Is your small business struggling to make ends meet?

Some relief may be on the way for distressed business owners. The Small Business Reorganization Act of 2019 will make it faster and less expensive to benefit from a Chapter 11 bankruptcy. The legislation was signed into law in August, and it goes into effect on February 19, 2020. Here’s what you need to know.

Basics of Bankruptcy Reorganization

Chapter 11 of the bankruptcy code allows a business to reorganize its debt. It may be advantageous to make a liquidation filing under Chapter 7, where assets are auctioned off or sold piecemeal, often leaving creditors with little or nothing. Or a business may not qualify under the threshold for Chapter 13.

Although technically available to both businesses and individuals, Chapter 11 is most often used by businesses. It currently applies to debts of less than $2,725,625. Typically, a Chapter 11 bankruptcy proceeding offers protection of business assets while restructuring the following types of debts:

Priority tax debts. Chapter 11 may be used to reorganize past due taxes that your company has incurred. This covers income taxes, payroll taxes and property taxes.

Under Chapter 11, your company may continue to operate the business as you meet your tax responsibilities. Although tax obligations are usually paid off during a five-year period, Chapter 11 allows you to renegotiate the repayment terms with the appropriate taxation authorities and reach a mutually beneficial agreement.

Secured debts. A business identifies secured debts and corresponding collateral contributing to the profitability of the business, similar to the way that secured debts are reorganized for individuals who file for Chapter 11 relief. Accordingly, the business then seeks to pay the current value of the property, as opposed to what’s owed on it. This treatment could apply to collateral such as real estate, business equipment and vehicles.

For example, suppose your business owns equipment that’s worth $250,000, but you still owe the bank $500,000 from the purchase of the equipment. You can ask the court to allow you to pay only the current value of $250,000. This enables your business to reduce its monthly operating expenses.

Unsecured debts. A business may incur significant credit card charges or other unsecured loans in the early years of operation or for ongoing operating costs. Chapter 11 allows a business to restructure this unsecured debt and pay it off in a lump sum or over a term of several years.

In the optimal situation, your business and unsecured creditors will agree on payment terms. If the parties can’t come to a reasonable agreement, the bankruptcy judge will decide the outcome in a binding determination.

Leases and contract debts. If Chapter 11 relief is available, a business can choose to accept or reject certain leases and contracts. For instance, suppose your business previously contracted with a janitorial service for a three-year period. Then you find a comparable service at a considerably lower price. If you can demonstrate that this contract would contribute to the profitability of the business, the judge may grant a replacement request.

The bankruptcy process starts with a petition to the bankruptcy court. A voluntary petition is filed by the debtor. Conversely, an involuntary petition is filed by creditors after certain conditions have been met.

In either event, the business typically has about four months to develop the reorganization plan. However, if “just cause” for a delay can be shown, the court may grant a business up to 18 months after the filing of the petition to develop its plan. Eventually, the goal is for the business to emerge from the bankruptcy in better financial shape.

Relief Coming Soon

Historically, it was difficult and expensive for small business owners to seek bankruptcy protection under Chapter 11. The Small Business Reorganization Act is designed to provide greater access to Chapter 11 for small businesses through a new subchapter devoted exclusively to this class of debtors.

Important: The debt threshold for qualifying for this new subchapter remains the same for small businesses as it previously was under Chapter 11 ($2,725,625).

The new subchapter of the bankruptcy law includes provisions for the following key improvements:

Streamlined reorganizations. The new law will facilitate small business reorganizations by eliminating certain procedural requirements and reducing costs. Significantly, no one except the business debtor will be able to propose a plan of reorganization. Plus, the debtor won’t be required to obtain approval or solicit votes for plan confirmation. Absent a court order, there will be no unsecured creditor committees under the new law. The new law also will require the court to hold a status conference within 60 days of the petition filing, giving the debtor 90 days to file its plan.

New value rule. The law will repeal the requirement that equity holders of the small business debtor must provide “new value” to retain their equity interest without fully paying off creditors. Instead, the plan must be nondiscriminatory and “fair and equitable.” In addition, similar to Chapter 13, the debtor’s entire projected disposable income must be applied to payments or the value of property to be distributed can’t amount to less than the debtor’s projected disposable income.

Trustee appointments. A standing trustee will be appointed to serve as the trustee for the bankruptcy estate. Similar to Chapter 12 bankruptcies for family-owned farms and fishing operations, the revised version of Chapter 11 allows the trustee to preside over the reorganization and monitor its progress.

Administrative expense claims. Currently, a debtor must pay, on the effective date of the plan, any administrative expense claims, including claims incurred by the debtor for goods and services after a petition has been filed. Under the new law, a small business debtor will be permitted to stretch payment of administrative expense claims over the term of the plan, giving this class of debtors a distinct advantage.

Residential mortgages. The new law eliminates the prohibition against a small business debtor modifying his or her residential mortgages. The debtor will have more leeway if the underlying loan wasn’t used to acquire the residence and was used primarily for the debtor’s small business. Otherwise, secured lenders will continue to have the same protections as in other Chapter 11 cases.

Discharges. The new law provides that the court must grant the debtor a discharge after completing payments within the first three years of the plan or a longer period of up to five years established by the judge. The discharge will relieve the debtor of personal liability for all debts under the plan except for amounts due after the last payment date and certain non-dischargeable debts.

Additionally, the exceptions to discharge contained in Section 523(a) of the bankruptcy code will apply to the small business debtor. Currently, a Chapter 11 bankruptcy features limited discharge exceptions.

Right for Your Business?

In the past, small businesses seeking Chapter 11 bankruptcy relief were often hampered by size and lack of resources. Beginning next year, the new law will provide more opportunity for successful small business reorganizations.

Could a reorganization put your small business on the road to recovery? Contact us with any questions regarding your bankruptcy rights and the application of the new law to your situation.

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© 2019, Provided by Thomson Rueters Checkpoint

In an era filled with uncertainty, you can count on one thing: time marches on.

Here are some important age-related financial and tax milestones to keep in mind for you and your loved ones:

Age 0 to 23

Under the Kiddie Tax rules, part of young person’s investment income can be taxed at the parent’s federal rate which can be as high as 37% for 2019 (and 2018) rather than at the young person’s lower rate (usually only 10% or 12% depending on the type of income).

The Kiddie Tax can bite until the year when the young person turns 24. However, after the year the individual turns 18, it can only bite if he or she is a student with at least five months of full-time school attendance. For 2019 (and 2018), the Kiddie Tax can only hit investment income in excess of the threshold amount of $2,200. Investment income below the threshold is taxed at the young person’s lower rate.

Age 18 or 21

Did you set up a custodial account for your minor child to help pay for college or save on taxes? It will come under the child’s control when he or she reaches the local age of majority (generally, age 18 or 21 depending on your state of residence).

Age 30

If you set up a Coverdell Education Savings Account (CESA) for a child or grandchild, it must be liquidated within 30 days after he or she turns 30 years old. Earnings included in a distribution that are not used for qualified education expenses are subject to federal income tax, plus a 10% penalty. Alternatively, the Coverdell account balance can be rolled over tax-free into another CESA set up for a younger family member.

Age 50

At this age, you can begin saving more for retirement on a tax-favored basis. If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan, 403(b) plan, Section 457 plan, or SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution to a traditional or Roth IRA.

Age 55

If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plans without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that a 10% penalty is due on distributions received before age 59 1/2.

Age 59 1/2

For any reason, you can receive distributions at age 59 1/2 from all types of tax-favored retirement plans and accounts without being hit with the 10% premature withdrawal penalty tax. This includes IRAs, 401(k) plans, pensions and tax-deferred annuities.

Age 62

At this age, you can elect to start receiving Social Security benefits. However, your benefits will be lower than if you wait until reaching full retirement age (see “Age 66” below). When considering this election, look at your health and your family’s history of longevity.

Also, if you continue working after starting to collect benefits but before reaching full retirement age, your Social Security benefits will be further reduced if your income from working exceeds $17,640 in 2019 (up from $17,040 in 2018).

Age 66

After years of paying into the system, you can start receiving full Social Security benefits. However, the age to collect full benefits is creeping upward. For example, if you were born between 1943 and 1954, it’s 66. And if you were born in 1960 or later, you will have to wait until age 67 to collect full benefits. If you reach age 66 in 2019, your benefits will be reduced if you are still working and your earnings exceed $46,920 (up from $45,360 in 2018).

Want to keep working? You won’t lose any benefits if you work in years after the year you reach full retirement age, regardless of how much money you make.

Age 70

You can choose to postpone receiving Social Security benefits until after you reach age 70. If you make this choice, your benefit payments will be more than if you had started receiving them earlier. They will be increased by a certain percentage (depending on your date of birth).

Important: If you decide to delay retirement, be sure to sign up for Medicare at age 65. In some cases, medical insurance costs more if you delay applying for it.

Age 70 1/2

You generally must begin taking annual minimum required distributions from tax-favored retirement accounts (including traditional IRAs, SEP accounts and 401(k) accounts), and pay the resulting income taxes. However, you need not take any such mandatory distributions from your Roth IRA.

The initial minimum required distribution is for the year you turn 70 1/2, but you can postpone taking that payout until as late as April 1st of the following year. If you chose that option, however, you must take two minimum required distributions in that following year. One must be taken by April 1st, which is the one for the previous year, plus another by December 31st, which is the one for the current year. For each subsequent year, you must take your minimum required distribution by December 31st.

There’s one exception: if you’re still working after reaching age 70 1/2, and you don’t own over 5% of the company, you can postpone taking any minimum required distributions from the employer’s plan(s) until after you’ve retired.

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© 2019, Provided by Thomson Rueters Checkpoint

Many business owners procrastinate putting a well-conceived succession plan in place.

The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Here are five of the top reasons why business owners don’t have an exit strategy, along with the reasons why it’s best to make a proactive plan.

Reason number 1: No time

Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done … later.

Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, “later” may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason number 2: Loss of control

In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.

Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason number 3: Ignoring tax issues because they’re complex

There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.

Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run — not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax advisor well in advance of the actual sale.

Reason number 4: Not sure who is going to take over

For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?

In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the “heir to the throne” have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost — and more. But if you don’t explore the possibilities, you leave the outcome to chance.

Reason number 5: Not enough retirement savings

While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement — especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.

Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your corporate attorney, accountant, estate advisor and other professionals.

And if transfer your business to your children, urge the next generation to start thinking about their succession plans.

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© 2019, Provided by Thomson Rueters Checkpoint