Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
Suppose you’re a partner in a partnership where the agreement requires you to work some of the time for the business. Can you ever be treated as an employee of the partnership for tax purposes instead of as a partner? The lines may become blurry, but the IRS has maintained, at least up until this point, that partners aren’t employees.
New regulations concerning disregarded entities shed some light on this issue. Traditionally, the IRS has said that if you’re a partner who provides services to the partnership, you aren’t treated as an employee of the partnership. The regulations clarify that this result can’t be avoided if you become an employee, based on state law, of a single-member limited liability company owned by the partnership.
What is the tax significance? Unlike corporations, partnerships pass through items of income and loss to partners. You report the appropriate share on your personal tax return. Instead of receiving Forms W-2 as employees do, the partnership issues a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., to partners. In addition, you must pay income tax on guaranteed payments made during the year even though you don’t receive a taxable salary. Guaranteed payments are amounts paid to partners no matter the partnership’s income.
Similarly, although employment taxes aren’t deducted from wages, you pay equivalent self-employment taxes. The tax rate is double the usual rate for employees, but half of the amount is deductible on your return.
This tax structure can be problematic if fringe benefits are provided to workers. Because you, as a partner, aren’t treated as an employee, you generally aren’t eligible for the tax exclusion for certain statutory fringe benefits. That means the fringe benefit payments can represent taxable income to you.
Do you have questions about how your business ventures affect your tax return? Contact us for help.
Partnership Tax Terms and What They Mean:
Puzzled by tax-related partnership lingo? Here’s the definition of key terms in partnership tax rules.
It’s awkward. And complicated. And emotional. But dealing with what happens to your estate after your death is an unavoidable and essential task. Like many people, you may have consulted an estate attorney to create a trust and will, ensuring that assets pass along to selected family, friends or institutions. However, like many people, you may not realize there is another step to take. A step that, if missed, could mean your wishes are not followed or your beneficiaries pay more taxes or wait longer to have access to their inheritance.
That is, regardless of who is named on your will and trust, those wishes have no bearing on accounts that have a different beneficiary designated.
As an example, imagine that your uncle goes through a terrible divorce but then meets the woman of his dreams and gets remarried. Being a responsible person, Uncle Charles revises his will and trust naming his new wife as his beneficiary. However, he neglects to update his beneficiary designation on his life insurance policy and his IRAs. When he passes away unexpectedly, his insurance and IRA benefits are paid out to his ex-wife while his new wife receives nothing, even though she’s listed in the will and trust.
As another example, let’s say that you and your spouse created a will and trust that equally distributes your $5 million insurance policy among your four children. However, unfortunately, you had not updated the policy beneficiary designations between the births of your second and third children, listing only the older two by name. Since the beneficiary designation on the account takes precedence over the will and trust, only your oldest two children would receive any inheritance from the policy. The younger two children would receive nothing, which would likely create conflict and drama at an already emotional time.
What if there is no beneficiary listed on an account?
If there is no beneficiary designation on an account, the will or trust will be consulted. However, if there is no beneficiary designation and no will or trust, a court determines your beneficiaries for you.
Even if you have a will or trust to turn to in the case that an account has no beneficiary designated, there can be tax implications for the heir. For example, some accounts must be paid out within five years of death, like annuities, qualified plans and IRAs. A named beneficiary can rollover to a qualified plan or stretch out their withdrawals from the IRA over the rest of their lives, deferring their income taxes. If the beneficiary is named by the will or trust or determined by a court, the funds must be drawn out during a five-year period or possibly even taken out as a lump sum distribution, both of which would be taxed at a much higher tax rate than funds rolled into a qualified plan.
What should you do next?
First, review your estate plan and ownership of your assets. Consider whether your trust should be the beneficiary rather than specific people’s names. Listing your trust has two main benefits:
For example, let’s say you have a $2 million qualified plan that you are leaving to your son. To be fair, you leave the rest of your estate, also worth two million dollars, to your daughter. You feel that you’ve balanced the inheritance perfectly and that both your children will receive equal shares. However, because your son is named, he can take the assets out of the account throughout his life, paying a much lower tax rate. While your daughter, unfortunately, may be required to pay the entire inheritance tax, which is at a much higher rate. While you intended to be fair, tax implications of the various kinds of inheritance leave your son with a much larger amount than your daughter. Naming your trust as the beneficiary and then designating inheritance within the trust will allow you to achieve the balance you desire.
Second, check the following list of accounts to be sure your designated beneficiaries are up to date:
When should you update your beneficiaries?
Some experts suggest checking your beneficiaries annually; others suggest every three to five years. One easy way to remember which accounts to check is to gather the 1099 tax forms from the financial institutions holding your assets, which you should receive in February of each year.
You should also update your beneficiaries any time there is a major change in your life, including:
How do you check who is listed as your beneficiaries?
Simply call your financial institution or see if you can access the information through your online account. Typically, the only information you need to provide about your beneficiary is their name and address, although sometimes a social security number is also required.
While thinking about what happens to your assets after your death can feel overwhelming, awkward and emotional, taking the time to update your beneficiaries prevents animosity and expense for your beneficiaries after your death. If you have any questions about trusts, wills or beneficiary designations, contact us today.
Most people hear the word “audit”, think of the IRS, and shiver. But in the business and nonprofit worlds, a financial statement audit is simply a commonplace process used to provide information to various groups, including banks, investors, grantors and the state. Savvy business owners and nonprofit leaders know a well-kept secret: audits identify ways to improve internal controls, the bottom line and convey that information to all interested parties.
At Cray Kaiser, we say financial audits reveal blind spots. But we prefer the comparison a client recently made that equated audits to opportunities. He appreciated the chance to learn more about the financial operations of his company, specifically identifying ways to increase the financial reporting requirements, identify areas to reduce costs, and strategically identify opportunities that affect growth.
Financial Statement Audits Explained
Beyond the typical association of financial audits with the IRS, most people believe that an audit is being conducted any time they see professional accountants in their place of business. However, an audit is just one of three kinds of financial assurance procedures. From least expensive and least involved to most, financial assurance procedures include compilations, then a review and finally, an audit. An audit is the most detailed and involved financial assurance procedure, and it provides the most data to businesses that want to sharpen their financial reporting, identify internal control deficiencies and grow strategically. [Be sure to follow our blog to catch an upcoming post describing the differences between the three kinds of financial assurance procedures.]
Added Benefits of Financial Audits
Beyond meeting requirements from banks or potential investors, or as part of nonprofits annual tax filings, financial audits provide additional benefits and opportunities to create efficiency and influence strategy and growth.
Is a Financial Audit Right for Your Business?
According to Cray Kaiser Principal, Deanna Salo, “Management cannot make the right decisions without accurate, timely financial statement reporting. Having a financial audit, even if not required by bankers, investors or shareholders, can be a good way of re-tooling the accounting department and streamlining procedures and processes.” She also notes that an audit helps companies be proactive instead of reactive. One of the by-products of an audit is a management letter which includes recommendations for management. Audit recommendations always carefully balance the need for checks and balances with the cost of the employee time involved. Is an audit right for your business? Contact us to learn more.
How much is my company worth? It seems like a simple question. You might be asking it because you are working on your estate plan. Or you may be creating a buy/sell agreement. Or you may be completing your annual business financing applications and personal financial statements and question the appropriate inclusion for your balance sheet. Or you may be considering the acquisition of a strategic partner and evaluating purchase terms. Or maybe you are embarking on a strategic planning exercise want to identify the factors that would prove most significant in enhancing value and market position. Regardless of the reason you’re asking the question, the answer is the same: you need a business valuation. Simply put, a business valuation is exactly what it sounds like: it determines and communicates the value of your company. However, it gets more complicated when you begin to consider all the factors involved in determining value. But, what is a business valuation?
Understanding what a business valuation is means understanding the factors that impact what your company is worth. Listed below are some of the key drivers:
The purpose of the valuation and the parties involved impact the value of your business. Your company is worth more for certain purposes than others and to certain parties than others. For example, an investment or financial buyer, someone who is purely interested in the assets and earnings opportunities for the firm, may not value the company as much as a strategic buyer, someone who sees valuable synergies between your operations and theirs. The value among family members, a liquidator, an ex-spouse, or the IRS, will differ as well.
A valuation is a process that attempts to estimate the value of an entity through the identification of market comparables and through an understanding of the likely estimated earnings stream coupled with an evaluation of the risks associated with the realization of that earnings stream. While a summary of historical earnings is an important benchmark, an understanding of the expected future earnings in the hands of a likely buyer predicates the value to that buyer. A valuation typically does not does not look at one good year but rather what factors affect growth over time and can be realistically expected to continue into the future.
There is often a question of the ability of an investor/ owner to exercise control over the entity and its operations. The valuation subject must be clearly identified. Is the valuation to consider the enterprise as a whole or a segment of the ownership? If a segment, is the ownership position a controlling or non-controlling segment? To the extent the owner lacks control, it must be determined if earnings distributions and salaries as well as control of management are outside of their control and if so the relative impact on the value of the interest.
It is usually difficult in the privately held enterprise market to find accurate market comparables. Enterprises are usually unique in product, staffing, skills and market positioning. Further, public sources for the data that would be needed to identify comparable trades is generally not available. Rules of thumb may be available but usually fail to consider crucial factors and characteristics. That being said, consideration of market trends and positioning is essential to the valuation process. The ever changing markets and the impact of new products, technologies and business models requires consideration whenever one is attempting to evaluate future expectations for an enterprise.
It seems logical that the value of a company would come mostly from the financial statements. However, many qualitative factors impact how much your company is worth, including brand reputation, personal goodwill, expected loyalty of key management and intellectual property. For example, if the revenues of the company are largely dependent on the relationships built by one key person, contracts insuring the longevity of those relationships increase the value of the business.
Purpose, market, risks, control and qualitative factors impact the methods chosen to determine of the value of your business. Understanding the standards, premise and methodologies is key to the accuracy and usefulness of the valuation findings. Click here to read more blogs from our Business Valuation 101 series.
If you’re still asking yourself, “what is a business valuation?”, we can help. Contact Cray Kaiser today to get started.
Your son John has the best sales record on the team. Your daughter Mary’s advertising campaign was a huge success. But despite their talents and success, neither has a head for numbers. And neither has much savvy when it comes to culture and management. Kevin, your right-hand man for the last 15 years, runs operations smoothly, managing both finances and people with ease. He’s the obvious leader. But he’s not family. And he’s not an owner. As you begin to plan for your retirement, how do you do what’s best for your family without risking losing Kevin? Focusing on the company as an entity rather than the people as individuals allows you to set emotion aside and gain the perspective you need.
Leaders will not always agree on the best decisions. Rather than arguing and creating unnecessary drama, the team can simply refer to the plan, finding the structure and direction to guide them to the correct decisions. Succession planning for family businesses allows you to make necessary changes within the family structure for the business without being interpreted as an individual slap or reprimand.
This is your business. And your family. You’ve poured your blood, sweat and tears into this company. And now you want to see your children benefit from all that hard work. You recognize that the best way for your children to succeed is by ensuring that Kevin stays with the company after you leave. Without Kevin’s leadership, John and Mary will struggle to run the company on their own. Your succession plan must find ways to keep Kevin involved, motivated and loyal.
A succession plan, especially one that endeavors to involve both family and key non-family employees, must be customized to your unique business needs and objectives. Every business, every family and every ownership structure is different. Various options are available, but what’s best for your company may be completely different from what’s best for your peers.
A few options to consider include:
Simply including key nonfamily employees in your succession plan is not enough. They are more likely to be loyal and motivated to work hard if their value to the company and their future with the company are clearly defined and communicated.
Thinking back to your situation with John, Mary and Kevin, how will you keep Kevin loyal to your company as you approach retirement? Will you offer him phantom stock? Assure him with a family employment policy that reduces the risk that he’ll be overlooked just because he’s not a member of the family? Should he have any ownership interest? Or does he need more control to drive the company toward success? Your best bet is to involve your trusted advisors in your succession planning process. With a full understanding of your company’s operations, risks and family dynamics, you and your planning team can create a succession plan that keeps Kevin loyal to the company and helps John and Mary achieve the success you’ve always wanted for them, and for your company.
Succession planning for family businesses is vital. If you’re looking for help with your succession plan, please contact Cray Kaiser today.
“It’s not fair.” When your children are toddlers, this statement hits you like nails on a chalkboard. But when you hear it from your grown children, it can quickly turn from an annoyance to serious family drama. As a family business, attempting to keep children’s compensation fair can be a minefield. Following a few simple compensation-planning strategies helps you maintain peaceful family dynamics while strengthening your business at the same time.
As a family business owner, you are pleased when you walk by a marketing team meeting and see your son suggesting ideas for the new website. You have built a strong, successful business, and you are proud to be able to pass it down to your children someday. Inside this article you will learn seven key ways your business will benefit from including the next generation of business owners in accounting meetings and practices.
As a business owner, you are immersed in your business. You wake up thinking about strategies for growth. Ideas for new products hit you while you are out walking the dog. Solutions to operations issues come to mind while you are falling asleep at night. You spend much of your time and energy building your company into a strong and successful business. But do you spend enough time thinking about how you are going to walk away from it? Are you asking yourself: what is an exit plan?
Exit planning can feel overwhelming, even for the most prepared business owner. The company is a large part of your identity and your legacy, which can make the transition to retirement or a new adventure a challenging proposition. For many, that makes exit planning a difficult process to begin. However, a well-planned exit strategy is essential for a smooth transition to new ownership, for ensuring your future financial goals are met, and for sustaining your business and your legacy.
First, evaluate you. Your first step in starting to create an exit plan is to begin a process to determine your goals and objectives. Beyond maximizing sale price and preparing the business for sale, imagine what you want your life to be like after you choose to leave your business. Leave on your terms. A strong exit strategy starts with a complete understanding of the financial state and structure of the business and the owner, as well as minimizing the tax implications from a sale. You and your advisors will work through a process to determine how much money you want to set aside so you can continue living the lifestyle you choose, keeping in mind that none of us know how long our lifespans will be. It can be hard to imagine how you will spend your time when your days are not filled running your business, but taking the time to imagine that life allows you to plan for and fund the life you want to live.
Next, evaluate your business. You’ll need to fully evaluate your company’s activity, structure, assets, business drivers, ongoing operating activities, market position and personnel. A business valuation gives you an understanding of the base point, including the company’s relationship to the industry, customers and employees. Understanding your company’s value drivers and cost matrix gives you the strategic tools to forecast and modify future operating expectations. Your most trusted advisors provide expertise in examining various areas of your business and identifying the company’s key requirements for growth. Include your accountant, valuator, attorney, insurance agent and your investment advisor. With your advisors, determine whether or not the company’s value will meet the needs and goals you have identified.
The next step of the exit planning process is to mold the business to the optimal position for sale or transfer by mitigating or correcting any issues identified during the valuation process that might lower the value of the business. Imagine yourself as a potential buyer. What risks do you see? Which parts of the company attract you and which would make you turn away? With your advisors, create a plan to maximize the value of the business and to mitigate risk prior to exit timing.
Next time you are out walking the dog and are inspired with a new product idea, take it one step further. How will that new idea impact my exit plan? Would it make the company more valuable to a potential buyer? A solid exit strategy and plan with the help of your trusted advisors gives you peace of mind. You have confidence that your beneficiaries are prepared in the event of a tragedy, that you are optimizing your position, and that you are on the right path to achieving your goals for your company, your future and your legacy.
If you’re still asking yourself, “what is an exit plan?” Contact Cray Kaiser today. We can help you get one started.
Hearing marketing advice from your accountant may be surprising and unexpected, but if you are working on your IRS Tax Form 990—the return filed by non-profit organizations—it’s exactly what you should hear. At Cray Kaiser, we refer to Tax Form 990 as your “resume for big donors.”
Yes, your accountant checks over every detail to be sure that the IRS—the number one audience for Form 990—continues to consider the organization tax-exempt. But did you know that Form 990 is also available to and frequently read by the general public?
Imagine a potential donor who is planning to make a large donation and is choosing among three organizations, one of which is yours. The donor pulls up the three 990 forms to learn more. She reviews mission statements, achievements and financials. She considers how much money went to the mission versus how much was spent on advertising and overhead. She examines Board of Trustees and senior management lists, possibly researching more about those involved with the organization.
How does your Form 990 compare? Will she choose your organization over one with a Form 990 that effectively communicates the mission of the organization and persuades readers to support the cause?
It’s not often that your tax form serves as a marketing tool, but in this case, that’s exactly what it is. Use this opportunity to persuade that donor with money to bestow that your cause it the most deserving one. And while you may not turn to your accountant for advice on your new logo or advertising campaign, the advice to use your Form 990 as a marketing tool can make the difference between getting that big donation or having it pass you by.
If you have questions about Tax Form 990, please contact Cray Kaiser today. We’re here to help!
Are you considering a merger or acquisition as the best solution for your business’ growth or exit plan? As shared in last month’s blog post When Mergers and Acquisitions Make Sense, mergers and acquisitions (M&A) can provide a more efficient, cost-effective way to grow a company, whether it’s by adding people, processes, or products. M&A can also be the perfect way to secure the financial goals you have for yourself and your family as you exit the company you built.
Being proactive and creating a simple M&A strategy sets you up to use your time wisely and to secure a financially-beneficial deal. It is wise to review these top six mistakes business owners make when considering a merger or acquisition and how to prevent them as you create your own strategy:
You hear it all the time: “mergers and acquisitions.” However, there are few true mergers. Merging two companies almost always results in one company acquiring the other. Why? It all boils down to the fact that there can only be one true leader, one chief.
Consider this an acquisition, not a merger. Are you being acquired or are you acquiring? Who will be the leader? Addressing this in the beginning avoids tension down the line.
If you do not have a strong grasp of M&A goals, you may move forward with a deal that does not help you achieve your goals or, worse yet, moves you further from your desired results.
Your very first step in the process is identifying your goals. Determining when mergers and acquisitions make sense can help you along this process.
Not spending enough time identifying targets that help you achieve growth or exit-plan goals means wasting both time and money on negotiating with the wrong potential partners.
Before you find yourself responding to interested parties, identify who you believe would be the best match for your company.
Which roles will be duplicated? What will happen to the people in those jobs now? Which company’s process will be used for which tasks? Not answering these questions before they’re asked puts your company into a state of turmoil, creating unhappy team members and risking losing the exact talent you are attempting to acquire.
Plan for changes in people and process. Be transparent with all involved. Communicate plans to reduce tension and create internal support.
It is easy to get drawn in by a strong connection with people you would love to do business with. Pressure to find a solution to growth or exit planning issues can make a deal look more attractive than it truly is.
Involve objective advisors from the start to guide you with an unbiased, impartial perspective.
Having unrealistic expectations about the time involved in the M&A process can frustrate you and the other people involved and create rushed decisions. Both parties involved will be interrupted with the challenges and responsibilities of running their businesses. As time goes on, expectations and projections can change, requiring everyone to maintain flexibility throughout the process.
Stay grounded and realistic in your expectations around the pace of the process. Lean on your advisors to take some of the work load.
The M&A process is an adventure, one that can end with a new entity that helps all involved meet goals or with one or all parties regretting their choices. To have a successful M&A process, be proactive rather than reactive. Understand when mergers and acquisitions make sense. Prevent the six common M&A mistakes. And involve objective advisors from the start.
If you’re considering a merger or acquisition, contact Cray Kaiser today. We can help you review your options.
