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Our extensive client base includes a diverse group of individuals, small and mid-size business, partnerships, corporations, estates and trusts. We work closely with all of our clients to provide innovative financial, accounting and business management services. Our goal is to provide a blend of personal service and high level expertise to all of our clients.

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Consider the tax advantages of investing in qualified small business stock

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While the Tax Cuts and Jobs Act (TCJA) reduced most ordinary-income tax rates for individuals, it didn’t change long-term capital gains rates. They remain at 0%, 15% and 20%.

The 0% rate generally applies to taxpayers in the bottom two ordinary-income tax brackets (now 10% and 12%), but you no longer have to be in the top ordinary-income tax bracket (now 37%) to be subject to the top long-term capital gains rate of 20%. Many taxpayers in the 35% tax bracket also will be subject to the 20% rate.

So finding ways to defer or minimize taxes on investments is still important. One way to do that — and diversify your portfolio, too — is to invest in qualified small business (QSB) stock.

 

QSB defined

To be a QSB, a business must be a C corporation engaged in an active trade or business and must not have assets that exceed $50 million when you purchase the shares.

The corporation must be a QSB on the date the stock is issued and during substantially all the time you own the shares. If, however, the corporation’s assets exceed the $50 million threshold while you’re holding the shares, it won’t cause QSB status to be lost in relation to your shares.

 

2 tax advantages

QSBs offer investors two valuable tax advantages:

 

1. Up to a 100% exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude a portion of their gain if they’ve held the stock for more than five years. The amount of the exclusion depends on the acquisition date. The exclusion is 100% for stock acquired on or after Sept. 28, 2010. So if you purchase QSB stock in 2018, you can enjoy a 100% exclusion if you hold it until sometime in 2023. (The specific date, of course, depends on the date you purchase the stock.)

 

2. Tax-free gain rollovers. If you don’t want to hold the QSB stock for five years, you still have the opportunity to enjoy a tax benefit: Within 60 days of selling the stock, you can buy other QSB stock with the proceeds and defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.

 

More to think about

Additional requirements and limits apply to these breaks. For example, there are many types of business that don’t qualify as QSBs, ranging from various professional fields to financial services to hospitality and more.

Before investing, it’s important to also consider nontax factors, such as your risk tolerance, time horizon and overall investment goals. Contact us to learn more about QSB stock.

 

© 2018

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2018 Q3 tax calendar: Key deadlines for businesses and other employers

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Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
  • File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

  • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 17

  • If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2017 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2017 to certain employer-sponsored retirement plans.

© 2018

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Basis consistency rules may come into play if you’re administering an estate or inheriting property

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When it comes to tax law changes and estate planning, the substantial increases to the gift and estate tax exemptions under the Tax Cuts and Jobs Act are getting the most attention these days. But a tax law change enacted in 2015 also warrants your attention.

That change generally prohibits the income tax basis of inherited property from exceeding the property’s fair market value (FMV) for estate tax purposes. Why does this matter? Because it prevents beneficiaries from arguing that the estate undervalued the property and, therefore, they’re entitled to claim a higher basis for income tax purposes. The higher the basis, the lower the taxable gain on any subsequent sale of the property.

 

Conflicting incentives

Before the 2015 tax law change, estates and their beneficiaries had conflicting incentives when it came to the valuation of a deceased person’s property. Executors had an incentive to value property as low as possible to minimize estate taxes, while beneficiaries had an incentive to value property as high as possible to minimize capital gains, should they sell the property.

The 2015 law requires consistency between a property’s basis reflected on an estate tax return and the basis used to calculate gain when it’s sold by the person who inherits it. It provides that the basis of property in the hands of a beneficiary may not exceed its value as finally determined for estate tax purposes.

Generally, a property’s value is finally determined when 1) its value is reported on a federal estate tax return and the IRS doesn’t challenge it before the limitations period expires, 2) the IRS determines its value and the executor doesn’t challenge it before the limitations period expires, or 3) its value is determined according to a court order or agreement.

But the basis consistency rule isn’t a factor in all situations. The rule doesn’t apply to property unless its inclusion in the deceased’s estate increased the liability for estate taxes. So, for example, the rule doesn’t apply if the value of the deceased’s estate is less than his or her unused exemption amount.

 

Watch out for penalties

The 2015 law also requires estates to furnish information about the value of inherited property to the IRS and the person who inherits it. Estates that fail to comply with these reporting requirements are subject to failure-to-file penalties.

Beneficiaries who claim an excessive basis on their income tax returns are subject to accuracy-related penalties on any resulting understatements of tax. Contact us if you’re responsible for administering an estate or if you expect to inherit property from someone whose estate will be liable for estate tax. We can help you comply with the basis consistency rules and avoid penalties.

 

© 2018

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Does your business have to begin collecting sales tax on all out-of-state online sales?

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You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax.

But for businesses with out-of-state online sales that haven’t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns.

 

What the requirements used to be

Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.

Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.

 

What has changed

In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is “unsound and incorrect,” and that the South Dakota tax satisfies the substantial nexus requirement.

The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes.

In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.

 

What the decision means

Wayfair doesn’t necessarily mean that you must immediately begin collecting sales tax on online sales to all of your out-of-state customers. You’ll be required to collect such taxes only if the particular state requires it. Some states already have laws on the books similar to South Dakota’s, but many states will need to revise or enact legislation.

Also keep in mind that the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The others weren’t argued in Wayfair, but the Court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.

 

Please contact us with any questions you have about sales tax collection requirements.

 

© 2018

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Home green home: Save tax by saving energy

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“Going green” at home — whether it’s your principal residence or a second home — can reduce your tax bill in addition to your energy bill, all while helping the environment, too. The catch is that, to reap all three benefits, you need to buy and install certain types of renewable energy equipment in the home.

Invest in green and save green

For 2018 and 2019, you may be eligible for a tax credit of 30% of expenditures (including costs for site preparation, assembly, installation, piping, and wiring) for installing the following types of renewable energy equipment:

  • Qualified solar electricity generating equipment and solar water heating equipment,
  • Qualified wind energy equipment,
  • Qualified geothermal heat pump equipment, and
  • Qualified fuel cell electricity generating equipment (limited to $500 for each half kilowatt of fuel cell capacity).

Because these items can be expensive, the credits can be substantial. To qualify, the equipment must be installed at your U.S. residence, including a vacation home — except for fuel cell equipment, which must be installed at your principal residence. You can’t claim credits for equipment installed at a property that’s used exclusively as a rental.

To qualify for the credit for solar water heating equipment, at least 50% of the energy used to heat water for the property must be generated by the solar equipment. And no credit is allowed for solar water heating equipment unless it’s certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state in which your residence is located. (Keep this certification with your tax records.)

The credit rate for these expenditures is scheduled to drop to 26% in 2020 and then to 22% in 2021. After that, the credits are scheduled to expire.

Document and explore

As with all tax breaks, documentation is key when claiming credits for green investments in your home. Keep proof of how much you spend on qualifying equipment, including any extra amounts for site preparation, assembly and installation. Also keep a record of when the installation is completed, because you can claim the credit only for the year when that occurs.

Be sure to look beyond the federal tax credits and explore other ways to save by going green. Your green home investments might also be eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates.

To learn more about federal, state and local tax breaks available for green home investments, contact us.

 

© 2018

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Do you know the ABCs of HSAs, FSAs and HRAs?

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There continues to be much uncertainty about the Affordable Care Act and how such uncertainty will impact health care costs. So it’s critical to leverage all tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs. Here’s how to make sense of this alphabet soup of health care accounts.

HSAs

If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,450 for self-only coverage and $6,900 for family coverage for 2018. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSAs

Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,650 in 2018. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a grace period of two and a half months to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRAs

A Health Reimbursement Account is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year.

There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Maximize the benefit

If you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. But tax-advantaged accounts aren’t the only way to save taxes in relation to health care. If you have questions about tax planning and health care expenses, please contact us.

 

© 2018

Do you know the ABCs of HSAs, FSAs and HRAs?

There continues to be much uncertainty about the Affordable Care Act and how such uncertainty will impact health care costs. So it’s critical to leverage all tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs. Here’s how to make sense of this alphabet soup of health care accounts.

HSAs

If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,450 for self-only coverage and $6,900 for family coverage for 2018. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSAs

Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,650 in 2018. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a grace period of two and a half months to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRAs

A Health Reimbursement Account is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year.

There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Maximize the benefit

If you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. But tax-advantaged accounts aren’t the only way to save taxes in relation to health care. If you have questions about tax planning and health care expenses, please contact us.

© 2018

 

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The BDIT: A trust with a twist

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The beneficiary defective inheritor’s trust (BDIT) allows you to enjoy the benefits of a traditional trust without giving up control over your property. BDITs can hold a variety of assets, but they’re particularly effective for assets that have significant appreciation potential or that may be entitled to substantial valuation discounts, such as interests in family limited partnerships and limited liability companies (LLCs).

Why it works

The BDIT’s benefits are made possible by one critical principle: Assets transferred by a third party (such as a parent) to a properly structured trust for your benefit enjoy transfer-tax savings and creditor protection, even if you obtain control over those assets.

IRS rules prohibit you from transferring assets to beneficiaries on a tax-advantaged basis if you retain the right to use or control the assets. But those rules don’t apply to assets you receive from others in a beneficiary-controlled trust. The challenge in taking advantage of a BDIT is to place assets you currently own into a third-party trust.

How it works

The classic BDIT strategy works like this: Let’s say Molly owns her home and several other pieces of real estate in an LLC. She’d like to share these properties with her two children on a tax-advantaged basis by transferring LLC interests to trusts for their benefit, but she’s not yet ready to relinquish control. Instead, she arranges for her father to establish two BDITs, each naming Molly as primary beneficiary and trustee and one of Molly’s children as a contingent beneficiary.

To ensure that the BDITs have the economic substance necessary to avoid an IRS challenge, Molly’s father “seeds” the trusts with cash. He also appoints an independent trustee to make decisions that Molly can’t make without jeopardizing the strategy, including decisions regarding discretionary distributions and certain tax and insurance matters.

In addition, in order for each trust to be “beneficiary defective,” the trust documents grant Molly carefully structured lapsing powers to withdraw funds from the trust. This “defect” ensures that Molly is treated as the grantor of each trust for income tax purposes.

After the BDITs are set up, Molly sells a one-third LLC interest to each BDIT at fair market value (which reflects minority interest valuation discounts) in exchange for a promissory note with a market interest rate. When the dust settles, Molly has removed the LLC interests from her taxable estate at a minimal tax cost, placed them in trusts for the benefit of herself and her heirs, and provided some creditor protection for the trust assets.

Unlike a traditional trust strategy, however, this strategy allows Molly to retain the right to manage and use the trust assets, to receive trust income and to withdraw trust principal in an amount needed for her “health, education, maintenance or support.”

Talk with us to determine if a BDIT makes sense as part of your estate plan.

© 2018

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The tax impact of the TCJA on estate planning

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The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.

Exemption increases

The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.

This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.

The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

The impact

Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025.

Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.

Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater.

Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning.

For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax.

Review your estate plan

Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan.

© 2018

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Fortify your estate plan against undue influence claims

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Of course, you expect the declarations in your will to be carried out, as required by law. Usually, that’s exactly what happens with wills. However, it’s possible your will could be contested and your true intentions defeated if someone is found to have exerted “undue influence” over your decisions.

Undue influence defined

Undue influence is an act of persuasion that overcomes the free will and judgment of another person. It may include exhortations, insinuations, flattery, trickery and deception.

Frequently, undue influence happens when an elderly individual, who may or may not have all of his or her bearings, is convinced to change provisions in a will or otherwise suddenly rewards another person, such as a caregiver.

Conversely, not all influence is “undue.” For instance, it’s perfectly reasonable for a child or close friend to advise an elderly person. It’s usually up to a court to decide if the “suggestion” constitutes undue influence.

Elements of undue influence

Generally, an interested party lodges a claim for undue influence when a deceased person’s will is being probated. To be successful, he or she typically must prove the following elements:

  • The will distributes assets in a way that wouldn’t be reasonably anticipated,
  • The deceased relied on the person who allegedly exerted undue influence,
  • The deceased’s physical or mental condition made him or her susceptible to undue influence, and
  • The accused person benefits from changes in the will or some other suspicious transaction.

Protect against claims

If your will distributes assets in a way your family might not expect, it’s possible that an undue influence claim could be successful — even if your will reflects your true intentions. Circumstances could still give the appearance of undue influence.

There are, however, steps you can take while you’re of sound mind and body to protect your estate against undue influence claims:

Establish competency. The best way to do this is to draft your will while you’re still in reasonably good health. Arrange for a physical examination around the time your will is executed. This is equivalent to a physician “signing off” that you’re competent.

Communicate clearly with family. Claims of undue influence may arise when relatives are blindsided after you’re gone. Let them know your intentions as soon as possible and explain your reasoning.

Taking these two steps may help avoid confrontations and place interested parties on notice that you’ve addressed the situation. The mere fact that you’ve taken action will be recognized in your favor. Contact us if you’re concerned that your will may someday come under an undue influence claim.

© 2018

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2 tax law changes that may affect your business's 401(k) plan

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When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.

1. Plan loan repayment extension

The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do.

Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59½).

Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.

2. Hardship withdrawal limit increase

Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.

Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.)

Under the BBA, the withdrawal limit will also include 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.

Nest egg harm

These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.

So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions.

© 2018

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