TAX+BUSINESS
ALERT
News for your business and your life.
| Hawkins Ash CPAs
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In this edition
July 23, 2019
Could an FLP Help Your Business Succession Plan?
Podcast:
Roth vs Traditional IRAs or 401(k)
No Surprises: Why you Should Check Your Tax Bracket
Tax Calendar
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Could an FLP Help Your Business Succession Plan?
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One of the biggest concerns for business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.
A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.
How It Works
To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children or other beneficiaries.
You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.
Tax Benefits
As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.
Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.
The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2019 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.
There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.
Some Risks
Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.
The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-avoidance strategy.
Not for Everyone
An FLP can be an effective succession and estate planning tool but, as we’ve taken pains to explain, it’s far from risk free. Please contact us for help determining whether an FLP is right for you.
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Contact:
Steve Albers, CPA
Direct: 920.337.4520
Email: salbers@hawkinsashcpas.com
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Podcast:
Roth vs Traditional IRAs or 401(k)
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As we talked about before, many taxpayers had their tax bill go down even though they saw less of a refund. With tax reform bringing rates down to levels that we have not seen in a while, we all have a limited window to take advantage of these rates, but not how you would expect. We can take advantage of these rates by not using them.
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No Surprises: Why You Should Check Your Tax Bracket
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Many taxpayers learned some tough lessons upon completing their 2018 tax returns regarding the changes brought forth by the Tax Cuts and Jobs Act (TCJA). If you were one of them, or even if you weren’t, now’s a good time to check your bracket to avoid any unpleasant surprises next April.
Under the TCJA, the top income tax rate is now 37% (down from 39.6%) for taxpayers with taxable income over $500,000 for 2018 (single and head-of-household filers) or $600,000 for 2018 (married couples filing jointly). These thresholds are higher than they were for the top rate in 2017 ($418,400, $444,550 and $470,700, respectively), so the top rate probably wasn’t too much of a concern for many upper-income filers.
But some singles and heads of households in the middle and upper brackets were likely pushed into a higher tax bracket much more quickly for the 2018 tax year. For example, for 2017 the threshold for the 33% tax bracket was $191,650 for singles and $212,500 for heads of households. For 2018, the rate for this bracket was reduced slightly to 32% — but the threshold for the bracket is now only $157,500 for both singles and heads of households.
So, a lot more of these filers found themselves in this bracket and many more could so again in 2019. Fortunately for joint filers, their threshold for this bracket has
increased
from $233,350 for 2017 to $315,000 for 2018. The thresholds for these brackets have increased slightly for 2019, due to inflation adjustments. If you expect this year’s income to be near the threshold for a higher bracket, consider strategies for reducing your taxable income and staying out of the next bracket. For example, you could take steps to accelerate deductible expenses.
But carefully consider the changes the TCJA has made to deductions. For example, you might no longer benefit from itemizing because of the nearly doubled standard deduction and the reduction or elimination of certain itemized deductions. For 2019, the standard deduction is $12,200 for singles and married individuals filing separately, $18,350 for heads of households and $24,400 for joint filers.
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Contact:
Matt Cantlon, CPA
Direct: 507.252.6672
Email: mcantlon@hawkinsashcpas.com
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July 31
- If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.
- The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 12 to file the return.
August 15
- If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax and nonpayroll withholding.
September 16
- Third quarter estimated tax payments are due for individuals, trusts and calendar-year corporations.
- If a six-month extension was obtained, partnerships should file their 2018 Form 1065 by this date.
- If a six-month extension was obtained, calendar-year S corporations should file their 2018 Form 1120S by this date.
- If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax and nonpayroll withholding.
September 30
- Calendar year trusts and estates on extension must file their 2018 Form 1041.
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More Resources from CPA-HQ
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Minnesota New Wage Theft Law
This new wage theft law
became effective on July 1, 2019. Click below to see what this entails for existing state labor laws.
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I
RS Continues Campaign to Encourage Taxpayers to do a Paycheck Checkup
Though doing a Paycheck Checkup is a good idea every year, for many people, it’s even more important this year.
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Avoid Litigation With Attention to Common Red Flags
With some planning, your retirement plan doesn’t have to be the target of ERISA litigation. Read more for common red flags to be aware of.
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Part of your business. Part of your life. | www.HawkinsAshCPAs.com
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