Archives for April 2021

The Proposed Tax Hike’s Effect on Families: Even Those Not Considered “Rich”

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President Joe Biden’s address earlier this week confirmed many of the plans that were being laid out in the preceding months; specifically, as they relate to real estate, capital gains and estate taxes.

Although the proposals have a long way to go before becoming law, a Democratic majority in the House and a tie-breaking vote in the Senate held by Vice President Harris creates a scenario in which the proposal will pass — provided the Democrats are able to hold their members in line.

There are three provisions which affect real estate in the Biden administration’s tax proposal.

The first, which has been talked about extensively, is the increase in the capital gains rate from 20% to 39.6%. This proposal is directed toward households making over one million dollars.

In the northeast, it doesn’t take a lot to push households to this level given residential and commercial real estate prices. This could mean an individual could pay as much as 43.4% in federal taxes alone and possibly over 50% when factoring in state taxes.

The second is the proposed elimination of the 1031 tax-free exchange when gain on a property is greater than $500,000.

This tax break allows owners of investment and business real estate to defer the gain by enabling them to purchase like-kind property within 180 days of the sale of the original property. This has been an often used technique to allow property owners to defer the entire gain on the sale of their property.

Finally, included in the tax proposal is the elimination of the “step-up“ in cost basis for inherited property.

Although we’re speaking about real estate, this applies to all property such as stocks, bonds, etc. The concept of stepping up the original cost to the fair market value at the date of the death of the owner has been in the tax law for decades, and ensured that beneficiaries who sold inherited property paid little if any capital gains tax on the immediate sale of the inherited property. This substantially reduced the tax burden for beneficiaries upon sale of the property.

Based on the likely passing of the above in some form, if you are contemplating a sale of investment or business property, careful examination should be given to the tax effect.

In prior administrations, when the capital gains rate was changed there was a cut-off date established for gains subject to the new and old rules when passed in the same year. More importantly, review your current will to ensure it is tax efficient, and consider further planning to take advantage of current estate and gift laws prior to potential changes.

Now is not the time to delay sales of property you may have been considered selling, especially real estate with a 1031 exchange.

The above is not tax advice. Please consult with your tax professional for guidance specific to your particular financial circumstances.

Moving Up to Your Company’s C-suite? Here Are Some Tips for Success

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C-suite positions usually come with big paychecks and plenty of perks, but these benefits are frequently accompanied by huge accountability, mammoth stress and seemingly impossible time constraints.

To quote the Harvard Business Review: “…the skills that help you climb to the top won’t suffice once you get there.”

How can you prepare to manage your new position successfully? In this series of three posts, we’ll explore what you need to succeed at the top:

  • Essential skills of a successful chief executive
  • Importance of communication and collaboration
  • Significance of a global mindset

 Advanced C-suite skills by title
Executives find they must rely more on the understanding of business fundamentals than they did prior to occupying the C-suite. Top execs also find themselves in the position of providing input on key decisions.

According to the Harvard Business Review report mentioned above, C-suite occupants should strive to achieve the following:

  • Chief Financial Officer — Understand the meaning of risk and how to balance it with performance. A global rather than regional approach to finance is necessary, as is a firm grasp of the role of technology.
  • Chief Information Officer — Possess a universal understanding of the business. He or she must be comfortable with organizational design, be able to process information analytics and know how to use ROI to plan future departmental expenses.
  • Chief Marketing Officer — Know how to use new marketing channels as they emerge. He or she must be prepared to be the CEO’s contact point for marketing, sales and e-commerce.
  • General Counsel — More important today because of intensified attention to risk management. The GC should have the ability to negotiate with regulatory agencies and industry watchdogs and should have knowledge of environmental regulations.
  • Chief Human Resource Officer — Has evolved way beyond administrative functions. The CHRO must understand cultural differences and shifting demographics, excel in change management and take the lead in attracting and developing top talent.

Important skills for all C-suite occupants
If you’ve risen to the C-suite, chances are you’ve already mastered some of the essential executive skills. Now you have to adapt these skills to meet the more rigorous demands of a senior leader.  For example:

  • The ability to prioritize is one of the most important abilities a C-level executive must possess, especially in the face of colossal time demands. Only by prioritizing will you be able to focus and devote time to your most important tasks.
  • All C-suite executives must be able to lead transversally, or across the entire organization. This enables executives to accomplish company objectives in partnership with other teams.
  • C-suite leaders must be able and willing to adapt quickly to changing economic and customer environments.

Personal qualities for chief officers
In addition to the business skills needed to navigate the C-suite successfully, Forbes identifies the personal qualities essential to executive leadership roles:

  • Displaying genuine empathy decreases stress and increases morale
  • Listening in a way that invites others to share
  • Being motivated by what is right rather than what the market demands

In addition, communication skills are critical in the C-suite. According to the Wharton School of Business, “Persuasion and influence are powerful skills for any executives and should be reflected in all aspects of communication.”

That includes asking for help when you need it. Whether it’s coaching to improve your presentation skills, a crash course in the industry if you’re new to it or objective third-party advice on operational matters, remember: You’re expected to be smart, not superhuman.

Editor’s note: We discuss the importance of effective communication in more depth in Part 2 of this C-suite series.

Family Businesses: What it Takes to Keep Them Strong and Sustainable

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Like their public counterparts, nearly all family business leaders are concerned about short-term revenue loss and cash flow these days. However, recent research shows they’re feeling confident about weathering the storm in the long term.

Family businesses, by definition, are survivors, according to Professor José Liberti of Northwestern University’s Kellogg School of Management. “If you start thinking about families that are four generations, three generations, they have learned through experience and faced hardships through time,” he says in an article on the university’s website.

It’s widely acknowledged that family businesses that have endured the hardships of multiple generations share the same traits that will sustain them through the current crisis and beyond. According to a joint study by The Harvard Business Review and the Family Business Network International, some of these traits include:

A shared value system
The joint HBR and FBNI report concludes that shared values not only provide a moral center for family businesses to withstand challenges; they also provide a means for the business to differentiate itself in the marketplace.

A shared vision for the future
With a common vision, the family business is better able to set goals and determine priorities. Shared visions support the family’s commitment because they are meaningful (which supports agreement on difficult decisions), engaging (which encourages talent development) and future-focused (which supports long-term planning).

Clarity about everyone’s role
Successful family businesses are ones in which everyone has clearly defined roles and responsibilities. These definitions are essential for avoiding conflict that often occurs within families. Clearly defined roles avert overlapping responsibilities and expectations.

Cohesion, interaction & communication
The joint HBR/ FBNI report defines this as “mutual understanding, respect and support, and a healthy exchange of ideas and discussion of key and delicate issues.” The study concludes that these behaviors determine the family’s resiliency and ability to respond to change.

Succession planning
An effective succession plan details the succession process and the standards used to determine when the successor is prepared to lead. Again, roles must be clearly defined for family members who will remain in the business. The plan must firmly establish that managerial aptitude is more critical than birthright, even if it means hiring a non-family member to lead the organization.

The good news and the bad news
The bad news is that FBNI’s study found that 40% of family businesses underperform in at least three of the areas noted above. The good news is that definitive action can help family businesses stay strong and sustainable.

Not sure what actions to take? An objective advisor can help take the emotion out of the discussion and get everyone on the same page. At Magone & Company, we know family businesses because we are one. Let us know how we can help keep yours strong for generations to come.

Self-Employed? Here’s What You Need to Know About Taxes

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The gig economy is booming. The COVID-19 pandemic has created a demand and an opportunity for workers to profit off their skillsets outside from traditional employment. In fact, country music star Dolly Parton even updated her classic hit “9 to 5” to speak to the growing number of entrepreneurs who are getting their side hustle on after clocking out of their day job. Now more than ever, people are working “5 to 9” and building a business from their own know-how.

Anyone who earns income directly from clients — as a contractor, freelancer or small business owner — and doesn’t have an employer that withholds money from their pay for tax purposes, is generally classified as a self-employed worker by the IRS. If you’re self-employed, it’s important to understand how taxes work, so you can avoid owing more than your fair share to the government. Being in business for yourself can lead to higher taxes and more complex tax returns than you bargained for.

The self-employed and tax withholdings
Self-employed workers are responsible for paying taxes through estimated tax payments. These estimated payments must be sent directly to the IRS on a quarterly basis — by April 15, June 15, September 15 and January 15 — if you expect to owe at least $1,000 in income tax at the end of the year. Failure to plan properly and pay enough estimated taxes during the year can result in a tax penalty and a large surprise tax bill. By paying at least 90% of the tax you owe or 100% of the total tax owed from the previous year, the IRS will typically not assess a penalty.

If your hustle isn’t very lucrative (yet), a net income of $400 or more from self-employment means you can expect to pay up on those earnings — even if you’re already paying taxes through your traditional job. For example, if you work as an employee year-round, but you take on small contract jobs on the side to make extra cash, that revenue must be reported as self-employment income when you file your tax return.

Traditional W-2 employees split the cost of paying into Social Security and Medicare with their employers, but self-employed workers must pay the full amount themselves. As a self-employed worker, you’re on the hook to pay the self-employment tax, which goes toward Social Security and Medicare, in addition to normal income tax. 

There’s no avoiding Uncle Sam
Preparing your annual return and calculating quarterly taxes as a self-employed worker can be tricky. That’s why the experienced CPAs at NJ accounting firm Magone & Company can help you navigate tax laws and ensure tax compliance. We’ll also help you maximize your return, saving on any tax write-offs you may be entitled to as an independent worker. Send us a message or call 973-301-2300.