The last month of the year is always a busy time. Christmas shopping. Holiday parties. School programs. The list goes on forever.
In the midst of it all, it is important to keep your business priorities in place. Whether you have procrastinated until now, or just recently thought of doing it, there is still time to get it done. But you have to act fast. Here is a quick look at some of the top year-end business activities you should consider participating in, if the situation fits you.
1. Form A New Business Entity.
Without diving into the pluses and minuses of forming a corporation or a limited liability company, if you have made the decision in your mind that you want to form a new entity, now is the time. The last month of the year is the best time to start that new LLC or corporation. By forming it now, you are setting yourself up for a seamless transition effective January 1st.
The best part about having an effective start date of January 1st for your new business entity, is that you are avoiding the necessity of doing a split year return. Let’s say for example you own a trucking business and want to start an LLC. If you do this at the beginning of July, half of your business will be reported on your Schedule “C”, while the other half will be on your business entity tax return. You will have to juggle checking accounts and records as you try to allocate profits and losses between the two tax returns all within the same calendar year. Why not just stop cold turkey at the end of the year and start fresh at the beginning of the next one?
Savvy entrepreneurs do this time and time again. If you are starting a new business, having it formed by year end is not as big of a deal. However, if you are converting an existing business activity from a sole proprietorship to an entity, doing it at year end will save you headaches and tax preparer fees. Take advantage of the new calendar year by forming that business entity prior to January 1st.
Let us know by as late as December 29th, and we can have your entity formed. Please visit /business-planning/ to get started today!
2. Fully or Partially Complete A Real Estate Transaction.
When real estate is sold, a 1099 is filed with the IRS, reporting the sale proceeds on behalf of the seller for the year in which it is sold. If you sell real estate in 2016, 100% of the sale proceeds will be reported this year. However, if you have not closed on your land sale yet, and want to split the income between multiple years, it is not too late. Perhaps selling half of it in 2016 and half in 2017 will lower the tax for you. Perhaps a multi-year installment sale approach will work best. Regardless, take advantage of your ability to slip in some of the sale in 2016, and the balance of it in the future years to come.
By carefully discussing this with your tax professional, we can help you paper the transaction in a manner to provide maximum legal security while at the same time maximizing your tax savings. Sometimes just closing on an undivided one-half interest on December 30th, and the other undivided one-half interested on January 2nd, can save thousands of dollars. Depending on your tax bracket and the overall net earnings from the sale, this simple two-step sale technique can create a huge savings.
If you are closing in on a year-end real estate transaction, carefully consider how you allocate the sale among the various tax years. Take advantage of a new year being just right around the corner. It might be the best Christmas present you can give yourself.
3. Complete Year end Gifting.
An individual can give up to $14,000 per year to as many people as you wish in 2016. This gift is free of any gift or estate tax. While the annual estate tax exemption is $5.45 million (currently), and slated to increase to $5.49 million in 2017, if you are concerned about someday having an estate in excess of this amount of value, then you should be considering an annual gifting program. Whether it be units or shares in a closely held business, or something more tangible like cows, corn or cash, you should consider reducing the size of your estate by transferring assets to your children on an annual basis.
It is important to remember that you get a new annual gift tax exclusion each and every year. This is Uncle Sam’s Christmas gift to you. It can be reckless to let it go to waste.
Just so it is clear in your mind, think of it this way. You have a bucket which allows you to put $5.45 million of assets into it and give it to your children tax free. If that bucket overfills, to say $6.45 million, then the last $1 million of spillage will be subject to the federal estate tax. If, during your lifetime, you give away $1 million, your “at-death” bucket shrinks to $4.45 million. Such “gifts” chew-up the lifetime exemption amount. But wait. You get a freebie. It is the $14,000 annual exclusion. You can give away $14,000 to 10 different people each year (or as many as you want), and your $5.45 million exemption “bucket” will be left undisturbed. This is a fantastic way to mitigate your federal estate tax exposure.
There are other considerations before a person goes hog-wild with gifting. What is your overall net worth? Do you have a surviving spouse? You will need to consider portability (the ability to stack a deceased spouse’s exemption onto a surviving spouse) as well the new presidency and how this could affect you.
Bottom line, if you have questions, contact legal assistance to evaluate all of these considerations before the end of the year.
4. Consider Making an S-Election for an Existing Limited Liability Company.
Are you operating your existing business as a Limited Liability Company? Are you paying a pile in self-employment taxes each year? If so, it might be time to consider having your LLC taxed as an S-Corporation, rather than as a partnership. While the liability protection will remain the same, the taxing aspects will be different.
The conversion of your LLC to an S-Corporation for tax purposes is something to only consider after a careful conversation with your CPA and legal counsel. It might be necessary to pull out depreciated assets prior to the conversion, or take other proactive steps.
If after consulting with your professional team you decide to convert your LLC tax structure to an S-Corporation tax structure, you must act quickly. You can only request S-Corporation status within the first 75 days of a new tax year.
5. Sign-Up for the Andrew Hoffman Law Business Maintenance Plan.
As the owner of a business corporation or limited liability company, you are required to maintain certain business formalities. The failure to do so can be devastating to your business—the complete disregarding of your entity for liability purposes. One of those business formalities includes the preparation of annual company minutes.
At our law practice, we have a program that may be just the thing you need. For only $199 per year, we will:
- Prepare your annual meeting minutes
- Provide up to 30 minutes of business consults with legal counsel (regarding your entity)
- Provide up to two additional sets of “special minutes” (i.e., financing minutes, FSA minutes, etc.).
Even if we did not form your business entity, we would be happy to help you with this. As a year end special, if you sign-up before January 1st, we will “catch-up” all of your minutes as part of your 2017 Business Maintenance Plan package.
Note that a second business entity can be added at a sharp discount. Please contact us to discuss your particular situation. You will be glad you did.
In this last month of the year, be certain that you are doing all of the right things to help your family build wealth. We are here to help with all of your family business needs. Have a great December. Finish 2016 strong.
NOTE: Please be advised that the above is not legal or tax advice. Andrew Hoffman Law PC, LLO does not give tax advice, but consults with your tax professional collaboratively, if engaged.