How the section 199A deductions might apply to your company

The Tax Cuts and Jobs Act made over 100 changes to the federal tax rules when it was enacted on December 20, 2017. The most significant change was the creation of an income tax deduction for nearly all businesses that both operate in the United States and that employ workers and/or place in service significant depreciable assets. A deduction is available to all taxpayers, other than C-corporations, equal to 20 percent of the qualified business income of a trade or business for tax years 2018 through 2025. This 20 percent deduction has the effect of lowering the taxpayer’s effective tax rate attributable to the qualifying business from 37 percent to 29.6 percent.

Like many changes in the tax law, this new incentive did not come without complexity, as there were many questions regarding who would qualify and how to calculate the deduction.

“The IRS did a commendable job on publishing the final rules in the early part of 2019 to provide much needed clarity,” says Carlo R. Ferri, director, Tax Strategies, at Kreischer Miller. “Although this addressed many of the questions that existed at the time, there still are a number of open issues that need further guidance.”

Smart Business spoke with Ferri about some of the more common issues and where guidance on those issues stands today.

What businesses qualify for the deduction?

Companies that mainly focus on manufacturing and distribution of their product within the United States that have employees and/or have significant fixed assets generally will qualify for the 20 percent deduction. Companies that generate revenue by providing a service generally will not qualify for the deduction.

The final rules provide comprehensive examples of which service businesses will not qualify with a narrower definition to give more clarity in this area.

This sounds very straight-forward until you start having conversations with real taxpayers with real facts. Their facts become quite messy because they may operate multiple trades or businesses, which can make applying the new rules to determine if they qualify very complex.

Does rental real estate qualify for the deduction?

Determining if rental real estate qualifies for the deduction is still challenging. If you own real estate that rents to your business, then the final rules clearly allow you to take the 20 percent deduction. However, if you own rental properties outside of the context of your business, then the rules are not very kind. The final guidance released by the IRS provided a safe-harbor for taxpayers to follow in determining if the rental property qualifies, but this analysis is quite complex, which often results in many taxpayers being unable to qualify. The taxpayer’s only alternative is reviewing the inconsistent tax case law in this area to make a determination for inclusion.

Does switching to a C-corporation now bring any advantages?

With the lowering of the corporate tax rates to 21 percent, many taxpayers have inquired if it would be best to convert their S-corporation or Partnership business to a C-corporation to save on income taxes. After going through the analysis for many companies, it became quite clear that if these companies were going to fully benefit under the 20 percent pass-through deductions, there would have been a significant reducing effect on the overall individual effective tax rate, and that lowering of the tax rate would make conversion to a C-corporation less advantageous. Also, it became quite clear that many business owners desired the tax efficiency and flexibility to take profits out of an S-corporation or Partnership compared to the double-taxation in a C-corporation. Therefore, business owners concluded it’s better not convert to a C-corporation.

Much progress has been made by the IRS and the business community on addressing the major issues and questions that existed in determining the new 20 percent deduction. Even though the final rules have been published by the IRS, there are still many open questions that have not been addressed and are left to taxpayers to make a reasonable interpretation of the rules.

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Is your leadership style helping or hurting your company?

Leaders take many forms, ranging from task-oriented tacticians to big picture-oriented strategists. The better leaders demonstrate flexibility among approaches, adjusting to the needs of their company, which can change as their company advances through the stages of its life cycle. Inflexibility, or failure to delegate leadership responsibilities to those better suited to a specific task, could cause setbacks — losing top talent to frustration, or draining value from a company because it’s unable to adapt.

Smart Business spoke with Chris Meshginpoosh, Managing Director of Kreischer Miller, to discuss the pros and cons of different leadership styles, and the importance of recognizing when to adjust.

What are the attributes that make for a good leader?

Aside from the obvious traits of integrity and good communication skills, leaders must make sure that their leadership style matches both the task in front of them and the talent of their other team members. For example, when leading a group of inexperienced team members engaged in a time-sensitive task, an autocratic leadership style may be highly effective. However, if a team is addressing a problem that requires creativity, an autocratic style can stifle the team’s efforts. Similarly, when leading a team of experts, an autocratic management style can result in lower levels of employee engagement and higher turnover rates in top talent.

There are stories about Bill Gates’ authoritarian management style in the early days of Microsoft. However, as the company grew, he was able to keep that style in check, understanding that exercising too heavy a hand could stifle innovation.

In the early stages of a business, an autocratic style is often necessary. The founder may be the only subject-matter expert at the company and, as a result, cannot delegate critical tasks to others without remaining heavily involved. Unfortunately, leaders who do not evolve with the business or devote the time necessary to recruiting and developing others and then trusting them to make important decisions, risk causing their companies to hit a wall. Great leaders evolve along with the needs of their organizations.

How can leaders tell if their style is not working?

Sometimes the symptoms, such as the loss of key members of the management team or deteriorating company performance, do not surface until the style is so deeply embedded in the culture that it is difficult to remedy. Employees — even those most trusted by the CEO — may not feel comfortable providing constructive feedback regarding the CEO’s leadership style. In these cases, creating a board of directors or a board of advisers can often help, because they can bring some level of objectivity to the table and can provide proactive feedback to make sure leaders adjust as the business grows.

What are some other potential long-term problems and what can leaders do to prevent them?

The reality is that, whether owners want to think about it or not, they are all going to exit their business at some point. There’s nothing worse than getting to that point only to find out that their successors — whether they be inside managers or outside buyers — value the business at only a fraction of what the owner expected.

Leaders can ensure they do not find themselves in that situation by devoting the time that’s necessary to develop the next generation of leaders. It also means having the courage to step back and give them the room they need to try, fail and learn. By doing that, and by providing support and feedback along the way, the business will have a strong foundation for future growth that will be much more highly valued by either internal or external buyers.

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Create and protect the value of your business

Many successful businesses start with a period of strong initial growth, but eventually level off as they mature. When that happens, it is common for the entrepreneurial spirit to diminish as the company’s leaders tend to focus less on the value proposition that inspired the initial growth period and spend more time on the day-to-day operations. Along with maintaining current operations, it is critical for leaders to continuously assess the valuation factors that impact their business on a regular basis.

Smart Business spoke with Brian J. Sharkey, director-in-charge of the business advisory group at Kreischer Miller, about what drives value in a business.

How is business value determined?

In its most simplistic form, the monetary value of a business interest is based on the future expectation of cash flows, which is why most valuation drivers revolve around the ability to replicate sustainable cash flows into the future for as long as possible.

As a result, the fundamental question every management team should ask themselves is: ‘What drives the value proposition for this business?’ Most of the time the answer will gravitate towards the ability to put forth a profitable product or service that customers will return to. But it’s also a bit deeper than that.

Value creation can also be achieved with improved processes. By implementing more streamlined and efficient processes, in the course of producing a product or providing a service, the company will have the ability to offer a lower price than competitors while still maintaining similar or better profitability. In addition, the company will be able to increase its market share, which will improve brand recognition.

How are brand recognition and value linked?

For most businesses, the value in brand recognition is immeasurable. Brand recognition is what keeps customers coming back to a product or service; without it, a company loses the ability to generate those recurring revenues, which are critical in measuring a business’s value.

Ask the management team how customers perceive value and whether the business is meeting those expectations. This concept goes beyond just quality and value, and into evaluating the overall customer experience. A business can have the best product or service out there, but if the customer experience is awful when dealing with the company, then none of it will matter and customers will look for alternatives.

What do employees contribute to a business’s value?

Employees are the most valuable asset of a company; an asset that does not show up on a balance sheet. If a business neglects to develop and retain those individuals who are critical to the organization, they can be recruited by a competitor who is looking to get a leg up. The knowledge and skill sets of a workforce are difficult to replace without significant time, costs and effort. Having to constantly retrain or develop new members of management is a distraction from the other activities that should be the focus of the company.

How can business leaders continue to drive up their company’s’ value?

Once a business becomes mature, as much attention needs to be paid to protecting the value as to creating value. This starts with never being comfortable, as complacency generally leads to declining value or vulnerability from competition. The companies that continue to succeed and build value are the ones that are constantly investing in process improvement, innovation and product development with aspirations of finding that next big thing. By doing so, they are hitting on many of the drivers that positively impact valuation, such as creating a recurring revenue model, diversifying their product or services, creating their own intellectual property, maintaining state-of-the-art facilities and employing top-notch people.

Focusing on tasks and objectives that increase company value will not only drive short-term results, but more importantly will also allow owners to maximize the valuation upon a future sale of their equity interest in their business. Even though a sale may not be in the immediate future plans, it is still wise to focus on valuation factors in the event that an unexpected, unsolicited offer is made.

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How the search for top talent changes in a tight labor market

“It’s a tight market for C-level talent, and the most competitive environment for top performers that I’ve ever seen,” says Tyler A. Ridgeway, director of human capital resources at Kreischer Miller.

He says companies looking to recruit A-players in this formidable landscape need a well thought-out strategy to attract that level of talent.

“Highly talented executives aren’t going to respond to a want ad, but if you can find someone who’s not really happy with the company they’re working for, they would answer a call from a recruiter who has a compelling offer,” he says.

Smart Business spoke with Ridgeway about strategies to consider in the search for and acquisition of top talent in a tight labor market.

What should companies understand about recruiting top talent?

Companies looking to recruit top-tier C-level talent need to understand that these individuals will be evaluating the company as much as the company is evaluating them. That means companies doing the recruiting need to put a good deal of thought and effort into the process.

Companies should invest a good amount of time before the search process begins to develop their recruiting story and ensure everyone is on the same page. That way, as candidates come into the process and meet the individuals who might ultimately be their C-level peers, the message they receive is clear and consistent. This should not be thought of as a sales pitch. Rather, the aim is to be open and transparent about expectations, the position the company is in and why it’s looking to fill this executive role.

It’s also critical to think about compensation beforehand, and consider a strategy that will reward long-term growth. While candidates likely won’t take a reduction in overall compensation for a new position, they might very well make a base-salary-lateral move if the long-term compensation, based on performance, is attractive.

What mistakes lead to companies missing out on the better candidates?

One common mistake is an interview process that is unnecessarily long. Due diligence is vitally important for these roles, but you also need to be mindful of the candidates’ circumstances. They are key employees in their companies, so their time is limited. They also may be fielding other offers. Therefore, try to keep the process moving along as much as possible to limit the risk of losing out on a candidate.

Transparency from the outset of the process is also key. Companies should tell candidates how long they expect the process to take, and what steps are involved. Some candidates may admit right away that they can’t commit. But for those who can, a transparent process can help build trust between both parties — candidates know what they’re getting into and companies can feel confident that they’ve found the right fit. An in-depth process also creates familiarity with the company, enough so that the candidate can hit the ground running right from the start.

How should companies adjust their staffing strategy during a tight labor market?

Be proactive. Companies that are really ahead of the curve are doing a lot of aggressive succession planning, and for more than just the CEO position. It’s important to have someone in the organization examining each department to see whether or not there are people who could climb the metaphorical ladder.

Consider this exercise: Imagine who in the organization would be tough to replace if they were to suddenly give notice to the company on a Monday that they’re leaving. Then, talk with those people and try to determine whether they feel they’re properly incentivized to stay. Also, consider whether there are people below them who could be trained to take over the position. From there, you can formulate a plan for what it will take to keep the top performer in place, as well as how you can build bench strength should the need arise in the future.

The war for talent is real. Those companies that want to hire the best candidates need to be prepared: have a great story and a compelling incentive program to put your best foot forward as an organization.

Insights Accounting & Consulting is brought to you by Kreischer Miller

How to develop the next generation of leaders

It’s unfortunately very common that many businesses do not have any sort of leadership development program in place. Typically, that’s because most owners are too involved in the business to work on the business, so strategic initiatives like leadership development are an afterthought.

However, businesses that do have leadership development programs tend to also have formal governance and a more sophisticated management team. These factors often translate into companies with higher employee retention rates and better financial performance.

Smart Business spoke with Steven E. Staugaitis, a director at Kreischer Miller, about how to set up a leadership development program.

What are the most critical aspects of a leadership development program?

A central piece of it is identifying the right candidates, which requires flexibility. How leadership is aligned today — its skills and knowledge — may not be what the business environment demands in the future. Running a business is so dynamic that what a company thinks it needs today could be very different than what it actually needs five to 10 years from now.

Family businesses that are intentional about their family legacy tend to have good leadership development plans. They’ll identify family members who have certain qualifications and help support their growth through a variety of activities. For example, companies might rotate their leadership candidate through different roles and departments in the company, assist them to obtain advanced degrees or send them to specific training. Mentoring relationships with people inside or outside the company is also a common practice.

How should companies choose candidates for leadership development?

It’s the tendency of companies to choose leadership candidates based on strong technical competencies. But when looking for a future leader, it is also critically important that they have the right leadership skills. As the leader of any organization, you are expected to motivate and encourage people, and hold them accountable for their performance. Leadership is more about managing people and driving a strategic vision rather than being a good technician.

What do companies tend to get wrong when it comes to leadership development?

The most common problem is that companies don’t do anything or wait too long to start. Leadership is not a switch that gets flipped just because someone’s title has changed. It takes years to develop internal candidates — a five-to-seven-year runway should be expected when grooming an internal candidate for a leadership position. And for those companies that don’t have internal candidates, it can take the better part of a year or more to hire an outside candidate for a key position.

In any transition, there is always risk in the process. When companies invest in people to make them better, they also need to empower these candidates along the way and give them a chance to implement some of their ideas. If not, there’s a good chance that they will take their skills and go somewhere else.

What are the differences between developing leaders and hiring them from the outside?

Often an internal candidate is perceived as less threatening to the rest of the organization than bringing in an outsider since they are known within the organization and also by their clients and customers. Promoting someone from within sends the message that there are similar opportunities for other people in the company.

Interviewing outside candidates for leadership positions can be a little like dating. Candidates and companies are on their best behavior. It’s not until someone is hired that their nuances and true personalities are revealed. Taking your time to thoroughly vet outside candidates for critical positions is a good idea.

Regardless of whether a leadership position is filled by an internal or external candidate, the process can’t begin early enough. It may seem overwhelming at times, but at least starting with something, even if it’s something small, is a far better alternative than do nothing at all.

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How the Wayfair decision is playing out in the U.S. market

It has been several months since the U.S. Supreme Court rendered its historic decision in the South Dakota v. Wayfair Inc. case and taxpayers are still grappling with its implications.

Prior to the Wayfair decision, a business had to have physical contact with a state before becoming subject to its sales tax collection and reporting requirements. As a result of Wayfair, physical presence was no longer required to establish a substantial contact with a taxing state for sales tax. The new sales tax nexus standard is now commonly referred to as economic nexus.

“The reality is that the U.S. Supreme Court changed the sales tax compliance landscape overnight, because states were very quick to get on board and adopt an economic nexus standard that was identical to the South Dakota standard at issue in Wayfair,” says Thomas M. Frascella, J.D., director of tax strategies at Kreischer Miller.

Smart Business spoke with Frascella about the Wayfair decision and how the change is affecting both businesses and states’ sales tax collection practices.

What has changed because of the Wayfair decision and who is affected?

As a result of the Wayfair decision, approximately 36 states now consider a remote seller to be subject to a state’s sales tax rules when the remote seller has either a specific number of transactions with residents in that state or a specified dollar amount of sales in that state. Generally, $100,000 of sales or 200 transactions will subject an out-of-state business to a sales tax collection responsibility in states adopting an economic nexus standard.

The decision affects many businesses, especially those that operate from a single location but use multiple channels, such as marketplace facilitators or internal e-commerce platforms, to generate sales. Often these businesses do not have either the personnel or financial resources to comply with these new requirements and must now navigate this new reality. Although there have been attempts at the federal level to pass legislation to minimize the impact to small businesses by narrowing the nexus generating activities, these attempts have failed and businesses remain subject to the requirements of each and every state.

How are businesses responding to the law change?

Businesses will now need to determine how to move forward. Some may decide to take a wait-and-see approach to the matter and do nothing, opting instead to see how aggressive states become in identifying and pursuing remote businesses for sales tax. Other businesses will be more proactive in managing their new filing requirements and begin to explore solutions. These solutions will most certainly require some type of technology investment to enable a business to charge the proper sales tax, as well as collect and remit that tax to the appropriate state and local taxing jurisdictions.

Businesses should take the time to understand the states where they have met or exceeded state economic nexus thresholds for sales tax purposes to determine if they have an issue. It will also allow a business to assess their potential exposure if they have nexus and decide to do nothing.

How are states’ collection practices changing?

States are likely developing discovery tactics and collection practices to identify out-of-state businesses with sales tax nexus. Once a state identifies an out-of-state business that should have been collecting and remitting sales tax, it will pursue recovery of past due sales tax with penalty and interest, which could be difficult for a business to recover from customers.

Many states are operating in a deficit and need to find new sources of revenue. It is no longer a ‘if they find me,’ but rather a ‘when they find me’ scenario. No business should consider themselves too small to pursue. Businesses need to develop an action plan to avoid being caught holding the liability for a tax that could have been passed along to customers in the normal course of business.

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How an M&A deal can go sideways and what to do about it

The 2018 M&A deal environment in the Philadelphia area was particularly strong across the middle market. And while the pace might not match the previous year, considerable deal activity is expected through 2019. Buyers and sellers looking to capitalize on the market should be mindful of the mistakes that can derail a deal, and how those mistakes can be avoided.

Smart Business spoke with Richard Snyder, director of audit and accounting at Kreischer Miller, about M&A pitfalls and what preparation ahead of negotiations can help buyers and sellers avoid them.

What tends to trip up M&A deals?

Any time the buyer doubts the quality of the information provided, there is a high risk of negative consequences. These first show as a loss in value and can eventually lead to the loss of a transaction. This may arise when information and documents requested by the buyer are slow to be provided, the seller cannot provide adequate explanations about certain details requested by the buyer, or information provided by the seller differs from the underlying support and details that come out of the due diligence process.

Complex issues such as customer concentrations, ongoing litigation, and environmental remediation may pose significant risks to a company that a buyer cannot overcome. These and others may impact the purchase price or may be too great a risk for a buyer, which results in the buyer walking away from the deal.

What happens if a deal goes sideways?

A great deal of resources are utilized by both the buyer and seller in a transaction. If a deal goes sideways, both lose the time and resources they put into the transaction. The seller’s management team loses valuable time that could have been spent on the operation of its business. Additionally, sellers may spend a considerable amount of money on professional services and other fees as part of the deal process. The business may continue to be for sale and a failed sale may make it less attractive in the marketplace.

A buyer may lose the lost opportunity cost to pursue other deals in addition to professional fees and other costs. However, it is important to note that the cost of failed mergers and acquisitions may far outweigh the costs spent on a potential transaction and walking away if the transaction is not right for both sides.

How can buyers and sellers increase their chances of success?

Sellers need to be prepared for the sale of their business by making sure they have a full understanding of the sale process and the necessary resources. Their books and records should reflect complete and accurate financial reporting and the owners should have a full understanding of risks that could affect the company’s valuation and potential salability. Understanding the latter gives the seller the opportunity to be upfront with a buyer and address potential issues before the sale process begins, which could offset any negative impact on a transaction.

On the buy side, it’s always important to have a sound due diligence process, and an understanding of the deal environment and the target’s industry and regulatory environment. Accurate valuations are also important in determining an appropriate purchase price, as well as having a plan for the integration of the business post transaction.

Who should be a part of the buyer and seller deal teams?

Sellers should have a good transaction attorney, accountant and possibly an investment banker. The investment banker will assist in preparing marketing information, taking the business to market and finding prospective buyers. It’s always a good idea to have an experienced accountant and attorney on the business advisory team. These advisers should not only understand the company, its industry and the deal market, but they should also have transaction experience.

Buyers often have internal teams that can run a financial analysis and conduct due diligence on a target. However, some buyers also work with an outside team on the financial due diligence.

There are multiple reasons deals don’t go through, but a significant obstacle is a lack of preparation. Having good advisers on both sides who are experienced and understand M&A is very important to a successful deal.

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The benefits of an independent Chief Information Security Officer

Cyber and information security readiness is high on the agenda of all executives. However, the ability of these executives to address their ongoing cyber security needs varies drastically.

The majority of larger organizations have an internal Chief Information Officer (CIO) who leads all IT-related efforts, including cyber and information security. These CIOs rely on a Chief Information Security Officer (CISO) to manage their internal and external cyber security teams. These teams comprise professionals, both internal and external, who address issues ranging from ongoing system configuration and monitoring to development and upkeep of information security and privacy policies.

Most middle-market firms, especially smaller ones, do not have a CIO. Some do not even have an IT manager on staff and thus rely heavily on their outside IT providers for ongoing maintenance and support of their systems. In these organizations, given the limited nature of internal resources, cyber and information security issues tend to be dealt with in less than optimum fashion.

Smart Business spoke with Sassan Hejazi, director of technology solutions at Kreischer Miller, about how middle-market companies can implement cyber security protocols in an effective fashion.

Why might an outside IT provider be ill-equipped to fully protect an organization?

Many executives of middle-market organizations equate cyber and information security with basic IT management, and as such assume their IT providers are performing all the necessary security-related activities as part of their normal IT support contract. Most IT service contracts, however, only cover basic security-related matters, such as virus protection and general-purpose application version updates, and do not get into reviewing each client’s unique business information management and classification processes and applicable cyber risk issues.

Who should companies work with to create and maintain a cyber security program?

An independent CISO provider has a team and the right tools in place to assist an organization and its internal and external IT teams with the same type of service that larger organizations use, but at a fraction of the cost. The independent CISO will be responsible to act as the subject matter expert in areas such as conducting risk assessments, identifying gaps, recommending remediation solutions, assisting with development and delivery of updated policies and procedures, and delivering applicable training solutions. The independent CISO team will also be responsible for conducting periodic validations, such as penetration tests or war-game exercises, to test and validate defenses and assist the organization and its internal and external IT teams with lessons learned and applicable improvement efforts.

This kind of a relationship is successful only if there is an empowered representative from the IT team and another from non-IT within the organization able and willing to participate and take ownership of the cyber security process. The IT provider representative will ideally be the lead system engineer assigned to the client organization who is familiar with their overall systems and acts as the IT support advocate for the client organization. The client organization will also need to have at least one individual, preferably two — one IT if there is an internal IT team or person, and one non-IT, usually highest-level finance officer, such as the controller or CFO — who will act as the organization’s cyber advocate.

How should executives stay connected to the cyber security process?

The independent CISO team will be working closely with all involved parties in establishing an effective and ongoing cyber and information security program. This will require periodic meetings to review, plan and execute cyber-related activities as well as quarterly or semi-annual executive meetings to update the executive team regarding the latest development in the field and what steps could be taken to address such concerns. This approach will lead to the implementation of the core components of an effective cyber and information security enterprise risk management program as practiced by larger firms, but one that has been adjusted to fit the needs of a middle-market organization.

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How to put yourself and your business in the best tax position this year

On December 22, 2017, the country experienced the most sweeping tax legislation since the Tax Reform Act of 1986. The Tax Cuts and Jobs Act is a comprehensive tax overhaul dramatically changing the rules for tax years beginning before 2026.

“With such a vast change to the law of taxation, tax season is so much more than just ‘getting your taxes done,’” says Lisa Pileggi, CPA, director of tax strategies at Kreischer Miller. “Preparation is key, requiring you and your tax adviser to communicate early and often. This communication should include your adviser obtaining an understanding of your current tax situation in order to determine how the new law will affect you.”

Smart Business spoke with Pileggi about the new tax laws and how businesses and business owners can ensure they’re prepared to comply with them come tax time.

At a high level, what can we expect from the new tax law?

The Act includes the suspension of personal deductions, provides for an increase to the standard deduction and the child tax credit, imposes limitations to the state and local tax deduction, a temporary reduction to the medical expense threshold, as well as the imposition of new income tax rates and brackets, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

The legislation enacted by Congress favorably impacts businesses by reducing the corporate rate to 21 percent. Additionally, other provisions positively impacting businesses include the elimination of the alternative minimum tax and the expansion of capital expensing and depreciation. The new law also provides favorable reforms to small business owners.

How can businesses prepare for the changes?

Businesses and owners should talk with their tax adviser now to learn what impact the new laws might have. Some of the questions that should be answered include:

  1. Will converting to another entity type provide an overall tax benefit?
  2. Should the business examine ways in which to assist employees for unreimbursed business expenses?
  3. Have wage withholdings been examined and are adjustments needed before year-end?
  4. Have year-end gifts been evaluated to take advantage of the annual exclusion?
  5. Should the business evaluate a capital expenditure plan before year-end to maximize the enhanced accelerated depreciation?
  6. Has the tax basis in pass-through entities and total estimated business losses been reviewed to determine if losses will be deductible?
  7. Is there a need to review compensation amounts to analyze if adjustments are needed to minimize the effective tax rate?

What else should businesses and business owners do to be ready come tax time?

Identifying the technical aspects of tax season is undeniably crucial, however that is not the only area that demands consideration. The manner in which tax season is executed also deserves attention. Both tax practitioners and clients have expectations with regard to the manner in which the relationship is managed, as well as the timetable to which deliverables are completed. Conversations should take place to discuss the expectations of both parties and determine a mutually agreed upon timeline to hold one another accountable.

A tax adviser wants a client that communicates regularly and involves them in their day-to-day business when appropriate. A client wants an adviser that is proactive, creative and effective. When advisers and owners work collaboratively, these goals can be met.

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What’s driving M&A deals and how companies can capitalize on the activity

Merger and acquisition (M&A) activity was very strong in 2017 and 2018 has been even more robust. Most closely held businesses have substantially enhanced their balance sheets since the recession and are now experiencing record years for profits and revenue. Many also have excess working capital that can be deployed to acquire competitors and/or key suppliers.

Smart Business spoke with David E. Shaffer, CPA, director of audit and accounting at Kreischer Miller, to get a breakdown of M&A activity in the market, what’s driving it, who is realizing success and why, and how business owners can capitalize on the opportunity.

What are some of the factors driving the increase in M&A activity?

  • Interest rates are still very low, by historical standards. As a result, the cost of capital remains low. Since many believe that interest rates will continue to rise, the cost of this capital could become more expensive in the future.
  • Company balance sheets seem much stronger than they have been historically and owners are actively looking for opportunities to enhance their return on invested capital. There are really only four choices to deploy excess capital: pay a dividend to shareholders, buy back stock, invest in internal expansion, or merge with or acquire another business.
  • Many privately-held businesses lack a succession plan. As such, aging owners may be forced to look at third-party acquisitions.
  • Private equity firms are actively looking for targets to purchase and established companies to sell. During the first half of 2018, private equity completed 2,247 deals with an aggregate transaction value of $263.9 billion.
  • The Tax Cuts and Jobs Act increased expected 2018 cash flows for C-Corporations and most S-Corporations. So, owners are looking for the best opportunities to put this additional capital to work.
  • Technology continues to improve efficiency and profits. Plus, companies with unique technology are especially attractive to buyers.
  • Business friendly legislation and policy changes are reducing the risk to potential buyers.
  • M&A can be an attractive option for owners who want to expand geographically, diversify their customer base, or expand their products or services.

What are business owners currently experiencing in M&A deals?

  • Purchase prices are increasing over historical levels. Larger, well-managed companies are selling at multiples in excess of seven times EBITDA.
  • Companies with unique technologies are fetching higher prices. Anything that provides a buyer with a competitive advantage over other suppliers is highly valued.
  • In most transactions, either the buyer or the seller (or the bank) is procuring a quality of earnings report. These reports are prepared by an independent professional and provide an objective assessment of the accuracy and quality of historical earnings and assets, as well as the sustainability of earnings in the future.
  • Deals that are from a ‘book’ or have gone to multiple companies for potential purchase usually do not get purchased by private companies or families. Instead, a private equity firm will typically acquire these companies, since they are more willing to pay a higher multiple and assume a greater degree of risk.
  • Banks are looking to finance these transactions. Many companies have satisfied their equipment and IT needs, so there is not a lot of loan growth and banks are seeking other ways to deploy their cash in order to maintain profitability.

Successful acquisitions require effective integration, accurate valuation in determining the purchase price, sound due diligence, and a clear understanding of the cash flow risks.

Insights Accounting & Consulting is brought to you by Kreischer Miller