Tag: Business Planning

Purchasing a Farm: Land Depreciation vs. Amortization

Jared Faltys

Specializes in financial planning, business tax planning, investment advisory services

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Purchasing a farm may seem like a good investment opportunity. However, with further analysis, the net return is often much lower than anticipated. This typically happens because investors also view agricultural land as a stable investment. Not to worry — there are ways to immediately improve the ROI on the land through potential tax benefits. When you purchase farmland, you may be able to depreciate or amortize various aspects of the farm. 

Amortization vs. Depreciation

When purchasing farmland, you will acquire not only the land but other assets that accompany it as well. Since many of these assets will eventually deteriorate and become unusable, their cost can be expensed based on their life expectancy. Amortization and depreciation are ways to calculate the value of these assets. 

Depreciation

Depreciation is a way to calculate the total cost of an asset over its useful life. It is used to establish the cost of obtaining the asset compared to the income it provides. Depreciation is used for tangible assets, such as buildings, machinery, or equipment. 

Amortization

Amortization is also a way to calculate the total cost of an asset over its useful life. However, amortization is used for intangible assets, unlike depreciation. Examples of intangible assets include trademarks, patents, and nutrients within the soil. 

Understanding these terms will help you during the prospecting phase of purchasing a farm, so you can be on the lookout for specific assets that you will be able to write off and gain a higher return on your investment. 

Depreciating Farm Assets

When considering a farm to purchase, you should be looking for specific structures that you file as depreciating assets to provide savings on your tax bill. Some of these structures may include fences, grain bins, farm sheds, irrigation systems, and other tools and equipment. Having the ability to write off these assets when tax season rolls around will help you offset the amount you are paying for the farm. 

Amortizing Farm Assets

Did you know that in certain instances you are able to amortize part of the physical dirt on your farmland? While uncommon, this is an approach that some choose to take and the return can be substantial. 

Overall, the general understanding of buying dirt is that you are unable to depreciate it until you sell the ground.  However, since farmland is commonly passed down throughout generations, farmers typically won’t ever see this value. 

How to Amortize Farm Assets

To amortize dirt on your land, the first step is to determine if there are more fertilizer nutrients in the ground than what is considered average. To check the levels of your land, you can hire an agronomist to collect soil samples from areas around the farm to analyze the nutrient values. 

Once you have this analysis, you can reach out to your local university’s agriculture department. Typically, they will perform studies to determine what is considered average for the embedded nutrients within their local soil. You can compare your specific dirt to the average values collected by the university to determine whether or not your land’s nutrient values are above average. If you have any values over the baseline, you can make a case that the ground can be amortized over the lifetime of those nutrients. 

McMill Can Help

Although the initial net return on farmland may not appear to be as high as you would expect, there are plenty of options to help increase your return on investment. Utilizing depreciating and amortizing assets will help you balance your return against your investment. 

McMill CPAs and Advisors are here to answer any other questions you still have about purchasing farmland. As your local experts in Norfolk, Nebraska, we can’t wait to assist you in your farming business along with other areas like tax planning, retirement planning, and risk management. Reach out to us today for more information.

A Business Owner’s Introduction to Cost Segregation Studies

The first few years of business can be the most challenging — money is typically tight, you’re just getting the word out, and you’re up against competition that has likely been in the market for a while now. In fact, research shows that less than 80% of small businesses make it longer than a year, with 29% of businesses failing because they ran out of cash. 

So, what’s the solution? Cost Segregation. 

When cash flow is slow, many businesses look to Cost Segregation Studies as a solution to their problem since it results in tax savings and more financial leniency. This way, if you need to increase focus on marketing or other business initiatives to generate more sales and revenue, you can. Here’s what you need to know to take advantage.

What Are Cost Segregation Studies?

KBKG defines Cost Segregation as a “strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.”

A cost segregation study refers to the process of splitting elements of a property into categories for tax reporting purposes. Essentially, the study accelerates depreciation so that the owner can take out a higher tax deduction immediately. 

Although it does not have to happen in the same year as the purchase occurs, you do have to have a cost segregation professional come to the property to conduct the study. From there, the process can include:

  • An analysis of what your potential benefits might be.
  • Gather all the necessary documents (i.e., appraisal, condition report, etc.).
  • Conclude with property examinations and a full report on the results and asset classifications.

Benefits of a Cost Segregation Study for Small Business Owners

There are many challenges to being a small business owner versus medium to large business owners. However, Cost Segregation Studies can be great for alleviating some of the financial burdens that may be holding you back from reaching your full potential and scaling in the future. 

Additional benefits include the various properties that can be studied, potential benefits based on depreciable aspects, and additional saving opportunities that can make all the difference for your small business. 

Can be used for a variety of properties

First and foremost, cost segregation studies can be used for various building types, from apartments and assisted living to restraints, retail, and warehouse properties. 

Common properties include:

  1. New construction
  2. Building purchases
  3. Remodels
  4. Additions to an existing property
  5. Tenant finish-outs

Benefits vary based on depreciable aspects of the property

While stating the benefits of conducting a study on all your depreciable aspects of the property, it’s important also to note that you cannot depreciate property features like the land itself and personal property. On the other hand, you can depreciate property such as:

  • Vehicles
  • Machinery
  • Office buildings
  • Buildings you rent out

When you do, you can yield huge tax savings over a period of time. The benefit of cost segregation comes from short-life property, and other expenses immediately tapped into. 

Can uncover other savings opportunities

Another savings opportunity that you may not have been aware of comes from Section 179D Energy Efficiency Commercial Building Deduction. The tax deduction allows taxpayers to receive up to $1.80 per square foot for remodeling or construction projects after 2021. 

The requirement is that particular energy efficiency standards are met to obtain the deduction, including new or existing buildings with installed interior lighting, building envelope, or “heating, cooling, ventilation, or hot water systems that reduce the energy and power cost of the interior lighting, HVAC, and service hot water systems by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1.”

Although most industries can benefit from the 179D tax deduction, the ones that would benefit the most include health care, real estate, retail, and manufacturing. 

Reduce the costs of expensive equipment 

One of the most stressful parts about being a small business owner is battling the many expensive upfront costs of equipment. While the depth of these costs can vary from industry to industry, every owner knows there is no shortage of equipment required to get the job done and impact your bottom line. Cost Segregation studies allow you to reduce the overall costs when you allocate your tax savings to outstanding leases and loan principles. 

According to Small Business Chron, “By increasing the deductions taken during the first few years of business, you will reduce your company’s overall tax debt and have more money to channel toward marketing, company development, and additional equipment purchases. More money available for marketing and expansion during a company’s early years can increase its chances of succeeding in its market.”

An early advantage in your industry means more potential to scale your company and increase cash flow in the years following your short-term savings from Cost Segregation Studies. Since each year your business makes it in the industry marks an increase in your odds for success, this can be significant. In fact, Investopedia reports that your chances for survival jump to 55% after the five-year mark.

Discuss Your Options with McMill CPAs & Advisors

If you’re considering your options after a long year and tight cash flow, cost segregation studies may be the answer you’ve been looking for. The extra money you can get back immediately in taxes from your investments can make a substantial difference in areas of your small business. McMill CPAs & Advisors has helped many small business owners in Norfolk, NE reach their business goals with Cost Segregation.

Contact us to learn more about Cost Segregation Studies and what we can do for you and your company. We understand that every business is different, so we will ensure that you are only matched with solutions best suited to your business needs in particular. 

Keep Your Financial House Organized With an Estate Planning Firm

Jared Faltys

Specializes in financial planning, business tax planning, investment advisory services

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For many, the phrase “estate planning” evokes images of sprawling mansions and accountants hunched over a computer. For this reason, you might think that this essential preparation process doesn’t apply to you or your family. You might even be under the impression that you don’t need an estate plan at all. 

On the contrary, estate planning is necessary for everyone who hopes to secure their assets and protect the financial futures of their heirs. Boston College reports that around $59 trillion will be transferred from approximately 94 million estates in America between 2007 and 2061. Ensuring the safe and proper transfer of your hard-earned, valuable assets requires advanced planning. 

While important, this process doesn’t have to be intimidating. Here’s what you need to know about planning for your estate’s future. 

What is Estate Planning? 

Despite the common misconception, estate planning is not just for the wealthy. Even if you wouldn’t classify your home as an “estate,” this term encompasses many other valuables in your life. Assets such as real estate, vehicles, business ventures, and cash are all included within the scope of estate planning. Anything and everything you’ve worked to earn is worth protecting!

Why would I want an estate plan? 

There are many benefits to establishing a legal plan for your estate. By formulating an estate plan, you can ensure that your valuable assets are properly transferred to a next-of-kin or other heirs after you pass. While this is never something pleasant to think about, establishing a plan can grant you and your loved one’s peace of mind. It will help ensure your last wishes are met. It will also eliminate any additional stress for your children or family as they determine how to proceed with your life’s assets.

You may not feel as if you’re in a place of life where you need an estate plan, but starting early has its advantages. The more time you have, the more thoughtful you can be in your deliberations and the more people you can include in important decisions. 

What is an estate plan? 

Your plan will be composed of documents that outline your intentions for your accumulated assets. It legally documents and records your wishes for how these assets will be handled when it comes time for them to be passed on. It also assigns roles, such as who will enforce your wishes and who will benefit from them. 

Despite the essential nature of these documents, only 42% of American adults currently have estate plans. Still, Edward Jones measured that 77% of adults know that these plans are important. By formulating an estate plan, you can ensure that your legacy lives on and benefits the ones you love most.

If you’re reading to begin your asset allocation, you might benefit from the help of an estate planning firm. 

What is an Estate Planning Firm?

An estate planning firm is a collection of licensed professionals that can assist with the creation and execution of an estate plan. Although it may seem simple to plan your future, these well-versed experts can help you navigate legal jargon and avoid any challenges along the way. 

These firms can do more than just file paperwork for you. They will also provide tax planning strategies designed to help you manage your wealth throughout your life, enabling you to eventually pass more on to your loved ones. Estate planning firms can also help you navigate the tax laws and difficulties that come with inheritances. As you establish the future of your estate, these experienced individuals can ensure that your plan is as streamlined and efficient as possible. 

Why Should You Work With an Estate Planning Firm? 

When you make the decision to work with an estate planning firm, you’ll gain a team of knowledgeable professionals. These individuals can act as a sounding board to help you determine what you want and need in your estate plan. With years of experience, they can provide ideas and advice that you may have never considered on your own. 

Best of all, you can inform your team of your personal goals. If you have a favorite charity or local organization, you can learn how to become a lifetime or legacy-leaving donor. If you have a small business or other entrepreneurial venture, they can provide legal advice regarding succession plans and asset allocation. 

When you choose to do business with an established firm, you’ll reap the benefits of a team that will work alongside you for years to come. This means that they’ll adapt to changing assets and changing visions for your beneficiaries. They can review current estate plan documents and help formulate new ones, with the knowledge of your history and personal financial goals. 

Forbes reports that one of the most important steps in establishing a successful estate or succession plan involves educating and communicating.  As you choose the perfect estate planning team for you, consider a group that will prioritize your wants and needs. With a team that’s ready to listen and offer expertise, communicating and executing your vision has never been easier. 

McMill CPAs & Advisors

McMill CPAs & Advisors serve as your one-stop shop for all of your financial and estate planning needs. Our large team of experts located in Norfolk, Nebraska is ready to manage the more complicated parts of owning assets so that you can relax and enjoy what you have! Whether you have personal or business needs, McMill can apply an experienced eye to your tax, accounting, and financial affairs. 

Much like establishing a will, no one ever likes to think about needing an estate plan. However, contacting McMill CPAs & Advisors is your first step in gaining peace of mind for yourself and your family. Whether you simply have questions or you’re ready to draft your first plan, today is the perfect day to contact our team. 

Buy-Sell Agreement Overview: Why Your Business Should Have One

Clint Weeder

Specializes in business tax planning, investment advisory services, business valuations

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Every small business that hopes to extend its legacy needs to consider a buy-sell agreement. A buy-sell agreement will ensure you can protect the continuity of your business if anything happens to you or another shareholder, like disability or death. This kind of agreement removes any ambiguity in the succession plan and the owners’ exit plan and will protect the interests of employees, customers, other shareholders, their families, and the company. However, while 60% to 70% of small business owners are willing to transfer the business to their heirs, only 15% have a succession plan.

This article targets small business owners who want to avoid potential disagreements or disruptions, which can turn into expensive financial and litigation matters. We will cover crucial aspects of a buy-sell agreement, triggering events, and how to prepare a proper agreement that protects the future for you and your business.

What Is A Buy-Sell Agreement?

A buy-sell agreement is a legally binding contract between business partners that clearly define how their ownership is to be handled in case of a triggering event such as death or if they leave the company. It will help streamline the process, so you aren’t left with the confusion of how to delegate responsibilities or ownership upon a partner’s departure. The agreement is similar to a will that aims to protect the interests of each owner and their beneficiaries.

What Are The Triggering Events In A Buy-Sell Agreement?

As the name suggests, triggering events are formidable situations that no business wants to face. A buy-sell agreement acts as a cushion to prevent any repercussions on the business’ continuity should a member depart. There are five common triggering events.

1. Death

The death of a partner must be considered in a buy-sell agreement. With the agreement, the members can decide what happens to their ownership and how the ownership interest should be valued.

2. Divorce

Divorces can lead to tussles over the ownership of company shares, but buy-sell agreements can dictate how ownership interests will be handled.

3. Termination of Employment

This usually happens when an employee who has ownership in the company is discharged from their duties. A buy-sell will regulate how the employee must sell their interest without causing friction.

4. Bankruptcy

When a shareholder declares bankruptcy or insolvency, the other shareholders can stop the ownership interest from being sold to pay off debts.

5. Disability

Disability, just like death, can bring a business to a standstill. The agreement needs to define the types of disabilities to be covered and the steps to be taken when buying out a disabled partner.

Do You Need A Buy-Sell Agreement?

Every co-owned business should have a buy-sell agreement. This is in the event any of the events listed above afflicts one or more partners. If partners fail to plan for any event, the ownership may pass to a child or spouse who lacks the passion or experience in the company.

Here are reasons a business owner would want to consider obtaining a buy-sell agreement.

1. You’ll Have an Exit Plan For Your Members

A buy-sell agreement will help avoid any negative impacts on the existing relationship among members. Waiting until the last minute to start negotiating places the business in jeopardy. If a partner wants to leave the company or retire, a buy-sell agreement will lay down what will happen to ensure a smooth transition. It will also act as a binding contract, so all parties are protected in case of any bad blood during the split. The business has the power of preventing the leaving partner from further having any influence in the company once they are gone.

2. It Will Give Clear Directions About What Will Happen to a Member’s Portion if They Pass Away

Death can cause emotional turmoil, which can place the company’s ownership in the wrong hands. If something unexpected happens, you want a plan so business operations can continue normally. 

3. Ensures Job Stability for the Other Employees in the Company

The exit or death of a partner can cause confusion and a gap in management, affecting the entire organization. Your employees may panic over their job security and decide to leave or the lack of structure and leadership could cause the company to have to let go of some employees. A buy-sell agreement acts as a protection plan to help create a smooth transition of power which will provide stability for your employees as well.  A succession plan is also suitable for small organizations without adequate resources to support knowledge management programs and solid employee development.

4. Establishes a Set Value for the Different Portions 

The existence of an agreement determines how the business will value the member’s ownership interest. It helps prevent a situation in which a partner may demand more money than what the shares are worth. This clause will come into play if the remaining partner wants to purchase the exiting partner’s portion of the company.

Basics Of Crafting A Buy-Sell Agreement

Having competent advisors at your side will help to ensure you don’t overlook critical factors in the agreement.

1. The First Step Is to Decide Which Agreement Is Best for Your Situation

Usually, there are three types of agreements for an organized and fair handover of the business reins. 

  • Cross-Purchase Agreement: The exiting partner sells their shares to the remaining partners. This type of agreement is typically better for smaller businesses with only a few owners. 
  • Entity-Purchase Agreement: The exiting partner sells shares to the entity which retires the ownership interest. This works well for larger corporations and is known as a stock redemption agreement. For a partnership, it’s called liquidation of interest. 
  • Hybrid Agreement: This type of agreement is a combination of the first two. The partner has to first offer to sell their interest to the entity. If the entity declines, then they can sell to the remaining partners.

2. Draft the Agreement Early on in the Business

You should draft a buy-sell agreement as soon as possible in case a triggering event takes place. This helps establish a plan early on to ensure decisions are made while all partners are level-headed rather than when an event occurs that could influence the agreement plan later on. 

3. Be Specific

The plan should be definitive on what events can trigger the buy-sell agreement due to their unexpected nature. In addition, there should be specific rules on who can buy or sell the ownership interests and under which types of situations.

4. Specify the Valuation Method

How will the value be calculated? Seeking business valuation services will provide a comprehensive picture of your business’s actual value. The valuation considers factors like fair market value, book value, and formula approach. It’s important to note that once the valuation method is decided, it will be extremely difficult to fight the valuation in the future. You can choose to have a valuation clause that directs an expert to calculate the value of the business. Others specify their valuation methodology in the agreement.

5. Take Out Life Insurance Policies

Partners will typically take out life insurance policies on one another so that in case of an emergency, they will have the necessary funds to purchase their member’s shares. The company is the policyholder and submits premium payments and upon the death of a partner, the firm receives the life insurance death benefits. Use a life insurance calculator to estimate how much insurance you and your partners need.

6. Don’t Forget Taxes

Research the tax implications of your buy-sell agreement, as each one comes with different tax requirements. However, proceeds from life insurance are usually tax-free, which reduces the tax burden. 

Conclusion

Running a business has its challenges. However, it also gives a sense of accomplishment. Implementing a buy-sell agreement will help extend the life of your business in case a life-altering event takes place. If you already have an agreement in place, it’s recommended you review it every three years as your business continues to change. If you still have questions about the ins and outs of a buy-sell agreement, McMill CPAs and Advisors are here for you. Succession planning is one of our core services to enable small business owners to develop a comprehensive buy-sell agreement. Reach out to us for help in drafting your Norfolk, Nebraska small business buy-sell agreement.

Purchasing a Farm: Land Depreciation vs. Amortization

Jared Faltys

Specializes in financial planning, business tax planning, investment advisory services

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Purchasing a farm may seem like a good investment opportunity. However, with further analysis, the net return is often much lower than anticipated. This typically happens because investors also view agricultural land as a stable investment. Not to worry — there are ways to immediately improve the ROI on the land through potential tax benefits. When you purchase farmland, you may be able to depreciate or amortize various aspects of the farm. 

Amortization vs. Depreciation

When purchasing farmland, you will acquire not only the land but other assets that accompany it as well. Since many of these assets will eventually deteriorate and become unusable, their cost can be expensed based on their life expectancy. Amortization and depreciation are ways to calculate the value of these assets. 

Depreciation

Depreciation is a way to calculate the total cost of an asset over its useful life. It is used to establish the cost of obtaining the asset compared to the income it provides. Depreciation is used for tangible assets, such as buildings, machinery, or equipment. 

Amortization

Amortization is also a way to calculate the total cost of an asset over its useful life. However, amortization is used for intangible assets, unlike depreciation. Examples of intangible assets include trademarks, patents, and nutrients within the soil. 

Understanding these terms will help you during the prospecting phase of purchasing a farm, so you can be on the lookout for specific assets that you will be able to write off and gain a higher return on your investment. 

Depreciating Farm Assets

When considering a farm to purchase, you should be looking for specific structures that you file as depreciating assets to provide savings on your tax bill. Some of these structures may include fences, grain bins, farm sheds, irrigation systems, and other tools and equipment. Having the ability to write off these assets when tax season rolls around will help you offset the amount you are paying for the farm. 

Amortizing Farm Assets

Did you know that in certain instances you are able to amortize part of the physical dirt on your farmland? While uncommon, this is an approach that some choose to take and the return can be substantial. 

Overall, the general understanding of buying dirt is that you are unable to depreciate it until you sell the ground.  However, since farmland is commonly passed down throughout generations, farmers typically won’t ever see this value. 

How to Amortize Farm Assets

To amortize dirt on your land, the first step is to determine if there are more fertilizer nutrients in the ground than what is considered average. To check the levels of your land, you can hire an agronomist to collect soil samples from areas around the farm to analyze the nutrient values. 

Once you have this analysis, you can reach out to your local university’s agriculture department. Typically, they will perform studies to determine what is considered average for the embedded nutrients within their local soil. You can compare your specific dirt to the average values collected by the university to determine whether or not your land’s nutrient values are above average. If you have any values over the baseline, you can make a case that the ground can be amortized over the lifetime of those nutrients. 

McMill Can Help

Although the initial net return on farmland may not appear to be as high as you would expect, there are plenty of options to help increase your return on investment. Utilizing depreciating and amortizing assets will help you balance your return against your investment. 

McMill CPAs and Advisors are here to answer any other questions you still have about purchasing farmland. As your local experts in Norfolk, Nebraska, we can’t wait to assist you in your farming business along with other areas like tax planning, retirement planning, and risk management. Reach out to us today for more information.