bear!” The sprinting hiker retorts, “I don’t need to outrun the bear, I just need to outrun you!”

Sometimes, competition is the key to success. Beating your colleagues in the company fantasy football league makes you the water cooler hero. Getting in on a high-flying stock will make you a star at wedding conversations. Those feel-good victories definitely have their place, and may save your life in a bear attack.

But here’s the twist: When it comes to your personal financial goals, it’s not about beating anyone. It’s not even about the S&P 500. Imagine someone beating the S&P 500 by 10% a year, but at age 83 they’re sitting on a park bench, struggling to pay their electric bill. What did the outperformance bring them? Bragging rights won’t keep the lights on.

So when it comes to your personal finances, remember:

Your goals, your rules: Whether it’s buying a house, retiring in comfort, or traveling the world, your financial goals are all about you. What your neighbor or coworker is doing is irrelevant. Focusing on your individual needs and aspirations will help create a personalized investment plan rather than chasing someone else’s dream.
The risk factor: Remember, not all investments are created equal. Trying to “win” by picking riskier stocks might get you those sweet bragging rights…for a while. But if it jeopardizes your long-term financial stability, is it really worth it? Picking investments based on your risk tolerance keeps you focused on the bigger picture.
Time is on your side: Investing is a long game. Sure, seeing your portfolio outperform the market feels great, but what if those gains come with a side of heart-palpitating-volatility? A slow and steady strategy tailored to your needs sets you up for sustainable, long-term growth.

So, the next time you start comparing your portfolio to your buddy’s, stop. Remember, it’s not a competition. Focus on building a financial future that secures the life you want to live. After all, what good is bragging about outperforming a bear market if you can’t pay your bills?

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Hard hit by the pandemic, the nursing home industry is still struggling to recover and rebuild its workforce. Standing in its way is the Biden Administration’s proposed federal staffing mandate. If passed, this mandate will cost nursing homes billions of dollars, compromise access to care for seniors, and increase the challenges already facing operators who are already responding to industry flux by limiting admissions and closing facilities.

According to a recent report by the American Health Care Association (AHCA), despite higher wages, the nursing home sector suffered the worst job losses out of all other health care sectors in the Covid period. In order to return to pre-pandemic levels, another 130,000 workers would still need to return to the industry.

The industry is up in arms and urging support for the Protecting Rural Seniors’ Access to Care Act, which would prohibit the Centers for Medicare and Medicaid Services (CMS) from finalizing its proposed federal staffing mandate for nursing homes, and would establish an advisory panel on nursing home staffing. The staffing mandate proposed by CMS would compel nursing homes to meet unjustified staffing minimums, without offering any resources or workforce development programs to soften the impact.

The proposed rule consists of 3 central staffing proposals:

The first calls for minimum nurse staffing standards of 0.55 hours per resident day for registered nurses and 2.45 for nurse aides.
The second rule mandates having an RN on site 24 hours a day, 7 days a week.
The final rule imposes additional facility assessment requirements.

According to a joint letter of protest written by the American Health Care Association and the National Center for Assisted Living, nearly 95% of nursing homes do not meet at least one or more of the three proposed requirements of the proposal. If the proposed rule is implemented, facilities would be forced to downsize or close down – displacing hundreds of thousands of nursing home residents.

The AHCA’s 2024 State of the Sector report asserted that if the staffing proposal is finalized, the sector will need to inject 100,000 more staff members into the workforce at an annual cost of $7 billion. An anticipated 280,000 residents would be displaced as facilities would be forced to downsize or close and the result would limit access to care for our most vulnerable population.

Ensuring that our nation’s sick and elderly population receives safe, reliable, and quality nursing home care is crucial. Further limiting the nursing home industry’s access to a competent workforce, without offering programs or funding to soften the blow, is untenable for both the industry and its beneficiaries.

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In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal, and operational positions.

As a business owner, you can perform these same types of reviews of your own company to discover critical insights.

Now you can take a deep dive into your financial or legal standing if you think something is amiss. But assuming all’s well, the start of a new year is a good time to perform an operational review.

Why Perform an Operation Review?

An operational review is essentially a reality check into whether – from the standpoint of day-to-day operations – your company is running smoothly and fully capable of accomplishing its strategic objectives.

For example, a real estate business relies on recurring revenue from established clients as well as new revenues, in order to survive and grow. It needs to continuously ensure that it has the knowledge, talent and resources to acquire, buy or lease properties to develop or resell. The point is, you don’t want to fall behind the times, which can happen all too easily in today’s environment of disruptors and rapid market changes.

Before getting into specifics, gather your leadership team and ask yourselves some big-picture questions:

Is your company falling short of its financial goals?

An operational review can spotlight both lapses and opportunities for increased profit and can offer recommendations to improve management performance.

Are day-to-day operations working efficiently?

Implementing system controls like automated financial tracking systems and data analytic tools can help real estate companies streamline their operations and improve efficiency.

Is your company organized optimally to safeguard its financial records and reports?

Protecting financial information is especially important in the real estate industry where most transactions involve large sums of money.

Are your company’s assets sufficiently protected?

Implementing system controls to protect your business and its properties can prevent unauthorized access; making regular inspections will identify any issues or damage.

What to look at

When business buyers perform operational due diligence, they tend to evaluate at least 3 primary areas of a target company:

Operations: Buyers will scrutinize a company’s structure and legal standing, contracts and agreements, sales and purchases, data privacy and security and more. Their goal is to spot performance gaps, identify cost-cutting opportunities and determine ways to improve the bottom line.
Selling, general & administrative (SG&A): This is a financial term that summarizes a company’s sales-related and administrative expenses. An SG&A analysis is a way for business buyers — or you, the business owner — to assess whether the company’s operational expenses are too high or too low.
Human resources (HR): Buyers typically review a target business’s organizational charts, staffing levels, compensation and benefits, and employee bonus or incentive plans. Their goal is to determine the reasonability and sustainability of each of these factors.

A Funny Question to Ask Yourself

Would you buy your real estate company if you didn’t already own it? It may seem like a funny question, but an operational review can tell you, objectively, just how efficiently and impressively your business is running. Roth&Co is happy to help you gather and analyze the pertinent information involved.

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Within this flurry are what we call ‘bellwether’ companies, whose earnings reports carry significant weight in gauging the overall economic health. Want to gauge consumer spending? Keep an eye on iPhone sales and airline bookings. Curious about food prices? Look into the restaurant chains and food suppliers. You get the drift. However, amidst the hustle and bustle of earnings season, a few events hold sway far beyond the immediate financial realm. Among them are the much-anticipated letters and shareholder meetings hosted by Warren Buffett.

This year, Buffett’s letter began with a heartfelt tribute to his longtime friend and business partner, Charlie Munger, who recently passed away just short of his 100th birthday. Following this poignant start, Buffett delved into insights about Berkshire Hathaway, along with nuggets of wisdom about business and investing:

“One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone, but always by someone.”

True success in investing lies in maintaining a steady hand through the inevitable ebbs and flows of the market. But, there’s a catch. Media outlets thrive on sensationalism. When things are tranquil, people tend to switch off, so it’s in the best media’s interest to stir up drama to recapture attention. Wall Street – as Buffet explains – yearns for action.

We can’t stress enough the importance of being aware of the biases inherent in the sources we so often rely on. Are they tied to defense contracts, hyping up tensions in Ukraine? Are they predicting market volatility while pushing investment newsletters? Or are they perhaps peddling doomsday scenarios about nuclear conflict while selling long-shelf-life emergency rations?

There will always be a cacophony of distractions. It’s those who can tune it out who will reap the benefits in the long run.

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Roth&Co hosted a webinar on February 28, 2024, featuring Tax Controversy Manager Ahron Golding, Esq. The webinar discussed the recent approach that the IRS has been taking towards the Employee Retention Credit (ERC), scrutinizing ERC claims for abuse and fraud. Audits and criminal investigations on promoters and businesses filing questionable claims are intensifying, with thousands of audits already in the pipeline.

What is the IRS looking for? Here is what the IRS refers to as the ‘suspicious seven:’

Too many quarters being claimed

Some promoters have urged employers to claim the ERC for all 7 quarters that the credit was available. Since the IRS believes that it is rare for a business to legitimately qualify for all quarters, making a claim for all of them is a red flag.

Government orders that don’t qualify

In order for a business to qualify for the ERC due to a government order that compromised their operations:

the order must have been in effect for the periods claimed
the order must have been directed towards the business rather than towards the customer
the full or partial shutdown must have been by order and not simply via guidance or recommendation
the IRS is looking for the negative financial impact on the business

Claiming that an entire segment of a business was shut down, though that segment was not significant compared to the entire business, will cause a claim to be disallowed.

Too many employees and wrong ERC calculations

The laws are complex, and have changed throughout 2020 and 2021. Dollar limits, credit amounts, and the definition of qualified wages changed as well. Make sure your calculations are accurate.

Supply chain issues

The IRS is not looking kindly at claims based on general supply chain disruption.

Business claiming the ERC for too much of a tax period

If eligibility is based on full or partial suspension, then a business can only claim the ERC for wages paid during the period of actual suspension, not necessarily the whole quarter.

Business did not pay wages or did not exist during the eligibility period

If the business did not exist or pay any wages during the period of the claim, the claim will be disallowed by the IRS and prosecuted for fraud.

Promoter says there’s nothing to lose

Promoters that urged businesses to claim the ERC because they had “nothing to lose” were mistaken. Incorrectly claiming the ERC invites repayment requirements, penalties, interest, audits, and the expense of hiring someone to help resolve the error, amend returns, and represent the business in an audit.

The IRS has a comprehensive ERC eligibility checklist here.

Many businesses have neglected to take into account the issue of aggregation as it applies to the ERC credit. This can potentially effect employee count, revenue, and other crucial calculations.

Overall, the IRS is not too pleased with ERC promoters. IRS auditors have been trained to start an audit by asking who the taxpayer used to help prepare their claim. The IRS expects a taxpayer to utilize a trusted tax professional, rather than a dubious ‘ERC mill’.

What if the employer has an opinion letter to back up his claim? Generally, opinion letters are only as valuable as the backup data they provide. If a claim can be justified by hard numbers, it will help the employer if challenged.

If a business determines that it incorrectly claimed the Employee Retention Credit, it can use the ERC claim withdrawal process outlined here, so long as the business has not yet received the credit or hasn’t deposited an ERC check. Requesting a withdrawal means a business is asking the IRS not to process their entire adjusted return that included the ERC claim. If the IRS accepts the request, the claim will be treated as if it was never filed.

If a business incorrectly received the ERC before December 21, 2023, and deposited the check, they can apply for the ERC Voluntary Disclosure Program before March 22nd, 2024. This program allows participants to repay only 80% of the ERC they received as a credit on their return or as a refund. Click here for more details.

If your business received an opinion letter regarding ERC eligibility that you would like us to review, please email engage@rothcocpa.com.

This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or tax advice.

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There are two accounting methods businesses use to figure their taxable income: cash and accrual. According to the IRS, your choice of accounting method should properly reflect the income and expenses you report for tax purposes. Very often, the cash method provides significant tax benefits for eligible businesses – but not always. It is imperative for your business to evaluate which method will work best to ensure that it achieves the most advantageous tax benefits.

Cash method – Are you eligible?

“Small businesses” are generally eligible to use either cash or accrual accounting for tax purposes, and some may also be eligible to use various hybrid approaches. The Tax Cuts and Jobs Act (TCJA) defined a “small business” by establishing a single gross receipts threshold:

A “small business” is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million for 2023).

This is a notable change from before the TCJA took effect, where the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured.

Difference between the methods

The main difference between the cash basis and accrual basis of accounting is the timing of when expenses and income are recorded in your financial statements. Using the cash basis, a business will record transactions when payment is exchanged. Accrual basis accounting records income as it’s earned and expenses when they are incurred. For example, if a business pays for an insurance policy in one lump sum at the beginning of the year, using the cash basis, it will record this entire transaction when it’s paid. If using the accrual basis, the business would record a portion of the cost each month over the entire year.

Tax Advantages

For most businesses, the cash method provides both significant tax advantages as well as cash flow benefits. Because cash-basis businesses recognize income when received and deduct expenses when they are paid, they have greater control over the timing of income and deductions. Income is taxed in the year received, so using the cash method helps ensure that a business has the funds needed to pay its tax bill. Additionally, this method offers the bonus benefits of simplified inventory accounting, an exemption from the uniform capitalization rules, an exemption from the business interest deduction limit, and several other tax advantages.

The accrual method may be preferable if, for example, a company’s accrued income tends to be lower than its accrued expenses. This would result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Switching methods

Besides considering the features offered by both methods, a business would have to carefully consider other factors before contemplating a switch. If your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. It would still be allowed to use the cash method for tax purposes, but it would require maintaining two sets of books – a costly and cumbersome choice. Changing accounting methods for tax purposes also may require IRS approval through filing. Before you make any changes, measure out the pros and cons for each method with your particular business in mind and reach out to the professionals at Roth&Co for advice and guidance.

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A well-timed merger or an opportune acquisition can help your business grow, but it can also expose you and your business to risk. Buyers must consider the strengths and weaknesses of their intended partners or acquisition targets before entering into any new transactions.

When entering into any new buy/sell agreement, a robust due diligence process is imperative in order to avoid the risk of costly errors and financial losses. Due diligence means much more than just assessing the reasonableness of the sales price. It involves examining a company’s numbers, comparing the numbers over time, and benchmarking them against competitors. Proper due diligence can help verify the seller’s disclosures, confirm the target’s strategic fit, and ensure compliance with legal and regulatory frameworks.

What are the phases of the due diligence process, and how can they help in the decision-making process?

Defining Your Objectives

Before the due diligence process begins, it’s important to establish clear objectives. The work done during this phase should include a preliminary assessment of the target’s market position and financial statements, and the expected benefits of the transaction.

The process should also identify the inherent risks of the transaction and document how due diligence efforts will verify, measure and mitigate the buyer’s potential exposure to these risks.

Conducting Due Diligence

The primary focus during this step is evaluating the potential purchase’s financial statements, tax returns, legal documents and financing structure.

Look for red flags that may reveal liabilities and off-balance-sheet items. The overall quality of the company’s earnings should be scrutinized.
Budgets and forecasts should be analyzed, especially if prepared specifically for the M&A transaction.
Interviews with key personnel will help a prospective buyer fully understand the company’s operations, culture and its practical value.

AI – A Valuable Resource

With its ability to analyze vast quantities of customer data rapidly and proficiently, artificial intelligence (AI) is transforming how companies conduct due diligence. Using AI, the potential buyer can identify critical trends and risks in large data sets, especially those that may be related to regulatory compliance or fraud.

Structuring the deal

The goal of the due diligence review is to piece together all of the information reviewed into one coherent picture. When the parties meet to craft the provisions of the proposed transaction, the information gathered during due diligence will help them develop their agreement. For example, if excessive customer turnover, shrinking profits or a high balance of bad debts are revealed during the due diligence process, the potential buyer may negotiate for a lower offer price or an earnout provision. Likewise, if cultural problems are discovered, such as disproportionate employee turnover or a lack of strong company core values, the potential buyer may decide to revise some of the terms of the agreement, or even abandon the deal completely.

Hazards of the Due Diligence Process

Typical challenges in executing a successful due diligence process include:

Asking the wrong questions, or not knowing what to ask
Poor Timing – presentation or execution of documents may be delayed or unavailable
Lack of communication between potential buyers and sellers or their representatives
Cost – due diligence can be expensive, running into months and utilizing extensive specialist hours

We can help

Comprehensive financial due diligence boosts the quality of information available to decision-makers and acts as a foundation for a successful M&A transaction. If you’re thinking about merging with a competitor or buying another company, contact Roth&Co to help you gather the information needed to minimize the risks and maximize the benefits of a transaction that will serve the best interests of all parties involved.

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“But Mommy, how is school supposed to be canceled if there’s nowhere near a foot of snow?” complains every 9-year-old when, once again, the meteorologist’s weather prediction goes awry.

As much as we love to gripe about the weather-predicting pundits, at least they tend to get it in the general ballpark. They may forecast a chilly 29 degrees topped with a foot of snow, which could end up being a 38-degree, slushy, killjoy. Yet while they don’t always nail the precise form of precipitation, we can still be confident that those aren’t the days to whip out the beach umbrellas from the garage.

Contrary to our almost-accurate weathermen, there is a group of predictors who often can’t even forecast conditions in the right direction (but somehow manage to keep their fancy office jobs). Ladies and gents, put your hands together for the brilliant economists and analysts of Wall Street.

Each Wall Street bank boldly predicts where the stock market is headed and whether or not the economy will face a recession. In early 2023, the Street foresaw a looming recession. A CNBC article from the final week of 2022 titled, Why everyone thinks a recession is coming in 2023, attested to this. But as we all know, the recession never materialized and economists slowly retreated from their initial predictions.

What about their knack for predicting the stock market’s trajectory? At the beginning of the year, the S&P 500 stood at 3,839. Here were the predictions from various Wall Street giants as to where we would end the year:

J.P. Morgan: 4200
Wells Fargo: 4200
RBC: 4100
Credit Suisse: 4050
Goldman Sachs: 4000
HSBC: 4000
Citi: 4000
Bank of America: 4000
UBS: 3900
Morgan Stanley: 3900
Barclays: 3725

At year-end, the index closed at 4770. Not even the most elegant office chairs, sharpest suits or fancy Bloomberg terminals can guarantee an accurate prediction. Sometimes, not even close to accurate.

It’s time to grab a pair of noise-canceling headphones and drown out the external clamor about what to expect. Instead, like we always say, focus on a long-term plan and stick with it – through thick and thin.

Are you prepared to work on a long-term plan? Reach out to us at info@equinum.com for your personalized path to financial success.

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Whether you are running a small business or are the CEO of a Fortune 500 company, having great leadership is critical for the success of any organization. Great business leaders don’t just inspire their employees to work harder and achieve more – they create a positive work culture that fosters growth, development, and success. The best business leaders create a vision for their company and help their employees turn that vision into a reality.

Becoming a great leader is a process — one that thrives on embracing challenges, seeking feedback, building connections, and cultivating understanding. While some leaders have certain innate skills that allow them to thrive, the majority of business leaders develop the necessary skills through a continuous journey of learning and growth. According to Professor Linda Hill, chair of the Leadership Initiative and author of Collective Genius: The Art and Practice of Leading Innovation, great leaders have intentionally put themselves into situations where they’ve had to learn, adapt, and grow. Finding and capitalizing on these situations is critical for developing the tenacity and fortitude to motivate and guide others.

There are certain qualities that great leaders need to have, like excellent communication, problem-solving skills, and delegating skills. I’ve written about these skills before, and they are a must for any strong business leader. Here are 5 additional qualities for successful leadership – according to Professor Linda Hill, along with ideas on how to help develop them:

Curiosity

Great leaders understand that curiosity is a mindset. They enjoy exploring uncharted waters and trying to understand the art of the ‘possible.’ They can look at situations and problems from the perspective of external stakeholders, such as customers or competitors, which enables them to better consider the broader context, beyond just an internal organizational viewpoint.

How to nurture curiosity

Be open to new experiences and people outside of your immediate division, function, and industry. Don’t be afraid to question the status quo, even if the questions seem basic or naive. The inspiration for the Polaroid instant camera came when Edwin Land’s daughter wanted to see a photo her father had just taken. When he explained that the film had to be processed, she wondered aloud, “Why do we have to wait for the picture?”

Adaptability

As technology evolves, the world changes faster and stakeholder expectations grow quicker. As a leader, you need to be able to adjust to these ever-shifting demands and cultivate an agile work culture. Adaptability allows you to swiftly respond to different issues, pivot when needed, and embrace new opportunities and challenges.

How to strengthen your adaptability

Venture beyond your comfort zone and push yourself to work in new environments with different kinds of people. By taking on assignments and seeking experiences that demand flexibility, you can help foster your adaptability.

Creativity

Any idea that is new and helpful to your company – is creative. Diversity of thought is the driving force behind true innovation, as each of us brings our own unique perspective and “slice of genius” to the table.

How to cultivate creativity

A leader’s job is not to come up with all the great ideas on their own, but rather to establish an environment that nurtures creativity in others. Encourage and promote diverse perspectives on your team. Different viewpoints standing against each other is when creativity flourishes and great ideas are born.

Authenticity

Being genuine and true to who you are is fundamental to success in any role and is even more important in leadership roles. Your talent and skills are not enough; people need to trust your character and connect with you, otherwise they will not be willing to take risks with you.

How to show your authenticity

Understanding how people perceive you is crucial for growth, but asking for and receiving feedback is not easy. Seek feedback at a time when you can remain open, without becoming defensive. Start by asking for feedback in more casual, low-pressure situations and work your way up to more formal and intensive reviews.

Empathy

Understanding and connecting with others on an emotional level is crucial to building trust and strengthening relationships. Great leaders need to see their employees not as robots, but as valuable team members. Leaders need to understand what matters to their employees, what their priorities are, and be able to find common ground. Developing empathy will give you a deeper appreciation of the challenges others are working through, and will help you foster a more supportive and nurturing environment.

How to develop greater empathy

Make a point to interact with employees by asking questions about their work preferences, the pressures they’re under, and their strengths and weaknesses. Your goal is to build understanding and connection. If someone’s opinions or actions strike you as illogical, it’s likely you don’t understand what matters most to that person.

Leadership isn’t a quality you either innately possess or lack. It is the composition of different skills that can be developed and perfected over time.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In this episode we dive into the 5 major KPIs to consider when investing in the hospitality industry.

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There are five major KPIs, or key performance indicators, that investors in the hospitality industry use to evaluate and compare potential hotel investments:

The Occupancy Rate (OCC)

This measures the percentage of hotel rooms occupied by guests at any given time. The OCC is calculated by dividing the hotel’s occupied rooms by the total number of rooms available. A hotel with a low OCC will need to look for ways to increase room availability in order to remain viable.

The Average Daily Rate (ADR)

The ADR represents the average price guests pay for a room. It’s an important metric because it reveals the price point that guests are willing to pay for a stay at the hotel. The higher the ADR, the better. A growing ADR tells the investor that a hotel is increasing the money it’s making from renting out rooms. To calculate the ADR, the investor takes the total (dollar) amount in room revenue and divides it by the number of occupied rooms

Revenue Per Available Room (RevPAR)

The RevPAR is calculated by dividing a hotel’s total room revenue in a given period by the total number of rooms available in that period. The RevPAR reflects a property’s ability to fill its available rooms and measures how much revenue each rentable room in the hotel generates. A hotel’s RevPAR is particularly useful because it takes into account both the occupancy rate and ADR.

Gross Operating Profit Per Available Room (GOPPAR)

To get a good picture of a hotel’s overall financial performance, an investor might want to look at its GOPPAR. The GOPPAR calculates the revenue from all hotel departments and amenities, then subtracts operating expenses, and divides that by the total number of rentable rooms. GOPPAR is a broad metric; it takes into account all of the property’s revenues – including room revenues and ancillary services, like on-site restaurants or stores.

Market Penetration Index (MPI)

Finally, an investor will want to look at a hotel’s MPI to see how it fairs compared to others in the market. The Market Penetration Index measures a hotel’s occupancy against the average occupancy of its competitors. It helps the investor understand how well a hotel is doing relative to its competitors in a given market. An MPI is calculated by multiplying a hotel’s OCC by its number of available rooms. That number is then divided by the product of the average market occupancy rate and the available rooms in the market.

Remember that no single KPI will reveal the full story about a hotel’s potential. The KPIs are tools that are meant to work together to inform an investor about a hotel’s strengths, weaknesses and commercial possibilities.

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January 2023

Investors: The market feels very risky right now. With inflation still very high, and the Federal Reserve aggressively raising rates, I’ll play it safe and invest in short duration treasuries yielding a risk-free 5%.

Stock market: LOL

At first glance, investing in non-volatile assets in response to an unstable and risky market may seem sensible. But it brings to mind one of Warren Buffet’s best pieces of investment advice: “Be greedy when others are fearful, and fearful when others are greedy.” This is the essence of successful investing; take advantage of opportunities when others are too apprehensive to seize them.

At the close of 2022, Wall Street had weathered a backbreaking annual percentage drop. The S &P market cap, the Dow, and Nasdaq fell drastically. It was a year of sharp losses and hefty interest rate hikes. Investors ran scared and turned risk-averse. They abandoned the market and went into safe, predictable government treasuries – investments that promised no variations in outcomes and no surprises.

In hindsight, we can see that the market bottomed on October 13th, 2022, a day when the Consumer Price Index (CPI) came in much higher than expected, with inflation running at 8.2% year over year. By that time, the Federal Reserve had already raised rates five times, with three consecutive hikes of 75 basis points; and they showed no sign of stopping until the inflation was under control.

Curiously, on that day, the market opened down by 1.5% and then, against all odds, managed to close with a 2.5% increase. At that point the market was down about 26% from previous highs. Since then, the market has risen 23% and is only a small percent away from reaching its previous highs. This unpredictability highlights the cruel irony of the market: it tends to be forward-looking and often thrives when things seem bleak on Main Street.

It’s natural for the investor to feel the need to run for cover in a volatile market. But historically, from an investment perspective, it’s always better to stay the course. Investors that abandoned the market after 2022’s debacle are still left with their stable government treasuries, while those who were able to endure the risk are now reaping higher returns. Had those timid investors remained invested, their shares would have ridden the waves and ended up high with the market.

From our vantage point at Equinum, we often witness how emotions play on an investor’s ability to make effective decisions. From our conversations with clients and prospects, we have seen patterns emerge: When investors are comfortable they tend to invest more, and when they are hesitant, they bail out – often counterproductively. Moving in and out of the market based on feelings is never a sound approach in the long-run.

As advisors, we are tasked with keeping our clients’ emotions level through both the good times and the uncertain ones. And given people’s innate tendency to make the wrong decisions when investing, it becomes crucial to adopt a big-picture approach and remain invested for the long haul. Emotional reactions to short-term fluctuations can lead to impulsive actions that may not align with one’s overall financial goals.

For more information, please reach out to us at info@equinum.com.

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Meetings are critical to a company’s success. Good meetings, that is.

Leading an effective and productive meeting is part science and part art. The science is in putting in the pre-meeting work to ensure that the essential elements of the meeting structure are in place. The art is in the way we run the meeting and promote positive engagement with participants. Here are six strategies to help you lead positive, engaging and efficient meetings that actually yield results.

Clearly Articulate the Purpose – Be clear and concise about the goal of your meeting. If you can’t describe why you’re holding a meeting in a sentence or two, you probably don’t need to have it. The meeting objective should have results-oriented terms and actionable goals.

Prepare an Agenda – Have the meeting leader prepare an agenda beforehand and send it to participants in advance. This will sharpen and clarify the purpose of the meeting and give everyone a chance to prepare. The agenda provides a compass for the conversation, so the meeting can get back on track if the discussion wanders off course.

Invite the Right People – Meetings are expensive and time-consuming. Avoid inviting anyone who is not needed to achieve the meeting objective. At the same time, be sure that you have enough participants for a productive, open discussion with diverse perspectives. A good meeting strikes a balance between minimizing attendees and maximizing the creative potential of a group.

Keep Detours Brief –The meeting leader’s job is to intervene when the conversation gets derailed. And nothing derails a meeting faster than discussing something that may be connected to the agenda, but not essential to the meeting. If you or someone else introduces an idea that’s only tangentially related or unrelated, get ‘in and out’ quickly so you can refocus on the purpose of the meeting. Set the climate for engagement by encouraging productive behavior and discouraging unproductive behavior. Nothing prevents engagement like letting bothersome behavior and random discussions run rampant in your meeting.

Keep the Meeting Short – Don’t overload your meeting agenda. Better to have four 30-minute meetings than a single 2-hour meeting. Setting a time limit for meetings is a respectful way to honor people’s time get them back to their schedules as promptly as possible.

End With Meaningful Action Steps – One of the biggest blunders people make when leading meetings is failing to record, recap, and follow up on action items, next steps, and important meeting outcomes. Leave the last few minutes of every meeting to discuss who is responsible for what, and what the deadlines are. Otherwise, all the time you spent on the meeting will be for naught. Every action item needs three things: 1) Clear deliverable; 2) Owner; and 3) Due date.

Meetings are a critical avenue for growing your business, improving productivity and communication, promoting team integration and increasing job satisfaction. It pays to run them well.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact your financial advisor to ensure that you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

Report income tax withholding and FICA taxes for second quarter 2023 (Form 941) and pay any tax due. (See the exception below, under “August 10.”)
File a 2022 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2023 (Form 941), if you deposited all of the associated taxes due in full, and on time.

September 15

If a calendar-year C corporation, pay the third installment of 2023 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2022 income tax return (Form 1120-S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2022 to certain employer-sponsored retirement plans.

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If a long-time business owner fails to establish a clearly written and communicated succession plan, the result can be chaotic. While there are many aspects to succession planning, one way to clearly document your goals — particularly if your company has multiple owners — is to draft a buy-sell agreement.

Avoiding conflicts

A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced or deciding to leave the company.

If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. It also ensures that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it.

A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value.

By facilitating the orderly transition of a deceased, disabled or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer.

This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs, know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention.

Funding the agreement

There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares.

However, since there are potential complications with both options, many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. There are two main types of buy-sells funded by life insurance:

1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest.

2. Entity-purchase agreements. In this case, the business buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company.

A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies.

Getting expert guidance

Speak to your financial advisor for help creating, administering and executing a buy-sell agreement.

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If you’re a frequent traveler, you may have accumulated hundreds of thousands or even millions of frequent flyer miles. The value of these miles may be significant, so it’s important to determine whether you can include them in your estate plan and share them with your loved ones.

Learn your options

Your ability to transfer miles at death (or any other time) is governed by your contract with the airline, which requires you to accept a long list of terms and conditions when you join its frequent flyer program. Most programs make it clear that miles aren’t your property and that you’re not entitled to transfer them during your lifetime or at death. But many programs provide that the airline may transfer miles to authorized persons at their discretion.

For example, American Airlines’ rules state that miles are nontransferable, but that, in the event of death, the airline “in its sole discretion, may credit accrued mileage to persons specifically identified in court approved divorce decrees and wills upon receipt of documentation satisfactory to American Airlines and upon payment of any applicable fees.” Anecdotal evidence indicates that American routinely grants these requests and often waives the fees.

Read the fine print

There are no guarantees, but you can maximize the chances that an airline will honor your wishes by including a provision in your will, leaving your frequent flyer miles to one or more beneficiaries. It may be beneficial to put on your reading glasses and read the fine print of your frequent flyer mile programs. Your attorney can answer questions on how to address your miles (or other nonstandard assets, such as a firearms collection) in your estate plan.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between passive and non-passive income, and why it matters.

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When it comes to a real estate investment, the income generated can be defined as either passive or non-passive.

Passive income refers to income earned from any business activity where the investor does not materially participate in its creation. When a real estate investor invests in a real estate property, but has no substantial, hands-on, active participation in generating its income, that income is defined as ‘passive.’ Passive income comes from money that was invested in a property and was left to generate revenue; the earnings are regarded similarly to earnings from interest, dividends, royalties and bonds, though the tax rates differ.

On the flip side, when an investor materially participates in the day-to-day activities of managing a property – for example, collecting rents, managing tenants, advertising and maintenance – the income he generates is defined as ‘non-passive.’ Some other examples of non-passive income include wages, earnings from active stock trading and earnings from business activity.

Why is the difference between passive and non-passive income relevant?

Because the way your income is categorized impacts how it will be taxed.

Generally, the IRS does not allow a taxpayer to offset passive losses against non-passive income. Passive activity loss rules preclude a real estate owner from deducting losses generated from passive income (i.e. rental income) from non-passive income (i.e. business income).

However, when it comes to taxes, there are always some exceptions to the rule.

If a taxpayer qualifies as a real estate professional, as defined by IRC Sec. 469, the passive activity loss rules do not apply. The investor, or ‘real estate professional,’ can use the losses from real estate activities (like rentals) to offset ordinary and non-passive income.

In another caveat, if a taxpayer owns a piece of real estate and uses it for his own business (i.e. it is “owner occupied”), then real estate loss (passive) can offset the business’ ordinary income (non-passive).

The takeaway? It is essential for a real estate owner to correctly define his income as passive or non-passive in order to enjoy the greatest ROI.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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Complaining, officially defined as ‘the act of expressing dissatisfaction,’ is an essential aspect of any organization’s communication. When done ineffectively, complaining can hurt the collective mood, individual relationships and organizational culture. But when done effectively, complaining can help manage risks, provide early red flags, uncover opportunities for growth and change, and even improve relationships and well-being.

Part of being a business leader is handling your employees’ complaints. While some larger companies have extensive dispute resolution and arbitration procedures, informal procedures are often the best method for the small business owner where each situation is dealt with on a case-by-case basis. Whatever method your business uses, if an employee complains about an employment-related situation, as a business leader, you should be prepared to handle it in a fair and consistent manner.

When considering how to handle complaints, it is important to understand why employees complain, and when and how complaining can be constructive or destructive. Different types of complaints have different underlying intents. When faced with complaints from employees, start by identifying the type of complaint:

Productive Complaints

A productive complaint is made with the intention of improving an undesirable situation. Productive complaints can bring in valuable feedback necessary to change practices or behaviors that are harming the organization. Productive complaints are used to improve an organization’s processes, products and services on behalf of all employees and customers.

Venting

Venting is an emotional form of complaining where an individual expresses their dissatisfaction about someone or something to others. The typical intent behind venting is to release bottled-up stress or frustration. Research shows that venting can have a positive impact because it helps people process stress and frustration while increasing team bonding. While managers are often nervous about employees expressing negative feelings about their work, as long as it doesn’t become toxic, these complaints play a role in every organization.

Chronic Complaining

Chronic complaining is when a person seems to enjoy complaining about everything (the temperature, their salary, their manager, or even the elevator speed). Chronic complainers often have pessimistic views of their role, their work, and the world around them. While many of their complaints may seem frivolous, chronic complainers are very good at picking out serious red flags in an organization that others may miss.

Malicious Complaining

Malicious complaining is a destructive form of complaining that’s used to undermine colleagues or gain an unfair advantage. An employee’s own benefit, rather than dissatisfaction with an organizational issue, is the true intent in this form of complaining.

While understanding the intent of a complaint is important, an employer should also have a strategy on how to listen to and act on complaints when they are received. Here are some helpful steps to harness the benefits of a complaint:

Validate and show thanks

Whether an employee’s complaint seems valid or superficial, it’s always important to take it seriously. Showing your employees that you value and respect their concerns – no matter how big or small – increases the trust employees have in you. Thank the messenger for showing trust in you to address the issue. Despite the fact that the message may be wrapped in negative emotions like frustration or disappointment, the fact that an employee would come to you to share their concerns rather than venting to a coworker or friend, is positive.

Be Curious

Make sure you really understand the problem. Allow the employee to talk without interruption, then ask open-ended questions until you have a clear understanding of the facts. Be curious and consider the employee’s intention. Is the complaint intended to fix a problem? Does it offer an opportunity for positive change? Is it a red flag for a future issue? Is it something that several employees have previously mentioned? Is the person just trying to be heard by venting about an unsolvable situation?

Consider a time buffer

When appropriate (and if the complaint isn’t extremely serious), consider implementing a “time buffer” – a short pause to reflect on the grievance, its impact, and potential solutions before having a conversation about it. This gives the employee time to articulate concerns with less emotion, more effectively. It can also allow you to prepare resources and ideas for a response.

Involve the employee in the solution

Involving the employee in finding a solution means asking for their input, suggestions and preferences, and then considering different options and actions together. By involving the employee in finding a solution, you show respect and trust in their judgment, and you also increase their buy-in and commitment to the outcome.

Understanding why employees complain is an important step in handling the complaints themselves. Then, by better managing employee complaints, managers can create a positive, high-performing work environment while monitoring and containing the risks and costs associated with complaining. When employees feel that they are being treated with respect and fairness, they are more likely to accept the solutions you suggest, even if it is not exactly what they wanted or expected.

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Whether you’re starting up a not-for-profit organization or your nonprofit has existed for years, you may have questions about insurance. For starters: What kind do you need? How much? Are you required by your state or by grantmakers to carry certain coverage?

Much depends on your organization’s size, scope and programming. But your goal should be to carry what’s required to meet any regulatory or funding mandates and to address legitimate risks. Although there are many types of insurance available to nonprofits, it’s unlikely that you need all of them.

The essentials

One type of insurance you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.

Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).

Depending on your nonprofit’s operations and assets, you might want to consider such optional policies as automobile, product liability, fraud/employee dishonesty, business interruption, umbrella coverage, and directors and officers liability. Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.

Biggest threats

Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats. Then discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate those risks.

Be careful not to assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies such as new employee orientations and ongoing training.

Don’t go overboard

Some organizations buy more insurance coverage than they need, which can be costly. Make sure you’ve thoroughly analyzed your nonprofit’s risks and buy only what’s necessary to protect people and assets.

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The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

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If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.

Here’s a brief rundown of four tax and financial issues you may contend with when you retire:

Taking required minimum distributions

These are the minimum amounts you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 73 if you were age 72 after December 31, 2022. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. Roth IRAs don’t require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).

Selling your principal residence

Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.

If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis, which can save you tax dollars.

Getting involved in new work activities

After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask if you’re launching a new venture:

Should it be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
Can you claim home office deductions?
How should you finance the business?

Taking Social Security benefits

If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($21,240 for 2023), you must give back $1 of Social Security benefits for each $2 of excess earnings.

If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($56,520 in 2023) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

You may also have to pay federal (and possibly state) tax on your Social Security benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.

Tax planning is still important

There are many decisions to make after you retire. Speak to your financial advisor to help maximize the tax breaks you’re entitled to.

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In the aftermath of the 2008 financial crisis, the Federal Reserve implemented a Zero Interest Rate Policy (ZIRP) to stimulate the economy. Interest rates remained near zero for an extended period, leading to the emergence of the acronym TINA – There Is No Alternative. TINA became the prevailing rationale for investors, suggesting that with treasuries and other fixed income securities offering minimal returns, the only viable option was to invest in equities and real estate.

But financial markets are dynamic, and nothing stays the same forever. In recent months, interest rates have experienced a significant rise as the Fed attempts to control inflation. As a result, a new buzzword has entered the investment lexicon: TARA – There Are Reasonable Alternatives. The concept behind TARA is that investing in short-term treasuries, which yield around 4-5%, presents a prudent opportunity.

This new trend has spurred a surge in investor interest, with flows pouring into treasuries. The allure of treasuries as an alternative to more traditional investments has taken hold. But is this shift truly beneficial for long-term investors?

Relying on short-term treasuries for long-term assets may prove to be a mistake. While the immediate satisfaction of a decent return may feel appealing, it is not conducive to long-term economic success. It’s the financial equivalent to subsiding your hunger with junk food. Sure, it provides momentary pleasure, but it ultimately leaves you unsatisfied.

Successful investing involves persevering through challenging times and sticking to a long-term plan. It comes from weathering market fluctuations and staying committed to a long-term strategy.

So for short-term assets – like funds earmarked for a house down payment or investments that cannot tolerate volatility – treasuries serve as an excellent option. Treasuries provide stability and security, which is why we encourage investors to consider this option. For corporations and nonprofits sitting on cash, this can be an amazing opportunity. However, when it comes to longer-term investments, adhering to the original plan and maintaining a steadfast approach is the optimal choice.

The key to achieving long-term financial goals lies in maintaining discipline and resisting the allure of short-term gains. While TARA may present attractive alternatives in the current market landscape, remember that TINA is still relevant. Remaining fully invested according to your long-term financial plan is critical, and that should not be compromised for the comfort of short-term options.

For more information, please reach out to us at info@equinum.com.

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School Management Solutions, a Roth&Co affiliate, hosted a webinar yesterday featuring Roth&Co Manager Yisroel Lowinger, CPA , along with Rabbi Yehoshua Pinkus, Director of Yeshiva Services at Agudath Israel of America.

The 30-minute webinar clarified the impact of NYS’ recently released budget for school meal programs. Lowinger discussed what CEP covers, who is eligible, how and when to apply, the anticipated benefits from the new NYS budget, and how summer 2023 will be affected.

Watch the video recap below:

Below are the links which were referenced in the webinar:

CEP Guidance

CEP Application ’23-’24 (direct download link)

CEP Application Instructions

Sample Roster For DCMP (direct download link)

Sample Roster For GoAnywhere (direct download link)

GoAnywhere Access Request Form

With 20+ years’ experience, SMS guides schools in all food and nutrition program needs including application assistance, procurement, program maintenance, compliance and government communications. For further guidance, please reach out to School Management Solutions at info@smsny.net or 718-480-5606.

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Welcome to the world of personal finance – where everyone strives to make it big, and few actually do.

Why is it so hard to build wealth?

Well for starters, we humans are wired to make the wrong decisions when it comes to money. We are an emotional species, and when common sense comes into conflict with that, emotion usually wins.

For example, we have a tendency to buy high and sell low, which is the exact opposite of what we should be doing. As Mark Yusko famously said, “Investing is the only place where, when things go on sale, everyone runs out of the store.” And it’s true. When the stock market takes a dip, most people panic and sell their stocks, which is the worst thing they can do. Instead, they should be buying more stocks at lower prices.

In the race to build lasting wealth, being able to overcome our emotions and remain levelheaded is the single most important component. Morgan Housel, in his book, The Psychology of Money, puts it best: “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”

It’s not about how much you know about the economy, the stock market or investing. It’s about your ability to control your emotions and make rational decisions. The road to success begins by checking your biases at the entrance of the investing arena.

And let’s face it, checking our biases when it comes to money is no easy task. Money is tied to our sense of security, self-worth and even happiness. When we see our investments taking a hit, it’s hard not to panic. But this knee-jerk reaction (or lack thereof) is what separates successful investors from those who never make it.

So what’s the key to succeeding in personal finance?

First and foremost, you need to understand your own emotions and how they impact your financial decisions. That means taking the time to reflect on your own biases and tendencies and making a conscious effort to overcome them.

Secondly, you need to have a plan in place. That entails setting financial goals, creating a strategy and investing in a diversified portfolio. Having a plan will help you stay on track and make rational decisions, even when the market takes a dip.

Another reason why you should be working with an advisor. A skilled financial advisor will help you tailor a proper plan – and hold your feet to the fire so you stick to it no matter what. An advisor will reinforce your backbone and help you resist the urge to react in those temporarily comforting ways that may negatively impact your wealth goals. Financial advisors can be the voice of reason to help you steer clear of the latest “hot stock” or get-rich-quick scheme, and encourage your commitment to diversified investments for the long-term.

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The traditional corporate ladder is no longer.

It used to be that an employee’s career would be at a single firm. As an employee proved themselves, they gradually moved into a better office, gained more responsibilities and earned a bigger paycheck. The path was clear and often linear. While titles changed and responsibilities grew, employees would measure services to their company in decades. The pinnacle of professional achievement was the corner office situated neatly at the top of a clearly defined corporate ladder.

Today, significant employee turnover has become a byproduct of the modern career path. Most employees spend 3 or 4 years at an organization before moving on. Despite this, most companies still see employee turnover as a negative attribute. During interviewing and onboarding, there is an underlying assumption that the employee will stay with the employer indefinitely, even though the average tenure of a modern worker is about four years, according to the U.S. Department of Labor. When the employee does leave, the process feels awkward – with neither side acknowledged or prepared for the inevitable moment.

In today’s world, employers need to closely review the real value of employee retention. Here are some reasons why employers should rethink their focus on employee turnover:

Retention does not equal engagement. Companies that focus too much on retention often get stuck with people who show mediocre (or even low) performance and have minimal ambition. Employees who want challenging, engaging jobs leave quickly when they see average performance being rewarded.
Lengthy employee tenures can be counterproductive. After a certain point, unless the employee has moved up in an organization, the longer an employee stays, the more likely they are to be unproductive, unengaged and unfulfilled. Businesses with a high percentage of long-tenured employees are less likely to be exposed to innovative ideas from new employees coming from other companies and industries.
Turnover is out of your hands. Employees leave companies all the time to pursue completely different career tracks and personal goals. No matter what you do or offer, employees may leave.

Some employers have embraced the notion of intentional attrition, often known as an “up-and-out” system. For example, at companies like McKinsey & Co., attrition isn’t negative. It’s normal. Employees know at the beginning of their time with McKinsey that they might not progress upward. With only a few senior positions available, McKinsey team members are encouraged to leave after a finite amount of time.

Like with any organizational change, it takes time and effort to push through the setback of losing great people. In the modern business world, the majority of employees are going to resign from their job at some point, but if you can create a culture that doesn’t penalize workers who resign, you can create an organization where highly successful people will want to work and grow. According to Bryan Adams, CEO and founder of Ph.Creative, here are several steps to consider:

Acknowledge that this isn’t forever from the beginning. Be honest from the start and acknowledge that your company may be a “stepping stone” to help your employees gain the experience and skills to find better opportunities elsewhere in the future. In return, expect exceptional performance from your employees and for them to be honest once they are ready to move on.
Focus on promoting internal candidates and boomerang employees. Some of your employees will want to stay at your organization for more than two or three years. However, they won’t stick around if you can’t offer them mobility. Be sure to show that you’re serious about recognizing impressive work by promoting from within whenever possible or rehiring former employees who have upped their skills and credentials.
Engage your alumni. Many people leave their jobs only to be replaced and forgotten by their former bosses. Another example from McKinsey, though, is that the firm proudly publishes articles on alumni and even offers alumni special recognition in the company. Consider putting together a program that encourages former employees to stay in touch and share news and events.
How you offboard people is key. Bid a positive farewell, celebrate their future successes and opportunities, and be grateful for their specific contributions. Keeping in touch and celebrating personal wins — and maybe even reaching out to feature or profile alumni as they move through their careers — encourages people to fondly remember their time at your company.

Rather than fighting to hold onto employees, companies are better positioned for success if they develop a culture that benefits from a healthy influx of people, ideas and practices. Employers must develop strategies that promote employee engagement, career development and succession planning to bring out the most appreciation and value from their employees. Employers who are willing to embrace this model of work – where employees give organizations 100% when they are there, and readily transfer knowledge to the next generation when they move up or on – will provide a significant competitive advantage.

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With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.

The Basics

An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. So if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 Major Advantages

There are 3 major advantages to an HSA to clearly communicate to employees:

1. Lower Premiums

Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax Advantages x3

An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.

3. Retirement and Estate Planning Pluses

There’s no “use it or lose it” clause with an HSA; participants own their accounts. Funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the Upsides

Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides.

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A common question for people planning their estates or inheriting property is: For tax purposes, what’s the “cost” (or “basis”) an individual gets in inherited property? This is an important area and is too often overlooked when families start to put their affairs in order.

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property that’s equal to its date-of-death value. So, for example, if an individual bought shares in an oil stock in 1940 for $500 and it was worth $5 million at his death, the basis would be stepped up to $5 million for his heirs. That means all of that gain escapes income taxation forever.

The fair market value basis rules apply to inherited property that’s includible in the deceased individual’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Lifetime Gifting

It is crucial to understand the fair market value basis rules so as to avoid paying more tax than legally required.

For example, in the above scenario, if the individual instead decided to make a gift of the stock during his lifetime (rather than passing it on when he died), the “step-up” in basis (from $500 to $5 million) would be lost. Property acquired by gift that has gone up in value is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies while owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. This is because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his or her basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes. Speak to your financial advisor for tax assistance when estate planning or after receiving an inheritance.

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As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.

A good way to prepare for the appraisal process, or to just maintain a clear, big-picture view of your company, is to learn some basic valuation terminology. Here are 5 terms you should know:

1. Fair market value

This is a term you may associate with selling a car, but it applies to businesses — and their respective assets — as well. In a valuation context, “fair market value” has a long definition:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

2. Fair value

Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.

For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.

3. Going concern value

This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce, an operational plant and the necessary licenses, systems and procedures in place to continue operating.

4. Valuation premium

Due to certain factors, sometimes an appraiser must increase the estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.

5. Valuation discount

In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.

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Equinum Wealth Management, a Roth&Co affiliate, hosted a webinar yesterday about rising interest rates and the bank crisis. Aron Pinson, CFA, Founder and Chief Investment Officer at Equinum, discussed the recent events of the bank failures and the importance of staying on top of these developments to make informed decisions with your money. Click here to watch the recording, or read a brief summary below.

Webinar Recap

The intense rise in interest rates has caused great paper losses on bank balance sheets. Had these banks held to maturity, these wouldn’t present any issues. But these losses were accompanied by excessive withdrawals, forcing these banking institutions to sell their holdings at a loss. That – along with the flame-fanning by some Silicon Valley elite – sparked a mass fear that people could say goodbye to their hard-earned dollars.

Though many believe that the Treasury, along with the FDIC insurance program, will cover any future losses, there are no guarantees. There are no style points for keeping extra uninsured funds at institutions where there is limited upside and potential downside.

At the same time – as Pinson briefly discussed – the potential stress area on banks stemming from commercial real estate. While this can prove to be a huge liability for many regional banks, there are still many unknowns as to how this will play out.

Either way, this newly added stress to the banking system has in itself added a huge restraint factor to the economy. Like Pinson mentioned in the webinar, as the news of the banks were unfolding, the expectation for future rate hikes came down drastically, and now the futures market indicates that the Fed is more likely to cut rates – multiple times – by the end of the year.

The biggest takeaway from it all?

It is crucial to work with a qualified team to ensure you’re making the best decisions for your money. Your financial team of experts needs to provide you with insights and advice tailored to your individual needs and goals. The economic landscape is ever-changing, and it’s important to stay on top of the news and events in the financial sphere.

Feel free to reach out to Equinum Wealth Management with any questions at info@equinum.com.

The Roth&Co Team

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As you are already aware, both Silicon Valley Bank and Signature Bank have entered into receivership programs from the federal authorities. Last weekend was a long and daunting one. Companies banking with these institutions were nervous about their unsecured deposits, which were necessary to meet payroll and other basic business functions. The Federal Reserve stepped in, took over the operations of both banks and announced a new program called the Bank Term Funding Program (BTFP) to try and quell the flood of withdrawals from other regional banks. This program allows banks to pledge certain assets that have lost market value due to the dramatic increase in rates as a result of Federal Reserve tightening, which began this time last year.

How much the Fed will be able to cover is still unknown. Should we consider all bank deposits guaranteed, even above the official $250,000 threshold? Will they keep this program for all future bank failures?

Besides the two banks previously mentioned, along with Silvergate – which was shut down earlier last week – there are many other banks in the limelight. Many publicly traded regional banks’ stock prices were down 50% or more on Monday alone – and the market is saying that this is only the start.

The biggest concern is that things are moving extremely fast. Just last week Wednesday, Federal Reserve Chair Jerome Powell testified in front of Congress stating that they aren’t seeing any issues in the banking world from the rate-hiking campaign they have been on over the last year. Since then, three banks with hundreds of billions of dollars of assets had to be bailed out!

So, what does this mean for us now? We believe this is a prudent and opportune time to rethink where and how we hold cash deposits. There are the large, ‘too-big-to-fail’ banks that many consider as safe as some government programs. Then there are the local regional banks that each bring along some benefits. The larger institutions offer safety to your assets, while smaller banks can give you higher yields, certain services and respect that only Fortune 500 companies get at the larger banks. The issue is that typically, these two are mutually exclusive. It’s rare to have safety and liquidity, along with higher interest, at the same institution.

Our wealth management partners at Equinum would like you to consider a third option – U.S. Government treasury bonds held in a brokerage account. Not only does this offer both security and higher yields, but it also offers tax advantages in some cases as well. Government treasures are backed by the full faith and credit of the United States Government. This is an assurance that supersedes the ‘too-big-to-fail’ status of some banks, and is on par with FDIC insurance as it relates to security. On top of this, yields are currently in the 4.5% range for short term treasuries. Obviously, for core banking functions and payroll processing, you will still need to have banking relationships. But for larger balances not needed for day-to-day operations, it’s imperative to consider where these assets are being held.

Keep in mind that there’s a key difference between assets held in a bank account versus those in a brokerage account. When you deposit $1,000,000 in a bank account, the bank takes most of that cash and invests the money into other things – mostly in new loans or existing fixed income investments. Your money is effectively mixed together with all the other bank depositors and invested by the bank. The bank has certain requirements as to what percentage of deposits need to be liquid, but that number is really small – currently just 10%. There are other ratios and stress tests that banks must adhere to, but as we all see with last week’s failings, there are obviously still risks out there.

Contrast this with brokerage accounts: When you hold an asset in your brokerage account, it’s in your name. You own the shares of the companies you invest in and can vote your ownership the way you want. You own the bond and receive the interest payments. Each respective client’s assets are in a segregated account held at the custodian in the client’s name. Even if something were to happen to the custodian, client assets are protected and secure. Even creditors would have no claim on client assets.

Each family and company’s situation varies – there’s no silver bullet to cover all circumstances. This is just something to consider in the current unique situation.

Always feel free to reach out to us or to our partners at Equinum.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses a tax-friendly way to maximize your charitable donations – by donating appreciated property.

Watch the video:

Donating appreciated property to a charitable organization that you care about is not only a do-good, feel-good undertaking; it also offers valuable tax benefits. When you sell a real estate property and donate the proceeds, your earnings are subject to capital gains tax. If instead, you donate that same property, you are free from capital gains taxes and the charity gets a higher-value donation. It’s a win-win.

A second benefit is realized when a real estate owner donates appreciated property held longer than one year. Appreciated long-term assets – such as stocks, bonds, mutual funds, or other personal assets like real estate that have appreciated in value – qualifies the donor for a federal income tax charitable deduction. Generally, this deduction is for the full fair market value of the property (or up to 30% of the donor’s adjusted gross income). If the property is held for less than a year, an owner can still benefit by deducting the basis of the property. Since the calculation is based on fair market value, it is highly recommended to get a qualified appraisal on the property so that the donor can substantiate its value if challenged.

What happens if the property is mortgaged? That debt is taken into account when calculating the deduction. The donation of the property is divided into two parts. The portion of the fair market value representing the mortgage is treated as a sale, and the equity portion is treated as a donation. The adjusted basis of the property will be prorated between the portion that is ‘sold’ and the portion that is ‘donated.’ The calculations are often complex, so don’t try this at home! Consult with an experienced tax advisor when donating a mortgaged property for the most accurate computation of your tax benefits.

The double benefits of donating appreciated property – a fair market value deduction and avoidance of the capital gains tax – makes donating to causes you care about both a generous and tax-efficient way to support a charity.

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As an investor, it’s easy to fall prey to “recency bias” – the tendency to base investment decisions on recent market performance rather than taking a broader and more forward-looking perspective.

Fighting the last war is a natural human tendency that results from our innate desire to find patterns and make sense of the world around us. But, in the world of investing, this can be a dangerous mindset to adopt. For example, after the 2008 financial crisis, many investors rushed to allocate billions of dollars to so-called “black swan” strategies that were designed to protect against rare and extreme events. This reaction was misguided, though. It came after the feared black swan, and at that point, was a useless strategy.

A more drastic example? A study conducted by Fidelity Investments on their flagship Magellan fund, during Peter Lynch’s famed tenure, from 1977-1990. His average annual return during this period was 29%, as compared to 14.47% of the S&P 500 index. This is a remarkable return over the 13-year period and made him one of the best investors ever. It was clear that investors were aware of the fund’s stellar performance as inflows made it one of the largest mutual funds of its time. Given that amazing performance, you would expect that Magellan Fund investors got really rich during Lynch’s tenure. Shockingly, a study by Fidelity Investments found otherwise. The average investor lost money under Lynch’s leadership. Rub your eyes and read that again: The average investor lost money in the Fidelity Magellan fund under Peter Lynch’s tenure during a period of time when the fund returned around 29% annually. How did the average investor lose out on Magellan’s success?

Markets swing up and down. When the market went up, the Magellan fund rose even higher. This excited and enticed investors who rushed to invest. But when the market and the fund declined, investors immediately sold. At every robust period, investors moved money into the fund, and at every decline, they sold – with Magellan’s value swinging lower than before. Recency bias killed Magellan’s performance.

Similarly, in the current market environment, investors are reacting to what worked in 2022, without considering whether those strategies will continue to be successful in the future. To avoid the pitfalls of fighting the last war, investors must adopt a progressive approach. This means taking a longer-term view of the investment landscape and considering how trends and risks might evolve over time. By focusing on the future, investors can avoid getting caught up in short-term market movements and can make better-informed investment decisions.

Be aware of this tendency, and look out of the windshield as opposed to the rear-view mirror. You’ll make more knowledgeable investment decisions and avoid getting caught off guard by unexpected events. You won’t get caught up in the latest market fads. Instead, you’ll be primed for long-term financial success.

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A lack of solid documentation is one of the most common mistakes employers can make when addressing an employee’s promotion, performance, behavior, or discipline issue. Not properly documenting, or not documenting at all, can hurt employers and employees in several ways. The value of good documentation is that it helps leaders provide useful feedback to employees, while also tracking both positive performance and areas of improvement. Documentation can make or break a manager’s ability to discipline, terminate, fairly promote, reward, and recognize employees.

Documentation is key to appropriate and effective disciplinary action. Although most employees never require discipline, some exceptions can occur, and it is useful to have a method that objectively, accurately, and fairly documents employee performance. Perhaps most importantly, solid documentation is critical should a terminated employee bring discrimination or other employment-related claims against the company.

One way to appropriately document workplace activities is the FOSA method. Identifying and documenting Facts, Objectives, Solutions and Actions (FOSA) helps ensure a fair and accurate recollection of events. The FOSA method helps keep a reliable record of employee performance, while also serving as a guide for managers when meeting to discuss an employee’s performance. Properly identifying the FOSA of every incident ensures that decisions are made correctly and that the employee clearly understands the expectations and steps to improve their performance.

Facts: Include specific facts explaining the who, what, where, when, and how. When recording the facts, keep them specific and focused on behavior, avoiding labels or attitude. Behavior is something that can be observed, whereas attitude is interpreted. Be careful not to interject your own opinions, emotions, or judgments. Include any information relating to dates, times, and previous discussions with the employee. For example, John increased sales by 7%, which exceeded his previously established goal of 5%. Michelle was 15 minutes late to work seven times in January.

Objectives: Objectives are your expectations. These can include performance expectations, work habit expectations, attendance and more. It can also include the impact of an employee’s behavior on peers, the organization, coworkers and customers. Define a specific behavior or result for the employee in measurable terms against which you (and they) can gauge performance.

Solutions: Solutions are ideas and suggestions in the form of assistance or coaching that can be offered to the employee to help him or her solve the performance problem. Examples of solutions include training, coaching, education or providing resources. The solutions offered should be designed to help the employee reach their objectives. Remember to include the employee when developing solutions because they may be able to come up with alternatives that you may not have considered. It will also help the employee become part of the solution while increasing accountability and a sense of ownership.

Actions: Actions are the steps in implementing the solutions. This is an important component because the actions communicate the importance of the situation and your commitment to helping the employee resolve the problem. In discipline situations, actions are the consequences for the employee if they do not improve their performance. The actions should clearly outline what will happen if the objectives are not met. When highlighting positive performance, the actions may be outlined as accomplishments or the positive impact that the incident had.

Do not put off documenting employee performance; be sure to write down the incident right away. Do your best to use objective terminology and stay away from vague language like “bad attitude” or “failure to get along with others.” Also, do not use terms such as “always” and “never,” as in, “Joshua never turns in his reports on time.” Using these types of absolutes without being 100% certain will undermine your credibility. Vague phrases that are unsupported by objective facts are almost as bad as not documenting at all.

Always remember that it is the responsibility of business leaders to create an environment of support, not fear. Most employees want to do a good job, and a good leader looks for the best in their employees.

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Unless 501(c)(3) organizations prove they’re publicly supported, the IRS assumes they’re private foundations. The distinction is important because publicly supported charities enjoy higher tax-deductible donation limits and generally are exempt from excise taxes and related penalties.

The tax code recognizes several types of publicly supported organizations, but most 501(c)(3) charities fall into one of two categories. The first, Sec. 509(a)(1) organizations, primarily rely on donations from the general public, governmental units and other public charities. The second category, Sec. 509(a)(2) organizations, have significant program revenue. The IRS has established tests for each type of organization. If your nonprofit doesn’t pass the 509(a)(1) test, it may qualify under Sec. 509(a)(2).

First test

The Sec. 509(a)(1) test requires that:

You have at least one third of your total support from the public, governmental agencies or other public charities, or
You have at least 10% of your total support from such sources and that the “facts and circumstances” indicate you’re a publicly supported organization.

Several facts and circumstances help determine whether your organization is publicly supported — for example, whether you have actual sources of support above the 10% threshold, answer to a representative governing body and serve the general public on a continuing basis. Such tests measure public support over a five-year period, including the current and four prior tax years.

The public support percentage excludes certain types of contributions, program revenue fees from related activities, unrelated business income, investment income and “unusual grants.” Net income from unrelated activities and gross investment returns are included in total support, though unusual grants aren’t.

Second test

Under the Sec. 509(a)(2) test, your organization must receive at least one-third of its support from contributions from the public and gross receipts from activities related to its tax-exempt purpose. No more than one-third of its support may be from investment income and unrelated business taxable income. Public support is measured over a five-year period.

This test is subject to limitations. When calculating public support, you can count only the greater of $5,000 or 1% of your total exempt-purpose-related revenue from a single individual, corporation or governmental unit in the numerator. Receipts of any type or amount from disqualified persons, such as board members, aren’t considered public support either.

Be careful about misclassifying gross receipts that are subject to the limits. IRS auditors will look for payments that should be deemed gross receipts but instead are classified as, for example, contributions, gross investment income or unrelated business taxable activity.

Mission critical

It’s critical to maintain your nonprofit’s publicly supported status. Certain organizations automatically qualify as public charities. For other nonprofits, we can help determine whether you pass one of the two tests.

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If you’re self-employed and run your business or perform certain functions from home, you may be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expense method and the simplified method.

How to qualify

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

You physically meet with patients, clients or customers on your premises, or
You use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.
Expenses you can deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
Depreciation.

Keeping track of actual expenses can take time and requires organized recordkeeping.

The simpler method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Changing methods

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2022 return, use the simplified method when you file your 2023 return next year and then switch back to the actual expense method for 2024.

What if I sell my home?

If you sell — at a profit — a home on which you claimed home office deductions, there may be tax implications.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. However, any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Different rules for employees

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive paychecks or Form W-2s aren’t eligible for deductions, even if they’re currently working from home because their employers closed their offices due to COVID-19.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

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Roth&Co’s recent ERC webinar, presented by Tax Attorney Ahron Golding, Esq., answered frequently-asked questions, provided authoritative guidance, and cleared up much of the confusion and misinformation surrounding the Employee Retention Credit (ERC). Click here to watch the recording, or read a brief summary below:

The webinar reviewed general principles and prepared businesses for a discussion with their professional advisors about how their specific organizations could benefit from the ERC. Business owners were encouraged not to make tax decisions based simply on something heard on a webinar or online, and instead to review their specific situations with a tax professional.

The history behind the ERC is simple. The government wanted to encourage businesses to keep paying their employees throughout the Covid crisis, even though those businesses were hurting from having been suspended by government order or from experiencing a significant decline in revenue. The language of the CARES Act, ERC Provision is excerpted here.

Quick Facts

• If a business is eligible for the maximum credit offered by the ERC, it can claim up to $5k per employee for 2020 and up to $21k per employee for 2021.

• There was a major law change over two years ago (Dec 2020) that allows businesses to apply for the ERC even if they received the PPP – as long as there is no double-dipping on the same funds.

• There are no new updates regarding eligibility since then, and the old rules regarding partial closure still apply.

• The ERC is a credit on a business’ payroll taxes; there is no danger of the funds running out.

• Dates to be aware of: The way to apply for an ERC is by filing a 941X (an amended payroll tax return). The deadline to claim the 2020 credit is April 15, 2024, and the 2021 credit, April 15, 2025.

• Regarding “partial suspensions,” it is possible to be eligible for the ERC even without a decline in receipts.

Eligibility is based on whether a business was shut down (fully or partially) by government order, or had a decline in gross receipts for that quarter compared to 2019. Partial closures may have included limitations on operations or mandatory modifications in a business’ processes. The closures must have been due to government order – not merely recommendation. Specific circumstances regarding closures and other ERC details are addressed in the IRS’ guidelines titled Notice 2021-20 and can be found here. You can read more about the specifics of partial closures in questions 17 and 18 on pages 34-40, excerpted here.

Take special note of the language in question 18 of the notice regarding what factors should be taken into account in determining whether a modification required by a governmental order has more than a nominal effect on business operations for ERTC purposes:

“Whether a modification required by a governmental order has more than a nominal effect on the business operations is based on the facts and circumstances. A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations…”

The ERC statute is relatively new. There is no history or case law to tell us how the determination of ‘partial closure’ will eventually be defined by the courts. It would be wise to consult a knowledgeable tax professional who may be able to provide your business with a tax opinion based on your unique facts and circumstances, and who can support your claim in case it is challenged in audit.

The IRS has started auditing businesses who have filed for the ERC and has trained teams of auditors specifically for this purpose. You can see the training manual here. The audits focus on eligibility, substantiation of the amounts claimed, and whether an amended income tax return was filed to correct any overstated wage deduction, where required.

Penalties for erroneously claiming the ERC are costly and could mean potential 20% accuracy penalties and possible criminal liability if the government can prove an intent to defraud. Note that if your business is awarded an ERC, it may have to file an amended return for the period it received the credit in order to reduce the deduction it claimed – even if the credit has not yet been received.

Businesses that filed for the ERC and are still waiting to see their credit come through can call their congressman and ask that he reach out to the IRS for a status report on its progress. Alternately, they can contact the Taxpayer’s Advocate Services (TAS), whose representatives are tasked with assisting taxpayers experiencing tax issues.

This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or counsel.

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Forecasting the stock market and interest rates is a pursuit that has captivated investors for centuries. A huge cohort of Wall Street brain cells surrounds the prediction business of markets, interest rates and other economic forecasts.

However, the reality is that predicting the future movements of these financial indicators is an exercise in futility. As of the end of 2021, the median of twelve leading Wall Street forecasters analyzing the S&P 500 was to end calendar year 2022 at the 4,825 level, according to Bloomberg. The highest was 5,300 and the lowest was 4,400. The S&P 500 closed at 3,839. Is it an overstatement to say these predictions aren’t worth the paper they’re written on?

It has been a particularly tough year to predict with the outbreak of the war in Ukraine, China’s Zero-tolerance Covid policy and backbreaking inflation. But that is exactly the point! “Forecasting is difficult because it concerns the future,” goes an old Danish proverb.

Instead, it is crucial for investors is to have a well-crafted and balanced financial plan and to remain steadfast in adhering to it through thick and thin.

The stock market is a complex system that is influenced by a multitude of both known and unknown factors. Predicting its movement is like predicting the weather – it may be possible to make educated guesses, but ultimately the future is uncertain. Similarly, interest rates are influenced by a plethora of macroeconomic factors, such as inflation, GDP growth, and monetary policy, making it impossible to predict their movements with certainty.

What investors should focus on instead, is creating a financial plan that is tailored to their unique circumstances and goals. This plan should be grounded in sound financial principles such as diversification, asset allocation, and risk management. By diversifying their portfolio across different asset classes, investors can reduce their overall risk and increase their chances of achieving their financial goals.

A well-crafted financial plan should be flexible and adaptable to changing market conditions. This means that investors should be prepared to make adjustments when necessary, while remaining focused on their long-term goals.

Is your financial plan on sound footing? Reach out to us at info@equinum.com to get a professional analysis of your current plan.

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Can you guess which months are the least productive of the year? If the timing of this article doesn’t give it away, you might be surprised to hear that it’s the first two months of the year. A study by the data collaboration software provider Redbooth found that January and February are the least productive months. Cold temperatures and daylight hours that are in short supply seem to cause dreary conditions that impact everyone’s productivity.

Instead of simply bundling up and waiting out the slump, try some new actions to boost productivity in your business or organization. Rae Ringel, president of leadership development consultants The Ringel Group, developed four strategies that can breathe new life into this notoriously gloomy time of year:

Experimentation Mode

The new year is an excellent time to think about introducing new routines, tools, and habits into a team’s culture. The more radical the departure from business-as-usual, the more likely employees are to break old habits and reexamine what brings out their best.

Some ideas include replacing hour-long meetings with 15-minute check-ins. Or setting aside one day a week as a meeting-free zone. Maybe even move to a 4-day work week? Whatever your team’s experiment is, be sure to commit to it for at least a few weeks.

Fail-fast February

Sometimes the key to success is failing spectacularly and quickly, but then working and changing a solution until it succeeds. The final product or strategy may be significantly different from the starting point, but in the end, the most important thing is that success is achieved.

Consider designating February (or March) as a month when fast failure will be celebrated. Encourage employees to creatively develop large and small ways to improve the organization, so that leaders can crack open underexplored opportunities and spark new thinking. One way to kick off the “fail-fast” month might include business leaders recalling their own most disastrous professional failures and what they learned from them.

Unexpected Appreciation

Many employees expect some type of monetary gift around the end of the year as a form of appreciation for a year’s work. When leaders surprise their employees with employee recognition moments early in the new year, these gestures can take on greater significance because they don’t feel obligatory. Leaders could frame such gestures as a “thank you in advance” for work to come in the new year. And these acts don’t have to be monumental. Sometimes food-delivery gift cards or other simple gifts can go a long way when they are unexpected.

Reconnecting with What Matters Most

Finally, reconnect your team with what matters most. This may be the customers an organization caters to, the clients it serves, or users of the products it develops. As an example, a law firm might bring in a client whose life was positively affected by the firm’s work. That impactful work wouldn’t have been possible without a lot of team members who may never have heard the client’s name. The idea is for employees to see themselves as essential sparks in the work the organization performs. Reflecting on the new year can ground your team in your organization’s purpose and meaning.

The new calendar year offers an opportunity to shake things up in a meaningful way. You can’t change the weather, the amount of sunlight, or the general lack of enthusiasm, but the suggestions above can help build energy and excitement that can fuel productivity year-round.

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If you own an interest in a closely held business, a buy-sell agreement should be a critical component of your estate and succession plans. These agreements provide for the orderly disposition of each owner’s interest after a “triggering event,” such as death, disability, divorce or withdrawal from the business. This is accomplished by permitting or requiring the company or the remaining owners to purchase the departing owner’s interest. Often, life insurance is used to fund the buyout.

Buy-sell agreements provide several important benefits, including keeping ownership and control within a family or other close-knit group, creating a market for otherwise unmarketable interests, and providing liquidity to pay estate taxes and other expenses. In some cases, a buy-sell agreement can even establish the value of an ownership interest for estate tax purposes.

However, because circumstances change, it’s important to review your buy-sell agreement periodically to ensure that it continues to meet your needs. The start of a new year is a good time to do that.

Focus on the valuation provision

It’s particularly critical to revisit the agreement’s valuation provision — the mechanism for setting the purchase price for an owner’s interest — to be sure that it reflects the current value of the business.

As you review your agreement, pay close attention to the valuation provision. Generally, a valuation provision follows one of these approaches when a triggering event occurs:

Formulas, such as book value or a multiple of earnings or revenues as of a specified date,
Negotiated price, or
Independent appraisal by one or more business valuation experts.

Independent appraisals almost always produce the most accurate valuations. Formulas tend to become less reliable over time as circumstances change and may lead to over- or underpayments if earnings have fluctuated substantially since the valuation date.

A negotiated price can be a good approach in theory, but expecting owners to reach an agreement under stressful, potentially adversarial conditions is asking a lot. One potential solution is to use a negotiated price while providing for an independent appraisal in the event that the parties fail to agree on a price within a specified period.

Establish estate tax value

Business valuation is both an art and a science. Because the process is, to a certain extent, subjective, there can be some uncertainty over the value of a business for estate tax purposes.

If the IRS later determines that your business was undervalued on the estate tax return, your heirs may face unexpected — and unpleasant — tax liabilities. A carefully designed buy-sell agreement can, in some cases, establish the value of the business for estate tax purposes — even if it’s below fair market value in the eyes of the IRS — helping to avoid these surprises.

Generally, to establish business value, a buy-sell agreement must:

Be a bona fide business arrangement,
Not be a “testamentary device” designed to transfer the business to family members or other heirs at a discounted value,
Have terms that are comparable to similar, arm’s-length agreements,
Set a price that’s fixed by or determinable from the agreement and is reasonable at the time the agreement is executed, and
Be binding during the owner’s life as well as at death, and binding on the owner’s estate or heirs after death.

Under IRS regulations, a buy-sell agreement is deemed to meet all of these requirements if at least 50% of the business’s value is owned by nonfamily members.

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Most not-for-profits can’t afford to turn down offers of financial support. At the same time, you shouldn’t blindly accept government or foundation grants simply because they’re offered. Some grants may come with excessive administrative burdens, cost inefficiencies and lost opportunities. Here’s how to evaluate them.

Administrative and other burdens

Smaller or newer nonprofits are at particular risk of unexpected consequences when they accept grants. But larger and growing organizations also need to be careful. As organizations expand, they usually enjoy more opportunities to widen the scope of their programming. This can open the door to more grants, including some that are outside the organization’s expertise and experience.

Even small grants can bring sizable administrative burdens — for example, potential reporting requirements. You might not have staff with the requisite experience, or you may lack the processes and controls to collect the necessary data.

Grants that go outside your organization’s original mission can pose problems, too. For example, they might cause you to face IRS scrutiny regarding your exempt status.

Costs vs. benefits

As for costs, your nonprofit might incur expenses to complete a program that may not be allowable or reimbursable under the grant. As part of your initial grant research, be sure to calculate all possible costs against the original grant amount to determine its ultimate benefit to your organization.

Then, if you decide to go ahead with the grant, analyze any lost opportunity considerations. For unreimbursed costs associated with new grants, consider how else your organization could spend that money. Also think about how the grant affects staffing. Do you have staff resources in place or will you need to hire additional staff? Could you get more mission-related bang for your buck if you spent funds on an existing program as opposed to a new program?

Quantifying the benefit of a new grant or program can be equally (or more) challenging than identifying its costs. Assess each program to determine its impact on your organization’s mission. This will allow you to answer critical questions when evaluating a potential grant.

The long-run

If your organization has lost grants during the COVID-19 pandemic, you’re probably tempted to welcome any new funds with open arms. But in the long-run, it pays to scrutinize grants before you accept them. Contact us if your nonprofit is trying to grow revenue and needs fresh ideas.

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Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not mandatory.

Is now the time for your small business to do so? As you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly. And the good news is that the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.

Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:

1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously, only 50% of costs were allowed. This limit still applies to employers with 51 to 100 employees.

2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than 3 years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.

3. Enhancement of employer contributions. Perhaps the biggest change brought by SECURE 2.0 is that certain employer contributions for a plan’s first 5 years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:

100% in the plan’s first and second tax years,
75% in the third year,
50% in the fourth year, and
25% in the fifth year.

For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.

In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.

To be clear, though the name of the tax break is the ‘small employer pension plan start-up cost credit,’ it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine if now is the right time for your small business to launch a retirement plan and, if so, which one.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between holders and developers, and why it makes a difference.

Watch the video:

An identity crisis in the real estate industry can make for costly tax obligations. The real estate industry is diverse and there are many roles to play – investor, agent, broker, developer. Each has its own tax ramifications. Before embarking on the purchase of a property, a buyer needs to ask himself some important questions in order to understand what role he is assuming. What is his business? Is he purchasing a property to hold and profit from as an asset? Is he purchasing a property to develop for sale?

Let’s start with some definitions. A real estate developer is someone who buys land and builds a real estate property on it or buys and improves an existing property. His intent in purchasing is to sell the property for a profit. A developer profits by creating real estate.

A holder or investor purchases a property with a long term intent. He intends to hold the property, rent it out and accrue revenues from it. A holder profits by possessing real estate.

Whether a purchaser defines himself as a holder or a developer is critical because the tax treatment of real estate holders provides certain benefits that are unavailable to developers.

A real estate holder may purchase a property, rent it out, collect income, and when he sells the property, his profit is taxed as a capital gain, as long as he’s held it for more than a year. That means that instead of being subject to the ordinary tax rate he had been paying on his rental income, his income from the sale will be subject to a lower, long term capital gains rate of 15%-20%. Holders are allowed to take advantage of a Section 1031 like-kind exchange to defer the recognition of their gains or losses that would otherwise be recognized at the time of a sale.

Because a holder may be challenged to prove that his intentions were to hold and utilize a property for the long term, it is advisable that he keep good records to support his status. Lease and rental agreements, advertising and listing information, and research efforts should be documented and saved in case his position is challenged by tax authorities after the sale of the property.

For a real estate developer, it’s a whole different picture. A developer is taxed like someone who is running a business that buys and sells real estate inventory. A real estate dealer, or developer, is defined as “an individual who is engaged in the business of selling real estate to customers for gain and profit.” Under this definition, a developer’s income, earned by the sale of his property, would be taxed as an ordinary gain, and taxed at the higher ordinary income rate of up to 37%. He may also be subject to self-employment taxes up to 15.3% (subject to OASDI limitations) as well as city taxes. Developers also cannot depreciate property held as inventory or use a Section 1031 like-kind exchange to defer income recognition. However, they may take advantage of their real estate selling expenses by taking them as ordinary business expenses and deducting unlimited ordinary losses.

Under the IRS Code, each individual property purchased is assessed independently, so one’s status as ‘holder’ or ‘developer’ is not absolute. A real estate entrepreneur may own a portfolio of rental properties which makes him a holder, and may simultaneously purchase and sell other properties, making him a developer as well. His tax status will depend on his intent for that individual property at the time of purchase.

Before purchasing, the savvy investor must be cognizant of his goals and make sure to structure his purchase properly at inception in order to avoid any tax surprises. Consult with your financial advisor regarding newly acquired or potential real estate assets.

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One of the few pieces of legislation that is being pursued during this Congressional lame duck session is an update to the Secure Act, which was originally passed in December of 2019. Dubbed the ‘Secure Act 2.0,’ this legislation carries a whole array of changes to the world of retirement accounts.

The act’s acronym stands for, “Setting Every Community Up for Retirement Enhancement,” but after a review of the first round of this legislation, it looks like “Setting Every Community Up for Robbery of Estates” would be a better fit. The legislation has eliminated what was known as the ‘stretch IRA’ – which allowed IRA beneficiaries to ‘stretch’ their IRA’s tax benefits over their lifetime.

Obviously, there were a few bones thrown in to support the legislation’s claim to ‘enhance retirements.’ The smoke screen created by titling this act in a positive way isn’t as egregious as it was for the Inflation Reduction Act, but it’s not far from it.

In the new version of the act, currently being deliberated by the offices of Congresspeople and various lobbying groups, there are north of thirty changes. However, though few of these changes will impact the act substantially, there are some minor provisions that are notable.

One of the changes being proposed is a positive one. It will allow employers to contribute – either through a match or a non-elective deferral – as a Roth contribution.

Currently, 401(k) plans can allow participants (i.e., employees) to contribute as a Roth contribution, but the company match and non-elective deferrals need to go into the plan as a pre-tax contribution. Also included in the proposed legislation is a provision allowing Roth accounts in SEP-IRAs.

So why is this exciting? Simple. ROTHs allow you to buy out the IRS for future taxation.

Picture this: You have a partner in a business who, without your consent, is entitled to decide at any time what his share of the business consists of. Wouldn’t you want to rid yourself of him and buy him out? With a pre-tax 401(k) or IRA, the IRS remains a silent partner that can walk in one day asking for its share of your money. If it decides that tax rates are 50%, then you have no choice but to comply.

When deciding to utilize a pre-tax or a Roth account, many people try to calculate what their current tax rates are as opposed to their future expected tax rates in retirement. The problem with this reasoning is that nobody really knows what tax rates will apply in the future.

Based on where our national debt is and the trillions in untapped resources for IRS retirement accounts, we don’t think it’s a bad idea to buy out this bossy partner. So, although we need to live with some of the negative clauses in this legislation, make sure to also glean some of the benefits as well.

Are you setting yourself up for retirement success? If you’re not sure, reach out to us at info@equinum.com for professional guidance.

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Have you ever been in a meeting and felt the ideas you were trying to communicate were not getting through? You could have the greatest idea in the world, but if you can’t persuade anyone else to follow your vision, or if no one can understand it, then even the brightest idea will go to waste.

Long considered a “soft skill,” effective communication is now regarded as one of the most important skills a business leader can have. Leaders who reach the top of their field study the art of communication in all its forms — writing, speaking, presenting — and are constantly striving to improve on those skills. The ability to explain the direction and strategy of your business to others so they can do what needs to be done is critical for any business leader and is often the difference between success and failure.

In his new book, The Bezos Blueprint, best-selling author and Harvard University Instructor Carmine Gallo describes three common tactics that top leaders use when communicating with their employees:

Using short words to talk about hard things

Long, complicated sentences make ideas hard to understand. “If you care about being thought credible and intelligent, do not use complex language where simpler language will do,” writes Nobel prize-winning economist Daniel Kahneman. Instead of muddling your ideas with complex and technical language, find the simplest and clearest way to communicate what you want to say.

There are simple ways to improve the clarity of your communication. Software tools can review your writing and create a numerical readability score that corresponds to an education grade level. For example, a document written for someone with at least an eighth-grade education level is considered “very easy to read.” It does not imply that your writing sounds like an eighth-grader wrote it; it means that the ideas are easy to grasp. And ideas that are easy to understand are more persuasive. (For context, Grammarly assessed this article at a 9th-grade education level.)

Choosing metaphors to reinforce key concepts

The beauty of metaphors is that they can provide simple, concrete and memorable comparisons to explain the complex or abstract.

In business, metaphors communicate complex information in short, catchy phrases. Warren Buffet is an expert communicator who has long used metaphorical references to explain complex financial topics. Buffett’s metaphors grab the reader’s attention and reduce complexity to a short sentence. For example, Buffett is frequently asked why 90% of his investments are made in the U.S. His answer: “America’s economic soil remains fertile.” Heavy textbooks have been written on foreign vs. domestic investment, but in five simple words, a metaphor allows Buffet to communicate a complex concept simply.

Visualizing or humanizing data to create value

In the information age, data is being collected in greater and greater quantities every day, but throwing up a graph or a pie chart on a presentation is often met with eyes glazing over. A trick to making any data point interesting is to humanize it by placing the number in perspective. Any time you introduce numbers, take the extra step to make them engaging and memorable.

An example from Gallo’s book is, “By 2025, scientists expect humans to produce 175 zettabytes (one trillion gigabytes) of data annually. It’s simply too big a number for most people to wrap their minds around. But what if I said that if you could store 175 zettabytes on DVDs, the disks would circle the earth 222 times?” The number is still the same, but the description is more engaging because it paints a powerful image.

The human brain does not do well with complexity or abstractions. Consider the previous strategies to improve your communication style and make sure your messages and ideas have the desired effect. Former PepsiCo CEO Indra Nooyi may have said it best: “If you cannot simplify a message and communicate it compellingly, believe me, you cannot get the masses to follow you.”

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Most businesses have some intangible assets, and the tax treatment of these assets can be complex.

What makes intangibles so complicated?

IRS regulations require the capitalization of costs to:

Acquire or create an intangible asset,
Create or enhance a separate, distinct intangible asset,
Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
“Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
Amounts paid to modify certain contract rights (such as a lease agreement);
Amounts paid to defend or perfect title to intangible property (such as a patent); and
Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

Outside counsel to draft and negotiate a lease agreement;
Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder;
Outside consultants to investigate competitors in preparing a contract bid; and
Outside counsel for preparation and filing of trademark, copyright and license applications.

Are there any exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need help or have questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules.

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The effects of inflation are all around. You’re probably paying more for gas, food, healthcare and other expenses than you were last year. Are you wondering how high inflation will affect your federal income tax bill for 2023? The IRS recently announced next year’s inflation-adjusted tax amounts for several provisions.

Some Highlights

Standard Deduction

What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2023, the standard deduction will increase to $13,850 for single taxpayers, $27,700 for married couples filing jointly and $20,800 for heads of household. This is up from the 2022 amounts of $12,950 for single taxpayers, $25,900 for married couples filing jointly and $19,400 for heads of household.

The Highest Tax Rate

For 2023, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $578,125 ($693,750 for married taxpayers filing jointly). This is up from 2022 when the 37% rate affects single taxpayers and heads of households with income exceeding $539,900 ($647,850 for married couples filing jointly).

Retirement Plans

Many retirement plan limits will increase for 2023. That means you’ll have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2023, individuals will be able to contribute up to $22,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $20,500 in 2022. The catch-up contribution limit for employees age 50 and over who participate in these plans will also rise in 2023 to $7,500. This is up from $6,500 in 2022.

For those with IRA accounts, the limit on annual contributions will rise for 2023 to $6,500 (from $6,000). The IRA catch-up contribution for those age 50 and up remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs)

These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored health Flexible Spending Account (FSA), you can contribute more in 2023. The annual contribution amount will rise to $3,050 (up from $2,850 in 2022). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2023, the amount that can be carried over to the following year will rise to $610 (up from $570 for 2022).

Taxable Gifts

Each year, you can make annual gifts up to the federal gift tax exclusion amount. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2023, the first $17,000 of gifts to as many recipients as you would like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $16,000 in 2022.)

Thinking Ahead

While it will be quite a while before you have to file your 2023 tax return, it won’t be long until the IRS begins accepting tax returns for 2022. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you are entitled.

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If your company uses supplier finance programs to buy goods or services, and if you’re required to adhere to U.S. Generally Accepted Accounting Principles (GAAP), there will be changes starting next year. At that time, you must disclose the full terms of supplier finance programs, including assets pledged to secure the transaction. Here are the details of this new requirement under GAAP.

Gap in GAAP

Supplier finance programs — sometimes called “structured payables” and “reverse factoring” — are popular because they offer a flexible structure for paying for goods and services. In a traditional supplier arrangement, the buyer agrees to pay the supplier directly within, say, 30 to 45 days.

Conversely, with a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile, the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. However, many organizations haven’t been transparent in disclosing in their financial statements the effects those programs have on working capital, liquidity and cash flows.

That’s the reason the Financial Accounting Standards Board recently issued Accounting Standard Update (ASU) No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. It will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

More details

Supplier finance programs are a relatively new form of arrangement that continues to evolve and grow in popularity. Even after this ASU becomes effective, GAAP doesn’t provide any specific guidance on where to present the amounts owed by the buyers to finance companies. It’s up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt.

However, the updated guidance does require that in each annual reporting period, a buyer must disclose:

The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary, and
For the obligations that the buyer has confirmed as valid to the finance provider or intermediary 1) the amount outstanding that remains unpaid by the buyer as of the end of the annual period, 2) a description of where those obligations are presented in the balance sheet, and 3) a roll-forward of those obligations during the annual period, including the amounts of obligations confirmed and obligations subsequently paid.

In each interim reporting period, the buyer must disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the period.

Ready, set, go

The new rules take effect for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information. That provision is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Contact us for more information or help implementing the changes.

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If you’ve been an investor in 2022, you don’t need us to tell you how tough things are. In order to tamp down inflation, the Federal Reserve is deliberately trying to make stock prices go down, crash the housing market, and slow down the overall economy.

For the most part, it’s worked. The stock market is officially in a bear market. The housing market has dried up, and it is almost certain that we are either in, or entering, a recession.

Here are the returns for the stated indices through September 30^th:

Index	Return
S&P 500	-25.25%
AGG Bond Index	-13.79%
60/40 Portfolio	-20.67%

As you can see, it isn’t only the stock market that has taken it on the chin. The “conservative” bond investments have also been taken to the woodshed.

By the Fed raising the Fed-Funds rate under their control, the other interest rates on government and corporate bonds have followed their rise, pushing down prices of existing bond holders. This has caused an extremely unusual reaction in the bond market – a double-digit percent correction. If the year would be over today, it would be the third worst calendar year for the observed 60/40 portfolio.

Charted below is a list of the worst years for a 60/40 portfolio. (Constituting 60% S&P 500 and 40% 10-year treasuries):

Year	Portfolio Return
1931	-27.3%
1937	-20.7%
1974	-14.7%
2008	-13.9%
1930	-13.3%
1941	-8.5%
2002	-7.1%
1973	-7.1%
1969	-6.9%
2001	-4.9%

These returns may surprise you. How are we down so much more now than we were in 2008, during a real financial crisis? Or in 2001 when the dot-com bust cut the S&P 500 in half?

The answer is the diversification aspect that we expected from bonds, or the lack thereof. For example, in 2008, equities were down -36.6%, quite a chunk lower than what equities are down now. Conversely, bonds were up 20.10%. Since 1928, there have been only four points in time where stocks and bonds have been down in the same year. And when that did happen, most were in the low single digits.

So, where is the good news?

The good news is that, if history is any guide, things will be looking quite positive from here on in.

First, on the fixed income side of things: A year ago, the yield we were getting from a ten-year bond was .74%. A two-year bond was yielding .49%. With that backdrop we were at a starting point of almost no yield, making it very hard to diversify portfolios. Now, these same bonds are yielding in the 4% range. So, the bond portion of the account will earn a yield, providing investors with a fixed income and a benefit from diversification.

As for equities, there is also a historical precedent for a comeback. Look below at what happens when the S&P 500 falls by 25% or more:

Source: A Wealth Of Common Sense

This isn’t to say the low for the year is in, or that there won’t be any gut-wrenching volatility until year end. But for those courageous enough to hold on, history proves that they will be paid back nicely.

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Earlier this year, I wrote about the term ”The Great Resignation” describing the record number of employees who have left their jobs since the start of the pandemic. Although the number of employees who are quitting remain at record levels, economists have begun using a different term to describe the recent employment phenomenon – ”The Great Renegotiation.”

”The Great Resignation” seems to imply that employees are simply resigning and finding new jobs or leaving the workforce altogether. The truth is much more complicated. There is a growing belief that the worker-employer relationship has changed both fundamentally and permanently. According to a report by McKinsey, 65% of workers who took a new job in the last 2 years did so in a different industry than the one in which they were previously employed. The pandemic has made employees adjust their priorities and rethink their work expectations.

Put a little differently, employee expectations have gone up, so organizations need to examine how they recruit talent. According to McKinsey, employees have different priorities and want more than just higher compensation, and it is up to employers to adjust. ”The Great Renegotiation” has begun, and companies who are committed to making the necessary work and cultural changes can leverage this workforce reshuffling into a powerful opportunity.

Traditional tools such as compensation, titles, and promotion are still important, but shouldn’t be the only levers that companies can use to attract employees. Katy George, a senior partner at McKinsey & Company, wrote a paper highlighting five changes that companies should consider making if they want to succeed in the emerging talent market:

From Pedigree to Potential

Job descriptions typically list specific education and experience requirements, but this can discourage candidates from applying who may be able to do the job despite lacking a certain credential. To broaden an employment search, companies can shift the focus from degrees to skills – simply changing the entry barriers, not lowering them.

From Preset Career Paths to Self-Authorship

In years gone by, employees would follow a pre-determined career track up a corporate ladder. Given the rapidly changing nature of today’s work and how quickly skills can become obsolete, employees are now taking charge of their own professional development. Companies should provide more professional development, apprenticeship, and personal growth opportunities. Self-directed learning can support both individual ambitions and company priorities.

From One-Way to Two-Way Apprenticeship

Traditional apprenticeship was about a younger person learning directly from an older one. Today, learning and teaching should flow both ways. For example, an apprenticeship that brings together a senior finance manager and a lower-ranking IT engineer would be an excellent way to share knowledge. A two-way learning dynamic gives employees opportunity for continual growth and can lead to greater loyalty and productivity.

From Time Served to Impact Delivered

An employee staying with a singular company for their whole career is pretty much unheard of nowadays. The stigma in leaving a job has never been weaker and the relationship between tenure and performance is nonexistent. Employees are looking for meaningful work where they feel they are making an impact. Employees expect their jobs to bring a significant sense of purpose to their lives and employers need to help meet this need. A paycheck is great, but a paycheck coupled with the feeling that you’ve positively contributed to society is even better.

From Culture Fit to Inclusive Culture

Capturing the full benefits of diversity is not about hiring people who can fit into the existing corporate culture. It’s about creating a company culture that is supportive and adaptable enough to embrace all kinds of talent. If a company does not work to embrace diverse talent, they will miss out on adding creativity and innovation to their team. Whether it is encouraging empathetic managers, or conducting fair performance reviews, there are many different ways to improve a company’s culture to be more inclusive.

Given the stress in many labor markets and the increasingly global hunt for talent, “The Great Renegotiation” is expected to intensify – but it is a process, not an end result. Adopting the changes above will be no small undertaking, but they are important steps to meeting both the present and the future needs of the labor market.

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There’s a strong sense of relief when outside experts announce that their audit of your not-for-profit is complete. But even if auditors have left your premises and returned the documents they’ve reviewed, the work isn’t really over. Not only do your executive director and board need to review the audit report, but it may be necessary to address auditor concerns by making changes to your organization.

Review the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your audit committee and management also need to meet with the auditors before the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”) highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Assess internal controls

The final audit report will state whether your nonprofit’s financial statements present its financial position in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. If the auditors have found your internal controls to be weak, promptly shore them up.

Gather feedback

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with the auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

Fiscal responsibility

Your donors, grantmakers and other supporters expect your organization to do everything in its power to ensure funds are used appropriately and responsibly. If you fail to act on issues identified in an audit, it could lead to asset misappropriation and seriously damage your nonprofit’s reputation and viability. Contact us if you have questions, require an audit or need help improving internal controls.

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If you’re interested in investing in tax-free municipal bonds, you may wonder if they’re really free of taxes. While the investment generally provides tax-free interest on the federal (and possibly state) level, there may be tax consequences. Here’s how the rules work:

Purchasing a bond

If you buy a tax-exempt bond for its face amount, either on the initial offering or in the market, there are no immediate tax consequences. If you buy such a bond between interest payment dates, you’ll have to pay the seller any interest accrued since the last interest payment date. This amount is treated as a capital investment and is deducted from the next interest payment as a return of capital.

Interest excluded from income

In general, interest received on a tax-free municipal bond isn’t included in gross income although it may be includible for alternative minimum tax (AMT) purposes. While tax-free interest is attractive, keep in mind that a municipal bond may pay a lower interest rate than an otherwise equivalent taxable investment. The after-tax yield is what counts.

In the case of a tax-free bond, the after-tax yield is generally equal to the pre-tax yield. With a taxable bond, the after-tax yield is based on the amount of interest you have after taking into account the increase in your tax liability on account of annual interest payments. This depends on your effective tax bracket. In general, tax-free bonds are likely to be appealing to taxpayers in higher brackets since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, the tax benefit from excluding interest from income may not be enough to make up for a lower interest rate.

Even though municipal bond interest isn’t taxable, it’s shown on a tax return. This is because tax-exempt interest is taken into account when determining the amount of Social Security benefits that are taxable as well as other tax breaks.

Another tax advantage

Tax-exempt bond interest is also exempt from the 3.8% net investment income tax (NIIT). The NIIT is imposed on the investment income of individuals whose adjusted gross income exceeds $250,000 for joint filers, $125,000 for married filing separate filers, and $200,000 for other taxpayers.

Tax-deferred retirement accounts

It generally doesn’t make sense to hold municipal bonds in your traditional IRA or 401(k) account. The income in these accounts isn’t taxed currently. But once you start taking distributions, the entire amount withdrawn is likely to be taxed. Thus, if you want to invest retirement funds in fixed income obligations, it’s generally advisable to invest in higher-yielding taxable securities.

We can help

These are only some of the tax consequences of investing in municipal bonds. As mentioned, there may be AMT implications. And if you receive Social Security benefits, investing in municipal bonds could increase the amount of tax you must pay with respect to the benefits. Contact us if you need assistance applying the tax rules to your situation or if you have any questions.

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Whether you’re considering selling your business or acquiring another one, due diligence is a must. In many mergers and acquisitions (M&A), prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers get their own QOE reports to spot potential problems that might derail a transaction and identify ways to preserve or even increase the company’s value. Here’s what you should know about this critical document:

Different from an audit

QOE reports are not the same as audits. An audit yields an opinion on whether the financial statements of a business fairly present its financial position in accordance with Generally Accepted Accounting Principles (GAAP). It’s based on historical results as of the company’s fiscal year end.

In contrast, a QOE report determines whether a business’s earnings are accurate and sustainable, and whether its forecasts of future performance are achievable. It typically evaluates performance over the most recent interim 12-month period.

EBITDA effects

Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Many buyers and sellers believe this metric provides a better indicator of a business’s ability to generate cash flow than net income does. In addition, EBITDA helps filter out the effects of capital structure, tax status, accounting policies and other strategic decisions that may vary depending on who’s managing the company.

The next step is to “normalize” EBITDA by:

Eliminating certain nonrecurring revenues and expenses,
Adjusting owners’ compensation to market rates, and
Adding back other discretionary expenses.

Additional adjustments are sometimes needed to reflect industry-based accounting conventions. Examples include valuing inventory using the first-in, first-out (FIFO) method rather than the last-in, first-out (LIFO) method, or recognizing revenue based on the percentage-of-completion method rather than the completed-contract method.

Continued viability

A QOE report identifies factors that bear on the business’s continued viability as a going concern, such as operating cash flow, working capital adequacy, related-party transactions, customer concentrations, management quality and supply chain stability. It’s also critical to scrutinize trends to determine whether they reflect improvements in earnings quality or potential red flags.

For example, an upward trend in EBITDA could be caused by a positive indicator of future growth, such as increasing sales, or a sign of fiscally responsible management, such as effective cost-cutting. Alternatively, higher earnings could be the result of deferred spending on plant and equipment, a sign that the company isn’t reinvesting in its future capacity. In some cases, changes in accounting methods can give the appearance of higher earnings when no real financial improvements were made.

A powerful tool

If an M&A transaction is on your agenda, a QOE report can be a powerful tool no matter which side of the table you’re on. When done right, it goes beyond financials to provide insights into the factors that really drive value. Let us help you explore the feasibility of a deal.

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Investing has been tough this year. We have seesawed up and down, with the downs swinging much more heavily. Long-lasting inflation pressures have caught the Federal Reserve flat-footed and are now forcing them to take drastic measures to try to dampen inflation. These measures have caused a lot of turmoil in the economy and have created a lot of volatility in the investing sphere. Equity markets, bonds and REITs have all been struggling.

One core question our clients challenge us with is why we don’t try to sell out before, or at the beginning of, market corrections, and then reinvest once calmer times have returned. This is much easier said than done. In the long run, investing on a constant basis and riding the ups and downs is the winning method. However, when you try to trade around market conditions, you need to be right twice: on the way out and on the way back in. What happens if you exit and the market creeps up another 10%? Will you get back in at the higher levels or wait on the side lines for safety for weeks, months or even years?

Having said that, there may be certain changes around the edges that can be appropriate based on economic conditions. But the slicing and dicing of trading in and out of the market can be a huge drag on long-term performance.

In Morgan Housel’s book, The Psychology of Money, Housel provides a great analogy for bearing the psychological pain to achieve higher returns:

Say you want a new car that costs $30,000. You have a few options:

Pay $30,000 for a new car.
Opt for a cheaper, used car instead.
Steal one.

Generally, 99% of people would avoid the third option because the consequence of stealing a car outweighs the upside. This is obvious, but say you want to earn a 10% annual return on your investments. Just like the shiny new car, there’s going to be a price to pay. In this case, the usual price is volatility and uncertainty. And just like in the car scenario, here too you have a few options:

You can pay it, and accept the volatility while you hold on tight to your investments.
You can find a more predictable asset and accept a lower return, such as government treasuries or CDs (the equivalent of the used car option).
You can ‘steal’ it – a.k.a. trying to simultaneously earn the return while avoiding the price that comes with it (volatility). People try anything to attempt this: trading, rotations, hedges, arbitrages, leverage – you name it.

Unlike the vehicle, with investments, many people attempt the third option. And while a few may get away with it, like car thieves – most get caught.

Running off with investment returns without paying for them – like driving off with someone else’s car – looks enticing (especially if you know that one guy who claims to have done it successfully). But don’t be fooled. The risk is great.

This warning may not be one you want to hear (especially with all the other warnings about economic storms coming our way) but your future self will be thankful. Investments made during bear markets yield amazing benefits down the line. Just make sure you have a sound financial plan in place, and abide by that plan through thick and thin.

(And if you aren’t sure if your financial plan is sound, you know where to find us.)

info@equinum.com

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Warren Buffett once said that “trust is like the air we breathe — when it’s present, nobody really notices. When it’s absent, everyone notices.” As anyone in the business world will tell you, trustworthiness is one of the most important assets for a business and one of the most essential forms of capital a leader has. No matter what kind of work your business does, it is critical that your customers trust you with their money and personal information, and that your employees trust you with their reputation and their careers.

Trust is the natural result of thousands of tiny actions, words, thoughts and intentions. It does not happen all at once – gaining trust takes time and work. It can take years for a manager or leader to develop the trust of their employees or customers, but it can only take a moment to lose that trust. Without trust, transactions cannot occur, leaders can lose teams, salespeople can lose sales…the list goes on. Trust and relationship, much more than money, are the currency of business.

Jack Zenger and Joseph Folkman, executives at a leadership development consultancy, analyzed over 80,000 employee assessments and found three elements that predict whether a leader would be trusted by his direct reports, peers and other colleagues:

Good Judgement/Expertise. One factor that influences whether people trust a leader is the extent to which a leader is well-informed and knowledgeable. A leader must understand the technical aspects of the work and be competent in their area of expertise. They must use good judgement when making decisions and exhibit a high degree of confidence in their ideas and opinions.

Consistency. Another major element of trust is the extent to which leaders do what they say they will do. This may seem obvious, but people rate a leader high in trust if they honor their commitments and keep their promises. Even something as simple as quickly returning emails and phones calls can go a long way in building trust.

Positive Relationships. According to Zenger and Folkman’s research, the most important element of trust is based on the extent in which a leader is able to create positive relationships with other people and groups. To instill trust, a leader must balance results with concern for others. Last month, we spoke about how to communicate with empathy – a critical element in building positive relationships. Leaders must also be able to generate cooperation between others and resolve conflicts in a helpful way.

Trust is a measure of the quality of any relationship — something worth investing a whole lot in.

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