GABB CPA’s Discussed Tax Law Impact on Businesses
Wondering how the new tax laws will affect your business? Three certified public accountants discussed how tax law changes will affect businesses, individuals and business valuations during the March 27 meeting of the Georgia Association of Business Brokers.
The three accountants also answered questions from the GABB, the state’s only association of professionals who work to facilitate the purchase and sale of businesses and franchises. The GABB meets at 10:30 a.m. at the Atlanta Realtors Center at 5784 Lake Forrest Dr. NW, Atlanta, GA 30328. The meeting was preceded by a free breakfast and networking session sponsored by corporate attorney Germaine Curtin.
An audio recording of the discussion is linked here.
The panelists were: Gary Massey, CPA, MBA, MST, founder and managing director of Massey and Company; Andrew Moore CPA, tax senior manager of Frazier & Deeter; and Will Geer CPA/ABV/CFF, CVA, MAFF, CFE, ASA, CMAP, a founding partner of Geer & Associates, PC.
Gary Massey, CPA, MBA, MST has worked in public accounting formore than 25 years, including a 10-year period at Ernst & Young, Coopers & Lybrand and KPMG. He specializes in tax compliance, tax planning and representation of taxpayers before the IRS. He earned a BA in History, Summa Cum Laude, at Brandeis University. He also earned an MBA in Accounting and MS in Taxation from Fordham University.
Andrew Moore CPA is an active member of his firm’s pass-through team and participates in the overall delivery of tax compliance, consulting, and planning services offered. Prior to joining Frazier & Deeter, Andrew led major initiatives that include helping clients implement the IRS Tangible Property Regulations and filing related accounting method changes which resulted in his clients saving millions of dollars in taxes. Before joining Frazier & Deeter, Andrew spent just over nine years working with clients in the automotive, manufacturing & distribution, trucking, legal, technology, and service based industries at various other accounting firms in Atlanta.
Will Geer CPA/ABV/CFF, CVA, MAFF, CFE, ASA, CMAP is a founding partner of Geer & Associates, PC, a firm of CertifiedPublic Accountants and advisors in Atlanta, Georgia. Mr. Geer performs construction, governmental, franchisor, and not-for-profit audit and accounting functions, consults on tax matters and controversies, and provides forensic and valuation services for its clients. Mr. Geer is responsible for creating both the tax practice, audit practice and forensic accounting practice his firm. Prior to founding his firm, Mr. Geer worked for a large regional accounting firm and worked for a United States Bankruptcy Trustee in the Southern District of Georgia. He earned a Bachelor of Science in Accounting from Florida State University with and then a Masters of Business Administration from Georgia Southern University.
The GABB is the state’s only association of professionals who work to facilitate the purchase and sale of businesses and franchises. The group includes business brokers as well as lenders, attorneys, business appraisers, insurance agents, environmental specialists and other professionals. GABB’s member business brokers work with businesses of all sizes to help them through all steps of selling their company: valuation, marketing, financing, and closing. Aspiring business owners also work with business brokers to purchase existing businesses at a fair price.
Read MoreGABB Spring Conference May 15: Taxes and Transitions
Learn about taxes and transitions at the Georgia Association of Business Broker’s Spring Conference on May 15.
Presenter Monty Walker will do two three-hour seminars. The morning session will cover a Tax Update for Business Brokers and the afternoon session will be Case Studies of Transactions. The GABB has secured continuing education credits.
The session will be held from 8:45 a.m.-4:15 p.m. with a 45 minute break for lunch, at the Atlanta Realtors Center at 5784 Lake Forrest Dr. NW, Atlanta, GA 30328. Brian Harper of Atlantic Capital Bank will sponsor the breakfast. Lunch will be provided by Leigh Milton of CharterBank and Kim Eells of Brand Bank.
Registration is $125 for all. Contact Diane Loupe at 404-374-3990 or georgiabusinessbrokers@gmail.com for more information.
Monty Walker is a Certified Public Accountant with a diversity of experience in the private business arena. Monty supports clients throughout the country, and focuses in the business transfer industry, providing support to small business owners in the areas of business transactions, business structuring and design, business tax planning, and business exit planning. Due to his background in the area of business transfers and business transitions, he is often referred to by his clients and colleagues as a “Business Transaction CPA”. Monty is a former member of the IBBA Board of Directors.
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Top Four Statistics You Need to Know About Ownership Transition
If you own a business, then ownership transition should definitely be a central topic in your planning. A few years ago, MassMutual Life Insurance Company conducted a very interesting and thought-provoking survey of family-owned businesses. Obviously, family-owned businesses have their own unique needs and challenges. The MassMutual Life Insurance Company survey certainly underscored this fact. While the survey was conducted a few years ago, the information it contained is more relevant and actionable than ever. Let’s take a closer look at some of the key conclusions and discoveries.
Founder Control
One of the most important findings of the survey was that a full 80% of family-owned businesses are still controlled by the founders. The survey also discovered that 90% of family-run businesses intend to stay family-owned in the future.
Lack of Leadership Plans
Leadership is another area of great interest. Strikingly, approximately 30% of family-owned businesses will in fact change leadership within just the next five years. Moreover, 55% of CEOs are 61 or older and have not chosen a successor. When a successor has been chosen that successor is a family member 85% of the time. Succession is often a murky area for family-owned businesses. A whopping 13% of CEOs stated that they will never retire.
Failure of Proper Valuations
According to the survey, valuation is another surprise area. 55% of companies fail to conduct regular evaluations, meaning that they are essentially flying blind in regards to the true value of their company. Adding to the potential confusion is the fact that 20% of family owned businesses have not completed any estate planning and 55% of family-owned businesses currently have no formal company valuation for estate tax estimates.
Lack of Proper Strategic Plans
The financials for family-owned businesses are often just murky as their succession issues. The MassMutual Life Insurance Company survey also discovered that 60% of family-owned businesses failed to have a written strategic plan and a whopping 48% of family-owned businesses were planning on using life insurance to cover estate taxes.
Simply stated, many family-owned businesses are not organized properly and are, in the process, not fully taking advantage of their opportunities. In short, family-owned businesses are frequently insular in their approach to a wide range of vital topics ranging from succession and leadership to valuation, planning and more. In the long term, these vulnerabilities may serve to undermine the business making it harder to sell when the time comes or opening it up to other problems and issues. Family-owned businesses are strongly advised to work with professionals, such as experienced accountants and business brokers, to ensure the long term profitability and continuity of their businesses.
Copyright: Business Brokerage Press, Inc.
Read MoreTop Ten Must-dos When Selling a Business
By Loren Schmerler of Bottom Line Management, Inc.
Are you ready to sell your business? Thinking about starting new adventures? Certain changes you may make now can help you increase your business value. Below are top 10 tips on how to prepare your business for sale from expert, Bottom Line Management, Inc. founder, Loren Marc Schmerler, a Certified Professional Consultant and Accredited Professional Consultant.
Top Ten Must-dos When Selling a Business
- Know why you want to sell your business. Make sure it’s a good reason and not just to dump your problems into someone else’s lap.
- Give some thought as to what you will do with your time after your business sells. Finding yourself with nothing to do can be very demoralizing.
- Make certain that your taxes are current. This includes sales taxes, unemployment taxes, payroll taxes, state income taxes and federal income taxes.
- Document all your policies, procedures and controls. Not only will this help during the transition period when you train the buyer, but this will make your business more appealing to the corporate buyer who is accustomed to formal documentation.
- If possible, develop and train a strong “second in command” who can fill in for you when necessary. The buyer might be hands-on or hands-off, and having a strong assistant provides flexibility. Many business sales are lost when there is no depth of management.
- Review each employee’s strengths and weaknesses and show when they were last reviewed and when they next need to be reviewed by the new owner. Not reviewing an employee on time can cause anxiety and diminish loyalty.
- Make sure your financial statements and tax returns are “bullet proof.” You do not want the transaction to fall apart when the buyer or buyer’s CPA finds discrepancies.
- Prepare a business and marketing plan that will help a new owner understand where the opportunities for growth exist. This plan should include an Executive Summary that explains why the business was started, how it progressed to its current status and what a new owner should do to take it to the next level.
- Select an asking price that is based on reality – not fantasy. Be able to justify it based on a multiple of Owner’s Discretionary Cash Flow. Bad reasons include “it’s what I want”, “this is what I have in it”, “this is what I owe the banks” “I have put blood, sweat and tears over x years into the business.”
- Be willing to be flexible on price, terms or both. Deal structure can make or break a transaction. When each party to the transaction is willing to bend, there is a higher probability of success.
IRS Regulations for S Corp vs LLC: a CPA Explains
By Greg DeFoor
One of the questions I get asked by aspiring or new business owners as a CPA and Business Broker is about S Corporations vs LLCs. Before deciding whether to form an S Corp or an LLC, there are a number of issues to consider. Assuming there is only one owner or a few owners and that all owners are qualified to own their respective shares or member units, here are factors to consider.
More Formal vs Less Formal
S corporations are more formal and require a little more in terms of documentation. When you form a corporation and elect S Corp status, you are required to elect officers and hold annual shareholder meetings. You need corporate bylaws in writing when you establish the corporation. You need to prepare minutes no less than annually that document decisions made during the year. It would be wise to get an attorney to help you with a form or template for completing these minutes.
LLCs are less formal. Once you form an LLC and prepare an operating agreement, there is no requirement for minutes or annual meetings.
Net Income and Distributions
Net income and distributions are not necessarily treated the same in S Corps and LLCs. In an S Corp, net income must be allocated based on ownership percentage. Distributions must be made by ownership percentage. In an LLC, there can be a disproportionate allocation of net income and unequal member draws. When there is only one owner, there really won’t be a difference. However, when there is more than one owner, S Corp shareholders are treated equally in terms of allocated items, and LLC members are treated based on how the operating agreement says they will be treated.
If you need an entity that allows for owner treatment that varies from ownership percentage, an LLC will allow that whereas an S Corp will not.
Guaranteed Payments vs Salary and Self-Employment Tax
In an LLC, you should not pay yourself a salary. Instead, you should take guaranteed payments. Guaranteed payments are subject to self-employment tax but are not paid as W-2 wages. They are treated more like a draw than as payroll. In an S Corp, you need to pay yourself a reasonable salary.
The net earnings from an LLC, except for earnings from the net rental of real estate held for investment, are subject to self-employment tax. The net earnings of an S Corp are not. One of the primary benefits of being a shareholder of an S Corp is the ability to take distributions that are not subject to self-employment tax. You are taxed on the net income of the S Corp. You pay yourself a reasonable salary, and any other net income may be distributed as a shareholder distribution.
Disregarded Entity and Tax Returns
If you are a single member LLC, you are a disregarded entity for tax purposes and the LLC income and expenses flow through your personal tax return on Schedule C. If there are more than one member of the LLC, the LLC files a partnership return. An S Corp files a corporate tax return specifically for S corporations. Both a partnerhip and S corporation are flow through entities. Neither pays income tax at the entity level; rather, both pass taxable income and other tax items directly through to the owner’s individual tax return.
To further complicate matters, an LLC can be an LLC for legal purposes but can also elect to be taxed as an S corporation for tax purposes. If an LLC elects S Corp status for tax purposes, tax matters have the attributes of an S corporation.
Distributions of Property
An S Corp is not necessarily a good entity to hold appreciating property in. That is why S Corp owners who also own the business real estate usually own the business real estate in a separate entity that is an LLC. The reason is usually a tax reason. You can’t distribute appreciated property, such as real estate, out of an S Corp to the S Corp shareholders without triggering a taxable event as if the real estate had been sold. With some restrictions and limitations, you can distribute appreciated property, such as real estate, out of an LLC to the LLC members without triggering a taxable event. In an LLC, the members assume the basis of the distributed property and there is no realizable gain or loss until the property is disposed of.
Elections
In order to be an S Corp, you form a corporation and then you file an election to be taxed as an S corporation with the IRS. The election is filed on IRS Form 2553. You must file the election within 75 days of the start of the year you want to elect S Corp status, or within 75 days of forming the entity if you want to elect S Corp status from the beginning.
If you file an LLC for legal purposes but want it to be taxed as an S Corp, you file the same type of election for the LLC you do for a corporation, with the S Corp election for an LLC also having the 75 day requirement.
The catch is, once you elect for either your corporation or LLC to be taxed as an S Corp, you cannot revoke the election. The S Corp election can only be terminated by filing a request with the IRS and receiving permission from the IRS for the S Corp status to be terminated. For this reason, electing S Corp status needs to be entered into carefully, as it cannot be easily undone.
S Corp vs LLC
In deciding S Corp vs LLC, seek advice of a tax professional and an attorney, and find out both the legal and tax reasons for electing one entity over the other. There is certainly more involved than what this article can cover, but this article should be enough to let you know there are a number of things to consider before choosing choice of entity for your business. Make sure you use an advisor that is familiar with business transaction services.
Greg DeFoor, CPA, CFE, has been a CPA for more than thirty years and is also a licensed Business Broker and Past President of the Georgia Association of Business Brokers.
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