Know the Need for a Succession Plan
Practical advice for business owners
The HBO series “Succession” illustrates the importance of a business owner having a concrete succession plan in place. Otherwise, families can be ripped asunder. Yet, according to recent statistics from the Society of Human Resources (SHRM), only 35% of firms have a formal succession planning process for critical roles. Without such a plan, the business may fail.
Details: Essentially, a succession plan is a road map for heirs and business associates to follow in the event of the death, disability or retirement of the owner. It may include provisions to distribute stock and other assets, acquire or amend life and disability insurance policies, arrange buy-sell agreements, divide responsibilities among successors and tie up any other loose ends. The plan can also establish the value of the business for various purposes.
Where do you start? First, the owner must clearly establish their objectives and define the financial circumstances. Next, several critical questions must be answered, such as whether the owner intends to retain some influence in retirement, whether there is a capable successor within the ranks and if there are sufficient assets to pay any estate tax, distribute assets and still keep the business running. This also requires some frank and honest discussions with any co-owners or partners, family members and key employees.
Following are several other points to consider:
- The plan should be flexible. Business, family and health situations are ever-changing, so make the plan relatively easy to modify.
- It is important to designate the best person (or people) to take over the This can be a difficult process if there are several viable candidates among the children, siblings or business associates. Similarly, dividing up business assets in an equitable fashion can be a challenge if you hope to preserve family harmony.
- Develop a basic understanding of the prevailing federal and state estate tax laws. On the federal level, the tax law currently provides a generous $13.61 million estate tax exemption in 2024 (up from $12.92 million in 2023) with a top tax rate of 40%. Thus, most small business owners can shield their estates from federal tax, but there may be other consequences on the state level for more families.
- Be aware of gift tax benefits. Under the annual gift tax exclusion, a donor can gift up to $18,000 in 2024 (up from $17,000 in 2023) to each recipient. The amount is doubled to $36,000 per recipient for joint gifts by a married couple (up from $34,000). The exclusion is allowed in addition to the lifetime gift tax exclusion (which is unified with federal estate tax exemption).
- Consider establishing the fair market value (FMV) of the company. The FMV is usually defined as the amount that a buyer would be willing to pay under the usual circumstances. It can be incorporated in a buy-sell agreement that will keep the business afloat in the event of a sudden death or disability.
In summary: This is generally not a do-it-yourself proposition. Seek guidance from your professional advisors.
Are Health Savings Accounts the Cure?
Tax-favored way to pay medical expenses
Are you worried about your long-term health? If you were not concerned before the pandemic, you probably are now. So you might consider the benefits of a Health Savings Account (HSA). It offers certain tax advantages to participants.
Although HSAs were initially slow to catch on with the public, they have been picking up steam in recent years.
Background: An HSA operates pretty much like an Individual Retirement Account (IRA) for medical expenses. (In fact, it has been referred to as the “Medical IRA.”) Usually, they are provided by an employer in conjunction with its health insurance plan, but may also be set up by individually.
Employees can deduct their out-of-pocket contributions to an HSA, within limits, above the line. If the company makes any contributions on behalf of employees, they are deductible on the company’s tax return.
As with a traditional IRA, there is no current tax erosion on the earnings within the account. Furthermore, distributions are completely tax-free if the funds are used to pay for qualified medical expenses. However, taxable distributions made before age 65 are assessed a 20% tax penalty (double the IRA penalty for pre-age 59½ withdrawals), unless an exception applies.
Who can participate? To qualify for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP), have no other insurance and not be eligible for Medicare (i.e., be under age 65). The IRS sets the standards for meeting the thresholds for HDHPs, subject to inflation indexing.
For 2024, an HDHP is defined as a plan with a deductible of at least $1,600 (up from $1,500 in 2023) and out-of-pocket maximum of $8,050 (up from $7,500 in 2023) for individual coverage or a deductible of at least $3,200 (up from $3,000 in 2023) and out-of-pocket maximum of $16,100 (up from $15,000 in 2023) for family coverage.
How much can you contribute if you qualify? For 2024, the HSA contribution thresholds are $4,150 for individual coverage (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). In addition, a “catch-up contribution” of $1,000 is permitted for individuals age 55 or over.
Also, be aware that any amount left over in your account at the end of the year may be used to pay medical expenses in the future. This provides a distinct edge for HSAs over flexible spending accounts (FSAs) used to pay medical expenses. Reason: Unused FSA amounts are generally forfeited when the year ends. Alternatively, however, a 2½-month grace period or carryover of up to $640 in 2024 (up from $610 in 2023) may be available for FSAs.
Note: The penalty for making HSA withdrawals for non-medical reasons is 20% instead of the 10% penalty tax for FSAs.
This is not to say that HSAs are without drawbacks. In addition to the restrictions explained above, HSA providers may charge monthly account fees or transaction fees. And the participant could be hit with extra charges for account overdrafts or deposits that do not clear.
Practical advice: If this option appeals to you, discuss the matter with your professional advisors.
Safeguard Your Computer Network
Steps for improving security measures
Would you ask a salesperson to hold onto your wallet or pocketbook while you go shopping in their store? Of course not. Yet, in effect, some small business owners are doing virtually the same thing with their computer network when they conduct business online. It is almost like you are giving hackers license to steal your money.
What are the potential dangers? There are several ways outsiders may be able to gain access to a company’s network. One possibility is to use a password-guessing program that seeks and identifies Internet addresses. Another type of program allows users to scan multiple host computers for vulnerabilities. Also, be aware that hacking may occur from “inside” sources like your own employees or others who have access to the business premises or your computer network.
What’s more, certain complex computer programs that were originally designed as theft deterrents may be used for illicit means. In many cases, the hackers are more innovative than the creators. And that is bad news for business owners.
So can you try to stop online thieves in their tracks or, at the very least, slow them down?
For those that are inclined, you can pursue more sophisticated techniques, but at the very least you should focus on several basic safety measures as part of an overall security program. To this end:
- Maintain physical security. Is it possible for someone to walk up to your network and shut the entire system down with one flip of a switch? The network server should be kept in an area that is off-limits to most personnel. You might even install security software that limits access to the keyboard and screen.
- Install a firewall. A firewall simply separates the Internet from your company’s computer network. In effect, it screens or blocks outside intrusions that look to be suspicious. Firewalls can also be used to partition one department of your company from another.
- Review your list of network users. Make sure that passwords are changed on a regular basis. Instruct your employees to use nonsensical passwords rather than common words or family names. In addition, supervisory privileges should be limited to a select group of high-ranking employees or officers. If file sharing is too rampant, it may give outsiders easy access to sensitive data.
- Seek protection against computer viruses. The most common method is to acquire software that can help protect you against the type of viruses that could infect your network. Be sure to install the latest updates. Also, watch out for new innovations and improvements.
Naturally, there are no absolute guarantees that these precautions will provide the security you need in all cases. At a minimum, however, taking these steps can set up a good first line of defense. If you don’t have the necessary expertise to address these issues yourself, assign responsibility to someone in your firm or utilize a third party who can handle the responsibilities.
Securing a Casualty Loss Deduction
How to navigate current tax rules
The damage caused by a catastrophe like a hurricane, tornado, flood or wildfire can be devastating. It is difficult to pick up the pieces, especially if your home is destroyed. At least, you may be able to salvage a casualty loss deduction on your annual return,
“Wait a minute,” you might say. “Didn’t the Tax Cuts and Jobs Act (TCJA) eliminate deductions for casualty losses?” True, the TCJA suspends deductions for casualty losses (except for those suffered by active duty military personnel) from 2018 through 2025. But you can still deduct a personal loss suffered in a federally-designated disaster area.
In fact, you can qualify for expedited tax relief. You may even obtain a refund for a disaster occurring in 2024 a year before you file your 2024 return.
Background: Under prior law, casualty and theft losses were available for personal property damage caused by an event that was “sudden, unusual or unexpected,” including the aforementioned natural disasters, as well as fires, vandalism and even auto collisions. However, the deductible amount was limited to the excess above 10% of adjusted gross income (AGI), after subtracting $100 per event. (Congress briefly tinkered with these limits during the pandemic but those changes have expired.)
Say that a married couple had an AGI of $100,000 in a previous year. A fire caused extensive damage to their home, valued at a loss of $15,000 after insurance reimbursements were made. Based on the 10%-of-AGI/$100 floor rules, their deduction was limited to $4,900 ($15,000 – 10% of AGI – $100). The loss generally had to be claimed on the tax return for the tax year in which the damage occurred.
Due to the current suspension of most casualty loss deductions, victims of destructive events may not benefit from any casualty loss deduction on their federal returns. But some taxpayers still have a way out. A loss is deductible if it is attributable to damage in a federally-designated disaster declared by the president. The IRS provides updated lists of qualifying areas.
Special rule: Thanks to unique provision in the tax code, a taxpayer may claim a casualty loss suffered in a federal disaster area on the tax return for the year preceding the year in which the casualty actually occurred. This might provide a desperately needed quick tax refund in a pinch. For instance, suppose your home is destroyed by a crippling winter storm in January. Instead of waiting to claim the loss on your 2024 return, you may obtain relief on the 2023 return you expect to file within the next few months,
Similarly, if you incurred a disaster-area loss in 2023, you may claim the deduction on an amended 2022 return.
Finally, remember that the TCJA only suspends deductions for losses to personal property. There are no such restraints or dollar limits—including the 10%-of-AGI threshold and the $100 reduction per event—for business property losses. As was the case under prior law, these remain fully deductible. Contact your professional tax advisor for assistance relating to any personal or business losses.
IRS Raises Retirement Plan Limits
The IRS recently announced cost-of-living adjustments (COLAs) for qualified retirement plans in 2024. Here are some of the key takeaways.
|Limit for 2023
|Limit for 2024
|Maximum annual dollar
benefit for a defined benefit
|Maximum dollar limit on
additions to a defined
|Maximum amount of
compensation take into
account for qualified
|Dollar limit for elective
deferrals to a 401(k) plan
|$22,500 ($30,000 if
age 50 or over)
|$23,000 ($30,500 if
age 50 or over)
|Dollar limit for contributions
to a SIMPLE plan
|$15,500 ($19,000 if
age 50 or over)
|$16,000 ($19,500 if
age 50 or over)
Note: The annual limit for contributions to traditional and Roth IRAs is also increasing from $6,500 for 2023 ($7,500 if you age 50 or over) to $7,000 for 2024 ($8,000 if age 50 or over). The phase-out levels for IRA and Roth contributions have also been adjusted upward.
Facts and Figures
Timely points of particular interest
New Wage Base—Social Security taxes are going up—again. For 2024, the wage base for the 6.2% OASDI portion of the tax is increasing to $168,600, up $8,400 from $160,200 in 2023. The 1.45% HI portion of the tax continues to apply to all wages. As a result, you would pay $5,208 more in tax (6.2% of $8,400) on the same amount of wages than you did in 2023.
Earnings Test—The earnings test for Social Security benefits is rising, too. For those attaining normal retirement age (NRA) after 2024, the threshold in 2024 is $22,320, up from $21,240. They lose $1 of benefits for every $2 of earnings above the limit. For those attaining NRA in 2024, the threshold is $59,520 up from $56,520. They lose $1 of benefits for every $3 over the limit.