Month: October 2025

Understanding Construction Allowances and Their Tax Benefits

Preface: “It is not the beauty of the building you should look at: it’s the construction of the foundation that will stand the test of time.” – David Allen Coe

Understanding Construction Allowances and Their Tax Benefits

If you currently lease retail space—or plan to in the future—it’s important to understand how “construction allowances” from a landlord may impact your taxes. The good news? If certain IRS requirements are met, these allowances can often be excluded from your taxable income.

What Are Construction Allowances?

A construction allowance is money (or a rent reduction) provided by a landlord to a tenant for the purpose of improving or building out leased space. These improvements usually involve the interior of the property, such as remodeling, adding walls, lighting, flooring, or fixtures.

In general, if you receive such an allowance and spend it on qualified construction or improvements to your leased retail space, you don’t need to include it in your gross income—meaning it’s not taxable.

This rule applies to leases signed after August 5, 1997 and only if all IRS criteria are met.

What Qualifies as a Construction Allowance?

A qualified construction allowance meets three key requirements:

      1. Short-Term Retail Lease (15 Years or Less)
        The lease must be for a term of 15 years or less and cover retail space—defined as nonresidential property used in selling tangible goods or services to the general public.
      2. Used for Construction or Improvements
        The allowance must be used to construct or improve “qualified long-term real property,” meaning permanent improvements like flooring, lighting, or walls that remain with the building and revert to the landlord when the lease ends.
      3. Used Only for Business Improvements
        The money must be spent only for improvements related to your trade or business—not for personal purposes.

Timing Matters

The IRS places time limits on when these funds must be spent. To qualify, the construction allowance must be used in the same tax year it’s received—or within a short grace period.

You have up to 8½ months after the end of the tax year in which you received the allowance to spend it on qualifying improvements.

This rule ensures that the allowance truly supports active business development rather than being used as a delayed income benefit.

Example

Let’s make this practical:

Big Mall Co. leases retail space to Simple Designs Co., a calendar-year taxpayer. The lease starts November 1 and includes a $5,000 construction allowance for tenant improvements. Simple Designs receives the payment on December 31.

To exclude this $5,000 from taxable income, Simple Designs must use it by September 15 of the following year (8½ months after year-end) to construct or improve its retail space.

If the funds are used after that date—or for nonqualified improvements—the allowance becomes taxable income.

Why It Matters

This provision helps small business owners manage the cost of preparing a leased retail space without incurring additional tax liability. It’s particularly beneficial for:

      • Retailers renovating leased storefronts
      • Franchises opening new locations
      • Businesses upgrading facilities for improved customer experience

However, businesses must maintain detailed records showing how and when the construction funds were used to support their tax position in the event of an IRS audit.

Planning Tip

Before signing a lease, review the construction allowance clause carefully and consult your tax advisor. Key things to verify include:

      • The lease term (must be 15 years or less)
      • The type of improvements allowed
      • Whether improvements revert to the landlord at lease end
      • How and when the allowance must be used

Proper documentation and timing are critical.

Final Thoughts

Construction allowances can be a powerful tax advantage for business tenants—reducing upfront costs and improving cash flow—as long as the rules are followed.

If you’re negotiating a lease or recently received a construction allowance, consult your CPA or tax advisor to ensure proper classification and compliance. Missteps could result in unexpected taxable income.

How to Handle Tough Conversations with Grace: Lessons from Crucial Conversations

Preface: “As much as others may need to change, or we may want them to change, the only person we can continually inspire, prod, and shape—with any degree of success—is the person in the mirror.” ― Kerry Patterson, Crucial Conversations Tools for Talking When Stakes Are High

How to Handle Tough Conversations with Grace: Lessons from Crucial Conversations

Have you ever walked away from a tough conversation wishing it had gone differently—wishing you’d said something better, or maybe said nothing at all?

We’ve all been there.

That’s why Crucial Conversations: Tools for Talking When Stakes Are High by Kerry Patterson, Joseph Grenny, Ron McMillan, and Al Switzler is such a timeless guide. It’s not about fancy communication theory—it’s about what to do when the stakes are high, emotions are intense, and the outcome really matters.

Whether it’s giving feedback at work, confronting a loved one, or resolving conflict with a friend, these are the moments that can either strengthen or strain relationships.

Defining a Crucial Conversation

A crucial conversation happens when stakes are high, opinions differ, and emotions run strong.

It might be a performance review, a family disagreement, or a tough decision between friends.

In those moments, most of us fall into one of two traps:

      • We go silent, avoiding the topic to keep the peace.

      • Or we go aggressive, pushing our point so hard that we shut others down.

Neither path works. The authors offer a third option—dialogue.

“Dialogue is the free flow of meaning between two or more people.”

When people feel safe enough to share honestly, understanding deepens, and solutions become wiser.

Core Skills for Navigating Difficult Conversations

1. Start with Heart

Before speaking, pause and ask:

“What do I really want—for me, for them, and for this relationship?”

When we focus on genuine goals rather than ego or emotion, our words carry calmness and respect. This shift often changes the entire tone of the conversation.

2. Learn to Look

Strong communicators watch for signs that the conversation is slipping.

Are people shutting down? Getting defensive? Are you?

Recognizing these cues early lets you pause, reset, and restore safety before things spiral.

3. Make It Safe

People open up only when they feel respected and understood.

If safety is lost, stop addressing the issue and repair the relationship first. Sometimes that means apologizing; other times it means clarifying intentions through “Contrasting”:

“I’m not trying to criticize you—I just want to understand what happened.”

A moment of empathy can reopen the entire discussion.

4. Master Your Stories

We don’t react to facts—we react to the stories we tell ourselves about them.

When someone interrupts, we might think, They don’t respect me. That story fuels anger.

The book challenges readers to separate facts from assumptions. Ask yourself:

      • What actually happened?

      • What story am I adding to it?

      • What else could be true?

It’s amazing how much calmer we become when we stop assuming the worst.

5. STATE Your Path

When it’s your turn to share your perspective, use the STATE model:

      • Share your facts

      • Tell your story

      • Ask for others’ views

      • Talk tentatively

      • Encourage testing

This approach balances confidence and humility. You express yourself clearly while showing you’re open to learning.

6. Explore Others’ Paths

Real communication goes both ways.

To keep the conversation open, you need to make space for others to talk too. The AMPP skills help with this:

      • Ask questions
      • Mirror their emotions (reflect what you see)
      • Paraphrase what they’re saying
      • Prime them if they’re quiet (take a guess at what they might be thinking)

When people sense you genuinely care about their perspective, they’re more likely to lower their guard and speak openly.

“When we stay curious instead of defensive, conversations stop being battles and start becoming bridges.”

7. Move to Action

Even the best conversations fall apart if they end without clear next steps.

The authors emphasize defining:

      • What will be done

      • Who will do it

      • By when, and

      • How you’ll follow up

Dialogue builds understanding; action builds results.

And as they note, participation doesn’t always equal consensus—what matters is that everyone’s voice has been heard.

Applying These Ideas Beyond Work

While many people read Crucial Conversations for professional growth, its principles are universal.

These tools help in marriages, friendships, and parenting just as much as in meetings and performance reviews.

Improving how we communicate takes practice. The authors suggest starting small:

“Pick one relationship or recurring conversation where you want to improve, and focus on one skill.”

Over time, you’ll notice yourself reacting less, listening more, and creating safer, more meaningful dialogue in every area of life.

Final Thoughts

Crucial Conversations reminds us that difficult discussions aren’t something to fear—they’re opportunities to grow, to connect, and to strengthen trust.

When we replace defensiveness with curiosity and courage, even the hardest talks can become turning points for better relationships.

So next time you feel your pulse quicken before a hard talk, take a breath and remember:

Start with heart. Listen with humility. Speak with respect.

You might be surprised at how much can change—with just one good conversation.

Understanding Reasonable Compensation for S-Corporations (Made Simple)

Preface: “Chase the vision, not the money; the money will end up following you.”  –Tony Hsieh

Understanding Reasonable Compensation for S-Corporations (Made Simple)

If you own an S-Corporation or plan to, there’s one important rule you need to know about: reasonable compensation. It might sound like a technical tax term, but it really just means: Are you paying yourself a fair salary for the work you do?

Why It’s a Big Deal

S-Corporations are special kinds of businesses where the company’s profits “pass through” to the owner’s personal tax return. This setup helps avoid some business taxes—but it also comes with IRS rules.

If you work in your S-Corp (not just own it), the IRS says you’re an employee, not just an owner. That means you have to take a real paycheck (with payroll taxes), not just profits or “distributions.” Why? Because wages get taxed differently from profits. And if the IRS sees that you’re only taking profits and no paycheck, they might hit you with taxes, penalties, and interest.

What Counts as “Reasonable”?

The IRS says reasonable compensation is the amount you would pay someone else to do your job in your business. So, if you’re doing full-time management, your pay should match what someone in that role would normally earn.

Here are some things the IRS looks at when deciding if your pay is reasonable:

      • What kind of work you do
      • How much time you spend working
      • Your skills and experience
      • What you pay other employees
      • What similar jobs pay at other businesses
      • How much profit your business makes

The idea is to make sure your salary isn’t too low (to avoid taxes) or too high (which could hurt your business financially).

Why Getting This Right Matters

If you underpay yourself, the IRS might say some of your profits should’ve been wages. That means:

      • You could owe back payroll taxes
      • You could face penalties and interest
      • You might even risk your S-Corp status

On the flip side, paying yourself too much means your business pays more employment tax than necessary.

So, What’s the Right Salary?

It depends on what you actually do for the business. For example:

      • If you work 40 hours a week and run day-to-day operations, you should get a market-rate salary.
      • If you only help out once in a while or offer advice, a smaller salary might make sense.

The goal is to find a fair balance that matches your role and how similar businesses pay.

How a CPA Can Help You

Getting reasonable compensation right can be tricky. That’s why it helps to work with a CPA They can:

      • Look at your role and what you do day to day
      • Compare what others in similar roles earn
      • Review your current pay and business profits
      • Help you figure out benefits and taxes
      • Keep records in case the IRS ever asks questions

Final Thoughts

Paying yourself fairly from an S-Corporation isn’t just about following the rules—it’s smart business. It helps you avoid IRS problems, pay the right taxes, and keep your business strong.

History of the Retirement Plan, Part V

Preface: “But a careful look at the historical record shows that the promise of American life came to be identified with social mobility only when more hopeful interpretations of opportunity had begun to fade, that the concept of social mobility embodies a fairly recent and sadly impoverished understanding of the ‘American Dream,’ and that its ascendancy, in our own time, measures the recession of the dream and not its fulfillment.” – Christopher Lasch, The Revolt of the Elites

History of the Retirement Plan, Part V

This is the fifth and final post in a series on the subject of retirement plans. The first four parts can be found here, here, here, and here. In this series, we have:

      • Briefly reviewed the history of government-defined retirement models in the United States,
      • Introduced the tax-deferred model, and
      • Explained the difference between Qualified plans and Individual Retirement Accounts (IRAs),
      • Discussed limits to deductibility of retirement contributions, and also
      • Tax treatment of non-deductible contributions, and introduced:
      • The Roth model, and even:
      • Roth conversions.

Why Retirement Accounts?

Now that you are more familiar with the variety of government-defined schemes that exist to help you save for retirement, you might also consider that you don’t actually need any special government-endorsed type of plan in order to accomplish this.

Any brokerage or savings account can be used to save for retirement. You can also invest in real estate or closely held businesses, anything that will retain its value or grow over time. Some people who are more worried about governmental collapse than about inflation will even withdraw all their money in cash or use it to buy gold and put it all in a safe. You can even put money in a cookie jar or hide it under the floorboards, although we don’t recommend this. As long as you can live within your means and not run through all of your savings before you retire, you have in some way saved for retirement.

And while these simpler and more direct savings methods don’t come with any special tax advantages, they also do not carry any of the restrictions and potential penalties to be found with specially designated retirement accounts.

Why Retirement Accounts Now?

At this point we might also ask why it was only in the 20th century that the government came to be so intimately involved in how we save for retirement, first with Social Security in 1935, and then in 1974 with ERISA and its later modifications.

One reason is that before the 20th century, people did not so often outlive their working years, and so “retirement” was not as much of an issue. Another is that, before the Industrial Revolution, more people tended to live in larger, multi-generational family units and had more children. Such a family structure was in effect a sort of retirement plan.

People were also more likely to own their own land, small businesses, and farms, what Karl Marx would call their “means of production.” These means, together with the families as mentioned earlier, likely meant that you might not see any drop in earnings just because you could no longer work.

In his book The Revolt of the Elites, Christopher Lasch suggests that some type of idealized self-sustaining middle-class existence such as this typified what was thought of as the “American Dream” during the first century and a half of American life and thought. Even if it was not attained or even attainable by most, it had still seemed realistic enough to endure as an ideal.

It was the movement of Americans to the cities and company towns in the late 19th century to seek wage employment that gave rise to the widespread indigent elderly population in the early 20th century, which grew to unbearable dimensions during the Great Depression and eventually led to the Social Security Act.

And it was at this time, according to Lasch, that the ideal of the yeoman farmer or craftsman faded to be replaced by the present-day association of the “American Dream” with a life of ease and plenty or even Cinderella-like rags-to-riches stories.

Lasch suggests the original purpose of American education was not “social mobility” as we conceive it now, but a strengthening of existing families and communities through both business and personal growth.

While the Social Security Act helped to alleviate the material suffering of those who could no longer work, it did not restore their status as members of an ownership class. Social Security did not owe its inspiration to earlier American ideals, but to European statist models pioneered in the 19th century by the Prussian philosopher G.W.F. Hegel and implemented in the German Empire by Kaiser Wilhelm III.

In the mid-20th century, this model was partially privatized as many employers and labor unions promised their workers pensions upon retirement. But by the second half of the century, it was clear that these promises were no better than the solvency of the employer or the political favors that labor muscle could leverage.

With ERISA, we have begun to come full circle, regaining control over our own “means of production” even if for many of us, this is only in the form of fractional ownership of publicly traded companies and government-issued debt. We can at least decide how we want to allocate our share of capital and can even vote by proxy in shareholder meetings. We at last regain the prospect of being middle-class again, not only in the sense of being middle-income, but of being masters of a fate, which, even if not high and majestic, is not subject to the whims and political fortunes of our betters.

Whither Retirement Accounts?

A society of small claims wealth-holders, especially those who hold income-producing assets that they understand and can beneficially manage, is qualitatively very different than a society of pensioned, socially secured wage earners.

The former is not only a society of free citizens who cannot be intimidated by a government or an oligopoly that can threaten to withhold subsidies. It is also a society of true stakeholders in the country itself who are bound to make more responsible decisions about their collective future. These will not tend to be the kind of people who will sell their freedoms and their legacy at the ballot box for promises of free beer, as Edmund Burke has warned. It is also a society where knowledge and skill can be acquired piecemeal in the Jeffersonian sense, without credentials and without the pretensions of an expert class, to be brought to bear directly on the development of what is effectively each individual’s portion of the national wealth to manage with his own unique talents.

If we consider family ownership of publicly traded stock as a rough measure of small-scale ownership of the national wealth, there is a case to be made that we are already now in this new kind of ownership society. According to the Federal Reserve, in 2022:

      • 58% of U.S. families (about 72 million families) held stock.
      • 21% of U.S. families (about 26 million families) directly held stock.

Yet in reality, most of this “privately” owned stock is in fact owned through funds concentrated in a very small group of very large fund companies. Of course, the fund companies do not own the funds, the individual account holders do, many of them through retirement accounts. Unfortunately, many owners of retirement accounts do not take much interest or an active role in managing their ownership positions.

If we consider fund control of equity Exchange Traded Funds (ETFs) as a rough measure of fund control of individually owned wealth, we might wonder to what extent individual account holders can meaningfully be said to own anything. How many even see themselves as “owners”? According to U.S. News & World Report, in 2024 74% of the Equity ETF Market is controlled by just three fund companies: Vanguard, BlackRock, and State Street Corp.

How strange this situation would seem to Thomas Jefferson. We might explain it to him thus: Most Americans still own their farms and trades, as it were. However, they are afraid to set foot on their own land or to touch their own work tools. They believe that only a gentry class of experts are qualified to do these things on their behalf.

Those of us who are lucky enough to still own farms and small businesses that we materially participate in and understand enough to pass them and the knowledge to run them on to our children, can still partake in the American Dream as Christopher Lasch describes. For the rest of us, it will be incumbent not only to save income earned from our chosen professions and invest it, but to take an active interest in our investments and be able to understand them well enough to pass them and the knowledge to manage them on to our children.