Rate Hikes on Hold Until September, Global Economic Breather Affects U.S. Growth Momentum
Rajeev Dhawan, Director, Economic Forecasting Center, J. Mack Robinson College of Business, Georgia State University
ATLANTA–The 35-day partial government shutdown was likely economically insignificant except for those who suffered delayed paychecks, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.
“The real bad news was the severe drop in retail sales in December,” Dhawan wrote in his “Forecast of the Nation” released this week. “With job growth in the 200,000-plus monthly range for the year, why did people scrimp on holiday spending?”
Dhawan suggests the negative wealth effect from what he characterized as “brutal” market losses in October and December dampened consumer desire for holiday spending, triggering what the forecaster described as an “alarming” drop in consumer expectations and CEO confidence.
“In an aging expansion, when the low-hanging fruit of investment has been picked clean, policy makers must be nimble. Net-net, the Federal Reserve is on hold for rate hikes until September,” Dhawan said.
Dhawan doubts the United Kingdom (U.K.) will leave the European Union on March 29 without agreements in place for future EU-U.K. relations. But, he anticipates negotiations will go to the wire. With the Bank of England preparing for a potential recession at home, Germany barely avoiding one, and Italian and French economies far from strong, Dhawan does not expect America’s Atlantic trading partners to provide global economic growth in 2019. This leaves China, he said.
China’s economy is in a serious slowdown and its monetary authority is trying to jump-start domestic consumption with cheap credit and other measures. But the biggest threat China faces is threatened escalation of the 10 percent U.S. tariff rate to 25 percent. The war of words between China’s General Secretary Xi Jinping and U.S. President Donald Trump is expected to be resolved soon, which is likely to help both economies continue to grow.
Highlights from the Economic Forecasting Center’s National Report:
• Expect GDP growth of 2.9 percent in 2018, followed by 2.5 percent in 2019, moderating further to 1.8 percent growth in 2020 and 1.6 percent in 2021.
• Investment growth will moderate from 6.9 percent in 2018 to 4.1 percent in 2019, then to 2.9 percent in 2020 and 2021. Monthly job gains will be 189,900 in 2019, drop to 107,200 in 2020 and 105,000 in 2021.
• Housing starts will average 1.258 million in 2019, 1.246 million in 2020 and 1.242 million in 2021. Vehicle sales will be 16.2 million in 2019, 15.8 million in 2020 and 15.6 million in 2021.
• The 10-year bond rate will average 3.1 percent in 2019, 3.4 percent in 2020 and remain in that range in 2021 following Fed rate cuts.t in 2021.
Why Goodwill Is Important to Your Business
Goodwill can enhance the value of your business, but what does the term mean when buying or selling a business?
Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business. In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business. Don’t underestimate the value of goodwill in the long-term and short-term success of any given business.
Goodwill is defined by Investopedia as an intangible asset associated with the purchase of one company by another. An intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market, according to the M&A Dictionary. If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.
Goodwill most definitely contrasts and should not be confused with “going concern value.” Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.
Examples of goodwill vary. Some of the more common and interesting examples:
- A strong reputation
- Name recognition
- A good location
- Proprietary designs
- Trademarks
- Copyrights
- Trade secrets
- Specialized know-how
- Existing contracts
- Skilled employees
- Customized advertising materials
- Technologically advanced equipment
- Custom-built factory
- Specialized tooling
- A loyal customer base
- Mailing list
- Supplier list
- Royalty agreements
In short, goodwill in the business realm isn’t easily defined. For example, standards require that an outside expert annually value companies which have intangible assets, including goodwill. A business owner simply can’t claim anything under the sun as an intangible asset.
Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process. Whether you are buying or selling a business, you should leverage the know how of seasoned experts. An experienced business broker will be familiar with goodwill and how to properly evaluate the worth of it in setting a valuation for your business. A business broker guide you in both understanding and presenting goodwill variables, as well as steer you though the buying and selling process.
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Employees May Welcome the Sale of a Business
Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale. Yet, mergers and acquisitions specialist Barbara Taylor thinks employees might welcome the news of a possible sale. In the article, “Selling Your Business? 3 Reasons Why Your Employees Will Be Thrilled,” Taylor cited the three reasons she believes employees might be excited by the prospect of a sale.
1. Job Security. Some employees may get nervous when they hear that a business is up for sale. When she was selling her business, Taylor said she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.” In fact, most employees did stay on after the sale. She wrote, “Our employees weren’t loyal to us, they were loyal to the business that we’d built: the brand, the reputation and values it represented, the quality of the product and service, the work environment and the customer base.”
While employees may worry that a new owner will “come in and fire everyone” the opposite is usually the case. Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome. But business owners should assure their employees that a new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.
2. Opportunities for Career Advancement
The size of your business will, to an extent, dictate the opportunities for advancement. However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities. As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.
3. New Growth, Energy and Ideas
A new owner is almost certainly going to bring in new energy to a business. Taylor worked with a 72-year-old business owner who confessed she was exhausted and knew “she wasn’t running the business on all cylinders.” This business owner believed that a new owner would bring new ideas and new energy and, as a result, the option for new growth.
How employees react to a business sale depends upon how information is presented. Don’t assume that your employees may panic if you sell your business. The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business. A professional business broker can help guide you through the rights steps to take to assure a smooth transition when selling your business.
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How to Overcome Your Fear of Selling Your Business
C. David Chambless is a former GABB president and president of Abraxas Business Services.
By C. David Chambless, President Abraxas Business Services
Getting to the Closing Table to sell a business is a complex journey. At Abraxas, we often find that business owners let certain concerns and fears keep them from taking the first step toward a successful sale and a comfortable “next stage” of life.
Here are four common worries that we consistently encounter. As discussed below, each one could be overcome with proper planning and the right business advisor.
Business Owner: I’m too busy running the company to have time to sell it. The sales process will distract me from growing, or even maintaining, the current level of revenue. And how can I be sure that expenses are under control if I’m not paying attention every day? I’ll never get the valuation I need if I’m distracted by the sales process.
Business Broker: Business brokers know that the process of selling a business can seem overwhelming. Working with a business advisor can increase the likelihood that the transition will make it to the closing table. An experienced, knowledgeable advisor would put in place proven methodologies to manage the process so that the business owner can continue to appropriately oversee daily activities of the business.
Business Owner: I don’t understand the sales process. Who would buy my company? What are the steps I would need to take?
Business Broker: It is our job to clarify the sales process and to navigate the intricacies of a sale on behalf of the owner. We have the expertise and experience to deal with the unique challenges of each transaction. We are proactive during negotiations and manage any road blocks in a timely manner so as to not lose momentum as the deal heads to the Closing Table.
Business Owner: My business pays for many of my expenses. I’m afraid my finances are messy and won’t really reflect the value of my company.
Business Broker: Experienced brokers, such as those at Abraxas Advisors, understand that the financial expectations for one owner could be different for another owner. We help guide a business owner as he/she works with the company’s financial team and accountants to assure that the company’s profit-and-loss and cash flow statements accurately present the company’s performance and expense history. With clear and detailed information, a prospective buyer can easily value the opportunity the business offers.
Business Owner: I need to net $XX from a sale to feel good about exiting the business.
Business Broker: The market is the ultimate determinate of the sales price. Abraxas Advisors understand what the market will include in its analysis of the company’s value. We advise our clients during initial discussions as to how their particular sector is evaluated and suggest ways to potentially increase the sales price. Often, an owner knows a number of steps they would take to grow the company if they had additional capital and time. Abraxas uses this perspective to help a prospect understand potential growth opportunities should they purchase the company.
Chambless is a former GABB president and has has extensive experience in business development; finance; operations; sales; marketing; and international channel development and management. Abraxas Advisors are experienced, multi-disciplined professionals who, collectively, have had seats in every role at the Closing Table.
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How to Claim Tax Write-Offs For Inventory in Year Purchased
Andrew Moore, CPA | Tax Senior Manager,
Frazier & Deeter
New Tax Loophole May Allow Many Small Businesses to Claim Large Tax Write-Offs For Inventory In The Year Purchased! Can it be true? How do Companies Sign Up?
Senior Tax Manager at Frazier & Deeter (Atlanta, GA)
Congress, either intentionally or unintentionally, as part of the Tax Cuts and Jobs Act provided for a potentially huge tax write-off for many small businesses that have inventory –basically any company that has physical products they intend to sell to a customer. Prior to the new tax law (before 1/1/2018), if your company kept an inventory, you generally couldn’t claim a tax deduction for inventory until the inventory was sold. As a result of the Tax Cuts and Jobs Act (TCJA), savvy small businesses may be able to take advantage of a new loophole that could provide a large tax windfall by completely expensing their ending inventory in the year purchased starting with returns that are about to be filed in 2019 (for the 2018 tax year).
For taxpayers and CPAs able to piece together several sections of the Tax Code and Regulations, the new law creates a huge opportunity and marks a significant change from prior tax accounting for inventories that didn’t allow for tax deductions for inventory until sold. There are a number of hoops to jump through and hurdles to overcome before companies can write off ending inventory, but will likely provide immediate tax savings to a large percentage of taxpayers who keep an inventory with a cost of less than $2,500 per inventory item. According to Donna Beatty, CPA, we may even see those companies that are able to take advantage of this loophole manage their tax bill via purchase of inventory before the end of their tax year.
Cash Method Now Allowed For Small Business –Even Those With Inventory
It works like this. The Tax Cuts and Jobs Act generally effective as of January 1, 2018, provides that taxpayers, in general, with less than $25 Million in gross receipts (average of past 3 years gross receipts) can now use the cash method of accounting, even if they keep an inventory. This is a major shift from prior law that required many companies with inventory to use the accrual method of accounting. This rule alone does not provide that businesses under the $25 Million threshold can simply start expensing their inventory as purchased – there are several additional nuances before a cash basis taxpayer can expense inventory when purchased.
First, if you are under the $25 Million average gross receipts threshold and currently using the “accrual method” of accounting, and you think you qualify to expense inventory based on all other parameters below, or you just want to start using the cash method of accounting for some other reason, you will need to file a “change in accounting method” with the IRS to begin filing tax returns on the cash basis. If you are already using the “cash method” of accounting for tax purposes that’s great – you don’t need to file a change with the IRS. If you need to file with the IRS to change your accounting method, don’t worry, the IRS has provided for a simplified filing requirement for small businesses rather than forcing you to complete the normal Form 3115 with all of its required schedules and disclosures. After you change your company accounting method to the cash method with the IRS, you still ARE NOT home free! There are additional steps to take before you can expense inventory as purchased – keep reading.
Required Tax Elections
Once you are on the cash method of accounting one of the two keys that makes this work is what’s called the “de minimis safe harbor election.” If you want to get technical, the election can be found at Treasury Regulation Section 1.263(a)-1(f), and provides that items under $2,500 per unit can be expensed if this election is made and your company accounting records are also in compliance (see next heading). Before the Tax Cuts and Jobs Act, this election did not apply to inventory.
As a result of the Tax Cuts and Jobs Act, either deliberately or inadvertently, Congress provided that when small businesses meeting the $25 Million gross receipts test use the cash method of accounting they can also elect to treat inventory as “non-incidental materials and supplies.” What’s the big deal with this you might ask? When you apply the “de minimis safe harbor election” to “non-incidental materials and supplies,” companies can then expense all items under $2,500 per unit if properly accounted for. That’s right, the “de minimis safe harbor election” that allows all companies to expense items under $2,500 per item also applies to “non-incidental materials and supplies.” There are also a number of rules here that are highly technical in nature dealing with the definition of inventory and definition of items qualifying for the “de minimis safe harbor election” that are beyond the scope of this article. Companies should consult with a knowledgeable CPA about these.
The “de minimis safe harbor election” is a very simple election that companies can have their CPAs make on their annual tax returns. The election to treat inventory as “non-incidental materials and supplies” on the other hand is not so simple. This election requires a change in accounting method with the IRS on a Form 3115. Again, just as with the change from the accrual method to the cash method noted above, the IRS has provided for a simplified Form 3115 filing requirement for small businesses making this change.
Required Financial Reporting
Ok, your company is now on the cash basis for tax purposes, filed the change in accounting method to elect to treat inventory as “non-incidental materials and supplies,” and ready to include the “de minimis safe harbor election” on your annual tax return. You still aren’t home free! There are a few more considerations before you can claim that big tax write off for all the inventory you purchased last year (instead of leaving it out on the balance sheet only to deduct whenever it’s sold to customers).
The magic that makes all of the above work is a little bookkeeping and financial reporting. To expense all your company purchases under $2,500 per unit using the “de minimis safe harbor election,” the Regulations mandate that you also expense these items on your financial statements and not just your tax returns. If your small business has no requirements to issue GAAP basis financial statements (audit, review, compilation) there may be an opportunity to implement this strategy. If you are required to issue GAAP financials, or for some other reason can’t expense inventory as purchased on your financials, you will be prevented from using this strategy. GAAP will not allow a company to expense inventory; instead, ending inventory under GAAP must stay on the company balance sheet and be expensed as it is sold.
If your company is like many small businesses with no external stakeholders to be accountable to, and you don’t mind expensing inventory as purchased, you may have an opportunity to expense all inventory otherwise sitting on your balance sheet at year end. To clarify, the rules dictate that you expense inventory on your financials – they do not prevent you from tracking inventory as you always have for your internal management purposes. The unit cost of each item must be included on the invoice from your vendors as well. Best practice would be to create an internal written accounting policy to expense all inventory purchases. Additional rules apply to labor and materials of manufacturing companies that produce their own inventory for sale to customers.
Putting It All Together
As you can see, the expansion of using the cash method of accounting for small business coupled with allowing small companies to elect to treat inventory as “non-incidental materials and supplies” may provide a large tax benefit when coupled with the “de minimis safe harbor election.” According to Donna Beatty, CPA, the tax professional industry is anxiously waiting on further guidance on this issue. In fact, the American Institute of Certified Public Accountants (AICPA) submitted their recommendation on the above issue to tax policy makers in Washington in a letter dated July 23, 2018. The AICPA recommended that the IRS and Treasury permit a small taxpayer to make a “de minimis safe harbor election” that would allow them to expense inventory. Although still awaiting further guidance, the way the law is currently written, some believe many small business taxpayers will take advantage of this potential loophole and expense all of their inventory. For example, we may see many small local retailers with maybe $100,000 – $200,000 of inventory at December 31, 2018 completely expense those amounts using this strategy –that would provide an average Federal tax savings of $37,000 – $74,000 (even more considering state income tax). Companies with a bit larger inventory of lower priced items under $2,500 per unit would experience even higher tax savings –and may even create taxable losses.
There are a number of rules and items not mentioned in this article, especially how the above might apply to production labor and overhead costs applicable to manufacturing companies. Accounting method changes, tax elections, and tax returns all have deadlines and must be properly and timely filed and reported – that could all impact the strategy discussed above. As with anything tax related, there are probably other unique items related to your business that would affect the tax strategy discussed in this article. This is a highly technical area of tax law which is very fluid, and this article may not be cited as authority, and is no substitute for counsel with your tax attorney or CPA.
How Can Frazier & Deeter help? Involve Frazier & Deeter early in the process of working through this tax strategy to determine if you qualify, and help to quantify the tax savings and potential risks.
If you have questions regarding this strategy or any other tax planning strategies feel free to reach out to one of the Frazier & Deeter Tax professionals: Andrew Moore at 404-573-4336 (Andrew.Moore@FrazierDeeter.com) or Donna Beatty at 404-573-4098 (Donna.Beatty@Frazier.Deeter.com).
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