Unlocking the Potential Benefits of ESOPs

Wouldn’t it be great if your employees worked as if they owned part of the company? An employee stock ownership plan (ESOP) could make that a reality.

Under an ESOP, employee participants gain partial ownership of the business through a retirement savings arrangement. Meanwhile, the company and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and, potentially, a smoother path for succession planning.

ESOP Basics

To implement an ESOP, your business establishes a trust fund and either:

• The company contributes shares of stock or money to buy the stock (an “unleveraged” ESOP) to the ESOP, or
• The ESOP borrows funds to buy the stock initially, and then the company contributes cash to the ESOP to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often tied to their compensation. The business must formally adopt the plan and submit documents and specific forms to the IRS.

The Tax Effects

Among the most significant benefits of an ESOP is that employer contributions to qualified retirement plans such as ESOPs are typically tax-deductible. However, employer contributions to all defined contribution plans, including ESOPs, are generally capped at 25% of covered payroll. One exception applies: C corporations with leveraged ESOPs can deduct all contributions used to pay interest on the ESOP loan. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, provided the dividends are reasonable. Additionally, dividends voluntarily reinvested by employees in company stock in the ESOP are usually also deductible for the business. (Employees, however, should consider the tax implications for their situations.)

Another potential benefit arises for shareholders in some closely held C corporations: They can sell stock to the ESOP and defer federal income taxes on any gains from the sale. Several stipulations apply, including that the ESOP must own at least 30% of the company’s stock immediately after the sale. Also, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic corporations within a set period.

Finally, when a business owner is ready to retire or leave the company for another reason, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares. Alternatively, the ESOP can borrow money to buy the shares.

Risks to Consider

The tax implications of an ESOP differ for entity types other than C corporations, and these should be carefully evaluated before implementing an ESOP for another entity type. While an ESOP offers many potential benefits, it also presents risks, such as the complexity of setup and, in some situations, a strain on cash flow.

ESOPs typically involve high initial costs plus ongoing costs that grow with the plan’s size. Additionally, ESOPs can be burdensome to administer. Because they’re considered a type of retirement plan, they’re heavily regulated by federal and state governments. Compliance will require hiring various professionals, including a trustee.

Choosing the Right Fit

Is your company a good candidate for an ESOP? It’s essential to sort through the details with an experienced advisor. Contact the office for guidance.

Prepare for Resilience with a Business Continuity Plan

Companies without a disaster recovery or business continuity plan need only consider the aftermath of recent hurricanes. News reports estimated property damages from Hurricane Helene alone last year to be more than $59.6 billion, plus disruption of untold businesses and services.

Disasters such as storms, wildfires and earthquakes are unavoidable. However, companies can protect employees, safeguard data and recover costs through a business continuity plan. This plan reduces losses and speeds up recovery.

What Should Your Plan Encompass?

The complexity of your business continuity plan should align with your company’s size, its location, the nature of your industry and the specific risks you face. Small companies may not need a sophisticated media relations plan. However, plans should prepare for local risks and gather feedback from department heads, including plans for these three areas:

1. People. Assign a primary contact and backups to ensure employee safety at work and home. This person should maintain an updated list of employee contact information and be ready to coordinate evacuation if needed. Designate an offsite meeting location and a central contact number for check-ins.

2. Information technology. To remain operational after a disaster, back up email, data and software offsite or in the cloud. Cloud services allow you to restore data securely from anywhere, keeping communication open with employees, customers and vendors during recovery.

3. Insurance. Regularly review your insurance coverage to confirm it’s sufficient to replace assets, restore operations or relocate if necessary. Consider potential losses, such as lost sales. Check details carefully. Standard policies may not cover certain damages, such as flooding after a hurricane.

Planning Isn’t One and Done

It’s not enough to create a disaster plan. You also need to review, revise and test it periodically. Hold regular fire and other evacuation drills and ask employees to update personal contact information. At least once a year, ensure that your IT backup systems function correctly and that your insurance coverage keeps pace with your business’s value.

By making business continuity an ongoing process, you and your employees will be ready to act should the worst happen. Contact the office with questions.

4 Key Tax Questions About 2025 Taxes

Right now, you may be more focused on what you’ll owe (or receive as a refund) when you file your 2024 tax return in April than on tax planning for the new year. However, as you work through your annual tax filing, you should familiarize yourself with amounts that may have changed for 2025 due to inflation adjustments.

Here are four commonly asked questions (and answers) about 2025 tax figures:

1. How much money can I contribute to an IRA? If eligible, you can contribute up to $7,000 to a traditional or Roth IRA (but only up to 100% of your earned income, if less). If you’re age 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts are the same as for 2024.)

2. What’s the maximum I can contribute to a 401(k) plan through my job? The amount you can contribute is up to $23,500 to a 401(k) or 403(b) plan (up from $23,000 in 2024). Those 50 or older can add a $7,500 catch-up contribution (unchanged from 2024). New in 2025, employees ages 60 through 63 can make enhanced catch-up contributions of up to $11,250 (including the $7,500 standard catch-up contribution).

3. How much must I earn not to pay Social Security on my entire salary? The Social Security tax wage base rises to $176,100 (from $168,600 for 2024). You don’t owe Social Security tax on amounts earned above this threshold. (Medicare tax must be paid on all amounts earned.)

4. How much can I give one person without requiring a gift tax return? The annual gift tax exclusion is $19,000 (up from $18,000 in 2024).

These are only some of the tax figures that may apply to you. Contact the office for more information.

Married Filing Separately: When It May Make Sense

Filing joint tax returns generally results in the lowest tax bill for married couples. However, in some circumstances, they may pay less taxes if they file separately, such as when one spouse has large medical expenses. Medical expenses are deductible only to the extent that they exceed 7.5% of adjusted gross income (AGI). So if one spouse would have significantly lower AGI filing separately, it may increase the deduction.

But be mindful of the downsides of filing separately. Certain tax credits, for instance, are generally unavailable to separate filers, specifically for child and dependent care and education. Also, the capital loss deduction for separate filers is limited to $1,500 (as opposed to $3,000 for married couples filing jointly).

Yet there may be reasons filing separately is better even if the tax cost is higher, such as if one spouse has an income-sensitive repayment plan for student loans. Contact the office to weigh all the factors and determine the most advantageous strategy for your situation.

A Better Way to Help with Tuition

Another year is here, and that comes with a new school semester and tuition bills for many people. If you’re considering helping a grandchild or other loved one with their college expenses, first take time to review the tax implications. If the total amount you give to the student in 2025 exceeds the annual gift tax exclusion, you might owe gift tax on the excess. In 2025, this exclusion is $19,000 per recipient or $38,000 for married donors who split gifts (up from $18,000 and $36,000, respectively, in 2024).

To avoid tax implications on gifts over the exclusion (or to preserve the exclusion for other gifts), you can pay tuition directly to the school, which qualifies for an unlimited gift tax exclusion. This exclusion applies only to tuition, not to room, board, books or supplies.

Business Mileage Rate Is Up for 2025

The IRS has issued the 2025 cents-per-mile rates that can be used to calculate tax-deductible vehicle operating costs. Effective Jan. 1, 2025, the standard mileage rate for the business use of a car, van, pickup truck or panel truck is 70 cents per mile. This is up from 67 cents per mile for 2024. (For medical or eligible moving purposes, the 2025 rate is 21 cents per mile, and for charitable driving, it’s 14 cents per mile, both unchanged from 2024.)

These rates apply to gasoline and diesel-powered vehicles and to electric and hybrid-electric automobiles. To protect your deduction, don’t forget to keep detailed mileage records. Contact the office with questions.

Upcoming Tax Due Dates

January 15

Employers: Deposit nonpayroll withheld income tax for December 2024 if the monthly deposit rule applies.

Individuals: Pay the fourth installment of 2024 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.

January 31

Employers: File 2024 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration.

Employers: File a 2024 return for federal unemployment taxes (Form 940) and pay any tax due if all the associated taxes weren’t deposited on time and in full.

Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2024 (Form 941) if all of the associated taxes due weren’t deposited on time and in full.

Employers: Provide 2024 Form W-2 to employees.

Businesses: Provide Form 1098, Form 1099-MISC (except for those with a February 18 deadline), Form 1099-NEC and Form W-2G to recipients.

Individuals: File a 2024 income tax return (Form 1040 or Form 1040-SR) and pay the tax to avoid penalties for underpaying the January 15 installment of estimated taxes.

February 10

Employers: File a 2024 return for federal unemployment taxes (Form 940) if all associated taxes due were deposited on time and in full.

Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2024 (Form 941) if all associated taxes due were deposited on time and in full.

Individuals: Report January tip income of $20 or more to employers (Form 4070).

Top Key Performance Indicators Every Business Should Track

In today’s competitive market, tracking performance is essential to ensuring your business achieves its goals. Key Performance Indicators (KPIs) are metrics that help you measure progress and make data-driven decisions. By focusing on the right KPIs, you can gain valuable insights into your operations, spot areas for improvement, and position your business for long-term success. Here are the top KPIs every business should monitor.

Revenue Growth

Revenue growth is a cornerstone KPI that reflects the increase or decrease in your company’s income over time. It indicates whether your strategies are driving success and highlights trends in your business performance. To track revenue growth, compare your current earnings to previous periods, such as month-over-month or year-over-year. Consistent revenue growth shows your business is thriving, while a decline may signal the need for adjustments in pricing, marketing, or customer acquisition efforts.

Profit Margin

Profit margin measures the percentage of revenue that remains as profit after accounting for expenses. It is one of the best indicators of a company’s efficiency and profitability. There are two main types to track:

• Gross Profit Margin: Focuses on revenue minus the cost of goods sold, providing insight into production efficiency.
• Net Profit Margin: Considers all operating expenses, taxes, and other costs to determine how much profit your business retains.

Monitoring these margins helps identify inefficiencies and ensures your pricing strategy aligns with your financial goals.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) calculates how much you spend to gain a new customer. This is critical for understanding the return on investment (ROI) of your marketing efforts. To calculate CAC, divide your total marketing and sales expenses by the number of new customers acquired in a specific period. A high CAC may indicate that your strategies need optimization, while a lower CAC shows your efforts are cost-effective.

Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) estimates the total revenue a business can expect from a single customer throughout their relationship. CLV is vital for determining how much you should spend on acquiring and retaining customers. A high CLV means customers are generating significant value, often due to repeat purchases, strong loyalty, or cross-selling opportunities. By tracking CLV, you can focus on strategies to enhance customer retention and maximize revenue.

Customer Retention Rate

While attracting new customers is essential, retaining existing ones is often more cost-effective and profitable. Customer retention rate measures the percentage of customers who continue to do business with you over a given period. A high retention rate indicates strong customer satisfaction and loyalty, while a low rate suggests potential issues with service quality or product satisfaction. Retention-focused strategies, such as loyalty programs and personalized marketing, can help improve this KPI.

Inventory Turnover

Inventory turnover measures how often your business sells and replaces inventory over a specific period. For product-based businesses, this KPI is crucial to maintaining a balance between stock availability and operational efficiency. A high inventory turnover rate indicates strong demand and efficient stock management, while a low rate may point to overstocking or slow sales. Tracking inventory turnover ensures you meet customer needs without tying up excessive capital in unsold products.

Employee Productivity

Your team’s productivity plays a significant role in your company’s overall performance. This KPI measures output per employee or revenue generated per employee over a given time. Monitoring employee productivity helps identify inefficiencies in workflows or areas where additional training may be beneficial. High productivity indicates that your team is working effectively, while low productivity suggests potential bottlenecks or lack of resources.

Choosing KPIs That Align With Your Goals

Not all KPIs are relevant for every business. The key is to choose indicators that align with your specific goals and industry. Regularly reviewing your KPIs helps you focus on what matters most, allowing you to make strategic decisions that drive growth. By tracking these metrics, you’ll gain the insights needed to stay competitive, improve operations, and achieve sustained success.

5 Reasons Why Effective Bookkeeping Is Essential for Business Growth

As a business owner, managing your finances effectively is one of the most important aspects of running a successful operation. Bookkeeping, the process of recording and organizing financial transactions, provides the foundation for making informed decisions, maintaining compliance, and planning for growth. Here’s why effective bookkeeping is essential for your venture’s success.

1. Clear Financial Visibility

Accurate bookkeeping provides you with a clear view of your financial position. By keeping track of income, expenses, assets, and liabilities, you’ll always know where your business stands. This transparency helps you make better decisions, whether it’s setting budgets, planning expansions, or identifying areas to cut costs. Without accurate records, you risk making uninformed choices that could hurt your business long-term.

2. Meeting Tax Obligations

One of the most critical reasons for effective bookkeeping is ensuring you meet your tax obligations. Properly maintained financial records make it easier to calculate your tax liability, prepare filings, and claim deductions. If your records are disorganized or incomplete, you could face penalties, audits, or missed tax-saving opportunities. With good bookkeeping, you’ll have everything ready for tax season, reducing stress and avoiding costly mistakes.

3. Supporting Business Growth

When your financial records are organized, you can plan for growth with confidence. Bookkeeping allows you to analyze trends, such as seasonal fluctuations in revenue or rising expenses, which helps you identify opportunities for expansion or areas needing improvement. Whether you’re seeking to hire new staff, launch a marketing campaign, or invest in equipment, accurate records help you allocate resources wisely and measure the success of your initiatives.

4. Strengthening Cash Flow Management

Effective bookkeeping is key to managing cash flow, one of the most critical aspects of business success. By keeping an eye on incoming and outgoing funds, you can avoid cash shortages and ensure you have enough resources to cover operating expenses. Proper bookkeeping also helps you identify patterns in spending and revenue, enabling you to take proactive steps to maintain a healthy cash flow.

5. Simplifying Financial Audits and Loans

If you ever need to apply for a business loan or face a financial audit, accurate bookkeeping is invaluable. Lenders and auditors require detailed financial records to assess your company’s stability and compliance. Well-organized books show that you manage your finances responsibly, making it easier to secure loans or pass audits without complications.

A Foundation for Long-Term Success

Bookkeeping may seem like a tedious task, but it’s an essential component of running a successful business. By maintaining accurate records, you’ll gain the financial clarity needed to make informed decisions, meet obligations, and plan for growth. Investing time and effort into effective bookkeeping today sets the stage for long-term success and stability.

5 Tips to Create a Realistic Budget

Creating a realistic budget is one of the most effective ways to take control of your finances. Whether you’re saving for a major purchase, paying off debt, or building an emergency fund, a well-thought-out budget helps you make informed financial decisions. Here are five practical tips to help you create a budget that works for your lifestyle and goals.

Understand Your Income and Expenses

The foundation of any budget is understanding your financial situation. Start by calculating your total income, including your salary, freelance earnings, or any other sources. Then, track your expenses to see where your money is going. Categorize your spending into fixed expenses (rent, utilities, car payments) and variable expenses (groceries, entertainment, dining out). Use tools like budgeting apps or spreadsheets to make this process easier and more accurate.

Set Clear Financial Goals

Your budget should reflect your financial priorities and goals. Think about what you want to achieve, whether it’s paying off a credit card, saving for a vacation, or building a down payment for a house. Divide your goals into short-term and long-term categories. Short-term goals, like saving for holiday gifts, might take a few months, while long-term goals, like retirement savings, require ongoing planning. Having clear objectives keeps you motivated and ensures your budget aligns with your aspirations.

Differentiate Between Needs and Wants

To create a realistic budget, it’s important to distinguish between your needs and wants. Needs include essential items like housing, food, transportation, and healthcare. Wants are discretionary expenses like dining out, entertainment, or subscription services. While it’s fine to spend on wants occasionally, prioritizing needs ensures that you’re living within your means. Allocating a set percentage of your income for discretionary spending can help you enjoy life while staying on track financially.

Use the 50/30/20 Rule as a Guide

One popular budgeting method is the 50/30/20 rule, which divides your income into three categories:

• 50% for needs: Cover essential expenses like rent, groceries, and utilities.
• 30% for wants: Spend on non-essential items that bring joy, such as hobbies or dining out.
• 20% for savings and debt repayment: Use this portion for building savings or paying down loans.

While this rule serves as a helpful starting point, feel free to adjust the percentages based on your unique situation. For example, if you’re aggressively paying off debt, you might allocate more than 20% to that category.

Review and Adjust Your Budget Regularly

Your budget isn’t a set-it-and-forget-it plan. Life circumstances, income, and expenses change over time, so it’s important to review your budget regularly. Assess your spending habits at the end of each month and make adjustments as needed. If you find you’re overspending in one category, consider cutting back in another. Flexibility ensures your budget stays realistic and effective.

Achieving Financial Freedom One Step at a Time

Creating a realistic budget is a powerful tool for achieving financial stability and freedom. By understanding your income and expenses, setting goals, and prioritizing your needs, you can build a budget that fits your life. With regular reviews and adjustments, your budget will guide you toward your financial aspirations while still allowing room for enjoyment along the way.

Understanding Tax-Advantaged Accounts

Tax-advantaged accounts are powerful tools for growing your savings while reducing your tax burden. These accounts are designed to encourage saving for specific purposes, such as retirement, healthcare, or education, by offering tax benefits. Understanding how these accounts work and choosing the right ones for your goals can significantly impact your financial future. Here’s what you need to know about tax-advantaged accounts and how to use them effectively.

Retirement Accounts

One of the most common types of tax-advantaged accounts is a retirement account. These accounts allow you to save for the future while enjoying tax benefits today. The two primary types of retirement accounts are:

• Traditional Accounts: Contributions to accounts like a traditional IRA or 401(k) are tax-deductible, reducing your taxable income for the year. However, withdrawals in retirement are taxed as income.
• Roth Accounts: Contributions to Roth IRAs or Roth 401(k)s are made with after-tax dollars, meaning you don’t get a tax deduction upfront. However, qualified withdrawals in retirement are tax-free.

Both options offer significant benefits, and the choice between traditional and Roth accounts depends on factors like your current income, tax bracket, and expected future tax rate.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) are an excellent option if you have a high-deductible health plan (HDHP), offering triple tax benefits that make saving for medical expenses more manageable. Contributions to an HSA are tax-deductible, lowering your taxable income for the year. Additionally, funds in the account grow tax-free, and withdrawals for qualified medical expenses, such as doctor visits, prescriptions, or medical devices, are also tax-free.

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over each year, allowing you to build a substantial reserve for future healthcare needs. HSAs remain with you even if you change jobs or retire, making them a versatile tool for both short-term and long-term medical expenses. By maximizing contributions and using the funds strategically, you can significantly reduce healthcare costs while enjoying valuable tax advantages.

Education Savings Accounts

For those saving for education, tax-advantaged accounts like 529 plans and Coverdell Education Savings Accounts (ESAs) offer valuable benefits. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses, such as tuition, books, or room and board. These accounts are ideal for parents, guardians, or individuals planning for their own education or that of a loved one.

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts (FSAs) allow you to set aside pre-tax dollars for specific expenses, such as healthcare or dependent care. Unlike HSAs, FSAs are employer-sponsored and typically have a “use it or lose it” policy, meaning unused funds may not roll over to the next year. FSAs can help you save money on predictable expenses like prescription medications, childcare, or medical supplies (including feminine hygiene products).

Choosing the Right Accounts for Your Goals

The best tax-advantaged accounts for you depend on your financial goals and current situation. For example, if retirement is a top priority, focus on maximizing contributions to retirement accounts. If you’re managing healthcare costs, an HSA or FSA may be more beneficial. For education savings, a 529 plan offers flexibility and substantial tax benefits.

Growing Wealth With Smart Savings Strategies

Tax-advantaged accounts are a key component of a sound financial strategy. By taking advantage of the tax benefits offered by these accounts, you can grow your savings more efficiently and achieve your financial goals faster. With careful planning and regular contributions, these accounts will help you build a secure future while minimizing your tax burden.

Tax Relief Programs for Small Businesses

Running a small business comes with a variety of challenges. From managing payroll to staying competitive in your market, the responsibilities can seem endless. One of the most pressing issues small business owners face is managing tax obligations. If you’ve ever felt overwhelmed by your tax burden, you’re not alone. Fortunately, there are tax relief programs designed to ease this financial strain. This guide will walk you through some of the most effective options to help you save money and focus on growing your business.

Federal Tax Relief Programs

The federal government offers several programs aimed at helping small businesses reduce their tax liabilities. Here are some of the most popular options:

1. Small Business Tax Credits

Tax credits directly reduce the amount of tax you owe and can result in significant savings. Key examples include:

• Work Opportunity Tax Credit (WOTC): If you hire employees from specific target groups, such as veterans or individuals who have faced long-term unemployment, you could qualify for this credit.
• Research and Development (R&D) Tax Credit: Businesses that invest in innovation, such as developing new products or processes, may be eligible for this credit.
• Employer-Provided Childcare Tax Credit: If you provide childcare facilities or services for your employees, you can claim this credit.

2. Section 179 Deduction

The Section 179 Deduction allows you to deduct the full purchase price of qualifying equipment or software in the year it is purchased, rather than depreciating it over time. This is especially beneficial for businesses making significant investments in their infrastructure.

3. Payroll Tax Relief

Programs like the Employee Retention Credit (ERC) were introduced during the COVID-19 pandemic to provide payroll tax relief for businesses that retained employees despite financial hardships. While some pandemic-related programs have expired, it’s worth keeping an eye on similar initiatives.

State and Local Tax Relief Options

Beyond federal programs, many states and municipalities offer tax incentives tailored to small businesses. These can include:

1. State-Specific Tax Credits

Some states offer unique tax credits for businesses that meet certain criteria, such as operating in rural areas, creating jobs, or investing in green energy. Research what’s available in your state to see if you qualify.

2. Property Tax Relief

If you own property for your business, check to see if your local government offers tax abatements or reduced rates for small businesses. Programs like these are especially common in economically disadvantaged areas.

3. Sales Tax Exemptions

Certain purchases or services may be exempt from sales tax, depending on your business type and location. For example, manufacturers often qualify for exemptions on equipment used in production.

Navigating Tax Debt Relief

If your small business is struggling with existing tax debt, several relief options can help you get back on track:

1. Offer in Compromise (OIC)

The IRS allows qualifying businesses to settle their tax debt for less than the full amount owed. This is an excellent option if paying your full tax bill would create financial hardship.

2. Installment Agreements

An installment agreement lets you pay off your tax debt over time in smaller, more manageable payments. This can help ease cash flow issues while keeping your business operational.

3. Penalty Abatement

If you’ve accrued penalties for late payments or filings, you can request penalty abatement. The IRS may waive penalties if you have a valid reason, such as a natural disaster or medical emergency.

Tips for Maximizing Tax Relief Opportunities

To make the most of tax relief programs, you should consider consulting a tax professional who can help identify opportunities you might overlook. Keeping detailed records of expenses, payroll, and equipment purchases is essential for claiming deductions and credits accurately. Additionally, staying informed about changes in tax laws and new relief programs can ensure you’re always taking full advantage of available options.

Taking Control of Your Tax Strategy

Tax relief programs can make a significant difference for your small business, helping you save money and focus on what matters most: growth and success. By understanding your options at the federal, state, and local levels and seeking professional advice when needed, you can navigate the complex world of taxes with confidence. Take the time to explore these opportunities as a step toward a more secure financial future for your business.

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