Annually, the Internal Revenue Service (IRS) adjusts certain tax exemptions that significantly affect estate plans for high-net-worth individuals. It is essential for individuals to understand these exemptions and to ensure that their estate plans are appropriately drafted to take full advantage of such exemptions. Without careful planning, estates may be subject to high tax rates that will significantly decrease the amount of wealth passed to heirs.
Effective January 1, 2023, the federal estate and gift tax exemption is $12.92 million per individual (increased from $12.06 million) and, given that the IRS allows married individuals to combine their exemption, $25.84 million per married couple. To the extent an estate is less than the exemption amount, the estate can entirely avoid the imposition of any federal estate tax. To the extent the estate exceeds the exemption amount, the excess amount of the estate will be subject to the federal estate tax (which may be up to 40%) unless a tax-sensitive estate plan is in place.
Also, effective January 1, 2023, the federal gift tax exclusion is $17,000 per recipient (increased from $16,000) and $34,000 per recipient per married couple. This exclusion allows a taxpayer to annually gift up to $17,000 tax-free without using any of the taxpayer’s lifetime gift and estate tax exemption. In the event a taxpayer gifts more than the exclusion amount to a recipient in a given year, the excess amount will reduce the then-applicable exemption amount.
The above-noted exemptions are applicable to gifts and deaths that occur in 2023. Although the IRS will continue to adjust these rates annually based on inflation, these rates are based on legislation that is scheduled to sunset on December 31, 2025. If Congress allows this legislation to sunset, effective January 1, 2026, the current federal estate and gift tax exemption will be cut in half and personal wealth in excess of approximately $6-7 million could be taxed at 40%. Fortunately, with careful estate planning, this can be avoided.
If you are a high net-worth individual, the time to put an estate plan in place is now. Today is never too soon to be planning for tomorrow. What will your legacy be?
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
When starting a new business, many entrepreneurs elect to structure their new business as a limited liability company (LLC). The LLC structure can protect owners from personal liability for their business operations (unlike many sole proprietorships and partnerships) and are relatively easy to form and operate (as compared to corporations, which are subject to various statutory requirements). Unfortunately, many new business owners fail to consider the tax implications of forming an LLC and are surprised to learn that the Internal Revenue Service (IRS) does not recognize LLCs for purposes of taxation.
By default, the IRS treats all LLCs as if they are sole proprietorships (for single-member LLCs) or partnerships (for multi-member LLCs). Income generated from the business passes through to the business owner, and a self-employment tax is assessed against 100% of the business profits, including all compensation paid to the owner. Under the default taxation regime, the IRS does not distinguish between compensation paid to an owner of an LLC as a return on investment and compensation paid to an owner that is also functioning as a full-time employee of the business.
As an alternative to the default tax regime, an LLC may file an election with the IRS to be taxed as an S Corporation (S Corp). Income generated by an LLC that has elected S Corp treatment also passes through to the business owner, however, owners may avoid the self-employment tax. Unlike the default regime, an S Corp owner who performs services for the LLC may wear two hats – that of the business owner and that of a business employee.
As an owner-employee of an S Corp, the owner-employee will be required to pay social security and Medicare taxes (customarily referred to as “payroll taxes”), and the LLC will be required to withhold federal income and employment tax from the employee. However, so long as the owner-employee is paid a reasonable salary, all additional distributions to the owner-employee will be treated as dividends and will not be subject to payroll taxes. Further, because the owner is viewed as being employed by the LLC, the business will avoid the imposition of the self-employment tax.
For example, if an LLC generates $500,000 of income, under the default tax regime, the LLC will be subject to a self-employment tax assessment of approximately $75,000. Under the S Corp tax regime, assuming the LLC pays its owner-employee a reasonable salary of $100,000, then the LLC would only pay approximately $15,000 in payroll taxes.
This example shows a substantial tax saving to the LLC. However, it is important to note that the LLC profits in the S Corp example will still be treated as passing through to the owner, who will then claim the profits as personal income. So, although the LLC sees savings at the business level, it is important that the owner have a thoughtful tax plan in place that takes advantage of all available income tax deductions.
Before making any decision regarding the best tax strategy for you and your LLC, please seek professional advice from an experienced accountant and corporate attorney. These professionals routinely work together to ensure that your tax planning needs are being addressed in a way that minimizes your overall tax liabilities while preserving the legal integrity of your business.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
Crowdfunding is the practice of asking a large number of people to make relatively small donations in order to finance a cause or business venture. A crowdfunding campaign is conducted on an online platform, such as Kickstarter or GoFundMe. The platform charges the user a processing or hosting fee in exchange for offering a central location to promote the crowdfunding project and accept contributions.
The most common type of crowdfunding is donation-based crowdfunding, where the fundraiser runs a campaign to raise funds in support of a certain cause without any obligation to repay the donors. Examples of donation-based crowdfunding include raising money for a family who has lost a loved one and raising money to support a youth sports league. The options are nearly limitless for donation-based crowdfunding – a fundraiser just needs an idea and the courage to solicit donations to fund it!
Although donation-based crowdfunding is the most prevalent type of crowdfunding, there are three other types of crowdfunding available to business owners that serve as useful tools for generating capital from third parties. These other types of crowdfunding are rewards-based crowdfunding, equity-based crowdfunding, and debt-based crowdfunding.
To start a crowdfunding campaign, the fundraiser generally needs to follow these steps: (1) select the crowdfunding platform; (2) set a fundraising goal; (3) set the length of the campaign; (4) create the campaign pitch; (5) define the incentives (i.e., rewards, interest rate, ownership); and (6) promote!
The emergence of crowdfunding has been one of the most dramatic changes to the business finance landscape in the last 10-15 years. Although crowdfunding is an exciting way to generate capital with low financial risk, a business should ensure its intellectual property is protected, it has appropriate form agreements in place (especially with respect to debt-based campaigns), and any equity-based campaigns are in compliance with applicable SEC regulations. Additionally, any nonprofit utilizing crowdfunding should be careful to not put its tax-exempt status at risk.
Before utilizing crowdfunding, a business should obtain advice from an experienced corporate attorney to help identify and minimize any risk associated with the anticipated fundraising and to facilitate a successful fundraising campaign.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
