Retirement plan design to attract and retain executive talent

As executives grow older, many of them want to put more money away than the limits of traditional plans — 401(k) and 403(b) plans, for example. They want to catch up and accelerate their savings before retirement. Several types of retirement plans are designed to not only help executives save more, but also defer their current income, and thus lower their current tax liability.

Because these plans are attractive to executives, they’re a recruitment and retention tool. Some plans can be designed to provide performance incentives with the reward of greater savings and deferred income. The company may also benefit from a tax deduction, depending on the plan.

“There’s more interest in these plans as the economy improves and the job market tightens up,” says Jeff Spencer, CPA, MAcc, tax principal at Ciuni & Panichi.

Smart Business spoke with Spencer about how company leaders can design retirement plans that fit their needs and provide great benefits for their executives.

What retirement plans benefit executives?

There are plans beyond the traditional 401(k) or 403(b) plans. Different allocation structures will compensate your executives, so you can attract and retain them. In fact, retirement plans for executives are common enough in larger organizations that not offering them can be a competitive disadvantage. Three common types are cash balance pension, nonqualified deferred compensation and 457(b) plans.

How do cash balance pension plans work?

Cash balance pension plans have recently gained popularity. These plans have an individual account balance, which makes them a hybrid between a traditional pension plan and a 401(k) plan. They’re geared toward older, high-paid executives who want to make large annual contributions and already maxed out their 401(k) plan limits. Depending on their age, pay, the company demographics, etc., the cash balance plan uses a formula — and the services of an actuary — to determine how much they can put away on a pre-tax basis. It could be $200,000 a year, for example.

These plans are typically utilized by smaller companies that are doing well, because once the plan is set up, the annual contribution is generally locked in. It can be very beneficial for professional service companies, law firms, consulting firms, doctor groups, etc., with a few key people who are nearing retirement. The company receives a corporate tax deduction, as well.

Cash balance pension plans also require an offset benefit that needs to be provided to some rank-and-file employees to make it work from a nondiscrimination standpoint. In a law firm, for example, the offset benefit might go to administrative staff who are lower paid and have higher turnover.

What are the benefits of nonqualified deferred compensation and 457(b) plans?

Nonqualified deferred compensation plans are best for larger employers. They’re often utilized by public companies, which want to benefit their top people who are already maxed out on their traditional retirement plan limit.

Nonqualified plans are very flexible. The company can earmark them for key people and design the plan to incentivize people to perform a particular way or create golden handcuffs to keep them around. These plans also can be designed to attract executives.

On the nonprofit side, one option is 457(b) plans. Nonprofits use them to reward, attract or retain top executives who max out their 403(b) plans. The executive pay in the nonprofit arena is typically lower, so midsize and large nonprofits sweeten the pot by adding something like 457(b) plans.

What are common challenges when designing these plans?

The cash balance pension plan is the most complex; the other two aren’t as involved to set up. But the most important thing is to ask, ‘Why are you doing this?’ Are you trying to reward people you already have? Are you trying or attract new people? What’s your end game? You don’t want to put in something that’s not going to fit your organization two or three years later — and have to go through this all again.

There are new and innovative ways to reward people, which is especially critical in today’s tighter labor market. So, if you haven’t looked at your plans in recent years, now is a good time to do so.

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

When to get a business valuation or a calculation of value

Many business owners who have had their businesses valued remember providing a large amount of information and documents that went into a long and expensive report containing only a few pages of relevant information.

Smart Business spoke with Bob Evans, a senior manager at Clarus Partners, about business valuations and a lesser known, but still useful, service called a calculation of value.

What’s the difference between a business valuation and a calculation of value?

A full business valuation is a formal document that arrives at a thoroughly documented conclusion of value. It contains extensive background information about the company and its management, its economic environment, and historical and sometimes projected financial statements. It’s designed to provide enough information to enable a person having no prior knowledge about the company to read the report, understand the company, and also understand the rationale and methodology used to value the company. In theory, the report should be so well documented that the reader would come to the same conclusion as the author.

In a calculation of value, the appraiser and company agree on a limited amount of background support and/or procedures to be used to calculate and document the value of the company. The conclusion is then expressed as a calculated value.

A calculation of value report can be significantly less expensive than a full valuation report, and under the right circumstances just as useful. This is because even though the background support is less, the analysis done within the agreed upon methodology is the same whether the report is a conclusion of value or a calculated value. However, a calculation of value report is required to include a disclaimer stating that had a valuation engagement been performed, the results may have been different. This makes a calculation of value report inappropriate in certain situations.

In a calculation of value, a detailed history of the company, management biographies, analysis of competition and a discussion of the economy can be reduced or eliminated. Support for the rationale used in the report may also be reduced.

A full valuation must consider value using each of the income-based method, market-based method and asset-based method. In a calculation of value, it may be agreed that only one or two of the methods are considered.

When is a calculation of value report useful?

Calculations of value are useful when the users of the report are familiar with the company — for example, if an owner is thinking of retiring and wants to estimate the proceeds from the eventual sale of the business. It’s useful when business owners receive an unsolicited offer to buy the company and want to know if the offer is a good one, or for new owner buy-ins and when retiring owners are bought out. Calculations of value may be useful when drafting or periodically reviewing buy-sell agreements and the adequacy of the life insurance that funds them. A divorcing husband or wife trying to settle on a property division in an inexpensive and amicable way may agree to use a single calculation of value to value the business.

When is a full valuation report required?

Generally, a full valuation report is required any time the report will be used in a court case or submitted to a third party for an official purpose. A full valuation report is required any time the report will be submitted to a court or to the IRS. The required disclaimer makes calculation of value reports inappropriate for official uses. If there is any question whether a calculated value is acceptable for the users of the report, it’s important for the accountant to know before work begins.

What is the takeaway for someone considering having their business valued?

The primary takeaway is that calculation of value reports cannot be used in submissions to third parties in an official setting, such as an income or estate tax filing, or to a court trying a case. In these third-party situations, the report will not be accepted. However, if the report is for internal use only, a calculation of value is a cost-effective level of service that can still deliver useful information.

Insights Accounting is brought to you by Clarus Partners

Cryptocurrency, blockchain will have a major impact on businesses

Cryptocurrency has the potential to be as disruptive to society as the creation of the internet, affecting the way we transact with family, friends, colleagues, banks and customers. And bitcoin, the most recognizable cryptocurrency, put blockchain on the map, which has created a massive use case for the technology.

Since the first bitcoin transaction occurred in 2009, companies have come to accept bitcoin for payment, as well as a means to paying employees’ wages. Blockchain, meanwhile, is introducing greater security and efficiency in the critical processes of many industries.

Smart Business spoke with Dennis C. Murphy Jr., a senior manager at Skoda Minotti, about what business owners should know about cryptocurrency and blockchain technologies.

What should companies do to prepare themselves to transact with cryptocurrency?
Cryptocurrency is volatile, so whether it’s adopted for investments or transactions depends on how risk averse the individual and business is — bitcoin’s value could be nothing tomorrow, and that’s important to keep in mind. There are also operational considerations, such as the administrative aspect — tracking trades, payments and receipts — and the custody aspect, which is how to store the currency securely.

Cryptocurrency lacks regulation, which means there’s no regulatory body to adjudicate a dispute. It’s intentionally decentralized. As a business or investor, that lack of regulation could be a serious threat.

Any business owner looking to deal with cryptocurrency needs a very good understanding of it. Working with a trusted adviser who has knowledge to help a business through it is key.

Under what circumstances could cryptocurrency benefit a business?
A company that accepts bitcoin as a form of payment could potentially expand its customer base as a result. It’s a global phenomenon, so the move has the potential to open up the business to the international marketplace.

Cryptocurrency can also reduce payment processing fees because it has lower transaction fees than credit cards. Further, transactions are permanent so there are no questionable chargebacks.
If managed correctly, transactions are secure thanks to strong encryption. It’s also a way for a company to diversify its assets.

How is blockchain technology being used?
Some countries and local governments have turned to blockchain to help ease the burden of real estate property sales and title transfers, thus reducing paperwork and making it more difficult to forge records.
The automotive industry has used blockchain to streamline supply chain management, reducing human error, waste and additional manpower throughout.

Blockchain provides the health care industry with data exchange systems that are cryptographically secured and irrevocable — a good fit when working with patient data.

Banks have begun to implement blockchain to reduce fraud by spreading out information over the blockchain database where it’s verified on various terminals. They’re also using blockchain to transfer money faster and cheaper, and to more easily obtain compliance information on their customers when dealing with regulators.

In accounting, blockchain can reduce errors when reconciling complex information from multiple sources. It also can decrease the amount of time it takes to complete an audit and reduce fraud.

What are some security considerations, advantages and challenges of blockchain?
Blockchain networks have an auditable operating environment with comprehensive log data that can be tested for compliance, providing security through verified transactions, locked contracts on the distributed ledger and a single set of records that can be viewed by all members.

It has the potential to eliminate reconciliations, duplicate ledgers and disputes over contract terms. Efficiencies are gained since information is continuously updated and intermediaries are removed from the transaction process.

Cryptocurrency and blockchain can be transformational for a business — they are important subjects to understand. With the help of a trusted adviser, businesses can be ready when the opportunity arises to use them.

Insights Accounting is brought to you by Skoda Minotti

Cash management tips help business owners add efficiencies

Business owners have to focus on sales, profitability, innovation, employee matters and more. But if cash management falls down the priority list, it can get your company into trouble.

Business owners may count on a controller or CFO to monitor the situation, but it’s not uncommon for bad news to be delayed. Other owners hide bad news from lenders, hoping things improve. Keeping your bank informed is important, yet business owners can struggle with what to say and when to say it — but generally, it’s best to share more.

“Cash management is a contact sport. You can’t leave it to chance,” says Mike Klein, CPA, MBA, partner in Audit and Accounting Services at Ciuni & Panichi. “If you’re generating profit, where is the cash? Is it sitting in accounts receivable where you can’t spend it?

Smart Business spoke with Klein about his cash management advice.

How should business owners use the balance sheet to support cash management?

Your reporting dashboard should include metrics like total cash position. Also, look at key ratios on the balance sheet, like days in receivables, days in payables or days sales in inventory, in a timely fashion. Then, drill down. Are those ratios trending favorably or unfavorably, and what’s behind the change?

What helps ensure customers pay on time?

Bill quickly, with a short lag from the time you deliver a service or good to the time you invoice. Getting the clock started is especially important with large enterprises where you have limited influence on how they pay. In some cases, you can negotiate sales terms. If cash is tight, incentivize customers to pay faster with discounts. Also, are you making it easy, with many ways to accept payment?

Encourage your employees to build relationships with accounts payable personnel. Customers will be less likely to stall payments to people they know. Also, if you know when they cut checks, you can time your invoicing to be included in the check run.

Understand your leverage: Can you stop delivering services or go to cash in advance? Business owners may hesitate to take these tactics, but a customer that doesn’t pay isn’t a customer. Be realistic in assessing credit quality and risk. Set formal policies for how much credit to extend. Are your salespeople making good decisions? No one likes to turn away business, but it doesn’t do you any good if it’s profit that doesn’t turn into cash.

If you’ve got large receivables, consider buying credit insurance to help manage risk.

How can owners right size their inventory?

To an extent it’s possible, you need good sales forecasts, which inform the inventory levels and production schedules. Also, set safety stock levels to provide order points. Make sure your inventory and purchase managers are evaluated against metrics and consider incentivizing them where needed to get inventory down.

Cycle count the inventory. If accounting records are out of line with the warehouse, it’s tough to make good decisions. Maybe people know the system isn’t accurate, so they keep excess inventory to hedge. Or, if inventory starts disappearing, investigate to see if fraud might be occurring.

Know your suppliers. What are their delivery schedules or flexibility to meet last-minute demands? Do you have multiple sources? This can help keep inventory lower.

Again, monitor the key ratios, and benchmark them against industry leaders and your past performance.

Where can accounts payable be improved?

Negotiate terms where possible — try to minimize your cash gap. If you collect receivables in 90 days and pay vendors in 60 days, that’s a 30-day cash gap. The cash gap is funded through a line of credit or reserves. With external funds, you pay interest and as rates rise, it costs more. With reserves, there can be opportunity cost. You may not be able to start a new project or innovation because your reserves are funding receivables.

Multiple suppliers may give you leverage when negotiating payment terms. With so many moving parts, you can influence some more than others. Be efficient with what you can manage, and plan for the things that you can’t. So, if a big box store won’t pay for 100 days, know where you’ll get the cash to float the difference — that’s why relationships with bankers and suppliers are important.

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

Your accountant is more than a number cruncher

Often business owners see their accountants as number crunchers — someone to handle taxes, financial statements and the like. What they tend not to see is a business partner.

“Accountants can and should be included in discussions about a person’s business and their expectations for it,” says Cheryl A. Fields, senior sales and use tax manager at Clarus Partners. “Be comfortable with your accountant. They’re really a business partner, so make sure they’re clued in to your plans so they can be more responsive to your needs. The business can only be better for it.”

Smart Business spoke with Fields about how business owners can get the most out of their accountants.

Why might business owners not take full advantage of their accountants’ capabilities?

Business owners often don’t know all that their accountants can do, primarily because they don’t have a full understanding of the accounting profession. They don’t know all they can ask their accountants to do. Accountants have access to a lot of information. It is their responsibility to keep up with all that’s happening with their clients’ businesses. However, if they’re kept in the dark, say about a desired expansion, the accountant can’t go looking for municipal credits that can be used to offset the costs.

On the other side, accountants need to do a better job of asking questions about not only what‘s happening, but also what the business owner is thinking so they can be proactive.

Discussions around tax strategies should be deeper than a cover sheet with bullet points. There’s a lot going on with tax laws. Businesses that work with their accountants to understand the changes can come up with an effective strategy to take advantage of them.

How should business owners start the process of building a better relationship with their accountant?

It really comes down to communication. Set up a time outside of tax season to discuss high-level planning — for instance, an in-depth state of the business and future plans.

Also, business owners should talk to their accountant about their expectations for the relationship. This is both an opportunity for the business owner to voice what they need, but also for the accountant to explain what other services they can provide.

What is an accountant’s responsibility when it comes to getting more out of the relationship?

Accountants should help their clients understand what they’re capable of. They should reach out during the year to check in on busy executives. Ask how things are going or have a lunch meeting to talk about the business. Send articles that cover an issue that could affect the business — a new law, for example. If an accountant is only reaching out to talk tax prep, it could be a sign that they don’t understand the person’s business or that they lack the interest or ability to expand the relationship.

Business owners need to trust their accountant. Accountants necessarily work with confidential information, predictive numbers and strategic plans. Business owners who are the least bit hesitant to disclose information to their accountant need to find someone new. An accountant should also be someone a business owner likes to work with. If the relationship is strained, get references and find someone better.

How do business owners benefit from a better relationship with their accountant?

Business owners who have a good relationship with their accountants find themselves with better tax planning opportunities and a step ahead of legislation, which gives the business time to prepare.

Also, accountants are objective outsiders who might see things internal people miss or that an inside person could be reluctant to bring attention to. In that way their perspective can be valuable.

Ultimately, keeping an accountant in the loop helps business owners on the front end, enabling them to put their business in the best financial situation. Accountants aren’t just numbers crunchers. They are trusted, knowledgeable business partners in a unique position to offer advice.

Insights Accounting is brought to you by Clarus Partners

How tax reform is expected to alter the mergers and acquisitions landscape

Buyers and sellers are sharpening their pencils and thinking strategically about how the new rules under the Tax Cuts and Jobs Act will impact 1) acquisition structures, 2) company operations and 3) plans for an eventual exit.

“Overall, structuring considerations after tax reform are complex and the rules have changed for everyone. We’re sitting down to help clients develop deal models,” says Dave Godenswager, senior manager of Transaction Advisory Services at BDO USA, LLP. “Some conventional wisdom needs to be re-evaluated, so everyone is going back to the basics. Buyers are definitely doing it and sellers would be well advised to follow suit.”

Smart Business spoke with Godenswager about tax reform and its impact on merger and acquisition deal structures.

What do you think will be the biggest changes to M&A deals?

Ultimately, the economics of the business impact the deal the most. You don’t want the tax tail to wag the dog, but you do need a view of the possible tax implications and a forecast of the potential outcomes. Many rules are still being developed, but at a 30,000-foot level, five areas of tax reform will likely impact M&A deals:

  • Reduced tax rates — both the corporate tax rate going from 35 percent to 21 percent, as well as a special provision for pass-through entities.
  • Limitations on interest deductibility.
  • Full expensing of certain qualified property.
  • Changes to the net operating loss rules.
  • International tax reform.

In addition, the carried interest rules’ holding period was moved to three years, but it isn’t likely to significantly impact many private equity buyers.

Details matter and are specific to each transaction, but there seems to be a growing appetite for asset sales or deemed asset sales because of the lower corporate tax rates and full expensing of certain qualified properties. Limitations on interest deductibility may change debt financing and may require more equity in deals. Buyers will need to consider how much leverage they can introduce and if they’ll hit limits on interest deductibility. Lenders will be interested in the type of entity, projected after-tax cash flow and how that debt is to be serviced. To make things more complex, in the international arena, debt placement is critical. You have interest limitations in the U.S., but you might not have those limitations in a foreign structure. You really have to run the numbers.

How else will international deals change?

There are sweeping changes in the international context. Historically, U.S. companies were thought to be at a disadvantage over foreign companies in global deals. An overall goal of tax reform was to level the playing field, but that resulted in some complex rules. The changes include a one-time transition tax on historically accumulated earnings, enactment of the partial participation exemption system for post-2017 earnings, a new global minimum tax on foreign earnings, a base erosion anti-abuse tax and more. It’s complicated and confusing, but, in general, the advantages a foreign buyer may have over a U.S. buyer have narrowed.
If you’re looking at a foreign target, it is critical for buyers to do their diligence, such as what exactly will be owed if there’s a transition tax, and how will that be paid and addressed in the deal documents?

Is there anything business owners or investors should be doing now as a result?

Typically, in the deal world, it pays to act quickly. To keep pace with that — and gain a competitive advantage over someone not doing their homework — firms should invest time now to factor the changes into their deal models and acquisition strategy. BDO has developed tools to help model out the effects of tax reform, both from an operational standpoint, such as the choice of entity (S corporation, C corporation or partnership), as well as deal structure, like an asset sale versus a stock sale.

Many areas are still unknown, uncertain and to be determined, including how states will react. You and your advisers can identify the assumptions you’re making, and if those assumptions change, what the after-tax result might be. You’ll want to stay tuned as items get sorted out. For a business owner who is contemplating an exit, though, it especially makes sense to line up a team of advisers now to help you think through the options.

Insights Accounting is brought to you by BDO USA, LLP

How the strength of a business plays into succession planning

The topic of succession planning for a closely held business centers solely around one thing: maximizing the value for the business owner. A business is often the owner’s largest single asset of his or her net worth, which creates a strong correlation between how well an owner plans for succession and the value of the underlying asset.

“The better you plan for succeeding the business, the higher the value,” says Michael Pappas, CPA, director of the accounting and assurance services department at Barnes Wendling CPAs. “The planning part is not easy. It takes time, diligence and organization.”

He says while most business owners are successful at running their business, they often lack the full complement of skills needed to successfully plan for succession.

Smart Business spoke with Pappas about what goes into a successful succession plan.

How are succession plans structured?
There are a variety of succession plan options. For instance:
  Succeeding the business to family members.
  Selling the business to a strategic buyer.
  Selling the business to a private equity group.
  Selling the business to the management team.
  Selling the business to your employees via an employee stock ownership plan.

What business improvements can help make a succession plan more successful?
A good first step is to conduct an organizational assessment. This can be accomplished by several approaches.

One approach is to hire a professional to analyze the current organizational and functional structure, while assessing the leadership team’s abilities. From there, a plan can be developed to ensure each key function of the business has been identified and is being led by what is referred to as a ‘functional expert.’

Business owners can also conduct a self-assessment. This starts by preparing an organizational chart, listing each functional area of the business along with the name of the leader in charge of the area. Then, ask key questions with regard to each functional area, such as:
  Is this area exceeding expectations?
  What is their plan for continuous improvement?
  What key metrics are in place to measure performance to ensure achievement?
  Is the leader working collaboratively with other members of the leadership team?

The answers to these questions will determine the necessity for corrective action plans.

Next, perform a financial benchmarking analysis. The analysis does not need to be overly extensive, but it should focus on key metrics of the business, such as cash flow, growth and profitability, productivity, and strength and value creation.

By performing these initiatives, business owners are assessing their company’s vital signs. The areas deemed to need improvement should be addressed with a sound plan to cure the problems. Systems and procedures should be developed to ensure the correction stays on point and measurements instituted to assure accountability. Incentives should be developed to sustain results and behavior.

What happens after issues are identified?
Once all the issues have been uncovered, a plan should be developed to fix them. This is where most of the time and effort will be dedicated.
With the problems in mind, business owners should:
  Identify the desired outcome.
  Identify the leader who is vested with plan responsibility.
  Develop a written action plan.
  Set a definitive timeline to fix the problem.
  Define the metrics that can be monitored to ensure sustainability.
  Set up a monitoring schedule to maintain accountability to ensure completion.
Conducting an organizational assessment and a financial benchmark analysis will help business owners identify areas that can be improved to enhance the business’s performance, which increases the value of the entire enterprise. Ultimately, these steps should put an owner on a path toward building a great business enterprise that can be easily succeeded.

Insights Accounting is brought to you by Barnes Wendling CPAs

Proposal impacts real estate industry

Ohio legislation has been proposed to close the “LLC Loophole” on real estate transfer taxes. The bill would apply to any transfer of ownership interest in a pass-through entity that owns real estate both directly or indirectly.

“While the change wouldn’t cost a lot for many real estate owners, it is something they need to be aware of,” says Tony Constantine, CPA, tax partner at Ciuni & Panichi, Inc. “Also, if they want to call their state representative to have their voice heard about how this could affect them, now is the time to do it.

Smart Business spoke with Constantine about Ohio’s real estate transfer taxes and how the proposed bill could apply.

What does the current law state with regards to real estate transfer taxes?

The current law imposes a tax on any direct transfer of real property located within the state. The tax consists of a state and county portion, totaling $4 per $1,000 on the transaction, and it’s paid by the transferor. So, a $2.5 million sale would have a transfer tax of $10,000.

The loophole in the current law is that it only applies to direct transfers, not indirect transfers. Indirect transfers are the sale of an ownership interest or entity that owns the property. If you own a building as a single member LLC, you could sell the interest in that LCC to someone else who becomes the owner — doing that is a transfer of an interest in an entity, versus an interest in the actual property.

Why do many real estate investors prefer to purchase real estate indirectly?

There are three main reasons:

1) To shield their identity. Some prefer some privacy with respect to their real estate acquisitions and may purchase through a trust or other entity.
2) To freeze the assessed value for real estate tax purposes. Real estate sales trigger the county to revalue the property to account for any appreciation.
3) To avoid the conveyance fee. When you transfer real property, there is a transfer tax (conveyance fee) that includes a state and county tax. With an acquisition of an LLC interest there is no transfer of title, and thus no transfer tax.

Not everyone sets up their real estate transfers this way, but it happens often. It’s a nuance of the law that not everyone is aware of. It’s also an example of why real estate investors need experts who can advise them on the tax, accounting and legal situation.

Why do some want to close the loophole? Do you think the bill will pass?

They want the extra tax dollars. If you look at how the tax dollars are used, the money — even the state portion — goes to the counties and typically gets allocated to the school systems. So, school boards are big proponents because it will increase their funding. If you look statewide, it could be very beneficial for larger counties, especially since the state has scaled back on its allocations.

The bill is just a proposal, and the likelihood of it passing will become clearer only as it moves through the legislative process. There are arguments to be made on either side. The real estate community could see it as an expensive issue for those with large portfolios.

What does this mean for real estate owners and investors, in practical terms?

If it passes, it won’t stop people from selling a building. The transaction costs could get a little higher, but that’s probably a small line item in most real estate deals. Compliance costs also could go up a little. For example, if you buy a 20 percent interest in a property partnership, there will be some compliance to determine the value of that 20 percent interest.

It would also enable the county to know there was a transfer of real estate, so the assessed value wouldn’t be frozen. However, counties are already getting on top of this by checking the mortgage records.

Really, it’s just a matter of keeping an eye on the situation and making sure your voice is heard if you have an opinion. The real estate market has been steady — and this bill won’t drive that up or down. Northeast Ohio’s cap rates and prices are attractive enough that they’ll continue to draw interest, especially from people outside of the market.

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

Factors to consider when choosing a business entity

Choosing a business entity is a big decision. The choice affects how owners are required to conduct business on a day-to-day basis, how financial statements are presented, and what income is taxable and the rate at which the income is taxed. The structure affects the manner in which owners can take cash out of the business and if the cash received from the business is taxable. And it will have long-term effects if or when the time comes to make changes in the ownership structure or sell the business.

Smart Business spoke with Kirk Trowbridge, director at Clarus Partners, about the factors to consider when determining the structure that’s best for a business.

What choices are available to those setting up their business entity and how are they differentiated?

Among the factors that narrow the possibilities are the number and types of owners involved. Ownership structures will dictate whether a company is registered as a single member limited liability company (LLC), partnership, S corporation or C corporation.

It’s important to recognize that just because a person chooses a type of legal entity, it does not necessarily mean the entity will be taxed in the manner that follows that choice. For example, a single member LLC by default would report its income on a Schedule C attached to the owner’s Form 1040. However, that person can make an election with the IRS for the single member LLC to be classified as a corporation and then make an additional election to have it report as an S-corp. with the IRS.

Another limit could be that the ownership structure doesn’t fit the entity. A business cannot be set up as a partnership if there is no partner. S-corps are limited by the number of owners who can be involved in the business and the tax structure of the owners. For example, an S-corp. cannot have a partnership as an owner, but a partnership can have an S-corp. as an owner.

How does someone determine what is the best business structure for their venture?

Many people, when setting up a business, want to know what structure will require them to pay the least amount of tax or put the most money in their pocket. While this can be an important factor, it should not be the primary factor. Rather, first consider what state and federal laws allow. Some business ventures may not be able to conduct business in a manner that is most tax-advantageous because of the makeup of the owners.

Also consider what type of flexibility that’s desired in the operations of the business. Partnerships generally allow the most flexibility while corporations offer the least.

A person should also think about why they are putting the business venture together in the first place. Is the plan to own the entity for five to seven years and then sell it, or is the plan to own the business for a long time?

Choosing the wrong structure can result in paying higher taxes and not having the flexibility that’s desired when conducting business on a day-to-day basis. Long-term, it can also affect how easily change in ownership can take place and how the sale of the business must be structured.

Who should someone work with as they consider which structure is best for their venture?

Work with an attorney and CPA when considering which structure is best for a business. An attorney will make sure the business is set up following state laws, and that all documents and proper registrations with the state have been filed. A CPA can advise the business as to the different options that are available when it comes to structuring the business under current tax law, along with advising on the best structure for income tax purposes.

There are multiple options available when it comes to setting up the structure of a business. Understand all of the choices that are available and the consequence of each before picking one.

Insights Accounting is brought to you by Clarus Partners

Diving into the tax reform, from an individual perspective

Tax reform, commonly referred to as the Tax Cuts and Jobs Act, significantly revised the individual tax code for tax years starting in 2018. But the changes may keep coming, even for tax year 2017, says Tax Managing Director Doug Klein of BDO USA, LLP. The Bipartisan Budget Act, which temporarily resolved the federal budget crisis in February, included tax extenders that were retroactive to Jan. 1, 2017. It permits casualty losses to more than taxpayers residing in federally declared disaster areas, extends business credits, fixes depreciation and adds energy tax credits.

The government will likely continue to issue proposed rules or loophole shutdowns, but, overall, Klein expects Ohioans to come out ahead and pay fewer taxes.

Smart Business spoke with Klein about tax reform and the impact on individual tax returns, starting in 2018.

What are the biggest changes for individual taxpayers under the Tax Cuts and Jobs Act?

The individual tax rates for all taxpayers were lowered, generally as much as a 2 to 3 percent decrease. The top tax rate is now 37 percent (previously it was 39.6 percent).

Several above-the-line deductions were suspended or modified. The deduction for moving expenses has been suspended, except for military members with military orders. For agreements that start as of Jan. 1, 2019, alimony will no longer be a deduction for the paying spouse or includible in income by the receiving spouse. Prior agreements will be grandfathered under the old rules.

Similarly, many itemized deductions have been reduced or suspended beginning in 2018. Congress limited the state and local tax deduction, suspended 2 percent miscellaneous deductions, i.e., unreimbursed employee business expenses, and limited who is eligible to claim a casualty loss. The mortgage interest deduction is now limited to interest paid on acquisition indebtedness of up to $750,000. Mortgages obtained prior to Dec. 15, 2017, are grandfathered under the $1 million limitation. Interest paid on home equity lines of credit, not spent on acquisitions or improvements, are no longer deductible. For tax years 2017 and 2018, however, taxpayers can deduct medical expenses as long as they exceed 7.5 percent of their adjusted gross income.

Congress increased the standard deduction (roughly double the pre-tax act amount) but suspended all personal exemptions. The Alternative Minimum Tax has been retained, but its effects have been severely curbed by eliminating many addbacks. The child tax credits increased, as did the amount that is refundable. In terms of the estate tax, the lifetime estate and gift exemption, and the generation-skipping transfer tax exemption, increase to $11.18 million for all taxpayers, starting in 2018.

Nearly all of these changes affecting individuals are set to expire Dec. 31, 2025.

Who gets the biggest benefit? Who will be hurt the most?

Business owners are big winners. Tax rates for C-corporations dropped to 21 percent from 35 percent. Owners with businesses structured as pass-through entities, such as partnerships and S corporations, who meet stringent requirements, can combine lower individual tax rates with a special deduction.

Taxpayers in high tax brackets who reside in high income tax states, such as California and New Jersey, will see the biggest increases. The new law limits their federal deduction for state and local taxes not attributable to a trade or business to a combined total of $10,000, which includes income and real estate taxes, among others.

How should business owners, investors or high net worth individuals react now?

Many high net worth individuals, and virtually all businesses, are analyzing the impact of the deduction for qualifying business income against the lower C-corp. tax rate, and determining whether their default choice of entity makes sense (S-corp., C-corp. or partnership). CPAs can model various scenarios while considering the multinational impact. Businesses with foreign owners or offshore assets should undertake analysis now, as potential taxes may be due as soon as April 17, 2018.

Individuals should revisit estate planning, including trusts and charitable donation vehicles. Even though the exemption doubled, they can still plan and reduce taxes.

Always keep in mind that tax reform is a moving target, best navigated with persistence and patience.

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