This Stock Election Could Save You Money
Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until it is no longer subject to that risk or you sell it. You then pay taxes on the fair market value at your ordinary-income rate.
But, instead, you can make a Section 83(b) election to recognize ordinary income when you receive the stock. You must make this election within 30 days after receiving the stock and it can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.
There are some potential disadvantages:
• You must prepay tax in the current year — this could push you into a higher income tax bracket or trigger the additional 0.9% Medicare tax.
• Any taxes can’t be refunded due to the election even if you eventually forfeit the stock or sell it at a decreased value.
The tax professionals at Ciuni & Panichi, Inc. can assist you with determining if this option is right for you. If you’ve recently been awarded restricted stock or expect to be awarded stock this year, please contact Jim Komos at 216.831.7171 or firstname.lastname@example.org and see if this election is right for you.
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Nasty numbers on Financial Statements
Financial statements show not only where a construction company stands financially, but also where it may be headed. Contractors who work with their financial advisors to analyze their statements can often catch problems early on before they turn into bigger issues. Here are eight red flags to look out for when reading your next statement:
- An accumulation (or lack) of cash. A strong cash flow is one of the hallmarks of success. But the key word here is flow. A static reserve of cash can be a sign that your backlog is dwindling and you’re running out of work, leading to a stockpile in the cash column.If you find yourself drawing on a line of credit when payments for a given project are slow in coming, you could also be headed for trouble. A construction company should always be in an overbilling position on a job. If underbilling is occurring, ask your financial advisor to perform an over/under billings analysis to get a handle on this dilemma.
- Declining equipment value. Slow periods in your business can lead to an unnoticed decrease in your equipment’s value and force greater spending down the line. You may be tempted to think that, because your assets aren’t getting as much wear and tear, they’re maintaining their value.Annual depreciation continues to steadily do its work on your assets. and you’re not buying replacement equipment at current market prices.
- Significant liability changes. Substantially changing liabilities warrant a close look. If your profits are dwindling, for example, certain liabilities may shrink as well, such as payments to profit-sharing plans or deferred tax liabilities. On the other hand, liabilities can balloon if you take out a loan to keep your construction business afloat.
- More current liabilities than current assets. Because many contractors have seasonal swings in their businesses, you may have more bills to pay than cash on hand at one time of the year or another. This is something worth tracking and planning around.
- Shrinking gross profit margin. Your gross profit margin is equal to your building costs for a particular period, not including overhead, payroll, taxes and interest payments, divided by your sales revenue for the same period. If this ratio is dwindling, it means your production costs are rising more quickly than your prices, or you’re charging less for your construction services (perhaps in an attempt to gain market share).
- Increasing ratio of general and administrative expenses to profits. General and administrative expenses, such as rent and utilities, are less “elastic” than project expenses, such as labor and materials. Thus, the ratio of these expenses to profits will skyrocket if your workload sags. Keep an eye on indirect costs, such as insurance; if the amount of these rises significantly, it’s often because you have fewer contracts to allocate these expenses to.
- Receivables growing faster than sales. If your receivables start to dwarf your actual sales, beware. It may be a sign that customers are taking longer to pay their bills or not paying at all and that it may be time to rework your collection procedures.
- Far-off or unprofitable future projects. Although you may take comfort in the sight of a lengthy project backlog on your financial statements, remember that not all projects are created equal.
Ciuni & Panichi, Inc. has a dedicated team of construction experts. Please contact John Troyer at 216.831.7171 or email@example.com for additional information and with any questions you may have regarding your financial statements.
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Need another idea to help you save on your tax liability?
Ciuni & Panichi is constantly looking for ways to assist you. Our Tax Group is always available if you have any questions.
This year, trusts are subject to the 39.6% ordinary-income rate and the 20% capital gains rate to the extent their taxable income exceeds $12,150. And the 3.8% net investment income tax applies to undistributed net investment income to the extent that a trust’s adjusted gross income exceeds $12,150. Three strategies can help you soften the blow of higher taxes on trust income:
- Use grantor trusts. An intentionally defective grantor trust (IDGT) is designed so that the trust’s income is taxed to you, the grantor, and the trust itself avoids taxation. But if your personal income exceeds the thresholds that apply to you (based on your filing status) for these taxes, using an IDGT won’t avoid the tax increases.
- Change your investment strategy. Non-grantor trusts are sometimes desirable or necessary. One strategy for easing the tax burden is for the trustee to shift investments into tax-exempt or tax-deferred investments.
- Distribute income. When a trust makes distributions to a beneficiary, it passes along ordinary income (and, in some cases, capital gains), which is taxed at the beneficiary’s marginal rate. Thus, one strategy for avoiding higher taxes is to distribute trust income to beneficiaries in lower tax brackets.
Some of these strategies may, however, conflict with a trust’s purpose. We can review your trusts and help you determine the best solution to achieve your goals.
Jim Komos is the Partner-in-Charge of the firm’s Tax Department. He has experience in all facets of taxation for individuals, closely held businesses, their owners and key personnel. His clients are in a wide range of industries, including manufacturing, service, real estate, and construction. Contact him at 216.831.7171 or firstname.lastname@example.org.
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