Small Business Owners

Home Office Deductions

“Safe harbor” option may be easier, but number crunching is still worth it for many

 

Key Takeaways:

·         The IRS simplified option for home office deductions five years ago and million or taxpayers are taking advantage. Just be careful if you do.

·         This option can significantly reduce paperwork.

·         However, the annual limit is $1,500, and those with higher home office expenses may still be better off slogging through the detailed Form 8829.



According to the IRS, more than 3.4 million taxpayers claimed deductions totaling just over $9.6 billion for business use of a home, commonly referred to as the “home office deduction.”

Introduced in tax year 2013, the optional deduction is designed to reduce the paperwork and recordkeeping burden for small businesses. The optional deduction is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.

Back in 2013, the IRS announced a new, simplified method for claiming home office deductions. According to the IRS, this safe harbor method is an alternative to the existing requirement of calculation, allocation and substantiation of actual expenses, including mortgage payments and depreciation that is done in Form 8829.

Moreover, there is an annual limitation of $1,500 under this new method, thus making this a viable option for those with offices in apartments or smaller homes. Still, there is merit to understanding this option now and evaluating the best course for your business deductions.

Which method is best for me?

Before we look at the new option, let’s run through the existing method. The existing method involves several steps before you can arrive at the total for a home office deduction.

Step 1: Figure the percentage of your home used for business
Divide the total square footage of your home that you use for business by the square footage of your entire house. That percentage is what you’ll need for Step 3 below.

Step 2: Sum up all the expenses
This step involves the most paperwork. You need to list the various expenses such as rent and utilities or—in the case of ownership—mortgage interest, real estate taxes, insurance, repairs, utilities and the big one—depreciation. Lines 36 to 41 on Form 8829 involve going back and forth between the instructions several times to arrive at appropriate depreciation numbers.

Step 3: Apply the percentage from Step 1 to Step 2
You will use the percentage from Step 1 to figure the business part of the expenses for operating your entire home.

Now the new safe harbor option lets you claim a flat deduction of $5 per square foot of the home office, up to 300 square feet. That means if you use this method and have a home office of more than 300 square feet, you will be able to claim a maximum deduction of $1,500.

Some of the benefits of this method are:

  • You drastically reduce paperwork and compliance burden.

  • If you itemize deductions and use the safe harbor method, those expenses related to your home, such as mortgage interest and real estate taxes, can be itemized without allocating them between personal and business expenses.

  • You can choose either method from year to year depending on which one is beneficial in a particular year. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year or vice versa is not a change in your method of accounting and does not require the consent of the IRS.

Some of the limitations of this method are:

  • You are limited to claiming $1,500 per year irrespective of actual expenses incurred on the home office.

  • If you have a loss and cannot claim the entire deduction of $1,500 in a year, you cannot carry forward the home office expense to the following year. This would be possible if you claim actual expenses. Moreover, if you choose the safe harbor method, you cannot set off office expense carried forward from an earlier year.


The definition of what qualifies as a home office has not changed. In short, the home office

·         Must be used as your principal place of business.

·         It must be used “regularly and exclusively” for business

·         It cannot double as a place that you use for business as well as for personal purposes.

If you’re a professional, you may face various scenarios. You might be working from home for the most part of your practice, or you might be working from an office location but sometimes doing work at home. Each scenario is dealt with differently from a home office deduction point of view.

·         Home as your principal place of business: If you work from home for the most part of your business or practice, that is, you perform all important activities at this place and spend relatively more time there, then your home would be your principal place of business. In such a case, you can claim a deduction for the portion of your home that you use regularly and exclusively for your business.

·         Business at office location while doing some work at home: If you have separate office premises for conducting your business, then that would be your principal place of business. You cannot claim a deduction for use of your home during weekends or after office hours.

However, there is an important exception for professionals who also use their home for client meetings.

If you meet or deal with clients or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both of these tests:

  • You physically meet with patients, clients or customers on your premises.

  • Their use of your home is substantial and integral to the conduct of your business.

The part of your home that you use exclusively and regularly to meet clients or customers does not have to be your principal place of business. Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.

You and your tax advisor can make a decision regarding which method to choose, depending on a few pointers:

  • Do a back-of-the-envelope calculation of your home office expenses under both methods. Calculate the deduction under the safe harbor method by multiplying the area of your home office by $5 (limited to $1,500). If that is significantly less than the amount you claimed as a deduction in your most recent tax return, it might make sense to go through the trouble of filling out Form 8829.

  • If you have a loss from your business and would like to carry forward the home office expense, choose the actual expense method. If you have home office expenses from an earlier year that you would like to set off, use the actual expense method.

Conclusion

Claiming home office deductions is widely believed to be a common cause for an IRS audit. At the same time, genuine use of your home for business purposes can hand you a valuable deduction. The new method can significantly reduce paperwork and compliance burden for those with small home offices. But those with bigger spaces may want to choose the actual expense method. Cumbersome as it may seem, it might well be worth the effort.

DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Buy-Sell Agreements

20-plus issues for every closely held business owner to consider


Key Takeaways:

  • Buy-sell agreements come in three basic forms but must be individually tailored to suit the specific needs of your business.

  • Make sure the agreement meets your ongoing needs, including tax, retirement, insurance and funding issues.

  • Without appropriate “exit” plans in place, ownership changes can be worse than Hollywood divorces—bitter, expensive and devastating to all involved.



Almost all owners of closely held businesses put all of their time, effort and money into launching and growing their businesses. Tragically, they put little effort into protecting what they have built from devastation caused by one or more of the owners leaving the business. Without an appropriate “exit” plan in place, changes in business ownership can be worse than a Hollywood divorce—bitter, expensive and devastating to all involved.

Don’t be fooled! Changes in ownership happen every day in all types of businesses for a multitude of reasons: death, retirement, disability, divorce, voluntary and involuntary termination of employment, lawsuits, financial and economic setbacks, bankruptcy, and selling and gifting interests, just to name a few. The disruptions caused by these events usually result in severe financial consequences for everyone involved, including collateral damage to customer, supplier, banking and employee relationships as well as to long-term company goodwill.

Consider a buy-sell agreement from Day One


Perhaps the biggest tragedy is that most, if not all, of the aforementioned problems can be avoided by putting a well-drafted buy-sell agreement in place right from the start. That’s when all the owners are still in the “honeymoon” stage of the business and relations are most amicable. However, it is never too late to put a buy-sell agreement in place, and some honest thought and open communication will strengthen and protect the business and bring peace of mind to everyone involved. Remember, ownership changes are bound to happen, but having a plan in place to deal with those changes will always smooth out the road ahead.

Next steps


Now that you are convinced that a buy-sell plan is critical for the health and well-being of both the business and the individual business owners, where do you go from here? First, consult with an experienced business lawyer who can walk you through the process and help craft a plan that fits the specific needs of both the business and the individual owners. Second, understand that no two agreements are ever the same, although they generally fall into one of three categories:

1.      Cross-Purchase Agreements, which can be ideal for a business with a small number of owners. When a triggering event occurs, the remaining owners directly purchase the departing owner’s interests in the business.

2.      Stock Redemption Agreements, which can be simpler and easier to structure. Generally they can be better-suited for entities with more owners. With these types of agreements the entity purchases the ownership interests of the departing owner. The remaining owners receive an increase in the value of their interests, not in the number of interests they own.

3.      Hybrid Agreements, which are a combination of cross-purchase agreements and redemption agreements. Generally the entity has the obligation to redeem the interest of the departing owner, but the remaining owners have the option of directly purchasing the departing owner’s interests if the entity is unwilling or unable to do so.

In order to determine which type of agreement will best suit your needs, consider the following issues:

  1. How many owners does the business have today and will have in the future?

  2. Is the business family-owned or are third parties involved?

  3. What type of business is involved, and are there specific issues that need to be addressed relating to the entity’s business, such as professional licensing or trade issues?

  4. What is the legal structure of the business: corporation, S corporation, partnership, limited liability company?

  5. What is the age and health status of each business owner?

  6. Is each of the owners insurable?

  7. What percentage of the business does each owner hold?

  8. What is the value of the business, and how is that value determined?

  9. What are the tax implications of each type of agreement?

  10. What are the transfer implications of each type of agreement?

  11. What restrictions will be put on the transfer of interests?

  12. Will the interests be subject to rights of first refusal?

  13. How will the business be valued and the purchase price determined? How often will the business be revalued? Will the interests be valued differently depending on the specific transfer event?

  14. Will there be penalty provisions for violating the terms of the agreements and/or conduct damaging the business?

  15. How will the transfer of interests be funded? Will insurance such as life insurance and disability insurance be mandated, and if so, how will premiums be paid?

  16. How will the transfers be paid, all upfront or over time? If the payments are over time, what are the terms and the arrangements to secure payment?

  17. Is the agreement aligned with other important legal documents such as the entity organizational documents, employment agreements, business agreements and contracts, banking agreements, and the estate planning documents of the individual owners?

  18. Coordinate the agreement with related property that may be owned by each of the business owners. Examples include affiliated businesses, insurance policies, land and personal property, intellectual property, and leases.

  19. How will termination of the business be handled?

  20. How often will the agreement be reviewed? Doing so annually is a good idea.

  21. How will disputes related to the agreement be handled—litigation, mediation or arbitration?

The foregoing is not a complete checklist of every issue that needs to be considered, but it will give you a good platform to begin discussions between you and your legal counsel.

Conclusion


First, properly structured buy-sell agreements are critical to the survival of any closely held business; they are not an option. Second, these agreements must be tailored to the specific needs of the business. One size doesn’t fit all. Finally, businesses and relationships constantly change; consequently, buy-sell agreements must be reviewed and updated regularly. An out-of-date agreement is next to worthless.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.



Using Office Antiques to Boost Net Worth, Cash and Aesthetics

Just make sure you know the rules before claiming tax deductions for fair business use

Key Takeaways:

  • Antiques can generally be expensed and deducted when a small business owner uses them to conduct business and subjects them to wear and tear.

  • Because antiques typically appreciate over time, while non-antique versions of the same asset diminish in value, owning antiques can significantly increase your net worth.

  • All kinds of antiques can be used as business equipment and furniture, including cabinets, bookcases, rugs, conference tables, paperweights, clocks, cars and musical instruments.

  • However, Plain Jane versions of those same items may not be deductible, even if you paid top dollar for them.


What did the small business owner do wrong?

Ned Worth, an avid antique collector, is sorely tempted to bid $5,000 for an 18th-century Chippendale piece and use it as his office desk. But, alas, Ned needs to depreciate and expense his office desk for tax-deduction benefits. So he doesn’t bid. Ned winces when the auctioneer’s hammer comes down. The next day he spends $5,000 on a pedestrian desk from Office Depot-- the same $5,000 that he would have spent at auction.

What did Ned do wrong?

Answer: Ned could have deducted and expensed the antique desk. He’d have gotten the same tax deductions and Section 179 expensing benefits with either desk. But while the Plain Jane desk will decline in value over time, the Chippendale desk will increase. By not buying the Chippendale desk, Ned now has three strikes against him:

  • Strike 1: Doesn’t result in increased tax deductions;

  • Strike 2: Takes a chunk of money out of his pocket; and

  • Strike 3: Makes him sad.

Grab some pine, Ned, yer’ out!

Deductibility of office antiques

Desks are among the many antiques that small business owners can actually use to carry out their businesses. But what you may not be aware of is that these antique desks may be just as deductible as are desks that are not antiques.

Historically, the IRS has taken the position that antique desks and other business furnishings and equipment are not eligible for Section 179 expensing and/or depreciation. Why? Because they don’t have a determinable useful life. The IRS still feels that way, or so they said many years ago. But a number of federal courts have overruled the IRS.

The Liddle and Simon cases

Let’s go back to 1984 when a professional violinist named Brian Liddle walked into a Philadelphia antique shop and purchased for $28,000 a 17th-century bass violin made by the famous Italian craftsman Francesco Ruggieri. Mr. Liddle didn’t simply display his Ruggieri. He played it during performances.

Over time, the violin began to wear down. When the neck of the violin began pulling away from its body, Liddle had the instrument repaired by expert artisans. Alas, the Ruggieri never did recover its “voice.” So, in 1991, Liddle traded it for an 18th-century bass with an appraised value of $65,000.

On his 1987 tax return, Liddle had claimed a $3,170 depreciation deduction on the Ruggieri under the Accelerated Cost Recovery System (ACRS), as per IRC 168. The IRS denied the deduction and Liddle appealed.

While all of this was going on in Philadelphia, an eerily parallel series of events was unfolding up the New Jersey Turnpike in New York City. Richard Simon, a violinist for the New York Philharmonic Orchestra, purchased a pair of 19th-century French Tourte bows with an appraised value of $35,000 and $25,000, respectively.

Like Liddle, Simon actually used his bows to perform. And like Liddle’s Ruggieri, Simon’s Tourte bows began to wear out. Although “played out” musically, the bows appreciated in value on the antique market during the time Simon owned them, just as Liddle’s Ruggieri had appreciated despite losing its musical “voice.”

On his income tax return, Simon claimed ACRS depreciation deductions of $6,300 on one bow and $4,515 on the other. The IRS said “no.” The Liddle case reached the U.S. Court of Appeals for the Third Circuit; the Simon case went to the Second Circuit. The courts treated them as companion cases and issued one ruling covering both.

In both cases, the IRS claimed the instruments weren’t depreciable because they actually increased in value over the time they were used. But previous court cases allowing depreciation deductions on assets that had appreciated in market value forced the IRS to back down from that argument.

So the IRS argued that the instruments were “works of art” that didn’t have a determinable life and thus couldn’t be depreciated. In fact, the IRS’s determinable life theory disallowing depreciation of antiques had been the law of the land until 1981.

Unfortunately for the IRS, things had changed since then. In 1981, Congress enacted a law called the Economic Recovery Tax Act of 1981 (ERTA) allowing for ACRS depreciation of business assets. As both federal courts noted, the purpose of ERTA and ACRS was to stimulate investment by making the rules governing deductions for depreciation of business assets easier for taxpayers to understand and apply. Accordingly, ERTA was meant to de-emphasize the complicated concept of determinable life. Assets would qualify for ACRS depreciation, the courts explained, as long as they were actually used in a trade or business and had suffered wear and tear.

Liddle’s Ruggieri violin and Simon’s Tourte bows met both tests, the courts reasoned. The taxpayers didn’t treat the instruments as mere show pieces or collector’s items; they actually used them as tools to earn their livelihood. And such use caused the instruments to wear down. In this way, the antiques were considered the same as any other business asset that wears down as a result of use.

Bottom line: Liddle’s antique violin and Simon’s bows were business assets subject to ACRS depreciation.

Current law on deducting and expensing antiques

According to the Liddle and Simon cases, antiques can be expensed and deducted under two conditions:

  • The taxpayer physically use them to conduct business; and

  • Such business use subjects the antique to wear and tear.

The risk of IRS opposition…

Caveat: In 1996—just a year after the cases were decided—the IRS issued a formal non-acquiescence, stating that it believed the cases “were wrongly decided” and that “the issue should be pursued in other circuits.” ACRS was meant to accelerate depreciation, not convert assets that weren’t previously depreciable, the notice argues.

...And why you shouldn’t worry about it

This may sound ominous, but there are good reasons not to allow the risk of IRS denial to scare you expensing and deducting antiques you use for business purposes.

First, the Liddle and Simon cases are binding in the states of the circuits where the cases took place, including:

  • The Second Circuit, which includes New York, Vermont and Connecticut; and

  • The Third Circuit, which includes Pennsylvania, New Jersey, Delaware and the Virgin Islands.

Further, very few, if any, cases have been reported in which the IRS has actually challenged Liddle and Simon and gone after a taxpayer for deducting and expensing an antique since the IRS issued its non-acquiescence way back in 1996.

Conclusion

Long story short, you can deduct and expense your antique office furnishings and equipment as long as they actually use them for business purposes and subject them to wear and tear.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Don’t Sell Your Business--Downsize It

Key Takeaways:

  • You don’t have to sell your business all at once.

  • You can keep 80 percent of your income and work one day a week.

  • You will end up with a lot more money at the end of 5 to 10 years.

  • You will be working only with clients and customers that you enjoy and value.

    

Succession planning is a hot topic today. The problem is that the only solution in most cases is either to sell or close your business. But, I want you to consider another option for the business you’ve worked so hard to build: the “wind-down strategy.” With a wind-down strategy, you essentially downsize your business.

How great would it be if you could keep your finger on the pulse of your business while reducing the amount of time you actually work by 80 percent or more! Just one important caveat: The wind-down strategy works best for professional service firms, but elements of this concept can work for all types of businesses.


Focus on the best 20 percent of your customers or clients


The first step is to take is look at your book of business. Who are you best 20 percent of customers or clients? This doesn’t necessarily have to be your largest clients, but many of the larger clients tend to be your best clients, too. After you put your list together, add up how much of your firm’s revenue these top clients account for. If you’re like most firms, it will be at least 80 percent of the total revenue.


If you are servicing 100 clients that produce $750,000 per year in revenue, then your wind-down will probably account for $600,000 in annual revenue. Think about this for a second. Eighty percent or more of your revenue probably comes from a very small group of clients or customers. How great would it be to spend your day taking care of only your best and most profitable clients?

It’s not a dream.

Put together a pro forma statement of what your downsized firm would look like


Now look at your business and see which types of expenses would remain if there were only 20 clients to service instead of 100. I bet you would cut a huge chunk of the costs out.

Overhead would go way down, as would the hassle of trying to take care of 80 so-so clients. You no longer have to put in 60-hour workweeks. Now you can work 10 or 15 hours and make a greater profit with 20 clients than you used to make with 100. That means you can take weeks of vacation at a time. Having a smaller business or practice allows you to do other things while keeping the lion’s share of the income from the former business or practice.

Compare this to selling


Let’s say you find a 10 to 15 hour-workweek attractive. Who wouldn’t? If this became your reality, guess what? You might not be so anxious to unload your business.

Let’s say you could sell your business for $1 million to a buyer that agreed to put 40 percent down in cash and would finance the remaining $600,000.

Don’t you think you would enjoy having something fulfilling to do one day per week? Suppose you could take home $400,000 per year instead of hoping you might get paid the money you’re “owed” from the complete sale of your business?

Let’s think about this for a second. You can earn $400,000 in cash and then hopefully the remaining $600,000 over seven or eight years with a lot of risk involved. Or, you can get $400,000 per year for as long as you want--with almost no risk. How? The wind-down should produce about $400,000 per year in profits. That means the business would take in $800,000, have $400,000 in costs and leave $400,000 for salary and profits. Remember, there are only 15 or 20 clients left to worry about. That means you’ll have little or no administrative costs. You could even find an outsourced solution for your administrative and overhead help

Isn’t getting $400,000 per year for working 10 to 15 hours a week an attractive idea?

Find a new home for the lower 80 percent


Of course, you need to figure out what to do with your B and C list--the remaining 80 percent of customers or clients who have relied on you for advice for years? Some of them may have started with you when you first opened your business. Can you just stop servicing them?

No. You’re not going to neglect them. You are going to find a good new home for them at another well-suited firm. And, you’ll do the right thing by offering to backstop those transferred customers or clients if there’s a problem at their new firm.

Over time, reduce the 20 percent


If you adopt this 20/80 wind-down strategy, you are likely to continue working way past normal retirement age. When you reach 70, you might want to work even less than the 10 to 15 hours per week that you’re working now.

Not a problem. Just follow the same winnowing down process. From your Top 20 percent list, be willing to let go of a few more clients—perhaps they’re on you’re A-List, but not the A+ List.  Find a good new home for them. Eventually you’ll get to the point where you have just five very, very good customers or clients. You love them and they love you.

The key here is to understand how your overhead works. Instead of having full-time staff, your business will be moving to part-time staff. You might even be able to find another similar business that’s willing to let you operate under their roof if you help them pay for their overhead.

If you do this, not only have you reduced the amount of time you must spend working,  but you’ve eliminated staffing and other fixed overhead.

Conclusion

Let’s say you only use this wind-down strategy for 10 years, starting in your late 50s or age 60. Instead of selling your business and hopefully getting $1 million over seven years, you’re going to earn $4 million over 10 years while working part-time.

What’s not to like? If you have any questions, please feel free to email us or give us a call at 303-440-2906.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is a Cash Balance Plan Right for You? Part 2

Real world examples and risk factors to consider
Robert J. Pyle, CFP®, CFA

As we discussed in Part 1, if you’re a high-earning business owner or professional Cash Balance Plans (CBPs) are an excellent tool for supercharging the value of your nest egg in the last stretch of your career. They can possibly enable you to retire even sooner than you thought you could. Here are some examples of how CBPs can work for you:


Real world examples

I just completed a proposal for a dentist who earned a $224,000 salary. At that income level, he could have maxed out his annual SEP contribution at $56,000…..or he could sock away $143,000 a year via a CBP. Even better, the CBP enabled him to make an additional retirement contributions for her staff.  When times are flush, most high-earning entrepreneurs and professionals don’t have to think twice about making their CBP contributions. But, what about when the financial markets and economy are in the tank?

Back in 2008, at the start of the global financial crisis, a couple came to me because they wanted to save the maximum before they planned to stop working. The wife was a corporate executive and the husband was a self-employed entrepreneur.  Both were in their early 60s and wanted to retire in half a dozen years. The corporate executive was already saving the maximum in her 401(k) and continued to do so from 2008 ($20,500) through 2014 ($23,500). The self-employed entrepreneur, age 61 at the time, was making about $200,000 a year and wanted to set up a plan to shelter his self-employed income.

We explored a defined benefit plan (DB) because that allowed the couple to save significantly more than they could have saved via a 401(k) alone. In fact, the single 401(k) could be paired with the defined benefit plan for extra deferral, if desired. The couple was a good fit for a defined benefit plan since they were in their early 60s, and the entrepreneur was self-employed and had no employees. We completed the paperwork and set a target contribution rate of $100,000 per year for the defined benefit plan and they were off and saving. 

Despite the terrible stock market at the start of their savings initiative, they managed to contribute $700,000 to the DB by the time they retired in 2014--all of which was tax deductible. This strategy ended up saving them about $140,000 in taxes. They also contributed to a Roth 401(k) in the early years of their savings commitment, when the market was low and that money grew tax-free.

With a DBP, you typically want to have a conservative portfolio with a target rate of return pegged at roughly 3 percent to 5 percent. You want stable returns so you will have predictable contribution amounts each year. The portfolio we constructed was roughly 75 percent bond funds and 25 percent stock funds. That allocation helped the couple preserve capital during the market slump of 2008-2009 because we dollar cost averaged the funding for the plan over its duration.

With this strategy, you don’t want to exceed a 5-percent return by too much because your contribution decreases and thus, your tax deduction decreases. On the other hand, if the portfolio generates a really poor return, then you, the employer have to make up a larger contribution. If you have a substandard return, it typically corresponds to a weak economy and you have to make up a larger contribution when your income is off. So, you want to set the return target at a reasonable, conservative level.

Solution

We rolled over the DBP into an IRA and the Roth 401(k) to a Roth IRA. For the corporate executive, we rolled over her 401(k) to an IRA.  They were now set for retirement and can continue to enjoy life without the worry as to how to create their retirement paycheck. 

Are there any income and age limits for contributing to a CBP?

Income limits are $280,000 a year in W-2 income. Depending on your age, you could potentially contribute over 90 percent of that income into a CBP.

Source, The Retirement Advantage  2019 | Click here for complete table


For successful professionals, a good time to set up a CBP is during your prime earning years, typically between age 50 and 60. You certainly don’t want to wait until age 70 to start a CBP because you want to be able to make large tax-advantage contribution for at least three to five years. You can’t start a CBP and then shut it down after only one year.

We did a proposal for an orthodontist recently who liked the idea of a CBP for himself, but he also wanted to reward several long time employees. Unfortunately, the ratios weren’t as good as we would have liked since many of the employees were even older than the owner, so they would have required a much larger contribution. The ratio in this case was 80 percent of the contribution to the owner and 20 percent to the employees. We like to see the ratio in the 85- to 90-percent range, however.

Age gap matters

It’s also helpful to have a significant age gap between you and your employees. Many folks don’t realize this. CBPs are “age weighted,” so it helps to have younger employees. Because those employees are older, they’re much closer to retirement, and would need to receive a larger contribution from the plan.

How profitable does your business/practice need to be for a CBP to make sense?

You have to pay yourself a reasonable W-2 salary and you have to have money on top of that for the CBP. A good rule of thumb is to be making at least $150,000 a year consistently from your business or practice. So, if you designed a plan to save $150,000 in the CBP, you’ll need $300,000 in salary plus distributions. What typically happens is the doctor/dentist pays themselves $150,000 a year in salary and then takes $150,000 in distributions from their corporation. Well, that $150,000 now has to go into the CBP, so you have to have a decent amount of disposable income.

Can employees adjust their contributions?
 
A CBP is usually paired with a 401(k) plan, so employees will have their normal 401(k) limits. In a CBP, the employer has to do a CBP “pay credit” as well as a profit-sharing contribution. The pay credit is usually about 3 percent and the profit-sharing contribution is typically in the range of 5-percent to 10- percent of an employee’s pay.


Setting up and administrating a CBP

You want a plan administrator who can navigate all the paperwork and coordinate with your CPA. There are many financial advisors out there who have expertise in setting up CBPs. You don’t have to work with someone locally; just make sure they are highly experienced and reputable.

CBPs can be more costly to employers than 401(k) plans because an actuary must certify each year that the plan is properly funded. Typical costs include $2,000 to $5,000 in setup fees, although setup costs can sometimes be waived. You’re also looking at $2,000 to $10,000 in annual administration fees, and investment-management fees ranging from 0.25 percent to 1 percent of assets.


Risks

CBPs can be tremendously beneficial for retirement saving. Just make sure you and your advisors are aware of the risk of such plans. Remember that you (the owner/employer) bear the actuarial risk for the CBP. Another risk is if the experts of your plan--the actuaries, record-keepers or investment managers—fail to live up to the plan’s expectations. You, the employer ultimately bear responsibility for providing the promised benefit to employees if a key piece of the plan doesn't work. Like a DBP, an underfunded CBP plan requires steady and consistent payments by you, the employer, regardless of economic times or your financial health. The required contributions of a DBP and CBP can strain the weakened financial health of the sponsoring organization. This is a key item to consider when establishing a CBP and what level of funding can be sustained on a go-forward basis. 

Conclusion

If you’re behind in your retirement savings, CBPs are an excellent tool for supercharging the value of your nest egg and can possibly allow you to retire even sooner than you thought. They take a little more set-up and discipline to execute, but once those supercharged retirement account statements start rolling in, I rarely find a successful owner or professional who doesn’t think the extra effort was worth it.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 


Is a Cash Balance Plan Right for You? Part 1

Key questions to consider before pulling the trigger

By Robert J. Pyle, CFP®, CFA


You’ve worked incredibly hard to build your business, medical practice or law practice. But, despite enjoying a robust income and the material trappings of success, many business owners and professional are surprised to learn that their retirement savings are way behind where they need to be if they want to continue living the lifestyle to which they’ve become accustomed.

In response, many self-employed high earners are increasingly turning to Cash Balance Plans (CBPs) in the latter stages of their careers to dramatically supplement their 401(k)s—and their staffs’ 401(k)s as well. Think of a CBP as a supercharged (and tax advantaged) retirement catchup program. For a 55-year-old, the CBP contribution limit is around $265,000, while for a 65-year-old, the CBP limit is $333,000—more than five times the ($62,000) limit they could contribute to a 401(k) this year.

Boomers who are sole proprietors or partners in medical, legal and other professional groups account for much of the growth in CBPs. For many older business owners, the tax advantages that come with plowing six-figure annual contributions into the CBPs far outweigh the costs.


As I wrote in my earlier article: CBPs: Offering a Break to Successful Doctors, Dentists and Small Business Owners, CBPs can offer tremendous benefits for business owners and professionals who own their own practices….especially if they’re in the latter stages of their careers. There are just some important caveats to consider before taking this aggressive retirement catchup plunge.


CBPs benefit your employees as well


Business owners should expect to make profit sharing contributions for rank-and-file employees amounting to roughly 5 percent to 8 percent of pay in a CBP. Compare that to the 3 percent contribution that's typical in a 401(k) plan. Participant accounts also receive an annual "interest credit," which may be a fixed rate, such as 3-5 percent, or a variable rate, such as the 30-year Treasury rate. At retirement, participants can take an annuity based on their account balance. Many plans also offer a lump sum that can be rolled into an IRA or another employer's plan.

Common retirement planning mistakes among successful doctors


Three things are pretty common:

1) They’re not saving enough for retirement.

2) They’re overconfident. Because of their wealth and intellect, doctors get invited to participate in many “special investment opportunities.” They tend to investment in private placements, real estate and other complex, high-risk opportunities without doing their homework.
3) They feel pressure to live the successful doctor’s lifestyle. After years of schooling and residency, they often feel pressure to spend lavishly on high-end cars, homes, private schools, country clubs and vacations to keep up with other doctors. There’s also pressure to keep a spouse happy who has patiently waited and sometimes supported them, for years and years of medical school, residency and further training before the high income years began.

Common retirement planning mistakes among successful dentists


Dentists are similar to doctors when it comes to their money (see above), although dentists tend to be a bit more conservative in their investments. They’re not as likely to invest in private placements and real estate ventures for instance. Like doctors, dentists are often unaware of how nicely CBPs can set them up in their post-practicing years. They’re often not aware that they have retirement savings options beyond their 401(k)…$19,000 ($25,000 if age 50 and over). For instance, many dentists don’t realize that with a CBP they could potentially contribute $200,000 or more. It’s very important for high earning business owners and medical professionals to coordinate with their CPA who really understands how CBPs work and can sign off on them.

Common objections to setting up a CBP

First, the high earning professional or business owner must commit to saving a large chunk of their earnings for three to five years—that means having the discipline not to spend all of their disposable income on other things such as expensive toys, memberships, vacations and other luxuries.

Another barrier they face is a reluctance to switch from the old way of doing things to the new way. Just like many struggle to adapt to a new billing system or new technology for their businesses or practices, the same goes for their retirement savings. Because they’re essentially playing retirement catchup, they’re committing to stashing away a significant portion of their salary for their golden years. It can “pinch” a little at first. By contrast, a 401(k) or Simple IRA  contribution is a paycheck “deduction” that they barely notice.

A CBP certainly has huge benefits, but it requires a different mindset about savings and it requires more administration and discipline, etc. However, if you have a good, trustworthy office administrator or if you have a 401(k) plan that’s integrated with your payroll, then that can make things much easier. It’s very important to have a system that integrates payroll, 401(k) and CBP. That can simplify things tremendously. For example, 401(k) contributions can be taken directly out of payroll and CBP contributions can be taken directly out of the owner/employer’s bank account.

Before jumping headfirst into the world of CBPs, I recommend that high earning business owners and professional rolling it out in stages over time.

1. Start with a SIMPLE IRA.
2. Then move to 401(k) plan that you can max out--and make employee contributions.

3. Add a profit sharing component for employees which typically is in the 2% range and this will usually allow you to max out at $56,000 (under 50) or $62,000 (age 50 and over)
4.  Once comfortable with the mechanics of a 401(k) and profit sharing, then introduce a CBP.


Conclusion

If you’re behind in your retirement savings, CBPs are an excellent tool for supercharging the value of your nest egg and can possibly allow you to retire even sooner than you thought. CBPs take a little more set-up and discipline to execute, but once those supercharged retirement account statements start rolling in, I rarely find a successful owner or professional who doesn’t think the extra effort was worth it.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 


Smarter Business Exit Strategies

Too many business succession plans don’t work out as planned, but smart owners can get back on track and stay that way for the long-term.


Key Takeaways:

  • Most business owners create unnecessary risks for their families, employees and clients by failing to fund business succession plans.

  • Every business owner should establish a clear vision for his or her transition and look for ways to improve after-tax returns.

  • Business owners can reduce the costs of succession plans by 50 percent by using pre-tax dollars to pay for insurance.

 

Many successful entrepreneurs, especially Boomers, may be thinking that now is the right time to exit their businesses. Unfortunately, business transitions don’t usually go as smoothly as expected. The failure rate of succession plans is now at eyebrow-raising levels. But it doesn’t have to be this way.

What motivates most business owners to think about a business succession plan?

Scary stories about failed companies motivate business owners to consider implementing a business succession plan. Despite the obvious need, few plans are actually designed, drafted and funded properly. High professional fees and insurance costs often take the blame when business owners are asked why they did not implement a succession plan.

Why do so many succession plans miss the mark?

Most business succession plans fail. According to Harvard Business Review, only 30 percent of the businesses make it to Generation Two and a mere 3 percent survive to generate profits in Generation Three. Estate planning experts such as Perry Cochell, Rodney Zeeb and George Hester came up with similarly disappointing numbers. Given this dismal success record for family business transitions, it is no wonder that 65 percent of family wealth is lost by the second generation and 90 percent by the third generation. By the third generation, more than 90 percent of estate value is lost despite the efforts of well-meaning advisors. It does NOT have to be this way.

What is the biggest problem business owners face when they try to implement succession plans?

Unless a business succession plan addresses tax issues, company owners can lose much of their wealth to taxes on income, capital gains, IRD, gifts, estates and other taxes. In most successful businesses, the company will generate taxable cash flow that exceeds what is needed to fund the owner’s lifestyle. This extra cash flow is usually taxed at the highest top marginal state and federal income tax rates. When the after-tax proceeds are invested, the growth is subject to the highest capital gains rates. Ultimately, when the remaining assets are passed to family members or successor managers, there could be a 40 percent gift or estate tax applied.

How can owners and their advisors solve this tax problem?

Every business owner should establish a clear vision for his or her transition and look for ways to improve after-tax returns. Tax-efficient planning strategies are needed to guide decisions about daily operations and business exit strategies. An astute advisor can help you find ways to fund business succession agreements in ways that generate current income tax deductions while allowing the business to generate tax-free income for the business owner and/or successors.

What are some other ways to reduce taxes?

There are many tax-advantaged business succession techniques that give business owners a competitive edge. Qualified plans provide tax deductions in the current years, but they are not typically as tax-efficient for funding a buy-sell. More advanced planning strategies involving Section 79 and Section 162 plans can provide tax-free payments for the retiring executive or death benefits for family members, but limit the tax deductions when the plans are funded. There are very few options when owners seek up-front tax deductions, tax-free growth and tax-free payments to themselves and/or their heirs.

Bottom line

Advanced planning strategies allow business owners to fund business continuity plans more cost-effectively. Business owners should work with advisors who can design a plan that can convert extra taxable income into tax-free cash flow for retirement and/or the tax-free purchase of equity from the business owner’s estate.

Once the plan has been designed, experienced attorneys will draft legal documents to facilitate the tax-efficient plan funding. This integration of design, drafting and funding helps ensure effective implementation of the strategy as well as proper realization of benefits under a variety of scenarios. An experienced advisor should be able to help you quantify how planning costs are just a small fraction of the expected benefits. More important, these financial benefits bring peace of mind to the business owner, the owner’s family and to key executives. Great clarity and confidence results from having a business continuity plan that has been designed properly, drafted effectively and funded tax-efficiently.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Six Really Dumb Things That Business Owners Do at Year-End

Avoiding calendar-related cardinal sins

Key Takeaways:

·         Spending money just to get a tax write-off is a really dumb thing to do.

·         Rushing to finish a project just because it’s year-end will often end up badly.

·         When you buy stuff you don’t need, it often ends up in the trash.

·         Paying bonuses just because you always pay them every year sets a bad precedent.

 

Around this time of year you start seeing lots of advice about what you should do for year-end planning. I’m going to take a slightly different tack. I’m going to talk about some of the really dumb things I see business owners do at year-end to reduce taxes.

Let’s face it; none of us likes to pay taxes. At the same time, a tax deduction is just a tax deduction. If you’re spending money unwisely, you’re taking at least 60 cents out of every dollar you spend and just flushing it down the toilet. This isn’t something you want to do, is it?

1. Buy capital equipment you don’t need

Just because you are having a good year doesn’t mean you should go out and buy equipment to get a tax write-off. Before you buy any type of capital equipment, always do an analysis to see if there is a true payoff for the expense.

When you and your advisor are contemplating what to do about some extra cash that’s burning a hole in your company’s pocket, make sure you figure out how to assess the ROI on the intended purchase. If the purchase doesn’t cover its cost of capital, then you shouldn’t spend the money, period.

Make sure you acknowledge the tendency we all have to overspend in December — with the inevitable cash crunch in February. You and your advisor will be glad you did.

2. Pay bonuses because you had a good year

When business owners do this, I call it the “pennies from heaven” bonus. Employees don’t know why they’ve received the bonus. They surely will appreciate it, but you haven’t communicated with your employees about why they received the extra money.

The real problem with a ”pennies from heaven“ bonus system occurs after you have done this two or three years in a row and then have a terrible year. Employees become resentful if they feel their employer is skipping the annual bonus to which they feel entitled. Even worse, when ”pennies from heaven“ bonuses are the norm, many employees have already spent the bonus money (at least in their minds) before it ever shows up in their paychecks. After all, it’s been paid in the past and now it’s perceived as an expectation, not just a reward.

I love variable compensation. I just want my employees and yours to understand why they’ve earned it. If you want to pay year-end bonuses, make sure the bonuses are based on some company metrics. If you do this, make sure your employees know throughout the year how they are tracking toward earning a bonus. If there isn’t one in the future, communicate early and clearly why a bonus isn’t going to be paid.

3. Rushing to buy a business before year-end

There is nothing magical about December 31. If you’re really not ready to close the transaction, don’t do it. The world won’t come to an end.

Rushing into any transaction, let alone buying a business, is always a bad idea. It’s really hard to do an acquisition that’s accretive under the best of circumstances. The only way to make a business purchase that actually works is to be mindful and carefully follow a purchase process that you’ve designed before you start.

The process should not be based on anything happening at any special time. That is, unless there is an unusual reason that the seller has to sell before the end of the year.

I’ve never seen an acquisition go quickly. Stay the course and follow an acquisition process that you know has a chance of making a smart purchase that you will be proud of.

4. Rush because it’s year-end

For that matter, don’t rush to finish up a project just because the end of the year is coming. I made that mistake when I launched our new website. For some reason I decided that I had to rush to get our site up and running before the end of the year.

One of the things I missed was making sure that all of the pages from our old site were linked to the proper pages on our new site. Our old site was never mapped to our new site. Because we didn’t map our site properly, Google penalized our site for almost a year. This happened just because I rushed a project for no really good reason.

5. Increase your inventory

If you are a cash-based taxpayer, you can deduct inventory as you buy it. The problem with loading up on inventory is that you then have to sell it. If you have too much inventory, you can be sure that some of it is going to go bad.

Don’t fall prey to end-of-the-year deals. They’re always just so your suppliers can make their numbers. If you must load up on inventory, make sure you have a way to return stuff you can’t use. Otherwise, you’re just going to rent a dumpster for those great deals you couldn’t resist.

6. A tax write-off still means you’re spending money

The days of tax credits for buying stuff are long gone. Don’t buy stuff just because you have money burning a hole in your pocket. You shouldn’t either. A tax write-off is only part of the money you spend. It really does come out of your pocket.

A tax deduction is just that, a deduction. Spending money just to get a deduction often turns out really poorly. We either end up junking stuff, throwing inventory away or resenting the feeling that we have to pay a bonus.

Buying capital equipment, setting a precedent for compensation or increasing your inventory because it’s a good deal too often means you just spent money that you’re going to need in the next year. Even worse, being forced into a major activity like buying a business can be worse than painful. It might just end up being a business disaster.

Conclusion

Be smart and think about your year-end purchases just like you would for one in April. If you need it and can afford the expenditure, go for it. Otherwise wait. You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Maximizing Small-Business Tax Deductions

Maximizing small-business tax deductions

How small-business owners can take advantage of Section 199A

The Tax Cuts and Jobs Act (TCJA) passed in December 2017 offers a wealth of opportunities to small-business owners. Among the most notable provisions is Section 199A, which provides for qualified business income (QBI) deductions. These deductions are available to taxpayers who are not corporations, including S corporations, partnerships, sole proprietorships and rental properties.

While Section 199A provides a huge tax break for small-business owners, determining who is qualified can be complicated. In addition to eligibility requirements, there are income thresholds after which deductions are phased out. Here’s a look at who is eligible to use Section 199A, as well as strategies business owners above phase-out thresholds can use to recapture QBI deductions. 

Are you eligible?           

In general, small-business owners may qualify for QBI deductions if they meet one of the following criteria:

  •  No matter the type of business, if a business owner’s taxable income falls below $157,500 for single filers or $315,000 for joint filers, that business owner is eligible for a QBI deduction. That deduction is equal to the smaller of 20% of their qualified business income or 20% or their taxable income.

  • Businesses that offer specified service—such as lawyers, accountants, athletes, financial services, consultants, doctors, performing artists, and others with jobs based on reputation or skill—may have deductions phased out if they make too much money. If your income is above $207,500 for single filers or $415,000 for joint filers, you can no longer claim the QBI deduction.

  • If you own a business that is not a service business or a specialized trade, the QBI deduction is partially phased out if your taxable income is above $157,500 for single filers or $315,000 for joint filers. The deduction is limited to the lesser of either 20% of qualified business income or the greater of the following: 50% of W-2 wages paid, or the sum of 25% of W-2 wages paid by the business generating the income plus 2.5% times the cost of depreciable assets

The retirement solution

If your income is above the phase-out limits, you can preserve your full deduction by making smart use of retirement plans. Here’s a look at a few examples of ways to strategically employ retirement plans to reduce your income and recapture a QBI deduction:

Example 1: A couple, age 50, with a specified service business

A couple, each 50 years old, has a specific service business in the form of an S corp that pays W-2 wages of $146,000 and pass-through income of $254,000, for a total income of $400,000. The couple claims the standard deduction of $24,000, making their adjusted gross income $376,000. Because of their high earnings, the couple’s QBI deduction is only $19,812 due to QBI phase-outs. Their total income is  $356,188.

The couple can capture their full QBI deduction by setting up and funding a 401(k) plan. They can set up an individual 401(k) plan, deferring $24,500 as an employee contribution and contributing 25% of salary, or $36,500, as a profit sharing contribution. The deferral and profit sharing max out their individual 401(k) plan with a total contribution of $61,000. In this way, their W-2 wages are reduced to $121,500, and their pass-through income is reduced to $217,500 after the profit sharing contribution. Their total income after the standard deduction is $315,000.

As a result, the couple can claim their full QBI deduction of $43,500 (20% of 217,500), and their income is now $271,500. With a $61,000 contribution to a 401(k), the couple was able to effectively reduce their income by $84,688. In other words, this couple was able to get 1.39 times the income reduction for every dollar they contributed to a retirement plan. 

Example 2: A couple, age 55, with a higher-income specified service business,

Business owners who earn higher income may need to deploy additional retirement plans to capture their QBI deduction. Consider an S corp that pays W-2 wages of $146,000 to the couple, and pass-through income of $317,500 for a total income of $463,500. They claim the standard deduction of $24,000 and their adjusted gross income becomes $439,500. The couple does not receive a QBI deduction because their high income results in a complete phase-out. Their total income therefore remains $439,500.

However, this couple can still take advantage of a QBI deduction by setting up an individual 401(k) plan and deferring $24,500 as an employee contribution. They also can add a defined benefit (DB) plan or a cash balance (CB) plan and contribute even more to a retirement plan. Suppose they set up a DB or a CB plan and the actuaries calculated they could contribute $100,000 to the plan for a total combined contribution of $124,500. In this case, their W-2 wages are reduced to $121,500 and their pass thru income is $217,500.

The couple’s total income after the standard deduction is $315,000. Their QBI deduction is $43,500 (20% of $217,500) and their income is now $271,500. With $124,500 in contributions to their individual 401(k) plan and DB or CB plan the couple received a $168,000 income reduction. This couple was able to get 1.35 times of income reduction for every dollar they contributed to a retirement plan.  

This material is for educational purposes and is not intended to provide tax advice. Talk to your tax professional to find out how QBI deductions may apply to your financial situation.

To learn more about how to maximize your QBI deduction, please email us at rpyle@diversifiedassetmanagement.com or call (303) 440-2906.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

New Ways To Influence The Next Generation

The Tax Cuts And Jobs Act of 2018 (TCJA) gives you more good reasons to help you children, grandchildren, great nieces and nephews. Any amount you give to a 529 account that's used to pay for qualified expenses for college as well as private or religious schooling before college is deductible. With tax reform eliminating all or a large chunk of state income-tax deductions for many individuals in 2018, giving to a 529 lightens your state income-tax load while perhaps changing a life of a family member or friend and influencing their values.

Are You “Rich” Or Not? New Survey Hits The High Points

Do you consider yourself rich? If you own a couple of mansions, a fleet of luxury cars, and financial accounts reaching high into the millions, it may be easy to answer that question. But other well-to-do people might struggle with the issue of whether they are "rich" or not. 

New Deduction Rules For Business Owners

If you are a small business owner, Washington, D.C. has changed tax rules to lower your burden but the new rules are fairly complex. Many small businesses, and some that aren't so small, are "pass-through companies," tax-jargon that means the entity's net income isn't taxed at the corporate level but flows straight to their owners' personal returns. That income is taxed at personal income tax rates, as opposed to corporate rates that are generally lower.

Five Retirement Questions To Answer

How much money do you need to save to live comfortably in retirement? Some experts base estimates on multiple of your current salary or income, while others focus on a flat amount such as a million dollars. Either way, the task can be daunting.

A Guide To The New Rules On Tax Deductions In 2018

Uncle Sam giveth, and Uncle Sam taketh away. New federal tax code, which went into effect in 2018 and affects the return you'll file in spring 2019, lowers taxes by expanding some deductions, but restricts or outright eliminates others.

Giving More To Loved Ones – Tax-Free

While it may be better to give than to receive, as the adage contends, both givers and receivers should be happy with the new tax law. The annual amount you can give someone tax-free has been raised to $15,000, from $14,000 in 2017.

To read the newsletter click on the link below:

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

10 Things That Will Soon Disappear Forever

Here is a nice article provided by David Muhlbaum and John Miley of Kiplinger:

 

By David Muhlbaum and John Miley / March 2017

 

Ten years ago, thousands of Blockbuster Video stores occupied buildings like this all over the country, renting DVDs and selling popcorn. Today, all but a handful are closed. The company’s shares once traded for nearly $30. Now Blockbuster is gone, scooped up (and then erased) by the DISH Network in a bankruptcy auction.

Obsolescence isn’t always so quick or so complete, but emerging technologies and changing practices are sounding the death knell for many familiar items. Here are 10 for which you should say your goodbyes ... and, as a bonus, seven that have defied the odds and refuse to die.

 

Things That Will Soon Disappear Forever

 

Keys

 

Keys, at least in the sense of a piece of brass cut to a specific shape, are going away.

At the office, most of us already use a card with a chip embedded to get access. But for getting into your house (and your car), the technology that will kill off the key is your smart phone. Connecting either via Bluetooth or the Internet, your mobile device will be programmed to lock and unlock doors at home, at the office and elsewhere. The secure software can be used on any mobile device. So if your phone runs out of juice, you’ll be able to borrow someone else’s device and log in with a fingerprint or facial scan. Phone stolen? Simply log in and change the digital keys. Kwikset, a brand of Spectrum Brands (SPB), offers the Kevo, and lock veterans Yale have partnered with Nest, now owned by Alphabet (GOOGL), to create the Yale Linus.

For the car, a variety of "connected car" services such as Audi Connect and GM's OnStar already let you unlock and lock the car remotely and even start it with a phone app — but you still need your keyfob to drive off. Next up: Allowing you to drive without even the keyfob, just your phone. Volvo is testing this capability in a pilot program in Los Angeles.

 

Blackouts

 

Frustrating power outages that leave people with fridges full of ruined food are on their way out as our electrical grid becomes increasingly intelligent – and resilient.

Two factors are at work: slow, incremental “smart grid” improvements to the system that delivers electricity, and the rapidly expanding use of solar energy in homes and business.

The breakthrough product here is the home battery. Developed by electric-car maker Tesla (TSLA) and others, by 2020, batteries will be cheap enough to store surplus solar power during the day and discharge it overnight, helping to better balance electricity supply and demand – and run a home for up to days during a blackout. LED lighting and more efficient appliances are helping, too, by reducing load on the system, whether the grid is or a backup system is running.

Utilities are also deploying huge banks of batteries, from suppliers like AES (AES), in storm-prone areas to make sure the power stays on for everyone.

 

Fast-Food Workers

 

Burger-flippers have targets on their backs as fast-food executives are eager to replace them with machines, particularly as minimum wages in a variety of states are set to rise to $15.

Diners will notice reduced staffing up front as outlets such as Panera (PNRA) turn to touch-screen kiosks for order placing. Behind the scenes in the kitchen, industry giants like Middleby Corp. (MIDD) and boutique startups like San Francisco's Momentum Machines are all hard at work for devices that will take on tasks like loading and unloading dishwashers, flipping burgers, and cooking french fries.

Humans won't be totally out of the picture — the machines will require supervision and maintenance, and dissatisfied customers will need appeasing. But jobs will plummet.

 

The Clutch Pedal

 

Every year it seems that an additional car model loses the manual transmission option. Even the Ford F-150 pickup truck can’t be purchased with a stick anymore.

The decline of the manual transmission (in the U.S.) has been decades in the making, but two factors are, ahem, accelerating its demise:

•Number one: Automatics are getting more efficient, with up to 10 gear ratios, allowing engines to run at the lowest, most economical speeds. Many Mazdas and some BMWs, among others, now score better fuel mileage with an automatic than with a stick.

 

•Number two: Among high-performance cars, such as Porsches, “automated” manual shifts are taking hold. They use electronics to control the clutch instead of your left foot. You can select the gears with paddles, or just let the computer take care of that, too. The result: The computer shifts faster than even the most talented clutch-and-stick driver, improving the cars' acceleration numbers. Plus, the costs on these are coming down, and they can now be found in less-expensive sporty cars, such as the Golf GTI.

Even the biggest of highway trucks are abandoning the clutch and stick for automatics, for fuel-efficiency gains and to attract drivers who won’t need to learn how to grind their way through 18-plus gears.

Some price-leader economy models, such as the Nissan Versa and Ford Fiesta, will list manuals on their cheapest configurations (though few will actually sell), and a segment of enthusiast cars, such as the Ford Mustang and Mazda Miata MX-5, will continue to offer the traditional three-pedal arrangement for some years to come. “It will be reserved for the ‘driver’s vehicle,’” says Ivan Drury, an analyst for Edmunds.com. But finding one will be a challenge — those holdout drivers had better be prepared to special-order their clutch cars.

 

College Textbooks

 

By the end of this decade, digital formats for tablets and e-readers will displace physical books for assigned reading on college campuses, The Kiplinger Letter is forecasting. K–12 schools won’t be far behind, though they’ll mostly stick with larger computers as their platform of choice.

Digital texts figure to yield more bang for the buck than today’s textbooks. Interactive software will test younger pupils’ mastery of basic skills such as arithmetic and create customized lesson plans based on their responses. Older students will be able to take digital notes and even simulate chemistry experiments when bricks-and-mortar labs aren’t handy.

This is a mixed bag for publishers. They’ll sell more digital licenses of semester- or yearlong usage of electronic textbooks as their customers can’t turn to the used-book marketplace anymore. On the other hand, schools are seeking free online, open-source databases of information and collaborating with other institutions and districts to develop their own content on digital models, cutting out traditional educational publishers such as Pearson (PSO), McGraw-Hill and Scholastic (SCHL).

 

Dial-Up Internet

 

If you want to hear the once-familiar beeps and whirs of a computer going online through a modem, you will soon need to do that either in a museum or in some very, very remote location.

According to a study from the Pew Foundation, only 3% of U.S. households went online via a dial-up connection in 2013. Thirteen years before that, only 3% had broadband (Today, 70% have home broadband). Massive federal spending on broadband initiatives, passed during the last recession to encourage economic recovery, has helped considerably.

Some providers will continue to offer dial-up as an afterthought for those who can’t or don’t want to connect via cable or another broadband means. But a number of the bigger internet service providers, such as Verizon Online, have quit signing up new dial-up subscribers altogether.

 

The Plow

 

Few things are as symbolic of farming as the moldboard plow, but the truth is, the practice of “turning the soil” is dying off.

Modern farmers have little use for it. It provides a deep tillage that turns up too much soil, encouraging erosion because the plow leaves no plant material on the surface to stop wind and rain water from carrying the soil away. It also requires a huge amount of diesel fuel to plow, compared with other tillage methods, cutting into farmers' profits. The final straw: It releases more carbon dioxide into the air than other tillage methods.

Deep plowing is winding down its days on small, poor farms that can't afford new machinery. Most U.S. cropland is now managed as "no-till" or minimum-till, relying on herbicides and implements such as seed drills that work the ground with very little disturbance. Even organic farmers have found ways to minimize tillage, using cover crops rather than herbicides to cut down on weeds. Firms like John Deere (DE) offer a range of sophisticated devices for these techniques.

 

Your Neighborhood Mail Collection Box

 

The amount of mail people are sending is plummeting, down 57% from 2004 to 2015 for stamped first-class pieces. So, around the country, the U.S. Postal Service has been cutting back on those iconic blue collection boxes. The number has fallen by more than half since the mid 1980s. Since it costs time and fuel for mail carriers to stop by each one, the USPS monitors usage and pulls out boxes that don't see enough traffic.

Some boxes will find new homes in places with greater foot traffic, such as shopping centers, public transit stops and grocery stores. But on a quiet corner at the end of your street? Better dump all your holiday cards and summer-camp mail in them, or prepare to say goodbye.

 

Your Privacy

 

If you are online, you had better assume that you already have no privacy and act accordingly. Every mouse click and keystroke is tracked, logged and potentially analyzed and eventually used by Web site product managers, marketers, hackers and others. To use most services, users have to opt-in to lengthy terms and conditions that allow their data to be crunched by all sorts of actors.

The list of tracking devices is set to boom, as sensors are added to appliances, lights, locks, HVAC systems and even trash cans. Other innovations: Using Wi-Fi signals, for instance, to track movements, from where you're driving or walking down to your heartbeat. Retailers will use the technology to track in minute detail how folks walk around a store and reach for products. Also, facial-recognition software that can change display advertising to personalize it to you (time for a mask?). Transcription software will be so good that many businesses will soon collect mountains of phone-conversation data to mine and analyze.

And think of this: Most of us already carry around an always-on tracking device for which we usually pay good money — a smart phone. Your phone is loaded up with sensors and GPS data. Is it linked to a FitBit perhaps? Now it has your health data.

One reason not to fret: Encryption methods are getting better at walling off at least some aspects of our digital lives. But living the reclusive life of J.D. Salinger might soon become real fiction.

 

The Incandescent Lightbulb

 

No, government energy cops are not coming for your bulbs. But the traditional incandescent lightbulb that traces its roots back to Thomas Edison is definitely on its way out. As of January 1, 2014, the manufacture and importation of 40- to 100-watt incandescent bulbs became illegal in the U.S., part of a much broader effort to get Americans to use less electricity.

Stores can still sell whatever inventory they have left, but once the hoarders have had their run, that’s it. And with incandescent bulbs burning for only about 1,000 hours each, eventually they’ll flicker out.

The lighting industry has moved forward with compact fluorescents, halogen bulbs, and most recently and successfully, bulbs that use light-emitting diodes (LEDs), and General Electric (GE) and Sylvania have found themselves sharing shelf space with newer firms like Cree (CREE) and Feit.

Soon, the only places you'll still see the telltale glow of a tungsten filament in a glass vacuum will be in heavy-duty and appliance bulbs, and some decorative items — and even for those, LEDs may ultimately 

 

Things That Refuse to Die: Parking Meters

 

Along with the pay phone and a cup of coffee, the parking meter was once one of the main reasons people carried around coins. The pay phone is gone, and a regular coffee now costs two bucks a cup, but meters are still standing on their stanchions, awaiting your quarters, in cities and towns across America.

New technologies are nibbling at the meter base: Many municipalities have installed machines (usually one per block) that let parkers buy a slip of paper to display on their windshield. Systems such as MobileNOW and Pango, which allow parkers to pay for parking by cell phone, are being enabled all over the country. Some experts see a future where the GPS in your car will link up with a municipal parking network, let you know where a spot is available nearby, and allow you to pay for it, all at once.

But don’t wave good-bye to Rita the meter maid yet; parking meters still have decades left on many streets and lots. For one thing, meter makers have introduced innovations of their own, such as new tops that accept credit cards, are powered by the sun and can relay through wireless connections to parking authorities how often spots are being used.

Plus, there’s a familiarity factor, says Casey Jones, a former chairman of the International Parking Institute. A city that has used meters in one place is likely to stick with that technology even when adding new metered spaces.

 

Things That Refuse to Die: The Cassette Tape

 

In the beginning, there was the LP record. When the compact disc arrived, many forecast the LP’s demise. It never happened; there's still a vigorous niche market for vinyl, even in the era of streamed downloads.

In between those two technologies came the cassette. Remember those rattly little plastic boxes full of tape? They were designed for dictation but pressed into service to deliver music to millions, particularly during the 1980s, when they were the only way to take tunes with you, whether with a Walkman, boombox or in your car’s tape deck.

They’re still around, actually. And not just as a last-gasp way to hear music when borrowing Granny's Buick Century. New music is being released on cassettes, kept alive by punk rockers, lo-fi artists and their labels. Sale numbers are generally small — a few hundred here and there for many promoters, although Burger Records, a Fullerton, Calif.-based label, estimates that it has sold upward of 300,000 tapes over the last eight years.

Cassette culture today thrives on the medium’s low production cost—at least compared with vinyl records. And being able to hold music right in your hand can also be a revelation to younger generations, for whom music is something you get online. "It's just something great to walk away from a show with," says Matt Stuttler, a St. Louis musician, publisher and producer who puts out cassettes under the label Eat Tapes. "A stack of cassettes is a reminder of specific shows, and they're a whole lot cooler to look at than a few loose scraps of download cards."

 

Things That Refuse to Die: Ethanol-based Flex Fuel

 

You may have seen E85 fuel at the pump—it’s the one with the yellow nozzle. Perhaps you’ve been tempted by a price per gallon that’s lower, sometimes much lower, than unleaded. Maybe you’ve even bought some, if you owned one of the millions of cars in North America capable of running on “flex fuel.”

E85, a blend of mostly ethanol (a type of alcohol) with a just a splash of gasoline, is one of a number of efforts by farmers (and the federal government, among others) to get you burning more corn in your car. (Oil companies are opposed—it’s one of those classic Washington battles).

Here’s the hitch: Running your car on E85 usually means a 15% to 30% mileage penalty, since ethanol produces less energy than petroleum gasoline. If the price discount isn’t bigger than the loss of fuel mileage, you’re probably spending more. The plummeting price of petroleum is making it harder and harder to find a discount that makes economic sense.

So why does E85 continue to sell? Enough folks like the up-front discount but aren’t doing the math. The National Association of Convenience Stores dug deep into the prospects for E85 in a study last year. Among their conclusions: “Consumers are focused on the absolute price differential, not the percent change, and that price discount need not be equal to the energy differential.”

Or, as one analyst of the renewable fuels market gently put it, "The consumer is a strange animal."

 

Things That Refuse to Die: The Penny

 

A penny for your thoughts isn’t much of a bargain these days. Not only is a penny worth less than ever thanks to inflation, but the cost of minting each Lincoln has been more than its face value for almost a decade.

Canada, Australia, New Zealand and other countries have deep-sixed their smallest coin, but the U.S. penny endures, as the U.S. Mint continues to churn out millions per year to replace the coins vanishing into change jars, vacuum cleaner bags and your car's floorboards.

Noted economists and the editorial pages of major national newspapers and journals continue to call for the penny’s retirement. But it has been years since anyone in Congress made a bid to kill the penny. One reason: While penny opponents are a diverse bunch, one group that’s deeply interested in its continuance is the zinc industry (a penny is actually 97.5% zinc and only 2.5% copper). And yes, Washington has a penny lobby, in the form of Americans for Common Cents (which is largely funded by zinc manufacturers).

But it's not just lobbyists. As an article in the Harvard Political Review put it, Americans' "general apathy and resistance to change" is also keeping the penny around.

 

Things That Refuse to Die: The Fax Machine

 

Ask not for whom the fax machine whirrs—it whirrs for thee. With e-mail, file-sharing, cloud services, collaborative office applications and more, who’s still using fax machines?

Folks (such as lawyers and real estate agents) who want your actual signature, for starters. Then there are offices communicating with far-flung branches that don’t have broadband, as well as mom-and-pop businesses. Finally, there are “non-technical users,” which Ross Rubin, principal analyst at Reticle Research, defines as people for whom sticking a sheet of paper in the fax and dialing a phone number is easier than scanning that document and attaching it to an e-mail.

The Consumer Electronics Association stopped measuring the sales of stand-alone fax machines in 2013, but that year, it estimated that 456,000 of them sold at about $100 each. That spells tweet-tweedle-tweet sounds for some time to come. What will eventually do in the fax (which is now over 50 years old)? Rubin thinks the smartphone will finish the job that e-mail started, with apps that let you sign documents using the phone’s touch screen and your finger.

 

Things That Refuse to Die: The Paper Check

 

We now have credit cards, debit cards, prepaid cards, PayPal, ApplePay, Venmo, Bitcoin and who knows what else. But the woman ahead of you in the grocery store checkout line just pulled out her checkbook!

Electronic means have displaced checks as the primary alternative to cash, particularly among businesses paying consumers (automatic deposit for paychecks, for example.) But Americans cling to their checkbooks, more than in other developed nations.

Just as there are early adopters of new ways to pay, there are resisters. For businesses, the ability to delay payment for a day or two while the check is in the mail is an opportunity to make money on the interest—the “float.”

And for consumers? “Old habits die hard,” says Gareth Lodge, a senior analyst with Celent, a research consultancy. Plus, he notes, “some of the alternatives aren’t really alternatives. Can you imagine your grandmother using PayPal? Can you use Venmo to pay your utility provider? Can you use Bitcoins at Walgreens? All of them will take checks.”

 

Things That Refuse to Die: The CB Radio

 

The citizens band radio (CB) was one of the biggest fads of the 1970s, when millions of people around the country hopped onto the airwaves while driving to chat with truckers and others about road conditions (and traffic enforcement). Movies and TV shows such as “Smokey and the Bandit,” “BJ and the Bear” and “Convoy” glorified the medium.

The dilettantes faded away, of course, and a number of technologies have taken bites out of CB’s relevance: GPS navigation, big trucking companies’ satellite networks and, of course, the cell phone.

But you can still pick up a CB radio online (or better yet, at a truck stop) and join the chatter on channel 19. The technology is still popular with truckers, who face considerable cell phone dead zones as they travel across the country. And preppers—people who are making plans to survive a breakdown in society—are buying them along with batteries and freeze-dried food. Unlike a cell phone, the CB radio requires no towers or network that could go down if the you-know-what hits the fan.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Cash Balance Plans: Offering a Break to Successful Doctors, Dentists and Small Business Owners in Boulder CO

For successful small business owners, cash balance plans can offer larger contributions than 401(k) limits allow.

Are you a small, highly profitable business owner looking for ways to (a) reduce your current taxes and/or (b) dramatically step up your tax-sheltered retirement savings?  If so, a cash balance plan may be worth looking into for your company.

What Is a Cash Balance Plan?

A cash balance plan is a retirement savings vehicle, crafted with the small business owner in mind. When combined with a safe harbor 401(k) or profit sharing plan, it can allow you to make significant, tax-deductible contributions to your own and select partners’ retirement savings, while controlling the costs of your contributions to employee retirement accounts.

What Are the Potential Benefits?

Here are a few of the possibilities a cash balance plan can offer:

·         It can position you to contribute considerably more toward your tax-sheltered retirement savings than 401(k) limits allow – up to $200,000 or more annually (depending on your age, income, years in business and other IRS limits).

·         Your annual contributions are tax-deductible.

·         You can make varying levels of contributions for you and partners in your firm.

·         You must contribute to your employees’ 401(k) accounts, but the contributions can be modest, typically in the range of 5.0–7.5% employee’s salary.

 

What Does It Take to Set Up a Cash Balance Plan?

In addition to accompanying it with a 401(k) or profit-sharing plan as required, your cash balance plan usually works best when all of these conditions are met:

·         You are a small business owner, age 40 or older, with 1–10 employees.

·         Your expected income is relatively predictable for at least the next five years.

·         You can contribute up to $200,000 or more annually for the next five years.

 

How Does It Work?

To establish your cash balance plan, you open one trust investment account for the plan, where investments are pooled for participants. Participants typically include you, and any partners or key employees. As the business owner and plan sponsor, you are the plan’s fiduciary trustee, charged with prudently managing its investments (or selecting and monitoring an investment manager to do so for you).

Each cash balance plan participant has a hypothetical “account” that earns a set interest credit annually, regardless of the plan’s actual investment performance. Contributions are then adjusted annually as needed, to fill any underperformance gap that may occur.

Investment Strategy Counts

If you’re reading between the lines, the structure of your plan means that it is both your fiduciary duty as well as in your best financial interests to be careful about how you invest your cash balance plan’s pooled assets.

You probably have taken or are continuing to take plenty of rewarding risks in your thriving business. Your cash balance plan serves as venue for offsetting those risks with a stable approach to preserving the wealth you’ve worked so hard to accumulate. Typically, we’d suggest something in the range of a three percent performance target, generated by a conservatively managed, low-cost portfolio.

Cash Balance Plans in Action

Case # 1 – A Medical Practice with 1-10 Employees*

Dr. Curtis, age 53, is a successful internal medicine practitioner with four employees. During the next decade, she wants to maximize her own retirement savings while contributing to her staff’s retirement accounts. Here’s how that might look:

CB chart1.JPG

Dr. Curtis’ estimated annual tax savings is approximately $78,500, with 93 percent of her contributions funding her own retirement.

Case #2 – Four Business Partners with No Employees*

Four partners in a successful law firm have varying preferences for funding their retirement accounts during the next five years. A cash balance plan can help the senior partners save at accelerated levels, while junior partners can contribute more modestly. Here’s what that might look like:

CB chart2.JPG

The partners’ combined annual estimated tax savings is approximately $145,000.

Careful Planning: The Usual Key to Success

As you might expect, even if a cash balance plan sounds right for you, there are plenty of caveats to consider, including ensuring that you and your plan remain compliant with IRS tax regulations as well as the Department of Labor’s fiduciary rules. We recommend consulting with professional tax and financial specialists to determine how the details apply to you.

* Case illustrations are reprinted with permission from Dedicated Defined Benefit Services. They assume combined federal and state tax rate of 38%. Cases are based on specific assumptions and used for illustration only.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Tips for Running a Successful Seasonal Business

If you have a seasonal business, you most likely face some challenges that year-round businesses don't. After all, trying to squeeze a year's worth of business into a far shorter period can get pretty hectic. Here are some tips that may help.

Cash Control

All small-business owners have to be careful cash managers. Strict management is particularly critical when cash flows in over a relatively short period of time. One very important lesson to learn: Control the temptation to overspend when cash is plentiful.

Arming yourself with a realistic budget and sound financial projections -- including next season's start-up costs -- will help you maintain control. And you may want to establish a line of credit just in case.

In the Off-season

It's difficult to maintain visibility when you aren't in business year round. But there's no reason why you can't send your customers periodic updat es via e-mail or snail mail. You'll certainly want to announce your reopening date well ahead of time. You can also spend time developing new leads and lining up new business.

Time for R and R

You deserve it, so take some time for rest and relaxation. But you'll also want to put the off-season to good use by making necessary repairs and taking care of any sprucing up you'd like to do. You can also use the off-season to shop around for deals on items you keep in stock and/or equipment you need to buy or replace.

Expansion Plans

If you're thinking of making the transition from "closed for the season" to "open all year," start investigating new product lines or services. If you diversify in ways that are complementary to and compatible with your core business, your current customer base may provide support right away. A well-thought-out expansion can be the key to a successful transition into a year-round business.


Being the owner of any type of business has its rewards -- and its challenges. Contact your business advisor, consultant, or small business banker for help. These individuals have experience dealing with the unique challenges of operating small businesses.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provid ed here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

I'm Self-Employed. How Can I Get Health Insurance?

Self-employment is an important career choice for many people, and it is an option elected by many seniors and baby boomers. But with this choice comes the need to provide your own health insurance, which can be a formidable expense. And, thanks to the Affordable Care Act, a necessary one starting in 2014. If you are self employed and are seeking health care coverage, here are your major options.

 

If you have a spouse or partner who is or can be enrolled in an employer-sponsored plan, joining this plan is usually the simplest and least expensive way to maintain coverage. Nearly all employer-based plans offer coverage to spouses and children, and many provide coverage to domestic partners as well.

 

If you formerly were employed by an organization that employed 20 or more people and made a group health plan available to employees, you may be able to obtain medical coverage through the federal Consolidated Omnibus Budget Reconciliation Act, known as COBRA. COBRA requires employers to make available to departing employees the option of continuing membership in an employer-sponsored group medical plan at the employee's expense. You can continue your health insurance under COBRA for yourself and your dependents for 18 months, during which time you can search for the best option as a self-employed person.

 

High-deductible plans (HDPs), as their name suggests, involve a high deductible or threshold below which you must pay all costs.  For 2014, minimum deductibles are $1,250 for an individual and $2,500 for a family. In essence, a high-deductible policy provides coverage for catastrophic situations but does not generally provide for regular doctor visits and routine care. Such plans can involve complex cost-sharing arrangements in which certain procedures or visits are covered only in part. When considering this option, factor in not only monthly premiums but also the costs of partial out-of-pocket payment for different procedures.

 

Combining an HDP with a tax-free health savings account (HSA) can also save you in taxes. You deposit pre-tax dollars into your HSA, and use that money to pay medical expenses that aren't reimbursed by your health insurance.

 

You may be able to save money by enrolling in a group plan sponsored by a professional organization. Check with any affiliations you may have (for example, the American Medical Association or a state bar association for attorneys) to see if they offer group rates for members. As with any plan, you'll need to look at not only costs but also deductibles, co-pays, and how well the coverage meets your needs.

 

Many states now have health insurance marketplaces. The federal marketplace has an up-to-date list and provides insurance referrals to consumers whose states do not have their own websites.

 

For many self-employed individuals, their best option will be to enroll directly in a health maintenance organization (HMO) or preferred provider organization (PPO). In general, HMOs tend to be more expensive than PPOs, but plan costs vary considerably with coverage options, so shop around. Also keep in mind that individual enrollment in a plan is likely to be expensive, often $500 or more per month for individual coverage, and that costs are generally not tax deductible.

 

When shopping for the right plan, make sure to do your homework. Compare premiums, coverage, deductibles, and copays. Also keep in mind that after you turn 65, you may be eligible for Medicare benefits, even if you remain self employed.

 

For More Information check out the Web resources listed below.

 

eHealth

Small Business Service Bureau

AARP

U.S. Treasury's health savings account resource center

 

Required Attribution

 

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

 

© 2014 Wealth Management Systems Inc. All rights reserved.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Case Study: How to Save Money Through a Financial Crisis - Defined Benefit Plan

Scenario: 

Six years before retirement, a couple, one of which was a corporate executive and the spouse, a self-employed entrepreneur, came to me because they wanted to save the maximum before they retired. When a client says they want to save the maximum that can range from up to the company match in their 401k (4% of salary) to 100k plus per year. 

 

Challenge: 

It was the mid 2008 the financial crisis was just gaining momentum, only we didn’t know it yet. 

 

Solution: 

The corporate executive was already saving the maximum in her 401(k) and continued to do so from 2008 (20,500) thru 2014 ($23,500k). The self-employed entrepreneur was making around 200k and was 61 years old and wanted to set up a plan to shelter his self-employed income.

 

The self-employed partner wanted to save more than the 50k that was available in a single 401(k) during the 2008 time frame. We explored a defined benefit plan (DB) because that would allow the client to save significantly more than a single 401(k). The single 401(k) could be paired with the defined benefit plan for extra deferral, if desired. The ideal profile for a defined benefit plan is: Candidates in their low 60’s, self-employed and no employees, which this client fit.  We completed the paperwork and set a target contribution rate of 100k per year for the defined benefit plan and they were off and saving. 

 

They contributed about 700k between 2008 and 2014 to the DB plan all of which was tax deductible. In addition, during the early years they contributed to a Roth 401(k) when the market was low and that money grew tax-free. The beauty of the DB plan is that you typically want to have a conservative portfolio because you want to try to achieve a target rate of return around 5% to get stable returns so you will have predictable contribution amounts. The portfolio we constructed was on the order of 75% bond funds and 25% stock funds and that worked very well during the drop in the markets in 2008 & 2009 because we dollar cost averaged the funding for the plan over the whole time frame.

 

Result:

In the end the self-employed client contributed over 700k to the Defined Benefit Plan, which resulted in about 140k of tax savings over the 7-year period. We rolled over the Defined Benefit Plan to an IRA and the Roth 401(k) to a Roth IRA. For the corporate executive, we rolled over her 401(k) to an IRA.  They were now set for retirement and can continue to enjoy life without the worry as to how to create their retirement paycheck.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

You and Your Business: Choosing the Right Form of Ownership

The form of ownership you choose for your company can have lasting legal, financial, and tax implications. Here's a review of some of the most common business structures.

 

•Sole proprietorship -- Under this arrangement, one person owns 100% of the business. Taxes are paid using a regular Form 1040, with the addition of a Schedule C to report profits and losses, and a Schedule SE for self-employment tax. While a sole proprietorship is easy to establish, since you and your business are considered the same entity, you potentially face unlimited personal liability if you are sued or become unable to pay your debts.

 

•General partnership -- A partnership is essentially two or more business owners operating under one entity. Ownership can be divided any way the partners see fit, and partners report only their portion of profits or losses on personal income tax forms. As with sole proprietorships, partners can be held personally liable for the debts of the partnership.

 

•Limited liability company (LLC) -- An LLC retains the tax structure and flexibility of a general partnership, but without the personal exposure to liability. Instead, the LLC itself is responsible for company debts and any potential legal claims.

 

•C-corporation; S-corporation -- Corporations also shelter owners from personal liability, but C-corporations get taxed twice -- once as a corporate entity and again on the owners' personal income that is passed through as dividends. In most states, S-corporations avoid the double-tax dilemma by passing profits directly to owners, but they are mired in special rules and regulations that make them more complicated to administer.

 

If you have yet to choose a structure for your business, or if you feel that your business may benefit from a new structure, make sure you talk through the issues with an attorney who is well versed in the legal aspects of business formation as well as an accountant who understands the potential tax implications.

 

Required Attribution

 

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

 

© 2014 Wealth Management Systems Inc. All rights reserved.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.