We’d like to discuss Roth IRAs, this week, and their advantages and disadvantages.

Roth IRAs

As most of you know, for Roth IRAs:

• Contributions are made in after-tax dollars.
• Distributions from a Roth IRA, if taken after age 59½ and providing the assets have been held for at least 5 years in that Roth account, are entirely free of income tax liability.
• There are no required minimum distributions (RMDs) for the original account owner; therefore, the assets can continue to grow after retirement, with no tax liability to the account owner.

As with all IRAs, a Roth IRA with a properly designated beneficiary or beneficiaries does not go through the probate process.

Who is Eligible for a Roth IRA?

That’s a question with a two-part answer.

• To be eligible to open or contribute to a Roth IRA, you must earn less than $153,000 as an individual, or less than $228,000 for married couples who file jointly (2023 limits).
• However, if you are over the thresholds above, you have the option of converting part or all of your current IRA-held assets to a Roth IRA.

What Happens When You Convert to a Roth IRA?

The principal event triggered by converting a traditional IRA to a Roth IRA is the recognition of the pre-tax dollars you contributed to your retirement accounts as current taxable income – so these conversions may in some cases best be done in stages or tranches, so as not to incur a huge tax liability all at once.

Why Might You Want to Convert to a Roth IRA?

Traditionally, IRAs have been considered a great way to reduce taxes overall, as contributions are made with pre-tax dollars, and in the general way of the world, a retiree’s income tax bracket usually drops a level or two. Therefore, post-retirement withdrawals from your IRA would in theory be taxed at a lower rate than you would have incurred on those funds if you had not made the tax-deferred contributions to your IRA.

And Roth conversions are not for everyone. But, if you are more than 5 years away from retirement, have a high income and a healthy balance in your tax-deferred IRA, and expect your income tax rate to rise in the coming years, a Roth conversion of all or part of your current IRA-held assets might be for you.

Remember, tax rates may increase in the near term, given:

• The current economic climate.
• The Federal budget deficit.
• The looming Presidential election coming in roughly 12 months.
• Income tax rates are in fact on course to revert to the levels in effect prior to the enactment of the Tax Cuts and Jobs Act (TCJA) effective January 1, 2026.

So you may not find that your post-retirement tax bracket is not lower, or not much lower, than your tax bracket during employment, although Congress may act to extend the TCJA tax cuts for individuals.

What Are the Upsides to Converting to a Roth IRA?

Some of the benefits include:

• Distributions taken after age 59½ from a Roth IRA are tax free, unlike tax-deferred IRAs, provided the assets have been be held in the Roth IRA for five years. Earlier withdrawal of these funds results in a 10% tax penalty – but no income tax liability.
• The original owner of a Roth IRA is not required to take minimum distributions (RMDs), unlike tax-deferred IRAs from which RMDs must be taken starting the year after you reach age 73, with a hefty 50% penalty if you don’t. So, you can effectively make a tax-free gift of a Roth IRA to your heirs in entirety, if you so choose.
• Distributions are also tax-free to certain beneficiaries, such as your spouse, over their lifetime.
• Other beneficiaries, including minor children, can also take tax-free distributions from the Roth IRA, though adult non-spousal beneficiaries, including children once they reach the age of majority, must in most cases take distribution of their entire portion over 10 years.
• Converting to a Roth IRA can reduce your estate taxes by the amount of income tax you paid in connection with the conversion. The estate exemption for 2024 of $13.61 million for individual tax filers ($27.22 million for married taxpayers who file jointly) is, like other provisions of the TCJA pertaining to individual income taxes, set to drop to an estimated ~$6.8 million for individuals or ~$13.6 million for married couples as of January 1, 2026.
• Another benefit of converting your tax-deferred IRA to a Roth IRA is that, by naming your child (or children) as beneficiaries, you can effectively make a tax-free gift to them, without the necessity of filing a Gift Tax Return.

What are the Downsides?

There are some drawbacks to converting to a Roth IRA:

• The most obvious is that you will have to pay income tax on the full amount of retirement assets converted – and you will need the cash available to pay these taxes from a source outside your retirement account(s). However, if you are considering converting to a Roth IRA, you may want to consider doing so before the TCJA tax cuts expire.
• Since the value of the assets converted is considered taxable income in the year you convert, you could find yourself in a higher income tax bracket this year, and pay higher taxes on all your current-year income – if you aren’t already in the highest bracket. We recommend you consult closely with your financial advisor when considering a Roth conversion, so that you are fully informed and there are no surprises.

If you are considering converting retirement assets to a Roth IRA, and want to understand the potential impact on your income tax liabilities, please click here to email me directly – I am here to help.

Until next Wednesday –

Peace,

Eric

Read our prior posts relevant to Roth IRAs:

SECURE 2.0 Enacted – Key Highlights
Roth IRAs: To Convert, or Not to Convert?
Roth Accounts – New Proposed Limitations Explained

What is the Income Tax Provision?

Income and tax provision calculation. What is that, exactly, you may be wondering. Simply put, it is the calculation of the amount of income tax your business will owe for the current year.

It’s Complicated . . .

But the income tax provision isn’t really simple at all. Most larger businesses keep their books under Generally Accepted Accounting Principles (GAAP). However, GAAP and the rules promulgated by the IRS for income tax accounting differ significantly, and accounting for these differences is what income tax provision, in reality, is about.

There are two separate categories and calculations within the income tax provision – current tax expense and deferred tax expense.

Current Income Tax Expense

A business’ or company’s current tax expense amount is arrived at by:

• Taking the net income from your income statement, as arrived at under GAAP,
• Taking account of permanent differences between GAAP and IRS-rule accounting. These are items which are permitted for financial statement calculation under GAAP, but not allowed by the IRS, and include entertainment expenses, 50% of certain meal expenses, fines and penalties, life insurance proceeds, and other items. These are added back to the net income as per your financial statements.
• Taking account of temporary differences between GAAP and IRS-rule accounting. These are items which are allowed by both GAAP and the IRS, but not in the same year, such as expenses recorded but not yet incurred, income received but not yet earned, and depreciation and amortization.
• Applying any credits and net Operating Losses (NOL).
• The result represents your current year’s taxable income, on which you can calculate your tax liability at the appropriate tax rate.

 

Note that, if you are estimating your current tax expense, you may want to add a buffer amount to your estimate, so as not to be caught short if your estimate turns out to be below your actual current tax expense.

Deferred Income Tax Expense

The deferred income tax expense is carried as a liability on your business’ balance sheet, while not yet due for payment. Arriving at your deferred income tax expense is a more complicated process than determining your current tax expense.

It’s a deeper dive into the temporary differences between GAAP rules and tax accounting rules as represented on your balance sheet. Again, these can include:

• Income received but not earned, such as prepaid fees or retainers.
• Expenses recorded on your books but not yet incurred.
• Depreciation and amortization timing differences.

 

It’s crucial to ensure that all these current differences and temporary differences are accurately reflected on your business’ books for income tax purposes, to avoid an inaccurate calculation of your deferred tax expense, which is the total of all temporary differences multiplied by the applicable tax rate.

We strongly recommend that you consult with your CPA, virtual CFO, or other trusted business advisor to check your income tax provision, and both the current and deferred tax expense estimates, to ensure its completeness and accuracy.

If you would like assistance calculating your business’ income tax provision, or income tax accounting, please click here to email us directly – the RFG team is here to help you!

Until next time –

Peace,

Eric

One thing every business owner of a private company should know is – what their business is worth. Surprisingly (or maybe not), many don’t.

Don’t Try This At Home!

We do not recommend owners of private companies attempt to value their businesses themselves. Nor should you take advantage of a “free” business valuation offered by a business broker. In this case, as in so many, you will get what you pay for. Get advice, recommendations, and vet recommended appraisers well-versed in valuing private companies thoroughly before making a decision. A good place to start asking is your virtual CFO or CPA – s/he is likely to know one or more well-regarded business appraisers to provide a reliable and accurate valuation for your business.

Valuing a business’ fair market value, even a small private company, is a process with a lot of moving parts.

Why Should You Know the Value of Your Private Company?

There are many reasons you might want a professional private company valuation:

• Gifting of stock to your children

• Buying out a partner

• Taking on a new partner

• Selling your business

• Acquiring a business

• Merging with another business

• Seeking investors

These are only a few of the reasons to have your business professional appraised. And the reason you want your business valued matters – be upfront with your appraiser, on this and all scores.

How a Private Company’s Present Value is Calculated

Income

Most methods of private company valuation are based on the business’ expected income going forward. Some of these valuation methods used include:

• Seller’s Discretionary Earnings: this is the most common valuation metric used for businesses worth less than $5 million. This approach to valuing private companies takes the business’ pre-tax net income, and adds back the owner’s compensation (plus any excessive salaries paid to other family members), interest, depreciation, amortization, discretionary expenses, and unusual non-recurring expenses to arrive at a valuation. But bear in mind that some lenders may not accept a business valuation based entirely on seller’s discretionary earnings – some of the items, such as high-level salaries to family members, they may decline to add back for their own valuation purposes.

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): this is similar to seller’s discretionary earnings, in that it takes pre-tax net income, and adds back interest, depreciation, and amortization expenses. Usually, some form of EBITDA or related methodology is used as one prong of an appraisal or evaluation of your business.

• Adjusted EBITDA: this approach is a deeper EBITDA dive, adjusting and standardizing your business’ EBITDA via removal of non-recurring, unusual, and one-time expenses and/or income entries. EBITDA may also be adjusted to account for additional staffing or other expenses which a new owner is likely to incur.

• Discounted Cash Flow: this approach is most often used for valuing a still-growing concern. The discounted cash flow method projects the value of a business as anticipated future earnings (usually over a period of years), discounted to arrive at the current present worth of those projected earnings. It is one of the most commonly used valuation method when a business is preparing for sale.

• Capitalization of Earnings: this method is also widely used, especially for very small closely-held businesses with measurable track records and anticipated stable growth going forward. It projects future earnings based on past growth numbers. This approach, however, is based more on judgment calls than on more technical calculations, and is therefore potentially subject to an appraiser’s personal take.

Assets

Asset-based approaches to valuing private companies can provide a bottom line – your business cannot be worth less than the value of its assets minus the total cost of equity and its liabilities. Some asset-based methods of determining market value are:

• Net Asset Value Method: this is a simple approach, which assumes that the values of the tangible assets as stated on your balance sheet represent those assets’ market value, and takes into account intangible assets such as transferrable goodwill.

• Adjusted Net Book Value Method: this involves adjusting the asset values to more accurately reflect their fair market value. This approach assumes there is no expectation of intangible values, and that there is no transferrable goodwill.

Market

Another approach in determining private company valuation is market-based, such as comparable company analysis. Such methods compare your private company with the current market value of a public company, or more than one, in the same industry, tracking stock prices back to financial statements and evaluating your own financial statements against those of comparable companies.

However, since each individual business, whether a private company or a publicly traded one, has so many specific factors impacting their performance and appropriate pricing that a market-based approach to enterprise value is most often used as a check on income or asset-based valuations.

Things Every Private Company Owner Should Consider

There are a few things we think every owner of a private company should be mindful of:

• Your industry affects the value of your business.

• The value will be higher if your personal, day-to-day involvement is not necessary for the business to run smoothly.

• Sometimes, effective business tax planning strategies can make a business’ bottom line look less attractive than it should – if you are valuing your private company with an eye toward selling it, you may want to consult with both your appraiser and your virtual CFO or CPA as to whether you want to add these back to your bottom line and consider other strategies and practices which can affect your pro-forma EBITDA.

• High officer compensation, company perks such as business-owned automobiles, family members on payroll – these are all items which a small business owner may find reduce the business’ value, if they are not added back to the pro-forma EBITDA.

• Revenue concentration – too few of your clients generating too much of your income – can reduce a business’ value.

If, indeed, you are contemplating a sale of your business, you may want to have it valued as much as three years or more before you think the sale will be finalized. There may be work to do to maximize the business’ value prior to seeking a buyer.

It’s always a good idea to know your business’ worth – but start the process mindfully, and with open eyes. If you are wondering whether it’s time to get your business professionally appraised, we invite you to consult with us. Based on your individual business, the reason behind the valuation, and your overall goals, we can advise you how best to proceed.

Please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

Want to learn more? Check out our prior posts relating to business valuation:

Are You Ready to Sell Your Closely Held Business?

Getting Your Closely Held Business Ready For Sale

Valuing Your Closely Held Business For Sale

What is Your Closely Held Business Worth?

There’s a lot of suffering in the world at large today, conflict, uncertainty. Whether it’s Israelis, Palestinians, Ukrainians, the world has become a scary place for so many people at present. And every single one of them is a real person. They have parents, spouses, children, homes, jobs, and all this can be disrupted at any moment.

Let’s remember, this Thanksgiving, to be grateful we are not, in the U.S., in the middle of a civil war.

And let’s not fight with one another – there’s too much fighting in our world as it is.

Rather, let’s be thankful for all the good things in our lives, our families, our friends, our work – and of course the wonderful feast I know you are looking forward to as much as I am.

Let’s make this a time of peace and kindness – let’s mend fences where we can, even with the difficult people. I am not saying you must make them a fixture in your home, as that can become a minefield of stress, but maybe make peace between you.

A little humility, a little humanity, a little empathy – these can go a long way.

And you’ll feel all the better for it.

On an end note, as a level one sommelier, if you are planning to serve wine with your feast, I would recommend a Beaujolais – it’s tasty, fruity, effervescent, goes wonderfully with turkey, and is reasonably priced.

What are your plans this Thanksgiving? Please click here to email me directly – I would love to hear from you.

Until next week –

Peace,

Eric

Thanksgiving 2023 is almost upon us. People are cleaning house, making groceries, washing the good china and crystal. And sharpening their knives.

Sad to say, actual cutlery isn’t all that’s being sharpened. I have noted that, for the past several years, newspapers are giving advice on how, and not whether, to introduce politics at the holiday table.

I am totally against that. While we must, of course, respect one another’s beliefs and opinions, holiday celebrations are, in my humble opinion, for enjoying the company of loved ones, sharing the feast, and, in general, times for positive, loving, generous impulses.

These are times to celebrate what we have in common, not to harp on what divides us.

To be grateful for shared bonds of blood, of affinity, of memory and affection, not to focus resentfully on differences of opinion.

It’s true that, especially in large families, we may not like every single relation equally. But they are our family – and don’t we have love for all of them, even the difficult people? Remember, the difficult may in fact be struggling in their lives (we all struggle, in our own ways) and need love at least as much as the easier-going – perhaps more, while they struggle.

So, this Thanksgiving – and indeed, this holiday season – let’s leave politics – and any other resentments – in the hall with our overcoats, or better still, outside on the porch.

And enjoy each other, the chance to gather together, and the shared feast, with kindness, gratitude, and love in our hearts.

Of course, if what you most want this Thanksgiving is to pare down your Christmas list, raising politics at the family holiday table might be a very good way to do that. But is that what you really want at holiday time? To sow pain and discomfort?

A little humanity, and a little empathy, go a long way!

How are you celebrating this Thanksgiving? Please click here to email me directly – I’d love to know your plans.

Until next week –

Peace,

Eric

One question we hear often is, “How are C Corporations taxed?”

So, we thought we’d answer it.

How Are C Corporations Taxed?

Looked at narrowly, that question has a very simple answer:

• A C Corporation, as a tax paying entity, pays income tax on its net profits (taking into account revenue, cost of goods sold, deductible business expenses, etc.) at a current federal rate of 21%, plus applicable state income taxes. Period.

How Are the Profits Taxed?

But, if we reframe the question as, “How are a C Corporation’s profits taxed?” the answer becomes more complicated.

• Any corporation is an entity owned by its shareholders, whether there is a single shareholders or thousands.
• A C Corporation may make distributions of some or all of its profits to its shareholders in the form of dividends.
• The C Corporation’s dividends are paid in after tax dollars.
• These dividends are taxable to the shareholder(s).
• Most such dividends are “qualified,” meaning they generate income tax liability at a rate usually lower than the individual income tax rate appliable to the shareholder – qualified dividends are taxable at federal rates of 0%, 15%, and 20%, depending on household income.
• Important: though they are taxed at similar rates, dividends are not capital gains.

A C Corporation’s profits, therefore, are taxed first at the corporate level and again at the individual shareholder level when distributed.

Example

Let’s say ABC Corporation has 10 shareholders with equal amounts invested. It began tax year 2022 with healthy balances in their operating and savings accounts. The corporation generated $3.5 million in gross revenue in 2022. We will assume a state corporate income tax rate of 5%.

ABC Corporation, its bank balances still comfortable, decided to distribute all its 2022 after-tax profits to its shareholders, in equal amounts of $74,000. We will assume that these distributions:

• represented qualified dividends, and
• that all shareholders fell into the income bracket paying 15% in federal income tax, and 6% in state income tax, on such dividends.

So, on 2022 net profits of $1,000,000, ABC Corporation and its shareholders paid a combined rate of over 41% in federal and state income taxes.

We strongly urge you to consult with your virtual CFO or financial advisor to help you plan for minimizing your income tax liabilities.

Please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

Want to learn more? Check out our prior posts concerning C Corporations:

C Corp to S Corp Conversion – Is It Right For Your Business?

Selling Your Business – Taxation of An Asset Sale

Virtual CFO Services

Virtual CFO services are getting a lot of buzz, these days, but what, precisely are virtual CFO services?

And what can you expect of RFG in a virtual CFO relationship?

What Are Virtual CFO Services About, Really?

To  begin with, virtual CFO services are about you, the client, and your business. A virtual CFO will, in the normal course of events:

• Provide high-level business financial forecasting and strategic planning to help your business grow in the direction you envision.

• Review your financial statements and financial reports, and provide expert guidance.

• Prepare (or review your own) forecasts on budgeting and cash flow.

• Provide outsourced accounting services if necessary.

• Advise on strategic business decisions – hiring, major purchases/rentals, mergers and acquisitions, etc.

• Provide strategic cash flow management.

• Consult and advise on developing your company’s financial strategy to ensure future growth.

• Be your most trusted business advisor, consulting with you on a regular, scheduled basis, and providing an outside, caring but objective eye to evaluate every aspect of your business to determine how to produce optimal results.

What Can You Expect From RFG as Your Virtual CFOs?

At RFG, we can provide all the above and more to our virtual CFO clients, including services such as:

• In-depth tax planning and financial planning for your business – we’ll develop strategies to minimize your business’ income tax liabilities.

• Tax planning and financial planning for you, personally – minimize your tax liabilities today and plan for tomorrow.

• Succession planning for your business – it’s our belief that every business owner should have an exit strategy in place, whether you plan to sell or otherwise leave your business in the next 5 years, or intend to continue running it for decades to come. Because life happens, and we never know what’s around the corner. A good succession plan is, for one thing, an updated plan, tweaked periodically to reflect new realities.

• Estate planning for you, personally. Protect and preserve your hard-earned assets for your loved ones, with counseling from a registered investment advisor (RIA).

• Transaction advisory services, whether you want to sell your business, or grow it by acquisition, RFG is equipped to provide expert advice and hands-on participation in the process.

How We Begin – By Listening

Prior to entering into any agreement for services, RFG will confer with you in depth, minutely analyze prior tax returns and financials, and undertake market research in your industry, to determine how best to help your business grow as much and as safely as possible in an uncertain world.

Virtual CFO is a collaborative process, and we will always listen to you – it’s your individual, specific plans and goals we want to help you achieve. You will always get expert financial guidance from us, as these are the cornerstone of vCFO services, but we can provide much more, depending on your wants and needs.

Do I Need a Virtual CFO?

If:

• You have high and growing revenues (>$2.5 million) and no in-house CFO

• You don’t have business and financial forecasts you can rely on

• You know your business can do better, but with all your efforts it’s not producing what you believe it should

The answer may well be “yes.”

RFG’s Virtual CFO Process

Learn more about RFG’s vCFO process here.

Next Steps

If you aren’t sure, or simply want to explore your options, please schedule an initial call here.

If you are not quite ready for an initial call, please click here to email us directly – let us know how we can help you or what questions we can answer for you.

Until next time –

Peace,

Eric

Want to Learn More? Check out our previous posts on Virtual CFO Services

The Power of Having a Virtual CFO
The Biggest Issue With Not Having a Virtual CFO
The Second Biggest Issue We See With Not Having a Virtual CFO – and How to Overcome It
The Third Biggest Reason to Hire a Virtual CFO

See Below for Eric Rigby’s Virtual CFO Minute Videos:

The Virtual CFO Minute – Episode I
The Virtual CFO Minute – Episode II
The Virtual CFO Minute – Episode III
The Virtual CFO Minute – Episode IV

Halloween is for fun for kids of all ages the costumes, the treats – and it’s a perfect festival for our beloved New Orleans (then again, what festival isn’t?)

We hope you and your families go all out for it and have a blast! But when trick-or-treating, be careful and aware. Not all the ghouls out there are friendly.

Wishing you all a safely spooky holiday!

What are your ghostly plans for today? Please click here to email me directly – it might provide inspiration for future Halloweens.

Until next time –

Peace,

Eric

It seems, doesn’t it, as if your estate planning is never just done. There’s no magic solution to arranging your estate plan and leaving it alone.

Because life goes on, things happen, relationships change. And, as they do, your estate planning needs change with them.

I want to talk about the vital importance of updating beneficiary statements on a regular as well as an as-needed basis.

You should have primary and contingent beneficiaries designated on all:

• Individual retirement accounts (IRAs)
• Employer-sponsored accounts, such as pensions, 401(k)s, 403(b)s, 457(bs), ESOPs, etc.
• Life insurance policies
• Disability insurance policies

It’s crucial that these designated beneficiaries be reviewed and updated to ensure that the designations align with your current estate plans. Did you know that, according to Supreme Court precedent, beneficiary designations trump your will’s stated intentions?

In that legal case, a husband and wife divorced. The wife had been designated as primary beneficiary on her husband’s retirement account. During the divorce, the wife renounced her claim to the account, but, since the husband never changed the beneficiary designation, after his death the Court ruled that the beneficiary designation was valid and in force. The ex-wife got it all, while the husband’s second wife and their children were cut off entirely from that asset.

Unfortunately, the story of the woes caused by outdated beneficiary designations does not stop with that case – there are too many misfortunes to list.

Review your beneficiary designations upon:

• Marriage (whatever number that makes)
• Divorce
• The birth of a child or grandchild
• The death of a family member (even if that person is not one of your designated beneficiaries – contemplating such a death may change your wishes)
• If a plan administrator changes (sometimes glitches occur when systems change over)

Even when you think nothing’s changed, it’s a good idea to review your entire estate plan every 2 to 3 years, including your beneficiary designations. People move, telephone numbers change – even if the right people are designated, keep their contact information updated.

Think of your estate plan as an engine, driving your assets to their proper destination(s). Complete with many moving parts, all of which require attention, maintenance, and perhaps repair.

And consider regular review of your estate plan like a turn-up for your car – every so often, it’s necessary.

Review your:

• Beneficiary designations
• Last Will and Testament
• Powers of Attorney, both medical and durable
• Any accounts or assets for which you have put in place “Pay on Death” or “Transfer on Death” designations

The best way to review your estate plan is to go over it with your financial advisor, whether this is your CPA, estate attorney, or Virtual CFO – s/he can help you navigate the complex process which is estate planning.

If you wonder whether your estate plan might need updating, there’s a good chance it does. Please click here to email me directly – RFG is here to help you!

Until next time –

Peace,

Eric