Tax planning is a key component of mergers and acquisitions for both buyers and sellers. It can impact the deal price and play a role in the post-transaction integration.

Tax issues are probably more stressful for sellers, because if there are tax exposures they may need to make representations and warranties. It also can have a bigger impact on the seller’s individual taxes. However, from a buying standpoint, if you want management to stay on but there’s a tax problem, say with executive compensation plans, that can have an adverse effect on operations prospectively.

“It’s one of those things where lots of times people forget, and they bring tax in, in my mind, a little too late,” says Mark Reis, CPA, a tax partner in the Bay Area at Moss Adams LLP. “Or maybe they don’t have a clear understanding of how some of the tax considerations work because they are focused on operations or the deal, and then it can impact purchase price and the taxes of selling shareholders.

“Without the proper planning, you see a lot of things that do go wrong, versus go right,” he says.

Smart Business spoke with Reis about tax planning tips for M&A activity.

Why bring tax into a deal early?

It’s imperative to get all your advisers to the same table early, so they’re communicating throughout the process. If you’re worried about professional fees, remember with the size of these transactions, it’s a comparatively small cost to ensure everybody is on the same page. And many times you’ll end up spending more on professional fees than if you’d been proactive from the start.

Another problem with waiting is you may not get the maximum tax value or benefit. For example, on a recently closed deal, if the company had brought in experts six months earlier, it likely could have saved $1 million in California tax. It’s a matter of having the right people with the right expertise at the table together in order to plan versus react.

What’s important to know about the deal’s structure and its tax effects?

Often business leaders can be unclear on the differences between a stock transaction and an asset purchase, or a tax-free or partially tax-free transaction. Understanding available structures gives both buyers and sellers flexibility to maximize the benefits. For instance, one transaction started as a tax-free merger, but it became mutually beneficial to restructure it as an asset purchase.

Your advisers can help find the best and safest answer, looking at how to manage all the risks, including income tax. Getting a clear understanding of all issues both before and after a transaction closes helps eliminate unnecessary stress or surprises. There are a lot of traps for the unwary; take in as much as possible about the whole picture.

How should buyers attack tax exposures with the target business?

During the diligence process, look at all the exposures, including transactional taxes like sales and use tax, or income tax in other states where activities haven’t been reported. These liabilities may decrease your purchase price offer, or lead to requiring the seller to clean things up prior to doing the deal.

You want to know what you’re buying. With one transaction, the change-in-control agreements were drafted unclearly, which led to problems with the golden parachute rules and payroll taxes. Not only do you have to meet all compliance burdens, but also the last thing a buyer wants is to alienate a key employee who was part of the target.

Is there anything else to keep in mind?

When running projections, you need a solid understanding of the pro forma financial, the purchase accounting adjustments and what kind of resource strain the integration will put on your organization.

When budgeting, project out from both an EBITDA and tax standpoint. Do you have to do fair value accounting? Are you inheriting a liability or is it a true asset? If it’s an asset, what’s the value? How will you handle the transaction costs, which may or may not be deductible?

And the work isn’t done after the deal closes. Post-transaction actions can add value. Again, you need a strong relationship with your advisers, so everybody is talking as issues bubble up. Sometimes it can be a great tax answer, but it doesn’t make sense operationally — but at least you can make an informed decision.

Mark Reis
, CPA, is a tax partner in the Bay Area at Moss Adams LLP. Reach him at (415) 677-8323 or

Insights Accounting & Consulting is brought to you by Moss Adams LLP

Published in Northern California
Year-end audits can be headaches for companies, as management takes time from busy schedules to gather information required by auditors. But a little preparation can make for a much smoother audit process.

“The first quarter is as busy for management as it is for us,” says Kami Refa, a partner at Moss Adams LLP. “But if the right control processes are in place throughout the year, the preparation for year-end audits become relatively easier, since the majority of the auditor’s requests should already be prepared as part of the company’s annual closing process.”

Smart Business spoke with Refa about year-end audits and steps you can take to prepare.

What preparations often get overlooked?

Getting big-ticket items out of the way ahead of time makes the actual audit fieldwork go smoother.  
That includes adopting new accounting pronouncements or changing over to the new Committee of Sponsoring Organizations of the Treadway Commission framework. Goodwill impairment analysis, which management is required to perform at least annually, is another example I frequently mention to clients.

This analysis can be done 
before the end of the year — there’s no need to wait for final numbers. Another area management and auditors can tackle prior to year-end revolves around onetime items, such as acquisitions.
Accounting for a significant acquisition can be a complex and time-consuming area. I encourage my clients to prepare the acquisition-related work papers as soon as the transaction closes and have us audit them right away. This can usually get done during non-busy times for both management and the auditors.
Should auditors be meeting regularly with management?

One approach is to have a continuous audit, which works well with public companies due to their quarterly review requirements. For private entities, auditors and management should meet regularly so the auditors can be brought up to speed as to the company’s operations, and management can learn of any new accounting or tax literature that may impact the company’s financials.

will avoid surprises at audit time. In addition to ongoing regular meetings, management and the auditors should hold planning meetings when there are significant events, such as an acquisition. U.S. Generally Accepted Accounting Principles requires that the assets purchased and liabilities assumed during an acquisition be recorded at fair value at the time of the transaction.

For software-as-
a-service companies, which tend to have large deferred revenue balances, the fair value of deferred revenue tends to be quite lower than the book value. Management needs to be aware of that fact when forecasting revenues and setting covenants. Management often relies on the amortization of the ‘book value’ deferred revenue when forecasting or setting covenants, which is wrong and can have costly consequences.

A lot of companies have debt and related debt covenants. If they’re close to violating those covenants and have set them without taking into account the impact of the fair value adjustments noted earlier, they could end up needing to reset the covenants or risk violating them. Bottom line is that if the auditors and management have discussions on a continuous basis, management has time to get a waiver or have the covenants reset.

What are the consequences of audits not being completed on time? 

Public companies have regulatory deadlines, and many private companies need to meet deadlines set by banks or investors. Failing to meet these deadlines could have dire consequences, such as delisting or impact on stock value for public companies, and lack of access to funds for private companies. If good preventive and detective controls are in place, it shouldn’t take a long time to prepare for an audit.

For example, account 
reconciliations should be done monthly, with one person preparing them and another reviewing them. If this is done, part of the year-end audit package is already complete. Part of the internal review for the audit should also be ensuring that documents are tied to the general ledger. A lot of this goes back to putting the right internal controls in place — not because of the year-end audit but because it’s good practice and helps both operationally and financially.
Kami Refa is a Partner with Moss Adams. Reach him at (949) 623-4161 or
Insights Accounting is brought to you by Moss Adams LLP
Published in Orange County

The Foreign Account Tax Compliance Act (FATCA) has been in the news for years, but the effective date of July 1, 2014 is fast approaching.

Any U.S. business that makes a payment to a foreign vendor or investor will need to determine whether or not the payment is subject to FATCA.

The act’s new disclosure requirements cast a pretty broad net — especially with business becoming more and more international, says Chris Paris, regional tax leader in the Greater Bay area at Moss Adams LLP.

“It’s either going to be a big demand on businesses’ internal resources, or they will outsource it to a third-party provider to ensure that they are FATCA compliant,” Paris says. “I believe it will be a pretty extensive list of internal policies and procedures that they are going to need to come up with.”

Smart Business spoke with Paris about what you need to know about FATCA.

What’s the purpose of FATCA?

Part of the Hiring Incentives to Restore Employment Act of 2010, FATCA requires disclosure of information related to payments made to organizations located outside the United States. It seeks to detect and discourage offshore tax evasion by making payments to overseas accounts more transparent.

Ultimately, the U.S. government wants other countries to sign agreements about sharing more information on payments across borders. The idea is slowly gaining traction, although those FATCA provisions are phasing in over 2015 and 2016.

The act’s first step, which starts July 1, is identification — understanding where funds are going and to whom. Step two will be deciding what to do with this information.

The act’s implementation was extended because the new reporting requirements are complex, and the resource-constrained IRS and Department of Treasury took awhile to issue regulations and guidance.

So, who needs to pay attention to FATCA compliance this summer? Is it just banks?

Beyond banks, non-U.S. foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) are subject to FATCA. There are a number of different investment funds that are going to be identified as FFIs, such as U.S. management companies and investment funds — private equity, venture capital, hedge funds, real estate funds, etc. — with foreign owners. And, of course, U.S. businesses that make payments to foreign entities may become subject to FATCA.

What do business owners need to know?

If you make payments to foreign vendors or investors, you have two options:

  • Choose to be FATCA compliant — meaning you must obtain information on the foreign parties that you’re paying, and disclose it to the IRS by filing additional forms, such as Form 8966 and 1042-S.

  • Decide you don’t want to become FATCA compliant, and then become subject to the 30 percent withholding penalty on payments to any foreign payees.

However, there are a number of exceptions. Just because your company makes a payment to a foreign payee doesn’t mean FATCA will be an issue. For example, paying rent to a foreign entity is exempt.

If you are subject to FATCA, you’ll need to discuss it with your foreign investors or vendors, who may value their privacy. Many of these, such as a high net worth family entity or sovereign European or Middle Eastern wealth funds, don’t necessarily want the U.S. government to know they are receiving payments. That’s why they are organized in the Cayman Islands or Switzerland. Certain foreign partners may opt to pay the 30 percent withholding tax, as a cost of doing business.

How time consuming will it be to set up a FATCA compliance process?

Really large companies are already hiring third parties to come in and FATCA test to ensure they will be compliant. Most business won’t have adequate internal resources, so they’ll outsource this compliance function.

Basically, an organization needs to assess what it’s doing now — identify its current processes and procedures related to payments overseas, determine if exemptions apply and then decide what needs to be done differently, including training staff.

It will be pretty time consuming, but the penalties are so significant that most organizations will likely make the effort.

Chris Paris is a regional tax leader in the Greater Bay area at Moss Adams LLP
. Reach him at (415) 677-8352 or

Insights Accounting & Consulting is brought to you by Moss Adams LLP

Published in Northern California
In a typical organization, 5 percent of revenue is lost to fraud, according to a 2012 global fraud study by the Association of Certified Fraud Examiners.
According to the study, fraud cases result in a median loss of approximately $140,000, with most lasting about 18 months before they’re detected. What surprises many companies is that it’s not the new hires who are commit fraud — it’s longtime employees.

“The ones that have been with you for 20 
or 30 years are the most problematic,” says Scott Swearingen, a partner at Moss Adams LLP. “They’re trusted more, so more opportunities for fraud arise.”
Smart Business spoke with Swearingen about fraud cases he’s encountered and what business can do to prevent it.
Does fraud occur because of a lack of internal controls?

It can be difficult to set up procedures to catch everything. In one case a client received an anonymous letter that an employee was receiving kickbacks from vendors. After the employee quit, a vendor called, happy that they wouldn’t have to pay kickbacks anymore.

This particular kickback 
involved delivery charges: The employee would add another hour or two for traffic and split the difference with the vendor. Cases involving collusion outside the company, such as kickback schemes, are difficult to uncover. More control or oversight of pricing or tracking may have allowed the client to see that one employee had more travel time compared to the company average or their peers.
This theft was discovered because of an anonymous letter, but it might have been found sooner if the company had a 1-800 tip line. More companies are creating tip lines to make it easier for employees to anonymously report suspected fraud. Even more important in combating fraud is the tone at the top; any internal control structure has to start there.

Why is the tone at the top so important?

If the owner is very entrepreneurial and runs personal expenses through the business or is engaged in other activities that might not be legitimate in the eyes of a regulatory agency, employees see and think it’s OK. This effectively sanctions such behavior and allows employees to rationalize it.

Auditors refer to a fraud triangle where opportunity, rationalization and motive all exist. Unfortunately, we bucket things into thirds. One third of people would never steal, even given the opportunity; another third will look for chances to steal no matter what; and the final third wouldn’t ordinarily steal but will if given the right situation with weak or little controls. Internal control practices address that final third. 
What are some key internal controls? 
There must be a good segregation of duties. The same person should not be responsible for the accounting of a particular asset class and also have custody of it. For example, a single employee should not have approvals over cash and the reconciliations as well as the ability to make changes to accounts receivable or invoicing or the ability to approve payments to vendors. 

We’ve seen fraud cases where employees have the ability to authorize credits on accounts receivable for returns and realize they can put a credit on their personal credit card as well. One clerk was building credits on her card to move out of the country. No
approval process was in place to ensure that the credits provided were valid and accurate.

In fraud cases there are usually underlying reasons the employee needs money: an illness in the family, addiction, or lifestyle. Changes in an employee’s lifestyle are a very common clue. One client, for example, had an employee making $50,000 a year who talked incessantly about eating at expensive restaurants. We tell clients to look for these kinds of signs where the lifestyle doesn’t match the pay grade.

Sound internal controls also minimize the possibility of employee errors. Too often fraud or errors occur because companies don’t appreciate the importance of internal controls or segregation of duties until an incident has occurred. Owners and managers may be told there’s an issue, but they can rationalize that it wouldn’t happen to them by their trustworthy employees. Plenty of stories about fraud involve trusted longtime employees that owners felt were
like family.

Don’t wait for something to happen before taking the control environment more seriously.
Scott Swearingen is a Partner with Moss Adams LLP. Reach him at (949) 221-4025 or
Insights Accounting & Consulting is brought to you by Moss Adams
Published in Orange County

Throughout 2013, companies expanded and took calculated risks, but the government’s actions — and its gridlock — continue to impact business leaders.

“There’s a lot going on within our midmarket client base that’s allowed them to expand their businesses, but the vast majority of our clients aren’t taking big financial risks because of the continued uncertainties,” says Tullus Miller, partner in charge of the San Francisco office of the accounting and business consulting firm Moss Adams LLP. “I hear a number of businesses talk about these issues.”

Smart Business spoke with Miller about the continuing concerns of companies, and how to be ready for 2014.

What are the top business concerns you’re hearing from CEOs and COOs?

Generally, there’s uncertainty about the economy and increased regulations, as well as concerns about the Affordable Care Act (ACA) and health care costs. Many companies are facing higher health insurance premiums and co-pays. If health insurance costs continue to rise, or the tax burden is too great because the ACA may have unintended consequences, some might consider options like health insurance captives.

Despite concerns surrounding tax and potential interest rate increases, the continued rancor between Congress and the White House, and a sluggish economy, there has been growth. Mergers and acquisitions, new operations opening in China and South America, capital market deals, initial public offerings, debt restructuring and private equity deals all have transpired in 2013. Businesses are taking financial risks, but on a smaller scale.

Looking ahead, what actions should business leaders consider?

Business leaders should look for more efficient tax solutions or structuring, such as tax deferral options. Arranging the deferral doesn’t avoid the tax — it just defers it to a different period or amortizes it. Another example is a better use of tax credits such as the California enterprise zone program, which has been revamped for 2014 and beyond.

Taxes have motivated some companies to open operations in more efficient tax states, such as Nevada or Texas, although workforce and client proximity factor in.

Organizations also are working on profitability improvement during slow growth periods, which relies primarily on being as efficient as possible — for example, by increasing accounts receivable terms to improve cash flow or initiating technology enhancements.

As the baby boomer generation ages, there are wealth transfer solutions and succession scenarios to consider for 2014 and beyond, which can create more efficient tax positions for wealthy families. High net worth individuals are limited in the amount of money they can transfer without being taxed. Wealth transfer strategies need to be considered well in advance of an individual’s retirement or transition out of the business.

What will higher interest rates mean, and how can businesses prepare?

The Federal Reserve has been buying $85 billion in bonds per month in an effort to keep rates low. Once the Fed decides to slow and then cease the buying program, interest rates could increase quickly. Putting inflation aside, as rates go up, so does the cost of borrowing, increasing the cost of doing business and the cost of goods and services. Consumers may have less discretionary income because they’re paying more interest on credit cards, student loans or home loans, if those have a variable rate.

Recent economic reports suggest that rates should stay down for 2014, possibly going up in 2015. Many companies have or are working on fixing debt, terming it out over a long period. Then, when rates rise, it won’t adversely affect their cost of borrowing.

Planning is very industry specific, but those who are ready will be much better off.

Tullus Miller is Partner in Charge, San Francisco, at Moss Adams LLP. Reach him at (415) 956-1500 or

Insights Accounting & Consulting is brought to you by Moss Adams LLP

Published in Northern California

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 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.

Frank Kaufman is a partner and National Retail Practice Leader at Moss Adams LLP. Reach him at (949) 221-4055 or

Insights Accounting is brought to you by Moss Adams LLP

Published in Orange County

Accounting is the language of business. People use it to make decisions about the past and devise a plan to carry them forward. With the continuing emergence of fair value reporting on financial instruments, accounting no longer just looks back at what you paid, it values those assets today.

“Say you’re putting money into your 401(k). What if you didn’t know the current values? How do you evaluate your prior investment selections and how to move forward?” says Bryan Cartwright, financial services assurance partner at Moss Adams LLP.

“Likewise, if you’re on a company’s board of directors and you have no idea how much management is awarding in stock options because the options have no assigned value, it makes it hard to be an effective board member.”

Smart Business spoke with Cartwright about the increased requirements for fair value reporting.

How has fair value reporting intensified?

Privately-held and thinly-traded securities often have no observable market activity to provide current value information. Loans, bonds, companies, or preferred or common stock are, in increasing measure, being reported at fair value.

The Financial Accounting Standards Board (FASB) and the Securities Exchange Commission (SEC) continue to drive accounting standards and requirements toward the use of fair value, rather than cost, as the basis of value for financial assets. They have gone from requiring companies to disclose fair value in the back of financial statements to including them in the statements with strong support from financial statement users.

The latest push is for companies to disclose the way they’ve ‘fair-valued’ the information for each class of security or asset, and the significant inputs or variables upon which the fair values hinge. For example, instead of simply reporting that a loan has a fair value of $1 million, the disclosures are providing supporting information about the ‘unobservable inputs’ used by management to determine that value, such as a discounted cash flow technique or an unobservable input for the discount rate such as ‘Libor plus 500 basis points.’

Does this just apply to public companies?

It applies to any company or organization reporting fair values for assets or liabilities on a recurring basis, including public and private commercial enterprises, or anyone with financial assets or liabilities on their balance sheets reported at fair value on a recurring basis.

The pressure for accuracy is mounting from the top down. The SEC has been taking action against board of directors and management that it feels haven’t taken fair reporting requirements seriously, or have shown indications of intentionally misstating values. This has been particularly true in investment management, where the SEC has jurisdiction over registered financial advisers. It has been looking into the policies and procedures used by these advisers when setting values for private-equity and other securities, which play so big a role in investment strategies used by pension and profit sharing fiduciaries.

What advantage does more fair value bring?

Regulatory authorities want fair valuations to be accurate, supportable, and based on market information when available. With better information, whether modeled (unobservable inputs) or market-based, people are more accountable for assets they use and deploy.

For example, in 2005, after nearly 10 years of delay, the value of employee stock options began to be recognized in income statements. Executives, board members and shareholders gained much better visibility into the real cost of this compensation, which heightened the understanding of their use. It’s widely believed that the migration to more balanced compensation packages emphasizing both short-term and long-term rewards were due in part to this change in accounting.

How should executives react to this trend?

Everybody can agree on what something costs, but not everyone always agrees on its fair value. Accordingly, you need to be ready to defend your approach. Companies are building systems to document how they select their chosen valuation techniques among alternatives. The work needs to incorporate validation concepts including using ‘look backs’ to determine if selected techniques and procedures are still appropriate. Based on feedback from the SEC and others, companies really need to focus on market-based information when selecting valuation techniques and determining valuation inputs — it’s becoming more of a science.

Whether fair values are determined with internal resources or outsourced, your company is ultimately responsible for the assigned values. Currently, it seems that regulators are showing higher thresholds for proving that the values you select are appropriate. You can acquire valuation models, but a model is only as good as its inputs. Someone in your organization must have the education and skill to understand valuation requirements and communicate your approach, even if you outsource the work.

Overall, fair value is improving financial reporting, although it’s certainly uncovering more differences of opinion and subjectivity than we are accustomed to dealing with. But as people begin to believe in the reliability of fair values, more decisions will be made based upon them, making them more important still.

Bryan Cartwright is a financial services assurance partner at Moss Adams LLP. Reach him at (415) 677-8331 or

Insights Accounting & Consulting is brought to you by Moss Adams LLP

Published in Northern California

Owners of family or middle-market businesses invest a tremendous amount of time and energy — sometimes their entire adult lives — building a successful business. Yet they often spend little time working on their succession plan.

“The business world is littered with second and third generations that don’t succeed in continuing the business,” says Jay Silverstein, principal in the Wealth Services Group at Moss Adams LLP. “One of the big reasons is that there wasn’t a well thought-out succession plan.”

Smart Business spoke with Silverstein about why it’s important to implement and continually monitor a succession plan.

Does every business need a succession plan?

Any business owner needs a succession plan. But the plan may differ for a business in the start-up and growth mode where the owner is not looking to exit the business compared to a mature business with an owner looking to retire in the near future.

In earlier growth stages, a succession plan is a contingency that allows the business to sustain itself if something catastrophic happens. In many cases, banks that lend to closely held companies require this type of management succession planning. They want to know the business will continue to be profitable and be able to pay off the loan if you’re not around.

Where should you start?

You need to identify and prioritize your goals and objectives in three separate areas: personal, business and family.

You and your advisers should complete a personal financial plan to understand your post-transition cash flow needs, and the likely sources of that cash. Do you need to sell the business or have you accumulated outside assets? This is important for an owner who must figure out how to increase the business’s value to be able to retire, as well as someone whose net worth is higher than his or her need. If a sale will generate more cash than you’d need, estate and gift planning decisions should be made prior to a liquidity event to help minimize tax obligations.

Consider what you want to happen to the business. Will it continue as a family legacy or do you want to sell it? These decisions help determine an appropriate exit strategy and limit your succession planning options.

Finally, what do you want for your family? With a family business, what do you deem to be fair and equitable in terms of transitioning to the next generation?

What else do you need to address with a family-owned business?

If the goal is to preserve the business into future generations and your objective is to be fair and equitable to all, it’s critical to work through a detailed succession plan well in advance. Is it possible to get business assets to the heirs who are involved in the business, and equivalent assets to those who aren’t? If not, you must strive to create an ownership structure that doesn’t drive a wedge between your heirs.

Do your heirs even want to run the family business? If they are already involved, take an independent look at whether they have the attributes and skills to take over. If so, they still may need additional training under a management development plan.

What common mistakes do you see?

With family businesses, some people gift ownership to their heirs before implementing a succession plan. Then, brothers and sisters who are never going to work in the business are wondering when they can turn their ownership into cash. You also don’t want to have heirs come to work in the business without clear rules of entry and how to move up in the company.

If you’re going to sell, you may think you don’t need succession planning. However, you still must examine what sale price you need and your estate tax situation, so you can deal with income tax structure issues and improve the company’s value.

You need to dedicate enough time, enough in advance, to meet goals and objectives. Succession planning doesn’t give you an immediate ROI and there’s no guarantee of success, but it gives a far better opportunity of preserving what you’ve created.

Jay Silverstein is a principal in the Wealth Services Group at Moss Adams LLP. Reach him at (707) 535-4115 or

Insights Accounting & Consulting is brought to you by Moss Adams LLP

Published in Northern California

It’s not easy to keep a company going for 100 years — there are going to be a lot of challenges to address along the way.

“There has to be a willingness to change and take chances,” says Roger Weninger, Southern California regional managing partner at Moss Adams LLP. “When I think of longevity, I think of growth. Not purely as it relates to size but also ingenuity, the willingness to change and remain relevant. The company that can continue doing the same thing and remain successful is the exception.”

Smart Business spoke with Weninger about common characteristics of companies that stand the test of time.

What are the keys to longevity for companies?

It’s very important to develop leaders, plural. Companies, no matter how successful they are, get to a point where they need to provide opportunities to others. That can be hard for an individual in charge to understand — the concept that he or she can do less and it will result in more. By allowing others to make decisions and feel a part of the success of the organization, you create a strong culture of growth and change. People thrive in these settings, and so will the business.

You also need to have leaders and decision-makers at all levels. To think that leadership takes place only at the highest levels within any organization is a mistake. Instill a culture of risk taking and empowerment where people at all levels feel they can make a difference and aren’t afraid they’ll be punished for making a mistake. You’ll be amazed at the ideas and the level of ownership people will take when they’re asked, and even expected, to contribute to organizational change and success.

Every organization should have strategic plans and goals that have application to every employee. In addition, each employee should know what contribution he or she can make to reach those goals.

How can a company stay relevant in changing times?

It sounds trite, but it goes back to your mission and focus — self-awareness of your strengths and weaknesses, as well as how you fit into the needs of your clients and customers. Creating this awareness within your organization will provide a clear decision-making and prioritization path for your people. If there’s doubt as to what your value proposition is, or what it isn’t, you can waste a lot of time and send confusing messages to your people and to existing and prospective clients. Being the best at something is always a good goal.

What poses the biggest threat to longevity?

Complacency. When things are going well, there’s a tendency to become satisfied and convince yourself that things will never change. The willingness to listen and actually hear what’s being said, rather than simply assuming you already have all the answers, is crucial. Again, you must have multiple decision-makers and leaders, and this highlights the need for ongoing succession analysis. Succession isn’t something that should be dusted off and practiced when the owner is ready to retire.

People want to see the opportunity to grow into leadership positions from the time they walk in the door. That doesn’t mean they want to take over the top spot in the organization within their first year of employment, but it does mean they want to feel relevant, appreciated and impactful. If they have to wait for someone to die or move on, they may not stick around very long. New leaders bring different ideas and knowledge, and not having that will restrict your ability to grow and sustain the organization through good times and bad.

There’s no such thing as staying flat — you’re either on an incline or decline. You have to always be working to get better. If you’re willing to listen, your people and your clients will tell you how.

Roger Weninger is the Southern California regional managing partner at Moss Adams LLP. Reach him at (949) 221-4047 or

Insights Accounting is brought to you by Moss Adams LLP

Published in National

Expiration of the Bush-era tax cuts raised the top individual income tax rate to 39.6 percent, prompting owners of pass-through entities to consider switching to C corporation status to avoid higher individual taxes.

“Now that the tax rate for pass-through entities like S corporations and partnerships is effectively going up because individual tax rates are going from 35 to 39.6 percent, people are wondering if it still makes sense to be a pass-through entity,” says Alan Villanueva, a tax partner at Moss Adams. “In California, a proposition passed in November increased the maximum state individual rate from 10.3 to 13.3 percent, so a California resident with a pass-through entity is looking at a combined rate of almost 53 percent.”

Smart Business spoke with Villanueva about the advantages and shortcomings of the different corporate formats and whether businesses should switch.

What are the tax differences between pass-through entities and C corporations?

For many years, the top C corporation rate and the top individual rate were the same — 35 percent; whether it was a C-corp or S-corp, the current tax paid was the same. That’s still the rate for C-corps. Now taxpayers are upset about higher tax rates for pass-through entities and want to know if it makes sense to become a C-corp.

Does it make sense to switch?

Some businesses may benefit, but if it made sense to be a S-corp before, the difference in the rates will likely not change things dramatically. Any significant business expecting a liquidity event down the road would not want to become a C-corp, even if tax rates are lower for the present, because it would be subject to corporate and individual taxes at sale. The detriment of the double tax can far outweigh the benefit of the lower rate now — it could result in 20 to 25 percent less in after-tax proceeds.

For example, a sale resulting in a $1 million capital gain would leave about $600,000 after the first level of tax, assuming a 40 percent combined federal and state tax rate. Then, the remaining proceeds would be taxed at the shareholder level, which could be another 33 percent — assuming a federal dividend/capital gain rate of 20 percent and state rate of 13 percent — or $200,000, leaving $400,000. If the business were a S-corp or partnership, there’s one level of taxation and the after-tax proceeds would be approximately $667,000.

Are there businesses that would benefit from a conversion to a C-corp?

Business owners have to weigh everything, including long-term plans. A S-corp business making $1 million a year that had paid $350,000 in taxes at 35 percent would now pay a 39.6 percent rate, and in some cases another 3.8 percent Medicare tax as part of the Patient Protection and Affordable Care Act. That 8.4 percent increase definitely makes an impact on a current basis every year. But does it make sense long-term to switch? If it’s a small business that’s never going to generate a large exit liquidity event or pay dividends, it may make sense to switch.

Other than avoiding the tax hike, would there be other reasons to change from a S-corp to C-corp?

One reason would be if the company decided to go public. Typically, any business remains a S-corp or a partnership right up until they go public. It’s expensive to switch back to being a S-corp, so it’s done only when everything is certain. When a C-corp is converted to a S-corp or partnership, there’s potentially a gain that’s taxed, if there are appreciated assets. Sometimes the tax cost is so great that businesses can’t switch and have to stay in a structure that is not optimal and/or desired.

That’s why businesses should be cautious about converting; it’s not something that is easily undone. There are also compelling reasons to be a S-corp in spite of the higher current rates. The 4.6 percent increase is just one factor, and it might not be the most significant one.

Alan Villanueva is a partner, Tax, at Moss Adams. Reach him at (949) 221-4046 or

Mobile App: Download Moss Adams’ Insights free app  with alerts, articles and videos for your mobile device.

Insights Accounting is brought to you by Moss Adams LLP





Published in National