In this second installment of our series on navigating business mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser Ltd., shares valuable insights on preparing your business for a successful transition. Whether you’re planning to pass your company to the next generation, sell to a third party, or position your business for future growth, preparation is crucial. Join us as we delve into the foundational practices that set the stage for a smooth and strategic process.

Transcript:

My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.

What needs to be in the Letter of Intent

The next point is probably where people get really close to signing something, and that’s a letter of intent, also known as an LOI. My next part here is to talk about what really needs to be in that letter of intent. Our clients receive letters of intents from prospective buyers and they can be very vague. And in the vagueness, they may feel that it’s giving each party a balance of opportunity to future, to negotiate in the future on these various points. I see the letter of intent, the LOI, as the framework of your purchase agreement. So I believe the letter of intent does need to be far more specific in terms of what it needs to include and I believe they need to include the following items.

The purchase price and the purchase structure definitely is the first line of every letter of intent. I’m going to give you X dollars for your company and this is going to be an asset purchase or it’s going to be a stock purchase. The difference between an asset purchase and a stock purchase is probably its own audio blog at its own time, but often people understand when they go into selling their business that those are the two structural options that they have in terms of how the purchase of their company may be transacted.

How much is going to be paid in cash? Sometimes if I’m going to be selling my company for X dollars, I may get a certain percentage of it in cash at closing, and the rest of it might be paid to me over time in an earn out with interest or with not interest with a promissory note. So being very specific as to what is the dollar amount for sure, what is the structure of the deal for sure, and then more importantly is how much am I going to get at close. So if the buyer needs to finance this purchase, you as the seller need to know that very early in the conversations.

An escrow, similar to selling a house, there might be an escrow requirement. Most deals that I’ve seen in the last five to six years, they all have escrows. And an escrow is effectively a certain percentage of the purchase price that’s held in a separate account in the name of the buyer and the seller for a certain period of time, until such time is all of the post-closing adjustments have been handled by the post-closing activities. It’s really to keep money aside for some of those loose ends of the deal, and then at the end of the period, the escrow is finally released to the seller. Another important part of the escrow is to understand how long do I have to wait for this escrow to be released. We see anywhere from six months to twenty-four months on these escrows. So it’s really important for the buyer to understand that the seller needs to know how long is that escrow going to need to be in place.

Understand the networking capital requirement

The networking capital requirement is also a very important part of a definition in a letter of intent. Networking capital is really current assets, less current liabilities. If you can picture the first day of operations of the new buyer with your company. They open on day one and they need operating assets to operate. They need receivables to be coming in and they certainly still might have some of your net payables that they need to pay out. So understanding how much of the networking capital component requirement will be of the buyer is another important part of the LOI in terms of specifying what that would be. Most times we just see that there will be a networking capital requirement, and most times the buyer may not yet be ready to understand what that amount might be because they haven’t completed their due diligence. But I would say that at the very least, it should say that there is going to be a networking capital component, and it will be agreed to by both parties. So this way, you as the seller, make sure that you have a voice to that final amount of what might be needed in that networking capital component.

Time to complete due dilligence

The letter of intent should also be very specific as to how much time the buyer has to complete their due diligence. You know as a seller time can be in your favor and time can be your worst enemy. With economic conditions changing so very quickly, if the buyer takes way too long to do their due diligence within the LOI framework, you may have economic conditions that will hamper the company’s ability and might actually reduce the value of your company. So making sure that the buyer has a specific period of time, we’ve seen it as few as forty-five days to complete their due diligence, all the way up to ninety days to complete their due diligence. Understand that letter of intent is an exclusivity arrangement between you and the buyer meaning at the time you sign the LOI, you are precluded from talking to anyone else. While an LOI is not binding, it does keep you both kind of on the same course to be honoring that LOI and being good stewards of the process to ensure that it gets completed in the right amount of time.

Who is paying the professional fees?

One of the other things that I see in LOIs that sometimes is missed is the transaction costs, professional fees. Professional fees should be taken on and each of the parties, the buyer and the seller, should take care of their own bills. As the seller, you can’t control how much attorney costs, advisory costs, will be generated by the buyer. And conversely, the buyer doesn’t have any control of the seller’s professional services from their accountants and attorneys. Ensuring that the transactional costs are paid for by each of their own parties and kept separate also commits to the letter of intent that should this deal not get done, meaning either party decides to walk away, that each party takes care of their own transaction costs at the end of the transaction.

The Non-Compete Agreement

The Non-Compete Agreement. Most times, the buyer will want to make sure that the seller, once they sell their company, they can’t turn around the next day and go open up a competing company down the block. So a non-compete is a very common additional bullet point in the letter of intent to suggest there will be a non-compete agreement, there will be a dollar amount assigned to the non-compete, and the seller will be precluded from operating in this industry for a certain sum of time. Perhaps a year, two years, three years, but it should be commented on that you as the seller will be committed to a non-compete. There’ll be a compensatory amount assigned to it and that you don’t want to have this non-compete to be for five or ten years. You want it to be a reasonable amount of time because if something goes wrong, you sell the company, the buyer is not really doing well with your company and you see it happening, you may want to open up your company again and having the non-compete understanding in the letter of intent protects both parties from doing the right thing during that period of time after the closing of the sale of your business.

Take care of key employees

Each company has key executives in their company, we wouldn’t get to where we are without having key personnel and ensuring that your key personnel are taken care of, I think is one of the head-to-heart conversations that most of our clients have. You know when you’re selling a business it’s a very emotional process and you’ve worked your lifetime to create the value, to create the place that you’ve created for your employees and your customers and your vendors and making sure that your key personnel are taken care of is very important to most sellers. So in the letter of intent, it’s another important part to have that the key executives in the company will be executing their own employment agreements with the buyer. So this ensures that you as the seller have a place for each of your key employees in the new company.

So we’ve talked a lot about mergers and acquisitions today mostly on the acquisition side and getting ready to be sold. Again, I think it’s important for any company in their strategic planning process to have many of these tools in their toolbox, being ready for a transaction, whether you’re going to buy a company or whether you’re positioning yourself to close, getting your financial warehouse in check, and getting ready operationally with your organizational structure to ensure that you have all the pieces laid out, the footprint of your company, understanding what should be included in a letter of intent, whether you’re buying again or selling your business, and making sure that your people at the end of the day are going to also be taken care of through employment agreements and be part of the team even in the in the new company if you’re selling your company.

All of this process there’s lots of phases to this process and at Cray Kaiser you know we’re here to help our clients again to and through their transactions at whatever point in their life cycle they’re at and if you need any further assistance on that please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.

In this first installment of our series on navigating business mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser Ltd., shares valuable insights on preparing your business for a successful transition. Whether you’re planning to pass your company to the next generation, sell to a third party, or position your business for future growth, preparation is crucial. Join us as we delve into the foundational practices that set the stage for a smooth and strategic process.

Transcript:

My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser Limited CPAs and Advisors. In the Cray Kaiser family of clients, we’ve had a lot of activity in the mergers and acquisitions front, mostly where clients are looking to succeed their companies to what might be the next generation of their family business or privately held space, or they sell to a third party and look to a buyer, e company, and somebody to succeed their company and exit the company accordingly. The readiness of being acquired is a process and it’s best practice to start early and get the right procedures and get the right people in place to move your strategic plan to an acquisition, meaning whether you’re acquiring another company or you’re being acquired. In most cases, as I mentioned before, our clients are looking to be acquired to exit their company and to fulfill their strategic plan of retirement.

How to get ready for an acquisition

Some of the shared experiences and one most recent client experience that we’ve had is in six to seven points, which I think are the most important things about getting ready for an acquisition or being acquired.

Make sure your financial warehouse is in check

Making sure that your financial warehouse is in check. Your financial department, the procedures, the accounting department really needs to be updated and looked at in a very granular sense, meaning you might be getting monthly financial reporting from your internal accounting department, but really what else is there? And that’s documenting the procedures around your financial reporting system. Even documentation of your general operating procedures is an important part of getting your financial warehouse in check. There’s three different levels of financial assurance that your CPA can provide to you. One is a compilation, which is really no assurance. It’s the lowest level of assurance. The next is a financial review, and the highest level of financial assurance is an audit. We see clients actually moving through a compilation to a review to a financial audit to really get integrity to their financial statements, get those auditors in their offices to check and balance the financial operations of the company. And when you’re looking to be sold, being able to provide a buyer or a third party a financial audit provides integrity to the financial statements, reliability to the financial statements really shows the audience that you are ready for a financial acquisition. So getting your financials in place and on check is the first step in that direction.

Understand your organizational structure

The next point is understanding your organizational structure. And many owners look to me and say, I know my organizational structure. I know where the hierarchy lies in my company. And then I look at them and I go, but have you mapped it out? Being able to put your organizational chart in a framework to show a buyer that here’s our C-suite of leadership. These are the folks below them and not necessarily listing out the people’s names, but just their titles, their roles and responsibilities. Being able to document your organizational structure is really important to provide the footprint, the mapping of your company to a third party, so they know that you know how your operations actually work and who are the most important people or the most important jobs and roles within the organization. Your people, your process are two very important parts of the value of your company. So being able to document that organizational chart with the roles of the folks that you have in your company is one of the other next steps in getting ready to be acquired.

Assemble your team of advisors

Getting your team of advisors together and people, you know, clients of ours look to us and say, “Well, you’re my advisor, Deanna, so you’re part of the team.” And I said, “Yes.” And we need to make sure we have the proper legal counsel. Your corporate attorney might be a great person to help you with this deal, but perhaps you may want to have somebody else who maybe specializes in mergers and acquisitions from a corporate legal counsel assist. Your wealth management advisor who should be ready to receive potentially your after-tax cash flow from the sale of your business should also be part of your advisory group. And the current operations of the company may already have a banker involved where you might have loans and obligations to that bank, and they too need to be part of that team of advisors. Getting ready to sell your company, you need all of these people to provide you counsel through the journey of selling your business. And most importantly, the banker, if you do have obligations with the bank, you know, any change of ownership, any look to sell your company, they need to be definitely included in that conversation early rather than later.

Understand the value of your company

Understanding the value of your company. Here we see lots of our clients look and say, okay, I think my company is worth X dollars. If we go to the marketplace, this is how much I should get for my company. This is the multiple of EBITDA that I might need. Earnings before interest, taxes, depreciation, and amortization. A key role in determining value in the marketplace sometimes is a multiple of your EBITDA. Well, that might be true. However, we have clients that come to us and say, oh, I need Cray Kaiser to do a business valuation so you guys can tell me how much I’m worth so that I can go pedal my company out in the public market. And I would say, I’m not sure we really need a business valuation. The business valuation may be a great educational tool for owners so that they can decide how much a third party might look to their company and value them at, but it’s an expensive cost to have where markets, fair market value is probably mostly looked at in terms of what will the market provide. There’s lots of different factors that a buyer might look to you. You may have a certain product or service that they don’t have in their company. So there’s synergetic reasons for that other company to look at you and provide you a higher value than might be what you’re looking for. There’s other reasons that somebody may want to come and buy you from a demographic perspective. They don’t have a business in Chicago and they want to have a footprint in Chicago. Therefore it gives you even a higher value than what you might even compute in a business valuation. So I guess, you know, out of the value, I would say, you know, understanding what and how somebody might look at you as an important part of your process. What I can tell you, your value is not. It’s not what the owners need to retire. We often hear from clients, “Well, I need X million dollars so that I can retire and have my life after my business.” And I would say, “Okay, that might be a number, but it probably isn’t the number.” What the fair market value will bring to you, you really do need to start that process of going out into the market and getting a couple of different buyers potentially interested parties in your business. You know, only selling to one business is probably where you’ll end, but as you work through the process, it’s probably in your best favor to have multiple companies looking at you to create a competitive environment to drive up that value perhaps, or just to become a little bit more popular in that space to really determine for yourself what is the value that you might need for your company.

Get a non-disclosure agreement

One of the next points that I think is really important, as business owners get excited to the idea of selling their company, they’ve kind of come to their crescendo, if you will. It’s time for me to exit my company. It’s time to sell, they get really excited, and when people are interested in them, they get even more excited. And when you get excited, oftentimes I see clients letting the horse out of the barn way too early. So don’t let the horse out of the barn. And what I mean here is, don’t give away so much financial information before you have a non-disclosure agreement. A non-disclosure agreement is also known as an NDA. It is fine to have great conversations over drinks, over dinner. It’s important for the buyer to get that information from you, all the tribal knowledge, all the history of the company, and that can be done in lots of different conversations. But as soon as you start providing them financial information, historical financial statements, historical tax returns, that’s where you really need to get that NDA out there in front of any of that financial reporting. I would also say that if a buyer wants to start getting copies of customer lists and vendors’ lists and sales by customer and wages by employee, all of that information will be shared with them, but during due diligence. And that’s long after you’ve already signed a letter of intent and I’ll talk about that in just a minute. But in terms of not letting the horse out of the barn, that’s really keep your information guarded. Certainly give them all the intelligence about your company, the story, the history, the products, the people, the energy around the company. You can give them the financial information and the tax return information, however only start giving them some tangible information after you have a non-disclosure agreement signed.

In this video, Kayla Daniels, an assurance supervisor at CK, explains the importance of Employee Benefit Plan Audits, emphasizing their role in ensuring compliance with Department of Labor regulations and internal revenue codes. She discusses the audit process from risk assessment to financial statement preparation. Kayla also offers recommendations for improving plan management and oversight to enhance compliance and operational efficiency.

Transcript:

My name is Kayla Daniels. Employee Benefit Plan Audit is an audit that is required by the Department of Labor to be filed with your 5500 annual filing. So Employee Benefit Plan Audit is a compliance audit, so we are making sure that plan processes and plan transactions are in agreement with the plan provisions in the plan documents. Generally employee benefit plan audits are required for any plan that has a hundred people with balances in the plan.

The purpose of an employee benefit plan audit is very compliance based. It is to make sure that your plan is operating in compliance with Department of Labor regulations, internal revenue codes, and a lot of the time those regulations and codes will be built into the plan document. So our audit is actually going to focus on making sure that your plan activities and transactions are in line with those plan provisions. The value that can be added from an Employee Benefit plan audit is related to identifying places in your plan that might have a weakness or could be improved in some way. So our audit will definitely look at those areas that might be a little bit more complex or areas that have a lot of room for error.

So during our audit we’ll bring it to the attention of management, any areas that we see that could be improved and that will help your plan operate more efficiently, more effectively, and will make sure that you’re in compliance. One of the key risks associated with employee benefit plans is the remittance of employee funds. So there is a requirement that plan sponsors have to permit funds in a timely manner. So that’s as soon as feasibly possible or as soon as the assets can be segregated, those assets need to go from the employer to the plan. And we’ll see many times that there are delayed remittances. So it took a lot of time between when it was withheld in payroll and when the plan actually received it. And that’s something that the DOL will definitely look at if you’re ever subjected to an audit. And when you do have delayed remittances it is your responsibility to correct that by calculating lost earnings and remitting those lost earnings to the participant to make them whole because a lot of our audit is going to focus on making sure that employee funds are being used in a proper manner in accordance with the DOL regulations.

Another deficiency that we sometimes see in plans is improper definition of compensation, which the definition of compensation is used when you’re calculating employee or employer contributions. And in the plan provisions, this can be kind of complex where certain types of compensation are excluded for certain types of contributions. So these things can be easily missed and fall through the cracks or maybe the payroll system isn’t set up correctly and is calculating contributions on the wrong compensation. So that’s also something that we look at during our audit and something that we see quite commonly and it’s something that we can fix and make sure that it’s right in the future.

And then another common deficiency that we see is deferral elections for employees not being followed. So when they sign up for the plan, they’ll tell you I want 5 % of my pay being withheld to the plan. And as a plan sponsor, you are required to do what a person wants you to do. And then after that point, they can change your deferral. So it’s important that there’s a process in place to track those changes, to track those new enrollments, to make sure that the employee’s authorization is being followed with their payroll funds.So the first place you want to start when you’re going to perform an employee benefit plan is with our planning and risk assessment. So we will set up a meeting with the client, we will discuss any changes that happened during the year that would include plan amendments, any new plan documents, agreements, and then that’ll serve as the foundation for our risk assessment. And during that process, we’re going to make sure that we identify all the risky areas of the plan and we’ll look back at prior years too to make sure that we’re including anything specific to the plan, where we will modify our audit procedures to ensure that we’re covering all of those areas and that our audit has great audit results. And from that step, we’re going to perform detailed testing of all the significant areas of the plan. And those generally will be related to contributions, distributions, loans and expenses. So we’ll do individual testing of all those areas to make sure that everything is in compliance with the plan documents. And lastly we’re going to prepare our financial statements which will be attached to the 5500.

Some of the discrepancies that you’ll see in the financial statements of plans will be supplemental schedules so that is required by the DOL. If there’s any delay remittances, those need to be identified and recorded in the 5500, in the financial statements. Also, you may see inconsistencies between the financial statement and the 5500. And either the 5500 will have to be revised so that it matches the audited amounts or will have to include a financial statement disclosure to make sure that those match up with each other for the filing.

The number one recommendation I would have for any plan that wants to improve their financial reporting in relation to their employee benefit plan would be to have a member of management or a team of management for proper oversight. That would be a person who does not perform the everyday activities of the plan but a person who knows the plan very well and can be involved in all the processes to make sure that everything is in compliance with the plan. When you are overseeing the process of your plan, you’re going to want to make sure that you have proper personnel documentation in place so that would be signed I -9 forms, anything from the personnel file that will support the important demographic information. So you’ll want to have those available to your auditors because we’re going to want to look at those to make sure that everything’s right. Also if you use paper forms for loans, distributions or deferrals you’re going to want to gather those. Make sure that they’re organized in a place where you can access them.You need to have an employee benefit plan performed every year that you have over 100 participants with balances and also you can have an audit done if you believe that your plan is going to go over 100 participants in the near future.

One of the more complicated issues that can come up when administering an employee benefit plan is when you realize that you haven’t followed employee deferral instructions. So you’ll find out a person originally deferred 5% and then they increased it to 15% and you didn’t implement that in a timely manner. So how you would fix that is you would remit them the extra that they missed out on and then you would calculate any missed earnings. If the market head gains and they missed out on those, you would calculate them and send them over to the participant to essentially make them whole again.

And another issue that you might come across in plans is issues with vesting. If there is employer contributions where it takes years of service for the participant to become fully vested. Sometimes when a participant takes a distribution, the vesting can be calculated incorrectly, which means that the person might not receive their full distribution. And in that circumstance, you would have to make an additional distribution to that participant to make them whole again.

So annually, the plan is required to have discrimination testing, and that is a series of testing that will ensure that highly compensated employees are not being favored over non-highly compensated employees and this is testing that will be performed either by the plan personnel or a third-party administrator. And the results of those plans will let you know if you need to make any refunds back to highly compensated employees and you need to remit those excess contributions within two and a half months after year-end or else you will have to pay a penalty. So it’s important to get those done in a timely manner and to make sure that you’re keeping track of your compliance testing every year.

One thing that I’ve learned while doing employee benefit plans is just the attention to detail that’s needed that you can carry over into other areas of your work life, where you really need to pay attention to what’s the intention, what is written into this agreement, and pay attention to those small details that really make a big difference.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, delves into the intricacies of sales tax nexus, taxable items and customer exemptions. She also talks about the invaluable lifeline offered by the voluntary disclosure programs offered by some states.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Each of the states really wants to get a piece of their pie from taxpayers.

There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes, we have personal property taxes and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.

 So, a business needs to determine whether or not they’re required to collect sales tax in the various states where they ship product or they do services and determining whether that business has nexus for sales tax is different from determining nexus for income tax.

 In the past, if the business didn’t have any physical presence in the state, they really didn’t have to worry about sales tax, but that all changed in 2018 when the Supreme Court ruled on South Dakota versus Wayfair.

And now the states, all of the states, have enacted economic thresholds, whereby if you have sales into that state over a certain threshold, even if you don’t have any physical presence there, you are required to begin collecting sales tax from your customers in that state. And this has been an area over the past few years that businesses have really had to keep a close eye on. So, this is something that each year, you know, we’re taking a look at that to see where our clients have exceeded those nexus thresholds.

Once a business decides that they are subject to collecting sales tax in a state, then the next step is to really determine what of their products or services are taxable. And this varies again from state to state. So, in some states, services across the board, you know, pretty much are not taxable and other states only specific services might be taxable. And then in this day and age, we have additional considerations like computer software. You know, when is that software considered a taxable product? Or when is it considered a non-taxable service?

So, there’s a lot to consider there just in determining what items are taxable. Once that’s determined, you also need to take a look at your customers and find out who of your customers are taxable because you may have resellers who you don’t have to charge tax to because they’re taxing the end customer that they sell to and so another really big aspect of protecting your business is to collect those exemption certificates, make sure that you have those on hand, and also make sure that they’re current. You know, if it’s been a few years since you’ve collected one, it’s always a good idea to go back to your customers and request an updated certificate from them.

But a business discovers that they have nexus in a state for income tax or for sales tax and that that nexus has existed for the last several years. There is a way that they can go to the states and get some protection and this is called voluntary disclosure. So many of the states offer a voluntary disclosure program where the taxpayers are coming forward and saying, you know, we recognize that we should have been filing income tax or collecting sales tax in your state. We’d like to make it right and the states in response to that coming forward place a limit on the look back period, so they may only go back three or four years to collect tax and then also they often will waive penalties. So it is it’s a great program to protect the business from back audit exposure because it limits those years and the states are very willing to work with taxpayers to get them into compliance.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, sheds light on the crucial topic of tax incentives offered by states and localities to businesses. From empowerment and edge credits to research and development incentives, she underscores the vast array of opportunities available.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Businesses should really be thinking about tax incentives that many states and localities offer to them.

The states really want to see economic development in their state and even certain areas, and so often they will offer empowerment, credits, edge credits where your business is employing people there, investing in capital. And these credits are very specific. You apply for it with the state. And then it helps businesses to really expand and get some credit, some benefits there. And some states offer, you know, research and development credits. You can get that at the federal level, but if you are also doing research and experimentation in a state, you may be able to receive a state -level credit as well.

And then there’s even states that have credits that have to do with your activities such as the Wisconsin Manufacturing Tax Credit, that’s a credit against income tax. So, there is an awful lot out there with respect to state incentives and if a business isn’t thinking about these things, they really could be missing out on some benefits.

One benefit that business owners have had had for the last couple years is taking advantage of the pass-through entity tax, which is a tax whereby the business can pay state income tax at the entity level rather than having it paid at the individual level for partnerships and s-corporations where the income would generally flow through to the owners.

Now as a workaround to the state and local tax deduction cap, businesses can pay those at the entity level and get a state tax deduction against the business income. For most states, this is set to expire after 2025. So, we’re doing all we can to take advantage of those deductions right now.

I think the hope is that some of these states will extend that provision, but as of now for most of them it’s expiring 2025 and this is just an issue that we’re going keep up on and make sure we know all the changes that are happening over the next couple of years.

In the complex landscape of state taxation, businesses face a myriad of challenges as they navigate the ever-evolving requirements imposed by each state. Watch the above video where CK Tax Supervisor of State and Local Taxation, Maria Gordon, talks about the broad spectrum of activities that can establish nexus and the critical roles played by services, vehicle presence, and employee locations when it comes to paying state income tax.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation.

Each of the states really wants to get a piece of their pie from taxpayers. There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes. We have personal property taxes, and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.

Businesses need to be concerned about whether or not they have enough connection with the state to be required to file income tax and that connection is called nexus. Each state has their own specifics about what creates nexus within their state, but very generally speaking for income tax, if a business is performing any sort of services in a state, then they’re going to be required to file income tax there. If they are driving their own vehicles into a state, then they would have nexus. Really, the one instance when a business does not have to worry so much about income tax is if they’re merely shipping products to customers in the state, and that’s their only activity. They may have salesmen in the states, but as long as those salespeople don’t do any services, then generally speaking, the business won’t have nexus with the state. We often ask our clients each year, what the activities look like in states where they have employees, and then we make that determination on a state-by-state basis.

The landscape of workers has changed a lot over the past 10 years. A lot of companies now have remote workers in states where they may or may not have filed in past years and so it is something to be concerned about and it all depends upon what activities the employee is doing for that business as to whether or not that’s going to trigger a nexus with the state. So it is very important to be mindful when you’re adding new employees in states or if an employee who works from home is moving to another state, you always want to take a look at those state requirements to find out if the business would suddenly be responsible for income tax filing.

So if a business determines that they have nexus within a state for income tax, then they need to determine what is their taxable income in that state. And we start with federal taxable income and then each state has their own modifications that they make to federal taxable income. Some really common ones are depreciation of fixed assets. States have different methods of depreciating than what’s allowed on your federal tax return. The states do not allow certain deductions like state income tax deduction. So once you make those modifications to the federal taxable income, then at that point you need to decide which portion of this is going to all of these different states. And there are formulas that the states use for that. Most of the time, it’s just looking at sales to that state versus everywhere.

But there are also states that take a look at the amount of payroll that you have in each state and property. So once you come up with that percentage, you’ve got your state taxable income.

It’s important to remember that when you add a state filing responsibility, if you kind of look at the whole pie, you’re not necessarily paying more state tax, it’s just a question of which state are you paying that tax to. And certainly there are some states with higher tax rates that it’s less favorable to file in those states but it’s best to kind of think of it as a pie and as long as you’re filing where you’re required to then that protects the business going forward.

You may be thinking “They’re just numbers people” but we can assure you, we are people people too. Being part of the CK team means so much more than facts and figures. We show up every day as trusted advisors to our clients and supportive teammates to our colleagues. And those days are also filled with lots of fun! To help show you what we’re all about at Cray Kaiser, we asked three team members to share what a typical day looks like and what it means to work here. Click below to hear their stories.

A Day in the Life at Cray Kaiser: Dan Swanson, Supervisor

“The learning opportunities and personal growth I’ve received at Cray Kaiser have been tremendous.”

Click here to read a transcript of this video.

A Day in the Life at Cray Kaiser: Natalie McHugh, Tax Manager

“I feel that my opinion and knowledge are always valued at Cray Kaiser.”

Click here to read a transcript of this video.

A Day in the Life at Cray Kaiser: Micah Vant Hoff, CK Principal

“There is so much opportunity at Cray Kaiser for anybody looking to make their mark in public accounting.”

Click here to read a transcript of this video.

If you are interested in a career with Cray Kaiser,
please click here to learn more.