The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.
A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can’t swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don’t qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.
Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.
It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a delayed exchange, the replacement property must be specifically identified in writing within 45 days and must be received within 180 days (or by your tax return due date, if earlier), after sale of the exchange property.
With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.
When done properly, exchanges let you trade up in value without owing tax on a sale. There’s no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.
Summer is here and so are tax-saving opportunities. Here are seven suggestions for cutting your tax bill.
- Rent out your vacation home. If you own a second home, rent it out this summer when you’re not using it. Generally, you can offset the rental income with rental-related expenses, leaving you with little or no tax liability.
- Harvest capital gains or losses. Use your semi-annual portfolio review to spot investments with built-in capital gains or losses that can offset transactions from earlier in the year. Any excess capital loss can be deducted against $3,000 of ordinary income in 2016.
- Hire your kids. Does your child need a summer job? Hire her to work in the family business. The wages earned will be taxed using your child’s lower tax bracket.
- Send the kids to camp. Are you the working parent of under-age-13 children? You may be able to claim a tax credit for the cost of day camp. Just remember, overnight camps don’t qualify.
- Combine pleasure with business. When you travel out of town for business reasons, you can deduct the full cost of your airfare, even if you spend time sightseeing while you’re away. Expenses for side trips aren’t deductible.
- Entertain business customers. Generally, you can deduct 50% of the cost of entertaining customers before or after a substantial business discussion. This includes golf outings or an evening of dinner and drinks.
- Host a staff get-together. The usual 50% limit on entertainment deductions doesn’t apply to summer barbecues and picnics if the entire staff is invited. In that case, you can write off 100% of the cost.
Contact us for details on these and other summertime tax-saving ideas.
In assessing their business, most owners focus on growth in sales and profits. Yet these do not guarantee business health and success. Another important gauge is cash flow. Simply put, is there enough cash inflow to cover cash outflow? Cash flow needs change on a daily basis. The more you’re aware of cash flow needs, the more control you’ll have over your business.
- Calculating cash flow. Cash flow from operations can be calculated by taking net profit, adding back depreciation and amortization (noncash outlays), subtracting increases in accounts receivable and inventories during the period, and adding increases in accounts payable. Calculations can be done on whatever operating cycle time frame is most meaningful to you (monthly, quarterly, etc.). Best results are usually obtained by using monthly cash flow statements and projections based on prior experience.
- Using cash flow. Building a history of cash flow needs by using historical financial records will provide an invaluable tool for projecting the timing of receipts, expenditures, and financing needs. Periods of negative cash flow can seriously hinder expansion plans and may even lead to business failure. Cash flow statements and projections can forewarn you of cash needs and allow you to implement changes.
- Improving cash flow. Proper management of accounts receivable and inventory can strengthen cash flow. Review billing procedures to reduce lag time between shipping and invoicing. Reexamine credit and collection policies. Consider offering discounts for early payment and charging interest on delinquent balances. Review inventory levels. Be alert for stockpiles and excess inventory. Dispose of obsolete inventory by reducing prices or selling for scrap.
Effective cash flow management will permit better utilization of cash, generate additional funds from internal sources, and provide advance notice of financing needs. Knowing your cash flow requirements is imperative for business success.
With summer vacations and warm weather just around the corner, tax planning may not be a priority on your agenda. The problem is that if you wait until December, you cut the time for planning strategies to take effect. But if you take the time to plan now, you still have eight months for your actions to make a difference on your 2016 tax return.
Making time for 2016 tax planning now not only helps reduce your taxes, but also helps to put you in control of your entire financial situation. Tax planning should be a year-round process, but it’s especially effective at midyear. Contact our office for guidance in identifying and implementing the best moves for your situation.