Consider the tax advantages of investing in qualified small business stock

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While the Tax Cuts and Jobs Act (TCJA) reduced most ordinary-income tax rates for individuals, it didn’t change long-term capital gains rates. They remain at 0%, 15% and 20%.

 

To be a QSB, a business must be a C corporation engaged in an active trade or business and must not have assets that exceed $50 million when you purchase the shares.

 

 

 

 

 

 

 

 

 

The 0% rate generally applies to taxpayers in the bottom two ordinary-income tax brackets (now 10% and 12%), but you no longer have to be in the top ordinary-income tax bracket (now 37%) to be subject to the top long-term capital gains rate of 20%. Many taxpayers in the 35% tax bracket also will be subject to the 20% rate. So finding ways to defer or minimize taxes on investments is still important. One way to do that — and diversify your portfolio, too — is to invest in qualified small business (QSB) stock.

 

QSB defined

To be a QSB, a business must be a C corporation engaged in an active trade or business and must not have assets that exceed $50 million when you purchase the shares.

The corporation must be a QSB on the date the stock is issued and during substantially all the time you own the shares. If, however, the corporation’s assets exceed the $50 million threshold while you’re holding the shares, it won’t cause QSB status to be lost in relation to your shares.

2 tax advantages

QSBs offer investors two valuable tax advantages:

1. Up to a 100% exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude a portion of their gain if they’ve held the stock for more than five years. The amount of the exclusion depends on the acquisition date. The exclusion is 100% for stock acquired on or after Sept. 28, 2010. So if you purchase QSB stock in 2018, you can enjoy a 100% exclusion if you hold it until sometime in 2023. (The specific date, of course, depends on the date you purchase the stock.)

2. Tax-free gain rollovers. If you don’t want to hold the QSB stock for five years, you still have the opportunity to enjoy a tax benefit: Within 60 days of selling the stock, you can buy other QSB stock with the proceeds and defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.

More to think about

Additional requirements and limits apply to these breaks. For example, there are many types of business that don’t qualify as QSBs, ranging from various professional fields to financial services to hospitality and more.

Before investing, it’s important to also consider nontax factors, such as your risk tolerance, time horizon and overall investment goals. Contact us to learn more about QSB stock.

Improving a struggling employee’s performance is a two-way street

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It’s easy to get frustrated when an employee is failing to produce the volume or quality of work you’re looking for. A business owner or department manager may even give in to the temptation to play the blame game, pointing a finger at the struggling worker and only exacerbating the situation.

In truth, performance improvement must be a two-way street. There’s no doubt that the individual in question must step up and do better. But, as an employer, you’ve got to provide information, tools and support to help his or her improvement efforts.

Map the route

To get started, before saying one word to the person, fully investigate the issue. This means first defining the nature and degree of the underperformance and then determining whether you’ve done the best job possible in helping the employee to be successful.

For example, when and how well was the employee trained? Someone hired years ago may have been taught to do a job differently than it now needs to be done. Also, is the employee aware that you consider his or her work subpar? Has anyone discussed the problem with the employee or put it in writing?

Staff members who aren’t sure whether they’re on the right track often wait for feedback, rather than proactively seeking guidance. That means you may need to act at the first sign an employee isn’t meeting expectations, rather than hoping the situation will remedy itself.

Embark on the journey

Once you’ve established what’s wrong, meet with the employee. Clearly and specifically state your performance concerns and let him or her know that your objective is to work together to find a solution.

After naming the specific performance issues, ask how you can help the employee turn around the situation, including some predetermined suggestions. There may be issues you aren’t aware of, such as tools that are in disrepair or missing, or poor lighting in the employee’s workspace. So be open to his or her input.

If the employee attributes the subpar performance to lack of clarity about expectations, the remedy might be as simple as weekly meetings with his or her manager to go over what needs to be accomplished. If the employee reports feeling overwhelmed and unable to prioritize tasks, you may need to provide additional training on organizational skills or better use of technology.

Work with the employee to create a performance improvement plan that includes specific goals and a timeline for achieving them. Then follow up regularly. If the goals and timeline are met, you’ll enjoy the benefits of having a more productive team member. If they aren’t met, then you need to consider what further action to take.

Take the trip

Employee retention isn’t about only strong compensation packages and companywide recognition. It’s also about making the effort to help struggling employees find success. When the person in question is, underneath it all, a good worker, it’s a trip well worth taking. Our firm can provide further information and ideas.

The tax impact of the TCJA on estate planning

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The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.

Exemption increases

The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.

This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.

The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

The impact

Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025.

Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.

Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater.

Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning.

For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax.

Review your estate plan

Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan.

Fringe benefits: Don’t overlook disability coverage

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In many ways, the days of employers offering only “traditional” employee benefits are history. Now, novel perks such as on-site gyms, free snacks and pet insurance are all the rage. But it’s often the more traditional benefits that provide the most value to employees in the long run. Case in point: disability coverage.

A common worry

Disability insurance is neither sexy nor widely offered. Yet the 2016 Insurance Barometer Study by LIMRA, an association of financial services firms and insurers, found that 56% of American workers worry about supporting themselves if disabled and unable to work — and the percentages are higher among younger workers, hitting 70% for Millennials and 68% for Gen Xers.

These fears aren’t misplaced. The Council for Disability Awareness reports that just over 25% of today’s 20-year-olds can expect to miss work for at least a year because of a disability before they reach full retirement age for Social Security purposes. And the average duration of a disability claim is almost three years.

Costs and taxes

Short-term disability insurance typically covers three to six months of pay, with long-term generally covering the remaining length of the disability or until retirement. According to the Bureau of Labor Statistics (BLS), the median salary replacement rate for both short- and long-term policies is 60%. Most long-term plans come with a maximum amount payable.

You can help employees protect against disability losses for a relatively low cost — especially compared to the expense of health insurance. The BLS estimates the cost of providing short- and long-term disability insurance to be about 1% of total compensation, or $624 per year for a full-time, private-sector worker.

The BLS says that most workers don’t make contributions to their short- or long-term disability insurance plans. Those employees who do and use after-tax dollars to pay for the coverage will see an upside if they ever need to tap the benefits: They generally won’t be taxed on the payouts, which essentially amounts to higher benefits.

Education needed

To help your employees get the most out of disability insurance, you’ll need to educate them. In a 2017 survey, LIMRA found that fewer than two in three workers understand what disability insurance is, and only 43% know that short-term disability insurance is often used to provide paid leave after routine childbirth. You might find it effective to provide examples of various ways employees can benefit from having disability insurance. Interested? We can provide you with further information.