Receiving a sudden and sizable influx of cash may seem like a dream come true. It can be, but many people get carried away by a windfall and end up in worse financial shape. If you’re hit with a financial windfall, here are some points you should know.

Risky Conditions

Perhaps the most obvious example is you may be tempted to immediately buy an expensive new car or home or fraudulent charities may come knocking. You can avoid these potential pitfalls by stashing your windfall in a bank or money market account as soon as you receive it. Let it sit there until you identify a few specific, reasonable goals — such as funding your retirement or a child or grandchild’s education. Waiting at least a month before you touch the money can help prevent impulse buys and other mistakes.

Also, you may owe taxes. Some windfalls, such as lottery winnings and certain legal settlements, are subject to federal tax — as much as 37% federal tax if your windfall pushes you into the top income tax bracket. State and local taxes may apply as well. A tax professional can help you determine what you may owe.

Shelter from the Storm

What you eventually decide to do with your windfall depends on many factors. If you have debt, you’ll probably want to pay it off ― especially if it carries a high interest rate and the interest isn’t deductible. Also, establishing or boosting your emergency savings can minimize the need to incur future debt.

Next, consider where you’d like to be five, 10 or 20 years into the future. Develop a budget that will help you move toward your goals — whether that means retiring early, starting a business or something else. You probably shouldn’t quit your job without having thought it through carefully. Few windfalls are large enough to see you all the way through retirement (depending on your age).

Long-Term Plan

A final word of warning: Be careful when you’re asked for money. Friends and family members may expect to share in your bounty or may pitch “sure-fire” investment opportunities. We can help you formulate a long-term plan to put a windfall to optimal use.

For various reasons, business owners sometimes decide to put their companies on the market. To successfully negotiate the sale of a business, it’s critical to understand the tax implications. Armed with this knowledge, you can assess the impact of various transaction structures and sales price allocations on your net proceeds from the sale and may be able to adjust the sales price accordingly.

Business owners tend to focus on the federal tax implications of a sale, while they may ignore state taxes. Now that federal tax rates are lower than they’ve been in the past, state taxes may take on added significance. If you’re contemplating relocating or retiring to another state, it may make sense to consider moving before you sell the business ― especially if the new state has low, or even no, income tax.

Before you attempt this strategy, however, be sure to consult a qualified tax advisor. Changing your domicile and residence for tax purposes isn’t like flipping a switch. You’ll need to take several specific actions to demonstrate your intent to establish a permanent place of abode in the new state, such as obtaining a driver’s license, registering to vote, and becoming involved with local organizations and activities.

Keep in mind, too, that there may be rules about the number of days spent in the state. So, you may have to do more than take the steps above to show that you’re a resident of a new state. For instance, if you live in your “old” state most of the year and spend only a couple months in your new state, you could find that, at least for tax purposes, you’re deemed a resident of both states. We can help you prepare for the best federal and state tax results of a business sale.

Podcast

Your Paycheck & Taxes: Deciphering Withholding Numbers

In this episode, Jeff Dvorachek explains the intricacies of paycheck withholding. Discover why those 'zero, one, two' numbers matter, and how they can impact your tax situation.

Whether you're aiming for a big refund or breaking even, understanding paycheck withholding is crucial. Jeff shares insights on adjusting your withholding throughout the year and offers recommendations for individuals looking to take control of their financial destiny.

Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues Unique to Certain Taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

Updates and Revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guide titles that have been revised or added in recent years:

• Entertainment Audit Technique Guide (March 2023), which covers income and expenses for performers, producers, directors, technicians and others in the film and recording industries, as well as in live performances;
• Capitalization of Tangible Property Audit Technique Guide (September 2022), which addresses potential tax issues involved in capital expenditures and dispositions of property.
• Oil and Gas Audit Technique Guide (February 2023), which explains the complex tax issues involved in the exploration, development and production of crude oil and natural gas;
• Cost Segregation Audit Technique Guide (June 2022), which provides IRS examiners with an understanding of why and how cost segregation studies are performed in order for businesses to claim refunds related to depreciation deductions.
• Attorneys Audit Technique Guide (January 2022), which covers issues including retainers, contingent fees, client trust accounts, travel expenses and more;
• Child Care Provider Audit Technique Guide (January 2022), which enables IRS examiners to audit businesses that provide care in homes or day care centers; and
• Retail Audit Technique Guide (March 2021), which details tax issues unique to businesses that purchase items from a supplier or wholesaler and resell them at a profit.

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website.

Do you use an automobile in your trade or business? If so, you may question how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.

Depreciation Is Built Into the Cents-Per-Mile Rate

First, be aware that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (65.5 cents per business mile driven for 2023), a depreciation allowance is built into the rate.

If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.

For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually. For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.

Reminder: Under the Tax Cuts and Jobs Act, bonus depreciation is being phased down to zero in 2027, unless Congress acts to extend it. For 2023, the deduction is 80% of eligible property and for 2024, it’s scheduled to go down to 60%.

Heavy SUVs, Pickups and Vans

Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.

What Matters Is the After-Tax Cost

What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.

The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.

Student On-Campus Events

Our recruiter and accounting professionals will be attending the following college career fairs and on-campus events. At these events, students will grow their network and explore career opportunities. Our team will be available to answer any questions and help guide students through the application and interview process.

Hawkins Ash CPAs Names New Partner Focused on Government Entity Audits



For further insights into expert audit services for government entities, connect with Joseph Haas, the newly appointed Partner at Hawkins Ash CPAs. With his extensive experience and dedication to excellence, Joe is a valuable resource in the field. Learn more about his contributions and the firm's offerings.

Hawkins Ash CPAs Announces Joe Jester as Manager in Mequon Office

Introducing Joe Jester, the newest Tax Manager at Hawkins Ash CPAs' Mequon office. With over three decades of expertise in accounting and taxation, Joe brings a personalized touch to intricate tax strategies for privately held businesses. Discover how his unique approach and extensive experience can add value to your financial goals.

It's Important to Understand How Taxes Factor Into M&A Transactions

Navigate the complexities of tax implications in mergers and acquisitions. Gain insights into stock and asset sales, the TCJA impact, and strategies for optimal tax outcomes. Seek expert advice for a seamless transaction. Discover how these dynamics can impact your merger or acquisition process.