4 reasons why your technology isn’t working — and what to do about it

Business executives understand technology is critical for daily operations like communication and processing orders, which is why IT spending keeps growing. But many of those same executives don’t realize a meaningful return on their technology investment.

“They’re dissatisfied with the results of their implementation,” says Glenn Plunkett, director of application development at Clark Schaefer Hackett. “With bottlenecks and processing headaches, what they end up with only meets their desires halfway.”

Plus, recurring costs for support staff, license renewals, etc., make tech investments feel more like a cost than added value.

“The technology isn’t optimized,” adds Mat Jackson, director of sales at Clark Schaefer Hackett. “It isn’t a competitive advantage that produces meaningful data or adds efficiency.”

Smart Business spoke with Plunkett and Jackson about the potential barriers to reaping rewards from your technology tools.

Why is outdated technology a challenge?

Technology has a limited lifetime, so think of your systems as a constantly evolving asset. Over time, performance can degrade, business processes can change and newer/better tech may be available. Plus, most vendors sunset support for aging systems.

If your business still uses legacy technology systems, more modern hardware and software will likely provide many benefits. Remember, the ROI on tech investments decreases over time, so you should continuously evaluate and modernize your technology stack.

How can untrained users derail technology implementation and use?

Don’t assume your staff automatically knows how to use your systems. That’s why training resources is a worthwhile investment.

When new software or workflows are first deployed, end user training and communication are usually part of the process. However, users often only absorb the minimum amount of knowledge necessary to accomplish their job. New staff also may not receive the same level of training as when the system was first delivered. Training and retraining remind users of your policies and procedures and help leverage your investment in the system. Therefore, be deliberate about allocating resources.

What happens when technology doesn’t adapt to work processes?

As business needs change and teams grow, workflows change. Technology tools need to support new ways of doing business, and systems need to change accordingly. In addition, off-the-shelf software may require you to alter your way of doing things to accommodate the way these tools work.

Custom software can help mitigate this, bridging gaps between systems or implementing custom workflows from the ground up. Often, the cost can be recouped quickly with productivity savings.

What if work-arounds already meet your needs?

If you are using multiple tools to accomplish one task or using people to perform tasks that the computer should be doing, technology isn’t serving your business. Work-arounds are often the result of out-of-date tech, untrained users and tools that aren’t adapted to current work processes.

It’s common for business users to turn to spreadsheets to get their work done because the business systems at their disposal cannot do what they need. Reporting, data manipulation and workflow automation are all good examples of areas where businesses use a tech tool with a manual component. However, these are also examples of things that can be automated.

For example, month-end closing might take weeks if your organization has a complex structure. It requires manual efforts to assemble the data, check the accounts and ensure proper allocation, in order to produce the reports that are reconciled against the ledger and ultimately used to generate the P&L statement. Fully leveraged technology can cut that time dramatically; what took weeks with manual work can turn into a handful of days.

While throwing more people at a problem is sometimes the best solution, first ask yourself whether technology can be employed in a better way. Rather than accepting manual work for repetitive tasks, put technology to work and free up people to be productive and creative.

Insights Accounting is brought to you by Clark Schaefer Hackett

Is your organization up to date on its HR compliance and training?

Human resources has never been more complicated. HR professionals are responsible for dealing with constant changes from the Department of Labor (DOL) or other regulatory agencies, while finding new talent and retaining employees in an operating environment of heightened awareness about harassment.

“In the last five years, I’ve seen more legislative updates and coverage of HR issues than I’ve seen in my 25-plus years of experience, and I only expect that to continue,” says Renee West, SHRM-SCP, senior manager and lead human resources consultant at Rea & Associates. “These changes can impact employers in a number of different ways through audits, lawsuits and insurance costs.”

Smart Business spoke with West about HR hot topics that employers cannot afford to ignore in 2020.

What are important changes and trends with regards to compliance?

There’s increased awareness surrounding workplace immigration and employment of legal workers. U.S. Immigration and Customs Enforcement opened 6,848 worksite investigations in fiscal year 2018, compared to 1,691 the prior 12 months. That led to 5,981 I-9 audits and more than 2,300 people being arrested at work. 

Employers need to ensure the I-9 Form is on file for every active employee hired since Nov. 6, 1986. Companies also must keep I-9s on file for terminated employees for the required time. Penalties for knowingly hiring and continuing to employ illegal workers can range from $375 to $16,000 and up per violation, with repeat offenders at the higher end. Failing to produce an I-9 can lead to penalties of ranging from $110 to upward of $1,100 per violation.

It’s also essential to have an updated employee handbook that reflects the wage and hour laws for overtime, meals and break periods, training and travel time, timesheet reporting, definition of the work week and deductions. During an audit, your handbook will be the DOL’s first reference. Also, because many policies depend on employee numbers, a business may move from one staffing level bracket to another as it grows.

All companies should review the handbook annually to ensure communications are consistent and the staff is up to date. After any updates, employees should sign an acknowledgement page that’s kept on file.

How did federal exempt overtime change?

The new overtime rule raised the ‘standard exempt salary level’ from $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker). It also raised the total annual compensation requirement for ‘highly compensated employees’ from $100,000 to $107,432 per year, and allows employers to use nondiscretionary bonuses and incentive payments, including commissions, paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices.

While the DOL hasn’t changed the current duties tests, the threshold increase means more employees will be eligible for overtime. Employers should review all job descriptions, looking at how they have employee jobs classified, either exempt or nonexempt, and the pay data for exempt workers earning below the new threshold. 

What can help minimize the talent shortage and maximize retention?

With a tight labor market, employers need the right fit for pre-screening job candidates. Reviewing and adjusting these procedures also may help ensure new hires stick around. In addition, many employers are looking outside the normal realm of hiring through internship and apprenticeship programs.

Retention needs to be a priority. What compensation and incentives will help current employees stay and attract new talent as well? Consider fringe benefits like paid time off, remote work, stay interviews, development programs, free lunch, etc.

Where does harassment come into play?

With the #MeToo movement, there is more visibility on harassment. It’s a best practice to have an updated, uniform general and sexual harassment policy in the handbook. Employers also should conduct annual training for all employees with a separate training for managers and supervisors, who are often the initial contact if there is a problem. Along with documenting who has been trained, if there’s a solid reporting structure, employees know who to go to.

Insights Accounting is brought to you by Rea & Associates

Recover your capital investment more quickly through cost segregation

If your company is planning to build, purchase or renovate a building, or has done so in the past several years, a cost segregation study could help boost your cash flow and save your company significant money, says Chris Bzinak, CPA, senior tax professional at Clark Schaefer Hackett.

Cost segregation studies separate personal property from structural components, putting personal property into depreciable categories, which allows taxpayers to depreciate property over much shorter periods of time as opposed to the standard 39-year (or 27.5-year residential) time frame. By taking these deductions sooner, property owners lower their current-year tax liability and free up more capital.

Smart Business spoke with Bzinak about how cost segregation studies can be a smart tax strategy.

How should property owners determine whether a cost segregation study will benefit them? 

First, property owners should understand their tax situation up front. Is it advantageous to accelerate deductions now, rather than in the future? 

The experts performing the study can discuss on a case-by-case basis whether the money owners invest will be worthwhile. Typically, a facility should have been placed in service within the last five years, and the cost of the building, remodel, expansion or build-out needs to be at least several hundred thousand dollars. Generally, a free feasibility study will show the amount of increased deductions and cash flow over the life of the building, which gives property owners the ROI and the net present value of their tax deferral.

What type of savings can property owners expect?

In general, 20 to 40 percent of the purchase can be reclassified as personal property and depreciated more quickly, usually in five-, seven- or 15-year increments. Flooring, signage, landscaping and parking lots are examples of components that can often be reclassified.

Tax law changes to expensing rules, however, have increased the benefit of cost segregation. Now, anything that falls under a 20-year depreciable life is eligible for bonus depreciation, which means property owners can take 100 percent of the cost in year one. Roofs, HVAC systems, fire alarm systems and security systems installed on existing commercial buildings also may be eligible for immediate expensing under Section 179.

Are there any risks to doing a cost segregation study?

Property owners should ensure those doing the cost segregation study are utilizing an IRS-approved method with documentation that can stand up to an audit. Rather than doing a full cost segregation study with a reputable firm, some property owners will come up with estimates without the proper analysis and site visit. If they use those generalities to adjust their tax return, they face the risk of an IRS audit without evidence to support their actions.

How should building owners prepare for the analysis? How will the study be conducted?

Once an owner decides to go forward with a study, the experts conducting the study will need to ask questions, look through the appropriate documents and do a site visit to take photos, measure and count different items in the facility. If a building is newly constructed or remodeled, it’s important to have the contractor’s payment applications and facility blueprints ready. An older building’s study can be based on a depreciation schedule and appraisal from the time of purchase.

A report that breaks down the reclassification will then be issued to the property owners, who can take that to their accountants and apply it to their taxes. Most likely, this will not require them to amend their tax return; the owners just file a Form 3115, which is an application for change in accounting method to adjust their deprecation. 

Under today’s tax rules, virtually every taxpayer who owns, constructs, renovates or acquires a commercial (or residential) real estate facility stands to benefit from a cost segregation study. Is it time to see if you can recover your capital investment sooner?

Insights Accounting is brought to you by Clark Schaefer Hackett

How to prepare your business for an uncertain tax future

While the Tax Cuts and Jobs Act (TCJA) continues to challenge both advisers and taxpayers, the upcoming federal elections could bring changes to the current tax law. Given this uncertainty, it’s imperative to have regular, consistent communication with your tax adviser to take advantage of favorable provisions and not run afoul of the law.

“Tax planning and strategy must be a fluid, continual process, not simply a year-end exercise,” says Matthew M. McKinnon, Director, Columbus Tax Practice Leader, Brady Ware & Company.

Smart Business spoke with McKinnon about what’s tripping up companies in the TCJA, and how they should prepare for federal changes, should there be any.

What questions do companies still ask about the Tax Cuts and Jobs Act?

When it comes to the TCJA, there are four key issues that companies look to understand better: choice of entity, enhanced depreciation, eligibility of activities for the Qualified Business Income Deduction and Opportunity Zones.

With choice of entity, many companies wonder if it’s preferable to be taxed as a C corporation. Now that the first set of tax returns reflecting the new laws have been filed, companies can compare actual tax liability for 2018 against what it would have been if they converted their tax status to a C corporation. This comparison, however, should be analyzed in conjunction with short- and long-term business goals, growth expectations and other factors.

Depreciation optimization is another area of discussion. Currently, bonus depreciation and Section 179 rules allow taxpayers to deduct the entire cost of certain eligible assets in the year of acquisition. While these rules generally apply only to tangible personal property, a few exceptions exist for specific types of real property. Consequently, there has never been a better time to make capital expenditures, given today’s favorable depreciation provisions.

At a high level, the new Qualified Business Income Deduction offers a 20 percent deduction for qualified business income, with respect to any qualified trade or business of the taxpayer — and the law specifies what can be considered a qualified trade or business. Compliance, however, can be difficult, as there are many factors the activity must meet to qualify, especially when considering rental real estate.

Without a doubt, Opportunity Zones are the most asked about provision of the TCJA. Potential investors in these economically distressed communities can invest realized capital gains from the sale of other assets into a Qualified Opportunity Fund, which will invest in qualified property or a qualified business. In return, investors can realize temporary tax deferral of the realized gain, a step-up in basis to offset portions of the realized capital gain and permanent gain elimination on post-investment appreciation of the property or business.

How should companies plan their tax strategy given the uncertainty ahead?

For income tax planning, stay the course. Run your business and use the current rules to be as tax efficient as possible. If President Trump is re-elected, the landscape should remain largely unchanged until the next election. If a Democratic candidate wins in 2020, increases in tax rates would likely not be effective until Jan. 1, 2022, at the earliest, given the time frame in which the TCJA became law. Once the results of the 2020 election are known, businesses and their advisers can make the necessary adjustments to income tax strategy.

Estate and succession planning matters, however, should be addressed now. The estate and gift tax exemption has never been higher — $11.4 million per individual in 2019. Most of the Democratic candidates’ tentative tax plans include significant changes to the estate tax structure, such as elimination of the basis step-up for inherited assets and rollback of the exemption to the 2009 amount of $3.5 million.

How can companies avoid being caught in an unfavorable tax situation?

Communicate with your adviser. Have regular meetings to review your current and forecasted operations, potential transactions and short- and long-term business plan. The more your adviser knows about where you are and where you want to go, the more he or she can be proactive and nimble with tax strategy recommendations.

Insights Accounting is brought to you by Brady Ware & Company

How to use passive losses and passive income generators as a tax strategy

Back in the 1980s, taxpayers with a high tax rate would invest into real estate and other similar investment vehicles and end up with large upfront losses, such as depreciation, that offset their other ordinary income. Many thought this type of sheltering maneuver was unfair, says Tony Constantine, tax partner at Ciuni & Panichi Inc.

To slow this tax sheltering down, Congress created a framework of rules and classifications of activities for passive and non-passive income. Taxpayers can now only can offset passive losses again passive income. And if there is no passive income, it carries forward.

“That’s where a passive income generator comes in because it can be a tough pill to swallow when you’ve got a $20,000 loss on your tax return that you cannot utilize,” Constantine says. “If you have passive activity losses carrying forward, you can invest in something and accelerate the use of the losses that would be available at some point in the future.”

Smart Business spoke with Constantine about pairing passive losses with passive income generators.

How do taxpayers acquire passive losses?

Passive losses are ordinary losses generated by a passive activity. A passive activity is a business that a taxpayer is not involved in such as a silent partner in a business or owning real estate. Just because an activity has a passive loss doesn’t mean it’s a bad investment. It could be a rental property that has significant depreciation in any one year, which generates a loss, but is still cash flowing.

There is a framework of rules governing whether a taxpayer is a passive investor. However, it’s not cut and dry when looking at multiple activities. If you’ve invested in, say, five different real estate properties, it goes property by property and there’s an aggregation election you can make, if you meet certain hour requirements.

It’s also important to note that looking at financial statements or refinancing a property are considered investor activities. They don’t count as spending time on an activity for non-passive purposes.

How does someone know if they have passive losses on their tax return?

If you cannot remember if you’re carrying passive losses forward, check to see if Form 8582 is part of your tax return package. This form details out all passive loss carryforwards.

If your underutilized losses are building up, you can look at certain investments that might generate some income of a passive nature to offset that.

What investments can provide passive income generators?

A passive income generator may not fit everybody and you never want to let the tax tail wag the dog, but it’s beneficial to consider the investment tools that are out there to set your affairs up in the most tax-efficient manner.

Passive income generators can be an investment that’s marketed as a passive income generator, such as real estate or private equity funds that are structured in such a way that they’re going to throw off income. They may be more mature properties that don’t have much depreciation and little interest deduction, so they’re in the cash flow stage. You invest in a property that’s going to appreciate in value and throw off some income and corresponding cash, but you shelter it with your passive losses.

You never want to make an investment just to offset passive losses, because every investment has its risk. If something is supposed to be a passive income generator, it could be a loss if something goes wrong. But if you’ve looked the risks and you want to make an investment, making one in something that is going to generate some passive income to offset your passive losses just makes sense. You’re going to save yourself tax on that, either that year or in future years by offsetting the two.

Insights Accounting is brought to you by Ciuni & Panichi Inc.

Recover your capital investment more quickly through cost segregation

If your company is planning to build, purchase or renovate a building, or has done so in the past several years, a cost segregation study could help boost your cash flow and save your company significant money, says Chris Bzinak, CPA, senior tax professional at Clark Schaefer Hackett.

Cost segregation studies separate personal property from structural components, putting personal property into depreciable categories, which allows taxpayers to depreciate property over much shorter periods of time as opposed to the standard 39-year (or 27.5-year residential) time frame. By taking these deductions sooner, property owners lower their current-year tax liability and free up more capital.

Smart Business spoke with Bzinak and Kathy Pugh, CPA, tax director, about how cost segregation studies can be a smart tax strategy.

How should property owners determine whether a cost segregation study will benefit them?

First, property owners should understand their tax situation up front. Is it advantageous to accelerate deductions now, rather than in the future?

The experts performing the study can discuss on a case-by-case basis whether the money owners invest will be worthwhile. Typically, a facility should have been placed in service within the last five years, and the cost of the building, remodel, expansion or build-out needs to be at least several hundred thousand dollars. Generally, a free feasibility study will show the amount of increased deductions and cash flow over the life of the building, which gives property owners the ROI and the net present value of their tax deferral.

What type of savings can property owners expect?

In general, 20 to 40 percent of the purchase can be reclassified as personal property and depreciated more quickly, usually in five-, seven- or 15-year increments. Flooring, signage, landscaping and parking lots are examples of components that can often be reclassified.

Tax law changes to expensing rules, however, have increased the benefit of cost segregation. Now, anything that falls under a 20-year depreciable life is eligible for bonus depreciation, which means property owners can take 100 percent of the cost in year one. Roofs, HVAC systems, fire alarm systems and security systems installed on existing commercial buildings also may be eligible for immediate expensing under Section 179.

Are there any risks to doing a cost segregation study?

Property owners should ensure those doing the cost segregation study are utilizing an IRS-approved method with documentation that can stand up to an audit. Rather than doing a full cost segregation study with a reputable firm, some property owners will come up with estimates without the proper analysis and site visit. If they use those generalities to adjust their tax return, they face the risk of an IRS audit without evidence to support their actions.

How should building owners prepare for the analysis? How will the study be conducted?

Once an owner decides to go forward with a study, the experts conducting the study will need to ask questions, look through the appropriate documents and do a site visit to take photos, measure and count different items in the facility. If a building is newly constructed or remodeled, it’s important to have the contractor’s payment applications and facility blueprints ready. An older building’s study can be based on a depreciation schedule and appraisal from the time of purchase.

A report that breaks down the reclassification will then be issued to the property owners, who can take that to their accountants and apply it to their taxes. Most likely, this will not require them to amend their tax return; the owners just file a Form 3115, which is an application for change in accounting method to adjust their deprecation.

Under today’s tax rules, virtually every taxpayer who owns, constructs, renovates or acquires a commercial (or residential) real estate facility stands to benefit from a cost segregation study. Is it time to see if you can recover your capital investment sooner?

Insights Accounting is brought to you by Clark Schaefer Hackett

If the idea of a ransomware attack doesn’t keep you up at night, it should

Ransomware is like New York City, says Shawn Richardson, principal of Cyber Services at Rea & Associates.

Ransomware is a type of malware designed to threaten to publish the victim’s data or block access to company data until a ransom is paid. The two main types are designed to encrypt or lock out information so data aren’t readable and the victim cannot gain access.

Locker ransomware locks the computer, server or device, and Crypto ransomware prevents access to files or sensitive data through encryption. Believe it or not, ransomware dates back to the late 1980s with the AIDS Trojan. It’s been evolving since. Just like how New York’s downtown buildings have constantly changed over the past 25 years, ransomware gets bigger, better and more modern as bad actors build upon past forms.

“It’s gotten sophisticated,” Richardson says. “The ransomware is injecting itself inside of applications such as email through phishing. Often, all it takes is clicking on an email to execute some malicious code. Then, it attaches to local information stores like customer databases or accounts payable.” 

The cybercriminal promises to restore the data if the victim pays a ransom — but there is no guarantee you’ll get your data back, even if you pay. In some instances, attackers ask for a little bit of money first to generate trust and then extort more funds.

Smart Business spoke with Richardson about the ransomware threat, which may loom larger than you think.

What are examples of ransomware attacks?

The most prevalent types of ransomware are CryptoWall, Locky and WannaCry. But as they get used, people take the code, make copies and improve it with higher levels of encryption. There are variants that are uncrackable, and federal authorities don’t have the ability to reverse engineer the modified versions of ransomware. 

In one case, ransomware was dropped into a company’s Microsoft Office 365. It locked down the user database. Then it elevated the account permissions to allow the attackers to exfiltrate information and sent emails to the organization’s bank. Fortunately, the federal authorities caught on to what was happening before funds were transferred.

In another instance, a services company with fewer than 50 employees was attacked. The ransomware hit the backups first, which were not properly segmented off from the existing networks, and then locked its customer database and service contracts. The business never recovered the data and ultimately had to go back to a backup that was incomplete and nearly a year old.

Do businesses need to actually be attacked to feel the effects of ransomware?

No. A business can run the risk and hope nothing will happen, but it may grow large enough that its contractual obligations with third parties require a cybersecurity framework, audit, software, etc. Otherwise, the company won’t get that business.

Which companies face the greatest threat?

Small and mid-sized businesses are the most at risk today, as the lowest-hanging fruit within the threat landscape. Surveys have found an estimated 80 percent of small and mid-sized businesses have been victimized by ransomware within the last 18 months, and only 20 percent of them reported it.

These companies typically don’t have an IT company with expertise in security mechanisms and controls managing their infrastructure. Owners of small and mid-sized businesses often don’t put the resources into a cybersecurity strategy because they don’t recognize the need — although this is starting to change as they’re targeted.

Within the small and mid-sized business sector, the most targeted are health care, which includes small doctors’ offices, and government organizations like schools.

Where do you recommend businesses start with risk mitigation?

You should put in security controls and a framework to protect your company. Bring in a trusted adviser to talk about the risks within the operation and how to protect important data. Consider putting in a customized cybersecurity strategy that makes sense — John’s Auto Body will have a very different approach than Bob’s Dental, which must follow certain regulations. 

It all starts with a business conversation and it’s critical to have that conversation before the bad actors get ahold of your information.

Insights Accounting is brought to you by Rea & Associates

Knowing your company’s advantages adds value when it’s time to sell

The drivers of a company enterprise value are a company’s strengths — internally, in how they operate, and externally, in the marketplace. They’re also of critical importance to buyers as they look for companies to acquire.

During due diligence, a company’s strengths and weaknesses will be scrutinized.

“Due diligence is run essentially to find out if what an owner says drives value in his or her company actually does,” says Steve Ford, director at Brady Ware Capital.

That’s why owners should clearly understand their company’s value drivers. Doing so helps them see their company through the eyes of an outsider, and that perspective can help them maximize the value of their company. However, this can only be done if they start preparing for a transaction well ahead of a planned sale.

Smart Business spoke with Ford about how a clear understanding of a company’s value drivers can help owners prepare their business for a sale.

How well do business owners understand the drivers of value in their company?

Business owners tend to know their value drivers instinctively by operating a business for years. However, when an owner meets with potential buyers, they must be able to articulate and communicate those value drivers clearly and succinctly. Most owners don’t get too many opportunities to take a step back and view the company through the eyes of an outsider. That can make those values drivers tricky to articulate.

Because buyers are basing much of their acquisition decision on a company’s unique value drivers, it’s important for business owners to present them clearly and define how they differentiate the company in the marketplace in which they operate.

How can business owners ensure they understand their company’s drivers of value?

Business owners can start by asking themselves questions about their business. For example, they could ask questions about the depth of the management team, the strength of their financial data, their customer concentration and more. By asking these types of questions, business owners can better identify their strengths and areas that need improvement — it’s better that owners discover they don’t have a strong answer than a buyer discovering an unaddressed weakness.

While not recognizing a weakness is an issue, understanding where the company could improve and addressing it with potential buyers is a good move that shows candor and a willingness to work together with a new owner/partner. Owners should articulate their position and be direct. But if a buyer has to inform an owner what’s wrong with their company, the owner has little chance of maximizing value.

When should business owners begin preparing their company for a sale?

It’s better that owners start the process when they want to, rather than when they have few other choices. Often owners really start thinking about an exit when they find themselves emotionally struggling, when there’s no one in the company to succeed into ownership, or when the industry dynamics change in such a way that the company would need to significantly alter its approach to stay competitive. When those signs arrive, it’s probably time to consider an alternative strategy. And that’s when owners should consult their trusted advisers about a path forward.

At a minimum, owners should start preparing their business for a sale two years ahead of a planned exit date. Lean on trusted service professionals to help address weaknesses and get the company sale-ready.

Business owners also need to prepare themselves to leave the business. They should take an honest assessment of why they feel they’re ready to exit. Look to see if there’s anything that can be done to get re-energized, such as bringing someone on to handle more of the day-to-day operations, or adding a partner to share some of the risk and find new avenues for growth. But, if all signs seem to suggest that there’s no more joy in operating the business, it’s clearly time for a change.

When the time comes for an exit, there’s a significant amount of work to be done to maximize its value. Fortunately, business owners don’t, and shouldn’t, do this in isolation. By engaging with their own internal team and their trusted service professionals, owners can make a successful transition into whatever comes next.

Insights Accounting is brought to you by Brady Ware & Company

How to get your business, and yourself, ready for a sale

For every business owner, there inevitably comes a point at which they can’t, or no longer want to, run their company anymore. Owners who early on start laying the groundwork for that transition put themselves in a position to maximize their company’s value and set themselves up for a fulfilling post-sale life. 

“The sooner you think about your exit, the more options you’ll have — for yourself and the business — when the time comes,” says Scott McRill, shareholder, Transaction Advisory Services, Clark Schaefer Hackett.

He says business owners who are prepared can pass the company on to family, move operational responsibilities to key employees, or sell the business to a third party or to employees. 

“But early planning is critical,” he says. “Business owners who don’t plan could find themselves in a situation where they need to sell but have limited options, which negatively affects the sale price.”

Smart Business spoke with McRill about what owners can do to prepare their business, and themselves, for a transition.

How far ahead of a transaction should preparations for a sale begin?

The typical time frame is at least two to three years before the planned sale date. That should give an owner enough runway to make the operational improvements necessary to maximize the business’s value. 

To prepare for the transaction, owners should get a third-party view of the business’s financial situation. Having an accounting firm involved with two to three years of audited or at least reviewed financial statements helps ensure the numbers are clean, reconciled and presented in accordance with GAAP ahead of the transaction process. 

Often overlooked during preparation is the state of the management team. Many buyers expect that a capable management team is in place to run the business post-sale and will also expect the owner to stay on for a short transition period. But if a capable team is not in place, the buyer may expect the owner to stay on board during a much longer transition period.

Who should business owners engage to help them sell their business?

Owners tend to underestimate the amount of time and attention that’s needed to complete a transaction. The process — from marketing to close — could take six months to a year. It’s often a job in itself. 

A business owner can lean on the team — accountant, attorney, investment banker or business broker — for much of the sale preparation. That’s important because if the company’s performance deteriorates during a sale, it can erode business value in a transaction.

Owners should also consider seeking the advice of a wealth adviser to ensure the proceeds the owner gets from the sale can be applied to accomplish whatever goals he or she has in life after business ownership. 

What mistakes do business owners tend to make once they decide they’re going to sell?

Owners need to consider the emotional side of the equation — they often don’t take enough time to evaluate whether they’re personally ready to sell their business. Owners need to think through what will occupy their time post transaction.

That can be difficult, as many entrepreneurs have devoted tremendous energy and time to their business and haven’t pursued a lot of outside interests. Then, the day after a sale, they have no idea what to do with themselves, which can lead to seller’s remorse. 

The ‘life-after’ plan is a living, breathing analysis of post-ownership life. It’s something that should be in the back of an owner’s mind during the earlier, high-growth stages of a company. It’s common to see owners formalize that plan a couple years ahead of a transaction, though planning four to five years ahead of a sale would be better. 

As part of this plan, owners need to consider the lifestyle they want to live post-ownership. From that, they can determine what cash flow will be needed, which will help determine how much they need to sell the business for vs. what they might want to sell the business for. This step is important to the negotiation process. Without it, owners can be disappointed in a valuation without realizing that it’s more than sufficient to achieve their objectives.

Insights Accounting is brought to you by Clark Schaefer Hackett

Planning strategies for your business and you

Now is the time to think about 2019 tax planning — before you find yourself in a year-end scramble.

“Business owners have a better sense of what kind of year they are having, and how that may impact their tax bill. They still have time to act,” says Jane Pfeifer, CPA, Shareholder at Clark Schaefer Hackett.

Smart Business spoke with Pfeifer about how taxpayers can plan ahead to fully utilize beneficial tax options.

How did the finalized Tax Cuts and Jobs Act (TCJA) regulations and most recent IRS notifications impact planning?

Under the TCJA, the Section 199A business income deduction was created, allowing taxpayers who own interests in pass-through entities to take a 20 percent deduction of qualified business income earned in a qualified trade or business. Taxpayers need to know where they fall under the clarified regulations. The deduction does not apply to attorneys, accountants, doctors or dentists, and certain other professional service providers whose income is above $350,000 for married filing joint taxpayers or $157,500 for those filing as single taxpayers.

The TCJA made changes to Section 163(j) regarding limitations on interest deductions, which can have a significant impact on a taxpayer’s 2019 tax bill. This is another area where regulations were delayed.

If a company’s gross receipts are above $25 million, deductions for interest expense are limited to 30 percent of taxable income from the business, before depreciation, amortization and interest expense. If an entity has a loss for the year, its interest deduction may be limited. Or, if a business is highly leveraged, it may not get that full deduction if gross receipts are above the limit. Also, the gross receipts of all related entities may need to be considered.

How can depreciation help business owners?

To reduce income taxes, a business owner may want to purchase and place new fixed assets in service by the end of the year. Under Section 179, entities can elect to expense up to $1 million of qualifying property, which includes HVAC equipment, fire protection or security systems. This break is phased out for qualifying purchases over $2.5 million. In addition, 100 percent bonus depreciation is still in play for 2019.

While these deductions do not apply to real estate purchases, a cost segregation study divides a building into components, where some might qualify for accelerated depreciation. For instance, special wiring or adaptations required to run equipment can be reclassified to a shorter depreciable life.

Many states, however, disallow the aggressive depreciation deductions that are available on a federal level.

What changed for individual returns?

The standard deduction increased. For 2019, it is $12,200 for individuals and $24,400 for joint filers. Therefore, taxpayers may want to take the standard deduction one year and itemize the next. This can be done by accelerating 2020 charitable donations into 2019. Individuals may be able to do the same thing with medical expenses if these expenses exceed the adjusted gross income threshold.

Many people under-withheld in 2018. While taxpayers should have addressed this early in 2019, there is still time to mitigate under-withholding.The IRS requires a minimum withholding of 22 percent for special compensation like restricted stock or bonuses. Depending on a person’s overall tax bracket, the minimum is often not enough. Looking at this now may avoid an unpleasant surprise in April 2020.

What else should taxpayers keep in mind?

Individuals need to understand their capital loss carryforwards and investment portfolio. Should taxpayers offload underperforming stocks to generate a loss at the end of 2019 and offset gains? Could sales that generate gains be offset by loss carryforwards?

Taxpayers also should consider maximizing retirement and health saving account (HSA) deferrals. Individuals 49 and younger can defer up to $19,000 in a 401(k) plan; 50 or over can contribute up to $25,000. HSA contributions max out at $7,000 for family plans or $3,500 for individual plans. Taxpayers who are 55 or older can contribute an extra $1,000. If medical expenses such as braces, glasses, hearing aids, etc., are on the horizon, funding an HSA is like getting a tax deduction by moving money from one pocket to the other.

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