“Planning for an exit can be a very emotional event in a business owner’s life. There are feelings of mortality — not only with one’s health, but also his or her role as the leader of a business. Businesses that achieve long-term success typically do a good job planning for succession,” says Steven E. Staugaitis, a director in Audit & Accounting at Kreischer Miller.
“It makes sense that companies that effectively plan leadership transitions will do better because they can sustain positive momentum when a leader is properly groomed and allowed to rise within the organization,” he says.
However, many business owners and executives don’t properly plan for an orderly exit. Less than 20 percent of organizations are well prepared for the departure of a key individual, according to the American Management Association.
“We see that particularly with first-generation business owners. One day they realize they’re 65 and ready to retire. They expect to be able to turn a key and exit the business. In those cases, it is rarely a successful exit,” Staugaitis says.
Smart Business spoke with Staugaitis about planning for succession and what business owners should be considering to increase their chances for success.
What steps should owners consider?
The succession process involves evaluating several steps. These steps include, but are not exclusive to:
- Identifying potential candidates.
- Training those qualified candidates.
- Publicly affirming the decision.
These action items are necessary to set the right tone and expectations for the organization and those around them.
When should owners start thinking about exit planning?
Successful transitions occur where sufficient planning takes place — five to 10 years from a planned exit is best. This time frame allows for potential ‘false starts’ as circumstances change. These changes can be a shift in the operations of the business, the unplanned departure of candidates or candidates simply not demonstrating the necessary qualifications to take over. It is important to start the process early in order to keep your options open.
Who should be involved in the selection process?
Certainly the current owner or owners should be involved as well as any identifiable candidates. These candidates need to confirm their intention of really wanting to take over.
Also, having an outside, independent entity such as a board of directors or advisory board can be helpful. The board can help balance decisions by removing the emotion, since they don’t work as intimately with the candidates on a daily basis. Board members are able to provide outside perspective and new, innovative ways for evaluating candidates.
What about contingency plans?
It’s always a good idea to have what is sometimes referred to as a ‘disaster plan’ in place. These plans are a set of key instructions for a spouse or the management team of a business to act upon in the event something happens to the owner. Unfortunately, there are situations where a key owner of a business passes away suddenly. If there is no clear direction left to anyone either in the family or in the company, the company may go out of business as a result.
Are there any other things an owner should be thinking about?
A leader who is planning to leave the organization should think about what he or she is going to do once he or she actually leaves. The most successful transitions occur when the owners take up an active hobby or they participate on advisory boards of other companies. Showing up at the business every day can undermine the whole process and give the perception that a succession has never really occurred.
The succession process needs to be mapped out like you would any other aspect of the business. Even if you’re not planning on exiting the business in the near future, being prepared ahead of an actual event sends a positive message to employees and customers that you’ve built a strong company that is focused on long-term success. ●
Insights Accounting & Consulting is brought to you by Kreischer Miller
More than 800 years ago, medieval philosopher Maimonides outlined eight levels of charity, the greatest of which was supporting an individual in such a way that he or she becomes independent. In Maimonides’ view, support was defined as a gift or loan, entering into a partnership or simply helping that person find employment.
Few things are more powerful than philanthropy — especially when its end goal is to better the lives of others. These days, philanthropy, and corporate philanthropy specifically, has assumed a broader role in society.
Today, companies give back more strategically than ever before. They align themselves with nonprofits that foster missions they believe in. The wealthiest people on the planet have even coordinated the Giving Pledge (www.givingpledge.org), where they’ve committed to dedicate the majority of their wealth to philanthropy.
At last count, more than 115 people had taken the pledge. Warren Buffett and Bill Gates may be the most prominent names on the list, but others include Spanx Founder Sara Blakely, Cavs Owner Dan Gilbert, Progressive’s Peter Lewis and Netflix Founder Reed Hastings.
Last month, one member, David Rubenstein, CEO and co-founder of The Carlyle Group, discussed the importance of philanthropy during a presentation at EY’s 2013 Strategic Growth Forum.
In his pledge letter, Rubenstein explains why: “I recognize to have any significant impact on an organization or cause, one must concentrate resources, and make transformative gifts — and to be involved in making certain those gifts actually transform in a positive way.”
One way Rubenstein is being transformative is through “Patriotic Philanthropy.” He has given $10 million to help restore President Thomas Jefferson’s Monticello home and underwrote renovations to the historic Washington Monument. Yet Rubenstein’s most noteworthy initiative is the whopping $23 million to acquire a rare copy of the Magna Carta, ensuring it remained in the United States. After its purchase, Rubenstein gifted it to the National Archives.
Not everyone has Rubenstein’s vast resources. But every organization and any individual can make their own impact.
In the workplace, for example, organizations that give back elevate their status perception-wise among competitors and peers. It doesn’t take much. But by being a company that cares, prospective employees want to work for you. For your existing team, deliberate and well-organized corporate philanthropy programs quickly take on a life of their own, becoming a rallying point.
Think strategically and get started by finding your cause. We all have them. They exist at our very core, forming the belief system we live by every day. So why shouldn’t our philanthropy follow that same course? Consider aligning your giving or volunteerism with something you personally believe in or care about; something that fits with what your company does or something that is close to your employees’ hearts.
Most important, get involved and just make a difference. It really comes down to that. One initiative that has always impressed me has been the annual CreateAthon event undertaken by WhiteSpace Creative, a member of the Pillar Award class of 2005. You can read a first-hand account of this year’s program here.
Being a good corporate citizen goes well beyond making good business sense. When you align yourself with causes you care about, whether big or small, you make a difference in someone’s life. And the bottom line is this: It is all of our duties to get involved. It’s no longer a question of if, but rather of what, when and how. ●
Dustin S. Klein is publisher and vice president of operations for Smart Business. Reach him at firstname.lastname@example.org or (440) 250-7026.
Semanoff Ormsby Greenberg & Torchia: How new FCC regulations severely limit autodialed and prerecorded callsWritten by SBN Staff
To protect consumers from unwanted autodialed or prerecorded telemarketing calls, referred to as telemarketing robocalls, new Federal Communications Commission (FCC) regulations took effect in October.
These regulations require a consumer’s “prior express written consent” before businesses can make telemarketing robocalls, eliminating the prior exception of an “established business relationship.”
“Businesses will need to modify their consumer contracts or create a separate consumer consent if they want to make these calls to their consumers,” says Ashleigh M. Morales, an associate at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Morales about what the new regulations require.
What calls are considered telemarketing robocalls under the new FCC regulations?
An autodialed call is any call placed using an automatic telephone dialing system that can produce, store and call telephone numbers using a random or sequential number generator. If your organization uses any type of call center software as part of a telemarketing campaign — calls offering or marketing products or services to consumers — the regulations most likely will deem it an autodialed call.
The new regulations apply to calls to cell phones as well as to landlines. In addition, the FCC considers a cell phone text message a call under the regulations.
Are any types of calls excluded?
The regulations do not apply to manually dialed calls or calls that do not contain a prerecorded message. The regulations also do not apply to purely informational prerecorded calls, such as calls from nonprofit organizations or for political, emergency or non-commercial purposes, such as those delivering information regarding school closings.
Is any customer base grandfathered in?
The FCC chose to not grandfather consumer consents granted under the old regulations. As a result, businesses and third-party telemarketers may need to re-solicit consents in order to satisfy the new requirements.
The old regulations allowed telemarketing robocalls to be made to consumers with whom there was an established business relationship. The new regulations eliminate this exception.
How can businesses best obtain written consent for calls?
To get prior express written consent, the consent must be signed by the consumer and include a clear and conspicuous disclosure informing the consumer that he or she is:
- Consenting to receive telemarketing messages using an automatic telephone dialing system or a prerecorded voice to the telephone number the consumer provides.
- Not required to sign the agreement regarding consent to telemarketing messages as a condition of purchasing any property, goods or services.
Electronic and digital forms of signature are acceptable provided the business complies with the federal E-Sign Act. In addition to modifying current consumer contracts, companies should obtain new consumers’ written consent to future autodialed or prerecorded calls at the time the consumer signs an agreement with the business. Then, the business must implement procedures to maintain records of the consents and ensure telemarketing robocalls only go to the telephone numbers for which the consumers have consented to receive calls.
What are the penalties for failure to comply?
Failure to comply with the new regulations can result in actual damages as well as statutory damages of at least $500 per call, which can be increased to $1,500 per call. In determining the amount of statutory damages, courts will look at whether the violation was willful. Since telemarketing campaigns generally involve hundreds, if not thousands, of calls, the potential damages could be great. If you have not already done so, contact your legal counsel to ensure you are complying with these new regulations. ●
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
If your business has benefited from California enterprise zone credits, the next few months might shock your system.
AB 93, signed into law by Governor Jerry Brown on June 12, 2013, effectively eliminates the enterprise zone program. In its place, three new tax incentives will take effect beginning Jan. 1, 2014. Will these new incentives bring the same value to the California economy? Will your business lose benefits that it has come to rely upon, or will it find new benefits?
Smart Business spoke with Marcus Halluin, CPA, tax manager at Sensiba San Filippo LLP, to find out more about these incentives, what’s coming in 2014 and what businesses can expect moving forward.
What was the enterprise zone program and what did it do for businesses?
The enterprise zone program was a long-standing state incentive designed to encourage specific business activities in designated ‘economically depressed’ areas. The program provided lucrative hiring credits, sales tax credits, net interest deductions, business expense deductions and net operation loss deductions.
What new incentives does AB 93 create?
AB 93 creates a statewide sales tax exemption, which will be available for equipment purchases made by businesses engaged in manufacturing or biotechnology research and development. It will significantly modify and restrict eligibility for the hiring credit. AB 93 also creates a new investment tax credit based on a competitive application process.
How has the California sales tax exemption changed?
The new sales tax exemption created by AB 93 targets industries and activities rather than geographic areas. Specifically, the exemption will apply to manufacturers and biotechnology R&D companies. Qualifying businesses can exclude the first $200 million of eligible purchases per year from state sales and use tax. At least 50 percent of qualified purchases must be used in the process of manufacturing or R&D.
How will the hiring credit change in 2014?
Beginning in 2014, the hiring credit will be decidedly more restrictive and will apply only to the net increase in jobs. The expected effect of this change is significant. Many businesses that previously relied on hiring credits may no longer qualify or may see their benefits significantly reduced. The new law also makes changes to the definition of qualified jobs, including reducing the number of qualifying target employee groups and requiring hourly wages between $12 and $28 per hour.
What is the investment tax credit and how will it be administered?
The investment tax credit will be based on a competitive application process and will be awarded by a newly established California Competes Tax Credit Committee. Competitive criteria have been outlined and include the number of jobs created or retained, the compensation paid to employees, the total value of the investment made in the state, the level of unemployment in the area of proposed business locations and the overall economic impact in the state of the project or business. The Governor’s Office of Business and Economic Development will negotiate agreements with applying businesses, subject to approval by the committee.
What do California businesses need to know before these changes take effect?
Businesses need to understand that the game has changed. Just because your business qualified for credits in the past doesn’t mean it will in the future.
If you were relying on enterprise zone credits, you should sit down with your accountant or tax adviser and analyze the effects of the changes. Getting caught by surprise with an unexpected tax bill could have a negative long-term effect on your business.
The new incentives are certainly worth investigating. Manufacturers and R&D companies will likely qualify for new sales and use tax exemptions. And the investment tax credit could be very lucrative for businesses that qualify and participate in the application process. ●
Insights Accounting is brought to you by Sensiba San Filippo LLP
The Check 21 Act, passed in 2003, had a dramatic impact on businesses’ cash flow by allowing banks to send digital versions of checks — eliminating the need for physical copies. Similarly, important developments are on the horizon to further enhance payment capabilities, says Tom Hoffman, senior vice president and manager of the Treasury Management Services Division at Bridge Bank.
“We’re seeing a lot of start-up technology companies focused on creating better ways to process payments, and adapters to allow accounting systems to interact with bank services,” Hoffman says.
Smart Business spoke to Hoffman about methods to help manage cash flow and services that may be available in the future.
How can a business tell what treasury management services might be needed?
A good banking partner should conduct initial assessments when clients start working with the bank, and also meet with clients on a regular basis to review needs.
For example, a growing business wanted to see if any changes could impact its treasury management needs. It had acquired a health insurance business in Southern California that processes COBRA payments, and payments were being mailed to central accounting at the company’s headquarters in Northern California. That’s a slow process. The business was able to set up a remote deposit capture (RDC) scanner to process checks electronically. There also are fields in the RDC platform for record keeping — for a payment of $100, the insurance company is paid $95 and $5 is kept for processing. Deposits are now made immediately, which speeds up cash flow and improves the flow of transaction data to the accounting system.
It’s a good idea to meet with your bank’s treasury management adviser at least annually to review your account. Look over the fees you’re paying, determine whether the services are worth the cost and see if there are other services you could be using.
Do businesses often pay for services that aren’t utilized?
It happens all of the time. There might be a base charge for Automated Clearing House (ACH) service and no activity. Maybe the business thought it was necessary, not realizing that if you’re not the party originating the ACH transaction, you don’t need the service. That can be confusing to many people. One of the benefits of treasury management consultation is that your bank should catch these oversights and alert you to save your business money.
How can business owners benefit from new solutions on the horizon?
Many start-up technology companies are working on adapters to create better ways to use existing payment rails such as the check clearing system, ACH, ATMs, and debit and credit cards. If you’re overseas, you can use your ATM card at a bank in London; so, why can’t you send a payment to an international vendor through this network and have an immediate settlement?
Technically, it can be done, but there are a lot of issues — international transfers are done through the Office of Foreign Assets Control. However with such efficiency, those things will be addressed. It can take two to four days to send a wire transfer internationally. It would be attractive to deliver a system to settle that immediately.
In terms of treasury management, the next step is to integrate enterprise resource planning systems with banking services. That’s already happening at Fortune 500 companies. The future is finding technology to create adapters that will connect the company’s banking services with its accounting platform. Businesses will be able to evaluate cash needs and reconcile the accounting system on a daily basis, rather than waiting for paper statements. It’s just a matter of creating an interface with whatever accounting software is being used.
One start-up company has a platform to upload accounts payable — all of the invoices a business receives — so payments can be reviewed and approved via tablet. CFOs want the ability to see every invoice and approve payment, even when traveling.
We’re going to see a lot of innovation. It might not be as dynamic as a new payment system, just modifying the ways existing systems are used to make cash flow more streamlined and free up working capital. Check 21 was a good example of that, and the efficiency, economic and environmental gains were tremendous. ●
Insights Banking & Finance is brought to you by Bridge Bank
Some companies can’t afford or simply don’t perceive the need for in-house legal counsel. However, many are seeing the benefits of using outside legal help regularly, rather than when a problem is at hand, says Enrique Marinez, a partner at Ropers Majeski Kohn & Bentley PC.
“Smaller and midsize businesses need to be proactive and preventative in addressing issues that could lead to litigation problems. The role of general counsel should be one of collaboration and proactive planning to address some of those eventualities before they become problems,” Marinez says.
Smart Business spoke with Marinez about how to best utilize outside counsel to provide a level of service that replicates having in-house expertise.
Why has the role of outside counsel changed?
There’s been a proliferation of the use of electronic media and technology, which brings additional challenges that not all companies have kept up with. One problem that’s prevalent now concerns the handling of electronic media — how to store backup tapes and how often backups should be run. Companies need to have polices and procedures in place to put holds on emails and electronic information when a claim or other circumstance arises.
Another problem area is dealing with employee complaints. You need to have policies to address complaints about the workplace environment — someone claims they’ve been sexually harassed or discriminated against because of age or race. There should be a procedure for how to investigate claims.
Other employment issues can range from someone not being paid proper overtime, providing for proper meal and rest breaks or items like smartphones. If you send employees work-related texts, should you be paying for the phone?
If you have policies and procedures to guide you through these issues, you can follow those when a problem arises rather than responding in the heat of the moment.
Can’t these policy needs be determined by meeting with counsel on a regular basis?
Exactly. Risk management should be part of every company’s business plan. Part of that is meeting with a legal professional who can guide them so they’ll be better positioned when a problem arises. That should be on the agenda at meetings.
Often, counsel attends board meetings or company leaders visit to address issues such as policies and procedures for handling complaints and other employment issues. Believe it or not, there are a lot of companies that do not have employee handbooks.
Meet with counsel on a quarterly basis to make sure risk management procedures are in place and to ensure you have proper liability insurance, including directors and officers, and employment liability coverage. Make it part of the business plan to discuss preventative measures, so you’re better able to address situations as opposed to being reactive.
Do companies just not think about using outside counsel that way, or is it that they don’t want the expense?
It’s a little of both. Some people think that you use a lawyer only when you have a problem. But much of the problem can be ameliorated on the back end when there are preventive measures taken upfront. And, yes, there is a cost, but it’s often much less than waiting until a problem requires litigation. For example, if you don’t change your car’s oil, then the engine blows out and you’re paying $3,000. That type of analogy fits exactly for the use of outside counsel.
Plus, establishing an ongoing relationship with a law firm provides additional benefits. Counsel has experience dealing with other companies and exposure to how they have addressed employment issues. For example, a multiservice firm deals in many different disciplines and can help with insurance issues, obligations in real estate contracts and things of that nature.
Outside counsel should be viewed as an extension of your company that can provide assistance similar to in-house. It’s unfortunate that many companies don’t have a dedicated attorney to work with them and only seek legal assistance when there is a problem. When you reactively act on the defensive, things do not go as well as they could. Address issues head-on before they become the subject of litigation. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Your business may be the largest asset in your retirement portfolio, but converting it into an income resource for retirement takes planning to ensure it has value, even after you are no longer at the helm.
“It’s important to start with the end in mind. What are you trying to accomplish?” says Sabrina Lowell, CFP®, principal and COO at Mosaic Financial Partners.
Those using their business as a retirement asset need to decide if they want the business to continue independently after they retire, or if they want to sell it, she says. In either case, business owners must come up with the end game before figuring out how to get there.
Smart Business spoke with Lowell about being purposeful with business planning and recognizing how much lead time you need to accomplish your goals.
Why is it important to manage a business as a long-term asset?
If you’re looking to exit, whether through retirement or a sale, and you haven’t purposefully mapped out a plan in advance, your business may end up without as much value as you thought. Some things to consider are:
- The health of your customer base. Is your client base aging with you? This can be a concern if there’s a sole owner, or even a few owners of a similar age.
- Human capital. Do you have an aging set of employees? Have you been bringing in the next generation, mentoring employees as future leaders?
- Product offerings and innovation. Are your products and/or services evolving and relevant to the current market?
What must a business owner consider when preparing for an exit?
When you’re clear about your objectives, decision-making becomes much easier. As a business owner, think about what your goals are for the business long term. The goals should be simple and concise so that they can be used to test alternative decisions that arise during the years an exit plan often takes to implement. These objectives are often qualitative, such as:
- Sustain client service standards.
- Take care of employees.
- Maintain company culture and values.
- Further the industry.
How can you keep long-term planning from falling to the bottom of a to-do list?
Be purposeful about setting time aside to say: ‘What is my vision and how am I going to implement that plan?’ on an ongoing basis. Like any transition, it’s not easy. The more you can set up systems to help support that effort, the better.
There’s no hard-and-fast rule for how much time is needed. There is usually more work on the front end, before the plan just requires maintenance. Important, but not necessarily urgent, strategic planning can often fall to the bottom of the daily ‘to-do’ list. Setting aside 30 minutes or an hour each day to focus on the business can make the process more approachable.
Where can a quality financial adviser help?
A financial adviser can help determine your number — how much you need to get out of the business for retirement. This may give you more flexibility when structuring your exit. Perhaps you get some payment upfront and an ongoing income stream, rather than just payment upfront.
Your adviser will help you discover what the transition is going to look like, and how to begin preparing. It’s always difficult to make decisions around an asset when you have a personal, emotional connection. A financial adviser has an arm’s length perspective that can help with both the numbers and personal side of a succession plan. ●
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
While brick-and-mortar stores add apps to reach customers on tablets and smartphones, e-commerce retailers are exploring ways to establish traditional storefronts, says Frank Kaufman, a partner and National Retail Practice Leader at Moss Adams LLP.
“The hottest topic these days is the omnichannel approach. Retailers want to engage customers at all points,” says Kaufman. “It’s about how you push information to consumers. That could be through text messages, social media, or signing them up for a geo program so you can identify their location and send a coupon to their phone when they’re near your store.”
Smart Business spoke with Kaufman about retail trends and the impact the Marketplace Fairness Act could have on the industry.
What does it take to implement omnichannel retailing?
Historically, brick-and-mortar stores were slow to embrace the Internet until there was a compelling argument to do so. It’s now evolved to a scenario where you have multiple avenues to engage the consumer at all points.
People are buying merchandise using smartphones, they don’t need to use a computer. With that in mind, how do you push information to consumers? It’s not just through traditional ads, but also texts and tweets.
Walgreens conducted a study that illustrated the effects of omnichannel. They measured annual sales at a base of $1 for traditional customers at stores. They found when that same customer goes online at some point to place an order, that goes to $2.50. And if they can get that person to load an app on a tablet or smartphone, that customer spends $6.
They go even further by giving the app the ability to map out the shortest distance to walk to find items in the store. Shoppers can get curbside service as well.
Pacific Sunwear enhanced the shopping experience by giving sales associates tablets. If a customer likes a garment, the associate can pull up a dozen other items that go with it and find them for the customer. Sales made through the tablets increased 50 percent over purchases at the registers. It’s all about giving extra value for someone coming into the store, making the experience better.
Why are e-commerce businesses interested in opening brick-and-mortar stores?
Even Amazon.com has said it’s going to find locations. One trend is buy today, have today, where you can buy online and pick it up at the store. It comes down to serving an immediate need. Even with Amazon Prime and free shipping, Amazon still can’t get items to the customer today. But the online retailer said it will not move forward until developing a model that’s different and unique to Amazon from the customer experience standpoint.
What impact will the Marketplace Fairness Act have on the retail industry?
The act, which requires online and catalog retailers to collect sales tax at the time of transaction, will ultimately pass; it passed the Senate in May and the House has it. The challenge is not getting agreement, but how to put it into effect. It’s not about having 50 states, it’s really 680 different jurisdictions and trying to determine where a sale has occurred and who gets the tax revenue. A company in California sells an item to someone in Ohio and it’s shipped from a business in New York — who made the sale?
However, what we’re finding is that it will not alter purchasing habits significantly, except for high-priced items involving $200 in sales tax or more. Studies show the impact on buying decisions is ridiculously low, less than 2 percent. Amazon went along because it knows it doesn’t matter — the convenience it can provide makes sales tax a non-factor.
It’s going to be a zero sum game because people will spend at the same level, it’s just that a portion of the funds will be redirected through the government channels and more money will go into local communities.
Whether consumers buy online or in stores, they are doing their homework. About 50 percent of purchases in stores have been researched online. It’s all connected. The goal for any consumer product company is to get an app on a smartphone, the device people have with them 24/7. Then combine that with a store where they can get it now. ●
Insights Accounting is brought to you by Moss Adams LLP
The laws of physics tell us that what goes up must come down. The reverse is true in today’s interest rate climate. Rates that have stayed low — among the lowest they’ve been in U.S. history — for such an extended period of time will soon begin to climb.
“This is a topic that gets commentary daily in the news,” says Jon Park, chair and bank leader of Westfield Bank. “It’s easy to think that it’s just noise and that things will stay this way forever. But it won’t, and companies should take precautions now against the inevitable increases in interest rates.”
The impact rate increases will have on borrowing money is obvious. But your company also could be impacted in other, more unexpected ways.
Smart Business spoke with Park about what you should expect from the coming rate increases, and how you should prepare.
When will rates start to rise and how large might the increases be?
Experts have predicted stable rates for now, with increases beginning in 2015. Once the Federal Reserve begins increasing short-term interest rates, they will likely climb at least 2 percent over a period of 18 to 24 months.
Interest rates work in cycles. The current 0.17 percent short-term rate (one month LIBOR) is considerably lower than its 20 year average of 3.27 percent. When rates have been artificially held low for too long, they will go up. It’s like tension in a spring that has to release.
Are there ways a rate hike can impact businesses that they might not expect?
Increases in interest rates will reduce the profitability of businesses in general. Though new borrowing will still occur, loans will be more expensive. Some companies are able to pass on these costs as price increases, like utilities and other businesses that are equipment-intensive. Many businesses will need to prepare for the increased cost, as the rising rates squeeze the profit margin for themselves, and their clients or vendors.
Another unexpected consequence is that the market value of commercial real estate could slowly begin to decline. The formulas used to determine a property’s worth are based on the positive cash flow the property generates, and interest rates are one of the biggest components of the formula.
What should businesses do to prepare?
Ask your bank to convert variable-rate term and real estate loans into fixed-rate loans. Many businesses have been borrowing at variable rates because it has been cheaper. Converting to a fixed rate will cost more in the short term, but will protect against future interest rate increases.
Approach your bank about re-pricing your fixed rate commercial real estate loan. Normally these loans are re-priced at five-year intervals. You may have several years before hitting the re-pricing threshold. Negotiating to re-price the loan now could secure that fixed interest rate for another five years.
You can also purchase an interest rate swap that will allow you to convert from a variable-rate loan to a fixed-rate loan. Ask your banker about the cost and terms involved to swap rates.
Finally, consider extending the term and/or renewal extension options of any real estate lease. Higher interest rates will eventually translate into higher rent payments, since interest expense is one of the largest cost components for real estate investors and landlords.
Are there other ways companies should prepare themselves from an operational perspective?
Finance your expansion now. If you need to buy a new drilling machine or update your computer system, take advantage of these low interest rates prior to the expected rise.
It is a prudent time to consider your process for accounts receivable. When interest rates are low, many companies aren’t as strict about payment terms. But as interest rates rise, it will be more important to collect your cash quicker and extend your payables longer. Plan ahead and implement the right strategy now.
This is a good time to make sure you have trusted financial advisers on your side to help you prepare for the coming interest rate hikes. ●
Insights Banking & Finance is brought to you by Westfield Bank
Before year’s end, taxpayers need to talk with advisers about their personal tax situation — wages, interest income, dividend income, capital gains, pass-through income from a business and other deductions. This preliminary road map can be used to make appropriate decisions.
“Years ago, I went through a projection with a client. We didn’t move the needle on their taxes much, but the client’s wife said, ‘I feel so much better knowing in December exactly what’s going to happen in April,’” says Patricia Rubin, CPA, director of assurance services at SS&G.
By reflecting in December, taxpayers have time to plan ahead, she says.
Smart Business spoke with Rubin about maximizing year-end planning.
Alternative minimum tax (AMT) is always a big topic. How can you plan around it?
This year, Congress formalized and stabilized many AMT issues. You should do an annual calculation to determine whether AMT will apply to you. A taxpayer must calculate taxes using the regular method and then recalculate following AMT rules and pay the higher amount. AMT rules are similar to regular tax rules. However, under AMT certain items are not deductible in computing taxable income, such as state and local income taxes.
Certain taxpayers will find themselves in AMT every year, but 2014 could have different results as regular tax rates have increased.
How can you reduce taxes with year-end planning?
Donating appreciated stock to a charity is one option, and taxpayers can deduct this under either tax system. If you bought a share of stock for $1,000 that is now worth $10,000, the charity gets $10,000 and you don’t have to pay capital gains on the difference while also claiming a deduction for $10,000. There’s also charitable giving of cash and non-cash items. If you’re cleaning out your closet, make a list. You cannot deduct without specifics on the thrift shop value of donated items. You also can time payments of your state and local taxes — bunching them up and paying them in 2013, or deferring into 2014.
What are some new taxes this year?
These are a little harder to plan for, so consult with your adviser to understand if, and how, these taxes affect you. In addition to the higher tax rates, there is a new 3.8 percent Medicare tax on certain net investment income, as well as a 0.9 percent Medicare tax on earned income. Both of these new taxes apply only if the thresholds have been exceeded. The first year, you need to understand which items are subject to the tax.
In addition, there is a phase out of itemized deductions if your income exceeds the threshold amounts.
What year-end planning is available for a business owner working in the business?
The income of a business owner with an S Corporation, LLC or a partnership passes through to his or her individual return, making tax planning critical.
Make sure your retirement plan maximizes the value to you and your employees, to take advantage of planning opportunities. You can accrue what you’re going to fund into the plan in the current year and pay it next year.
Two depreciation items may be significant. Under Section 179 of the tax code, you can deduct purchases of property, plant and equipment up to $500,000. As the law stands, it drops down to $25,000 in 2014. Also, you still can get 50 percent bonus depreciation for new equipment, which is scheduled to sunset in 2014.
Other items to capture are a health insurance credit for those with less than 50 employees and a self-employed health insurance deduction, which might apply to a shareholder in a closely held company.
Overall, the promise of tax planning is to let you know what’s coming, properly plan for the appropriate deferral of income taxes and reduce your overall taxes. You may not have all three, but year-end tax planning always helps avoid surprises. ●
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