Header Right

Try a Trust

by

Shot of a young woman bonding with her dog in the parkYou don’t have to be fabulously wealthy to benefit from a trust. For many people, a trust is a great financial planning tool.

What Is a Trust?

A trust is a legal arrangement between the person who sets up the trust and transfers property to it (the “grantor”) and the individual or institution that agrees to manage the trust assets (the “trustee”). The grantor specifies who is to benefit from the trust (the “beneficiaries”) both during his or her lifetime and at death, if applicable, names the trustee, and spells out in the legal document creating the trust how the trust assets are to be managed and distributed.

What Can a Trust Do?

Trusts can be used for many purposes, including:

  • Managing your assets if you become incapacitated. With a revocable living trust, you can stay in control of your assets while you’re able and avoid probate after your death. You can also arrange to have a successor trustee make investment decisions and handle other financial matters for your benefit if you’re no longer able to do so. This arrangement avoids the expense and complications of a court-ordered guardianship or conservatorship.
  • Reducing the size of your estate. With a grantor retained annuity trust (GRAT), you transfer assets with the potential for appreciation to an irrevocable trust for the benefit of a child, other family member, or noncharitable beneficiary and retain an annuity interest for a term of years. When the annuity ends, your child (or other beneficiary) will receive the remaining trust assets. If you outlive the trust term, the value of the assets won’t be included in your estate.
  • Donating to charity. If you set up a charitable remainder trust (CRT), you receive an income stream from the donated assets for life or a set number of years. Then, at your death or when the trust term ends, the charity you have chosen will get the trust assets. If you set up a charitable lead trust (CLT), the charity you choose receives income from the assets for a period of time that you specify. After that period ends, the assets flow to your family as “remainder beneficiaries.” Both CRTs and CLTs offer potential income tax and estate tax advantages.
  • Preserving wealth for future generations. With a dynasty trust, wealth is preserved and generated by cascading through multiple generations. Any income or appreciation generated by the trust assets may be exempt from estate and generation-skipping transfer taxes as long as it remains in the trust and if the laws governing such trusts are satisfied. Typically, your children and then your grandchildren would be the trust income beneficiaries. You also can determine under what conditions your beneficiaries can or cannot receive income from the trust.
  • Protecting assets from creditors. When you set up a trust, you can generally include “spendthrift” provisions that prevent your beneficiaries from assigning their interest in the trust to creditors. Putting assets in trust for your child instead of giving them to your child outright may be a good way to provide asset protection in case of a future divorce or major lawsuit.

Your financial and legal professionals can provide more information about the different types of trusts and how they may apply to your situation.

LLC vs. S Corp: Which is Best for Tax Purposes

by

Close up Businessman consultant holding pen and pointing at financial on wooden desk in coffee shop. freelance, tax, accounting, statistics and analytic research concept.If you’re confused by the difference between LLCs and S Corps, this article is for you! Here, we clarify the difference and provide guidance on which option is best for you.

Before we get to the best qualification for your small business regarding tax filing, let’s define an LLC and an S Corp so that we know what each designation means.

What is an LLC?

An LLC is a limited liability company. It is a legal designation. The owner is protected from personal liability regarding business activities in this business structure. Owners are considered “members” of the LLC and are self-employed. An LLC can have one or more owners who can actively participate in a business organization or be hands-off. Further, an unlimited number of owners can reside anywhere in the world.

What is an S Corp?

An S Corp is a tax classification. It is desirable because it protects business owners from double taxation. Like an LLC, owners can be hands-off; owners of an S Corp may also take a salary as an employee. There is a limit to the number of owners of an S Corp – there can be no more than 100 owners, and all must be United States citizens.

How are LLCs and S Corps taxed?

LLCs are taxed like sole proprietorships or partnerships (if there are multiple members in the LLC). Because an S Corp is a tax classification, an LLC, as a business entity, can attain S Corp status by meeting specific qualifications.

For LLCs, not S Corps, the owner(s) must pay a 15.3 percent self-employment tax on all net profits. The owner can take a salary for S Corps to avoid the self-employment tax.

How do I know which is best for my business?

To help you determine whether your business should remain an LLC or further classify as an S Corp, consider the following:

  • How many owners are there in your business?
  • Where do you do business (U.S. only or overseas as well)?
  • Who else has a stake in your company (i.e., a partnership or a corporation)?
  • Do you plan to scale your business?
  • How important is personal liability protection to you?
  • How hands-on do you wish to be in terms of business upkeep?

Answering these questions will help guide you on the best option for your business’ tax filing status. To determine what is best for you financially now and over time, speak to a qualified tax accountant or CPA. They will be up to date on the most recent tax laws, so they can better guide you.

5 Often-Overlooked Tax Credits for Your Small Business

by

Cropped shot of a young business owner using her tablet while standing in her storeAs a small business owner, tax time can be stressful. That’s why ensuring you’re garnering every benefit possible is essential. Many small businesses overlook some huge benefits when it comes to tax credits. This article reveals five of the most overlooked tax credits for small businesses. Read on to determine if any of these apply to your business.

Tax Credit vs. Tax Deduction

Before jumping to five tax credits often overlooked by small businesses, let’s clarify the difference between a tax credit and a tax deduction.

While tax deductions reduce your taxable income resulting in you paying a lower tax amount, tax credits are a dollar amount deducted from the taxes you owe. So, if you receive a tax credit of $500, you subtract $500 from taxes due.

Tax credits can be highly beneficial come tax time, so knowing which ones your small business is eligible to claim is good. Unfortunately, there are quite a few that many business owners aren’t aware of.

Here are five tax credits that are the most overlooked by small businesses. After you review the list, check with your accountant to see if your business is eligible for these or other tax credits to reduce the amount you owe to the IRS.

5 Tax Credits You May be Overlooking

1. Retirement Saver’s Credit

For small businesses that start a retirement plan for their employees, the IRS offers this credit to offset some of the startup costs they consider “ordinary and necessary.” Your business must employ fewer than 100 employees and not have had a retirement plan previously. The credit is for 50 percent of your startup costs, with a maximum credit of $500.

This tax credit can be claimed for three years, beginning the year before your plan becomes effective. If you do not currently offer a retirement savings plan for your employees, now may be the time to establish one.

2. Research & Development Tax Credit

The R&D tax credit is one of the most overlooked because small business owners not in a “research” field with a laboratory setting often blaze right past this one. But according to the IRS, “research” isn’t necessarily in a lab.

To qualify for this tax credit, a business must improve a product or process, often occurring in many companies as part of their everyday operations. For example, you may qualify if you own a software company and develop or improve an IT process.

Developing, designing, enhancing, or improving a product or process related to your business can qualify you for a credit of 13 cents on every dollar. Of course, you’ll want to confirm whether your business qualifies, identify qualifying activities, and keep copious records so that you can back up your claim to the credit.

3. Rehabilitation Credit (Historic Preservation)

If your business spent money to rehabilitate or renovate a historic structure, this credit likely applies to you. A 20 percent tax credit is available for rehabilitating historic, income-producing buildings determined by the Secretary of the Interior to be “certified historic structures.”

This does not apply to residential structures; however, many businesses purchase historic properties to house their office, restaurant, or other business. Historic structures are certified by the National Park Service, which reports to the IRS. If that applies to the structure where your business is housed, it is worth reviewing this credit with your accountant.

4. Empowerment Zone Employment Credit

Empowerment Zones (EZ) are distressed urban and rural areas needing revitalization. The purpose of the EZ credit is to encourage business owners to operate in these areas and employ EZ residents.

The credit is 20 percent of qualified wages paid during a calendar year. Businesses are eligible for a wage credit of up to $3,000 annually for each eligible employee.

5. Plug-In Electric Vehicle Credit

Suppose you purchase a new plug-in electric vehicle (EV) for your business between 2023 and 2032. In that case, you may qualify for a tax credit of $7,500. To be eligible for the credit, your adjusted gross income (AGI) must not exceed $150,000 in the year you take delivery of the vehicle or the year before (whichever is less).

The EV must meet qualifications regarding battery capacity, retail price, and weight. Speak to your tax accountant for the guidelines and qualifications if you purchased a plug-in EV for your business.

Ensuring you claim every tax credit your small business is entitled to is the key to paying the lowest tax possible. There are dozens of tax credits that small businesses are eligible for. Be sure to have your accountant or CPA review your eligibility for maximum savings come tax time.

Intellectual Property: Patents, Trademarks, and Copyrights

by

Senior man talking on cell phone and using laptop on work table. Mature carpenter working on laptop and answering phone call in his carpentry workshop.Many businesses are founded on an original idea or design. Consider Xerox or IBM. Or look at products like Coke or popular published works such as the Harry Potter books. Where would they all be today if their idea or work had not been protected by intellectual property laws? For a growing business, securing the rights to an idea, products, or an identity can be a critical step in staving off the competition and in locking in future revenues.

Patents, trademarks, and copyrights collectively make up the backbone of intellectual property rights. Which may apply to your business depends on the nature of your product or service and what specifically you are looking to protect.

Patents

Patents are used for gaining rights to an invention — which can be a machine, process, design, or even a new type of plant. A patent grants the holder “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States. Patents are issued by the United States Patent and Trademark Office, generally for an initial term of 20 years. Once a patent is issued, it is the responsibility of the holder, or patentee, to enforce the patent.

There are three basic types of patents: utility patents, design patents, and plant patents. Utility patents relate to processes, machines, and other manufactured items, substances, or any improvements thereto. Design patents pertain to design for an article of manufacture. Plant patents relate to distinct and new varieties of plants. For all three types, the invention must be “new and original.”Therefore, the application process necessarily involves a patent search.

While there are numerous online patent search engines, most serious applicants consult a patent attorney, as the cost and consequences of using an already patented idea can be significant. Filing fees can run from as much as $600 to $1,000 or more without legal fees, and approval can take time. If you are considering applying for a patent, ask yourself whether the idea you are applying for is even patentable and whether the idea’s long-term potential outweighs the time and cost of applying for a patent.

Trademarks

In contrast to patents, trademarks protect words, names, symbols, designs, or even sounds and colors that distinguish a product or business. A service mark is the same as a trademark, except that it relates to service rather than a product. Unlike patents, trademarks and service marks can be renewed forever as long as they are actively used in a business.

To claim rights to a trademark, you need only place the “TM” or “SM” next to the trademarked material. However, you must first check to see that it is not already trademarked by someone else. Using a trademark that is already registered can land you in an expensive law suit. So you’ll probably need to do a trademark search — which generally involves engaging a trademark lawyer.

A registered trademark (®) goes a step further and requires registration with the Trademark office of the U.S. Patent and Trademark Office. Although it is not required to register a trademark, it does provide some advantages, most notably, greater legal precedent in the event it is challenged and the ability to bring action in a federal court. Trademark registration also is a prerequisite for registration in foreign countries.

What should you trademark and when should you use it? Consider trademarking any material that is integral to your business — its name, a product name, or logo — anything that connotes the business and factors into its marketability. Make sure to include the mark on packaging, displays, and sales literature, as well as any advertising.

Copyrights

Copyrights relate to “original works of authorship” such as articles, books and other writings, music, and works of art — both published and unpublished. A copyright gives owners the exclusive right to reproduce, distribute, publicly perform, and display their work. Legal protection is extended automatically, as soon as the work is created, though registration provides the copyright owner with the advantage of establishing public awareness of its use. The Library of Congress registers copyrights, which last for the life of the author plus 70 years.

Legal Matters

Intellectual law can be very complex. Identifying the subtle differences between one trademark and another, defining what constitutes patent infringement or what level of “copying” is acceptable over the Internet — are all issues that are regularly debated by lawyers and judges across the country. There’s also a matter of international intellectual property rights; U.S. trademarks and patent grants are effective only within the United States and every country has its own laws. If you are to successfully navigate the complicated world of intellectual property rights, you should consult a legal professional — preferably one familiar with your specific business. Not only can qualified counsel aid with patent or trademark searches, but they can give you direction on what intellectual property needs registering and help you through the application process.

The Pluses and Minuses of Business Borrowing

by

Human hand giving money to other hand. Holding banknotes. Isolated on blue background. Vector illustrationThere are distinct pluses and minuses that small business owners should consider when looking for a loan.

New small business owners typically enter the marketplace with high expectations — they want to build sales and increase profits quarter to quarter. More often than not, they hope to add employees and, perhaps, open up additional locations. To help turn their dreams of growth into reality, they often seek out financing.

The big question is when to borrow money and on what terms. The decision isn’t always clear-cut, as there are distinct pluses and minuses that small business owners should consider.

The Pluses of Business Borrowing…

Seeking financing can make sense from a business perspective if the loan is intended to help the business expand and grow. For example, using debt to add to or introduce a new line of products, acquire additional property, or take other actions that are expected to boost revenues is an appropriate business strategy. A loan can also make sense when it is used to repay the owner of the business some of what he or she put into the business using personal funds.

…And the Minuses

A business loan impacts cash flow as it is being repaid, often in monthly installments. The interest cost may be an important consideration, depending on the interest rate environment. Business borrowers should understand that their tax deduction for interest expense may be limited to 30% of the business’s adjusted taxable income. However, smaller businesses may be permitted to deduct more. A tax professional can provide details on these rules.

Excessive Debt

Business owners also need to consider other possible negative ramifications from taking on excessive debt. For example, the owner of a small business is typically required to personally guarantee loans to the business. If the business defaults on the loan, then the owner is personally liable for repaying the loan balance. It is possible that in such a situation, the lender would take steps to seize the owner’s auto, home, and other assets in order to settle the debt. Moreover, if the business ended up with more liabilities than assets and was unable to repay what it owed, then the business might be forced to file for bankruptcy.

Seek Professional Input

Before taking on debt, small business owners may want to consult with an experienced financial professional. A professional analysis of the business’s financial health, cash flow, and prospects can help the owner determine whether a business loan at this stage makes sense and how much debt the business can afford to take on.

Facing Off Against a Big Competitor

by

Business people run on the arrows. Concept business competition vector illustration. Flat business cartoon, Speed, Togetherness, Office Team, Back view.Running a small business isn’t easy. You probably wouldn’t have it any other way. The ability to survive and thrive is a source of great pride for small business owners. So when a competitor moves in, especially a big one, it can feel like battle lines have been drawn.

Sharpen Your Edge

Before you do anything, accept the fact that you can’t compete on the same level as a large national chain. But that doesn’t mean you can’t win the battle. Study what the competition does and how they do it. Then use that information to define — and sharpen — your company’s competitive edge.

A large competitor will almost certainly have lower prices and a deeper inventory. But you can connect with customers in ways the competition can’t. You can add value to every customer interaction by being attentive and providing expertise and personalized service.

Perhaps your biggest edge is your size. Being small means you can respond to market trends and customer requests more quickly. You can also change and adapt policies and procedures faster.

Rally the Troops

You have another big advantage: You have an established customer base and you know what they need. Establish a timeline to reach out to your customers directly via snail mail or e-mail (or both) with special offers. If you have a loyalty program, consider doubling rewards for a period of time that overlaps with the competition’s opening.

Look for Advantages

Having a big competitor move in may have some unexpected benefits. The new company validates the need for what your business offers and may do a fair amount of advertising. If your marketing budget allows, this could be a good time to do some strategic advertising of your own.

The competition also may create some unexpected opportunities in the future. The new company will change the dynamics of the marketplace, which may lead you to steer your business in a new direction.