What’s Your Business Exit Strategy?

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Ever since you became a business owner, you’ve focused on growing revenue, managing expenses and leveraging tax advantages. But don’t overlook a critical element of your long-term financial well-being, that is, a business exit strategy. Ideally, your exit strategy will help you meet your retirement and estate planning goals.

Multiple-Owner Businesses

A buy-sell agreement is a powerful tool for businesses with multiple owners. A well-drafted agreement outlines what happens if specified events occur, such as the owner’s retirement, disability or death. The agreement should:

  • Create a ready market for the departing owner’s interest,
  • Establish a valuation method, and
  • Help prevent disputes by keeping ownership transitions clear.

Life or disability insurance can help fund the buyout and can give rise to several tax issues and opportunities. Life insurance proceeds are generally tax-free to the beneficiary, provided certain conditions are met, making this a tax-efficient strategy.

Family Ownership

If you have family members who are willing and able to fill ownership roles in the business, you can pass your business on by giving them interests, selling them interests or doing some of each. Consider your income needs, the tax consequences, and how family members will feel about your choice.

Under the annual gift tax exclusion, in 2025, you can gift up to $19,000 of ownership interests without using up any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift.

With the gift and estate tax exemption for 2025 at $13.99 million, gift and estate taxes may be less of a concern for some business owners. However, others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership.

Outside the Family

If family succession isn’t the right fit, you might consider selling the business to key employees. This requires significant planning, including executive compensation plans, loans and possibly “key person” life insurance. So you’ll need plenty of time and professional guidance to put the elements in place.

Another option is a leveraged Employee Stock Ownership Plan (ESOP), under which an ESOP trust borrows funds to buy the company. Then stock units are periodically awarded to eligible employees and are eventually vested.

Finally, there’s the option to sell to an outsider. If you can find the right buyer, you may be able to sell the business at a premium. Putting your business into a sale-ready state can help you get the best price. This generally means transparent operations, assets in good working condition and minimal reliance on key people.

For the Best Chance of Success, Start Early

Whatever path you pursue, you want your business to be in good hands in the future. Your exit strategy will require planning well in advance of retirement or any other reason for an ownership transition. Contact the office for assistance.

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Combine a Business Outing with Tax Breaks

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Summer is here, and you may be planning a picnic or other outing for your employees. When doing so, keep tax deductions in mind. Most entertainment expenses aren’t deductible, and business meals are generally subject to a 50% deduction limit. But, you may be able to deduct 100% of employee party costs. The event must be for your entire staff and not be “lavish or extravagant.” Deductible costs include food, beverages, live music and venue rentals.

Detailed invoicing and recordkeeping are a must. Before sending out invitations, contact the office about maximizing your tax deduction.

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CA Passthrough Entity Tax: Estimate Due June 16th

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If you have a passthrough entity (Partnership, LLC, S Corporation) and would like the opportunity to make the Passthrough Entity Tax election for 2025, you have a California PTET deposit due for your entity on Monday, June 16th.

  • If your entity made the election in 2024, your PTET deposit due on June 16th is 50% of your total 2024 Passthrough Entity Tax amount. You can find this amount on Form 3893 (PTE) in your 2024 California business entity tax return: it will indicate a due date of June 16th.
  • If your entity did NOT make the election in 2024, you need to make a payment of $1,000 by June 16th for the opportunity to elect in 2025. This voucher is Form 3893 (PTE).
  • If your entity has not yet filed its 2024 tax return, but you intend to make the election for 2025, follow instructions that were provided to you with your extension documents for the amount to pay for your estimated PTET deposit by the June 16th due date.
  • Please note that making this estimated payment does not lock your entity into making the 2025 election. However, your entity will be unable to make the election if you do not make this payment.

Instructions for Making Estimated Payment

Your PTET deposit payment can be made via the Franchise Tax Board Direct Pay website. We recommend that you make the payment using this method and send your preparer the confirmation for your tax files once completed.

We also recommend making this payment ahead of time to avoid any deadline related issues with the FTB Direct Pay website. If you mail the payment, please send certified and save a copy of the certified receipt.

FTB Direct Pay:

  • California Web Pay for Business
  • Enter entity type
  • Enter entity ID
  • Enter Contact Info
  • Select Payment Type –> Passthrough Entity Elective Tax
  • Be sure to choose 1/1/25 – 12/31/25 as period beginning and end date
  • Save down payment confirmation

Mailing Address:

Franchise Tax Board
PO Box 942857
Sacramento, CA 94257-0531

If you have any additional questions that were not covered above, let us know by reaching out to your preparer or our front desk.

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Your Business Tax Information at Your Fingertips

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The IRS Business Tax Account provides information to sole proprietors, partners of partnerships, and shareholders of S corporations and C corporations. Eligible business taxpayers who set up an account can use the hub to make electronic payments, schedule or cancel future payments and access other tools. They can also view their current balances, payment history, other business tax records, and digital copies of select IRS notices.

A newly added Income Verification Express Service enables lenders to easily access the income records of a business borrower, provided the taxpayer has authorized access. Here’s more: https://www.irs.gov/businesses/business-tax-account

Got questions? Contact Us

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Tax-Saving Moves Businesses Should Consider Before Year End

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Now is a good time to consider year-end moves that can help reduce your business’s 2024 taxes. The effectiveness of a particular action depends on the circumstances of your business. Here are several possibilities.

Time Income and Deductions

A tried-and-true tactic for minimizing your tax bill is to defer income to next year and accelerate deductible expenses into this year. For example, if your business uses the cash method of accounting, consider deferring income by postponing invoices until late in the year or accelerating deductions by paying certain expenses before year end.

If your business uses the accrual method of accounting, you have less flexibility to control the timing of income and expenses, but there are still some things you can do. For example, you may be able to deduct year-end bonuses accrued this year even if they aren’t paid until next year (if they’re paid by March 15, 2025).

Accrual-basis businesses may also be able to defer income from certain advance payments (such as licensing fees, subscriptions, membership dues, and payments under guaranty or warranty contracts) until next year. These payments may be deferred to the extent they’re recorded as deferred revenue on an “applicable financial statement” of the business, for example, an audited financial statement or a financial statement filed with the Securities and Exchange Commission.

Deferring income and accelerating deductions isn’t right for every business. In some cases, it may be advantageous to do the opposite, that is, to accelerate income and defer deductions. This may be the case if, for example, you believe your business will be in a higher tax bracket next year.

Buy Equipment and Other Fixed Assets

One of the most effective ways to generate tax deductions is to buy equipment, machinery and other fixed assets and place them in service by Dec. 31. Ordinarily these assets are capitalized and depreciated over several years, but there are a few options for deducting some or all of these expenses immediately, including:

Section 179 expensing.

This break allows you to deduct up to $1.22 million in expenses for qualifying tangible property and certain computer software placed in service in 2024. It’s phased out on a dollar-for-dollar basis to the extent Sec. 179 expenditures exceed $3.05 million for 2024.

Bonus depreciation.

This year, you can deduct up to 60% of the cost of eligible tangible property, which includes most equipment and machinery, as well as off-the-shelf computer software and certain improvements to nonresidential building interiors. Now’s the time to take advantage of bonus depreciation, since the deduction limit is scheduled to drop to 40% next year and 20% in 2026 and to be eliminated after that, unless Congress passes new legislation.

De minimis safe harbor.

This provision allows you to expense certain low-cost items used in your business, even if they’d ordinarily be treated as fixed assets that are capitalized and depreciated. If your business has applicable financial statements, you can deduct up to $5,000 per purchase or invoice for these items to the extent that you deduct them for accounting purposes. If you don’t have applicable financial statements, then the limit is $2,500.

Despite the term “de minimis,” the safe harbor makes it possible to immediately deduct a significant amount of property. For example, if you buy 10 computers for your business for $2,500 each, you can deduct as much as $25,000 up front.

Each of these options has advantages and disadvantages and is subject to various rules and limitations. Contact the office for help choosing the most effective strategies for your business.

Fund a Retirement Plan

If you don’t have a retirement plan, establishing one can be a great way to generate tax benefits. It can also improve employee recruitment and retention efforts. Certain employers are entitled to tax credits for starting a new plan.

Whether you start a new plan now or already had one in place, depending on the type of plan, you may be able to take 2024 deductions for contributions you make after year end. Some plans, including simplified employee pensions (SEPs), can be adopted and funded after year end and still create deductions for this year.

Be Prepared to Write Off Bad Debts

Year end is a good time to review your receivables and determine whether any business debts have become worthless or uncollectible. If they have, you may be able to reduce 2024 taxes by claiming a bad debt deduction.

To qualify for the deduction, you’ll need documentation or other evidence that the debt is bona fide. You’ll also need evidence that there’s no reasonable expectation of payment (such as the debtor’s insolvency or bankruptcy) or documentation that you’ve taken reasonable steps to collect the debt. You should also have documentation that the debt was charged off this year, which is required for partially worthless debts and a best practice for totally worthless debts.

Finally, to deduct a bad debt you must have previously included the receivable in your taxable income. Thus, an accrual-basis business can deduct an otherwise eligible bad debt if it’s already accrued the receivable, but a cash-basis business can’t.

Find the Optimal Combination

Whichever year-end tax strategies you explore, it’s critical to understand how they interact with other provisions of the tax code. For example, if you have a pass-through business, claiming significant amounts of bonus depreciation can reduce your Section 199A deduction for qualified business income (QBI). That’s because first-year depreciation deductions reduce your taxable income and your QBI. Contact the office for help selecting the optimal combination of year-end planning strategies for your business.

408-252-1800

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Are You Aware of the Business Credits and Other Tax Benefits Available?

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It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.

1. Statutory Incentives

Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.

State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.

The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

2. Discretionary Incentives

Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.

To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

3. Sales Tax Exemptions

States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

  • Retailers for the purpose of resale,
  • Manufacturers of equipment, raw materials or components used in the manufacturing process,
  • Specific tax-exempt entities, and
  • Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to the sellers that they have a resale or exemption certificate.

Don't Miss These Opportunities

Every year, a vast amount of tax credits and incentives aren’t claimed because businesses are unaware of them or erroneously believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.

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Hiring? How to Benefit from the Work Opportunity Tax Credit

If you’re a business owner or manager who is seeking to hire, you should be aware of the details of a valuable tax credit for hiring individuals from one or more targeted groups. Employers can qualify for the Work Opportunity Tax Credit (WOTC), which is worth as much as $2,400 for most eligible employees (higher or lower for certain employees). The credit is limited to eligible employees who begin work for an employer before January 1, 2026.

Who is Eligible?

Generally, an employer is eligible for the WOTC only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

To claim the WOTC, an employer must first get certification that the person hired is a member of one of the targeted groups above. An employer can do so by submitting Form 8850, Pre-Screening Notice and Certification Request for the WOTC, to their state agency within 28 days after the eligible worker begins work.

You Must Meet Certain Requirements

There are several requirements to qualify for the credit. For example, each employee must have completed a specific number of hours of service for the employer. Also, the credit isn’t available for employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for first-year wages generally is $2,400 per employee. But it’s $4,000 for long-term family assistance recipients, and it’s $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

An eligible employer claims the WOTC on its federal income tax return. The credit value is limited to the business’s income tax liability.

A Valuable Credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be worthwhile. Contact the office with questions or for more information about your situation.

408-252-1800

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