Did you know that there are more millionaires in the United States than ever before? Recently, I had the opportunity to read Chris Hogan's latest book "Everyday Millionaires: How Ordinary People Built Extraordinary Wealth-and How You Can Too". In the book, Chris Hogan destroys millionaire myths that are seemingly keeping everyday people from achieving financial independence.

You don't have to inherit family assets or have a high paying job. In fact, most millionaires have achieved their wealth through ordinary tools, discipline and determination.

If you are looking to be a better steward of your personal cash flow or know of someone that could benefit from an easy to understand plan, check out "Everyday Millionaires". – Rusty Fulling


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Financing a family-run enterprise can bring out the worst in some people. So handling the transactions carefully can go a long way toward keeping the peace.

Common sources of financing family firms can include personal savings, credit cards, home equity loans, second mortgages and personal loans -- sometimes from relatives not directly involved in the business.

Here are some financing considerations for family businesses:

1. Plan the financing with your spouse and other relatives involved. This includes the type of financing, repayment schedules and the realistic expected returns from the business.

2. If you borrow from a family member, put the agreement in writing to ensure the repayment schedule is understood, to help secure tax benefits and to promote family harmony.

3. Weigh the charges and risks of various loans: For example, rates are higher when you borrow against a credit card than on a home equity loan, but you don't risk foreclosure on your property.

4. Investigate taking out a loan in the company's name. The rates might be a little higher, there's more paperwork and the qualifications are more rigid, but it helps establish credit for the business, makes it easier to borrow in the future and eliminates strain on the family's finances.

5. If you borrow from traditional lenders or a government agency, such as the Small Business Administration, keep in mind that they insist that business and family finances are kept separate. The IRS also demands this.

Like all lenders, family lenders expect a return on their money. This could come in the form of increased equity in the company. Or it could involve principal and interest payments from the business back to the family member. In either case, keep written documentation. This protects the company at tax time and helps alleviate questions about future payments as the business expands beyond the family. In addition, documentation is important if you seek additional funds from traditional lenders or the government.

Tax Consequences

Family loans must be properly structured for several reasons:

  • The lender must charge an interest rate the IRS considers adequate or there can be negative tax consequences.

  • If the business never pays the lender back, the lender can claim a bad debt deduction. First, a good faith attempt to collect must be made. (Under the tax code, business bad debts are more advantageous than personal bad debts.)

  • If a loan isn't properly documented and the lender is audited, the IRS may say the family loan was a gift and disallow a bad debt deduction. And there could be problems because a gift tax return was filed.

You Might Not Want Funds From Family Members If. . .

  • You qualify for other financing.Higher interest rates may be a small price to pay to maintain independence in the family.

  • It involves a big sacrifice. Be aware of relatives' capabilities and take money only if they won't be hurt by a failure.

  • There's already friction in the family.

These sources can cause the success or failure of the business and put family finances in jeopardy.

Assuming your family business is a success, there shouldn't be any major problems with family loans. However, let's say the business falters and your spouse is providing income for the family. You wind up supporting the business rather than the other way around.

This can work for a while, but if the money-losing venture can't eventually support itself, you need to answer some tough questions:

  • Is the problem temporary? For example, does the business need more time to become stable or is it suffering from a slump in the economy?

  • Is the problem permanent, perhaps the result of unrealistic business expectations or long-term market changes, such as the failure of major customers?

  • What changes can you make to improve cash flow and profits?

In the above scenarios, your accountant can help determine financing alternatives for family-run businesses.



Q. An employer asks: "I want to set up an 'Employee of the Month' program, but I don't know where to start. How do I go about doing this?"

A. Start with the things you need to consider and, with your answers, decide on what you will do. Here are questions to consider:

  • What's motivating you to want to have an employee of the month program? What do you want to accomplish? If your reason is that you think it's a good idea or because a competitor is doing it, that's not good enough. What are the specific benefits to your organization if you have a program? If you can't define specific benefits, why waste time and money on this?

  • How many employees would be eligible for the award? Are they in one location or more than one? How many locations? Will you have an employee-of-the-month at each location? Will you have a winner in each department?

  • Which employees will be eligible? Only employees in some departments? Only the nonexempt (usually the hourly-paid) employees? All employees except top management?

  • Who will select the winner? Will you have employees nominate candidates? Who will vote on them? Who will make the final selection? Will a team of management people make the selection? Will the top executive make the selection?

If one of your purposes is to encourage employees to improve their performance or the quality of their work, consider having employees recognize coworkers who exhibit outstanding performance or who "go beyond the call of duty."

You could give employees outstanding service certificates or thank you memos they would fill in with a coworker's name, the reason for giving the certificate or memo, and the date. The employee or employees with the most certificates or memos in a given month would be the winner or winners for that month.

  • What criteria/standards will you use to select the winner?

  • What is the form of recognition you will use? The typical recognition is a plaque on the wall with the employee's photo and/or name, or a paper certificate presented at a meeting of employees. An award also could be, or include, cash or a gift.

Here are some characteristics to look for in a winning "Employee of the Month." They are adapted from guidelines used in a program at Stanford University:

  • The employee demonstrates excellence in performance and customer service, actively builds partnership with colleagues, and contributes new ideas for the benefit of the University.

  • The employee is dedicated to accomplishment, is venturesome, takes responsibility and gets things done.

  • The employee is committed to people, and involves, challenges and supports others.The employee is enthusiastic.

  • The employee inspires others with a positive attitude, is energetic, motivates others into action, is friendly, and goes out of his or her way for others.

Q. Will an "Employee of the Month" award promote competition vs. cooperation and teamwork?

A. It is more likely to promote competition than cooperation. You have to decide which it is that you want: competition between individuals or cooperation within a team. An "Employee of the Month" program works, for example, to motivate individual sales people to excel. It can be counter-productive in a team environment.

If you want to use this type of award, consider offering it to teams or departments. Such as a "Team of the Month" Award. You'll have less resentment against the winners if the employees are on teams, or in departments, competing with other teams or departments.

Q. Is it advisable to have staff or management pick the award winners?

A. The answer depends on your current workplace culture and the kind of culture you want to encourage. Where does the power reside now? How much authority and responsibility do you place with employees? Do you want to encourage employees to accept more authority and responsibility? Answers to these questions will help you decide.

In addition, if you choose to go with a "Team of the Month" Award, it's pretty difficult to have the employees select or vote for the winning team.

One approach some employers use in selecting winners is to have the customers or clients do the voting. Typically, in this approach, the focus is on delivering quality customer service or achieving high customer satisfaction. Employees give the customer or client little ballots or coupons on which the customer or client can write in the name of the employee who gives them quality service or high satisfaction. The employee or employees who receive the most "votes" from the customers or clients in a given period are the winners.

Q. What are some negatives associated with "Employee of the Month" programs?

A. Following are three reasons this type of well-intentioned recognition program becomes counter-productive or fails:

  • The monthly award becomes routine. Employees eventually ignore it.

  • Employees come to view the monthly winners as the recipients of favoritism, even as the "boss's pets." If the Employee of the Month isn't selected by some objective system or measurement, in time employees see the selection of the monthly winners as the result of favoritism by someone in management.

  • The program eventually damages employees' morale. When the monthly winners do not actually deserve the recognition, the program can damage the morale of other employees.


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Q.  Our company maintains a premium-only cafeteria plan (POP) under which employees who elect company-sponsored major medical coverage can pay their share of the premiums with pre-tax dollars. We are thinking of amending our cafeteria plan to add some other benefits. We know that health flexible spending accounts (FSAs) and dependent care assistance programs (DCAPs) can be offered under a cafeteria plan, but what other benefits can we offer?

A.  Employer-sponsored group major medical coverage, health FSAs, and DCAPs are the most common cafeteria plan benefits. Other common benefits that can be offered under a cafeteria plan include the following:

  • health savings account contributions;

  • group-term life insurance on the life of an employee (although the cost of coverage in excess of $50,000, less any amount paid after-tax, is includible in the employee's gross income);

  • long-term or short-term disability coverage;

  • coverage under other arrangements that qualify as accident or health plans under the law (for example, employer-sponsored group dental or vision coverage); and

  • purchase or sale of paid time off (PTO), for example, vacation, sick, or personal days.

Of course, various rules and issues may need to be addressed before offering these benefits under the cafeteria plan. For example, specific requirements must be met when the purchase or sale of PTO is offered as a benefit under a cafeteria plan. And cafeteria plans generally cannot be used to pay or reimburse premiums for individual insurance policies that provide major medical or other non-excepted coverage. Reimbursing premiums for other types of individual insurance coverage raises issues under ERISA, COBRA, and other laws.



Health care costs have skyrocketed over the last few decades. Fortunately, health savings accounts (HSAs) allow qualifying individuals to pay for certain medical expenses with pretax dollars. Here is what you need to know to put an HSA to work for you. 

Healthy Growth

Over the last decade, many people have jumped on the HSA bandwagon. HSA assets exceeded $51 billion as of June 30, 2018, according to a recent survey conducted by HSA investment provider Devenir. That's an increase of 20.4% compared to the previous year.

In addition, the total number of HSAs grew to 23.4 million as of June 30, 2018, up 11.2% compared to a year earlier. Devenir projects the number of HSA accounts to increase to 29 million by the end of 2020 with assets approaching $75 billion.

The Basics

With HSAs, individuals must take more responsibility for their health care costs, instead of relying on an employer or the government. The upside is that HSAs offer some tax benefits.

Under the Affordable Care Act (ACA), health insurance plans are categorized as Bronze, Silver, Gold or Platinum. Bronze plans — which have the highest deductibles and least generous coverage — are the most affordable. Platinum plans have no deductibles and cover much more, but they're also significantly more expensive.

In many cases, the ACA has led to premium increases, even for those with less generous plans. However, these less generous plans also might make you eligible to open and contribute to a tax-advantaged HSA.    

For the 2018 tax year, you could make a tax-deductible HSA contribution of up to $3,450 if you have qualifying self-only coverage or up to $6,900 if you have qualifying family coverage (anything other than self-only coverage). For 2019, the maximum contributions are $3,500 and $7,000, respectively. If you're age 55 or older as of year end, the maximum contribution increases by $1,000.

To be eligible to contribute to an HSA, you must have a qualifying high deductible health insurance policy and no other general health coverage. For 2018, a high deductible health plan was defined as one with a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. For 2019, the minimum deductibles are the same. 

For 2018, qualifying policies must have had out-of-pocket maximums of no more than $6,650 for self-only coverage or $13,300 for family coverage. For 2019, the out-of-pocket maximums are $6,750 and $13,500, respectively.

Important note: For HSA eligibility purposes, high deductible health insurance premiums don't count as out-of-pocket medical costs. 

Deductible Contributions

If you're eligible to make an HSA contribution for the tax year in question, the deadline is April 15 of the following year (adjusted for weekends and holidays) to open an account and make a tax-deductible contribution for the previous year.

So, there's still time for an eligible individual to open an account and make a deductible contribution for 2018. The deadline for making 2018 contributions is April 15, 2019.

The write-off for HSA contributions is an "above-the-line" deduction. That means you can claim it even if you don't itemize.

In addition, the HSA contribution privilege isn't tied to your income level. Even billionaires can make deductible HSA contributions if they have qualifying high deductible health insurance coverage and meet the other eligibility requirements. 

Important note: Sole proprietors, partners, LLC members, and S corporation shareholder-employees are generally allowed to claim separate above-the-line deductions for their health insurance premiums, including premiums for high deductible health plans that make you eligible for HSA contributions.

HSAs in the Real World

To show the tax perks of HSAs, consider the following example: Albert and Angie are a married couple in their 30s. They're both self-employed, and both have separate HSA-compatible individual health insurance policies for all of 2019. Both policies have $2,000 deductibles.

For 2019, Albert and Angie can each contribute $3,500 to their respective HSAs and claim a total of $7,000 of write-offs on their 2019 joint return. If they're in the 32% federal income tax bracket, this strategy cuts their 2019 tax bill by $2,240 (32% × $7,000). Over 10 years, they'll save $22,400 in taxes, assuming they contribute $7,000 each year and remain in the 32% bracket.

Tax Treatment of Distributions

HSA distributions used to pay qualified medical expenses of the HSA owner, spouse and dependents are federal-income-tax-free. However, you can build up a balance in the account if contributions plus earnings exceed withdrawals for medical expenses. Any earnings are free from federal income tax unless you withdraw them for something other than qualified medical expenses.

So, if you're in very good health and take minimal or no distributions, you can use an HSA to build up a substantial medical expense reserve over the years, while earning tax-free income along the way. Unlike flexible spending accounts (FSAs), undistributed balances in HSAs are not forfeited at year end. They can accumulate in value, year after year. Thus, an HSA can function like an IRA if you stay healthy.

Even if you empty the account every year to pay medical expenses, the HSA arrangement allows you to pay those expenses with pretax dollars. But there are some important caveats to bear in mind:

  • HSA funds can't be used for tax-free reimbursements of medical expenses that were incurred before you opened the account.

  • If money is taken out of an HSA for any reason other than to cover qualified medical expenses, it will trigger a 20% penalty tax, unless you're eligible for Medicare.

If you still have an HSA balance after reaching Medicare eligibility age (generally age 65), you can drain the account for any reason without a tax penalty. If you don't use the withdrawal to cover qualified medical expenses, you'll owe federal income tax and possibly state income tax. But the 20% tax penalty that generally applies to withdrawals not used for medical expenses won't apply. There's no tax penalty on withdrawals after disability or death. 

Alternatively, you can use your HSA balance to pay uninsured medical expenses incurred after reaching Medicare eligibility age. If your HSA still has a balance when you die, your surviving spouse can take over the account tax-free and treat it as his or her own HSA, if he or she is named as the account beneficiary. In other cases, the date-of-death HSA balance must generally be included in taxable income on that date by the person who inherits the account.

For More Information

HSAs can provide a smart tax-saving opportunity for individuals with qualifying high deductible health plans. Contact us to help you set up an HSA or decide how much to contribute for 2019. And, remember, there's still time to make a deductible contribution for your 2018 tax year, if you're eligible. 


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I had to smile as my vehicle hit 220,000 miles this week.  Eighteen years ago, with title in hand, I drove this brand new truck right off of the new car lot.  It was the first vehicle that I had saved up and paid cash for.  While our family has bought and sold other vehicles since that time, we made a decision in 2001 not to make car payments a priority in our monthly budget.  

Paying cash rather than financing has been taught for years by budget experts like Larry Burkett, Ron Blue and Dave Ramsey.  Most likely they were taught by their grandmothers with the trusty envelope system which has been around for decades. The envelope system limits you to only spend the amount that is placed in the envelope. Advantages of using this system creates a sense of discipline and accountability with your spending, along with making it challenging to overspend.

Although it may be unpopular to wait and save in our "instant gratification" society, the absence of financing can truly free you up from the burden of debt.  One of my favorite quotes from Dave Ramsey says...

"If you will live like no one else, later you can live like no one else."

What small decisions are you making today to make a positive difference in your future? - Rusty Fulling


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The Fulling Management & Accounting team along with one of our clients, IntelligeneCG, had the opportunity to serve at the Kansas City Rescue Mission Men's Center this past weekend. Always such a humbling experience and a great reminder to "...continue to remember the poor." Gal 2:10


KCRM is a Christ-centered community offering freedom (from the past) & hope (for the future) to the poor and homeless, empowering them to reach their full potential. The community offers Relief Services, Recovery Services & Reentry Services.


Be a part of something you believe in that is bigger than yourself!


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One of the most effective and inexpensive ways of building employee loyalty is to hold regular outings and get-togethers. By holding staff gatherings, you build loyalty and form bonds outside the workplace. Plus, you get a major tax break.

You can hold a staff party at a restaurant or treat your entire staff and their families to a day at a local ball game or amusement park. Most places offer discount rates for groups.

When planning an event, here are four cues to keep the emphasis on fun:

Take it outside. Hold your outings away from the office, if possible. This creates a more relaxed atmosphere and lets staff members feel free to put work aside and just have a good time. They are more likely to bond if the focus is off the workplace.

Involve families. This lets everyone feel a part of the workplace community and opens the way for more personalized relationships. In addition, spouses and family members play a major role in employees' longevity with your company.

Make it enjoyable. Come up with a theme and hold a contest. For example, if you're going to a ballpark, the employee who can name the team's highest scoring player wins a baseball cap. Or if you're headed to the beach, a beach towel can be awarded to the family that comes up with the longest list of songs from Annette Funicello and Frankie Avalon movies.

Keep it regular. The more often you hold company-wide events, the more your staff members feel part of a community that works and plays together. Send out invitations at least a month before each outing and get everyone involved in a countdown.

By investing a little time and money in showing employees and their families a good time, you build loyalty that can help retain your staff.

Now, here's the tax bonus:  Under prior law, businesses could deduct 50% of the cost of its entertainment and meal expenses, with certain exceptions. For example, you could write off 100% of the cost of a company outing for employees, such as a 4th of July barbecue or company picnic. This special tax law provision wasn't touched by the 2017 Tax Cuts and Jobs Act. 

However, there has always been a catch to claim this tax break: You must invite the entire staff. In other words, you can't restrict the get-together to just the higher-ups. Inviting a few friends or family members won't jeopardize the deduction, but you can't write off the costs attributable to those social guests.


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18 weeks ago some of our Fulling Management & Accounting team joined up with World Visionto help provide clean water access for children and families in areas of Africa around Kenya. World Vision did an incredible job organizing the fundraising efforts and partnership with the Kansas City marathon.

Kelly Roney, her husband Brant, and Rusty Fulling from our team joined over 900 other World Vision volunteers to run in the Kansas City half / full marathon event this past weekend.

Through the marathon event, Team World Vision was able to raise over $800,000. This will provide over 17,000 people access the clean water. If you are looking for a great group to invest in, check out: www.worldvision.org


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Did you know nearly 1,000 children under age 5 die every day from diarrhea caused by contaminated water, poor sanitation, and improper hygiene? We believe the global water and sanitation crisis can be solved within our lifetimes.

Some of our staff and family members at Fulling Management & Accounting have joined up with Team World Vision to bring awareness to this crisis. On October 20th, we will be running in a half marathon to help provide life-changing clean water to children and communities in Africa. Yes, this will be my first attempt at a half-marathon. Needless to say, my muscles are already sore just thinking about it.

For every $50 raised, World Vision is able to provide clean water to 1 person. So far, our Kansas City World Vision team has raised almost $500,000 toward our $750,000 goal. That means life changing, clean water for over 10,000 people!   Click HERE to find out more on how to participate or donate.Thank you.   – Rusty Fulling


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For tax years starting in 2018, the Tax Cuts and Jobs Act (TCJA) provides new and improved tax incentives for buying new and used business equipment. But leasing still offers benefits for some taxpayers. Here are some important considerations when deciding whether to buy or lease equipment.

Pros of Buying

The primary advantage of owning fixed assets is that you're free to use them as you see fit. When you own equipment that won't become obsolete, you should get your money's worth from the purchase over time. This is especially true for assets — such as a desk or drill — that tend to have a long useful life and aren't affected by technology changes.

In addition, from a tax perspective, the Section 179 deduction and first-year bonus depreciation privileges can provide big tax savings in the first year an asset is placed in service. These tax breaks were dramatically enhanced by the TCJA — enough so, that you may be convinced to buy assets that your business might have leased in the past.

Sec. 179 expensing. This tax law provision provides a current deduction for the cost of qualified new or used business property that's placed in service in the tax year. The maximum Section 179 deduction has been doubled from $500,000 under prior law to $1 million under the TCJA for qualified property placed in service in tax years beginning in 2018. The Sec. 179 deduction is available for most types of equipment, ranging from heavy machinery to computers and desks. Software and qualified real property expenditures can also qualify for the Sec. 179 deduction privilege.

The Sec. 179 deduction is limited to the amount of a taxpayer's business income calculated before the deduction and is phased out if qualified asset additions exceed the phaseout threshold. The TCJA increased the phaseout threshold from $2.03 million for tax years beginning in 2017 to $2.5 million for tax years beginning in 2018. This increase provides plenty of leeway for most small businesses.

Bonus depreciation. A business can claim a first-year bonus depreciation deduction for the cost of qualified property, which includes most types of equipment used by small business owners. In fact, the same property may qualify for both the Sec. 179 deduction and bonus depreciation. If so, bonus depreciation is preferred for assets placed in service by December 31, 2022.

Under the TCJA, bonus depreciation has been extended to include used property. The amount of the deduction has also been doubled from 50% under prior law to 100% under the TCJA for qualified property placed in service from 2018 through 2022. For tax years starting in 2023, bonus depreciation deductions will be phased out based on the following schedule:

  • 80% for property placed in service in 2023,

  • 60% for property placed in service in 2024,

  • 40% for property placed in service in 2025, and

  • 20% for property placed in service in 2026.

Bonus depreciation is scheduled to expire at the end of 2026, unless Congress decides to extend it.

These two tax breaks can be a powerful combination: Many businesses will be able to write off the full cost of most equipment in the year it's purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.

Important note: Other rules and restrictions may apply, including limits on annual deductions for vehicles and restrictions on "listed property" (such as TVs).

Cons of Buying

The primary downside of buying fixed assets is that you're generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that's financed.

If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating.

Important note: If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income (ATI) for tax years starting in 2018. Any excess can be carried over indefinitely. In addition, when computing ATI for tax years beginning in 2022 and beyond, deductions for depreciation, amortization and depletion won't be added back. This transition rule could significantly increase ATI for a business, resulting in a lower interest expense deduction limitation after 2021. Be aware that this complicated provision is subject to several exceptions. Contact your tax advisor about your situation.

In addition, when you own an asset, you run the risk that it could quickly become outdated or obsolete. It may be difficult to unload the equipment at a reasonable price, not to mention the headache of trying to sell it. For example, if you buy computers costing $5,000 today, they could be worth only $1,000 or less in just three years.

Pros of Leasing

From a cash flow perspective, leasing can be more attractive than buying. But the tax benefits for leasing may not be as valuable. And you don't own equipment at the end of the lease term. So, if you want to replace the asset when the lease is up, you'll face the leasing vs. buying decision all over again. But this could be a good thing if an asset is likely to become obsolete by the end of the term.

The main advantage is the upfront cost savings. For example, if you lease equipment with a five-year useful life, the first-year expense may be only 20% of the total asset cost. Typically, you won't have to come up with a down payment for a leased asset (although there are exceptions, including some vehicle leases). In turn, the funds you retain by leasing an asset, rather than buying it, can be used for other purposes and to improve business cash flow.

Of course, your business is entitled to a tax deduction for annual lease payments, but you miss out on Sec. 179 and bonus depreciation deductions. Although there are some nuances, lease payments are generally tax deductible as "ordinary and necessary" business expenses. As with ownership of vehicles, annual deduction limits may apply.

Beyond taxes, leasing may be a more viable option for companies with questionable credit ratings, limited access to bank financing or limited cash reserves. And, in today's competitive leasing market, leases with favorable terms are common.

Important note: For many years, U.S. Generally Accepted Accounting Principles (GAAP) have provided a financial reporting incentive for certain types of leasing arrangements. See "Add New Accounting Rules to the Mix" at right. However, new accounting rules go into effect in 2019 for calendar-year public companies and 2020 for calendar-year private companies that bring leases to the lessee's balance sheet. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.

Cons of Leasing

Leasing does have drawbacks, however. Over the long run, leasing an asset may cost you more than buying it, because you're continually renewing the lease or acquiring a new one. For example, a top-of-the-line computer that normally costs $5,000 might run you $200 a month over a three-year lease term, or $7,200. After all, leasing companies have to make profits, too.

Leasing also doesn't provide any buildup of equity. At the end of the lease term, you get nothing back, whereas buying might result in some return on a resale.

What's more, when you lease, you're generally locked in for the entire lease term. So, you're obligated to keep making lease payments even if you stop using the equipment. In the event the lease allows you to opt out before the term expires, you still may be forced to pay an early-termination fee.

Decision Time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal "right" or "wrong" choice. With assistance from your tax and financial advisors, you can take the approach that best suits your circumstances.


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Many business ventures generate tax losses, especially in the first few years of operation or under adverse conditions. When can losses be deducted — and how much can you deduct in any given year? This article explains new limitations on the ability of individual taxpayers to deduct losses from pass-through business entities, including sole proprietorships, limited liability companies (LLCs) treated as sole proprietorships for tax purposes, partnerships, LLCs treated as partnerships for tax purposes and S corporations.

Old Rules

Before the Tax Cuts and Jobs Act (TCJA), an individual taxpayer's business losses could usually be fully deducted in the tax year when they arose. That was the result unless:

  • The passive loss rules or some other provision of tax law limited that favorable outcome, or

  • The business loss was so large that it exceeded taxable income from other sources, creating a so-called "net operating loss" (NOL).

Under prior law, you could carry back an NOL to the two preceding tax years or carry it forward for up to 20 tax years.

Current Rules

For 2018 through 2025, the TCJA changes the rules for deducting an individual taxpayer's business losses. Unfortunately, the changes aren't favorable.

If your business or rental activity generates a tax loss, things get complicated. First, the passive activity loss (PAL) rules may apply if it's a rental operation or you don't actively participate in the activity. In general, the PAL rules only allow you to deduct passive losses to the extent you have passive income from other sources, such as positive income from other business or rental activities or gains from selling them.

Passive losses that can't be currently deducted are suspended. That is, they're carried forward to future years until you either have sufficient passive income or sell the activity that produced the losses.

To make matters worse, after you've successfully cleared the hurdles imposed by the PAL rules, the TCJA establishes another hurdle: For tax years beginning in 2018 through 2025, you can't deduct an "excess business loss" in the current year.

An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

  • Your aggregate business income and gains for the tax year, and

  • $250,000 or $500,000 if you are a married joint-filer.

The excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards. (See "Limits on Deducting NOLs" at right.)

Important: This new loss deduction rule applies after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don't get to the new loss limitation rule.

Real-World Examples

To illustrate how these new rules work, consider Ed, an unmarried individual who owns rental real estate. In 2018, he has a $300,000 allowable loss from his rental properties (after considering the PAL rules). So, his excess business loss for the year is $50,000 ($300,000 – the $250,000 excess business loss threshold for an unmarried taxpayer).

Ed has no other business or rental activities, but he has $400,000 of income from other sources. Ed can deduct the first $250,000 of his rental loss against his income from other sources.

The $50,000 excess business loss is carried forward to Ed's 2019 tax year and treated as an NOL carryfoward to that year. Under the TCJA's revised NOL rules for 2018 and beyond, Ed can use an NOL carryforward to shelter up to 80% of his taxable income in the carryforward year.

If Ed's rental property loss for 2018 is $250,000 or less, he won't have an excess business loss, because the loss is below the $250,000 excess business loss limitation threshold for an unmarried taxpayer. So, he wouldn't be affected by the new loss limitation rule.

Alternatively, consider Fern and Fernando, a married joint-filing couple. In 2018, Fern has a $300,000 allowable loss from rental real estate properties (after considering the PAL rules).

Fernando runs a small startup business. He operates the business as a single-member limited liability company (LLC) that's treated as a sole proprietorship for tax purposes. For 2018, the business has a $100,000 loss.

Fern and Fernando have no other business or rental activities, but they have $550,000 of income from other sources. This couple doesn't have an excess business loss for the year, because their combined losses are $400,000, which is below the $500,000 excess business loss limitation threshold for a married joint-filing couple. So, they're unaffected by the new loss limitation rule. Therefore, they can use their $400,000 business loss to shelter income from other sources.

Practical Impact of New Loss Disallowance Rule

The rationale underlying the new loss limitation rule is to further restrict the ability of individual taxpayers to use current-year business losses (including losses from rental activities) to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains.

The practical impact is that your allowable current-year business losses can't offset more than $250,000 of income from such other sources or more than $500,000 for a married joint-filing couple.

The requirement that excess business losses must be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses.

Rules for S Corporations, Partnerships and LLCs

For business losses passed through to individuals from S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner's allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner's personal federal income tax return for the owner's tax year that includes the end of the entity's tax year.

To illustrate, consider Gerald and Gina, siblings who quit their jobs at the end of 2017 to start a flower shop. They operate the new business as an LLC that's treated as a 50/50 partnership for tax purposes. Gerald is single and Gina is a married joint-filer. They each invest $500,000 in the new enterprise.

The 2018 LLC tax return for the business reports a net loss of $700,000. Each owner is allocated a $350,000 loss. Neither owner has any income or losses from other business activities. But Gerald has $300,000 of income from a trust, and Gina's husband has $200,000 of salary income.

The excess business loss limitation rule is applied at the owner level. So, Gerald has an excess business loss of $100,000 from the LLC ($350,000 – the $250,000 excess business loss threshold for an unmarried taxpayer). For 2018, he can deduct $250,000 of the LLC loss (the amount up to the threshold) against his trust income. The $100,000 excess business loss is carried forward to his 2019 tax year as an NOL carryforward.

Gina, on the other hand, has no excess business loss from the LLC because her $350,000 loss is less than the $500,000 excess business loss limitation threshold for a married joint-filing taxpayer. For 2018, the first $200,000 of the LLC loss can be deducted against her husband's salary income. The remaining $150,000 loss from the LLC generates an NOL carryforward to her 2019 tax year.

Ask the Experts

There's a silver lining to the unfavorable loss rules: The new excess business loss limitation rules only apply to tax years beginning in 2018 through 2025, unless Congress decides to extend them. But, while they're around, the rules may cause some struggling business owners additional hardship when they can least afford it.

Are you expecting your business to generate a tax loss in 2018? If so, consult your tax advisor to determine whether you'll be affected by the new loss limitation rules.


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"Audit" is a word that can strike fear into the hearts of taxpayers.

However, the chances of an Internal Revenue Service audit aren't that high. In 2016, the IRS audited 0.7% of all individual tax returns.1

And being audited does not necessarily imply that the IRS suspects wrongdoing. The IRS states an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.

The IRS selects returns for audit using four main methods.2

  • Random Selection. Some returns are chosen at random based on the results of a statistical formula.
  • Information Matching. The IRS compares reports from payers — W2 forms from employers, 1099 forms from banks and brokerages, and others — to the returns filed by taxpayers. Those that don't match may be examined further.
  • Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.

There are a number of sound tax practices that may help reduce the chances of an audit.

  • Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers -- including those for any dependent children and ex-spouses.
  • Avoid Math Errors. When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
  • Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don't match may be flagged for an audit.
  • Don't Repeat Mistakes. The IRS remembers those returns it has audited. It may check to make sure past errors aren't repeated.
  • Keep Complete Records. This won't reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.

Audits Have Changed

Most audits don't involve face-to-face meetings with IRS agents or representatives. In 2015, the latest year for which data is available, 71% were actually conducted through the mail; only 29% involved face-to-face meetings.

Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.


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Question:  Our third party administrator provides an electronic system for our 401(k) participants to make and change their deferral elections, choose and change investments, and request distributions, including requests for hardship distributions.

Can we avoid collecting any hardship-related documents from participants in our 401(k) plan by allowing them to certify electronically that they satisfy all requirements for a hardship distribution?

Answer: Unfortunately, not all of the hardship conditions can be met by self-certification. A 401(k) plan can make a hardship distribution only if the participant experiences an "immediate and heavy financial need" and a hardship distribution is "necessary to satisfy the financial need." 

While the regulations allow a participant to self-certify that a requested distribution is the sole way to alleviate a financial need (that is, other resources are lacking), self-certification is not sufficient to show the nature of a hardship (in terms of the type and amount of the need).

Informally, the IRS has stated that a plan should obtain and maintain the following records in paper or electronic format for hardship distributions:

  • Documentation of the hardship distribution request, review, and approval;
  • Financial information and documentation substantiating the participant's financial need;
  • Documentation to support that the distribution was properly made in accordance with the Code's hardship rules and applicable plan provisions; and
  • Proof that the distribution was made and that Form 1099-R was filed reporting the distribution.

Self-certification can be used in lieu of collecting any information or documents about the participant's lack of other resources to meet the financial need.

Alternatively, a plan may use a safe harbor that uses information known to the sponsor and a minimum required suspension of deferrals to relieve the plan of having to collect documentation about the participant's lack of other resources.

These strategies address only whether the distribution is "necessary," and do not eliminate the need to document the nature of the participant's hardship. The plan must request and retain documentation such as bills or legal documents establishing the nature of the hardship.

In the IRS's view, not requesting and retaining documentation needed to substantiate a participant's financial hardship is an operational qualification failure that requires correction under the Employee Plans Compliance Resolution System. 

Even when a third party administrator maintains hardship distribution records, it's ultimately the plan sponsor's responsibility to ensure those records are retained (in electronic or paper format) so that they are available to support the plan's decision in the event of an audit or dispute.


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A new U.S. Supreme Court ruling paves the way for states to require Internet sellers to collect sales tax from consumers — even if they don't have a physical presence in the state. (South Dakota v. Wayfair, No. 17-494, June 21, 2018) In doing so, the Court has reversed the long-standing, but controversial, precedent in Quill v. North Dakota. (504 U.S. 298, May 26, 1992)

This landmark decision, reached by a narrow 5-4 vote, puts online retailers on the same virtual sales tax footing as brick-and-mortar stores.

Sales and Use Tax Basics

At last check, 45 states plus the District of Columbia impose a sales tax on businesses located within the state. (Only Alaska, Delaware, Montana, New Hampshire and Oregon don't.) Each business is required to collect this sales tax from consumers when transactions happen. In addition, states with sales taxes have a "use tax" that effectively mirrors the sales tax. The use tax applies when businesses don't collect sales tax, but have merchandise delivered into the states.

Thus, the sales tax and use tax of a state are mutually exclusive. In other words, either the sales or use tax applies to a transaction, but not both.

For many years, businesses — from big-box retailers to boutiques on Main Street — have collected and remitted sales and use taxes to state authorities. But then the landscape changed dramatically with the proliferation of online sellers.

Initially, there was no clear-cut consensus about sales tax responsibilities for Internet-based sellers. However, states quickly recognized an opportunity to generate tax revenue. Because their efforts were aimed mainly at merchandising giants like Amazon, the laws designed to impose sales tax on these sellers were often dubbed "Amazon laws." Currently, Amazon voluntarily collects sales tax for products it sells directly (but not on third-party purchases).

In the 1992 Quill case, the U.S. Supreme Court ruled that states can force online sellers to collect and remit sales and use taxes only if the business has a presence or "nexus" in the state. Generally, this required the entity to maintain a physical presence in the state, such as a warehouse or delivery center. Otherwise, the online sellers weren't legally responsible for this obligation.

To further complicate matters, several states — including California and New York — ramped up their efforts to collect sales tax from Internet sellers by expanding on the basic concept of nexus. This has led to a bewildering quilt of state laws on this issue. At the same time, Congress wrestled with proposed legislation that would impose sales tax collections on a national basis, while traditional brick-and-mortar store owners protested their competitive disadvantage. However, no legislation has been enacted by Congress. So, the decision was left up to the Supreme Court.

New Tax Environment

South Dakota enacted legislation in 2016 that requires all merchants to collect a 4.5% tax if they received more than $100,000 in annual sales or more than 200 individual transactions from residents within the state. When three large online retailers — Wayfair, Overstock.com and Newegg — failed to comply with these standards, the state sued them. Justice Anthony M. Kennedy, who wrote the majority opinion, noted that online retailer Wayfair, in particular, has played up the omission of state sales taxes in its advertising materials.

The lower courts ruled in favor of the online sellers. Now the Supreme Court's reversal turns the tide.

Justice Kennedy emphasized the way that the retail marketplace has changed since Quill was decided back in 1992. At that time, mail-order sales totaled $180 billion. In 2017, e-commerce retail sales alone were estimated at $453.5 billion. Combined with traditional remote sellers, the total exceeded $500 billion last year.

"When it decided Quill, the Court could not have envisioned a world in which the world's largest retailer would be a remote seller," the opinion states. "…The Internet's prevalence and power have changed the dynamics of the national economy."

According to the Court opinion, the costs of complying with different tax regimes in this electronic age are largely unrelated to whether a company happens to have a physical presence in a state.

However, the majority opinion leaves the door open for some transactions to be exempt from sales tax collections if they're tiny or random. In addition, the Court offered no guidance as to whether the individual states can seek to collect sales tax retroactively.

How Should Online Retailers Respond?

The new ruling will exert pressure on online sellers, including those that also maintain physical locations in stores and businesses that operate out of basements and garages. There's no one-size-fits-all approach. Accordingly, retailers should consider taking these seven steps in the wake of the Wayfair decision:

1. Consult with your tax and legal advisors for guidance.

2. Review business activities to assess collection obligations.

3. Develop a plan for maintaining sales tax compliance.

4. Assess the possible effects on your business, including additional costs for technology updates and compliance measures.

5. Analyze the means for collecting taxes in the appropriate states, including bundling of taxable and nontaxable products.

6. Determine if the operation's technology and personnel resources are sufficient to handle tax analysis and compliance, document retention and audits. If not, you may need to outsource some of these tasks.

7. Establish procedures for monitoring sales tax changes — such as tax rates, law changes and fulfillment practices — in various jurisdictions.

Need Help?

It will take time to unravel all the implications, and federal legislation may still be coming in this area. Fortunately, your tax advisor can help you determine how to proceed.


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Q. It's time for us to begin saving for our child's education. We've heard a great deal about Section 529 plans. What are the advantages?

A. The advantages can be significant. Section 529 plans include both prepaid tuition programs and college savings plans. While prepaid tuition programs have been around longer, it is the college savings plan that is garnering most of the attention these days. Changes enacted by the Economic Growth and Tax Relief Reconciliation Act made these college savings plans more attractive from a tax-strategy standpoint.

Basically, a college savings plan allows you to place money in a state plan to be used for the beneficiary's higher-education expenses at any college or university. These expenses include tuition, fees, books, supplies, and certain room-and-board costs. There is no tax deduction for contributions made to the plan, but the money is allowed to grow tax-free until the funds are withdrawn to pay for qualified education expenses. Your money is invested in stocks, bonds, or mutual fund options offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college.

Here are some of the more significant benefits of these plans:

  • You are the owner of the account and can change the beneficiary or even take the money back, if permitted by the plan. This is helpful in the event that your original beneficiary decides not to go to college. If you take the money back, you will owe income taxes on the earnings and a 10% federal tax penalty as well. The money can be withdrawn without penalty if the beneficiary dies or becomes disabled.
  • In 2018, you or other family members can contribute up to $75,000 to a qualified plan in one year and count it as your annual $15,000 tax-free gift for five years (up from $14,000 in 2017). If the gift is split with your spouse, you can contribute up to $150,000, also for five years. However, if you die within the five-year period, a pro-rata share of the $75,000 returns to your estate. Grandparents can set up accounts for grandchildren, transferring large sums from their estates while providing for their grandchildren's education.
  • There are no income limitations for contributions. Thus, these plans may be of particular interest to higher-income individuals who may not qualify for other college savings tax breaks.
  • The assets in the plan are considered the account owner's assets, not the beneficiary's assets. For financial aid purposes, 5.6% of the parents' assets and 35% of the child's assets are to be used for college costs. If the grandparents are the owners, the assets may not even be considered for financial aid purposes. Even though distributions are income tax free, their status for financial aid purposes is not clear. It may come down to a college-by-college decision whether the income will be considered the child's income.
  • You can now make tax-free transfers of funds from one plan to another or from one investment option to another for the same beneficiary once every 12 months. In the past, the beneficiary had to be changed to make a tax-free transfer.

Private colleges and universities can now set up their own prepaid Section 529 plans. Distributions from these plans are eligible for the same federal income tax advantages as distributions from state-operated plans.

Most states now offer college savings plans, with the plans administered by the state or financial institutions. Certain state programs only accept residents, but most plans allow participants from any state. Before contributing to a plan, consider these tips:

  • Check out your own state's plan first. Many states offer state income tax benefits to residents who contribute to their in-state plans.
  • Review investment options carefully. You can't actively control the investments in your account, so you have to select from the plan's options. Some offer a couple of choices, while others feature a more diverse selection. Recently, several plans added a principal-protected or guaranteed-return option to counter concerns about stock market volatility.
  • Examine fees. The management fees charged by plans vary widely and can significantly impact the performance of your fund. Some also charge an enrollment fee, an annual maintenance fee, and other annual expenses.

College savings plans offered by each state differ significantly in features and benefits. The optimal choice for an individual investor depends on his/her objectives and circumstances. In comparing plans, an investor should consider each in terms of investment options, fees, and state tax implications.

Update:  Beginning in 2018, a new law, the Tax Cuts and Jobs Act (TCJA) makes it possible to use 529 accounts to pay for tuition not just at college, but also at public, private, or religious elementary or secondary schools. The TCJA also allows you to take tax-free distributions of up to $10,000 per year to pay for these education costs.


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The Tax Cuts and Jobs Act (TCJA) may have put a crimp in some of your summer plans by eliminating or scaling back certain tax breaks. But individuals and small business owners still have plenty of opportunities to save taxes. Here are six ideas to consider this summer.

1. Host an Outing for Employees

Under prior law, businesses could deduct 50% of the cost of its entertainment and meal expenses, with certain exceptions. For example, you could write off 100% of the cost of a company outing for employees, such as a 4th of July barbecue or company picnic. This special tax law provision wasn't touched by the TCJA.

However, there has always been a catch to claim this tax break: You must invite the entire staff. In other words, you can't restrict the get-together to just the higher-ups. Inviting a few friends or family members won't jeopardize the deduction, but you can't write off the costs attributable to those social guests.

2. Combine Business Travel with Pleasure

Small business owners can generally deduct the cost of business travel — such as airfare and lodging — if the primary purpose of the trip is business-related. If you add a few extra vacation days to the trip, you can generally still write off your business-related expenses, including the entire cost of a round-trip airline ticket and lodging expenses and 50% of meal expenses for the business days. But the number of business days vs. personal days is critical to establish the primary business purpose test.

Business travelers should remember that the TCJA eliminates deductions for most business-related entertainment expenses, including the cost associated with facilities used for most of these activities. For instance, you can no longer deduct the cost of tickets to sporting events, sailing or golf outings, and theater tickets for events that immediately follow or precede a substantial business meeting.

You can still deduct 50% of your meal expenses while away on business, but the exact rules for deducting meals with business contacts aren't clear yet. Expect the IRS to issue detailed guidance sometime this year. In the meantime, keep detailed records of what you spend to take advantage of any deductions that turn out to be available.

3. Navigate a Deduction for a Boat

Under the TCJA, the mortgage interest deduction for 2018 through 2025 for one or two qualified residences is limited to interest paid on the first $750,000 of acquisition debt. (Prior home acquisition debts are grandfathered under prior law.)

The TCJA limit on home acquisition debt is down from $1 million, while the deduction for interest on the first $100,000 of home equity debt is generally repealed (unless the home equity debt is used to buy, build or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt). Depending on the size of your mortgage(s), you might have enough slack to benefit from a little-known tax break for boats.

For this purpose, a "qualified residence" can be your primary residence and one other home. The IRS definition of a qualified residence includes a boat that has sleeping, cooking and toilet facilities. Therefore, a vessel should qualify if it has a galley, sleeping quarters and a bathroom. If you're shopping for a new boat, remember to stay within the current home acquisition debt limit of $750,000.

4. Schedule Time at Your Vacation Home

If you own a vacation home and rent it out part of the year, you can generally deduct related expenses against the rental income. You might even be able to claim a rental loss if your personal use for the year doesn't exceed the greater of:

  • 14 days, or

  • 10% of the rental time.

Keep an eye on these two personal use tests as the year progresses. If it helps you out tax-wise, you might forgo some personal vacation or rent out the place a little longer. Also, remember that a day spent cleaning the vacation home or making repairs doesn't count as a personal use day — even if the rest of the family tags along.

5. Camp Out for Dependent Care Credits

If you pay for child care costs while you work and the kids are out of school, you may be eligible for a dependent care credit. Generally, the credit is equal to 20% of the first $3,000 of qualified expenses for one child or 20% of up to $6,000 of qualified expenses for two or more children. So, the maximum credit is usually $600 for one child or $1,200 for two or more children.

The list of qualified expenses includes the cost of day camp where your child participates in recreational activities, such as swimming or hiking. The credit is even available for costs of specialty camps for athletics, academics or other pursuits. However, no credit can be claimed for an overnight summer camp.

6. Hire Your Kids

While staffing your business this summer, you might add a teenager or 20-something who's off from school. Not only does this provide a meaningful and financially rewarding activity for your child, but you can also claim a business deduction for the wages, assuming the amount is reasonable for the services performed.

When interviewing applicants for summer help, consider hiring your own child or grandchild. He or she will probably earn less than the standard deduction for a dependent — which the TCJA increased for 2018 to the greater of:

  • $1,050, or

  • $350 plus earned income limited to $12,000.

So, your child or grandchild probably won't owe any federal income tax on the wages. A child can even avoid withholding by claiming an exemption when filing his or her W-4. As a bonus, wages paid to an under-age-18 child or grandchild are exempt from Social Security and Medicare taxes, if you run your business as:

  • A sole proprietorship,

  • A limited liability company (LLC) treated as a sole proprietorship for tax purposes,

  • A husband-wife partnership, or

  • A husband-wife LLC treated as a partnership for tax purposes.

A similar exemption for FUTA tax applies to wages paid to a child or grandchild under age 21.

Hot Planning Strategies

Could any of these strategies work for you or your business? Although the recent tax law may have complicated tax matters, it still provides some tax-saving opportunities. Contact your tax advisor for more information on these strategies and many other ideas that may apply to your personal or business tax situation.


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In early January, the U.S. Department of Labor (DOL) published a fact sheet that lays out how the agency is aligning its policy on intern employment status with new rulings by several U.S. appellate courts. Previously, it would've been much harder to bring interns on board without having to pay them minimum wage and overtime. Employers had to satisfy several tests to prove that interns weren't subject to Fair Labor Standards Act (FLSA) protections.

The new standard relies instead on a "primary beneficiary" test that's grounded in "economic reality," according to the DOL. If an unpaid intern (or one whose pay was less than that dictated by the FLSA) asserts that he or she should be covered by the FLSA, the Labor Department's Wage and Hour Division would weigh the following seven factors.

The extent to which:

1. The intern and the employer clearly understand that there's no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee — and vice versa.

2. The internship provides training such as that would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

3. The internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.

4. The internship accommodates the intern's academic commitments by corresponding to the academic calendar.

5. The internship's duration is limited to the period in which the internship provides the intern with beneficial learning.

6. The intern's work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

7. The intern and the employer understand that the internship is conducted without entitlement to a paid job after the conclusion of the internship.

Unique Circumstances

Also, under the above test, "no single factor is determinative," the DOL explains. Rather, a determination will be made based on "the unique circumstances of each case."

Clearly, under these guidelines, an internship still must be a two-way street. And as a practical matter, an internship program — particularly an unpaid one — will need to appeal to prospective interns based on what they'll learn from it. Otherwise, they won't apply.

This begs the question: Why have an internship program in the first place? If it's not just a source of free or low-cost labor, how do internships benefit your organization? Here are the most important additional benefits, according to the Society for Human Resource Management (SHRM). An internship program allows you to:

  • Tap into a pool of potential future full-time employees about whom you'll know much more than can be derived from resumes or job applications,

  • Generate your brand recognition as an employer, including recognition as an employer that helps launch careers of young people,

  • Gain an impetus to evaluate your human resource functions in terms of where there might be gaps in training support, both for interns and regular employees,

  • Advance your workforce diversity initiatives, and

  • Enhance the loyalty of employees whose own children and relatives are selected as interns.

Not Just for the Young

Keep in mind that while the typical internship involves students, interns can also include working-age people who are seeking a career change. Retirees and pre-retirees may wish to take on an internship to stay engaged in the working world, learn new skills and interact with others.

SHRM recommends that internship programs be created and assessed with the same degree of rigor as other important organizational initiatives. That means establishing a set of goals that are specific, measurable, attainable, relevant and time-bound, also called "SMART goals." Examples of SMART goals could include enhancing or building a reputation as a "best local place to work." Another goal, suggested by SHRM, might be "obtaining candid feedback about organizational problems and overlooked opportunities and talents."


Finally, here are a pair of internship caveats. First, be careful not to bump up against any child labor laws. Federal requirements are relatively minimal. However, state child labor laws vary widely and must be reviewed prior to launching an internship program.

The second caveat is that interns, particularly when they're not paid, sometimes consider themselves exempt from the workplace policies applicable to regular employees (such as an existing dress code). Generally, interns should be held to the same standards that you expect from employees. Just be sure to spell out those standards from the beginning.

As noted, the DOL's new flexibility with respect to internships doesn't give you carte blanche to ignore interns' needs and expectations about the benefits they'll derive from the program. But the value proposition of an internship from an employer perspective may be stronger than ever. You can improve your chances of avoiding legal challenges if you consult a qualified attorney before launching an internship program.


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Succession planning is important in any business, but it's sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan.

A family meeting in a neutral settingaway from interruptions can help focus discussion, perhaps with the assistance of a professional consultant to guide the agenda.

Consideration should be given to business and personal goals, as well as the plans of the next generation. Who has the most aptitude for leadership? Who wants to stay with the business?

The plan needs to be well thought out and discussed with everyone affected. Don't just assume that a son or daughter will want to carry on the family business. Even if your children say they will take over, they may not have the true desire required to continue a successful operation.

The "heir to the throne" also may not have the business skills to succeed after a parent (or aunt, uncle, etc.) turns over the reins.

Another question that needs to be settled in the case of multiple potential successors (for example, more than one child): What responsibilities will each person have upon succession? It's important that the details be worked out early, because, in the case of an unexpected death or disability, succession might occur sooner than planned.

You also need to address the involvement of the next generation. In some situations, the retiring family elder has adult grandchildren — some who may already be working in the business.

Beyond the discussion of the roles of younger family members, you will also need to outline the times for major transitions, barring unexpected illnesses or death.

You want to make sure that the future leaders of the business have the proper training. There are several different options. One is having younger family members work in several different areas of the business. Another is having aspiring family business leaders get some experience in another, non-family business to learn alternative ways of doing things.

The importance of preparing for succession can't be overemphasized. Neither can the importance of transitioning the business in an orderly fashion.

Sometimes, as planned retirement nears, elder family members don't want to let go. This can cause resentment on both sides. Naturally, the elder family members want to see the business they built (or took over, if already a second-generation business), continue to succeed as it did under their leadership. They can be concerned that the firm won't flourish without their direction.

At the same time, the younger family members may think they can bring the business to even greater success if the older relatives would just step aside. This is where a scheduled, gradual transition of management and leadership responsibilities from one generation to the next can help.

As they turn over the reins of the business, elder family members can be compensated through preferred stock in the corporation. They can also look to stay involved in business — if not directly — through participation in industry groups and associations.

Such actions recognize the contributions of retiring members and help them recoup their equity. Meanwhile, the new manager and active relatives can plan for the future.

And once retiring family members are no longer immersed in the daily grind of running the business, they may be interested in pursuing non-business community activities, personal hobbies and travel that they never had time for before.


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Most 401(k) plans permit hardship withdrawals, though plan sponsors aren't required to allow them. As it stands today, employees seeking to take money out of their 401(k) accounts are limited to the funds they contributed to the accounts themselves, and only after they've first taken a loan from the same account. Loans must be repaid, of course. The theory behind the loan requirement is that employees would be less apt to permanently deplete their 401(k) accounts with hardship withdrawals.

Thanks to the Bipartisan Budget Act (BBA) enacted in February, the rules change, beginning in 2019. Under the BBA, the employees' withdrawal limit will include not just amounts they have contributed. It also includes accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

Liberalized Participation Rule

In addition to the changes above, the BBA also eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This is good news on two fronts: Employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And for plan sponsors, it means they won't be required to dis-enroll and then re-enroll employees after that six-month hiatus.

One thing that hasn't changed: Hardship withdrawals are subject to a 10% tax penalty, along with regular income tax. That combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have in order to wind up with the same net amount.

For example, an employee who takes out a $5,000 loan from his or her 401(k) isn't taxed on that amount. But an employee who takes a hardship withdrawal and needs to end up with $5,000 will have to take out around $7,000 to allow for taxes and the 10% penalty.

Hardship Criteria

The BBA also didn't change the reasons for which hardship withdrawals can be made. Here's a reminder of the criteria, as described by the IRS: Such a withdrawal "must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need." That can include the need of an employee's spouse or dependent, as well as that of a non-spouse, non-dependent beneficiary.

The IRS goes on to say that the meaning of "immediate and heavy" depends on the facts of the situation. It also assumes the employee doesn't have any other way to meet the needs apart from a hardship withdrawal. However, the following are examples offered by the IRS:

  • Qualified medical expenses (which presumably don't include cosmetic surgery);

  • Costs relating to the purchase of a principal residence;

  • Tuition and related educational fees and expenses;

  • Payments necessary to prevent eviction from, or foreclosure on, a principal residence;

  • Burial or funeral expenses; and

  • Certain expenses for the repair of damage to the employee's principal residence.

The IRS gives two examples of expenses that would generally not qualify for a hardship withdrawal: buying a boat and purchasing a television.

Finally, a financial need could be deemed immediate and heavy "even if it was reasonably foreseeable or voluntarily incurred by the employee."

Deadline Extension

Another important and somewhat related change in 401(k) rules was included in the 2017 Tax Cuts and Jobs Act (TCJA) that took effect this year; it pertains to plan loans. Specifically, prior to 2018, if an employee with an outstanding plan loan left your company, that individual would have to repay the loan within 60 days to avoid having it deemed as a taxable distribution (and subject to a 10% premature distribution penalty for employees under age 59-1/2).

The TCJA changed that deadline to the latest date the former employee can file his or her tax return for the tax year in which the loan amount would otherwise be treated as a plan distribution. So, for example, if an employee with an outstanding loan of $5,000 left your company and took a new job on Dec. 31, 2017, that individual would have until April 15 (or, with a six-month fling extension, Oct. 15) 2018 to repay the loan.

Alternatively, the former employee could make a contribution of the same amount owed ($5,000, in this example) to an IRA or the former employee's new employer's plan, assuming the new plan permitted it. In effect, that $5,000 contribution to a new plan would be treated the same as a rollover from the old plan.

While this new flexibility might seem like a boon to plan participants, it could also represent a financial trap. Employees typically aren't accumulating enough dollars to put themselves on track to retire comfortably at a traditional retirement age. Therefore, although you can't prevent a plan participant from taking advantage of the new rules if they qualify, you can redouble your efforts to help employees understand the importance of thinking of their retirement savings as just that — savings for retirement, and not a "rainy day" fund.