Help has arrived for small and midsize businesses burdened by preparing financial reports according to generally accepted accounting principles (GAAP). The American Institute of Certified Public Accountants (AICPA) released the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) to provide some relief.
“This has been an ongoing concern of privately-held companies for a long time,” says Jim Suttie, CPA/ABV, a principal with Skoda Minotti. “There’s been talk about separating what they call ‘big GAAP’ and ‘little GAAP,’ but no one knows when that will happen. So the AICPA stepped up to supply a new framework that saves owner-managed companies from a lot of compliance requirements.”
Smart Business spoke with Suttie about the new framework and the benefits it provides for small and midsize businesses.
Are GAAP standards too cumbersome for small businesses?
They can be, depending on the situation. For a small to midsize business that is owner-managed, the cost and complexity of GAAP compliance can be quite a burden. What the FRF provides is an alternative, principles-based framework that can provide meaningful financial statements, while reducing unnecessary complexity and costs.
What makes GAAP reporting costly?
The cost comes from two places — gathering the information and complying with the standards.
Take the example of an operating company that leases a building from an entity that is set up for tax purposes or estate planning purposes. The building is under a separate entity, but with common ownership. Under GAAP, those would need to be consolidated, so it adds a layer of complexity.
Another example is if there is goodwill on the books. Under GAAP, goodwill must be assessed for impairment — the difference between book and implied fair value — on at least an annual basis. With the FRF for SMEs, goodwill is treated the same way as it is for tax purposes; you amortize it over the life of the goodwill, which is 15 years.
Is there a size requirement for businesses to use this new framework?
It’s not necessarily based on size; the AICPA intentionally did not set a quantitative limit. Typically, SMEs are owner-managed businesses. The preface of the FRF outlines characteristics of SMEs, including:
- For-profit businesses.
- No regulatory requirement to use GAAP.
- Users of the financial statement have direct access to the entity’s management.
- The entity does not operate in an industry involved in transactions that require highly specialized accounting guidance.
- The entity is owner-managed.
The FRF is not applicable to companies that are public or have plans to go public.
Are there potential problems in switching from GAAP to the FRF?
One challenge is that the framework is not authoritative — although it has been subjected to public comment and professional scrutiny. In the AICPA’s words, it has not been approved, disapproved, or otherwise acted upon by the AICPA or any authoritative body. There’s also the challenge of third-party users, like banks and sureties, which require GAAP financial statements in their documentation. Accounting firms and others are trying to inform them that this is a viable alternative that may provide more meaningful information. In some instances, the FRF can give clearer information about a company’s cash flow, liquidity and financial position than GAAP, which can sometimes muddy the waters with its complexity.
In the case of a variable interest entity in which a real estate company is consolidated with the operating company, the consolidated financial statements are given to the bank, which may separate the information on the real estate entity. So FRF can make the process more direct for third-party users.
But the biggest advantage of the new framework is with the company itself in the reduction in cost of compliance with GAAP. It just makes it easier to prepare financial statements. ●
Insights Accounting & Consulting is brought to you by Skoda Minotti
Businesses and individuals managing employee retirement plans need to understand their Employee Retirement Income Security Act of 1974 (ERISA) obligations and the liabilities associated with plan mismanagement.
“Plan fiduciaries must act prudently. They must do things such as diversifying investments to minimize risk, and they must always act in accordance with plan documents, as long as those plan documents comply with ERISA,” says Kerri L. Keller, a partner at Brouse McDowell.
“There are certain actions that plan fiduciaries must never do. These include using plan assets for personal gain or for business purposes,” she says.
Smart Business spoke with Keller about the role of a plan fiduciary and how to comply with ERISA requirements.
Who is a plan fiduciary?
A plan fiduciary can be any business or individual who exercises discretion, control or authority with respect to plan management. It can also be any business or individual who manages plan assets or exercises discretion or control with respect to the disposition of plan assets. An ERISA fiduciary also can be those businesses or individuals who provide investment advice to a plan, or are responsible for plan administration.
Examples of plan fiduciaries are the named fiduciary or plan administrator, such as the employer or plan sponsor. But sometimes third-party service providers, investment managers and advisers, insurance brokers, and officers of the employer or plan sponsor can be deemed plan fiduciaries.
What are the responsibilities of a fiduciary?
Every plan fiduciary has a duty of loyalty, a duty of prudence, a duty to diversify and a duty to act in accordance with the plan documents. Plan fiduciaries should know that they could incur personal liability for breaching any of their ERISA-imposed responsibilities, obligations or duties.
This personal liability can require a plan fiduciary to pay back to the plan any losses that result from a breach of fiduciary duties, and to give back any profits that the fiduciary may have made from using plan assets. Fiduciaries must act solely in the interest of the plan participants, and for the exclusive purpose of providing plan benefits and defraying reasonable plan expenses.
Are all employer actions considered fiduciary actions?
No. Certain business actions are not considered fiduciary actions, such as the employer’s decision to establish a plan, what features to include, and the decision to amend or terminate a plan. In other words, when an employer acts on behalf of its business, it is generally not acting in its capacity as a plan fiduciary.
However, actions taken to implement these decisions can transform a business or individual into a plan fiduciary. Fiduciary actions generally include exercising discretionary functions over the management of a plan and its assets.
What are the obligations and liabilities associated with plan mismanagement?
For starters, ERISA fiduciaries can be liable — even personally — for breaching any of the responsibilities, obligations or duties imposed by ERISA. If a fiduciary breaches a duty to the plan, he or she may be required to personally pay back any losses to the plan and restore any profits made by the use of plan assets. A court also can order any other relief that it deems appropriate.
What would be an example of a breach?
A breach would occur if a business owner used plan assets to finance a purchase of equipment to open a new division. The business — and the owner in his or her personal capacity — would likely be required to pay the plan back and disgorge any profits that were made by the improper use of the plan’s assets. As previously stated, a plan fiduciary must act in the best interest of the plan and its participants — not in the best interest of the employer or owner.
The IRS, the Department of Labor, and the Department of Justice all have a role in ERISA oversight. These are the agencies that will generally perform compliance investigations and enforce penalties against the plan or plan fiduciaries. ●
Insights Legal Affairs is brought to you by Brouse McDowell
Companies that have looked into using the IC-DISC (Interest-Charge Domestic International Sales Corporation) provisions of the tax code, intended to help U.S. companies compete internationally, might remember that the incentive essentially reduces the top federal tax rate on income from certain qualified goods and services from 39.6 to 20 percent.
“Partly because it is thought of as a manufacturing and export incentive, many companies have dismissed the IC-DISC. Many more have misinterpreted the rules, which actually do not require manufacturing or exporting,” says Amit Mathur, CPA, director at WTP Advisors.
Pete Chudyk, head of the tax consulting practice at Maloney + Novotny LLC, says “We have helped many companies realize that the definition of ‘qualified export’ sales for IC-DISC purposes is explicitly based on use outside of the U.S., and does not literally require the exporting of goods.”
Smart Business spoke with Mathur and top accounting firms about five IC-DISC myths that lead to business owners missing or underutilizing the valuable government incentive.
Myth 1: Products must be exported.
Perhaps the most widely held IC-DISC misinterpretation is that a company must export a product and sell to a foreign customer to qualify for benefits.
While the product generally must be ultimately used outside of the U.S. — without being further manufactured by another party inside the U.S. — there is no requirement that the product be exported, or that the customer be foreign. In some cases, the product may even return to the U.S. For example, an Ohio auto parts maker that sells to General Motors Co. can claim benefits if the parts are incorporated into a car GM builds in Mexico. A special component rule allows these parts to qualify after being incorporated into another product abroad that returns to the U.S.
Mike Trabert, a partner at Skoda Minotti, says “Any closely held manufacturer or distributor should examine where the ultimate use of their products occurs. While they may not consider themselves ‘exporters,’ significant and easy to implement tax benefits may be available.”
Myth 2: The taxpayer must manufacture the product.
Closely held distributors and brokers, as well as the final manufacturers, of any U.S.-made product are eligible for IC-DISC benefits for any given qualified sale or lease. Unlike the Domestic Production Activities Deduction often enjoyed in tandem with the IC-DISC — both benefits can be claimed — manufacture by the taxpayer is not required.
Myth 3: Business operations will be disrupted.
A popular misconception is that using an IC-DISC will require a new entity to sell qualified exported goods in order to obtain the tax savings. This fear of having to alter contracts, logistics, payments, etc., is totally unfounded. There is actually no effect on cash flow or any other business operations from using an IC-DISC. Other than receiving a commission from the related operating company and immediately paying a dividend back to the company, or its owners, the IC-DISC typically does not perform any activities whatsoever.
Myth 4: IC-DISC benefits are limited to $10 million of qualified sales.
No limitation exists on the amount of qualified export sales that can generate IC-DISC benefits. Originally, the IC-DISC provided a deferral benefit, and the amount that could be deferred was related to only $10 million of qualified export sales.
Myth 5: IC-DISC commission is 4 percent of export sales or 50 percent of export income.
IC-DISC savings result from allowable commission paid to an IC-DISC, generating an expense at ordinary rates (39.6 percent) with the same amount typically being paid from the IC-DISC to its shareholders as a dividend, taxed at dividend rates (top rate 20 percent). Many believe this commission amount is limited to 4 percent of export sales or 50 percent of export taxable income.
In reality, each qualified export transaction can use either of these basic methods, or a host of other methods explicitly encouraged in the regulations that can be more beneficial. Some methods even allow loss transactions to generate a commission. ●
Insights Tax Incentives is brought to you by WTP Advisors
The Jan. 1, 2014, implementation date of many insurance provisions and mandates under the Affordable Care Act (ACA) is rapidly approaching, leaving employers to wonder just how the ACA is going to impact them and their benefit offering.
“As employers explore their health insurance options for 2014 and receive renewal rates from their carriers, some may see an increase that is higher than what they may have expected,” says Marty Hauser, CEO of SummaCare, Inc. “This increase can be attributed to several factors mandated by the ACA. Employers should familiarize themselves with these changes so they understand the reason for premium costs and can decide what is best for their employees and business.”
Smart Business spoke to Hauser about the changes in rating and underwriting under the ACA that will impact premium costs next year.
What do insurers use to determine rates for employers and how will that change?
Currently, rating is based on a number of factors including age, gender, health status and geographic location. Preexisting medical conditions and prescription use are also used to determine rates.
In 2014, rating is limited to age, smoking status and geographic location. Guaranteed issue also goes into effect, meaning that insurers cannot deny coverage because of a preexisting condition or rate-up for high-risk groups. Simply put, insurers can rate a group based on fewer factors than in previous years.
What else is changing in rating that will impact premiums?
Age bands, which are ranges of ages that determine premium amounts, are used to determine a group’s rates, and today these are set at a 5-to-1 gender-based ratio.
Beginning in 2014, age bands can have a maximum ratio of 3-to-1, and these age bands are separated into three groupings: one single age band for children ages 0 through 20, one year age bands for adults ages 21 through 63, and one single age band for adults ages 64 and older.
It’s important for employers to understand that under the ACA these ratios are uniformly mandated and regulated across the country for each carrier in order to level the playing field when it comes to group insurance premiums.
In addition to the change in rating factors and age bands, the ACA requires certain fees and taxes from health insurance companies based on the insurer’s membership.
The first fee, called the patient centered outcomes research trust fund fee, went into effect last year at a cost of $1 per family member and increased to $2 per family member this year. The fee is collected to help fund the Patient-Centered Outcomes Research Institute, which will assist patients, clinicians, purchasers and policy-makers in making informed health decisions through research.
The second fee, called the transitional reinsurance program fee, is effective from 2014 through 2017 at a cost of $5.25 per family member per month or $63 per family member annually. This fee will be assessed against both insured and self-funded group health plans in order to stabilize premiums in the individual market for the first three years the marketplaces are in effect. These fees will be used to make payments to carriers that cover high-risk individuals in the individual market.
The third fee, called the marketplace user fee, goes into effect next year at a cost of 3.5 percent of policy costs. The marketplace user fee is meant to cover administrative costs of policies on the health insurance marketplace.
Finally, the annual health insurer industry fee begins next year at a cost of 2 to 2.5 percent, increasing to 3 to 4 percent in 2015. This fee is an excise tax to fund some of the provisions of the ACA.
In addition to the new fees, health plans are still subject to the 1.4 percent state premium tax.
How can employers offset some of the expense of their health insurance next year?
While there isn’t much employers can do about the new rating factors or fees imposed by the ACA, they can help offset their premium costs by working with their insurer or independent insurance agent to make sure they are offering the right coverage for their employees and budget. ●
Insights Health Care is brought to you by SummaCare, Inc.
With more than 3 million people set to retire this year, one significant component of retirees’ cash flow is top of mind: Social Security. Yet the staggering options of how and when to claim benefits can be overwhelming.
“That creates a need in the private sector for someone to look at those options and determine what makes sense based on personal circumstances,” says Roy H. Kramer, CPA, CDFA, CDS, NSSA, a member of Tax Services at Brown Smith Wallace.
Kramer, a certified National Social Security Advisor, says it’s important to review Social Security benefits in the context of overall retirement funds, and with a qualified independent adviser.
Smart Business spoke with Kramer about myths and mistakes people make when it comes to Social Security benefits.
Should Social Security be included as part of an overall retirement strategy?
It’s an important component of your entire financial planning and retirement structure. A lot of people think it’s not going to be around for their retirement, so they don’t factor in Social Security, which is a mistake.
The federal government has projected that 100 percent of current benefits are funded through the year 2033, and then at 75 percent for subsequent years. So we know Social Security has sufficient resources to pay benefits through 2033 and retirement planning should reflect that. Clearly, there also will be some discussion about what to do post-2033 because that reduction would be devastating to retirees who worked so hard and paid into Social Security their whole lives.
What’s the first step to figuring out when to take benefits?
Go to www.ssa.gov and set up an account. It’s the only way to access Social Security statements that previously were mailed. There may be mistakes, and correcting them can be a time-consuming process made more difficult if years have passed and documentation may not be readily available.
A common error may be a Social Security number improperly transcribed when a person is married, and years can go by before it’s caught. Most people don’t keep copies of W-2 forms and tax returns after the statue of limitations has expired. So it’s important to review the information on the website to ensure there are no glaring errors.
What are some often overlooked strategies?
One option, which has been available since 2000, is called file and suspend. If you are married, typically one spouse is a high-income earner and applies for benefits at the retirement age of 66. But he or she suspends receipt of those benefits until age 70. That provides what is called a delayed retirement credit, which increases the benefit by 8 percent a year for a total of 32 percent more at age 70. Applying for benefits allows the other spouse to claim spousal benefits of half of the applicant’s Social Security benefit, without reducing the first filer’s benefit amount. So the family can collect Social Security earlier while increasing the benefit received at age 70.
There’s also a rule that allows you to collect benefits on an ex-spouse if your benefits are less. You have to be at least 62, been married at least 10 years and not currently married. You can apply for spousal benefits if the ex-spouse is eligible for benefits, regardless of whether he or she has applied. Overall, Social Security benefit decisions are more effective when considered in conjunction with tax planning.
How are benefits determined?
It’s an indexed average of the 35 highest-earning years of work history. But in order to qualify for Social Security, you must have paid into the system for at least 40 quarters.
When deciding whether to take early retirement at age 62, collecting benefits at the established retirement age of 66 — for those born in 1954 or later — or waiting until age 70, you have to consider your personal situation.
One couple with both spouses in poor health needed the money and filed at age 62. The thought of them living to the average age expectancy of 84 for a woman and 81 for a man was not a realistic possibility.
But if you can afford it and have a family history of longevity, you can wait until 70 and enjoy that 32 percent increase in benefits for a long time. ●
Find out more on this and other tax topics at Brown Smight Wallace.
Insights Accounting is brought to you by Brown Smith Wallace
The U.S. is very much a national economy — even small businesses aren’t restricted to their hometown communities. Many companies don’t know that certain activities give rise to filing requirements for income, payroll and/or sales taxes in other states.
At the same time, it’s no secret that states are having trouble making ends meet, so they are using creative ways to find companies doing business from out of state.
“States essentially are looking to find new sources of tax revenue, without increasing taxes on the folks in their own state. It’s really easy to tax the people who don’t vote for you,” says Brad Greenberg, a director of tax in SS&G’s Chicago office.
Smart Business spoke with Greenberg about being proactive with your state tax filing requirements.
How would a business know if it had a filing requirement in another state?
There are more than 11,000 taxing jurisdictions in the U.S., whether states, cities or counties. With state and local tax filing requirements, the keyword is nexus — a minimum physical connection, often through sales or delivery trucks, attending a trade show or having contractors service a machine you sold.
If you make sales to a state, you probably have a responsibility to remit sales tax. However, if your activities are restricted to sales, you may not need to pay income tax. Payroll taxes are more black and white — if you have an employee based out of another state, you’ll have a payroll tax requirement.
If your employees are working on a project in another state, depending on the length of time and that state’s tax requirements, you may need to withhold state income taxes. Rules are so varied that Congress introduced legislation for a 30-day minimum rule. In addition, some states use a concept known as economic nexus to determine filing requirements, such as Ohio’s commercial activities tax, or if you sell $500,000 or more to California, even over the Internet.
What are states doing to find businesses?
States are cross-referencing taxpayer information from various departments to generate lists of companies that are remitting payroll taxes, but aren’t remitting sales or income tax.
Then, states send out letters. One is an audit or assessment that says ‘you’ve been doing business in our state. We think you should be filing sales and/or income tax returns.’ Any business receiving this letter needs a professional to investigate whether or not a filing requirement existed. If one does, you must file returns; if there isn’t, the adviser can help explain why filing requirements don’t exist.
The other kind of letter is a nexus questionnaire, which asks about your business activities. Don’t ever try to fill out one of these yourself. They are written to create more taxpayers for that state. Tax professionals can help ensure you answer the questionnaire completely and accurately, truly reflecting your business activities, without leading the state to believe there is a filing requirement.
Why is it helpful to be proactive?
You want to sit down with your tax adviser and take a close look at your multi-state activities to recognize any issues. If you happen to be doing business in a state where you potentially owe tax, there are mechanisms to minimize your liability, interest and penalties. Your accountant can ask the state for a voluntary disclosure agreement. If you voluntarily come forward, you’ll likely have a shorter look-back period, and in many cases forgiveness of penalty.
What if the business provides services?
A professional services firm can perform work for out-of-state clients on site or virtually. The income tax filing requirements depend on whether the states in which you perform the work, and where your customers are located, apportion income based on where you provide the service (‘cost-of-performance’ method) or where the customer realizes the benefit of the service (‘market’ method). So it’s important to keep good records with respect to where employees are working on each client engagement. The rules are complex and differ from state to state.
You don’t want to be subject to the hassle of audits or filing back tax returns, or to face penalties and interest. An accountant with a strong background in state and local tax can help manage these risks. ●
Insights Accounting & Consulting is brought to you by SS&G
The U.S. government enacted Medicare 48 years ago to help senior citizens who were finding it difficult to obtain private health insurance coverage.
It originally consisted of Medicare Part A for hospital insurance and Part B for supplemental medical insurance. A payroll tax paid by employees, employers and the self-employed funded Part A, available to those 65 or older; it had a $40 annual deductible. Part B was open to aged citizens and legal aliens who lived in the U.S. for at least five years for a $3 monthly premium.
Medicare costs have climbed at rates substantially above growth in general inflation or GDP. Today the Part A deductible is $1,184 and the Part B premium is $104.90 with a $147 annual deductible.
“Nearly 50 million Americans — 15 percent of the nation’s population — depend on Medicare for their health insurance coverage. With increasing life expectancies and more baby boomers turning 65 every day, that number is expected to double between 2000 and 2030,” says Crystal Manning, a Medicare specialist at JRG Advisors, the management arm of ChamberChoice.
Smart Business spoke with Manning about how Medicare coverage operates.
Why is Medicare important?
Medical costs have become expensive, especially for those older than 65 and already retired. They are more prone to diseases and injuries, and need a plan that covers drugs, hospital stays and doctor’s visits to ensure necessary medical care. The Medicare benefit structure has remained stable, but medical technology has rapidly increased the tools available to diagnose and treat patients.
Medicare applies to individuals who can’t afford private health insurance, which prevents severe financial hardships from chronic or long-term diseases like kidney failure. Medicare also is available to people of all ages with qualifying disabilities that keep them from earning a living.
How is Medicare funded?
Medicare funding comes partially from payroll taxes. Federal Insurance Contributions Act (FICA) taxes are comprised of a Social Security tax that contributes to Social Security retirement benefits and a 2.9 percent Medicare tax. With Medicare taxes, employers withhold 1.45 percent from employees and then match it. High-income Social Security beneficiaries also pay income tax on Social Security income. Some of that goes into a trust fund used to pay doctors, hospitals and private insurance companies when Medicare patients use their services.
How were Medicare Parts C and D created?
Prescription drug costs are increasing as more seniors rely on new drug therapies to treat chronic conditions. Many cannot afford to maintain their health. This trend will continue as out-of-pocket spending for prescription drugs rises.
In 1997, Medicare benefits became available through private health plans. Now known as Medicare Advantage plans (Part C), they replace and cover all Part A and Part B benefits, with the option to add prescription drug coverage. The Medicare Prescription Drug, Improvement, and Modernization Act created a specific drug only benefit (Part D) through private insurance companies.
In the 2000s, 25 percent of Medicare beneficiaries had no drug coverage. Today, beneficiaries can join a Prescription Drug Plan for drug coverage, or join a Medicare Advantage plan, which covers medical services and prescription drugs. However, seniors need to join a drug plan when first eligible to avoid paying a monthly late enrollment penalty of 1 percent.
What’s critical to know about Medicare?
The drug benefit has a major coverage gap called the ‘doughnut hole,’ which begins when total retail drug costs — not what you personally spend at the pharmacy — reach $2,970. In 2013, anyone reaching the doughnut hole receives a 52.5 percent discount on brand-name formulary drugs and a 21 percent discount on generic formulary medications. Part D beneficiaries remain in the doughnut hole until their true out-of-pocket costs exceed $4,750.
Seniors need to choose the right Medicare coverage. However, know that Medicare isn’t part of the Affordable Care Act’s health insurance exchanges. Your benefits won’t change and you don’t need to do anything. ●
Insights Employee Benefits is brought to you by ChamberChoice
The Kaiser Family Foundation recently released a study that stated premiums available on state-based health insurance exchanges would be lower than expected. In Ohio, rates cited were even lower than the national average, with costs for the second-lowest silver tier plan at $249 compared to $320 nationally.
However, Ohio Lt. Gov. Mary Taylor had earlier announced that individual premiums were expected to increase by 41 percent.
Smart Business spoke with William F. Hutter, CEO of Sequent, about whether the Patient Protection and Affordable Care Act (ACA) will succeed in driving down health insurance costs.
Do the rates cited in the Kaiser study mean costs are going down?
Possibly for a couple of years — we’ve still not seen the community rating prices for small group coverage, and just maybe the lowest prices were illustrated in the Kaiser study. The rates indicate a very low and attractive premium structure. It’s unlikely these rates will be sustainable after 2016 because carriers don’t know the real cost of insuring this group yet.
In addition, the paper didn’t address complex tax implications for both the company and employees that must be considered for total cost. For example, the new taxes on insurance premiums paid by carriers, but collected from employers, are a protection for the carriers. The tax will be set aside to help carriers offset the real cost of coverage for the first two years. After that, the exchange carriers will be on their own, with no government subsidy.
What impact will these rates have on businesses and their health care plans?
One of the leading actuarial firms, Milliman, has an analysis tool to help any company dig through the ‘play or pay’ considerations. Having completed more than 250 separate analyses, Milliman reported it made sense to ‘pay’ for only two of those companies. However, it’s difficult to access the individual total costs relative to plan designs.
What do the delays mean for 2014?
This is a practice year for everyone; 2014 is a penalty-free zone. With the rollback in enforcing penalties and a delay in reporting incomes for the affordability test, people think they are off the hook regarding ACA requirements. But everything else is going forward, including a big increase in taxes.
Unfortunately, the early testing on the exchange, scheduled for early September, was delayed. The Department of Health and Human Services also delayed the deadline to sign final agreements on health plans that will be available to consumers on the exchanges, which might have occurred because some insurers have been hesitant to sign up.
Many people anticipate there may be massive technology glitches relative to the exchanges, including a brewing concern in the technology arena about confidentiality and Health Insurance Portability and Accountability Act (HIPAA) compliance. The system is going to be large and unwieldy.
Who is going to buy insurance from the exchanges?
Even with the individual mandate — which still could be delayed by the government — beginning next year, most people will not be making changes regarding their health care, whether they have insurance or not. If you haven’t purchased coverage because you’re young and invincible, you’re not going to purchase coverage now with minimal individual mandate penalties in the first year.
The people who will be truly interested in participating are the most needy — those who cannot afford other coverage because they are ill and not working.
As for businesses, depending on the average income per worker, some might drop plans and let employees go to the exchanges. Businesses with fewer than 50 full-time equivalent employees will not be penalized when penalties are assessed in 2015. So, they could drop coverage, give everyone a $4,000 raise and let employees buy their own insurance. But companies need to remember that giving a raise to buy exchange coverage causes everyone’s taxable income to increase. Therefore, the employee pays more in taxes, the company pays more in taxes and the increase might bump income over the subsidy limits.
It’s still very difficult to predict what exactly is going to happen because there are so many unknowns. ●
Insights HR Outsourcing is brought to you by Sequent
Business succession often fails because business owners failed to plan, not because of a failure of the plan itself. But once a succession plan is established, it requires periodic review because tax laws change, goals change, dreams change and outcomes change.
“Often I find a business, particularly when it’s closely held, is one of the biggest assets of a family. So you’ve got to treat it that way,” says Rick Applegate, President of First Commonwealth Financial Advisors. “People get so close to their business that they forget, or fail to, look at it objectively.”
Smart Business spoke with Applegate about what to consider with business succession.
Why do business transfers to another generation often fail?
Assuring continuity is vital, but it doesn’t always mean that a second generation can assure success. A business succession strategy needs to take into account the business owner, the buyer, key employees and, most importantly, the clients.
Many times, owners of a closely held family business want to be ‘fair’ to all their children. So, a sibling who hasn’t been involved gets an interest equal to that of the sibling who has worked in the company for many years. Fairness has nothing to do with a successful business succession. Work out some other way, such as taking out a life insurance policy on yourself to benefit the uninvolved son or daughter.
How does a defensible business valuation help?
Understand what you’re trying to do — are you selling to family members, on the open market or to internal employees? One of the first things a buyer wants to know is the cost, so you need a supportable valuation to put a price on the business.
Even if you’re not selling, a business valuation is helpful. If the company hasn’t been properly valued at your death, the IRS will value it as highly as possible to collect more tax when your estate executioners sell or transfer the business.
It’s important to bring in appropriate professionals like attorneys, tax accountants, financial planners, etc. People who are closely vested in their business almost always think it’s worth more than it is. Professionals can help guide you to a reasonable valuation, including picking the best methodology.
What else should you take into account?
You need to think about who would be interested in buying your business. It might be difficult to sell in the open market. Family members could be disinterested. So, employees may be an option. Employee stock ownership plans have tremendous tax benefits to the prospective seller. Today’s low interest rates also easily allow a stock transfer with a bank loan. Again, qualified professionals can help with sale contract language and other matters.
In addition, you might not have the option of active, thoughtful selling. Plans must weigh what happens if there’s financial hardship, injury, disability or even death. Business succession planning should go hand-in-hand with your estate planning.
When family members are under duress, you don’t want them scrambling with business operations or estate matters. Leaving the business to your uninvolved spouse may be a terrible position to put him or her in. And it can hurt the value if they end up having a liquidation sale.
Use the plan to put your successors in the best position. Ask who is key to the continued success of the business. Do you need to give key employees part ownership or incentives to stay?
How can the right financing help with the plan’s execution?
There are different ways to sell a business. Prospective owners often utilize life insurance purchased under an agreement of sale because it makes the outcome a known entity. This is particularly useful when the buyer is paying through installments. If the business owner dies in the transition period, the life insurance awards funds to pay for the remainder of the company.
There are a lot of details to wrap up with business succession. Even after a sale, the right parties must be notified so previous owners or survivors aren’t liable for the unemployment tax filings, tax returns, business credit cards, etc. With help from experienced professionals, your plan can anticipate and respond to ensure the business continues after you’re gone. ●
Insights Wealth Management is brought to you by First Commonwealth Bank
Recently, President Barack Obama outlined a plan to combat rising college costs by holding colleges and universities more accountable for results. The foundation of this plan is a ratings system that would provide students and families with information to help them select a school that offers the best value. Ultimately, Congress may tie the provision of federal student aid to a college’s rankings.
What might the proposal mean for colleges and universities and the businesses that hire their graduates?
Smart Business spoke with Luis Ma. R. Calingo, Ph.D., president of Woodbury University, about the challenges of making college more affordable.
Will this proposal help colleges do a better job of turning out graduates who are prepared, for example, for a career in business?
The ultimate impact of the president’s proposal is difficult to gauge. However, the debate must begin with understanding the role of higher education.
Colleges and universities exist for one reason: to produce graduates with highly valued degrees who have the knowledge and the character to serve and lead. President Obama’s proposal enjoins colleges and universities to return to basics.
Doesn’t it make sense to focus curriculum on courses that are most essential to a student’s future career?
While that makes sense at the graduate level, there are benefits to a broader undergraduate liberal arts education, which is when students ought to be exploring their interests.
Businesspeople often say they can’t understand why any undergraduate student would pursue a history major or take a philosophy course. But the students who study history or philosophy are those who end up in law school, just as those who pursue biology may end up in medical school. These are the courses that enrich the mind so that students become better business executives by being more critical in their thinking and more socially responsible. All of those things come from a liberal arts education, which is why many professional degree programs have a strong foundation in liberal education.
On a personal note, my daughter is majoring in theology and minoring in Arabic in preparation for a career in law and foreign service. She’s a prime example of why it’s important to debunk the myth that a liberal arts education does not contribute to preparation for a business or other professional career. The dichotomy between liberal education and professional preparation is an artificial one.
What can be done to reduce the spiraling costs of a college education?
How people respond to the cost question depends on their perspective.
If you are a parent or student who relies on federal Pell and/or state grants, any move that reduces public funding for higher education is of great concern. It also depends on where you live. A state university education in Ohio costs two or three times what it costs in California.
At Woodbury, what we do and what we spend is related to producing quality graduates. As with most universities, we spend 70 to 80 percent of our budget on personnel. We consistently apply a student-to-faculty ratio to determine new faculty hires. Any inflationary increases are generally tied to the Consumer Price Index. That’s how we establish the bulk of our budget.
In fact, Woodbury is doing a business process improvement study of our student services and business processes to improve our operational efficiency. Other colleges, large or small, should do the same.
Of course, universities like Woodbury could reduce the numbers and kinds of courses offered to focus on those required for majors. That, however, would be counter to the argument that business and other professionals benefit from a grounding in liberal education. ●
For more of Calingo’s perspective on the challenges facing colleges and universities today, visit his blog, Pursuing Excellence in Higher Education, which debuts in October.
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