Step-Up in Basis Rule is an Heir’s Best Friend

The step-up tax adjustment has faced considerable scrutiny over the years, yet it has managed to withstand the numerous challenges it has encountered. This provision, which results in a reduction of capital gains tax for estates, has been a subject of controversy since the 1970s. Despite this, policymakers have continued to express their desire to tap into the substantial tax revenue potential that it offers.

An opposing viewpoint suggests that repealing the step-up basis law could potentially result in significant tax liabilities for assets held across multiple generations. Additionally, the process of sifting through decades-old documentation to reconstruct transactions could prove to be an arduous task. Despite this, the step-up basis issue is likely to remain a contentious topic within estate accounting.

How it works

The narrative commences in the year 1916, coinciding with the adoption of federal estate tax legislation. Prior to this juncture, provisional death taxes had been implemented to garner funds directed toward specific initiatives such as the establishment of the Navy or financing the Civil War. The step-up provision was subsequently introduced in 1921 for all asset categories, encompassing tangible possessions like real estate to intangible investments such as stocks and bonds. Its primary objective was to evade dual taxation on unrealized appreciation after assets had already been taxed once at their fair market value.

The step-up approach is a widely utilized method of valuation that is commonly employed after the demise of an asset holder. Its primary purpose is to reset the cost basis for inherited assets, which represents the original value of the asset adjusted for expenses such as commissions, depreciation, and other relevant costs. The step-up mechanism entails elevating this assessment to be determined as of the date on which the owner passes away, effectively resetting its value. This becomes particularly crucial in cases where an asset has appreciated in value over time, as it serves to exclude any prior gains from taxation when it is sold. Conversely, if the asset has depreciated in value over this time period, the step-up would be rendered immaterial.

Estates have the option to utilize various exceptions in order to minimize tax liabilities. Rather than utilizing the date of death, personal representatives can choose a date six months after the decedent’s passing, if doing so results in a reduced tax bill for the estate. In this scenario, all property must be grouped together for valuation purposes and representatives are not permitted to selectively choose favorable assets. Additionally, it is important to note that the Internal Revenue Service (IRS) closely monitors transactions that are solely designed for tax avoidance purposes. As such, any transfer from an heir to an owner within one year of the owner’s death is not eligible for step-up treatment.

A costly loophole

Numerous administrations have grappled with the challenge of closing a perceived elitist loophole, citing its disproportionate advantages for larger estates. Despite their efforts, repeals advocated by Presidents Clinton, Obama, and Biden have all been unsuccessful thus far.

Setting aside arguments of fairness, the elimination of the step-up in basis on inherited assets would have significant financial implications for government revenues. The Congressional Budget Office predicts that replacing the step-up with the original cost basis would generate approximately $110 billion over a period of 10 years. Similarly, the federal Joint Committee on Taxation estimates that the step-up results in a loss of $42 billion in revenues for 2021 alone.

The step-up provision has had a tumultuous history, being repealed in 1976 and reinstated in 1980, only to be challenged and reversed shortly thereafter due to concerns regarding record-keeping for past transactions. In recent times, opponents of the provision have argued that the apprehension over double taxation is no longer relevant given the small number of individuals currently subject to federal estate tax with the current exemption being over $12 million. Furthermore, critics have claimed that the step-up creates distortions in revenue by promoting a lock-in effect where asset owners avoid selling assets to evade capital gains taxes, thus impeding portfolio choice and liquidity.

Watch out for changing legislation

As a recipient of an inheritance, one can effectively leverage the step-up to mitigate their capital gains expenses within the estate. It is possible that one may not be the initial individual within their family to utilize this strategy. Subsequent beneficiaries, spanning over several years, could continue to transfer ownership of a property while benefiting from the step-up in each generation, thereby incurring minimal capital gains taxes.

It is advisable to stay informed about any potential changes to the tax break in order to remain up-to-date. Homeowners with real estate in high-priced metropolitan areas such as New York City and Los Angeles may have witnessed an increase in property values, making them less vulnerable to any legislative alterations. However, it is important to note that financial portfolios may also be impacted.

It is advisable to seek professional guidance in matters concerning the step-up tax rules. Whether you are receiving an inheritance or planning to leave one, it is crucial to discuss the intricacies with a qualified expert to ensure that all relevant considerations are taken into account.

How to Invest and Then Still Sleep at Night

Individuals possess varying levels of risk tolerance or risk appetite, indicative of their comfort level with uncertainty in investment. However, it is crucial to question whether they are truly aware of their personal level of risk acceptance. It is often the case that one would only recognize their capacity for risk when confronted with a significant potential loss. Until faced with a substantial decline, it remains a challenge to determine whether they possess the fortitude to withstand such a situation. In times of bullish markets where portfolios are continuously on the rise, it may be too simplistic to assume that everyone has high-risk tolerance.

Individual risk capacity

In the realm of finance, it is important to differentiate between subjective risk tolerance and risk capacity. The former refers to an individual’s willingness to endure financial discomfort, while the latter pertains to one’s overall financial situation and resources. Financial planners take into account various factors in order to determine an appropriate score, which ought to be reassessed as clients approach retirement.

  • Time horizon: In the context of a lengthier time horizon, an investor may elect to undertake greater risk with the anticipation that market fluctuations will be mitigated over the course of months and years.
  • Goals: The feasibility of an investor taking on a particular risk at a specific time is contingent upon their income and future plans, including but not limited to home ownership and retirement. It is advisable to compartmentalize these investments into distinct categories.
  • Age: Investors of a younger age are afforded the luxury of an extended timeline to effectively manage fluctuations in the market.
  • Portfolio size: The acquisition of additional assets serves as a protective measure. A larger and more diversified portfolio results in a reduced percentage of loss.
  • Comfort and stress: Individuals exhibit varied thresholds and psychological dispositions in the face of loss. Research indicates that, on average, the negative impact of losing financial resources outweighs the positive effects of gaining them.

In order to effectively manage investment portfolios, it is crucial for investors and their financial planners to ensure that risk capacity and risk tolerance are in line with each other. However, this can prove to be a challenging task as many investors possess a low risk tolerance despite having a high capacity for risk, or vice versa. For example, certain investors may be inclined towards making investments that are considerably risky despite not having adequate assets or prospects to support such decisions. Similarly, individuals who have begun saving for their retirement at a later stage may require assuming more risk than they would prefer in an ideal scenario.

Creating profiles

Financial planners utilize a standardized set of client profiles to delineate appropriate investment options. These classifications serve as a foundation for constructive dialogues.

Conservative investors prioritize preservation of capital as a primary objective and tend to lean towards interest-bearing securities like treasuries or blue-chip corporate bonds, accompanied by a small number of growth socks.

Moving along the investment continuum, investors with a moderate risk appetite and a slightly longer investment horizon exhibit a preference for a comparable blend of defensive and growth assets, typically seeking a 70/30 defensive/growth ratio.

Balanced portfolios, which typically consider a time horizon of approximately five years, allocate assets evenly between growth-oriented investments such as equities and listed real estate, and more defensive positions such as cash and fixed income. This approach aims to achieve a balance between risk and return, while also providing diversification benefits.

Finally, the most assertive investors tend to shift towards portfolios consisting solely of equities, with a forward-looking time horizon of up to nine or ten years.

Quizzes and questionnaires

Financial planners employ various techniques to determine clients’ risk appetites and facilitate their comprehension of how their attitudes influence their decisions. One such method is administering quizzes, which feature a series of questions designed to elicit pertinent information, including:

What is your anticipated timeline for initiating withdrawals, and what is the projected duration of your withdrawal period?

When considering investment options, would you prioritize protection or returns as your primary concern?

Anticipated changes to your income: Do you project an increase, decrease, or stability?

Regrettably, a significant number of questionnaires employed in the financial industry are inadequately constructed and overlook crucial topics such as longevity and inflation risk. They neglect to establish a correlation between risk and specific objectives and instead center too narrowly on clients’ risk appetites as a preliminary screening tool, rather than conducting a comprehensive evaluation of their goals.

Given the aforementioned constraints, it is advised to initiate a dialogue with your financial advisor to gain a more comprehensive comprehension of how your risk tolerance is affecting your investment choices.



How To Handle Your First Payroll

Irrespective of the number of employees involved in your first payroll, it is imperative that the process is carried out with precision and adheres to compliance regulations. To achieve this objective, we have outlined a set of steps to assist you in managing your initial payroll.

It is imperative to obtain an Employer Identification Number from the Internal Revenue Service and complete any necessary state registrations. This includes registering with the state department of revenue for employee tax-withholding purposes and the state department of labor for state unemployment tax purposes. As such, we recommend promptly acquiring an EIN and fulfilling all applicable state requirements to ensure compliance with all relevant regulations.

When selecting a payroll system, it is important to consider the available options. These options include performing all payroll tasks in-house using internal resources, outsourcing the entire payroll process to a service provider, or combining in-house and outsourced activities. To make an informed decision, it is recommended that research be conducted regarding the advantages and disadvantages of each system..

Conduct employee verifications and classifications. This includes:

  • The process of ascertaining the eligibility of employees to work in the United States through the completion and submission of Form I-9.
  • To ensure accurate classification, it is essential to verify the employment status of individuals as employees rather than independent contractors.
  • In accordance with the Fair Labor Standards Act and relevant state regulations, it is imperative to accurately categorize employees as either nonexempt or exempt.

Give employees the appropriate payroll forms to complete. Typically, these include:

  • The proper documentation for federal income tax withholding is the W-4 form.
  • Forms for state or local tax withholding are required to be completed in order to comply with state and local tax regulations.
  • Please complete the direct deposit form to receive your electronic wage payments.
  • Forms for enrolling in employee benefits, such as health insurance and 401(k) plans.

It is imperative to ensure that your employees are furnished with the necessary labor posters and notices mandated by federal, state, and/or local law. Kindly take note of this critical requirement.

Best practice advice

  • Establish a regular pay frequency for your esteemed employees, with options such as weekly, biweekly, or semimonthly. Provide clear and concise pay period start and end dates.
  • Design a comprehensive time and labor system to monitor the work hours of nonexempt employees. Consider implementing an automated timekeeping system that can seamlessly integrate with the payroll software for efficient tracking and processing of employee hours.
  • As a responsible employer, it is imperative that you remain mindful of your legal obligations. This includes upholding obligations for wages and hours, employee taxes, employer taxes, payroll reporting, and payroll recordkeeping. It is crucial to ensure that all relevant legal requirements are met to maintain your business’s compliance with the law.
  • When considering ways to streamline business operations, outsourcing payroll management is a viable solution for business owners who prioritize growth and management over the nitty-gritty details of payroll administration.

Additional considerations

  • When considering your business’s payroll practices, it is important to determine the optimal approach for managing payroll taxes. One option is to handle regular payroll processing internally while outsourcing payroll tax administration to a third-party provider. Alternatively, some businesses choose to handle all aspects of payroll management in-house. It is recommended that you carefully evaluate your company’s needs and resources before deciding on the most appropriate approach for your organization.
  • Familiarize yourself with the available integrated payroll software solutions. Certain systems offer a comprehensive platform for HR management, time and labor tracking, payroll processing and benefits administration, while others only incorporate specific functionalities.
  • We propose the implementation of a self-service platform that empowers employees to independently carry out specified payroll duties, including the retrieval of pay stubs and Form W-2s.

When outsourcing your payroll, it is important to ensure that your provider is equipped with all necessary resources to effectively handle your first payroll. Additionally, it may be beneficial to leverage online resources, such as the U.S. Department of Labor’s and the IRS’ Publication 15: Employer’s Tax Guide, in order to gain a comprehensive understanding of your payroll obligations.

Top Tax Issues for Businesses

Agencies commonly levy varying taxes on diverse scenarios, driven by the agency’s distinct rules, regulations, and payment modes. It is imperative to acknowledge that ignorance about tax issues can lead to adverse consequences. Therefore, enhancing one’s awareness of tax-related challenges that businesses frequently encounter is crucial.

Listed below are prevalent tax concerns

These can have a significant impact on your overall financial outcome over time:

Engaging in tax evasion and maintaining inadequate record-keeping practices.

One notable tax concern that business owners should be aware of is the inadvertent underpayment of taxes stemming from inadequate or careless record-keeping practices. In the course of conducting business, sales tax must be collected from customers. If a business owner neglects to remit this sales tax to the relevant state authority, it will ultimately lead to insufficient payment of both sales and use taxes, which are obligatory.

A scenario may arise wherein you run a business that operates on a cash basis and require evidence of your personal income. It may come to your attention that you have been underpaying your income taxes, assuming that the payment of estimated quarterly taxes is discretionary; however, this is not the case.

Compliance with the obligation to pay quarterly taxes is imperative, as full and timely remittance of income taxes is required. Failure to do so may result in unfavorable consequences, including substantial penalties and elevated APR interest charges applied to outstanding tax liabilities.

Lastly, neglecting the maintenance of your records and the upkeep of precise duplicates may lead to numerous challenges during tax-filing season, especially if subjected to an IRS audit.

It is important to consider that individuals may occasionally underpay their taxes due to the intricate nature of tax regulations, which can often leave taxpayers feeling perplexed. While retaining the services of a tax professional can be a considerable expense, improperly paying taxes can result in even greater financial implications. Adopting a proactive approach can prove advantageous in the long term.

One common mistake is the misclassification of a business or business-related matters. This error can have significant implications and should be avoided through careful consideration and proper documentation.

As a business proprietor, it is crucial to note that the classification of your business is an important matter that requires careful consideration. Despite the numerous responsibilities that come with running a business, it is essential to pay attention to even the smallest details. For instance, it is advisable to verify whether your state imposes a franchise tax. If so, you must identify the applicable forms and calculate the corresponding tax amount based on your company’s business entity classification. Take every necessary step to ensure compliance with relevant regulations and avoid potential penalties.

One common mistake made by employers is misclassifying their employees. This can lead to legal and financial consequences, as each classification comes with distinct legal requirements and benefits. It is important for employers to properly classify their workers as either employees or independent contractors, exempt or non-exempt from overtime pay, and full-time or part-time employees. Failure to do so can result in lawsuits and fines for the employer, as well as negative consequences for the affected workers. Therefore, it is crucial for employers to seek guidance from legal experts to ensure proper classification of their employees.

As a business owner, one of the critical decisions you’ll make is whether to hire workers as employees or contractors. It’s essential to take ample time to make this decision since misclassifying an employee as an independent contractor or the other way around can have significant tax implications. Therefore, it’s imperative to ensure that you classify your workers correctly to avoid any legal and financial repercussions.

Certain entrepreneurs may hesitate to file their taxes on schedule due to financial constraints that prevent them from paying their outstanding tax liabilities for the preceding fiscal year. However, avoiding tax filing is not a prudent strategy, particularly since it can lead to an array of negative outcomes. These may include exorbitant interest charges and undesired fines, as well as a 25% penalty fee for non-filing if the period of delay exceeds five months beyond the prescribed deadline.

Fortunately, a multitude of tax-related predicaments can be avoided with proper vigilance and effective tax management. Employing the services of a knowledgeable business tax expert can be immensely beneficial in ensuring compliance with regulations within designated timeframes.

Maintaining accurate records throughout each tax year is an effective way to simplify the process of paying your business taxes. It is essential to stay organized and keep track of all receipts associated with the deductions you plan to make. Deductions can provide additional proof that the money spent was genuinely business-related. Furthermore, it is advisable to preserve all tax files or workbooks utilized in calculating taxes. By adopting these practices, you can ensure a smooth tax filing process for your business.

It is recommended to retain tax records for a minimum of four years, with some experts advocating for a retention period of up to 12 years. It is prudent to maintain separate accounts for records pertaining to taxes collected from customers, ensuring ease of access in the event of future requirements.

It is recommended to remain current on the dynamic tax legislations to ensure timely payment of owed taxes. Moreover, it should be noted that not all enterprises underestimate their tax liabilities.

It is not uncommon for businesses to inadvertently overpay their taxes due to their failure to claim all eligible tax deductions and utilize available tax credits. Such errors can have a notable effect on a company’s financial performance, highlighting the importance of avoiding common tax mistakes.

Maintaining a keen awareness of your business taxes throughout the year can transform tax planning into a continuous, beneficial process. Avoid neglecting your tax-related concerns until April by implementing this strategy. For expert guidance in managing your business taxes, it is recommended that you seek the assistance of a professional without delay.

Savers Can Sleep More Soundly at Night

FDIC - Federal Deposit Insurance Corporation acronym.Following the tumultuous events of the Great Financial Crisis, the banking industry in the United States has maintained a level of stability. The combination of historically low borrowing rates and an increased demand for digital services stemming from the COVID-19 pandemic has resulted in a steady influx of funds. However, recent developments have revealed vulnerabilities, with mounting interest rates impacting profitability and prompting customers to engage in classic bank runs at two sizable institutions in March 2023.

In response to the recent collapse of Greensill Capital and Archegos Capital Management, concerns have arisen over the potential for a wider banking crisis. The Federal Deposit Insurance Corporation (FDIC) and other regulatory bodies have taken swift action to mitigate any potential contagion effects. Despite these efforts, some depositors remain apprehensive, recalling the 2008 financial crisis. President Biden has sought to alleviate these concerns by affirming that the banking system is secure, and that deposit accounts are protected in the event of broader upheaval.

The Federal Deposit Insurance Corporation (FDIC) ensures the protection of your funds.

The establishment of the agency dates back to 1933, a period marked by the Great Depression. Its primary objective was to restore public confidence in the banking system, which had been severely impacted by the financial crisis. During this time, approximately 9,000 banks failed, accounting for roughly one-third of all banks in operation at that time.

The network of 4,700 member institutions has proven to be highly effective over the course of several decades. The number of bank failures since 2001 has been limited to just 563, with the majority of these occurring during the economic recession between 2007 and 2009. In the period spanning from 2020 to early 2023, only a small number of banks have ceased operations.

  • Silicon Valley Bank (California)
  • Signature Bank (New York)
  • Ericson State Bank (Nebraska)
  • The First State Bank (West Virginia)
  • First City Bank of Florida (Florida)
  • Almena State Bank (Kansas)

The process of acquiring FDIC insurance involves a bank submitting an application and paying the required premiums. While the primary responsibility of the agency is to provide deposit insurance, it also serves as a supervisor and examiner to ensure that banks and savings associations operate in a sound manner. Additionally, the FDIC is the primary federal regulatory agency for state-chartered banks that are not members of the Federal Reserve System.

In the event of a bank’s insolvency, the Federal Deposit Insurance Corporation (FDIC) assumes the role of receiver and provides affected customers with access to their funds. The FDIC is empowered to take over the failed institution’s assets, settle debts, and seek out a viable replacement to assume its operations. This critical function ensures that depositors are protected and able to access their funds while maintaining stability in the financial system.

Are your financial assets adequately insured?

The process of obtaining coverage for deposited funds does not require any action on the part of depositors as their accounts are automatically protected. Additionally, depositors are relieved from the obligation of filing insurance claims in case of any potential losses.

FDIC insurance provides protection for various types of deposit accounts, including checking, negotiable order of withdrawal (NOW), savings, and money market deposit accounts. In addition, it also covers certificates of deposit (CDs), cashier’s checks, and money orders. However, it’s important to note that FDIC insurance does not extend to non-deposit products such as stocks, bonds, mutual funds, cryptocurrency assets, life insurance policies, or safe deposit boxes. US Treasuries, on the other hand, are backed by the full faith and credit of the US government and therefore entail no discernible risk.

FDIC coverage provides protection up to $250,000 per depositor, per bank, per account ownership category, inclusive of interest earned within the cap amount. It is important to note that careful allocation of funds will enable individuals to maximize their protection. Please be aware that deposits held in distinct branches of the same bank will be consolidated for FDIC coverage purposes.

Diversify your financial portfolio.

It is possible that you are currently in possession of a substantial amount of funds. This may be due to the recent sale of a property, accumulation of savings for a future home purchase, or an inheritance. Alternatively, you may have recently retired and are considering the repositioning of your investments.

The ownership classification serves as a valuable means of establishing multiple account types, each with its own coverage of $250,000. These categories encompass individual and joint accounts, as well as retirement accounts such as IRAs, revocable trust accounts like PODs, and employee benefit plans.

A viable approach for couples seeking to maximize their deposit insurance coverage is to maintain individual accounts with the same financial institution, along with a joint account. This arrangement would entitle them to an aggregate insurance coverage of up to $500,000.

It is important to exercise caution in order to avoid surpassing the FDIC limits and ensure prompt access to your funds in the event of a bank crisis. Recovery of deposits exceeding $250,000 may take several years, as the FDIC liquidates assets of the failed bank and subsequently disburses periodic payments on a fractional basis.

It is advisable to conduct periodic reviews of any cash holdings with your financial advisor. This will ensure that you have adequate protection and security in place.

When Death Do Us Part

Unlike a unilateral will, a prenup is a bilateral agreement crafted between two people. Ideally, a prenup will be drafted in alignment with the corresponding will. However, in situations in which the two documents are in direct contradiction with one another, courts tend to prioritize the prenup over the will as long as the former document was negotiated fairly between the two involved parties.

A prenup can enhance an estate plan. For instance, it can protect the financial interests of children from prior marriages, keep family money safe or ensure that an inheritance is not taken away from the original beneficiary. It may also be appropriate when both spouses are financially independent.

These instruments are becoming increasingly popular for those who enter second marriages, marry later in life, enjoy financial independence or amass substantial assets prior to getting married. Prenups can also provide people with reassurance when a significant age difference is at play between spouses or one party has a massive amount of debt, such as college loans, prior to the marriage.

What prenups can and cannot do

Although a prenup cannot serve as a replacement for a will, a prenup can spell out the minimum standards and waive certain inheritance rights. Spouses can agree to provide for one another as generously as they choose, which can end up being an extra layer of protection that transcends the basic, elective legal entitlements.

A flexible prenup can also include an adjusting formula. For instance, it can tie a share of the inheritance to the actual duration of the marriage, which is known as an escalator clause.

Spousal rights vary among states, but they usually comprise one-half to one-third of the estate. A bereaved spouse may also be able to claim other allowances, potentially including the following:

  • Homestead: A right to remain in the marital home.
  • Personal property: A right to items such as housewares and furniture.

A prenup enables a spouse to decline either some or all of these rights. Frequently, after one spouse dies, the living spouse is allowed to stay rent free in the marital home for the rest of his or her life. Conversely, a prenup may instead specify that the surviving spouse cannot receive a share of the family business. It is all relative.

But there are limits to what a prenup can achieve. It is normally confined to assets and property rather than details such as child custody or support. Prenups must be in writing as well, seeing as how verbal promises do not qualify. Many prenups have been challenged in court as an indication of certain boundaries, such as:

  • Attorney conflict of interest: if sharing the same attorney prompts favoritism.
  • Fraud or a misrepresentation of assets.
  • Unconscionable or inequitable behavior.
  • Coercion or duress, though a threat to call off the marriage does not count.

Clarifying who owns what

Parties who are considering a prenup must disclose the full extent of their assets to one another. At the very least, they must waive disclosure. Describing exactly who owns each asset is helpful in terms of preventing marital conflicts or family discord over the estate. A prenup can expressly state that an asset is separately, not jointly, owned, even in reference to the couple’s home itself.

Normally, assets that were acquired before the marriage are classified as separate, and they can be willed to anyone. However, in community property states, shared marital property is almost always divided equally between spouses, though a prenup would allow couples to bypass the community property division.

Spouses should ensure that they do not inadvertently convert a separate asset to a joint asset. For example, someone might transfer the title of a separately owned house to a spouse or transfer funds into a joint bank account. Even adding a spouse to a checking account for the sake of facilitating a credit card can create joint implications.

Many fear that a prenup might birth feelings of mistrust. Instead, think of it as marriage insurance. No one buys life insurance expecting to die prematurely or auto insurance counting on a car accident to happen soon. Likewise, a prenup offers peace of mind, honest knowledge of each other’s finances and the assurance of fewer estate conflicts over money.

If you think you might benefit from such an arrangement, discuss your individual circumstances with your attorney today.

How To Handle Intangible Assets

Intangible assets have long existed — rights such as copyrights, leases and government subsidies — but other electronic properties are gaining recognition, too. Intangibles run a wide spectrum, from patents and trademarks to less visible concepts like culture and networking or to even more latent infrastructure, such as industry protocols, standards or trusts.

Examples include:

  • Brand names.
  • Internet domains and social media presences.
  • Noncompetition and employment agreements.
  • Computer software.
  • Trade secrets and recipes processes.
  • Customer lists.
  • Order backlogs.
  • Licenses, leases and royalties.
  • Government grants.

The art of valuation

In general, if a company derives much of its value from intangible assets, it typically warrants a higher discount rate and a more conservative approach. One drawback of discount rate analysis is that it is easy to manipulate to arrive at the required valuation. Compounding the dilemma, even slight adjustments have amplified ramifications. Think of it like the Hubble telescope — move it a quarter of an inch, and you’re in a different galaxy.

A decision to increase or decrease the discount rate may come down to idiosyncratic factors. Patents, for example, provide differing levels of protection, depending on their remaining term. A longer remaining life could increase the discounted cash flow. By contrast, that same patent might actually lead you to reduce your estimated cash flow if it were nearing expiration. How many years does it have left to run, what’s the nature of the competitive landscape, and does a firm’s process generate additional patents over time?

Interpreting goodwill

Goodwill is exceptionally difficult to evaluate. Assets like trademarks, patents or customer lists are somewhat easier to pin down, but goodwill is vulnerable to manipulation.

Some companies are organically driven and may not even utilize a line item for goodwill. Others, during an aggressive growth mode, might lump many components of goodwill together. Coca-Cola is often cited as exemplifying how organic goodwill can be worth billions of dollars, vastly more than the rest of a company’s assets. Coca-Cola’s product consists of water, corn syrup and flavoring, but the company has tremendous brand and secret-recipe value.

What is the underlying reason for the existence of a particular item of goodwill? Is it relevant to longer-term business exposures and strategies? Does that goodwill help a firm establish a position or become more involved in trends driving the global economy? At the crux, is it more economical to buy a new business line of activities or to create it in-house?

Current accounting rules call for a rapid write-down for any impairment of that elusive goodwill balance sheet entry. In simple terms, goodwill represents the excess amount an acquirer is willing to pay over the fair value of a unit — the price that would be received in an orderly transaction between market participants. Yet analysts struggle mightily with impairments.

For any acquisition, the purchase price only applies to Day 1. The slope gets slipperier for a nonfinite asset with no expiration, like a trademark. Rather than amortizing and writing down these assets over time, companies must retest them annually. The technology may even become obsolete, in which case that entire investment should theoretically be written down to zero. But management would then have to admit a huge mistake. Few are eager to do so!

It can happen, however. Goodwill sometimes provides justification for the price of an acquisition. For example, Warren Buffett wrote down the value of the Kraft and Oscar Mayer brands inside the Kraft Heinz Company. The company concluded it had overpaid in goodwill when Heinz acquired the Kraft name. Although relatively little had changed, the company considered it imprudent to carry those brand values at overstated valuations.

A new outlook

Older gauges may not adequately capture today’s business themes: the compression of time, technological change, enhanced communications, globalization and network effects. None of these concepts are easy to operationalize in concrete corporate terms. As investments shift in emphasis toward ideas and relationships, investors may want to take into account the role of intangible elements in their portfolio holdings.

For a deeper dive into the role and weight of intangibles among your own investments, ask your financial adviser how these features may be reflected in your asset lineup.


Long-Term Advantages of Home Ownership

There are two big tax benefits you get when owning a home: You can deduct the mortgage interest that you pay each year and you can deduct at least a portion of your property taxes.

Mortgage interest deduction: The most valuable tax benefit is the mortgage interest deduction. This perk allows you to deduct the interest you pay each year on any mortgage that you use to buy, build or improve your primary residence or a second home.

Under federal law, you can deduct the interest you pay on up to $750,000 of combined mortgage debt if you are filing your taxes as an individual or as a married couple filing jointly. Married couples filing separately can deduct up to $375,000 in mortgage debt. (Higher limits apply if you bought your home on or before the end of 2017 — check the IRS for details.)

What’s especially nice is that these deduction rules don’t apply only to the mortgage you used to buy your primary residence. You can also deduct the interest you pay on a second home. Remember, though, that you can only deduct up to a combined $750,000 in interest, no matter how many mortgages you have.

You can deduct the interest — again up to the federal limits spelled out above — on home equity loans and home equity lines of credit, too. But to take the deduction, you must use the funds from these loans to make improvements to your primary or second home. If you use the dollars from these home equity loans to pay down credit card debt or cover your child’s college tuition, you can’t deduct the interest you paid on them.

Property tax deduction: You can also deduct the state and local property taxes that you pay each year on your home, though this deduction might not be as valuable if you live in a state in which property taxes are especially high. That’s because you can only deduct up to $10,000 for state and local taxes each year, a change that went into effect after Congress passed the Tax Cuts and Jobs Act in 2017.

If you live in a state in which property taxes routinely soar past that $10,000 limit, then you won’t be able to deduct all the money you spend each year on these taxes. That $10,000 cap is for a combination of taxes, including state and local income and sales taxes, too, which means that in high-property-tax states, you’re more likely to be paying more than the limit.

Still, you’re at least able to deduct some of the property taxes that you pay, providing a bit of relief when you file your income taxes each year.

This is just a summary; there may be other provisions that affect you. The point is that you have to look at the big picture. To understand in detail how home ownership will affect your bottom line, work with a financial professional.

How To Deal With Employee Taxes

Employers generally must withhold income tax from employees’ wages. To figure out how much tax to withhold, you need to use the employee’s Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. You’ll deposit your withholdings based on your business and the amount you withhold.

File returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to employees. Each employee needs a completed copy. You will use Form W-3, Transmittal of Wage and Tax Statements, to transmit Form W-2 to the Social Security Administration.

Other key responsibilities

You must withhold Social Security and Medicare taxes from employees’ wages and make sure they submit the matching amounts. (Something else to budget for!) To figure out how much tax to withhold, use the employee’s Form W-4 and the methods described in Publication 15, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. Deposit the taxes you withhold. You can find the detailed requirements for depositing on the website.

The current tax rate for Social Security is 6.2% for you and 6.2% for the employee. For Medicare, the current rate is 1.45% for you and 1.45% for the employee, or 2.9% total. Also, an Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. You’ll withhold an Additional Medicare Tax of 0.9% for single filers who make more than $200,000. For married couples filing jointly, the threshold is $250,000, but if filing separately, $125,000. You don’t have to match this additional portion.

The government generally adjusts the earnings subject to Social Security each year. For 2023, the maximum earnings were $160,200.

Employers report and pay taxes under the Federal Unemployment Tax Act. The FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different based on the respective state’s rules.

Mark your calendar with key dates. The IRS has an Employment Tax Due Dates page with information on what you need to do and when you need to do it. The matching share of the Social Security and Medicare payroll taxes are collected as the Federal Insurance Contributions Act taxes and your part is considered a business expense, not a liability. Because it’s a business expense, it can be written off at tax time.

Don’t forget the states

This is just the beginning of an employer’s responsibilities. You are likely subject to state withholding rules as well. It’s essential that employers be on top of the general rules and any annual rate changes. Understanding these tax issues is important, since you bear the responsibility of fulfilling your tax obligations relating to your employees. It’s important to send out payments on time to avoid penalties and late fees. Be sure to work closely with financial professionals to make sure you stay compliant.

Your Business is Being Audited, What’s Next?

You recently learned that your company is being audited. Not to worry! You can overcome it. It is important to first confirm that the audit is legitimate. The IRS emphasizes that audits are always started via mail. It’sCaution Sign - IRS Audit Ahead a scam if you receive a call or email.

Even if you’ve established that the audit is genuine, you haven’t broken any rules. When there are problems with your returns and the returns of other taxpayers whose returns were chosen for an audit, you may occasionally receive a “related examination.” Other times, your selection may be entirely arbitrary and based only on a statistical calculation.

How does an IRS audit work?

In order to review your records, the IRS will conduct your audit via mail or in-person interview. An IRS office (office audit) or your home, place of business, or the office of your accountant (field audit) may host the interview. Keep in mind that we will first contact you via letter. The letter you receive from the IRS will provide all necessary contact details as well as instructions.

The IRS may ask for particular papers. For a company, these can be personnel records like uniform guidelines or dress regulations, requirements for continuing education, W-2 reimbursement statements, and Schedule K-1. The IRS is willing to accept some electronic records generated by tax software in place of or in addition to other kinds of records. You will be informed of what is acceptable by the auditor.

You should be aware that the law requires you to maintain all the documents you used to draft your tax return for at least three years following the filing date. In an audit, the IRS generally states that it will take into account returns submitted during the last three years. However, it may add additional years, but never more than six, if it discovers a significant error.

What rights do you have in your audit?

The government might act in this manner. What you can anticipate is as follows:

IRS staff are treated with professionalism and courtesy.

Privacy and secrecy about tax matters.

having knowledge of the IRS’s requests for information, how they would use them, and the consequences of not providing them.

a self- or authorized representative making a representation.

the ability to challenge disputes in front of the IRS and in court.

What’s the audit’s outcome?

One of three things can happen to end an audit:

The same: You supported every aspect of the review, but nothing changed as a result.

Agreed: You are aware of and accept the adjustments proposed by the IRS.

Disagreed: You acknowledge that the IRS has proposed modifications, but you don’t agree with them.

Working closely with a certified tax professional is your best option from the minute you receive the notice until the issue is finally resolved. The audit will proceed as fast and smoothly as possible if you do this.