. . . plus new mileage allowance, planning for capital losses, late filing, and making loans
Giving Growth to the Kids
As you may know, the Tax Reform Act of 1986 prevents you from freezing the value of your business for estate-tax purposes. Before the law was enacted, a widely used strategy among family businesses was for the owner to hold preferred stock and transfer common stock -- and thus future growth -- to the kids. Now, new strategies are developing.
One effective way of removing future growth from your estate is to sell all or a portion of the stock to your children. But there is a price to pay: you must pay tax on the capital gain, and the children will need income to make nondeductible payments to you. If you're not an S corporation, one tax maneuver is to have the children make that election as soon as they purchase the stock. They can then use the business's profits as a cash-flow source to pay for the purchase.
Often, a gift to your children is the best way to make the transfer (see "Family Gifts" below). If you can't make a full transfer that way because of the value of the company or your age, think about selling a portion and gifting a portion. -- Irving L. Blackman
One way to reduce the taxes on your estate is to start giving gifts to your family. Here are the rules:
* The first $10,000 in gifts made to each person in a year is tax free.
* To qualify for tax-free treatment, gifts must be of "present interest" (a direct cash gift, for instance) rather than "future interest" (such as a gift of cash that goes into a trust fund for later distribution).
* A gift by one spouse can be treated as though each spouse gave half, doubling the annual exclusion to $20,000.
Lifetime gifts up to $600,000 (double that if you're married and excluding the annual $10,000 or $20,000) are essentially tax free. Gift and estate taxes are reduced by a special unified tax credit of up to $192,800. Of course, if you use the entire credit for lifetime gifts, none will remain to reduce your estate taxes.
You can give away anything you own -- the family business, bonds, real estate, an interest in a partnership, and so on. The amount of the gift is based on the fair market value of the property on the date of the gift. The recipient does not have to treat the gift as income. -- I.L.B.
If you are about to sell a capital asset at a loss -- stock in your company, for example -- consider putting the property in joint tenancy with your spouse before the sale.
The reason is this: If you can't deduct the full amount of the loss, you can carry it forward. But if anything happens to you, your spouse won't be able to claim the carry-over loss on his or her individual return. That's the case even if you've been filing joint returns for years. If property is held in only one spouse's name, the tax attributes connected with that property terminate with that person's death. -- I.L.B.
If you lend money to a relative or a friend, and the debt goes sour, the Internal Revenue Service says you can deduct it. But tax collectors routinely toss out deductions based on handshake deals. The key is to set up the transaction with care:
* Ask the borrower to sign a note of agreement.
* Spell out in the note the amount borrowed and the repayment schedule.
* Charge a realistic rate of interest.
* In some states, you need to have a witness sign the note.
You take the deduction in the year the note becomes worthless, that is, when there is no longer any chance of your being paid. The IRS will want evidence of this, which means you need to show that you took reasonable steps to collect it. At the least, you should send a letter asking for payment. If the money was a business loan, you can deduct it directly from your income. If a personal loan, it's treated as a short-term capital loss. -- Julian Block
If you use the optional mileage allowance rather than actual expenses for deducting the business use of your car, the rate has been raised from 22.5¢ to 24¢ a mile for the first 15,000 miles in 1988. Any mileage above that is allowed at 11¢ a mile. You can also deduct tolls and parking. The 24¢-a-mile rate also applies to reimbursements companies make to employees, but they are not limited to 15,000 miles annually.
Since the allowance is not overly generous, you may do better by keeping track of your expenses -- and holding on to your receipts. -- I.L.B.
To get the IRS to waive a late-filing penalty, you have to convince it that the delay was "due to reasonable cause and not due to willful neglect." The list of acceptable excuses is not surprising: a serious illness or death in your immediate family; postal delays; wrong advice from an IRS employee; IRS tardiness in providing tax forms and instructions; and the destruction of your home, place of business, or records due to a fire or other casualty or civil disturbances.
What may be surprising is this: if you rely on your attorneys or accountants to get your returns in on time and they miss the deadline, that's not an acceptable excuse.
Irving L. Blackman, specializing in closely held businesses at Chicago-based Blackman Kallick Bartelstein, certified public accountants, speaks and writes on tax issues.
Julian Block covers taxes for Prentice Hall Information Services.
TOP TAX RATES FOR ESTATE AND GIFT TAXES
|More than||Not more than||The tentative tax:*|
|$2,500,000||$3,000,000||$1,025,800 + 53% of amounts over||$2,500,000|
|3,000,000||10,000,000||1,290,800 + 55% of amounts over||$3,000,000|
|10,000,000||21,040,000||5,140,800 + 60% of amounts over||$10,000,000|
|21,040,000||11,764,000 + 55% of amounts over||$21,040,000|
|$2,500,000||$10,000,000||$1,025,800 + 50% of amounts over||$2,500,000|
|10,000,000||18,340,000||4,775,800 + 55% of amounts over||$10,000,000|
|18,340,000||9,362,800 + 50% of amounts over||$18,340,000|
*The tentative tax should be reduced by the unified credit, up to $192,800 in a lifetime.
Source: Winning Tax Strategies 1989, Laventhol & Horwath n