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Tax planning is essential for two very important reasons.  The first reason is to ensure you take advantage of opportunities BEFORE the year is over.  The second is that you are informed well in advance of April 15th of what your potential tax liability will be so that you can begin to plan for the cash outlay.  Now is the time to take a serious look at your tax situation.  Tax planning holds equal importance for your business and you personally and we want to make sure you pay as little tax as legally possible.  Here are some tax planning ideas worth considering:

If you are like most business owners, the thought of business growth is exciting! You have the passion to succeed and the battle scars to prove it. Perhaps it’s been your sheer will, a lot of hard work, some sleepless nights and even a little luck to get you to this point. Perhaps you have even relied on those small moments of triumph to help carry you through the challenging times. One thing we know is that the same strategies that got you to this point will most likely not get you to the next level. For the business to reach its full potential, it must be able to reach beyond the capabilities of you, the owner.

A big issue facing business owners today is determining if an individual should be hired as an employee or as an independent contractor. The government does not take this issue lightly. Misclassifying workers as independent contractors can result in large, unexpected tax bills along with penalties and interest. Furthermore, employers may pay penalties on employment taxes – Social Security, Medicare, and Federal and State Unemployment – in addition to incorrectly filing tax forms. Determining the correct classification requires an in-depth look at the circumstances surrounding the worker’s arrangements.

We are always relentlessly committed to our client’s success!
As a way to encourage its team to contribute to the firm's strategic initiatives, our firm rolled out its very first Company-sponsored silent auction!
No one likes to be limited – least of all business owners and leaders.

Globalization and lean manufacturing have made supply chain management more important than ever.

It's crucial that materials and parts arrive when needed in the manufacturing process so that you can fulfill orders and customer expectations. But because of the minimization of inventory, your company could be more vulnerable to disruption.

Most people don't like to think about a catastrophe striking their business, so when things are running smoothly, it's tempting to put disruption planning on the back burner.

Unfortunately, most disasters don't give advance notice, although today's more sophisticated weather tracking does give some warning.

For example, Hurricane Sandy, which struck the East Coast in October 2012, was predicted five days ahead. One of the country's biggest ports was shut down by the huge storm, as were transportation and logistics businesses operating in the region.

Would five days be enough time to make contingency plans if an important shipment was due in New York? Probably not.

In addition to severe weather, disruption might be caused by labor issues, raw materials shortages, wars, fires and terrorism. Sometimes a supplier to your supplier is the one with the problem, and the ripple effect impacts you.

While you can't prevent these critical events, you can mitigate their impact through risk management, a key part of supply chain planning. Because of economic uncertainty on top of wild weather and political unrest in many regions of the world, risk management is rising in importance.

Almost all executives (98 percent) recently surveyed by consulting company Accenture felt risk management was more important than two years earlier. Four out of five were worried about the resilience of their supply chains.

Most companies plan out their supply chains several years in advance. Rather than regard your plan as static and set, take a hard look at your chain to find the weak spots. Which supplies or sources are most critical to your functioning? Which have the longest lead times? Where are you most at risk because of external political, geographic, weather or scarcity factors?

If currency exchange rates and fuel costs could make supplies from certain countries too expensive, include them as risks.

A useful tool to rank supply risk is a grid with low risk to high risk on one axis and low importance to high importance on the other. You can map out which supplies are both high risk and high importance, high risk and low importance, etc. This will help you prioritize disruption planning to address the most vulnerable areas first.

Once threats are ranked, the next steps are to mitigate the risk as well as create a plan to address disruption, should it occur.

Risk can be reduced in several ways. You can increase your inventory of the critical, high-risk part to create a more comfortable buffer. Establishing relationships with alternative suppliers and logistics and transportation services will give you options should the worst occur.

Strategic alliances with others in your industry might also be a viable part of your plan, either as an emergency provider of inventory or a source of intelligence.

Recognizing the complex nature of supply chains in a global economy, companies are working together to share information. The Fair Factories Clearinghouse in New York, for example, gathers submitted documentation on 30,000 factories in 142 countries.

A cross-functional team approach is key to developing and modeling your disruption plan, since it is likely all departments will need to respond in some way – from accounting to the production floor.

Running through "what-if" scenarios, your team can brainstorm and draft on paper various response strategies.

After the best options are selected, testing and dry runs will validate your plan. Your team's roles and responsibilities during a crisis should be pre-determined so decisions can be made quickly and effectively.

A system and responsibility for ongoing intelligence gathering and situation monitoring should also be part of your plan. You can identify the critical issues – weather, currencies, fuel prices, political situations – for your most important suppliers and set up a data-gathering mechanism.

This intelligence gathering could include customized real-time data feeds watched by your team. RTT News and Reuters are examples of services that allow users to set preferences for continuous news updates.

New information should be integrated into your ongoing supply chain management process so that you can respond and adjust to changing conditions as they occur.

What would become of your business if something happened to you, your business partner or a fellow shareholder?

If an owner dies, becomes disabled, divorces, declares bankruptcy or simply retires, your business could be thrown into turmoil. Not only would family members and employees be affected, but the value of the business could fall.

There might even be a question of whether the business would survive at all. It is important to look to the future and realize that the value of a business built by long hours over many years can be significantly affected when ownership changes.

Do you and other key members of your business have an agreement describing what happens in the event of the death, disability or withdrawal from the business of one of the owners?

If you don't, develop one. If you do, keep it current.

What is a buy-sell agreement?

A buy-sell agreement is an essential part of succession planning. It is an agreement among the owners that sets down their rights with respect to each other and the business. It describes what would happen in the event of the death, disability or retirement of any of the owners.

The real benefits of a buy-sell agreement are to create the framework for choices about how to deal with shares of the company and to try to eliminate friction over price and terms.

Buy-sell agreements may ensure a fair price to the purchaser of the stock, generate liquidity to pay estate debts and taxes, and provide income to a surviving spouse. They can be funded by life insurance, and the agreement may provide the purchase price, or a substantial part of it, for the shares.

In some circumstances, the agreement may involve a future prospective buyer. A sole owner might negotiate an agreement with a prospective buyer to purchase the business under certain terms in the event of the owner's death or retirement.

Without a buy-sell agreement, the surviving spouse or other family members may have to deal with finding a prospective buyer as well as placing a value on the business.

Why should your business have a buy-sell agreement?

Buy-sell agreements are overlooked far too often. The lack of an agreement can cause unnecessary problems that can destroy a family business, such as uncertainty for next-generation owner-managers, friction with uninvolved family members and inadequate financial resources for estate taxes. Outdated agreements often cause the same problems.

But a properly structured agreement can ensure family harmony and business continuity for future generations.

One of the primary goals of a buy-sell agreement is to provide a plan in which the parties agree to terms for the sale of an asset that is notoriously difficult to value – an interest in a closely held business. The result can be to create a market for the owner's business interest.

A key part of the development of a buy-sell agreement is to look at how to fund the buying party. There is no market for the interest unless the buying party – whether another owner or the business entity itself – has the ability to buy out the selling party's interest.

Another reason to enter into a buy-sell agreement is to avoid undue disruptions in the business. Planning in connection with buy-sell agreements will often address issues of smooth management transition as well as changes in ownership. Buy-sell agreements may also help protect the jobs of your long-time employees and reduce disputes among owners and employees.

Estate tax planning is also a major factor. For example, a buy-sell agreement may contain a valuation for the business interest that will be respected for IRS valuation purposes. With little or no planning, it could be necessary to sell off assets just to pay estate taxes. A lack of planning may result in delays in administering the estate.

What are the types of buy-sell agreements?

The buyer may be an individual or the corporation, depending on tax consequences and funding availability at the time. The agreement should describe whether it will be funded, what the payment terms will be and how the price will be determined. It should also cover any other miscellaneous factors that are important to the provisions of the agreement.

There are three primary types of buy-sell agreements:

1. Cross-purchase agreements

In a cross-purchase agreement, two or more owners or entities purchase the ownership interest directly from the withdrawing party or from the estate of the deceased individual. Assume two shareholders enter into an agreement that the surviving shareholder will purchase the shares of the estate or trust. Each shareholder buys life insurance on the other owner and names himself or herself as beneficiary of the policy. Upon the death of one of the shareholders, the surviving shareholder buys the shares. The surviving shareholder then owns 100 percent of the corporation.

Cross-purchase agreements may become unwieldy if there are more than a few shareholders. The advantage of the cross-purchase agreement is that the purchasers have a higher basis in shares, which may reduce tax if they later sell the shares during their lifetime. Also, with a cross-purchase agreement, funding isn't subject to any claims of business creditors.

2. Entity-purchase agreements

In an entity-purchase agreement, the corporation and shareholders, for example, enter into an agreement that the corporation will purchase the interest of a deceased or departing owner. The corporation buys life insurance on each shareholder and names itself as beneficiary. The corporation receives the life insurance proceeds upon the death of one of the shareholders and so has liquid funds to buy the shares owned by the estate or trust of the deceased shareholder or departing shareholder.

The surviving shareholders own 100 percent of the corporation as a result of owning all the shares that remain outstanding after the corporation redeems the shares of the former shareholder. Funding is provided by the business, so the business takes out only one life insurance policy on each owner. These type of arrangements can also be implemented with other types of entities such as partnerships, etc.

3. Hybrid agreements

If circumstances change or the owners don't know for sure whether the cross-purchase or entity-purchase approach will work better later, flexibility may be needed. The hybrid agreement employs a partial entity-purchase agreement and a partial cross-purchase agreement. It often leaves the option of who the buyer is until a triggering event occurs. A business may be given an option to buy all or part of the interest of a departing owner.

Another flexible approach is to give the other owners an option to buy shares or partnership interest, and then obligate the entity to buy any interest not purchased by the remaining owners. The parties may also consider periodic reviews and updates of the buy-sell plan.

What about sole proprietorships?

If your business is a sole proprietorship, the entity-purchase approach is not possible. In a sole proprietorship, if the owner dies, the business will be either sold or liquidated. However, the proprietor may plan for this situation by obligating the estate to sell the business to a purchaser, typically an employee or competitor. Or, the buyer may be a family member.

There is no particular procedure for setting the price. The parties may set the price subject to review, determine a price established by a formula, or provide for an appraisal to determine a price. An important consideration is that the valuation should withstand IRS scrutiny.

What are some issues that need to be addressed?

Structuring a buy-sell agreement is not a simple affair because of the estate and income tax issues, as well as the business and financial matters. There are issues of the relative tax brackets of the parties, the decision of whether to restrict gifts of interests in the business to family members, disparate costs of insurance due to age or health, alternative funding approaches, such as loans among the parties, and others. The possibility of a deadlock exists, as well as other concerns.

Special issues arise with the circumstances of the owners, including whether the parties are related family members. Planning also depends on whether the business is operated a sole proprietorship, S corporation, C corporation, partnership or limited liability company.

For family businesses owned by groups such as sibling partners or cousin groups, other issues make buy-sell agreements more complex. Deadlock-breaking provisions are important should there be an even number of shareholders divided along family lines.

Provisions should address what happens if some shareholders have previously sold their shares and the company is subsequently sold to a third party. A claw-back provision would provide a method for participation in an after-event transaction by sharing some of the excess proceeds with those who previously had sold their shares.

Too often, buy-sell agreements describe only what happens if a shareholder dies. More often, shareholders retire without any provision for the company to repurchase its stock. Therefore, agreements should specifically address what happens in the event of retirement, termination or disability.

Another often-overlooked provision deals with a situation in which stock goes into trust for a decedent's spouse while the company continues to be run by one or more active family members. With the surviving spouse continuing to control the company, the next-generation owner-managers may become increasingly frustrated as they get closer to their own retirement unless the buy-sell agreement spells out when they will actually become owners of the company.

What are the negatives of having a buy-sell agreement?

About the only possible negative of a buy-sell agreement is that, if the agreement is poorly structured, it might not adequately anticipate future needs and changes in the family, marital or financial circumstances. If it is properly structured, a buy-sell agreement gives the flexibility needed to address the needs of young children, disabilities, fluctuations in value and other changes.

Consult your CPA regarding a buy-sell agreement. Ideally, CPAs with knowledge of your business can work closely with attorneys to ensure that the best possible agreement is crafted.

Many taxpayers mistakenly believe that they have to be scientists inventing something completely new or developing cutting-edge technology to qualify for the research and development tax credit.

Or they think they have to be doing "research" as we commonly understand that word.

These do qualify, but there are many other activities that also qualify. The tax definition of "research and development" is quite broad. A dedicated R&D department or laboratory is not required, and it is not necessary to be a biotech, semiconductor, or similar "high-tech" company to be eligible for R&D tax credits.

Most businesses across a broad range of industries are routinely involved in common activities to develop, refine or improve their products and processes to stay competitive, and thus potentially qualify for the incentive.

Regardless of the nature of a business, as long as qualified research and development activities are being performed, there is an opportunity to pursue R&D tax credits.

This credit applies to many businesses, quite a number of which are in the manufacturing field. It also applies to software or technology companies, as well as architectural and engineering firms if they have taken on the economic risk for the project and have met the retention of rights requirements.

Smaller businesses can qualify for the credit in addition to large companies. Many taxpayers have claimed billions of dollars in federal and state tax credits for qualified research expenditures. Qualified research expenditures include costs associated with investments in innovation and improvements beyond just new product development.

The research and development tax credit is available for businesses developing new or improved products. It also can apply to:

  • Engineering and designing a new product
  • Research aimed at discovering new knowledge
  • Searching for ways to apply new research findings
  • Designing product alternatives
  • Evaluating product alternatives
  • Significantly modifying of the concept or design of a product
  • Designing, constructing and testing preproduction prototypes and models
  • Engineering activity to advance the product's design to the point of manufacture
  • Systems processing modeling
  • System and functional requirements analysis
  • Integration analysis
  • Experimenting with new technologies
  • Experimenting with new material and integrating the material to improve manufactured products
  • Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality and durability
  • Developing new production processes during prototyping and preproduction phases
  • Research aimed to significantly cut a product's time-to-market
  • Research aimed to obtain more efficient designs
  • Developing and modifying research methods /formulations /products
  • Paying outside consultants/contractors to do any of the above activities

To determine whether your company qualifies for the tax credit, consult with your tax adviser and consider the following:

1. Is your company discovering some technological information that does not already exist within your company?
2. Is there uncertainty regarding the product or process development?
3. Are the costs your company is expending attributable to a process of experimentation?
4. Does the "research" have a general business purpose?

If you answer "yes" to these four questions, get in touch with your CPA as soon as possible. Your CPA will help you determine whether you are eligible for the tax credit and provide you with an estimate of how much the credit will be.

You can then decide if the benefits of the tax credit are worth the documentation requirements needed to sustain the credit. Under IRS regulations, a taxpayer must retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.

To claim the credit, you must clearly establish full compliance with all of the relevant statutory and regulatory requirements. It is imperative to ensure that qualified expenses have been properly quantified and that documentation is properly prepared to support the credit position taken. Failure to maintain records in accordance with these rules is a basis for disallowing the credit, so it is important to consult with your CPA to make sure these records comply with the IRS requirements.

What types of costs qualify for the R&D credit?

The expenditures that may be applied toward the R&D credit include both in-house research expenses and contract research expenses.

The in-house research expenses that can qualify for the R&D credit fall into two categories:

1) Wages paid to company employees for conducting, directly supporting and directly supervising qualified R&D activities

2) The cost of supplies used or consumed in relation to these R&D activities

Contract research expenses are those amounts paid to anyone outside the company performing qualifying research activities on your company's behalf. The time and effort devoted to conducting research do not necessarily have to be undertaken by your employees. By contracting with outside individuals or companies to conduct these activities on your behalf – provided their contract expenses qualify for the R&D credit – you are improving and advancing your company and, as a result, those expenditures may qualify for the R&D credit.

General business credits can be used up to the full amount of the corporation's or individual's tax liability. In addition, credits that can't be used in the current year can be carried back to any of the previous five years.

It should be noted that, due to legislative changes in 2010, this provision is available for "eligible small businesses." An eligible small business is defined as one of the following:

(a) A corporation whose stock is not publicly traded

(b) A partnership

(c) A sole proprietorship

To qualify as an eligible small business, average annual gross receipts of the corporation, partnership or sole proprietorship for the three prior tax periods cannot exceed $50 million. Many businesses that qualified for the credit, but could not benefit cash-wise because of AMT limitations, can now get their credits currently versus having to carry them forward.

In addition, the American Taxpayer Relief Act of 2012 extended the tax credit through 2013. The R&D credit has been "temporary" for many years and its availability subject to many extensions by Congress. Many businesses are lobbying to make the credit permanent, but there are no guarantees.

Additionally, in recent years a few states have added a "refundable R&D credit" to companies that meet their general R&D criteria, but are not yet profitable and operated at a net operating loss for that specific tax year.

To encourage additional development and growth, which would translate to future state taxes, some state legislatures have voted to support state qualified (small) businesses by offering them a refundable credit based on a few additional R&D criteria. Generally speaking, it mirrors their regular R&D credit but requires additional details about the business, etc.

If you are entitled to these credits – take them! In these hard economic times, don't leave tax dollars on the table for the IRS or states that could be in your pocket.

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