Protect Your Business with a Buy-Sell Agreement
Jun 22, 2016
The unexpected can always happen. That’s why, if you’re the co-owner of a business, you need to prepare for the possibility that you — or the other owner — won’t be at the helm one day. The fact is, either of you could die tomorrow. What would happen then?
When you enter into a buy-sell agreement, you face this issue head on. A buy-sell agreement is a legal contract between you and the company’s other owners. In it, you each agree that your ownership interest will be sold (or offered for sale), at a certain price, to the company or to each other when you die. Often, the company or the owners buy life insurance policies so they’ll have the cash to make any agreed-upon purchase.
Tax Advantages Buy-sell agreements offer more than simple protection for you and your family. You may also gain estate-tax benefits. Your estate can usually value your business interest according to the price or formula set in the agreement. This lets you plan in advance for what that value will be.
Buy-sell agreements can also help your estate avoid time-consuming and costly battles with the IRS. When an estate includes a closely held business interest, the IRS may see a red flag. The IRS wants to be sure that estates don’t come up with artificially low values for businesses in order to save taxes. If you have a buy-sell agreement in place, and follow all the tax law rules, the IRS is likely to accept your value.
What’s Your Interest Worth? The key to making the value in your buy-sell agreement stick is to make sure that it is a “fair market” price. If you and the other owners aren’t relatives, this shouldn’t be a problem. You’ll probably bargain with one another to get the best deal possible. However, if you intend to pass your interest in the company on to a child or other family member, the IRS may argue that you and your close relative didn’t negotiate a fair price. That’s why it may be best to provide in the buy-sell agreement that a qualified professional will value the company annually or at the time of the sale.
Our team of business valuation experts can help you plan for the future through a buy-sell agreement. If you have questions or concerns about your business, contact Jack Hagmeyer at hagmeyer@wvco.com
Categories: Other Resources
Independent Contractor or Employee?
Jun 16, 2016
This seems like such a simple question. However, many companies and employees never take the time to consider their position. This is one of the most important decisions in the tax world. In fact, it goes well beyond taxes as it involves workers’ compensation, unemployment insurance, state and federal wage and labor laws, pension laws, nondiscrimination laws and more.
From an employer’s perspective, it’s often preferable to hire freelancers and contractors instead of employees. An employer is not required to pay for all the benefits offered to regular employees, such as health insurance, bonuses, 401(k) plan contributions, and so on. As a result, employers experience considerable incentives when utilizing independent contractors. More often than not, such employment follows the regulations set forth by the law. Nevertheless, some employers have been accused of misclassifying workers who should be considered employees as contractors instead.
The IRS has issued guidelines on the matter, stating “if you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” Meanwhile, “If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result, then your workers are probably independent contractors.” The distinction is important because there are penalties for misclassification.
For businesses of all sizes, the fines are everywhere and they’re not cheap. Take a look:
- The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
- A prominent shipping company settled a series of class action lawsuits alleging worker misclassification for a total of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
- The San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest. The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totaled $11 million.
The IRS has given guidelines to its agents to determine worker status. In the past, a list of 20 factors compiled by the IRS had been used in court decisions to determine worker status. The list, sometimes called the “20-Factor Test” is still used as an analytical tool, although some of the factors are no longer as relevant as they once were.
Basically, the IRS’ 20-Point Checklist focuses on three main factors:
- How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
- How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
- What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?) Estimates are that 20% of businesses misclassify workers, so make sure your business understands the difference.
By: Mark Dietrich, Accountant
Categories: Other Resources, Tax Planning
Role of A Cost Accountant
Jun 13, 2016
I recently spoke with a client concerning their cost accounting department. This particular organization was a manufacturer of automotive related products with a sophisticated cost system. The company had a number of full-time employees specifically devoted to maintaining and developing the costing system. Our conversation, however, involved the various expectations and standards this CFO should anticipate from the cost department.
Of course, there is a different answer for virtually every business which maintains a costing specialty area. However, from my perspective, what cost accountants do can generally be broken down into three general areas.
First is to maintain cost information on the products the company is producing. This maintenance includes a constant review of existing standards, noting changes in processes or products which result in a change of cost. The goal of the cost accounting team is to maintain up-to-date and accurate product costs. Such information should be based on actual data being produced on the floor or to original standards and rates that were used to develop the cost at the beginning of the period. This is an ongoing assignment which requires frequent attention and constant focus on what is occurring on the shop floor. In addition, the job requires the ability to anticipate needs from the management team related to product costing.
Second, cost accountants provide management controls of operations. Many costing systems are still based on the standard cost method which includes variance reporting by department, by product, by a person, or by a process. Such reporting can be utilized to compare standard cost data in relationship to actual results. In some cases, reporting of such management information is completed very regularly, maybe hourly or maybe daily, and issued in reports to the various management team members. However, other components may be reported on less frequently. For instance, overhead variance calculations should probably be done no more frequently than once a month. These variance calculations are generally done for the purpose of improving management control and usually result in very specialized periodic reporting to a variety of individuals. based solely on their ability to impact or improve the costing results based on the data that they have been provided to them from the cost accounts.
The third general category of assignments cost accountants frequently work on are related to specialized projects. I have worked with accounting teams which were charged with determining the profitability of certain parts, or a specific manufacturing location. Others have included assignments related to make vs. buy or outsourcing of a product to a foreign country. In this particular instance, special assignments included those related to products previously produced by the company and analyzing costs to determine if it would be more cost-effective to have these parts produced elsewhere. There are also special projects which help to determine how efficient a specific apartment may be or how efficient a given process is over the another. Other cost accounting specialized projects include assistance with determining a capital expenditure and the criteria to be included on simple payback or rates of return to assist management in making a capital improvement decision.
As I think about the wide array of assignments in which cost accountants are associated, I believe this general list of categories included the most common. However, as I said earlier, every firm is different and can include a wide diversity of other assignments that are unique to their industry or their location.
Categories: Cost Accounting
Changes Coming To The CPA Exam
Jun 09, 2016
For every CPA, the CPA Exam is a rite of passage, one of the first milestones on the path to a career in accounting. Long hours of study and prep work and the stress of the test itself are rewarded with the joy and/or relief of passing scores on all parts of the exam.
If you or anyone you know is planning to enter the field of public accounting, be aware changes are coming to the Uniform CPA Examination in April 2017, the first major update to the exam since 2011. Periodically, the AICPA conducts a practice analysis, seeking input from state boards of accountancy, state CPA societies, public accounting firms, and other stakeholders to assess whether the test is able to measure the skills and knowledge needed by newly licensed CPAs. This analysis determined that due to the automation and outsourcing of routine accounting tasks, greater critical-thinking skills were needed of new hires.
The four basic content areas of the exam – Auditing and Attestation, Business Environment and Concepts, Financial Accounting and Reporting, and Regulation – are not changing. How those areas are tested, however, will be. There will be fewer multiple-choice questions, and a greater emphasis on task-based simulations that better assess higher-order critical-thinking skills. Because of this, total test time will be increased from 14 to 16 hours.
To aid new candidates with preparation for the exam, an array of preparation and support materials reflecting the new exam format are being rolled out. The current Content Specification Outline and Skill Specification Outline are being replaced by new “blueprints” that will contain about 600 tasks across the four exam areas that will align with the skills expected of new accountants. AICPA.org will offer a sample of the new exam at aicpa.org/nextcpaexam, as well as a LinkedIn group for exam candidates.
Based on historical trends in advance of previous changes to the exam, the AICPA expects a surge of exam candidates in 2016. Forty total testing days will be added – ten each quarter beginning in April 2016.
Jake Freppel, Senior Accountant
Categories: Other Resources
Gross Margins & Benchmarks
Jun 07, 2016
I recently met with a client looking to purchase a manufacturing facility. He spoke about the gross margin of the facility and I was surprised by his comments.
First, he mentioned how shocked he was by the poor the margin which was 25%. I do not know about you, but for a manufacturer, this margin seemed decent. I know of manufacturers who operate with single-digit margins, and many who strive for 20%. Different industries have varying degrees of margins and the number can also be dependent on a company’s location within the world. It is not usually fair to cross compare margins. In this instance, the client did not know much about the given industry to have appropriate benchmarks. It is vital in any business to have benchmarks and set goals for your profit margin based on such data, If you are not realistic the goals are unattainable and will not be worthwhile.
Second, the client said he was very surprised to see factory employees insurance and other related expenses in COGS. In his mind, these were clearly part of G&A. Based on my experience, these are clearly COGS. I’m not sure why he believes otherwise.
As you can imagine, I am concerned about this client purchasing and attempting to manage such a facility. Hopefully, through coaching and expanding upon various costing principles, we will be able to achieve success. Do you or various leaders in your organization make such comments?
Managing your gross margin is essential. It’s an important part of any business, but particularly manufacturing. Do you know your organization’s financial benchmarks? Do you have a good handle on your true gross margin calculation?
Categories: Cost Accounting