What can a valuation expert do for your succession plan?

                 

Most business owners spend a lifetime building their business. And when it comes to succession, they face the difficult decision of whether to sell, dissolve or transfer the business to family members (or a nonfamily successor).

Many complicated issues are involved, including how to divvy up business interests, allocate value and tackle complex tax issues. Thus, as you put together your succession plan, include not only your financial and legal advisors, but also a qualified valuation professional.

Various value factors

When drafting a succession plan, a valuation expert can help you put a number on various factors that will affect your company’s value. Just a few examples include:

Projected cash flows. According to both the market and income valuation approaches, future earnings determine value. To the extent that a business experiences decreasing, or increasing, demand and rising (or falling) prices, expected cash flows will be affected. Historical financial statements may require adjustments to reflect changes in future expectations.

Perceived risk. Greater risk results in higher discount rates (under the income approach) and lower pricing multiples (under the market approach), which translates into lower values (and vice versa). When selecting comparables, the transaction date is an important selection criterion a valuator considers.

Expected growth. Greater expected revenue growth contributes to value. In addition, there’s a high correlation between revenue growth and earnings (and thus, cash flow) growth.

Other determinants of discounts

In many cases, valuation discounts are applied to a company’s value. For example, decreased liquidity translates into higher marketability discounts, while increased liquidity reduces marketability discounts. Other factors that affect the magnitude of valuation discounts include:

• Type of assets held,
• Financial performance of the underlying assets,
• Portfolio diversification,
• Leverage,
• Owner rights and restrictions,
• Distribution history, and
• Personal characteristics of the general partners or managing members.

Discounts vary significantly, but can reach (or exceed) 40% of the entity’s net asset value, depending on the specifics of the situation.

For best results

An accurate and timely value estimate can facilitate the succession process and prevent costly and time-consuming conflicts. Please contact our firm for more information.

Can the WOTC save tax for your business?

Employers that hire individuals who are members of a “target group” may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2016 and obtained proper certification, you can claim the WOTC on your 2016 tax return. Whether or not you’re eligible for 2016, keep the WOTC in mind in your 2017 hiring, because the credit is also available for 2017.

In fact, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended the WOTC through 2019. The PATH Act also expanded the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

What are the “target groups’?

Besides the long-term unemployed, target groups include:

• Designated community residents who live in Empowerment Zones or rural renewal counties,
• Long-term family assistance recipients,
• Qualified ex-felons,
• Qualified recipients of Temporary Assistance for Needy Families (TANF),
• Qualified veterans,
• Summer youth employees,
• Supplemental Nutrition Assistance Program (SNAP) recipients,
• Supplemental Security Income benefits recipients, and
• Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

How much is the credit worth?

Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

• Target group of the individual hired,
• Wages paid to that individual, and
• Number of hours that individual worked during the first year of employment.

The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if there are 10 individuals that qualify, the credit can be 10 times the amount listed.

Certification requirement

Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

But if you hired long-term unemployment recipients between January 1, 2016, and May 31, 2016, the IRS extended the deadline to June 29, 2016, as long as the individuals started work for you on or after January 1, 2016, and before June 1, 2016.

The WOTC can lower your company’s tax liability when you hire qualified new employees. We can help you determine whether an employee qualifies, calculate the applicable credit and answer other questions you might have.

An EAP can keep your top players on the floor

A good basketball team is at its best when its top players are on the floor. Similarly, a company is the most productive, efficient and innovative when its best employees are in the right positions, doing great work.

Unfortunately, it’s not uncommon for good employees to battle personal problems, such as substance dependence, financial and legal woes, or mental health issues. These struggles can negatively affect their productivity and the working environment around them. One way employers can help is by offering a benefit called an employee assistance program (EAP).

A benefit with benefits

An EAP helps identify at-risk employees and assist them in finding the professional help they need. An employee who enrolls in the EAP may, for example, immediately be put in touch with a counselor or social worker.

According to the U.S. Department of Labor’s Office of Disability Employment Policy, EAPs have been shown to contribute to:

• Decreased absenteeism,
• Reduced accidents and fewer workers’ compensation claims,
• Greater employee retention,
• Fewer labor disputes, and
• Significantly reduced medical costs arising from early identification and treatment of individual mental health and substance abuse issues.

An EAP is, of course, not a substitute for health care insurance.

Vendors available

Employers don’t have to create and administer EAPs on their own. A wide variety of vendors are available. But, as is the case with any benefit, it’s important to choose a vendor carefully and make sure you get good value for your investment. Please contact our firm for assistance in assessing the costs and specific features of an EAP.

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Do you need to file a 2016 gift tax return by April 18?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

• That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
• That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
• That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
• To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

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SEPs: A powerful retroactive tax planning tool

Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous.

SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested.

Deadline for set-up and contributions

A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:

• A calendar-year partnership or S corporation has until March 15, 2017, to establish a SEP for 2016 (September 15, 2017, if the return is extended).
• A calendar-year sole proprietor or C corporation has until April 18, 2017 (October 16, 2017, if the return is extended), because of their later filing deadlines.

The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return.

Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017).

Contribution amounts

Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee.

For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively.

Setting up a SEP is easy

A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us.

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Envision your advisory board before you form it

Many companies reach a point in their development where they could benefit from an advisory board. It’s all too easy in today’s complex business world to get caught up in an “echo chamber” of ideas and perspectives that only originate internally.

For many business owners, an understandable first question about the concept is: What should my advisory board look like? To find an answer, start by envisioning the ideal size and composition of your company’s board in terms of skill sets and personalities.

The guest list

First and foremost, participants in your advisory board should have skills, experience and expertise that complement your company’s in-house staff. Second, they should support your established long-term strategic goals.

Ideal board candidates can think creatively and provide constructive advice while maintaining discretion with sensitive business issues. This allows the board to honestly discuss every aspect of your operations, including:

• Current challenges,
• Emerging opportunities, and
• Managerial dynamics.

Selecting advisory members is similar to selecting friends and colleagues to invite to an intimate dinner party. You want a diverse mix of backgrounds, expertise and skills. For example, try to balance impulsive, assertive personalities with more thoughtful, cautious ones.

An evolving entity

Bear in mind that, as your business needs change, you may need to rotate some board members out and bring in new blood. For instance, if the company needs to upgrade to a new technology platform to minimize data breaches, board members who were invaluable when the company began — and technology perhaps played a less prominent role — may lack the experience needed to get the business through the next phase.

In addition, the size of your board may change over time. Generally, business owners should limit the number of members to three to seven people. This will help keep the board affordable and manageable, particularly in terms of effective deliberation and decision making. But it may need to grow beyond that in number if your company itself gets larger.

Innovation and competition

Sage advice and diversity of opinion can be invaluable when looking to innovate and gain a competitive edge. Please contact our firm for help assessing whether now is the time for your business to form an advisory board.

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Take small-business tax credits where credits are due

Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two available credits are especially for small businesses that provide certain employee benefits. And one of them might not be available after 2017.

1. Small-business health care credit

The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.

For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.

To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.)

If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2016 may be a good idea. Why? It’s possible the credit will go away for 2018 because lawmakers in Washington are starting to take steps to repeal or replace the ACA.

Most likely any ACA repeal or replacement wouldn’t go into effect until 2018 (or possibly later). So if you claim the credit for 2016, you may also be able to claim it on your 2017 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

2. Retirement plan credit

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

If you didn’t create a retirement plan in 2016, it might not be too late. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions.

Maximize tax savings

Be aware that additional rules apply beyond what we’ve discussed here. We can help you determine whether you’re eligible for these credits. We can also advise you on what other credits you might be eligible for when you file your 2016 return so that you can maximize your tax savings.

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