March, 2005
Protect Your Business with a Buy-Sell Agreement
March, 2005
Protect Your Business with a Buy-Sell Agreement
The unexpected can always happen. That's why, if you're the co-owner of a business, you need to prepare for the possibility that you - or the other owner - won't be at the helm one day. The fact is, either of you could die tomorrow. What would happen then?
When you enter into a buy-sell agreement, you face this issue head on. A buy-sell agreement is a legal contract between you and the company's other owners. In it, you each agree that your ownership interest will be sold (of offered for sale), at a certain price to the company or to each other when you die. Often, the company or the owners buy life insurance policies so they'll have the cash to make any agreed-upon purchase.
Tax Advantages
Buy-sell agreements offer more than simple protection for you and your family. You may also gain estate-tax benefits. Your estate can usually value your business interest according to the price or formula set in the agreement. This lets you plan in advance for what that value will be.
Buy-sell agreements can also help your estate avoid time-consuming and costly battles with the IRS. When an estate includes a closely held business interest, the IRS may see a red flag. The IRS wants to be sure that estates don't come up with artificially low values for businesses in order to save taxes. If you have a buy-sell agreement in place, and follow all the tax law rules, the IRS is likely to accept your value.
What's Your Interest Worth?
The key to making the value in your buy-sell agreement stick is to make sure that it is a "fair market" price. If you and the other owners aren't relatives this shouldn't be a problem. You'll probably bargain with one another to get the best deal possible. However, if you intend to pass your interest in the company on to a child or other family member, the IRS may argue that you and your close relative didn't negotiate a fair price. That's why it may be best to provide in the buy-sell agreement that a qualified professional will value the company annually or at the time of the sale.
Each dependency exemption you can claim in full on your 2005 tax return will reduce your taxable income by $3,200. New rules define "dependent" as qualifying children and relatives.
Qualifying Children
This category includes sons, daughters, stepchildren, brothers, sisters, step-siblings, or descendants of such individuals who:
Qualifying Relatives
Included, among others, are parents, children, siblings, nieces, nephews, aunts and uncles who:
Several additional rules apply.
A succession of sharp increases in medical insurance premiums has fueled the drive to find new ways to pay for health care. The health savings account - or HSA - is an innovative arrangement that could change the way many Americans pay for medical expenses. Here's an overview:
A Two-part Plan
An HSA has two components. The first is a qualified high deductible health plan (HDHP). In 2005, "high deductible" is defined as insurance with a minimum deductible of $1,000 for individuals and $2,000 for families. Annual out-of-pocket expenses (excluding premiums) can't be more than $5,100 ($10,200 for family coverage).
The second component is a tax-advantaged savings account that can be used - tax free - to pay qualified medical expenses. The savings account can be invested and the earnings accumulate tax deferred. Unused funds stay in the account and continue to grow.
Control and Flexibility
In addition to tax advantages, an HSA has many other attractive benefits.
Contributions and Limits
Individuals, employers, or both may contribute to an HSA - up to certain limits - on a tax-deductible basis. The limits for 2005 are $2,650 for individuals and $5,250 for families, or the amount of deductible, if less. Individuals who are age 55 or older can make an additional "catch-up" contribution of $600 in 2005.
Eligibility Factors
Individuals must be covered by a qualified HDHP only. (Some supplemental insurance - such as dental, vision, accident and disability, and employee assistance programs - is allowed.) People enrolled in Medicare are not eligible, nor are individuals who are claimed as dependents on someone's else's tax return.
Future generations will probability find the notion of life without the Internet as inconceivable as we find the idea of life without cars. So chances are, if your business doesn't already have a website, you are considering building one.
Getting Started
As a first step, think about what you want your website to do. Should it provide information? Sell merchandise? Showcase your capabilities or services? Here are some ideas to help you zero in on your objectives.
What is the competition doing?
Surf around. You'll see what similar businesses in your area - and all over the world - are doing with their websites.
Can you do it better?
The Internet has always been about creativity. Getting a late start may work to your advantage because you have access to state-of-the-art tools.
Do you need a secure site?
Security should be a major focus, especially if your site will be involved in either selling merchandise or handling personal data.
What's your budget?
Launching a website can be costly, especially if you want hover buttons and other interactive features and special effects. You'll also have to pay for web hosting. Look for a host that provides some services you may need, such as a shopping cart.
Reaching Your Audience
Make sure your site is "optimized" so it shows up on search engine result pages. Choose key words for the title tags for your web pages and include meta description tags. Confused? Don't worry - your we designer won't be.
How is the dollar faring relative to foreign currencies? Currency movements may be of particular interest to you if you are planning an international trip or if you invest or have business dealings abroad.
Falling
A weak dollar makes foreign products more expensive for Americans to buy because they have to use more dollars to pay for their purchases. On the other hand, a weak dollar helps U.S. businesses that sell their products abroad because the products become cheaper to buy in the foreign country. A weak dollar also can benefit investors when returns on their foreign holdings are converted into dollars.
Rising
The reverse happens when the dollar is strong. It's cheaper for Americans to buy things abroad, U.S. exporters are hurt because their products become more expensive, and U.S. investors may take a hit when returns on their foreign investments are translated into dollars.
Traditional individual retirement accounts (IRAs) have been around for more than 25 years. Millions of Americans have them. The reason: Taxes.
If you're eligible, you can deduct your contributions to a traditional IRA. Earnings on your IRA investments are tax deferred. And, if you receive a distribution from an employer's qualified retirement plan, whether you retire or change employers, you can preserve the tax-deferred status of your savings by rolling it over to a traditional IRA.
In Time
The IRS, however, is waiting patiently to collect taxes on the money in your traditional IRA. That time comes when you make a withdrawal. Before you reach age 70-1/2, you can decide if and how much to withdraw.* After you reach that age, however, you have to start taking a required minimum distribution (or RMD) every year.
Information Sharing
Until recently, the IRS didn't have an effective way to make sure that people were taking their RMDs. Problems were sometimes discovered (through audits, for example) but it was hit or miss. Now, institutions that offer IRAs are required to notify the IRS of everyone who has to take a distribution that calendar year. The institution must also let IRA owners know that a distribution is required.
Painful Penalty
Failure to take an RMD can be costly. The IRS can assess a 50% penalty tax on the amount of the shortfall. So a missed RMD of $10,000 could cost a forgetful taxpayer a $5,000 penalty!
Some Confusion
If you have more than one IRA, your RMD will be based on the total of all the minimum distributions required for each of your IRAs. You are allowed to take the distribution from just one IRA - or you may take smaller distributions from several IRAs if you prefer.
*With certain exemptions, early withdrawals taken before age 59-1/2 are subject to a 10% penalty.
Ben, a single parent, has purchased life insurance to provide financial protection for his daughter Nicole if he dies prematurely. Ben has taken an important step. However, simply buying a policy may not be enough.
Because Nicole is still young, Ben should also take steps to ensure that the insurance benefits will be used as he intends.
Ben might want to set up a life insurance trust. A trust is a legal arrangement under which a trustee agrees to manage the trust assets for the benefit of the trust beneficiary.
With a life insurance trust, the trustee is the designated owner and beneficiary of the insurance policy. The trustee collects the insurance proceeds, invests the money, and makes distributions to or for the benefit of the trust beneficiary (Nicole, in this situation) according to the instructions given in the trust agreement. Ben also might consider arranging for his estate to distribute some (or all) of his assets to the trust to be managed for Nicole's benefit.
You don't have to be a single parent like Ben to consider including a life insurance trust in your estate plan. If properly arranged, a trust can be used to reduce potential estate taxes by removing life insurance proceeds from your gross estate. If you would like to learn more about a life insurance trust or other estate planning techniques, please give us a call.
For the first time since 1999, the IRS audited more than one million individual taxpayers during its 2004 fiscal year. Compared to 2003, there were 40% more audits of high-income taxpayers with annual earnings topping $100,000 - more than 195,000 audits in all.
The moratorium on Internet access taxes has been extended through November 1, 2007. The extension is retroactive to November 1, 2003. States may continue to impose taxes on charges for telephone calls made over the Internet, but not for services that are incidental to Internet access, such as voice-capable e-mail or instant messaging.
the 2005 standard mileage rate for business driving is 40.5 cents per mile, three cents more than the 2004 rate. Taxpayers may use a rate of 15 cents per mile in computing deductions for the use of an automobile for medical reasons or moving. The mileage rate for charitable driving is 14 cents per mile.
The number of U.S. households having a net worth of more than $1 million (excluding the primary resident) in mid-2004 was 8.2 million, reports a survey by TNS Financial Services.
The Treasury Department now offers individuals an opportunity to purchase U.S. savings bonds electronically through payroll deduction. Employers can find out more about the new online program at www.treasurydirect.gov
Q. I own my own business. Can I deduct the cost of using my cell phone for business?
A. Only if you keep appropriate records. If asked, you need to be able to show the IRS the date and duration of each business call, the business purpose for the call, and the amount of the related expenditure. If you receive detailed bills form your cell phone provider, save them to make your job a little easier. A daily log also may be helpful.
Q. A recent U.S. Supreme Court case addressed damage awards for violations of the federal Truth in Lending Act. Do you have any details?
A. You are probably referring to Koots v. Nigh a case that was decided last November. The Court held that individuals can recover no more than $1,000 in statutory damages in cases involving consumer loans secured by personal property (such as car loans). A lower court had said that damages could be as high as twice the amount of the loan's finance charges.