The election is over and there are still many unanswered questions regarding tax law, making it difficult to do tax planning for 2012 and beyond.

“You need to partner with a tax adviser,” says Rich Lundy, CPA, Director, Tax and Business Advisory Services with GBQ Partners LLC. “It’s difficult for the general population to stay up to date because a lot is still up in the air. It is not yet known when any potential changes will take effect and what the outcome will be, both in the short term and long term.”

Lundy says working with an adviser on year-end planning can result in potential permanent savings due to possible changes in tax rates.

Smart Business spoke with Lundy about the major tax issues impacting year-end planning for businesses and individuals.

How is the fiscal cliff affecting year-end tax planning?

Late in 2011, Congress couldn’t agree on spending cuts, so it put in automatic mechanisms to reduce expenditures. In addition, if nothing is done by the end of the year, tax rates will increase for almost everyone. There are major economic concerns over the impact of reduced government spending and increased tax rates going into effect at the same time. If Congress doesn’t act by the end of the year, the top tax rate would revert to 39.6 percent, up from the current 35 percent, and there would be increases in the lower brackets, as well.

President Barack Obama has proposed keeping the rates the same for the lower brackets — less than $200,000 of taxable income for individuals, or $250,000 for those married filing jointly. Tax rates currently range from 10 to 28 percent below those income levels. In a potentially higher tax rate environment, in general, individuals could benefit from maximizing income before tax rates increase.

Businesses, specifically C corporations, are currently subject to a maximum tax rate of 35 percent, one of the highest corporate tax rates in the world. The president has proposed reducing that rate to 28 percent, along with potentially curbing some business deductions. The strategy for a C corporation would be to try to defer deductions and/or income to some time in the future when rates may be lower.

What impact will the Medicare tax increase have on year-end planning?

There are two types of tax increases enacted by the health care reform in 2010 that take effect on Jan. 1, 2013. The first is on earned income: If you exceed the earned income limit of $200,000 for individuals or $250,000 for those married and filing jointly, there will be an additional 0.9 percent tax, increasing the Medicare tax rate from 1.45 to 2.35 percent. Those who will fall into this category in 2013 may want to consider taking an early bonus in 2012, or maximizing income before the end of the year if self employed.

The other tax is on unearned income, including interest, dividends, rental income, royalties, passive income and capital gains. This will be an additional 3.8 percent tax if you have income in these areas and exceed modified Adjusted Gross Income of $200,000 if single or $250,000 if married and filing jointly. Those whose modified AGI exceed these limits should consider accelerating these types of income into 2012, rather than deferring to 2013, to the extent possible.

What other areas of concern exist?

One is the capital gains tax. Currently, the long-term capital gains tax rate is 15 percent. In 2013, with no further action, rates could increase to as high as 25 percent. Many people are choosing to take their long-term gains now by selling stocks and bonds to generate long-term capital gains, and some who were already considering selling their businesses have moved the timeline up to this year. This is one of the most significant changes and an area where you can take action in your year-end planning to avoid those higher rates next year.

Another area of concern is qualified dividends, which are now taxed at 15 percent for higher- and middle-income taxpayers. If Congress does nothing, the phrase ‘qualified,’  which generally means that you’ve held the stock for 120 days, disappears from the tax code. The higher bracket could increase from 15 percent to 39.6 percent, the middle bracket from 15 to 28 or 33 percent and the lowest bracket from zero to 15 percent.

As noted earlier, the new Medicare tax on unearned income applies to interest, dividends and capital gains as well, so there would be an additional 3.8 percent tax for the upper-income individuals in this area. This could potentially triple the tax rate on qualified dividends. This is problematic because not only are dividends subject to double taxation, but many investors have invested in companies that are paying reasonable yields because they cannot get reasonable investment income from vehicles such as CDs and money market funds.

These expiring tax rates could wreak havoc on the stock market. There has been discussion about whether companies will unleash some of their cash before the end of the year in the form of dividends while the rate is still 15 percent. This could potentially impact stock valuations and large company behavior toward shareholders.

Finally, alternative minimum tax could hit an additional 33 million taxpayers if Congress does not implement a patch before the end of the year. The proposed two-year patch would restore exemptions to near 2011 levels, retroactive to the beginning of 2012. Because alternative minimum tax is not indexed for inflation, more and more people will be subject to it.

Rich Lundy, CPA, is Director, Tax and Business Advisory Services with GBQ Partners LLC. Reach him at (614) 947-5264 or

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Published in Columbus

Ohio’s incentive programs can assist businesses undergoing expansion projects such as job creation, facility changes, employee training and energy management. But taking full advantage of them requires company resources to negotiate, apply for and manage these incentives. Putting together the right team can help negotiate the best deal and make realistic projections related to the project.

“Having the right team on both sides of the table — the company’s side and government side — can help secure an optimal incentive package,” said Marti Brenner, location and incentive practice leader at GBQ Partners LLC. “Not only will you get the best deal, but you also will alleviate issues and ensure the project remains on schedule.”

She says when your company is growing, you must simultaneously prepare the business for expansion while attempting to secure an incentive package. “Having the right team in place can help streamline the incentive process and avoid costly distractions.”

Smart Business spoke with Brenner about a few Ohio incentive programs and getting key people in place to manage the process.

What are some of the major incentive programs in Ohio?

A popular Ohio incentive program is the Job Creation Tax Credit, which is a refundable state income tax credit determined by net, new payroll in the state. Another prevalent program is the Ohio Workforce Guarantee Program, which offers a 50 percent reimbursement of your eligible training cost.

Property tax abatements, available locally, can offset up to 100 percent of that tax for up to 15 years through a Community Reinvestment Area or an Enterprise Zone.

A new program on the horizon creating a lot of buzz is the Ohio Incumbent Workforce Training Voucher Program. It is expected to provide a 50 percent reimbursement of eligible training costs totaling up to $4,000 per trainee. The program was allotted $50 million in the state budget that will be disbursed over two state fiscal years — from July 1 to June 30. There is $20 million available this fiscal year and $30 million available in state fiscal year 2014. It is planned to be distributed on a first-come, first-serve basis.

What are the steps you need to take in order to create a team? 

Every project presents different needs and the application of various incentive programs touches many aspects of a business. As a result, the ideal core dream team is comprised of a combination of the following:

  • Accounting, finance and/or controller — They tend to have easy access to company and project information including capital investment, operating costs and financing needs that typically are required information on the various incentive applications.  Completing accurate incentive applications will avoid issues in the agreements and/or costly mistakes in calculating incentive benefits.

  • Tax — Many of the incentive programs are tax credits, but more importantly analyzing and drawing attention to the positive economic impact will only enhance the incentive package offered.

  • Operations (plant manager or project engineer) — They are usually aware of operational and facility needs related to the project from building specifications to utility needs. It is a best practice to have identified these needs early in the discussions with state and local officials because it is difficult and sometimes impossible to secure additional incentives after commitments have been made.

  • Human resources — HR representatives tend to have a better understanding of the specifics when it comes to training, pay and benefits related to current and future employees. The HR representative is one of the most critical team members because of the application and ongoing reporting information associated with incentives. If ongoing incentive reports are not filed properly, your company may not realize the full, or any, benefit of the incentives awarded.

Depending on project plans, it’s critical for the core dream team to utilize other resources as ancillary team members at various points in the incentive process. Other dream team players may include:

  • Executive level — Officers of the company that have a thorough understanding of the company growth strategy and have final location or project decision authority.

  • Public relations — As many of the incentives involve approvals in a public setting, marketing and public relations professionals may help control the overall project message and information that may be published in the media.

  • Government affairs — Companies may tap these practitioners for their government relationships with state representatives and/or senators to raise political support for the project.

  • Legal counsel — Attorneys should review the various legal agreements between the state or local jurisdiction and the company, as it is a legal contract that often covers multi-year periods.

How can you stay on top of the latest news to be the first in line to apply for these incentives?

It all relates to partnering. The goal of economic development is to attract and partner with companies in the community. Incentive opportunities are sometimes missed if the company is not partnered with state and local economic development organizations. Even without a current expansion project, it is generally a best practice to develop relationships at the state and local levels, whether with the Development Services Agency, JobsOhio or your regional network partners such as, but not limited to, Columbus2020, Team NEO/Cleveland+ and Cincinnati USA Partnership. It is important to establish economic development relationships to give a name and face to the company.

Marti Brenner is the location and incentive practice leader at GBQ Partners LLC. Reach her at (614) 947-5287 or

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As the U.S. population ages, many leaders are beginning to think about preparing their business for the next generation. The business can be sold to a third party, gifted to heirs, or sold to management or employees through an employee stock ownership plan (ESOP). While ESOPs are not the most widely used option — there are only about 10,000 throughout the U.S. — they can be very beneficial for both business leaders and employees.

“Employees benefit from the increasing value of the business because they’re partial owners,” says Brian Bornino, CBA, CFA, CPA/ABV, director of valuation services with GBQ Consulting LLC. “There’s a lot of uncertainty about how people will retire, with the lack of pensions and Social Security being questionable. So having control of your own retirement and owning part of the company where you work is good for employees.”

Smart Business spoke with Bornino about why an ESOP is a good option and how to determine if it’s right for your business.

Why is an ESOP a good option to consider?

There’s a strong desire to try to keep jobs local. When you sell the business to your employees, jobs are locally controlled, whereas a third-party buyer may move the jobs across state lines, to a different city or even a different country.

Owners who built their business also have a pride factor and want there to be a legacy for the business. They would prefer an option other than selling to a third party that will integrate their business into the third party’s business, in which case their life’s work goes away.

There are also many tax advantages to an ESOP. A handful of academic studies has shown that employee-owned companies tend to outperform those not owned by employees.

What are the tax advantages of forming an ESOP?

The most powerful tax advantage of an ESOP is the ability to create an income-tax-free entity. If the ESOP owns 100 percent of an S corporation, the tax liability arising from corporate income flows through to the shareholder, which is a tax-exempt trust. That’s a very powerful advantage for savvy management teams, as a business that doesn’t have any income tax liability can invest that savings — which is often about 40 percent — and redeploy those dollars to grow the business through acquisitions, investment in equipment, hiring new people or paying dividends. That’s where a lot of the incentive is for management. They’re trying to build and grow the company, so if you can take out the largest expense item on the company’s profit and loss statement, that’s a major motivator.

Another key tax advantage is tax-advantaged financing, as the principal payments on ESOP transaction debt can be structured to be tax deductible (whereas typically only interest on debt is deductible).

These tax advantages also benefit the selling shareholders. To the extent that the selling shareholder is the one financing the deal, these advantages often result in the shareholders geting repaid quicker because the company has more cash to repay them. It becomes a lower risk proposition for the selling shareholder.

How do you determine if an ESOP is the best option for your company?

It starts with defining your goals for the transition of the business. The typical options are the outright sale of the company to a third party, selling or gifting it to your heirs operating in the business, or selling it to management or employees through an ESOP. You have to decide which of those you want to pursue. If you don’t have heirs in the business, that obviously eliminates that option. The sale to a third party makes the most sense if the company doesn’t have adequate management to run on its own. There also may be a strategic buyer that could help you maximize the purchase price, which makes a third-party sale more attractive.

The decision of whether to pursue an ESOP starts with the selling shareholder. If there is a desire to preserve a company’s legacy by keeping it independent, as well as reward employees who helped build the business, then an ESOP is often an attractive option. Because employees don’t put up their own money to buy the shares, virtually all employees will likely be on board, as they’ll get the benefit of owning the business. Obviously there will be skeptics, but by and large, most employees will be excited about an ESOP.

You also need to convince management of an ESOP’s benefits. On occasion, management may prefer to buy the company without involving employees, but the economics of management buyouts are different and management often cannot compete against the ESOP option.

What types of companies are most favorable to an ESOP?

Employee-oriented companies are often the best candidates for an ESOP, such as service companies, engineering or architectural firms, consulting firms or other companies where employees are critical assets to the business. ESOPs also make sense from an employee morale standpoint because you’re trying to attract, retain and motivate highly skilled employees, and employee ownership is a way to do that.

It also works for more traditional manufacturing and distribution businesses. Many times they have an easier time financing the transaction because they have the equipment and assets to borrow against, compared with service businesses that have to raise money for the transaction. Any business with a strong team, consistent cash flow and an interest in rewarding, attracting and motivating employees is a great candidate for an ESOP.

Brian Bornino, CBA, CFA, CPA/ABV, is director of valuation services with GBQ Consulting LLC. Reach him at (614) 947-5212 or

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The recent accessibility of oil and gas in the Utica Shale rock formation, located throughout much of Eastern Ohio, will have a major impact on businesses and individuals alike. New businesses will be coming to the state due to the drilling, and companies currently here will likely see increased business.

As a result, companies should be considering the state and local tax ramifications of these operations in Ohio.

“Many businesses coming into the state may not have done work in Ohio before,” says Anthony Ott, CPA, senior manager, state and local tax services with GBQ Partners LLC. “For the first time, they will be subject to Ohio’s state and local tax structure, which does have some nuances that differ from other states.”

Smart Business spoke with Ott about how to prepare for the increased business and the resulting tax ramifications.

What are a few key state and local tax focus areas for businesses impacted by the shale boom?

Ohio is one of the few states that allows municipalities to enforce their own income taxes, which creates a very burdensome compliance process.

Owners of land leased for drilling will likely receive upfront lease bonuses, as well as royalty payments once the well is active and producing. This could produce a much larger municipal income tax liability for these individuals, depending on where they live. They may also be required to make estimated payments for municipal income tax, creating a new level of complexity.

It’s also very problematic for businesses to properly comply, especially those coming from out of state that are not familiar with the municipal taxing structure. Ohio utilizes a 12-day entrant rule — if you operate in a given taxing municipality for 12 days during any given year, you’re responsible for withholding and paying municipal income tax in those locations. Businesses with mobile work forces have to track the location of employees and property to apportion their income in Ohio to the correct municipality. This becomes difficult when you have crews working all over the state.

Ohio also imposes sales tax on certain services such as temporary employment.  So, if businesses are utilizing temporary help and other taxable services, they will have an impact on the profitability of their jobs.

How do severance and real property taxes apply?

The severance tax is the hot topic right now. With the mid-biennium budget review, Gov. John Kasich proposed certain changes that would increase the tax above its current level and use the additional funds collected to provide an income tax credit to Ohio individuals.

The legislation would establish two categories of wells — hydraulically fractured horizontal wells and conventional wells — and tax each differently. If this legislation passes, it will raise the complexity for companies, particularly those with hydraulically fractured horizontal wells, given the opportunity to use a reduced rate for the first two years while they recoup costs associated with construction of the well.

The real property, or ad valorem tax, allows county auditors to value the oil and gas reserves for producing wells and assign a value for real property tax purposes. The value is determined based on an annual return filed with the county auditor.

What about the Commercial Activity Tax?

Ohio’s CAT is unlike the income/franchise taxes levied in many other states. In essence, it is a tax on a business’s gross receipts. The CAT’s unique requirements around what items are included in gross receipts and how receipts are sourced will have an impact on both businesses and individuals participating in the industry.

What is the overall risk of not understanding and complying with Ohio’s taxing structure?

The risk is that a company operating in the state fails to comply with all the statutory tax requirements. This could lead to an audit by the state or municipality, and the business would likely be subject to the tax assessment and associated penalties and interest.

What are some of the opportunities for companies participating in the boom?

The state and local tax impact can increase dramatically as the associated revenue dollars and investment rise. Depending on the project, there may be opportunities for incentives from the state and local jurisidictions that may help offset some of those increased costs. These may include incentives and tax credits for job creation, capital expenditures, training, etc.

Ohio law also provides a sales tax exemption related to items directly used in the production of oil and gas. I would encourage industry participants, as well as service providers, to fully understand what qualifies for the exemption in order to take full advantage and possibly reduce the overall dollar investment required.

How can companies stay up to date on these issues?

Participants in the industry should keep a keen eye on the severance tax legislation. The Ohio Oil and Gas Association is very active in this area and is a good resource for members of the industry to stay informed.

Regarding current Ohio taxes, businesses and individuals alike should review the structure and consult with a state and local tax professional to better understand how it will apply. Each industry segment, as well as the ancillary service businesses, will be impacted differently.

There are also many opportunities to attend informational seminars specifically related to these issues.

Anthony Ott, CPA, is a senior manager, state and local tax services at GBQ Partners LLC. Reach him at (614) 947-5311 or

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Now is a great time to start making gifts from your estate or start planning to make those gifts before the end of the year. Provisions of The Tax Relief Act of 2010, set to expire at the end of 2012, increased the lifetime gift tax exemptions to $5.12 million for individuals and $10.24 million for married couples, while keeping the estate and gift tax rate at 35 percent. If no legislative action is taken before the end of the year, the lifetime exemption will drop to $1 million in 2013 and the tax rate will increase to 55 percent.

As a result, if you transfer $5.12 million in assets in 2012, you will pay no gift tax. If you wait and make that same transfer in 2013, the result would be a $2.266 million tax liability.

“That’s a significant increase,” says Kaz Unalan, CPA, director, tax and business advisory services at GBQ Partners LLC. “If you are considering transferring assets, do it this year before these tax provisions expire.”

Smart Business spoke with Unalan about how to take advantage of the tax cuts while there’s still time.

How does the economic environment play into estate planning?

Based on the current economic climate, many values are depressed. These lower values give you the opportunity to gift more at a lower cost. A prime example is real estate. Those values are creeping back, but they’re still much lower compared to values in 2007 and 2008.

Values of closely held businesses are no different. Because these are at historic lows, it is an ideal time to consider gifting a closely held business. In addition to low values, marketability and minority interest discounts could further enhance your gifting capacity. Currently, interest rates are also historically low and very favorable when gifting assets into a trust. Trusts are appealing gifting vehicles for retaining control of an asset while freezing its value. The interest rate is important in that the lower the interest rate the less the income interest is worth, and conversely, the more the remainder interest is worth. This is extremely beneficial for gifting strategies related to Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts.

When gifting nonmarketable assets such as real estate or interests in a closely held business you should have a professional appraisal or business valuation performed.

How does the future tax environment affect estate and gift tax opportunities?

There’s a lot of uncertainty going into 2013, which has to do with the political environment and the current administration’s budget proposal. Currently, there are valuation provisions in place that are favorable for taxpayers as they relate to the ability to discount valuations of family-controlled entities for gifting purposes. The proposed budget would eliminate those discounts. Part of the current budget proposal also includes restrictions on the use of GRATs. Those proposed restrictions would make GRATs less favorable as an estate planning tool. You need to work with your advisers — your CPA and legal team — to make sure you stay on top of these changes. Those are the best and biggest allies when you’re trying to find out more about these laws and changes and how it impacts you and your business. Those advisers know the rules and have a good understanding of your personal situation. That’s a key component to planning.

What are some strategies to take advantage of this favorable time?

A lot of it starts with looking at your business and family situation. Many considerations are made based on how your personal beliefs and your values align with the tax and legal aspects. You need to answer some big-picture questions such as what you want to leave your heirs, how you want to ensure the financial security of your family now and when you are gone, and who is ultimately going to receive your estate.

Start looking at those big-picture questions and then boil it down to a specific vision. It can then be as simple as making an outright gift and taking advantage of the increased exemption by transferring the gift by the end of the 2012. You can also look at it from a comprehensive planning perspective. Gifting can be part of a family-owned business strategy and include other elements of planning such as the use of trusts.

What are the benefits and risks of estate and gift planning?

The benefit is preserving your estate for your heirs. By doing that now, you take advantage of a tax environment that hasn’t been this favorable for a very long time. Being more efficient in your tax planning can also significantly add value and preserve more of your estate.

By not working with the right professionals you risk missing big opportunities. Beyond the opportunities, you want to make sure you are working with professionals who understand the tax laws and the compliance elements that go along with estate and gift planning. Failing to document and execute the plan is a risk that can be avoided with the right professionals. It’s important to fully understand all of the steps that are necessary for estate and gift planning in order to reduce any kind of risk you may have.

Kaz Unalan, CPA, is director, tax and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5309 or

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Whether the organization is publicly-traded, a family business or a not-for-profit, boards of directors deal with many universal issues. The central responsibility of a board member is to make sure the organization prospers and fulfills its strategic mission while ensuring nothing puts the organization’s existence in detriment.

“Board members should have a solid understanding of the basic fiduciary responsibilities that need to be fulfilled and how they are going to ensure that they do so at the particular organization they are serving,” says Bob Stillman, CPA, director, assurance and business advisory services at GBQ Partners LLC. “The top priority of board members is to strategically develop a high-level course of action to ensure the preservation, existence and continued success of the entity.”

Smart Business spoke with Stillman about the essentials of board member fiduciary responsibilities and other matters that affect board members and benefit their related organizations.

What are the key fiduciary responsibilities of a board member?

When advising my clients, I routinely refer to the guidance provided by the attorney general of Ohio, who identifies four primary fiduciary duties:

  • Duty of care: meaning be active in the organization’s affairs, consistently attend meetings, keep yourself informed to determine if the policies established are appropriate and adhered to, understand how the organization functions, act diligently and in good faith, with knowledge and after adequate deliberations.
  • Duty of loyalty: really relates to acting without self-interest and resolving conflicts of interest. This takes varying forms depending on whether the organization is a public corporation, closely-held/family-owned organization or a not-for-profit organization.
  • Duty to manage accounts: relates to the financial accountability of the organization and checks to ensure appropriate internal control is established; records, reports and financial accounting are accurate, timely, sufficient, and monitored; appropriate activities are occurring to ensure sufficient funding resources and there is appropriate expenditures and risk management.
  • Duty of compliance: relating to following articles of incorporation, by-laws, other operating documents, relevant laws, regulations and filing requirements.

It is imperative that both management of the organization and the board members understand what each of these duties encompass.

How can board members understand more about these duties and take better responsibility for their roles?

The organization should provide a sufficient level of board member training that is tailored for the particular organization. People join boards having past board experience ranging from none to extensive. Providing new board member training offers an opportunity to explain what’s expected of a board member.  Management benefits significantly when their board members have a strong understanding of fiduciary responsibilities. The full board should receive a refresher annually about their basic fiduciary responsibilities.

Why is important for board members to understand and take control of their fiduciary responsibilities?

Many people view participating on a board as an opportunity to apply their personal and professional skills for the benefit of an organization and an opportunity to continue to develop their personal and professional network. However, the board’s collective decisions could have serious consequences for the organization that may reflect on individual board members. Clearly understanding the basic fiduciary responsibilities will help them be a more cognisant about that general risk as well as be a more effective board member.

You cannot abdicate your fiduciary responsibilities to another board member. Commonly, the CPA on the board takes the brunt of the details of the duty to manage accounts, but all other board members must have sufficient information to make their own decision.

Beyond fulfilling the basic fiduciary responsibilities, what other areas should a board member focus?

A well-informed and engaged board of directors will ensure an appropriate strategy is developed and implemented to enable the future success of the organization. Doing so inevitably requires the board to assess the leadership within management. This can be an uncomfortable position, however, a board member should expect to deal with this matter routinely. Also, key management personnel risk is becoming more prevalent with our aging society as professionals move toward retirement. The board needs to consider succession planning for key management personnel.

What skill sets should business leaders look for in a good board member?

A strong board needs to be well-balanced with people that possess specialized skills in certain common areas, such as legal, lending, investing, accounting, human resources, business development, insurance, human resources and technology. You also need members who will establish the tone at the top from an internal control standpoint and develop expectations with management about the quality they expect of the organization.

In the end, for any organization, reputation is its biggest asset and difficult to restore if it is damaged. Board members have a high responsibility to preserve, continue to promote and safeguard this. If they stumble, the organization could be open to negative exposure.  You want people who are well respected with certain credentials who will continue to preserve and improve the organization’s



Bob Stillman, CPA, is director, assurance and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5304 or

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Exporting goods overseas can have a positive impact on your business. The Interest Charge Domestic International Sales Corporation, or IC-DISC, can offer a tremendous tax benefit and a permanent tax savings opportunity for your company.

Generally, if you are a tax-paying entity that exports more than $1 million in sales to locations outside the U.S., you should consider an  IC-DISC, says Tim Schlotterer, CPA, director, tax and business advisory services with GBQ Partners LLC. An IC-DISC could reduce your federal effective tax rate on qualified export income by as much as 20 percent.

“IC-DISC has become more prevalent in recent years due to the favorable qualified dividend tax rate,” says Schlotterer. “In years past, companies have used other export incentives. However, those are no longer available as a result of the World Trade Organization potentially placing sanctions on the U.S. for offering those incentives.”

Smart Business spoke with Schlotterer about what you need to know about IC-DISC and how it can benefit your company.

What are key items businesses need to understand about an IC-DISC?

IC-DISC is not for everyone. It is really important to identify that you  have qualified export income. Three requirements must be met in order for an IC-DISC to have qualified income from an export sale.

  • The goods sold must be manufactured, produced, grown, or extracted in the U.S. by an entity other than the IC-DISC.
  • The export property must be held primarily for sale, lease or rental use, consumption, or disposition outside the U.S.
  • The export property must contain at least 50 percent of the fair market value attributable to U.S. produced content.

In addition to export sales, an IC-DISC can be used if you are providing engineering or architectural services for construction projects located outside of the U.S.

What is an IC-DISC?

An IC-DISC is a separate legal entity.  Companies will need to coordinate with their tax adviser and attorney to incorporate the IC-DISC. An IC-DISC’s benefits are not retroactive. To qualify as an IC-DISC, a corporation must:

  • Have a minimum capitalization of 2,500 authorized and issued shares.
  • Have a single class of stock.
  • Be incorporated in one of the 50 states or in the District of Columbia.
  • Have qualified export sales.
  • Ninety-five percent of the IC-DISC’s gross receipts and assets must be related to the export of property.
  • File an election with the IRS to receive approval to be treated as an IC-DISC for federal income tax purposes.
  • Maintain separate books and records.

How can an IC-DISC reduce taxes?

An entity that has qualified as an IC-DISC will need to set up a commission agreement with your company. The company then pays a commission (which is tax deductible) to the IC-DISC.

The qualified export sale commission income earned by an IC-DISC is tax-exempt as long as the IC-DISC distributes its income to its shareholders. This distribution is made in the form of a qualified dividend, which is currently taxed at a rate of 15 percent.

There are two methods by which the commission can be computed. Companies are able to compute this commission on a transaction by transaction basis. Therefore, companies are able to use the greater of the two methods in determining which commission to charge:

  • 4 percent of qualified export receipts
  • 50 percent of foreign source taxable income.

It is recommended that you work with your tax adviser to determine which commission method should be used. Companies with large gross margins will generally have a larger tax benefit using the 4 percent method in computing the IC-DISC commission.

What are the benefits and risks associated with IC-DISC?

The largest benefit an IC-DISC provides is a permanent tax savings to the company. In addition to this, an IC-DISC could be used as a way to incent key employees within your organization or as an estate planning tool.

There is no requirement that an IC-DISC’s shareholders be the same as those of the company. You can therefore offer ownership that differs from the operating company and distribute earnings to the shareholders in the form of a 15 percent qualified dividend.

The largest risk of IC-DISC is that the qualified dividend rate of 15 percent is only secured through the end of 2012. There is concern that if nothing is done with the current tax law, the qualified dividend rate would go away and it would return to the ordinary tax rate, so there would be no difference in the tax rates and no benefit.

To the extent that the qualified dividend rate stays at 15 percent, or lower than the ordinary tax rate,  an IC-DISC will be a good option for companies to enhance their export sales in the future.

Tim Schlotterer, CPA, is director, tax and business advisory services, at GBQ Partners LLC. Reach him at (614) 947-5296 or

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When the recession hit in 2008, the number of mergers and acquisitions dropped precipitously. Now that the stock market and economy are improving, more and more businesses are undergoing transactions, both in sales and purchases of companies.

And if you’re one of these companies, partnering with a firm that focuses on Transaction Advisory Services can increase your value.

“Whether you are involved in selling or buying a company, buying out shareholders, transitioning your business to family members, obtaining funding for your venture, or a host of other transactions, there are typically a lot of dollars changing hands, and it’s an important time for a business owner from both a financial and emotional perspective,” says Wade Kozich, CPA, senior director and director of Transaction Advisory Services at GBQ Partners LLC. “There’s a lot of value that comes to businesses as a result of using a firm with strong capabilities that is highly focused on transactions, which can save you millions of dollars during a transaction process.”

Smart Business spoke with Kozich about the importance of Transaction Advisory Services and key items you need to understand about business transactions.

How can businesses take advantage of the change in the mergers and acquisitions environment?

We are back in an environment where people are feeling a lot better about the economy. Many people held off on selling because there weren’t enough buyers, or the prices they were getting weren’t justifying what they thought their businesses were worth. Multiples are very high right now, which is encouraging businesses to sell part or all of their company.

Even if you’re considering another type of liquidity event, such as a management buyout or ESOP, interest rates are at all-time lows and it is a great time to lock in long-term interest rates. Low capital gain rates, due to expire this year, are also causing more transactions to occur.

On the buy side, many companies have been hoarding cash, but more are now aggressively seeking acquisitions. Banks are also starting to loan more to finance transactions. Private equity funds have windows of time to make investments, and those windows are closing.

Why are Transaction Advisory Services important to businesses?

On the buy side, it’s making sure that what you think you’re buying is actually there, and you are looking for synergies and opportunities to expand revenues and profits. You also want to make sure you are paying the right amount and that you have the right structure for the deal.

On the sell side, you want to make sure your company is in good shape to be sold. A seller maximizes its value based on how it positions the company prior to a sale. There are a lot of things a firm can do in terms of pretransaction planning, evaluation of opportunities and transaction execution, and even post-transaction planning, to maximize value.

What should businesses look for in Transaction Advisory Services?

Look at a firm that has people with strong capabilities who have a lot of experience going through many transactions. A lot of nuances are only learned through real-life experiences.

It’s important that a firm has people with diverse technical skills, including tax structuring, due diligence, valuations, state and local tax, technology, business consulting, corporate finance and restructuring and succession planning. Having it under one roof and in a coordinated fashion is critical to adding value.

What key items do companies need to understand about business transactions?

If you are selling, start preparing at least a year in advance. Clean up your company and your financials, and have a review or audit done if you have not done one in the past.  Make sure your tax structure is most advantageous for a sale. Do due diligence on your own company, checking the things a buyer will look at when it does due diligence. You want to sell when you’re most profitable, so start planning at least a year in advance, sometimes up to five years, because you want to maximize profitability and sell at the right time.

You also need knowledge of how to go through a transaction. Who should you consider as a buyer? Should you use an investment banker? Who would be interested in buying the business — a strategic buyer or a financial buyer? You need to scope out the marketplace. Start building relationshiops with potential buyers. Too often, a business will get a call from someone and end up doing a transaction without fully considering who the best partners are to buy the business. It may never realize that it could have gotten a much better price and sold to a better partner.

When people sell companies, they may keep a minority interest and stay in the business, so you are, in essence, taking on a new partner. Who you take on as a partner is crucial. How is that person going to treat the people you’ve been working with for years? Will that person treat them well and retain them, or get rid of as many as possible? That can be important.

What are the benefits of using a firm for Transaction Advisory Services?

There are many complex nuances in deals. The buyers you are talking to have been through a lot of deals, and if you do not have experts on your side, you will be at a huge disadvantage. Going through a transaction can be very distracting and stressful on a business, and particularly on the owners. A strong transaction advisory team can alleviate a lot of the distraction and stress and give you peace of mind.  There are also a host of risks inherent in all transactions that you may not realize. Having a good Transaction Advisory Team on your side will greatly mitigate those risks. Any time you go through a sizeable transaction, you want the smartest and most skilled people on your side, because there is a lot to be gained or lost.

Wade Kozich, CPA, is a senior director at GBQ Partners LLC. Reach him at (614) 947-5255 or

Insights Accounting & Consulting is brought to you by GBQ Partners LLC

Published in Columbus
Saturday, 31 March 2012 23:19

How social media is used in litigation

It’s often said that once something is posted to the Internet, it’s hard to get rid of it — no matter how many times you press the delete button. With the prevalence of social media in today’s society, this is something to consider. Once you post a picture on Facebook or tweet something in Twitter, it will stay there, in some form. And you never know how that personal information you posted online will come back to haunt you — especially in court.

“A great deal of valuable information about individuals and corporations can be determined from what people put on their social media sites such as Twitter, Facebook, LinkedIn and blogs,” says Rebekah Smith, CFFA, CPA, CVA, director of financial advisory services at GBQ Consulting LLC.

Smart Business spoke with Smith about the role social media plays in litigation and what you need to know about social media’s use in litigation.

What role does social media play in litigation, mainly in the financial realm?

People typically think about divorce cases where social media was used to uncover some type of personal behavior. While it is true that social media can be extremely helpful for attorneys in a divorce case as one method for proving certain actions of one party or the other, a forensic accountant can also use social media for financial purposes. For example, Facebook pictures or Tweets may be used as evidence of non-disclosed assets or a certain lifestyle. We have used social media in cases to determine if a debtor was hiding assets from a creditor, to obtain someone’s education, work history and current career direction, and frequently for research on a corporation or individual.

How has this changed over the last 10 years?

Dramatically! Ten years ago the only ‘social media’ was blogs, but unless you knew the name of a person’s blog, or it was easy to find, personal blogs were pretty hard to uncover. LinkedIn and Facebook did not even exist 10 years ago. LinkedIn popped up in 2003 and Facebook did not launch until 2004 and neither really gained major popularity until later. Twitter was the last to start in 2006. So 10 years ago, none of these resources were available to forensic accountants and attorneys when they were conducting their investigations. Now, it is standard protocol to see if the individual has a Facebook, Twitter, LinkedIn, or blog page where one can conduct some research.

How much, and to what extent, can your personal online footprint be used in litigation?

It partially depends on the type of litigation. In general, the more personal the litigation and the more personal information someone puts on their social media site(s), the more valuable it can be. For example, in a case regarding whether an individual was hiding assets from a creditor, social media was used to determine that the individual had a child who had recently purchased a very expensive piece of property in a different state. After running down that lead, it was determined that the property had been purchased with the funds from the individual under investigation, unveiling a common scheme of hiding  assets in relatives’ names.

We have also used Facebook as evidence of someone’s lifestyle when doing a lifestyle analysis in a fraud investigation. This involves looking at the lifestyle someone leads and comparing it to the known available monies (i.e. salary) to see if there is a gap in spending versus earnings, which could be an indicator of fraud.

What about your business’s online footprint?

In a fraud case, social media can be used to track down certain individuals and identify the parties related to the potential fraud. Sometimes, as part of researching a company and trying to understand what the company does, we will search social media sites. Many times in a shareholder dispute or a ‘business divorce’ people have motivation to either pump up the value of the business or depress it depending on whether they are the seller or buyer. Often times while scouring social media, you will find statements the company has issued which confirm or contradict self-serving statements made by the parties during litigation.

What are key things you need to understand about the use of social media in litigation?

It used to be that it was the exception to check social media sites as part of litigation, but it has become more and more routine. A recent article described the ways that social media was used, which even included jury research. If you think about people’s status updates on their Facebook pages, a lot can be gleaned about a potential juror’s political or social affiliations, which might make them more or less attractive jurors.

Jurors are Facebooking and Tweeting about juries they are on and judges are trying to monitor social media to make sure jurors aren’t disobeying their orders to not discuss a case. Recently in Florida, a man was kicked off a jury for ‘friending’ the plaintiff on Facebook. Unfortunately, the judge didn’t take too kindly to the fact that the juror allegedly posted his excitement about getting kicked off the jury and has now called for a hearing to determine if the actions rise to the level of contempt of court, which carries a potential fine and jail time.

Rebekah Smith, CFFA, CPA, CVA, is director of financial advisory services at GBQ Consulting LLC. Reach her at (614) 947-5300 or

Insights Accounting & Consulting is brought to you by GBQ Partners LLC

Published in Columbus

Cloud computing is one of the hottest topics in business today. This technology lets companies utilize massively scaled information technology infrastructure at a remote site instead of their own data center, resulting in increased redundancy, security and significant cost savings.

“The cost of purchasing and maintaining the infrastructure internally and the salaries of people to operate the infrastructure continues to increase, while the cost of obtaining it on a larger scale from cloud service providers continues to decrease,” says Michael Dickson, CPA, CISA, CISM, CRISC, director, business technology services at GBQ Partners LLC. “The result of these two trends is an intersection of the cost models for computing.”

Smart Business spoke with Dickson about how the cloud works and how to select the right cloud service provider.

What is cloud computing?

There is much confusion about what cloud computing is, because there are so many different kinds of cloud service offerings. Cloud computing is nothing more than a new name for an old concept (time sharing).

Cloud services enable you to connect to a provider’s application (Software as a Service — SaaS), deploy, run and manage your own applications on a provider’s computing resources (Infrastructure as a Service — IaaS), or you can deploy, run and manage your own applications that were created using programming languages, databases and tools supported by the provider (Platform as a Service — PaaS). In each of these models, the provider and management have different responsibilities as it relates to owning and managing the operating and application systems.

Remotely hosted applications, like Office 365 and are perfect examples of using SaaS. The applications are developed, owned and hosted on providers’ infrastructure, and users subscribe to the services they need and connect over any network (company or home network, WiFi, Cellular, etc.).

Examples of IaaS are products like Amazon’s Web services and Rackspace’s cloudfiles. Subscribers pay for the amount of computing or storage they need, relying on the provider to manage and maintain the infrastructure.

What companies are best suited to take advantage of a cloud?

A company that is looking to replace legacy software or hardware or is planning a significant expansion is in an ideal position to take advantage of cloud service offerings.

Some companies are driven to look at cloud solutions simply because they are having trouble retaining an IT staff with appropriate technical skills and/or are driven by cost reduction measures to look at the options.

What are some key items you need to understand about cloud computing?

You need to understand the benefits and risks, because they will vary for each company depending on which service type you are considering. The key is to understand your specific risk posture by assessing the application landscape, the type of data processed and understanding the unique accessibility, confidentiality, security and compliance requirements of your specific situation. This will drive the decision on what should be ‘put in the cloud.’ Moving into the cloud doesn’t have to be an all-or-nothing proposition. You can start by putting a low risk commodity application in the cloud, and keep your high-risk core business applications on site until you get more comfortable with how it works for you.

What are some keys to making cloud computing safe?

It’s safe if you choose your provider carefully and structure your agreement properly. The biggest misconception is that you don’t know what’s happening to your data when they are in the cloud. If you select the right service partner, they will have implemented the appropriate security and physical and logical access controls to prevent others from gaining access to your computing environment.

A reputable data center will have engaged an independent auditor to express an opinion on the appropriateness and effectiveness of controls put in place to ensure the availability, reliability, security and processing integrity of their data center environments. These reports used to be called SAS 70s but are now referred to as SOC (Service Organization Controls) reports.

What are the benefits and risks associated with cloud computing?

The big benefits are cost savings and increased reliability/availability resulting from economies of scale. If a business has a peak time, it can take advantage of extra processing capabilities for that peak period, but doesn’t have to maintain and own all of the computing capabilities all year round. Computing is becoming a utility. Like electricity or natural gas, you pay for what you use.

Another benefit is having access to new applications and technologies that the cloud service providers can purchase, implement and leverage over multiple customers as they update their service offerings.

For risks, the biggest concerns are related to access to data and being locked into a service provider for a multi-year term. You need to look carefully at the terms and conditions to know how your data are stored and how they might be made available back to you or to a successor provider in the event of a dispute.

People also fear they will lose control of their computing capabilities, and that can be good or bad, but it needs to be addressed. They’re fearful that if they get into a fee dispute with their provider, or become unhappy the level of service provided, the service provider holds all of their eggs in their basket. You can mitigate these risks by structuring the agreement to address users’ rights to data in the event of a dispute and by implementing solutions that provide real time back-up outside of the cloud.

Make sure your data are encrypted, access controls are strong, and you know who owns the data.

Michael Dickson, CPA, CISA, CISM, CRISC, is director, business technology services at GBQ Partners LLC. Reach him at (614) 947-5259 or

Published in Columbus
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