A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.

But an installment sale can backfire on the seller. For example:

•  Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.

•  If tax rates increase, the overall tax could wind up being more.

Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.

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If you have a traditional IRA, you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

There’s no income-based limit on who can convert to a Roth IRA. But the converted amount is taxable in the year of the conversion. Whether a conversion makes sense for you depends on factors such as:

• Your age,
• Whether the conversion would push you into a higher income tax bracket or trigger the 3.8% net investment income tax,
• Whether you can afford to pay the tax on the conversion,
• Your tax bracket now and expected tax bracket in retirement, and
• Whether you’ll need the IRA funds in retirement.

We can run the numbers and help you decide if a conversion is right for you this year.

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Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these two tax pitfalls:

1. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
2. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.)

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, we’d be pleased to help you assess the potential tax impact and suggest ways to minimize your tax liability.

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Summer is a common time to put a home on the market. If you’re among those who are following this trend, it’s important to be aware of the tax consequences.

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the Affordable Care Act’s 3.8% net investment income tax.

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

If you have a home on the market, please contact us to learn more about the potential tax consequences of a sale.

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In general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction. But which party? Last year, the IRS finalized regulations that address this question.

In the employer-employee setting:

• If the employer reimburses the employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit.
• If the employer doesn’t treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.

In a customer–independent contractor setting, the final regulations allow the parties to agree as to who will be subject to the 50% limit. If there isn’t an agreement, then:

• If the contractor accounts to the customer for meal and entertainment expenses reimbursed by the customer (i.e., properly substantiates the expenses), the 50% limit applies to the customer.
• If the contractor doesn’t, the limit applies to the contractor.

The rules surrounding meal and entertainment expense deductions are complex. Please contact us to ensure you’re making the most of the deductions available to you but not putting yourself at risk for back taxes, interest and penalties.