Leaving specific assets to specific heirs may lead to unintentional outcomes

Determining “reasonable compensation” is a critical issue for owners of C corporations and S corporations. If the IRS believes an owner’s compensation is unreasonably high or low, it may disallow certain deductions or reclassify payments, potentially leading to penalties, back taxes and interest. But by proactively following certain steps, owners can help ensure their compensation is seen as reasonable and deductible. Different considerations for C and S corporations C corporation owners often take large salaries because they’re tax-deductible business expenses, which reduce the corporation’s taxable income. So, by paying themselves higher salaries, C corporation owners can lower corporate taxes. But if a salary is excessive compared to the work performed, the IRS may reclassify some of it as nondeductible dividends, resulting in higher taxes. On the other hand, S corporation owners often take small salaries and larger distributions. That’s because S corporation profits flow through to the owners’ personal tax returns, and distributions aren’t subject to payroll taxes. So, by minimizing salary and maximizing distributions, S corporation owners aim to reduce payroll taxes. But if the IRS determines a salary is unreasonably low, it may reclassify some distributions as wages and impose back payroll taxes and penalties. The IRS closely watches both strategies because they can be used to avoid taxes. That’s why it’s critical for C corporation and S corporation owners to set compensation that reflects fair market value for their work. What the IRS looks for The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like enterprises under like circumstances.” Essentially, the IRS wants to see that what you pay yourself is in line with what you’d pay someone else doing the same job. Factors the IRS examines include: Duties and responsibilities, Training and experience, Time and effort devoted to the business, Comparable salaries for similar positions in the same industry and region, and Gross and net income of the business. Owners should regularly review these factors to ensure they can defend their pay levels if challenged. How to establish reasonable compensation Several steps should be taken to establish reasonable compensation: 1. Conduct market research. Start by gathering data on what other companies pay for similar roles. Salary surveys, industry reports and reputable online compensation databases (such as the U.S. Bureau of Labor Statistics) can provide valuable benchmarks. Document your findings and keep them on file. This shows that your compensation decisions were informed by objective data, not personal preference. 2. Keep detailed job descriptions. A well-written job description detailing your duties and responsibilities helps justify your salary. Outline the roles you perform, such as CEO-level strategic leadership, day-to-day operations management and specialized technical work. The more hats you wear, the stronger the case for higher compensation. 3. Maintain formal records. Hold regular board meetings and formally approve compensation decisions in the minutes. This adds an important layer of corporate governance and shows the IRS that compensation was reviewed and approved through an appropriate process. 4. Document annual reviews. Perform an annual compensation review. Adjust your salary to reflect changes in the business’s profitability, your workload or industry trends. Keep records of these reviews and the rationale behind any changes. Strengthen your position Determining reasonable compensation isn’t a one-time task — it’s an ongoing process. We can help you benchmark your pay, draft necessary documentation and stay compliant with tax law. This not only strengthens your position against IRS scrutiny but also supports your broader business strategy. If you’d like guidance on setting or reviewing your compensation, contact us. © 2025 

It’s not uncommon for an estate plan to contain multiple trusts. They can enable you to hold assets for and transfer them to beneficiaries, avoid probate, and possibly reduce estate tax exposure. When drafting a trust, you must appoint a trustee. This can be an individual or a financial institution. Before choosing a trustee, know that the job comes with many responsibilities — from keeping careful records and making smart investment choices to staying fair and keeping beneficiaries informed. A trustee must always put the beneficiaries’ interests first and handle everything with care, honesty and good judgment. What are a trustee’s tasks? Trustees have significant legal responsibilities, primarily related to administering the trust on behalf of beneficiaries according to the terms of the trust document. However, the role can require many different types of tasks. For example, even if a tax professional is engaged to prepare tax returns, the trustee is responsible for ensuring that they’re completed correctly and filed on time. One of the more challenging trustee duties is to accurately account for investments and distributions. When funds are distributed to cover a beneficiary’s education expenses, for example, the trustee should record both the distribution and the expenses covered. Beneficiaries are allowed to request an accounting of the transactions at any time. The trustee needs to invest assets within the trust reasonably, prudently and for the long-term sake of beneficiaries. And trustees must avoid conflicts of interest — that is, they can’t act for personal gain when managing the trust. For instance, trustees typically can’t purchase assets from the trust. The trustee probably would prefer a lower purchase price, which would run counter to the best interests of the trust’s beneficiaries. Finally, trustees must be impartial. They may need to decide between competing interests while still acting within the terms of the trust document. An example of competing interests might be when a trust is designed to provide current income to a first beneficiary during his or her lifetime, after which the assets pass to a second beneficiary. Although the first beneficiary would probably prefer that the trust’s assets be invested in income-producing securities, the second would likely prefer growth investments. What qualities should you look for? Several qualities help make someone an effective trustee, including: A solid understanding of tax and trust law, Investment management experience, Bookkeeping skills, Integrity and honesty, and The ability to work with all beneficiaries objectively and impartially. And because some trusts continue for generations, trustees may need to be available for an extended period. For this reason, many people name a financial institution or professional advisor, rather than a friend or family member, as trustee. Consider all your options Naming a trustee is an important decision, as this person or institution will be responsible for carrying out the terms outlined in the trust documents. We can help you weigh the options available to you. © 2025 

Many business owners take an informal approach to controlling costs, tackling the issue only when it becomes an obvious problem. A better way to handle it is through proactive, systematic cost management. This means segmenting your company into its major spending areas and continuously adjusting how you allocate dollars to each. Here are a few examples. Supply chain Most supply chains contain opportunities to control costs better. Analyze your company’s sourcing, production and distribution methods to find them. Possibilities include: Renegotiating terms with current suppliers, Finding new suppliers, particularly local ones, and negotiating better deals, and Investing in better technology to reduce wasteful spending and overstocking. If you haven’t already, openly address what’s on everyone’s mind these days: global tariffs. Work with your leadership team and professional advisors to study how current tariffs affect your company. In addition, do some scenario planning to anticipate what you should do if those tariffs rise or fall. Product or service portfolio You might associate the word “portfolio” with investments. However, every business has a portfolio of products and services that it sells to customers. Review yours regularly. Like an investment portfolio, a diversified product or service portfolio may better withstand market risks. But offering too many products or services exhausts resources and exposes you to high costs. Consider simplifying your portfolio to eliminate the costs of underperforming products or services. Of course, you should do so only after carefully analyzing each offering’s profitability. Focusing on only high-margin or in-demand products or services can reduce expenses, increase revenue and strengthen your brand. Operations Many business owners are surprised to learn that their companies’ operations cost them money unnecessarily. This is often the case with companies that have been in business for a long time and gotten used to doing things a certain way. The truth is, “we’ve always done it that way” is usually a red flag for inefficiency or obsolescence. Undertake periodic operational reviews to identify bottlenecks, outdated processes and old technology. You may lower costs, or at least control them better, by upgrading equipment, implementing digital workflow solutions or “rightsizing” your workforce. Customer service Customer service is the “secret sauce” of many small to midsize companies, so spending cuts here can be risky. But you still need to manage costs proactively. Relatively inexpensive technology — such as website-based knowledge centers, self-service portals and chatbots — may reduce labor costs. Perform a comprehensive review of all your customer-service channels. You may be overinvesting in one or more that most customers don’t value. Determine where you’re most successful and focus on leveraging your dollars there. Marketing and sales These are two other areas where you want to optimize spending, not necessarily slash it. After all, they’re both critical revenue drivers. When it comes to marketing, you might be able to save dollars by: Refining your target audience to reduce wasted “ad spend,” Embracing lower-cost digital strategies, and Analyzing customer data to personalize outreach. Data is indeed key. If you haven’t already, strongly consider implementing a customer relationship management (CRM) system to gather, organize and analyze customer and prospect info. In the event you’ve had the same CRM system for a long time, look into whether an upgrade is in order. Regarding sales costs, reevaluate your compensation methods. Can you adjust commissions or incentives to your company’s advantage without disenfranchising sales staff? Also, review travel budgets. Now that most salespeople are back on the road, their expenses may rise out of proportion with their results. Virtual meetings can reduce travel expenses without sacrificing engagement with customers and prospects. The struggle is real Cost management isn’t easy. Earlier this year, a Boston Consulting Group study found that, on average, only 48% of cost-saving targets were achieved last year by the 570 C-suite executives surveyed. Beating that percentage will take some work. To that end, please contact us. We can analyze your spending and provide guidance tailored to your company’s distinctive features. © 2025 

Stock, mutual fund and ETF prices have bounced around lately. If you make what turns out to be an ill-fated investment in a taxable brokerage firm account, the good news is that you may be able to harvest a tax-saving capital loss by selling the loser security. However, for federal income tax purposes, the wash sale rule could disallow your hoped-for tax loss. Rule basics A loss from selling stock or mutual fund shares is disallowed if, within the 61-day period beginning 30 days before the date of the loss sale and ending 30 days after that date, you buy substantially identical securities . The theory behind the wash sale rule is that the loss from selling securities and acquiring substantially identical securities within the 61-day window adds up to an economic “wash.” Therefore, you’re not entitled to claim a tax loss and realize the tax savings that would ordinarily result from selling securities for a loss. When you have a disallowed wash sale loss, it doesn’t vaporize. Instead, the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. When you eventually sell the securities, the additional basis reduces your tax gain or increases your tax loss. Example: You bought 2,000 ABC shares for $50,000 on May 5, 2024. You used your taxable brokerage firm account. The shares plummeted. You bailed out of the shares for $30,000 on April 4, 2025, harvesting what you thought was a tax-saving $20,000 capital loss ($50,000 basis – $30,000 sales proceeds). You intended to use the $20,000 loss to shelter an equal amount of 2025 capital gains from your successful stock market sales. Having secured the tax-saving loss — or so you thought — you reacquired 2,000 ABC shares for $31,000 on April 29, 2025, because you still like the stock. Sadly, the wash sale rule disallows your expected $20,000 capital loss. The disallowed loss increases the tax basis of the substantially identical securities (the ABC shares you acquired on April 29, 2025) to $51,000 ($31,000 cost + $20,000 disallowed wash sale loss). One way to defeat the rule Avoiding the wash sale rule is only an issue if you want to sell securities to harvest a tax-saving capital loss but still want to own the securities. In most cases, investors do this because they expect the securities to appreciate in the future. One way to defeat the wash sale rule is with the “double up” strategy. You buy the same number of shares in the stock or fund that you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. That way, you’ve successfully made a tax-saving loss sale, but you still own the same number of shares as before and can still benefit from the anticipated appreciation. Cryptocurrency losses are exempt (for now) The IRS currently classifies cryptocurrencies as “property” rather than securities. That means the wash sale rule doesn’t apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency shortly before or after the loss sale. You just have a regular short-term or long-term capital loss, depending on your holding period. Warning: Losses from selling crypto-related securities, such as Coinbase stock, can fall under the wash sale rule. That’s because the rule applies to losses from assets that are classified as securities for federal income tax purposes, such as stock and mutual fund shares. Beware when harvesting losses Harvesting capital losses is a viable tax-saving strategy as long as you avoid the wash sale rule. However, you currently don’t have to worry about the wash sale rule when harvesting cryptocurrency losses. Contact us if you have questions or want more information on taxes and investing. © 2025 

Your business can set up an educational assistance plan that can give each eligible employee up to $5,250 in annual federal-income-tax-free and federal-payroll-tax-free benefits. These tax-favored plans are called Section 127 plans after the tax code section that allows them. Plan basics Sec. 127 plans can cover the cost of almost anything that constitutes education, including graduate coursework. It doesn’t matter if the education is job-related or not. However, you can choose to specify that your Sec. 127 plan will only cover job-related education. Your business can deduct payments made under the Sec. 127 plan as employee compensation expenses. To qualify for this favorable tax treatment, the education must be for a participating employee — not the employee’s spouse or dependent. Also, the plan generally can’t cover courses involving sports, games or hobbies. If the employee is a related party, such as an employee-child of the owner, some additional restrictions apply that are explained below. Plan specifics Your Sec. 127 plan: 1. Must be a written plan for the exclusive benefit of your employees. 2. Must benefit employees who qualify under a classification scheme set up by your business that doesn’t discriminate in favor of highly compensated employees or employees who are dependents of highly compensated employees. 3. Can’t offer employees the choice between tax-free educational assistance and other taxable compensation, like wages. That means the plan benefits can’t be included as an option in a cafeteria benefit program. 4. Doesn’t have to be prefunded. Your business can pay or reimburse qualifying expenses as they’re incurred by an employee. 5. Must give employees reasonable notification about the availability of the plan and its terms. 6. Can’t funnel over 5% of the annual benefits to more-than-5% owners or their spouses or dependents. Payments to benefit your employee-child You might think a Sec. 127 plan isn’t available to employees who happen to be children of business owners. Thankfully, there’s a loophole for any child who’s: Age 21 or older and a legitimate employee of the business, Not a dependent of the business owner, and Not a more-than-5% direct or indirect owner. Avoid the 5% ownership rule To avoid having your employee-child become disqualified under the rules cited above, he or she can’t be a more-than-5% owner of your business. This includes actual ownership (via stock in your corporation that the child directly owns) plus any attributed (indirect) ownership in the business under the ownership attribution rules summarized below. Ownership in your C or S corporation business is attributed to your employee-child if he or she: 1) owns options to acquire more than 5% of the stock in your corporation, 2) is a more-than-5% partner in a partnership that owns stock in your corporation, or 3) is a more-than-5% shareholder in another corporation that owns stock in your corporation. Also, a child under age 21 is considered to own any stock owned directly or indirectly by a parent. However, there’s no parental attribution if the child is age 21 or older. Ownership attribution for an unincorporated business What about an unincorporated business? You still have to worry about ownership being attributed to your employee-child under rules analogous to the rules for corporations. This includes businesses that operate as sole proprietorships, single-member LLCs treated as sole proprietorships for tax purposes, multi-member LLCs treated as partnerships for tax purposes or partnerships. Payments for student loans Through the end of 2025, a Sec. 127 plan can also make tax-free payments to cover principal and interest on any qualified education loan taken out by a participating employee. The payments are subject to the $5,250 annual limit, including any other payments in that year to cover eligible education expenses. Talent retention Establishing a Sec. 127 educational assistance plan can be a good way to attract and retain talented employees. As a bonus, the plan can potentially cover your employee-child. Contact us if you have questions or want more information. © 2025 

Members of the sandwich generation — those who find themselves simultaneously caring for aging parents while supporting their own children — face unique financial and emotional pressures. One critical yet often overlooked task amid this juggling act is estate planning. How can you best handle your parents’ financial affairs in the later stages of life? Consider incorporating their needs into your estate plan while tweaking, when necessary, the arrangements they’ve already made. Let’s take a closer look at four critical steps. 1. Make cash gifts to your parents and pay their medical expenses One of the simplest ways to help your parents is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion. For 2025, you can give each parent up to $19,000 without triggering gift taxes or using your lifetime gift and estate tax exemption. The exemption amount for 2025 is $13.99 million. Plus, payments to medical providers aren’t considered gifts, so you can make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amounts. 2. Set up trusts There are many trust-based strategies you can use to assist your parents. For example, if you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die. Another option is to set up trusts during your lifetime that leverage your $13.99 million gift and estate tax exemption. Properly designed, these trusts can remove assets — together with all future appreciation in their value — from your taxable estate. They can provide income to your parents during their lives, eventually passing to your children free of gift and estate taxes. 3. Buy your parents’ home If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home’s equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent. 4. Plan for long-term care expenses The annual cost of long-term care (LTC) can easily reach six figures. Expenses can include assisted living facilities, nursing homes and home health care. These expenses aren’t covered by traditional health insurance policies or Social Security, and Medicare provides little, if any, assistance. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments. Don’t forget about your needs As part of the sandwich generation, it’s easy to lose sight of yourself. After addressing your parents’ needs, focus on your own. Are you saving enough for your children’s college education and your own retirement? Do you have a will and power of attorney in place for you and your spouse? With proper planning, you’ll make things less complex for your children so they might avoid some of the turmoil that you could be going through. Contact us for additional planning techniques if you’re a member of the sandwich generation. © 2025 

Today’s companies have several kinds of tax-advantaged accounts or arrangements they can sponsor to help employees pay eligible medical expenses. One of them is a Health Reimbursement Arrangement (HRA). Under an HRA, your business sets up and wholly funds a plan that reimburses participants for qualified medical expenses of your choosing. (To be clear, employees can’t contribute.) The primary advantage is that plan design is very flexible, giving you greater control of your “total benefits spend.” Plus, your company’s contributions are tax deductible. How flexible are HRAs? They’re so flexible that businesses have multiple plan types to choose from. Let’s focus on one in particular: excepted benefit HRAs (EBHRAs). 4 key rules Although traditional HRAs integrated with group health insurance provide significant control, they’re still subject to mandates under the Public Health Service Act (PHSA), which was amended by the Affordable Care Act (ACA). This means you must deal with prohibitions on annual and lifetime limits for essential health benefits and requirements to provide certain preventive services without cost-sharing. Because employer contributions to EBHRAs are so limited, participants’ accounts under these plans qualify as “excepted benefits.” Therefore, these plans aren’t subject to the ACA’s PHSA mandates. Any size business may sponsor an EBHRA, but you must follow certain rules. Four of the most important are: 1. Contribution limits. In 2025, employer-sponsors may contribute up to $2,150 to each participant per plan year. You can, however, choose to contribute less. You can also decide whether to allow carryovers from year to year, which don’t count toward the annual limit. 2. Qualified reimbursements. An EBHRA may reimburse any qualified, out-of-pocket medical expense other than premiums for: Individual health coverage, Medicare, and Non-COBRA group coverage. Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term, limited-duration insurance (STLDI). However, under certain circumstances, federal agencies may prohibit small employer EBHRAs in some states from allowing STLDI premium reimbursement. (Contact your benefits advisor for further information.) 3. Required other coverage. Employer-sponsors must make other non-excepted, non-account-based group health plan coverage available to EBHRA participants for the plan year. Thus, you can’t also offer a traditional HRA. 4. Uniform availability. An EBHRA must be made available to all similarly situated individuals under the same terms and conditions, as defined and provided by applicable regulations. Additional compliance matters An EBHRA’s status as an excepted benefit means it’s not subject to the ACA’s PHSA mandates (as mentioned) or the portability and nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA). However, EBHRAs are subject to HIPAA’s administrative simplification requirements. This includes the law’s privacy and security rules unless an exception applies — such as for certain small self-insured, self-administered plans. In addition, like traditional HRAs integrated with group health insurance, EBHRAs sponsored by businesses are generally subject to the Employee Retirement Income Security Act (ERISA). This means: Reimbursement requests must comply with ERISA’s claim and appeal procedures, Participants must receive a summary plan description, and Other ERISA requirements may apply. Finally, EBHRAs must comply with ERISA’s nondiscrimination rules. These ensure that benefits provided under the plan don’t disproportionately favor highly compensated employees over non-highly compensated ones. Many factors to analyze As noted above, the EBHRA is only one type of plan your company can consider. Others include traditional HRAs integrated with group health insurance, qualified small employer HRAs and individual coverage HRAs. Choosing among them — or whether to sponsor an HRA at all — will call for analyzing factors such as what health benefits you already offer, which employees you want to cover, how much you’re able to contribute and which medical expenses you wish to reimburse. Let us help you evaluate all your benefit costs and develop a strategy for health coverage that makes the most sense for your business. © 2025 

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Suppose you’re thinking about setting up a retirement plan for yourself and your employees. However, you’re concerned about the financial commitment and administrative burdens involved. There are a couple of options to consider. Let’s take a look at a Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE). SEPs offer easy implementation SEPs are intended to be an attractive alternative to “qualified” retirement plans, particularly for small businesses. The appealing features include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions. If you don’t already have a qualified retirement plan, you can set up a SEP just by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on your employees’ behalf. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are received, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you. When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS approved. The maximum amount of deductible contributions you can make to an employee’s SEP-IRA in 2025, and that he or she can exclude from income, is the lesser of 25% of compensation or $70,000. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s contributions to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free. You’ll have to meet other requirements to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens associated with traditional qualified pension and profit-sharing plans. The detailed records that traditional plans must maintain to comply with the complex nondiscrimination rules aren’t required for SEPs. And employers aren’t required to file annual reports with the IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund. SIMPLE plans meet IRS requirements Another option for a business with 100 or fewer employees is a Savings Incentive Match Plan for Employees (SIMPLE). Under these plans, a SIMPLE IRA is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a SIMPLE 401(k) plan, with similar features to a SIMPLE IRA plan, and avoid the otherwise complex nondiscrimination test for traditional 401(k) plans. For 2025, SIMPLE deferrals are allowed for up to $16,500 plus an additional $3,500 catch-up contribution for employees age 50 or older. Unique advantages As you can see, SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact us for more information or to discuss any other aspect of your retirement planning. © 2025