Preface: Amortization of intangible assets is similar yet different than depreciation. It is governed by a different Section of the IRC and methods are unique to the intangible asset based on the IRC code section relevant to various intangible. This blog is provide an explanation of amortization and namely IRC Code Section 197 relevant to the majority of small business intangible assets. Amortization of a Businesses Intangible Assets   Amortization is the expensing of intangible asset costs ratably over the intangible assets life. Amortization is governed with Internal Revenue Code (IRC); including section 197 and 195. Section 197 assets have a three factor test 1. They must be listed in Section 197 descriptions, 2. They must have been purchased, 3. They must be held in connection with the conduct of trade of business or investment activity. Factor 1 assets in Code Section 197 include: goodwill, workforce in place, patents, copyrights, formulas, processes, designs, patterns, market share, customer lists, licenses, permits, governmental rights, covenants not to compete, franchise fees, trademarks, trade names, contracts for use of acquired intangibles, and information bases in a business. This is not a comprehensive list of Section 197 assets, but the majority of the typical Section 197 intangibles.   Intangibles in Section 197 are expenses ratably over 15 years, beginning with the month of the acquisition. In businesses where intangibles are purchases along with other business assets, the intangible assets are determined by subtracting the cost of Class 1, Class 2 and Class 3 assets from the purchase price. This information is listed on IRS Form 8594 Asset Acquisition Statement.  For example, if a business is purchases $150,000 of intangible assets, including goodwill and patents in a acquisition, the intangible costs would be expensed at say $10,000 for 15 years, and not depreciated at standard MACRS methods…

Preface: Alternative minimum taxes (AMT) are increasingly applicable to taxpayers. Understanding what AMT is and being aware of the additional tax cost, as earnings increase, is the purpose of this blog.   What is Alternative Minimum Tax?   The Internal Revenue Codes Section 55, is a shadow tax system, designed to collect more tax revenues and is becoming more relevant an increasing number of taxpayers resulting from inflationary increases in wages and business earnings. In fact, more than 4 million taxpayers filed Form 6251 for an Alternative Minimum Tax (AMT) liability in the previous year. AMT was introduced to the tax code in 1969 after Treasury Secretary Joseph Barr testified that in 1967, 155 individuals paid no federal income tax with incomes over $200,000 at that time (the equivalent of say $1.2m today). To resolve that problem, Congress added a minimum tax feature the Internal Revenue Code, hence today’s code Section 55, and called AMT after the 1982 modification of IRC Section 55. AMT tax calculations involve adjustments to taxable income and preferences designed to either eliminate or defer tax deductions for AMT purposes. To name a few adjustments and preferences: medical expenses to the extent they exceed 10% on AGI and not 7.5% for regular tax; state and local taxes are not deducted for AMT purposes from itemized deductions, so therefore, taxes for income to state and local authorities, sales tax, property taxes etc. are not deduction for AMT. This reduces the Schedule A itemized deductions for income earners subject to AMT. In addition, numerous miscellaneous itemized deductions subject to the 2% floor are not deductible for AMT, i.e. investment advisor fees, and portfolio management fees say or unreimbursed employee business expenses. A planning tip for AMT is to reduce withholdings and quarterly estimates in the years subject to AMT so…

Preface: Gifting of assets is a tax strategy typically referenced in December. This blog is help entrepreneurs understand the gift options that can work for a specific gifting idea. Tax Strategies With the Gifting of Assets Reducing taxes can sometimes involve the gifting and transfer of assets (although it doesn’t reduce your taxes) to family or friends.  Numerous strategies for this are 1. Using the annual gift tax exclusion; 2. Using the lifetime exemption; 3. Making direct payments of medical or education expenses that qualify for the exclusion; 4. Contributing to a 529 qualified tuition plan or Coverdell Education Savings Account; 5. Transferring assets to a spouse; 6. Transferring assets to a charity. Gifting is a common form of transferring taxable assets for most taxpayers among family and friends. An annual exclusion for gifts from the IRS taxability and reporting is below a threshold of $14,000 for 2016 and 2017. Therefore, you can gift up to $14,000 to another individual, of fair market value property without any reporting requirements in those years. If you and a spouse are gifting the balance then the value increases to $28,000, i.e. $14,000 per taxpayer. If you and your spouse gift to another couple, say a child and spouse, then the balance increases to $56,000, e.g. $14,000 per taxpayer to two individuals each. Gift in excess of $14,000 to an individual requires the filing of a federal gift tax Form 709 for IRS purposes. A gift is a transfer to an individual either directly or indirect where full consideration is not received in return. Gifting of assets must be conventional, i.e. you can’t gift $10,000 to an individual for a free vehicle, so they can avoid taxable income; neither can you gift for payments of landscape or lawn work at your home a friendly vendors avoidance of income taxes,…

Preface: Asset protection strategies are advised for any level of asset holder. Compartmentalizing risks and segregating asset parcels or preparing to contain and prevent financial fires is worth the effort, but need the strategy implemented ahead of the time to be “judgment proof”. Reverence includes good stewardship, and that includes healthy respect for risks that are best unmeasured!    Asset Protection Strategies Awareness. Asset protection planning and strategy is best managed with the trusted eye of an experienced attorney specializing in asset protection. In recent years, this topic has become increasingly important to business owners, e.g. entrepreneurs avoiding risks from third-party creditors, high network individuals concerned with risks that are not “judgment proof” and individuals who simply want to sleep well at night. While a CPA can advise on the value of asset protection planning, attorneys specializing in asset protection should prepare and implement the strategy. This blog is written to bring an awareness of the importance to reduce financial risks with asset protection. What are effective strategies to protect assets? Standard strategies include retirement plans including ERISAs or in some state an IRA, third party trusts for family members, domestic asset protection trust, family limited partnerships and capital restructuring. Capital restructuring includes equity distributions, holding companies, family secured loans, and multiple LLC structures. Asset protection strategies can be as simple as distributing excess cash from your business before any risks occur, i.e. asset distribution. If you have excess cash and high AAA in your S-Corporation, the benefits of cash distributions to lower asset exposure inside the business is always advisable. Any entrepreneur who has significant debt risk, i.e. bank mortgages, should take steps with asset protection. Does your wife really want your dinner plates applied to bank collateral? Paying an attorney to modify loan agreements before signing is always advised. A few hundred of legal fees upfront…

Preface: Proper accounting for customized software costs is becoming increasingly relevant to entrepreneurs. This blog is make the complexity understandable for business owners. Accounting for Investments in Software Computer software is becoming increasingly relevant to more smaller businesses and entrepreneurial financial management teams. From CRM modules to customized accounting systems and automated inventory controls, trends with reliance on customized business and industry software continue to climb. For chief financial officers, this requires appropriate knowledge of accounting for the costs incurred on the purchase and investment in licenses and programming fees from vendors; and for IT programmers, questions on revenue recognition. For programmers involved in method development, or customized software programming on computer systems that require significant production, modification, or customization, the accounting for revenue should be on a contract basis; either percentage of completion or complete contract. Typically, this is tracking of estimated hours on programming to hours incurred, and the measure of the percentage of projection completion is accrued to revenue on current project billings. For companies investing in internal-use software, the decision to capitalize or expense depends mostly on the nature of the cost incurred, and more specifically on the state of the incurred costs, i.e. preliminary project, application development, or post-implementation/operation state. When upgrading software, external costs in the preliminary project states or post-implementation should be expensed, while application development costs should be capitalized. When capitalizing costs for internal use software, the types of expenses eligible are say fees paid to third-party developers, costs paid to obtain the third-party code, and travel expenses associated with the software development, along with payroll and employee benefits for time devoted to the internal-use software. In addition, this includes any interest expense to finance the associated above costs. General and administrative expenses should be expensed; say rent, utilities, and office supplies. Now let’s…

  Construction Equipment:  To Buy, To Lease, To Rent? Preface: John Deere explains the merits of buying, leasing, or renting for construction businesses.  

Preface: If you plan to add a vehicle(s) to your business, discuss with your tax accountant the cost/benefit options of purchase versus lease, and the expense method of standard mileage or actual expense.   Business Vehicles _Lease, _Buy   Deciding whether to buy a vehicle versus leasing is not always easy. The main advantages of leasing are lower monthly payments than a loan, and less cash paid upfront to provide transportation for you or your employees. A purchase provides depreciation expense if actual vehicle expense deductions are employed; a lease payment is deductible as an expense too. For instance, if you lease a vehicle you can deduct the monthly lease expense plus fuel, repairs and maintenance.   So why lease when you can afford to buy? If you lease, you can often obtain more car for the same monthly payment as a purchase. This is the main reason luxury vehicles are leased rather than purchased. When the lease term is finished you can obtain a new vehicle. Warranties often last the life of a lease and increase the ease of vehicle ownership, and some leases are maintenance free too. Disadvantages of leasing – you pay for door ding’s and spills at the end of the lease – deductions from the security deposit which can be thousands in addition to the monthly payments. If you want to terminate a lease early there are additional costs associated with such, and if you lease you will always have vehicle payments to make without gaining equity. Gap insurance, covering the cost of the lease if the vehicle is totaled, is most often a part of the lease. If you purchase a new vehicle every two or three years, or want to minimize monthly payments, leasing may be for you. Leasing also has a lower…