Plan now to create the life you want in retirement

The word retirement takes on different meanings for different people, making retirement planning unique in each case. The commonality is that individuals are responsible for making sure they have enough money saved to fund their retirement.

“Retirement planning can be complicated and stressful,” says Christopher D. Bart, managing director and partner at Aurum Wealth Management Group, a Skoda Minotti firm. “The difficulty has increased as people are living longer and in some cases spending more years in retirement than working. This is why people need to approach retirement planning with realistic expectations of what life for them will look like in their retirement years.”

Smart Business spoke with Bart about preparing financially for their retirement years.

What, generally, can be said of the state of mind of people as they think about how they’re positioned for retirement?
For many, the concern is determining how much money they’ll need to retire and be able to maintain their lifestyle or even meet their expenses through their retirement years. One study found that only one out of every five people believe they’ll have the money they need for retirement.

Business owners have a unique challenge when it comes to retirement. They’re accustomed to drawing money from their businesses for personal needs. But once that source of income is sold, they’re left with a pool of money and often uncertainty about how they’ll continue to generate an income from that liquidity event. It can be a difficult transition to make.

How can people ready themselves for retirement?
There is what’s referred to as the retirement equation, which is really just thinking through the factors affecting retirement that can be controlled, that can’t be controlled and those factors that can only be somewhat controlled.

For example, no one can control the performance of the markets or future tax policies. People can have some degree of control over employment earnings and duration, and can completely control their savings, spending and investment decisions.

A sound plan involves making the most of the factors that can be controlled and not being overwhelmed by what can’t be controlled.

What is the value of an adviser for those who are working out how to fund their retirement?
There is an element of fear involved in retirement planning that makes it a difficult exercise. It can be overwhelming for some with all the decisions that need to be made. Someone who plans to retire at the age of 60, according to current life expectancy, could live to age 84, which is a lot of years to consider.

The value of an adviser comes from his or her experience, knowledge and ability to provide guidance that aids the planning process. An adviser can help prevent investors from making the wrong decisions at the worst times.

The right adviser can help a person create a retirement plan and keep them accountable to it, so the earlier an adviser can get involved the better.

What are the characteristics of a good adviser?
It’s important to find someone who can be trusted. Understand the type of clients he or she deals with — is it preferable to be a big fish in a small pond or a small fish in a big pond?

Also, understand how that person is compensated. Determine if there are conflicts of interest and how they might affect the person’s advice.

Find out if they are held to a fiduciary standard or a suitability standard. This will dictate what liability that adviser has for the advice he or she gives.

There are many factors someone must consider to ensure that they’re able to live the way they want in retirement and not run out of money. Whether working alone or with the help of an adviser, it’s critical to have a plan in place sooner than later.

Insights Accounting is brought to you by Skoda Minotti

Revenue recognition standards are changing. Here’s what you should know.

Revenue recognition standards determine both how much and when revenue is recognized on the income statement. Any company keeping their financial statements under generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) that enters into contracts with customers to transfer goods or services would follow the revenue recognition standards. And those standards are changing.

“Revenue is one of the most important measures used by management and investors in assessing a company’s performance,” says J.W. Wilson, CPA, director of accounting and auditing services at Clarus Partners. “So it is important to record revenue correctly and consistently.”

Smart Business spoke with Wilson about the changes to revenue recognition standards and what companies should know.

What should companies know about the new revenue recognition standards?

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued new accounting standards for recognizing revenue from contracts with customers. The old rules were based on industry-specific guidance, which resulted in different industries recognizing revenue differently for similar transactions. The new guidance is industry-neutral and therefore more transparent. It should improve comparability of revenue recognition across entities and industries.

Who is affected by the change?

Any company that keeps its financial statements under GAAP or IFRS will be affected by the change to the revenue recognition standards. Companies that have not done so already should determine if the changes affect their business. This is especially vital if a company’s financial statements are given to outsiders, such as banks, regulators and investors.

The changes also affect any business that has contracts with customers to transfer goods or services. Technology sectors, such as software, engineering, construction and automotive are examples of industries that will certainly see a change.

How do the new standards affect how companies recognize revenue in contracts, in certain transactions and in financial reporting?

The new standards established the core principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

One example would be software companies. The new rules will replace the current software recognition guidance under GAAP and may accelerate the timing of revenue recognition compared with today’s rules. That’s in part because under the old rules revenue was recognized once the risks and rewards of ownership transferred to the end consumer. Under the new standards, revenue is recognized when a customer obtains control of the product, even if they have a right of return or a price protection option.

When will the changes go into effect and when will companies need to implement the new reporting?

For private companies and nonprofits, the new guidance will be required for annual reporting periods beginning after Dec. 15, 2018, and interim and annual reporting periods after those reporting periods. Private companies and nonprofits may elect early application, but no earlier than the effective date for public companies.

For public companies, the new guidance will be required for annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period. Early application is not permitted.

No business owner likes surprises. Companies should take it upon themselves to determine sooner, rather than later, whether the new standards affect their business. It not only affects their financial reporting and accounting procedures, but it also could affect other areas, such as company commission polices and how customer contracts are written.

Insights Accounting is brought to you by Clarus Partners

How do you stack up to the risks of big manufacturers?

Manufacturers are up against coalescing forces of technological disruption, economic uncertainty, globalization and trade upheaval — all of which will shape the manufacturing industry of tomorrow. Today, that means a wide array of business risks to identify, evaluate and build into business strategy.

But there’s also ample reason for optimism. New orders, employment and inventories reflect stability, and with the installation of a new administration vocally committed to boosting U.S. manufacturing competitiveness, momentum seems to be building.

Smart Business spoke with Tina Salminen, assurance partner at BDO USA, LLP, about the 2017 BDO Manufacturing RiskFactor Report, which examines risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers.

How much are politics playing into companies’ risk profiles?

Even with the Trump administration’s stated focus on regulatory reprieve, the feasibility and speed of potential reform is still murky. There’s hope in the industry that a solid level of balance will be reinstated between the greater good some regulations seek and the high costs of compliance.

One in five manufacturers mentioned the 2016 U.S. general election and its associated changes in their filings. As businesses wait to see how campaign rhetoric will play out in enacted policies, manufacturers seem to be feeling uncertainty around economic priorities and spending.

One key promise was repealing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In early May, the House Financial Services Committee voted to send the Financial CHOICE Act, which would rollback significant pieces of Dodd-Frank, to the House floor, where the bill passed in early June. Its fate in the Senate, however, remains unclear.

More than a third of the respondents say the effects of climate change are a threat to their business, but regulatory standards aimed at addressing those concerns bring their share of challenges. At the same time, nearly all reported that environmental regulations are a risk.

What about international politics, like Brexit?

The United Kingdom’s Brexit vote in June spurred global shockwaves, and 30 percent of filers mentioned this vote in their filings. Almost all (94 percent) of manufacturers say their international operations and sales face threats this year, with the combined forces of protectionist trade and immigration measures, rising commodity costs and sharpening international currency risks.

Where do manufacturers stand on the next wave of manufacturing, connectivity?

Many are unsure of how to staff the industrial revolution that’s underway — and speeding up. With connectivity comes technology risk, too. Cybersecurity broke into manufacturers’ top five risks this year, with 96 percent citing potential security breaches in their filings. That’s a 50 percent jump from just four years ago.

Another critical question is how to fund the unprecedented innovation and change in the industry. The National Association of Manufacturers reports that 93 percent of manufacturers are positive about their own company’s outlook, up from 57 percent last year, and marking an all-time high for their survey. Hurdles remain, however, as capital availability is uncertain and the Federal Reserve will likely raise rates sooner rather than later. This spurred a 31 percent jump in mentions of interest rates in recent manufacturers’ filings.

What’s your advice for local companies in light of these findings?

Local manufacturing companies should remain cautiously optimistic, despite international volatility, market disruptions and uncertainty of potential reform under the new administration. Manufacturers should thoughtfully embrace the opportunities to enhance technology and refine products and processes through the development of sound business plans under an administration that remains focused on revitalizing manufacturing in the U.S.

Insights Accounting is brought to you by BDO USA, LLP

Key aspects that impact what your business is worth

Having a formal valuation performed by a qualified valuation expert is something every business owner should consider, especially if they haven’t had one done in the past, says Steven J. Piatak, CPA, ABV, CFF, CFE, Senior Manager, Valuation Services and Fraud Prevention at Barnes Wendling CPAs.

Smart Business spoke with Piatak about business valuations and why you need to have your business ready to be sold at any time.

The following are key components that can impact the value of your business:
  Management/processes — Is your business reliant on one person? How strong and innovative is your management team? Are key employees properly compensated with appropriate incentives in place? Most buyers will place more weight and give higher value to businesses with strong management teams.

  Revenue — Buyers love recurring revenue and contractual agreements. What is your customer attrition rate? Do you survey your customers and understand their level of satisfaction? Revenue is a secondary factor in determining the value of a business, but one with more cash flow will have a much higher valuation.

  Diversification — Are your customers and suppliers diversified? If not, what can you do to improve upon this? If you are reliant on a key supplier, have you asked them what their contingency plan is in case of a business interruption? Businesses with a concentration on a single customer often experience substantial pricing pressure and significantly lower profit margins.

  Industry — Is your industry growing? Is it facing potential regulatory changes? If your business is in an industry on the downturn, your valuation may be lower while businesses in a growing industry may see a higher valuation.

  Growth — Is your business growing faster than the industry? If you have a business model with high growth potential, this could increase the value of the business. If your growth has slowed down, what is your plan to re-energize it? Mature industries still offer many opportunities if they can reinvigorate their sales.

  Scalability — What is your company’s ability to meet increased demand? Does your business model allow for rapid growth? Are you operating at full capacity? A scalable business is one that focuses on the implementation of processes to create an efficient operation.

  Reinvestment — Have you reinvested profits into the business? What kind of shape are your IT systems or equipment in? Would a new buyer come in and have to make major capital improvements? Value is not created just by maximizing returns on capital, but by putting an emphasis on investment for future growth.

  Differentiation — What is your competitive advantage? How strong is your brand? Do you have intellectual property? Are you a low-cost provider? What can you do to maintain or improve upon your competitive advantage? Differentiation isn’t just beneficial for a business valuation, it’s critical for any successful business to be successful.

  Profitability — Are you making money? How does your profitability compare to the industry? Buyers are focused on adjusted earnings before taxes, depreciation and amortization (EBITDA). Track unusual, non-recurring or discretionary expenses (i.e. things a new buyer would not need to incur in the future).

  Due diligence — A buyer is going to want to go through your books and records and verify information. Have you prepared for this? There are steps you can take to ensure a smooth process before you decide to sell. Have you considered having audited financial statements? If not, have you considered having your financial systems and processes evaluated for improvements?

Understanding what drives the value of your business and implementing strategies to improve it will help ensure the best possible outcome when the time comes to exit. Your business is an investment. As such, you should be focused on having it ready for sale at any time.

Insights Accounting is brought to you by Barnes Wendling CPAs

Avoid these pitfalls to get the full tax benefit of your charitable contributions

U.S. businesses and individuals tend to be generous with their time, talents and treasures. Turning that generosity into an allowable tax deduction against taxable income, reducing annual income tax bills, can be a trickier matter.

Smart Business spoke with Maggie Gilmore, director of tax services at Clarus Partners, about the substantiation requirements and potential limits of charitable tax deductions.

Why might companies not get the full tax benefit of their charitable contributions?

The IRS grants an organization tax exempt status, and only organizations permitted to receive tax-deductible charitable contributions qualify for a deduction. An organization’s tax exempt status, however, does not guarantee a charitable deduction. Donations to a political organization or candidate, for example, would not qualify as a charitable deduction.

Not having the proper written documentation is another common mistake. The donating company must receive written acknowledgement from the charitable organization for cash or noncash contributions greater than $250. Any claims of noncash charitable deductions in excess of $5,000 requires a written appraisal to the IRS of the fair market value by a qualified appraiser and Form 8283 filed and attached to the company’s federal income tax return. If the donating company receives a benefit in return, the charitable organization should disclose the fair market value of the benefit received by the donor, which reduces the donor’s deduction. For example, if a company buys a table at a charitable benefit dinner, the fair market value of the dinner and amenities would reduce the amount the company can deduct.

Companies sometimes deduct the wrong amount. For noncash contributions of property, the amount allowable as a deduction can vary depending on the type of property donated and its use by the charitable organization. For donations of publicly traded securities, the fair market value of the security on the date of the contribution would be the allowable deduction amount. However, if a company donates inventory to a charitable organization, it can deduct the lower of the fair market value or its basis. If a company donates artwork to a museum, and the museum displays the artwork, the company deducts the artwork’s fair market value. But if the museum sells the artwork to use the proceeds for other purposes, the company can only deduct the lower of fair market value or its basis.

Not knowing the deduction limitations is another issue. Corporations may deduct charitable contributions, but not amounts in excess of 10 percent of its taxable income. To the extent that the contribution is disallowed, it can be carried over to use in future years up to five years. Individual owners of businesses that report as pass-through entities may deduct their proportion of the company’s charitable contributions subject to their personal Form 1040 limitations. These limitations cap the individual business owner’s deduction at 50, 30, or 20 percent of his or her Adjusted Gross Income (AGI), depending on the organization donated to and/or the type of property donated. If the individual owner’s portion of the company’s charitable donation is partially disallowed, the disallowed amount can be carried over for five years for future use.

Employees’ volunteering time is not a deductible contribution. Driving to and from a charitable event to donate one’s time may be deductible at 14 cents per mile, but the economic equivalent of the volunteer’s time is not deductible.

What can companies do to get the most tax benefit out of their charitable contributions?

Investigate whether the organization receiving the charitable donation qualifies your company for a potential charitable contribution tax deduction and ensure proper written records are retained. Donate appreciated property where possible, but consult your tax adviser first to ensure all options and scenarios are considered.

Time the charitable contributions. For corporations, bunching contributions in taxable years where the 10 percent taxable income limitation will not apply will maximize current deductibility and minimize tax cash flow impact. The same applies for individuals in minimizing the impact of AGI limitations.

Insights Accounting is brought to you by Clarus Partners

Companies that welcome the digital transformation see results

The digital transformation — the integration of technology into an organization to increase its competitiveness, core capabilities, profitability and productivity — is well underway. Organizations that have welcomed the wave of changes have found ways to wisely and effectively use it to improve business outcomes.

“Companies are able to more easily tailor their business to the needs and wants of their customers, which is enabling greater flexibility and changing the ways in which businesses operate,” says David Mustin, a partner at Skoda Minotti.

Smart Business spoke with Mustin about the digital transformation and what it can bring to companies that embrace it.

What effect has the digital transformation had?
The digital transformation has disrupted the linear supply chain. Products can now be customized to a client’s specific needs, allowing value to be added in new ways.

In Industry 4.0, manufacturers can use additive manufacturing to customize products rapidly, meeting customer specifications efficiently while reducing downtime. There are companies, for example, that are manufacturing products with new 3-D printing technology, reducing costs by as much as 75 percent from former methods, all while speeding up the process and increasing product integrity.

What is Industry 4.0?
There is a generational change in manufacturing that sees leading organizations integrating artificial intelligence, second-generation robotics, cloud computing and advanced materials to leapfrog companies using older techniques. This fourth generation, which has been advancing quickly since 2013, is defined by the blending of physical and digital processes to transform manufacturing for the better.

How would you characterize the rate of adoption of digital transformation?
There’s a wide dispersion of adoption. In Fortune 500 companies, adoption is incredibly fast. Billions of dollars are being invested in these technologies — for example, many companies are leveraging IBM Watson to analyze large amounts of data and using robotics to automate distribution to handle small shipments quickly and efficiently.

In the middle market and private companies, adoption is moving more slowly. These companies often don’t have the capital or the expertise to move as quickly into digital transformation. Often they don’t have personnel who understand the technology enough to find what works and integrate it. These companies are hesitant to go through the necessary cultural change to be better prepared for implementation.

How does a company get started in its digital transformation?
The first step for midmarket companies in their digital transformation is making sure their Enterprise Resource Planning (ERP) systems are running effectively.

A business intelligence platform can help the company understand what it is doing well, determine with greater certainty what products are profitable, which customers are profitable, determine more relevant sales metrics and produce an efficient turn of inventory. The business can then think about other digital tools that could help solve other problems.

Second, build an ecosystem of partners. It’s almost impossible for many smaller organizations to jump in solo and be successful. Forward-leaning organizations need to find partners in the areas of systems or advanced manufacturing practices that understand where technology growth is occurring and how to integrate those capabilities.

Third, establish a clear plan and set of objectives for the impact digital transformation can have on the business. Determine whether it’s greater efficiency, additional clients and/or new product innovation. Any of these are possible through a strong digital transformation effort.

Businesses that understand and incorporate business intelligence systems see greater opportunities to take out costs and drive efficiencies. It’s a mechanism through which companies can better understand where growth and cross-selling opportunities exist that ultimately leads to growth from the topline and cost savings to the bottom line.

Insights Accounting is brought to you by Skoda Minotti

How to survive sales and use tax audits

Any growing company can expect to hit the department of revenue’s radar at some point. Since it may be inevitable, it’s important to be prepared for sales and use tax audits.

“Each state has its own criteria that guide its decision to conduct an audit,” says Cheryl A. Fields, sales and use tax manager at Clarus Partners. “Sometimes it can be a noticeable change in what would be normal business activity that will trigger an audit; other times it’s because a company is doing business in a state but is not registered to do so. With all states and localities trying to balance budgets, they are carefully looking to ensure each business is paying its fair share of tax.”

Smart Business spoke with Fields about preparing for and surviving a sales and use tax audit.

What typically triggers a sales and use tax audit?

States consider different criteria as they scan the market for potential sales and use tax audits. For instance, states are looking more closely at internet-based businesses and transactions. Sometimes an audit is instigated by a phone call from a customer questioning the taxability of a transaction or a specific business practice. Other times an auditor may discover an irregular transaction during their daily activities and choose to investigate further. Regardless of why an audit is initiated, every company could be subject to one.

What are auditors looking for?

Auditors primarily dig in to a company’s financial records to make sure everything has been reported correctly. They’ll look carefully at any exempt sales to make sure the company has documentation showing the exemption is valid. An auditor will check expenses, both capital and recurring, to make sure everything that should have sales tax on it does, or the business paid the corresponding use tax.

Who is required to charge sales tax differs in each state. Companies that execute sales through the internet should keep track of the changes in the nexus requirements for each state and the changes in business activities, such as marketing efforts and expansions, where the sales personnel are located, to stay compliant.

What happens if the auditor finds issues?

If there are issues discovered through an audit, the department of revenue will issue an assessment. The company under audit, however, has a chance to review the findings prior to an assessment being issued.

If it is your first audit, many jurisdictions will waive the penalty associated if the assessment is not a result of fraud or gross negligence. Most states and localities will assess the interest. Penalties can be assessed at 25 to 30 percent of the tax involved. A fraud penalty will be greater.

How can companies prepare for an audit?

Keep communication with the auditor open, but give him or her no more information than what they request. Document the process and keep a log of all of the audit activity, i.e. when documents were turned over to the auditor, when they call, etc. This information could be helpful if there’s a need to challenge the assessment later. Also, remember that auditors are not trained to look for overpayments of sales and use tax. Therefore, it is necessary to review your records for sales and use tax paid in error so it will be included in the audit results. This may reduce any assessment or the state may issue a refund.

Challenges are common because the statues/laws are subject to interpretation. Read the law and make sure they are applying it properly.

What common mistakes do companies make that lead to penalties?

Most companies get in trouble when they don’t have the needed documentation. What’s important is that the company addresses the issues upfront with the auditor and agrees on an acceptable method to complete the audit.

There’s no need to be afraid of a sales and use tax audit. Establish a good working relationship with the auditor so that the audit will not become unnecessarily difficult. Never be afraid to challenge an assessment because the laws are subject to interpretation and you know your business better than the auditors. Consider it a routine part of doing business.

Insights Accounting is brought to you by Clarus Partners

How to determine if a family office is right for your needs

Family offices combine the expertise of financial, accounting and legal professionals all under one roof. However, the term “family office” is sometimes a confusing phrase that needs further clarity and understanding.

The family office is unique in and of itself. As the old saying goes, “If you’ve seen one family office, you’ve seen but one family office.”

“Each family office has myriad services it can offer a family, and there are two different types of family offices: single-family offices and multi-family offices,” says Floyd A. Trouten III, CPA, a Director at Barnes Wendling CPAs.

“Both types cover separate family office functions for a mixture of family groups. Multiple generations of family members can be part of the family office. The function of a family office is defined by the family and individual member needs.”

Furthermore, a critical role of the family office is providing financial education to younger generations.

“These educational services can include offering mentorship for family members as they begin to enter the business world and assistance in the development of next generation leadership within the family,” Trouten says. “Generally, family offices will also provide office services as necessary for any philanthropic planning or governance.”

Higher-level family office services can include concierge travel arrangements, calendar control and maintenance, bill pay, budget preparation, analysis and other direct financial functions.

Smart Business spoke with Trouten about the evolution of family offices and how to determine if they are a fit for your particular needs.

How have family offices evolved?
In recent times, family offices have reinvested heavily in closely held operating businesses. The pendulum has swung away from pure financial assets to ownership in operating entities. In fact, some family offices will co-invest, or outright compete, with private equity groups for highly valued targets. Family offices, unlike private equity funds, usually do not have a limited hold period for the investment, thus providing the luxury of taking a longer term view.

All in all, family offices serve as a way to protect family financial assets, minimize risk, educate family members and develop next generation leadership. From a purely financial perspective, family offices are able to control costs, manage taxes and cash flow, provide objective measurements of financial returns and assist in choosing what assets to invest in.

How can an accounting firm help family offices?
An accounting firm can provide valuable services to family offices, such as tax planning, compliance services, cash flow management, asset protection planning and investment management.

An accounting firm can also screen outside service providers, determine the risk profile for various buckets of investment dollars and review private investments as part of the overall asset diversification plan. An important service family offices should offer is specialized estate and trust planning that accounts for beneficiary needs while providing the most advantageous tax positions.

Difficult discussions may need to occur in order to make sure the family office has a clear purpose so the entire family is focused on what is best for the group. The financial needs of one family member should not outweigh the others. Prudent and thoughtful advisers are needed to help reach the optimum group goal.

How does someone determine if their needs require the services of a family office?
The more complicated your situation, the more you may need a family office. For example, if you’re selling your business and need to make important decisions regarding financial or legal management, an accounting firm specializing in family office services could manage these issues for you.

The assets of the family are much more efficiently and effectively managed when using one overseeing organization. The greatest value of an accounting firm is its ability to coordinate all of the various professional services needed to manage the financial affairs of a family.

Insights Accounting is brought to you by Barnes Wendling CPAs

Too many companies miss out on common cost-saving tax credits

Many businesses fail to take advantage of cost-saving tax credits made available by state and local governments. These credits are established by jurisdictions to incentivize behaviors such as job creation, which helps offset employers’ costs to create new positions while increasing the tax base. Other targeted hiring incentives are designed to encourage businesses to hire individuals in certain categories who may have trouble finding employment — for example, people with disabilities, veterans or those on public assistance.

“Tax credits are also used by state and local governments to encourage businesses to make investments in their jurisdiction, either through job creation, capital investments or to get outside businesses to set up facilities within their borders,” says Monika Diehl, tax director at Clarus Partners.

Smart Business spoke with Diehl about how businesses can identify and take advantage of available tax credits to offset expenses.

What are the basic criteria for receiving tax credits?

Tax credits are typically available when a business makes a meaningful investment in its workforce, for instance by creating 10 new positions or investing in training programs to teach new skills to employees. In some cases, credits are aimed to attract businesses in certain higher paying industries, like technology, for instance, to encourage more of those types of companies to set up shop in a jurisdiction.

Some companies may be engaged in qualifying activities and not be aware that they qualify for a tax credit. And to the extent that a business is planning to make an investment — by hiring employees, buying equipment, relocating or adding another location — there may be opportunities to work with a consultant to get a negotiated incentive package.

What’s the difference between statutory and negotiated credits?

Statutory tax credits are written into the law and can be taken, typically without an advanced application, as companies file their annual tax returns. Businesses must meet certain criteria to qualify for them, which could be based on the type of business, hiring individuals from certain categories, or because they operate in an economically disadvantaged area. Businesses generally must complete a form to calculate and claim their credit, then include the form with their tax filing.

Negotiated incentives are usually a part of a larger project and most often come into play when a business is considering relocating or building a new facility. They create an opportunity to get state and local jurisdictions to compete with each other for the business. Such incentives are rarely the reason to move, but they are an influencing factor in where the company ends up.

These tax credits are negotiated with economic development departments. In most cases, the interest of the government offices will be around how many jobs are created, the pay level of those jobs and the total proposed investment in capital assets. For the companies, the negotiated package might include credit for each new job created, training grants for new employees, low interest financing for capital purchases and more.

What’s the difference between refundable and nonrefundable credits?

Nonrefundable credits reduce a company’s tax liability to zero, but not below. In many cases the remainder, or amount of available credit that couldn’t be applied in a given year, can be carried over and applied to the next year’s tax liability. Refundable tax credits allow companies to reduce their tax liability below zero and get a check back for the difference.

What compliance components are associated with these credits?

After qualifying for some tax credits, there is compliance work that needs to be done. This is usually an annual filing requirement to report on how the company’s growth and investments made during the year compare with what was planned. Companies must be aware of what’s due and when to get their benefit. Missing a deadline could delay receipt of the incentives.

There are many incentives that exist for companies large and small, but they must be sought out. Talk to a consultant to see what opportunities exist to reduce costs.

Insights Accounting is brought to you by Clarus Partners

Let an owner representative guide your commercial real estate project

An owner representative in a commercial real estate project serves as the eyes and ears for an owner. These professionals have expertise from a number of different disciplines and bring them to bear on a project, tackling financial, accounting, project coordination and real estate elements.

“Leveraging the experience of an owner representative means the owner doesn’t have to use his or her company’s resources and take people off of their main tasks to oversee a real estate project,” says Dale Bradford, Esq., a principal at Skoda Minotti.

“Working with an experienced owner representative on a commercial real estate project, whether renovating or buying land and building, means putting the task in the hands of someone with experience to ensure the project gets completed on time and on budget.”

Smart Business spoke with Bradford about owner representatives and their role in commercial real estate deals.

What are the common roadblocks in a commercial real estate transaction?

Companies must deal with the jurisdictional requirements, such as zoning, and concerns such as whether the location is within a flood plain. There are also environmental issues, such as whether or not the property is on a brownfield, has hazard violations or could be in a protected wetland.

There are many reasons land may not be prime for development, for instance, because of geological limitations. Issues found underground can be among the most problematic for a real estate project. Owners can rest a lot easier after the foundation is built.

Other concerns that need resolved are the title, easements, and determining if there is access to necessary and sufficient infrastructure, such as water, sewer and electric.

Many due diligence questions need to be asked from the initial research through the project to completion. It’s an owner representative’s job to think about everything that’s involved and be sure that any point at which a problem could arise, it either doesn’t or is quickly addressed when it does.

Why should an economic analysis be performed?

The overall cost of a project is determined and reviewed between the owner and owner representative. Its basis is established by matching the functional necessities of the final structure with the available budget for its creation. It’s very important that owners carefully set a budget for the project and understand what outcome is feasible for that money, and where the funding for the project will come from.

Crunching numbers and setting budgets may sound like a job for a CFO. But — and with respect to CFOs — they aren’t necessarily focused on the same issues as someone who primarily does commercial real estate. Owner representatives are naturally considering such elements as the cost of materials and putting together bid proposals. It’s a different assessment than those most companies do regularly, which is why it’s better left to experienced professionals.

What factors determine whether or not to proceed with a commercial real estate development project?

There are basically three:

  • Outside third-party incentives offered by the authority overseeing the state or local jurisdiction, such as tax credits and tax abatements, or other government incentive programs specifically created to facilitate real estate development projects that offer an owner tangible savings.
  • The availability of real estate in a location that makes sense.
  • Whether it accommodates most or all of the user’s end needs. For example, a manufacturing facility may need nearby access from the facility to a highway or rail spur.

While those are important, consider that many projects fail or cost way more than they should because they are not coordinated well. It can be tough for those who are inexperienced to be aware of real estate project pitfalls. An owner representative has the experience to bring a project in on time and on budget, while avoiding pitfalls that would trap an inexperienced project leader.

Insights Accounting is brought to you by Skoda Minotti