Succession Plans for Your Business

Saratoga Tax Attorneys – Successfully passing a family business to the family upon death of the owner is not an easy task.

Most business owners fail to realize the importance of a sound business succession plan. As a result, only about half of all family businesses are transferred to the next generation. A significant number are forced to look elsewhere for capital and management expertise.

Without the benefits of a succession plan, grieving loved ones are forced into a business they know little about, which can adversely affect the financial stability of the business and the financial security of your family. Not only should management succession be addressed in the business succession plan, but transfer of ownership and estate planning issues should also be taken care of as well.

Choosing the successor is one of the biggest challenges in business succession planning. Appraise the individual’s strengths and weaknesses and ensure that the individual has the leadership skills and drive to meet the goals of the business. The needs of the business – not the desires of family members – should be your foremost consideration. It is imperative that a plan is developed in the early stages so that whomever you choose can benefit from your experience and knowledge.

Other crucial elements of a sound business succession plan include transfer of ownership and estate planning. Buy-sell agreements, stock gifting, trusts and wills are some of the ways to transfer ownership. Each of these means of transfer has specific legal and tax ramifications and should be considered in conjunction with proper estate planning.

Mandatory Returns for Filing

Bay Area Tax Lawyers – The following are the basic returns that may need to be filed following a taxpayer’s death, dependent on the filing requirements of each:

Form 1040 – File the decedent’s final federal return as usual on Form 1040, 1040A, etc., and a corresponding state return, if required.

Form 1041 – This is the federal income tax return of the estate–used to report income received on the assets in the estate, including sales of property. An equivalent return for the decedent’s state of residence may also be required.

Form 706 – Used to compute the tax on the value of the assets in the estate and is required if the gross estate is greater than the taxpayer’s estate tax exemption. Unless reduced because of pre-death gifts, the federal estate tax exemption is $5.25 million in 2013 (up from $5.12 million in 2012).

Effective for deaths of married individuals occurring after 2010, by election, if all of the decedent’s estate tax exemption is not used, the excess can carry over to the surviving spouse to be added to his or her own exemption when the time comes. The election must be made on the estate tax return of the first spouse to die. Therefore, even if the value of that deceased spouse’s estate is less than the 706 filing requirement it will be necessary to file a Form 706 to make the election.

CAUTION: Some may consider not filing the 706 to avoid the trouble and cost when the estate value of the first spouse to die is below the filing requirement and there is not a foreseeable need for the carryover for the surviving spouse. That choice should be considered carefully since future inheritances, lotto winnings, inflation, tax law changes and other events could make the surviving spouse’s estate subject to unexpected inheritance tax.

A state estate tax return may also be required, depending on the decedent’s state of residency and that state’s filing requirements; many states do not have an estate tax or piggy-back on the federal return

Reduce Your Debt Load Today!

Ainer & Fraker – Follow these steps to pay off debt the smart way:

Bag Unnecessary Items to Reduce Debt Load
Do you really need the 800-channel cable option, or that dish on your roof? You’ll be surprised at what you don’t miss. How about magazine subscriptions? They’re not terribly expensive, but every penny accounts. It’s nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.

Don’t ever, ever miss a payment
You’re not only retiring debt, but you’re also building a stellar credit rating. If you ever decide to move or buy another car, you’ll want to get the lowest rate possible. A blemish-free payment record will help with that.

Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.

Do Not Increase Debt Load
If you don’t have the cash for it, you probably don’t need it. You’ll feel better about what you do have if you know it’s owned free and clear.

Shop Wisely, and Put the Savings on Your Debt
If your family in large enough to warrant it, invest $30 or $40 and join a store like Sam’s or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride: Use coupons religiously. Calculate the money you’re saving and slap in on your debt.

Each of these steps, taken alone, probably doesn’t seem like much, But learn to live this way, adopting as many of them as you can, and you’ll be able to watch your debt decrease every month.

For more information on on getting out of debt, click the following link: Being Smart About Debt.

Growing Tax Threats!

San Jose Tax Attorneys – Originally conceived to combat taxpayers in the higher-income brackets who utilized legal tax shelters and tax preferences to avoid paying income tax, the AMT can be tricky and hit you when least expected.

The tax was supposed to inflict a “minimum” tax on those who were able to avoid the regular tax. However, years of inflation have pushed many middle-income taxpayers into the reach of the AMT. Although there is a long list of items that can trigger the AMT, for most individuals, the triggers include the following or a combination of the items listed below:

  • Preference income from exercising stock options from an employer’s qualified plan, sometimes referred to as incentive stock options (ISOs);
  • Having a large number of dependents;
  • Having large itemized tax deductions;
  • Having large miscellaneous itemized deductions;
  • Large itemized deductions for state income or sales tax, real property tax and personal property tax;
  • Large medical itemized tax deductions;
  • Home equity debt interest deduction; and
  • Interest income from private activity bonds.

In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT.

Reference the following link for tips on Understanding Your Taxes.

Sample Business Property Depreciation Techniques

Ainer & Fraker, LLP – Business Property Depreciation

From Business Property Depreciation, we learned that whenever property is purchased for use in a business and that property has a useful like of more than one year, its cost must be deducted over its useful like. Refer to the examples listed below:

Example: A small business owner with a retail clothing store could expense under Sec 179 improvements that were made in 2010 through 2013 inside the store, such as built-in cabinets to better stock clothing or lights to brighten the fitting rooms. Allowing a retail store owner to expense these improvements immediately lowers the owner’s cost.

Example – Business taxpayer places in service, in 2013, $100,000 of equipment eligible for Sec 179 expensing and $350,000 of qualifying leasehold improvements.  Assuming there is no income limitation the maximum Sec 179 deduction that the taxpayer can claim for 2013 is $350,000 ($100,000 for the equipment and $250,000 for the qualifying leasehold improvements). 

Bonus Depreciation – For qualifying assets purchased and placed in service in 2012 and 2013, trades or businesses are allowed to depreciate an additional 50% of the cost of the assets. The bonus allowance does not apply to real estate.

Deducting the Cost of Business Assets– Most business assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others accelerated methods that front load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use.


Agricultural Equipment 7 Yrs
Automobiles (1) 5 Yrs
Commercial Real Estate 39 Yrs
Land Not Depreciable
Land Improvements 15 Yrs
Office Equipment 5 Yrs
Office Furnishings 7 Yrs
Residential Real Estate 27.5 Yrs
Trucks 5 Yrs

(1) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions.

Marginal Tax Rates?

Bay Area Tax Attorneys – Ever wonder what the term “tax bracket” means?

It refers to the top marginal tax rate that individuals are being taxed, not the average. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at your top marginal rate. Thus, if you are in the 25% marginal bracket and plan on signing up for your employer’s 401(k) plan, you will generally save $250 ($1,000 x .25) in federal taxes for each $1,000 contributed to the 401(k) plan. The reason we say “generally” is because sometimes a tax deduction can actually drop you into a lower marginal tax bracket.

The table below reflects the marginal tax bracket for various taxable incomes. Keep in mind that not all of your income is taxed. The amount equal to the sum of your deductions and exemptions is not taxed at all. If your income is below the sum of your deductions and exemptions, you would not have a taxable income, and your marginal rate would be zero.

However, once your income exceeds the sum of your deductions and exemptions, you will have taxable income and your marginal tax rate can be determined from the table. For example, let’s assume that your income for the year is $50,000. You are married with two dependent children and will take the standard deduction. The standard deduction in 2013 for a married couple $12,200 (up from $11,900 in 2012). The exemptions for 2013 are $3,900 (up from $3,800). Thus, your taxable income would be $22,200 ($50,000 – $12,200 –$3,900 x 4)). For a taxable income $22,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.

Increased Tax Rates: The 2013 Marginal Tax Rates Table below reflects the increased tax rates for higher income taxpayers as the result of the American Taxpayer Relief Act of 2012 (ATRA). ATRA added the 39.6% bracket.

(Values shown are the top of each
marginal tax bracket.)
Tax Rate
Head of
Married Filing
Over the 35% amounts
* Also used by taxpayers filing as Qualified Widow(er) with dependent child
(Values shown are the top of each
marginal tax bracket.)
Tax Rate
Head of
Married Filing
Over 388,350
Over 194,175


* Also used by taxpayers filing as Surviving Spouse

Tax-Free or Taxable Interest?

Bay Area Tax Attorneys – A frequent tax strategy question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income.

Therefore, the question is really which provides the greater “after-tax” return.  Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also tax-free for a particular state if the bonds are issued by that state or its local governments. In addition, interest from U.S. Government Bonds cannot be taxed by any state.

The following are issues related to making a decision on taxable or tax-free income:

• Municipal Bond Interest – Interest earned from general purpose obligations of states and local governments, which are issued to finance their operations, are generally tax-exempt for Federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and local governments within the state. Hence, there are two categories of municipal bonds, namely the tax-free Federal and state and the tax-free Federal only. Individuals can invest in municipal bonds by directly purchasing a bond or through funds that invest in municipal bonds. Some funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state’s return.

In general, tax-free bonds are likely to be more attractive for taxpayers in higher brackets, since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit from excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond.

Even though municipal bond interest isn’t taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of social security benefits that is taxable, and may affect the alternative minimum tax computation, as well as the earned income credit, investment interest deduction and sales tax deduction.

• Tax-Deferred Retirement Accounts – It generally doesn’t make sense to buy and hold municipal bonds in your regular IRA, Keogh, or 401(k) plan account. The income in these accounts is not taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. Thus, if you want to invest your retirement funds in fixed income obligations, it is generally advisable to invest in higher-yielding taxable securities.

Being Smart About Debt!

Saratoga Tax Attorneys – Being in debt isn’t necessarily a terrible thing. Most people are, between mortgages and car loans and credit cards and student loans.

Being debt-free should always be a goal, but you should focus on the management of it, not the presence of it. It’ll likely be there for most of your life, and if you handle it wisely, it won’t feel so much like an albatross around your neck.

There are alternatives to shelling out your hard-earned money for exorbitant interest rates, and to always feeling like you’re running behind and on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay off even more, faster.

Know Where You Are
Assess the depth of your debt. Write it down, using pencil and paper or computer software like an Excel spreadsheet or Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, any outstanding tax liens, students loans, and payments on electronics or other household items through a store.

Record the day the debt began and will end (where possible), the interest rate you’re paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged; you’re going to break this down into manageable chunks, and find extra money to help pay it down.

Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you’re getting payday loans (which you shouldn’t be), the worst offenders are probably your credit cards. Here’s how to deal with them.

• Don’t use them. Don’t cut them up, but put them in a drawer and only access them in an absolutely dire emergency.

• Identify the card with the highest interest and pile on as much extra money as you can every month. Pay minimums on the others. When that one’s paid off, work on the card with the next highest rate.

• Don’t close them, and don’t open any new ones. If you do, this probably won’t help your credit rating.

• Pay on time, absolutely every time. One late payment these days can lower your FICO score.

• Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club that you’ve never used? Looks for line items you don’t need.

• Call your credit card companies and ask them nicely if they would lower your interest rates. It works sometimes.

Save, save, save
Do whatever you’re able to do to retire debt. If you take a second job, earmark that money strictly for higher payments on your financial obligations. Substitute free family activities for high-cost ones; your local library may have cheap or free tickets to events. Sell high-value items that you can live without.

Be sure to click the following link for more ways to learn about how to Reduce Your Debt Load.

Filing for a Deceased Family Member?

Filing for a Deceased Family Member?

Generally, the same filing requirements apply to a deceased taxpayer as would otherwise be used if the taxpayer were still living, based on income level, age, and filing status.

CAUTION: A fiduciary return reporting the income earned on the decedent’s assets after the date of death and until the assets are distributed to the beneficiaries may also be required. In many cases, a fiduciary return may need to be filed for more than one year.

Refunds – If a decedent’s return claims a refund, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, should be filed. However, Form 1310 is not needed if:

  • The person claiming the refund is the surviving spouse of the decedent, filing a joint return with the decedent, or
  • A court-appointed or certified personal representative is filing an original return for the decedent.

Income to Include – The decedent’s income on the final return generally includes income derived up to the date of death.

Exemptions and Deductions – The general rules for exemptions and deductions apply to the final return.

  • Medical Expenses: Medical expenses paid before death are claimed by the decedent as itemized deductions in the usual manner. Medical expenses not deductible on the final return become liabilities of the estate–they are claimed on the estate tax return. However, expenses that were paid out of estate funds within one year after death can be treated as if paid by the decedent and claimed on the decedent’s final return instead of on the estate return.
  • Net Operating Loss (NOL) Carryovers: An NOL carryover of the decedent can only be deducted on his/her final return. If the final return results in an NOL, it can be carried back to the decedent’s prior year returns (just as with other NOLs).
  • Passive Losses: When a passive interest is transferred due to death, the accumulated suspended losses from the activity are deductible on the decedent’s final return. The deduction amount is limited to the excess of the basis of the property at date of death over the decedent’s adjusted basis in the property just before death.

Other Tax Attributes
 – What becomes of other tax carryovers attributable to the taxpayer upon his or her death? To the extent that the following carryovers are attributable to the taxpayer (in the case of a married taxpayer all or half of the carryover on a joint return may be attributable to the surviving spouse), the balance of the following carryovers are lost.

  • Charitable Contribution Carryover
  • Investment Interest Carryover
  • Capital Loss Carryover
  • Business Tax Credit Carryover
  • Minimum Tax Credit Carryover

Special rules apply to the carryovers of foreign tax credit, domestic production deduction and unrecovered basis in the decedent’s pension. In addition, any unsatisfied term of the moving deduction qualification period is waived.  

Return Signature, Etc
 – The word “DECEASED,” the decedent’s name and the date of death should be written at the top of page one of Form 1040. If there is a personal representative, that person must sign the return. If the return’s filing status is married joint, the surviving spouse must also sign. If there isn’t a representative and the return is being filed jointly, the surviving spouse signs the return and notes in the signature area: “Filing as surviving spouse”. If the decedent had no representative or wasn’t married, the person in charge of the decedent’s property should sign as “personal representative.”

Due Date – Due date for the decedent’s return is the same as for any other taxpayer, regardless of the date of death during the year.