ERTC Enforcement and Withdrawing a Claim The Employee Retention Tax Credit (ERTC) was introduced during the COVID-19 pandemic as a tax incentive for businesses to keep employees on their payroll.
Planning an optimal business sale requires careful consideration and understanding of various sale options and structures, as well as a thorough understanding of the sales’s effect on the business owner’s personal financial planning. Many owners leave money on the table during a sale while they stay focused on growing their business or finding the right buyer. Effective exit planning involves many moving pieces and may be a multi-year process which is why it is crucial for business owners to prioritize their personal goals alongside the 2017 Tax Cuts and Jobs Act isn’t renewed. On the other hand, capital gains rates can range from 0% to 23.8% at the federal level. The difference between ordinary income tax rates and capital gain tax rates can be profound, so any offer should be evaluated on an after-tax basis. Moreover, timing differences in long-term versus upfront compensation should also be adjusted to the present value when negotiating. Stock Sales Versus Assets Sales There are a significant number of implications and motivations when it comes to structuring a business sale as an asset sale versus a stock sale. While the business entity type and individual circumstances matter greatly, purchasers usually want to structure the sale as an asset sale, while stock sale transactions tend to be more optimal for business owners and their charitable strategies. These strategies can not only amplify their philanthropic impact but also potentially reduce their liability for capital gains taxes, income taxes, state taxes, and/or financial planners, business owners can align their personal and financial goals while enhancing their preparedness for a successful business sale. Sincerus Advisory.
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For more information on the benefits of this IRC Section 453 solution, give this podcast a listen. While the topic of this episode dealt with the sale of land, the solution is also available to individuals selling their business, allowing them the unique opportunity to defer immediate tax obligations and maximize the sale through personally designed future annuity payments.
Learn how you can use 1031 exchanges and DSTs to your advantage by Downloading my FREE Brochure. Read About: What a 1031 exchange is and an overview of the basic steps Essential rules and timeline to follow in a 1031 exchange The expected net proceeds of selling a property vs using a 1031 exchange The vast range of “like-kind” properties available for investment The many benefits of a Delaware Statutory Trust (DST) Follow the Link for Brochure Download:
Defer Taxes, Maximize the Sale, Secure the Financial Future…. Chad Ettmueller – JCR Settlements, LLC. What if you could offer your clients a way to sell their business, property or other appreciated asset and avoid immediate tax obligations while growing the net proceeds in an attractive, tax-deferred manner with future payments they design unique to their needs? If it seems too good to be true, you need to explore Structured Installment Sales (SIS). Following approved IRS guidelines under IRC Section 453, Structured Installment Sales allow an individual the unique opportunity to defer their immediate tax obligation by placing a portion of their net proceeds into an annuity product with highly rated life insurance carriers. In so doing the Seller avoids constructive receipt of the funds and the IRS cannot tax them on that portion of the sale. Sellers can design a future payment schedule that meets their unique needs, realizing significant income growth through the investment (as high as 10% depending on the design), paying a deferred tax obligation in the future year(s) when annuity payment is received. The Seller will pay both a pro-rated Capital Gains tax (at the cap-gains rate in the year payment is received) and a pro-rated Ordinary Income tax on the interest earned. Traditional Installment Sales transact between the Buyer and the Seller and are wrought with risk, as the Seller is dependent on the creditworthiness of the Buyer and is hoping they will successfully make the future payments. A SIS changes everything, placing the creditworthiness of the life insurance company at the forefront of the transaction and allowing both parties to move forward without future risk. Moreover, as a result of the investment growth associated with the annuity, the Seller can quite often entertain offers that are lower than they have targeted, knowing the investment yield will more than make up for the difference. Combine that growth with the immediate tax savings on the portion placed into the annuity and the Structured Installment Sale offers a serious solution to many sales transactions. In fact, more and more savvy Buyers are making offers wherein they incorporate a SIS as part of their offer. As a result, they are able to offer the Seller (ultimately) more than asking price while securing the property or business at a discounted price, providing them more immediate operating capital to make necessary enhancements to the property or business. If all of this is not exciting enough, there are other highlights to the Structured Installment Sale: – Seller can defer first payment up to 40 years. – No investment minimums or maximums. – Include future payment schedules to match future needs, including monthly, quarterly, semi-annual or annual payments and lump sums on identified future dates. – Index linked, market-based growth, with a guaranteed floor payment and uncapped growth based on market performance. – For use in the sale of businesses, real estate or appreciated asset collections (art collections, vintage vehicles, wine, etc.) – Backed by highly rated life insurance markets. SHOW ME THE MONEY Please take a look at the attached illustration for a real life example of how the product works and the type of income such a solution can produce. The highlighted area on page 3 will show the projected yields. Pages 5-6 will show the projected monthly income. As a quick example, a 51-year-old Seller in Florida sold his business for $25M. He placed $10M of the purchase into a Structured Installment Sale, saving approximately $1M in immediate tax obligations. He deferred first payment 14 years, to his age 65, taking monthly payments for twenty (20) years thereafter. Based on the projected growth of the Indexed linked annuity, and back testing, all the way back to 2006, the Seller is projected to earn between $50.5 and $157M, with a projected median growth of $85.5M. These are jaw dropping numbers to say the least and illustrate the power of the product. KEY CONSIDERATIONS To comport with IRS guidelines, the payment schedule for any SIS must be incorporated into the Sales Agreement as an addendum to the sale. All parties must sign an assignment document, acknowledging the fact that all future payments are forthcoming from the life company, and not the Buyer. Payment for the annuity must go directly from the Buyer to the Life Insurance Company with whom the SIS is placed to avoid constructive receipt by the Seller. If funds are deposited into the Seller’s account, this will trigger constructive receipt in the eyes of the IRS and an immediate tax obligation will be required and a structured installment sale cannot take place. Depreciation Recapture cannot be placed into a SIS. All depreciation recapture must be recorded and appropriate taxes paid in the year of sale. Deposits of more than $5M into the SIS will trigger an IRS Interest Penalty on an annual basis. This penalty is nominal and an annual lump sum equal to the penalty amount can be established, through the future payment schedule of the annuity, to pay this obligation. Structured Installment Sales offer a remarkable advantage to all parties involved in a given transaction and should be considered in nearly every sale. There are no associated costs to establish a structured installment sale now, or in the future. However, such a sale must be coordinated by a licensed and appointed annuity advisor. JCR Settlements enjoys serving as a Gold Sponsor of XPX and looks forward to assisting you and your clients, as appropriate. Please do not hesitate to call or email with any questions or to request an investment illustration. Chad Ettmueller Senior Vice President JCR Settlements, LLC 770-886-7400 cettmueller@jcrsettlements.com
Oct 24, 2022
Oct 24, 2022
2 min read
Donna Beatty, Tax Partner with Frazier & Deeter, and Robert Stephens, Managing Partner of CFO Navigator, were Bill McDermott’s guests on this episode of Profit Sense with Bill McDermott. Donna provided timely advice about taxes, new laws, and advice for business owners. Robert Stephens talked about how he helps businesses as a financial guide, how he speaks about both accounting and business, the advice he gives his clients on the current economy, and much more. Bill closed the show with a commentary on how to transition from employee to owner. ProfitSense with Bill McDermott is produced and broadcast by the
After a tsunami of a year facilitating 1031 Exchange transactions, we found there are many misconceptions among investors about 1031 Exchanges. Here are five of the most common areas of investor confusion. Reverse Exchanges Are Quick & Simple: Identifying replacement property in a hot market was a challenge for 1031 Exchangers this past year, causing many sellers to pursue a strategy of purchasing a replacement property before selling their relinquished property. Known as the Reverse Exchange, in this scenario, the investor first buys a new property of equal or greater value than the relinquished property and then has 180 days to sell their relinquished property. With a Reverse Exchange, you cannot own your replacement property and relinquished property at the same time, requiring an affiliated entity (a Qualified Intermediary) to hold the title of the relinquished property or the new replacement property. While Reverse Exchanges can benefit sellers in hot markets, they take longer to arrange, include more steps, and have, additional costs and fees compared to the more common Delayed Exchange. Vacation Homes/Secondary Homes Qualify for an Exchange: Residential property can only be considered “like-kind” if held for investment purposes. The rules are very specific. You can sell your vacation/secondary home through a 1031 Exchange if you rented it for more than 14 days per year and your personal use was no more than 14 days per year (and less than 10% of the total nights rented over the two years leading up to the sale). When renting a vacation home you purchased as part of a 1031 Exchange, you must charge rates at fair market value. You cannot rent to a “family member” for $1.00 per night! 1031 Exchanges are a “tax Loophole”: Since 1921, 1031 Exchanges have been a vital part of U.S. tax policy. Exchanges have been available in their current form since 1986. Like-kind exchanges encourage capital investment for the highest and best use of real estate, thus improving communities and increasing the local and state tax base. Section 1031 like-kind exchanges give businesses and entrepreneurs more incentive and ability to make real estate and capital investments. Far from being a tax loophole, the 1031 Exchange, which has enjoyed political support from Republican and Democrat legislators for decades, is a powerful economic tool that allows investors to grow and transfer their wealth to future generations in the most tax-efficient manner. Partners in an LLC Can Simply Separate in the Middle of an Exchange: The “Drop & Swap” alternative is an exit strategy for the sale of real property held in an LLC where two or more partners in the LLC have differing ideas about what to do with the proceeds in another property and continue deferring taxes to “drop” the partnership interests in the LLC and “swap” for Tenant-in-Common (TIC) interests. But the Drop and Swap strategy is not simple, and careful planning is required. It is recommended to prepare the property being sold for separate exits before signing a listing agreement with a real estate brokerage. Considering Replacement Property Options Can Wait Until Closing of the Relinquished Property: You’ve heard the adage, “timing is everything,” and that certainly holds true regarding the timeline requirements of a 1031 Exchange. Many first-time exchangers, aware of the 45-day replacement property identification rule, often wait too long to explore their options, only to discover their deadline passes before selecting a property. And their exchange fails. That’s why it’s critical that you work closely with your 1031 Exchange investment professional and Qualified Intermediary to ensure you take the necessary actions at each stage so that your exchange is successful. Get clear on conducting a proper 1031 Exchange, feel-free to contact me. Disclosure: The commentary in this blog post reflects the personal opinions, viewpoints and analyses of the Safe Harbor Asset Management, Inc.’s employees providing such comments, and should not be regarded as a description of advisory services provided by Safe Harbor Asset Management, Inc.’s or performance returns of any Safe Harbor Asset Management Inc.’s Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this blog constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Safe Harbor Asset Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Don’t Leave Money on The Table Does your CPA always wait until the last minute? Do they not get your returns filed until the due date and then you’re scrambling to review and make sure there are no errors? Is yours the business that has all of your work done in advance, but your CPA treats you like you’re unimportant and the reason you don’t file on time is because they didn’t have the staff, bandwidth, experience or professionalism to take care of it? This is how mistakes happen on your return When we see math and spelling errors on returns, we know that someone didn’t take pride in their work. Glaring errors = red flags, noticeable by a professional. If we can notice it, certainly a taxing authority will notice it. It may not even be an error in reporting, it may just be an error in bookkeeping that could have been recorded differently to benefit the organization, potentially leaving money on the table. An example of this is having salaries for shareholders set too high thereby reducing the potential QBI deduction and potentially paying too much in payroll taxes. If your returns are always completed at the last minute or on the fifteenth, this is a bad sign. The level of quality offered by a firm is substandard if they are doing things late, not asking questions, not providing adequate time for review and not providing suggestions. There are two types of business taxpayers that have not completed 2021 tax filings to date— people who have done their planning and are prepared but awaiting paperwork that is beyond their control and people who owe money and are disorganized and want to delay the inevitable. There really isn’t a good reason for a business not having their tax returns prepared by July, if you had a calendar year end. The taxpayers with different fiscal year ends are an anomaly. Plan for Growth and Change Having accurate timely financial records and filed income tax returns is essential. Business owners have so much responsibility, that they may not be aware that late prepared and filed tax returns can result in: Costly penalties and interest Inability to qualify for financing Prevention of a successful Merger, Sale or Acquisition (M&A transaction) Inability to provide timely information for managerial decision making Lack of confidence for partners and shareholders awaiting K-1s Financial wrongdoing to go undetected Missed tax credits Just think, without proper returns you’re unprepared to open that additional location, hire those additional employees, plan for asset acquisition, begin offering new products or services, or work on long-time planning and exit strategies.
Wrapping up our series on your most googled financial questions, we saved a big one for last: taxes. A word that strikes fear in the hearts and minds of many business owners. But, it doesn’t have to. Every business owner has a big dream for their business and wants to make it happen. However, many business owners don’t follow a unified strategy to get there, leaving them overwhelmed and sometimes angry. Some of that anger is relegated to the amount of taxes they had to pay on last year’s income. Part of that unified strategy is to sit down with your tax accountant annually, maybe even twice a year if your taxable income is large. Read more:
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As an advisor, your role is to help clients prepare to exit their business, yet many people resist thinking about the future because it involves so many unknowns, decisions, and choices. And emotions typically complicate matters further, sometimes derailing the process altogether. Here are some questions that can help you establish rapport with your clients, learn more about their concerns, and move the conversation forward. How are you feeling about your work/profession/business these days? Which aspects of work are you still enjoying, and which are you ready to leave behind? Do you envision retiring from work at some point, or are you contemplating an encore career? What part of planning for your future feels most challenging? How do you imagine your life in retirement will be different from how it is now? What process are you using to figure out what you’ll do next after you retire? What would you like to see happen with your business long term? What options have you considered for the transfer of your business? What steps have you taken to make your business more attractive to a potential buyer? What are your concerns about transitioning your firm to new ownership? What would be your ideal scenario for transitioning out of your company? What topic(s) have we touched on today that we should put on our agenda to revisit? So, what happens after you pose a few of these questions and your clients open up about emotional matters? Remember, the most helpful thing you can do is to listen attentively. You’ve created a valuable opportunity for them to talk about things they may not share with other advisors. Here are some tips for managing the conversation when clients raise emotionally loaded topics: Don’t try to “fix things” by immediately offering suggestions. Doing so sends the message that you’re uncomfortable hearing their concern. You can offer suggestions but do so later. Don’t say anything that conveys the message that their feeling or concern is unwarranted. “There’s really no need to feel that way” or “I’m sure it will be just fine” may sound reassuring to you but could be experienced as dismissive by your client. Don’t immediately offer a logical counterpoint to your client’s emotion. Remember, feelings don’t have to make sense; they’re “as is”. Put another way, if feelings made sense, they would be thoughts. People report concerns and characterize their feelings differently from one another, so it’s in your best interest to seek amplification and clarification by inquiring as follows . . . “I want to make sure that I understand exactly what you mean by ___. Can you tell me more?” “People sometimes mean slightly different things when they talk about ___. What does ___ mean for you?” “Before I suggest anything, I’d like to learn more about it from your perspective.” It’s possible that during early conversations your client may hint at mixed feelings about exiting their business. That’s perfectly normal, but you need to bring it out into the open. You want to foster an atmosphere such that your client keeps you apprised about where they’re at. If they keep their ambivalence to themselves, it has greater potential to blindside you and complicate the sale. You can say: “In my experience, it’s normal to have some mixed emotions about selling. Those thoughts may not always be top of mind, but when they do pop up let’s be sure to talk about them. Believe it or not, they can help inform our process and alert us to aspects of the sale that are important to you.” You may also find that your client is overly risk averse. If so, consider saying the following: “Our work together won’t be comprehensive if we only plan for what could go wrong. That’s just half the equation. It’s fine to be conservative and err on the side of caution, but to be truly realistic we should also consider a range of possibilities both good and bad.” Author’s Note: The concepts in this article are derived from Robert Leahy’s book, Overcoming Resistance in Cognitive Therapy. New York: Guilford
For five decades, the southern United States has been an attractive location for automakers to open plants thanks to generous tax breaks and cheaper, non-union labor. However, after decades of failing to unionize automakers in the South, the United Auto Workers dealt a serious blow to that model by winning a landslide union victory at Volkswagen. In an effort to fight back, three southern states have gotten creative: they passed laws barring companies from receiving state grants, loans and tax incentives if the company voluntarily recognizes a union or voluntarily provides unions with employee information. The laws also allow the government to claw back incentive payments after they were made. While these laws are very similar, each law has unique nuances. If you are in an impacted state, you should seek local counsel. In 2023, Tennessee was the first state to pass such a law. This year, Georgia and Alabama followed suit. So why this push? In 2023, the American Legislative Exchange Council (“ALEC”), a nonprofit organization of conservative state legislators and private sector representatives who draft and share model legislation for distribution among state governments, adopted Tennessee’s law as model legislation. In fact, the primary sponsor of Tennessee’s bill was recognized as an ALEC Policy Champion in March 2023. ALEC’s push comes as voluntary recognition of unions gains popularity as an alternative to fighting unions. We recently saw this with the high-profile Ben & Jerry’s voluntary recognition. Will this Southern strategy work to push back against growing union successes? Time will tell. Brody and Associates regularly advises its clients on all labor management issues, including union-related matters, and provides union-free training. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.
Almost since time began, the nimble small business has been axiomatic. Large corporations are like big ships, the common knowledge goes. They take a long time to change direction.
I once had the thrill of interviewing Jerry West on management. He was “The Logo” for the NBA, although back then they didn’t advertise him as such. Only the Laker followers knew for sure. In 1989 the “Showtime” Lakers were coming off back-to-back championships. Pat Riley was a year away from his first of three Coach of the Year awards.
Can you Offer Too Many SKUs to Your Customers? The short answer is YES! A SKU, or Stock Keeping Unit, defines each different product version that you sell and keep inventory of. There may be different SKUs of the same overall item based on size, color, capacity (think computer or cellphone memory), features, and many other parameters. For build to forecast businesses, that number of variations can quickly explode and become difficult to manage. Your customers are busy and want ordering simplified. Of course, they may need (or want) more than one variation of a product. That is reasonable and a common aspect of business – one size does not fit all! But there is a point where too offering too many SKUs is not value added either for your customer or your business. In his April 30, 2013 article “Successful Retailers Learn That Fewer Choices Trigger More Sales” in Forbes, Carmine Gallo discusses his experience and a study about “choice overload” by other authors. He writes about a retailer that “has discovered that giving a customer more than three choices at one time actually overwhelms customers and makes them frustrated…when the customer is faced with too many choices at once, it leaves the customer confused and less likely to buy from any of the choices!” Choice overload is well-documented in consumer studies but can apply in B2B as well. While customer satisfaction is important, another key concern is the often-hidden costs associated with a business offering and managing a large number of SKUs for a given product type. These costs include holding inventory, S&OP (Sales and Operations Planning) team time, small production runs, and scrapping inventory. Holding inventory takes up space, which may come with a cost or utilize racks that could be used for other products. Scheduled inventory counts take up employee time and may result in blackout periods when the warehouse is not shipping product. The more SKUs there are, including extra SKUS, the greater the potential impact. The Sales team’s forecasting and the Operations team’s purchasing reviews that are part of the S&OP process can occupy more of their valuable time if they need to consider these times. If small orders or forecasts require a new production run, this could be costly and create excess inventory. Whether from this new production or past builds, eventually it will make sense to write off and scrap old inventory, another cost impact to the company. How do you know which SKUs to focus on if you wish to look at reducing your total number of SKUs? Start by examining SKUs that have: Low historic sales over a period of time Small variations between SKUs that customers do not value Older technology or model when newer option SKUs are available This requires a true partnership between Sales and Operations. It starts with educating both teams on the costs involved – neither group may be aware of the money and time impact to the company. Periodic (such as quarterly) reviews of SKUs that meet the above descriptions should become a fixed part of the calendar. A review of the data and other available for sale options should result in the identification of SKUs which may not be needed. At that point, it is helpful to have a customer friendly EOL (End of Life) Notice process by which you inform customers of last time buy requirements for this SKU and alternates available. It is usually best to provide some time for the last time buy in the interest of customer satisfaction, although that may not always be necessary. At a company that designed and sold electronics, a robust SKU rationalization process was implemented to help address these issues. A representative from the Operations team analyzed SKUs that met a version of the above criteria and suggested candidates for the EOL process. Next, a member of the Sales team reviewed them and, where appropriate, issued product change or EOL notices to customers, providing them time for last time buy orders when needed. These steps helped reduce the work involved in maintaining these SKUs while not leading to any customer complaints. A final note – sometimes it makes sense to continue offering low selling SKUs – to support customers buying other items (hopefully in larger quantities). It may be worthwhile to encourage them to keep coming back to you for all of their product needs and this may be a way to accomplish that. But it helps to understand that this is truly the case and not assume that this customer would not be equally happy with another, more popular, SKU. Steven Lustig is founder and CEO of Lustig Global Consulting and an experienced Supply Chain Executive. He is a recognized thought leader in supply chain and risk mitigation, and serves on the Boards of Directors for Loh Medical and Atlanta Technology Angels.
When it comes to careers, business owners are a minority of the population. In conversations this week, I mentioned the statistics several times, and each owner I was discussing it with was surprised that they had so few peers. According to the Small Business Administration (SBA), there are over 33,000,000 businesses in the US. Let’s discount those with zero employees. Many are shell companies or real estate holding entities. Also, those with fewer than 5 employees, true “Mom and Pop” businesses, are hard to distinguish from a job. The North American Industry Classification System (NAICS) Association, lists businesses with 5 to 99 employees at about 3,300,000, and 123,000 have 100 to 500 employees (the SBA’s largest “small business” classification.) Overall, that means about 1% of the country are private employers. Owners are a small minority, a very small minority, of the population. Even if we only count working adults (161,000,000) business owners represent only a little more than 2% of that population. So What? Where am I going with this, and how does it relate to our recent discussions of purpose in business exit planning? It’s an important issue to consider when discussing an owner’s identity after transition. Whether or not individual owners know the statistics of their “rare species” status in society, they instinctively understand that they are different. They are identified with their owner status in every aspect of their business and personal life. At a social event, when asked “What do you do?” they will often respond “I own a business.” It’s an immediate differentiator from describing a job. “I am a carpenter.” or “I work in systems engineering,” describes a function. “I am a business owner” describes a life role. When asked for further information, the owner frequently replies in the Imperial first person plural. “We build multi-family housing,” is never mistaken for a personal role in the company. No one takes that answer to mean that the speaker swings a hammer all day. Owners are a Minority We process much of our information subconsciously. If a man enters a business gathering, for example, and the others in the room are 75% female, he will know instinctively, without consciously counting, that this business meeting or organization is different from others he attends. Similarly, business owners accept their minority status without thinking about it. They expect that the vast majority of the people they meet socially, who attend their church, or who have kids that play sports with theirs, work for someone else. There are places where owners congregate, but otherwise, they don’t expect to meet many other owners in the normal course of daily activity. This can be an issue after they exit the business. You see, telling people “I’m retired” has no distinction. Roughly 98% of the other people who say that never built an organization. They didn’t take the same risks. Others didn’t deal with the same broad variety of issues and challenges. Most didn’t have to personally live with the impact of every daily decision they made, or watch others suffer the consequences of their bad calls. That is why so many former owners suffer from a lack of identity after they leave. Subconsciously, they expect to stand out from the other 98%. “I’m retired” carries no such distinction. This article was originally published by John F. Dini, CBEC, CExP, CEPA on
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