Laying the Groundwork for a Business Sale

Are you considering selling your small business? To ensure a successful and profitable outcome, now may be the right time to prepare for such transaction in advance.

After you’ve built your business from the ground up, being objective about its value can be difficult. Knowing what similar businesses have sold for recently can provide significant guidance. If you require a clear idea, you may consider having a certified accountant complete a business valuation.

Next, it is important to give some thought to an appropriate type of buyer – your ideal candidate. Is it a key person who currently works for your company? A competitor? Someone who just wants to buy a good business and run it but isn’t a current employee or competitor? An investor who wants to make a profit but isn’t interested in the day-to-day operations of the company? The sales price you desire will be dependent on the type of buyer being targeted.

At this point, you will also want to think about your future participation in the business after it is sold. Consider the role you’d be willing and able to play, if any, during the transition to new ownership.

Make It Attractive
Before putting your company on the market, you’ll want to focus on its profitability. Taking steps to enhance the bottom line — even if it means paying more income taxes — may allow you to command a higher price for the business.

On the asset side, now is the time to identify any equipment, furniture, fixtures, or machinery that is no longer useful and consider selling or otherwise disposing of these items. That way, you’ll be able to present a leaner business to potential buyers.

It’s What You Keep
Selling your company for a fair price is important, but so is securing all available tax advantages. Will you be structuring the sale as an asset sale or will you be selling your company stock? Each has different tax implications. With smart planning, you’ll be in a better position not only to command top dollar for your company, but also to minimize taxes on the sale.

Donating Excess Inventory to Charity

Getting rid of excess or obsolete inventory can provide much needed warehouse space.  Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.

A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.

The basis of contributed inventory is any cost incurred for the inventory in an earlier year the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.

Manufacturing_Inventory3

If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.

Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.

IRS Changes Call First Policy for Audits

Most taxpayers are familiar with the IRS’ promise of not calling first. The IRS offers this assurance in an effort to combat scammers making unsolicited calls claiming to be IRS officials. However, this pledge has not been entirely accurate and lends to an explanation.

Tirs-logohe IRS made such declaration with regard to phone calls made for the collection of taxes or requests for personal information. However, until recently the Internal Revenue Manual suggested the preferable way to schedule in-person field examinations was to make initial contact through phone calls. The IRS felt it was clear their previous assurance of not calling first related only to collection calls while calls to schedule audits were a completely different function. Unfortunately, the distinction is not as obvious to a taxpayer receiving a cold call from someone claiming to be from the IRS. Distinguishing between the two scenarios may be difficult. In an effort to avoid confusion, the IRS is changing their policy and will now send a notification of audit through the U.S. mail and will follow-up with a subsequent call to schedule an appointment.

This change in policy is the result of various complaints from attendees of a public forum held by the Taxpayer Advocate Service on May 5, 2016. The complaints argued taxpayers has received phone calls from the IRS to schedule audits, which contradicted the IRS’ assurance of never calling first. In response to these complaints, the IRS issued a statement that “in an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams.”

This change in policy means the IRS will no longer make initial contact through phone calls, but will instead only contact taxpayers via for follow-up communication. An IRS Consumer Alert reminds taxpayers that the IRS will never do any of the following over the phone:

  • Demand immediate payment
  • Request you to verify your identity or ask for personal and financial information
  • Ask for credit or debit card numbers
  • Require the use of a specific payment method for your taxes, such as prepaid debit card
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying

If you receive a phone call from someone claiming to be from the IRS that involves any of the above red flags, do not provide any information and hang up immediately. You can then call any of the professionals at William Vaughan Company and we will assist you in determining if you have any obligation to the IRS.

By: Mark Sawyer, CPA

Protecting Your Brand on Social Media

Thanks to social media, grandparents are posting photos on their grandchildren’s Facebook pages, shoppers are reading product reviews online before making a purchase, and disgruntled customers are sharing their displeasure with anyone who will read their review.

The benefits of social media to small businesses may be considerable. However, it has introduced potential risks. One of the most critical threats to any business is a negative review. Such  adverse commentary can ruin a business’s reputation, which could be fatal.

How can you protect your business from damaging online attacks? Here are some suggestions:

Social MediaJoin the conversation. If you’ve been visible on social media, you’ll have more credibility if something erupts. However, battling a possible negative comment or two is not the only reason to have a social media presence. Social media has leveled the playing field by offering the opportunity to market and promote your business through direct engage with your customers. The mere convenience of smartphones and tablets make utilizing social media to your advantage effortless. Take the time to know where your clients or potential customers visit and make an effort to engage in conversations or even start one of your own.

Pay attention. Monitor the Internet for news about your brand. Routinely check online review sites (if appropriate) and social networking sites for references to your company. There are programs designed to help you determine when your brand or name is mentioned on social media platforms. Such “brand monitoring” helps you preserve your brand and the light in which people view your organization.

Be prepared. You can’t draft specific responses ahead of time, but you can identify your vulnerabilities and draft a response strategy. You’ll be well ahead of the game if you do this before a crisis strikes rather than during one. You’ll also be able to dial down your emotions and respond more objectively. There’s another upside to identifying your vulnerabilities ahead of time: You have an opportunity to eliminate them.

Respond. Make sure you have the facts straight before you do anything. However, things can escalate rapidly online. So if you’re going to respond, do so quickly and publicly. That said, not every attack warrants a public response. The complaint may not be legitimate or the person complaining may be a troublemaker, in which case responding may be a waste of time.

Social media has opened the door for many businesses to connect with a wide prospect base. While the benefits of social media can be significant there is always a risk. Take the time to research and review your social media strategy. Effectively communicate your stance on handling potential threats to your staff and make sure you have a plan in place before you explore the world of social media.

By: Jessica Sloan, Marketing Manager

Financial Planning Is For Everyone

That’s right — even you! From buying your first home to planning for retirement, financial planning can set you on the right course. Make your planning session with your financial professional a success by deciding what you want to accomplish and preparing ahead of time.

Share Your Info

financialplanningYour advisor will need to know every detail regarding your finances and your investment goals before mapping out a strategy.  It is essential to bring all of your important financial data with you when meeting. This includes bank, investment, and retirement account statements; information on loans and other debts; and last year’s income-tax return.

Define Your Risk Tolerance

If you’re designing an investment plan, your financial professional will help you assess your investor type— conservative, moderate, or aggressive. Your ability to handle risk, as well as goals you’ve set for yourself, will serve as a guide for choosing investments that meet your objectives and comfort level. Exposing your portfolio to too much risk may put your savings in jeopardy, while holding too many “safe” investments may prevent you from reaching your goals.

If you’ve already chosen an investment strategy, use the time with your financial professional to review your progress toward your goals. If your investments aren’t performing the way you expected, you may want to make some changes.

Bring Your Spouse

If you’re married, both you and your spouse should attend the meeting and be prepared to discuss your goals and expectations. If you and your spouse have different objectives or risk tolerances, your advisor can help you come up with a plan that addresses your differences. Your session may be more productive if you and your spouse discuss financial issues before the meeting

It’s a Lifelong Process

You can’t simply “set and forget” your financial plan. Over time, your goals and risk tolerance may change. You’ll probably achieve some of your objectives, and new ones may take their place. Even events that are out of your control, such as market volatility and inflation, can affect your plan. Reviewing your strategy periodically with your financial professional can help you stay on track.

 

Ohio BWC Annual Payroll True-Up & Ohio Unclaimed Funds Returns

Over the past few months, the Ohio Bureau of Worker’s Compensation (BWC) has been sending notices to businesses as a reminder of the new regulations which have been in affect over the past year. After the final June 2016 payroll, businesses will need to file an annual payroll true-up return. This will include all wages paid from July 1, 2015, through June 30, 2016. Businesses will be required to report the total wages paid for this period along with the deposits submitted to the Bureau of Workers’ Comp since last July and into the current year. Deposits should have been paid – some organizations elected to pay 1 payment while others decided to pay bi-monthly. Organizations should not include the amount paid for your 1st half 2015 wage report filed last July/August. Only payments made on this new payment schedule must be reported

In May, employers should receive a notice of estimated annual premiums along with their annual certificate of coverage. Letters and emails have been sent to businesses regarding the payroll true-up. Such letters provide instructions on establishing an e-account online to file the return in July. Filing can also be completed over the phone. The BWC will no longer mail paper returns. True-up returns are due August 15, which happens to be 2 weeks earlier than in previous years. When filing, if your organization owe’s money, you will pay the outstanding balance at this time. In addition, any refunds will either be applied to the following year’s installment payments or will be refunded. Employers must pay online to be eligible for the Go-Green rebate which is calculated at 1% of your premium up to $2,000.

Ohio Unclaimed Funds Returns – Due November 1, 2016

Now is also a good time to review monthly bank reconciliations for old checks which have not cleared the bank. If they are over a year old, chances are the check has been lost. Once you have checked to make sure you have not resubmitted the payment or the check has been voided, you may contact vendors or employees. A simple change of address may assist you in getting your books organized before June 30th. The sooner you start reviewing old checks and determining why they have not cleared, the easier it will be to file a negative return on June 30th.

If you have any questions, please contact William Vaughan Company.

Sandra Stone
Accountant

Nonprofit Board Member Alert

If you are a volunteer board member for a nonprofit organization, one specific issue to keep in mind is the IRS’s trust fund recovery penalty. If any entity — nonprofit or for-profit — fails to properly remit Social Security taxes and/or income taxes withheld from employees’ wages, the IRS will directly approach the organization’s “responsible persons” for the tax payments and a potential 100% penalty.

Object_AlertIn general, the penalty will not be imposed on any unpaid, volunteer member of the board of a tax-exempt organization if the member: (1) is solely serving in an honorary capacity, (2) does not participate in the day-to-day operations of the organization, (3) does not participate in the financial operations of the organization, and (4) does not have actual knowledge of the failure on which the penalty is based.

However, for an active member who has governing responsibilities, it is still important to ask questions about who is handling these tax payments (a staff member, the executive director, a payroll service, an accountant?) and what checks and balances are in effect to make sure no problems arise. Annual reviews or audits may also be helpful to verify compliance.

Business Equipment: Break Even Analysis

Break-even analysis is used to determine the break-even point for a business. This is where the total revenues equals total expenses. In other words, the break-even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period. Such analysis can be a very valuable analytical tool to determine if action must be taken to increase sales or decrease your costs. Some business owners do not know their break-even point and instead enter each month blindly. This can be extremely dangerous as you are unable to be proactive, only reactive. Leading a business down such a road may result in an inability to recover and ultimately the failure of a business.

Business_Graphs13A more non-traditional application for a break-even point is using the calculation to help determine if an additional capital expenditure is worthwhile. If you are considering making a large investment by purchasing a new piece of equipment you will require a more methodical decision-making technique to determine benefit. Break-even analysis can be one of those techniques. Purchasing a new piece of equipment may reduce your variable costs. However, it will increase your fixed costs, such as interest and depreciation. If the decrease in variable costs is not more than the extra in fixed costs, it is not a viable investment. In theory, your break-even point should be reduced with the purchase of new equipment.

There are some important considerations to be made when calculating your business’s break event point for a new piece of equipment. You must know what the fixed costs will be for the equipment, the new variable costs, and the associated sales. These are all the necessary parts of a break-even analysis. It all seems simple enough, but if you are looking to purchase this machine, you do not yet have it to know these things for certain. It is important to do as much research and have as much valuable information as possible. Keep in mind, the dealership selling the equipment wants to make a sale and may inflate some of the positive numbers. This may mean you will be working with averages which may be on the low end or high end. Nevertheless, this can be a very valuable tool in determining if it is a viable option. If your sales will have to be so high to cover the costs of a new machine, then it may not be worth it.

Like all calculations, it is vital to have quality and accurate general ledger numbers to compare and understand. Do not review the implications of a purchase from one side – the expense side. Instead, make sure you consider the overall impact. Break-even analysis is your big picture view.

By: Tara West, CPA, CMA

The Tax Implications of Fringe Benefits For Shareholders

An S Corporation is a very popular business entity with various tax advantages for shareholders. However, for two-percent shareholders, the IRS tax regulations for specific fringe benefits may be unclear. First, it is essential to first determine who is a two-percent shareholder. This is any person who owns (directly or indirectly on any day during the tax year) more than two percent of the outstanding stock of the total combined voting power.

Certain fringe benefits normally excluded from an employee’s taxable wages are required to be included when provided to any two-percent shareholder. If these fringe benefits are not included in the shareholder’s W-2 Box 1, then they are not deductible by the corporation.

The most common fringe benefits affected by such rule are health, dental, and vision insurance premiums paid under a corporate plan or the amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If a company has established an HSA account and makes contributions on behalf of employees, this fringe benefit is typically excluded from their compensation. However, for a two-percent shareholder, these must be included in compensation. These premiums are subject to federal and state withholding, but not FICA or FUTA. The two-percent shareholder must take an above the line deduction for self-employed health insurance on their 1040 for the premium amount included in Box 1 of the W-2 from the S corporation.

Business_NotesA two-percent shareholder is not eligible to participate in a cafeteria plan, nor can their spouse or child. If a two-percent shareholder is permitted to participate, the plan may lose its tax-qualified status thus resulting in the provided benefits becoming taxable to all participating employees. As such, employees would not be able to make pre-tax salary reduction elections to obtain any benefits offered under the plan. Typically, such benefits may include dependent care assistance, adoption assistance, portions of health insurance premiums paid by the employee and health savings account contributions.

Other taxable fringe benefits can include qualified transportation, qualified adoption assistance, contributions to a medical savings account made by the employer, and qualified moving expense reimbursements. All of the above must be included as compensation for any two-percent shareholders. These fringe benefits are subject to FICA, FUTA, federal and state withholding.

This brief overview provides a glimpse into the complexities which may be encountered as a two-percent shareholder of an S Corporation. If your organization utilizes a payroll service, make sure such information is conveyed so a proper W-2’s can be submitted. If payroll is being completed in-house and additional guidance is necessary, please contact a payroll specialist at William Vaughan Company for assistance.