Category Archives: Business Consulting

Buy-Sell Agreements: Are You Prepared?

Business scenario: Fifteen years ago, I and three others started a business. We had our corporate attorney draft a buy-sell agreement which we all signed.Fast forward to current day. A triggering event occurs (a member quits, is voted out due to lack of performance, retires, becomes disabled, is going through bankruptcy, is having a divorce, etc.), what happens? Our buy-sell agreement was never updated, so what happens is dependent upon what the agreement stated 15 years ago.

In this specific case, there are a number of variables that can drastically affect the outcome of the situation at hand. If there is a shareholder dispute, the process will be fairly lengthy as a result of involving multiple attorneys and the appeals process. Who owns the stock during this timeframe? Does the former shareholder, who feels was voted out of the business unfairly, still get distributions during the lengthy appeals process?

Or, what if a member is going through a divorce, the ex-spouse wants part of the other spouse’s percentage of ownership in the business. Does the buy-sell agreement limit this from happening?

If life insurance policies are in place on each of the owners in case a triggering event occurs. Will the proceeds from the policies be enough to purchase the interest of the departing owner? Does the policy amount cover the total value of the departing member’s interest? If not, what other funding vehicle is going to be to purchase the interest? Also, is the value received by the departing member or member’s spouse “in the ballpark” of what was expected; or is there going to be some ill feelings when it is all said and done between friends (now former friends), family, etc.?

buy-sellagreementSo, let me ask you this, do you have a buy-sell agreement in place? When was it last updated? Does the buy-sell agreement address any of the items mentioned in above? Are the intentions of the ownership group the same as they were when the last buy-sell agreement was signed? Does the buy-sell agreement actually meet the expectations of those signing it?

These are critical questions that must be considered when involved in a buy-sell agreement.  Whatever you spend on a buy-sell, it will be a drop in the bucket compared to what it can save you.

A buy-sell agreement provides the peace of mind knowing that their business. It also:

  • Provides money to create a fair market value exchange
  • Promotes equitable and orderly transfer of wealth, ownership and management
  • May offer tax advantages
  • Guarantees heirs a buyer for assets they may not know how to manage
  • Provides heirs cash to pay estate debt, expenses and taxes

It is far much easier to take the time now to ensure all your “ducks are in a row” while the interests of the parties involved are in alignment. Once a triggering event does occur, the interest of the parties involved generally diverge, and either the buyer or the seller will ultimately be unhappy and unsatisfied. Which end of the spectrum will you be on? Contact our buy-sell agreement specialists today at leininger@wvco.com or call (419) 891-1040 and ask for Ryan Leininger.

By: Ryan Leininger, CPA, CVA

LIFO Inventory Election: Don’t Miss Out

Today’s significantly reduced oil prices creates an financial opportunity for any business that maintains an inventory of products that are petroleum-based. Products such as heating oil, gasoline,lubricating oils, and diesel fuel are all obvious product types that use crude oil as their raw material. However, products such as plastics, fertilizers and other petrochemicals often are also based on crude oil prices.

If your company relies on one or more of those products and maintains an inventory, especially a large dollar value of inventory, then this might be the year for you to consider a “last in first out”(LIFO) inventory election.

Many taxpayers in the U.S.currently use (FIFO) “first in first out” which means they are always valuing their inventory using the purchase price closest to the date of the inventory. The assumption on the flow of cost is that the oldest products are sold first and the cost of the most recent additions to the inventory are maintained as the inventory value.

imageLIFO, on the other hand, reverses that assumption. LIFO maintains inventory values based on the original purchase price, typically the lowest price, and in effect allows current costs to be expensed as incurred. The end result is that many taxpayers who have elected LIFO 30 or 40 years ago are still valuing their inventory at the prices that were in affect at the time they made the LIFO election. This means that all the years of price increases have been expensed as a cost of sales for the year they were incurred, and none were trapped in inventory. In times of rising prices, this is a great benefit to the taxpayer.

Basically, the best time to consider making a LIFO election is at the time when raw material prices are at the lowest point. This election is simply done by attaching several forms to the year-end tax returns and is an automatically approved election by the Internal Revenue Service.

With crude oil prices being under $60 a barrel at the end of 2014, it sets the stage for those taxpayers that have not already elected LIFO to lock-in, what could be, the lowest oil prices we’ll see for years. This low cost would be part of their base inventory cost and they would gain the benefit in all future years, as prices most-likely climb.

If you have questions on any element associated with LIFO inventory or think it may be a valuable option for you, please contact your professional at William Vaughan Company as soon as possible.

By: Bill Horst, CPA, CMA

2014 Business Year in Review

Busy is good. Most small business owners would rather things were too hectic than too slow. As the year winds down, though, let your staff handle the busy-ness while you look at the business — where you are, what you’ve accomplished in 2014 and where you’re headed in the new year and beyond.

Your bottom line

The quickest way to figure out where you are is to check your bottom line. Are you making money? Are profits better or worse than they were last year at this time? Are you meeting your expectations? If not, why not?

business_outlookYour business plan

Change is inevitable. And businesses have a way of outgrowing their business plans. But if you don’t have a current plan, you don’t have a way of measuring your progress. So if you’ve been “off road” without a plan for a while, it’s time to formalize a plan that reflects past growth and sets new goals for the next several years.

Your competition

The more you know about your competition, the better. Who are they? How are they different? How are they the same? Where do you overlap each other? Understanding their business model will help you prepare strategically for possible changes in the marketplace.

Your secret weapon

Your workforce is your secret weapon, especially if you’re in a competitive market. Dedicated, well-trained employees providing top-notch customer service can help put you out front of even the largest competitor. A rich, competitive benefits package will help you attract — and retain — a high-caliber workforce. Health insurance and retirement plans are highly valued benefits. You can offer a variety of other benefits to suit your employees’ needs and your budget. Ask your financial professional for information.

Your future

Do you have a formal succession plan? Are you grooming someone to take over? A well-trained successor could help in the successful — and profitable — transfer of your business. And you can use life insurance to pre-fund all or part of the sale.

Retirement Plan Fiduciary Responsibilities

Do you manage your company’s retirement plan in your day-to-day activities? Managing a retirement plan such as controlling the plan assets or using discretion in managing the plan makes you the plan fiduciary. According to the IRS, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. Fiduciary is not just a title, but the very functions performed for the plan.

Important fiduciary responsibilities include:
– Acting solely in the interest of the participants and their beneficiaries
– Acting exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
– Following the plan documents (unless inconsistent with ERISA)
– Diversifying plan investments
– Carrying out your duties as a fiduciary prudently, with care, and diligence

fiduciaryWho sets the standards for fiduciaries of retirement plans?

The Employee Retirement Income Security Act, also known as ERISA, set standards of conduct for those who manage employee benefit plans and its assets. It is important for the fiduciary to follow through with their responsibilities because they act on behalf of the participants in the retirement plan and their beneficiaries. According to the Department of Labor (DOL), the significance of being a fiduciary is acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them.

Carrying out duties prudently is one of a fiduciary’s central responsibilities under ERISA. In other words, a fiduciary should have knowledge and expertise in a variety of functions necessary to operate the plan. It is recommended to consult experts in accounting and investments to assist in carrying out your fiduciary responsibilities the best that you can.

It goes without saying, the responsibility of being a fiduciary should not be taken lightly. It is a big responsibility and often times businesses hire someone to act as their fiduciary to handle the responsibilities set forth above. Even if you hire a financial institution or retirement plan professional to manage your plan, you retain some fiduciary responsibility for the decision to select and keep the service provider. You should document your selection process and monitor the services provided to determine if you need to make a change.

By: Aubrey Forche, Staff Accountant

Special Per Diem Rates for 2014-2015 Travel Expenses Issued

The IRS has released its annual update of special per diem rates for use in substantiating certain business expenses taxpayers incur when traveling away from home in 2014 and 2015. IRS Notice 2014-57 includes rates for incidental-expenses-only deduction, special meals and incidental expenses in the transportation industry, and high-low substantiation method.

Transporation_Airplane6Rates for special meals and incidental expenses in the transportation industry are $59 for travel anywhere in the continental United States and $65 for travel outside of the continental United States. Regardless of whether you are traveling inside or outside of the continental United States, the per diem rate for incidental expense-only deduction will be $5 per day. The per diem rates for the high-low substantiation method have increased from $251 to $259 for travel to any high-cost locality and $172 for travel to any other locality in the continental United States. Out of the $259 high rate and $172 low rate, the amounts treated as paid for meals is $65 for travel to any high-cost locality and $52 to any other locality within the continental United States. A list of high-cost localities with a per diem rate of $216 can also be found in Notice 2014-57.

These new per diem rates went into effect on October 1, 2014 and are intended for any employee traveling away from home on or after that date.

By: Rachel Mossing, Accountant

Employee Dishonesty Coverage

Most businesses have insurance policies that cover their employees, but is it enough? Does your business have employee dishonesty insurance? This insurance protects the employer from financial loss due to the fraudulent activities of an employee or group of employees. The loss can be the result of the employee’s theft of money, securities (which includes checks) or other property of the insured. Of course, policy coverage may differ between insurance companies. The employer, the named insured on the policy, is the main entity insured. The “who” of coverage may also include all current or former employees, partners, members, directors, volunteers, trustees, seasonal employees and temporary workers at your direction or control. Employee dishonesty coverage is really a fidelity bond. The normal form of coverage is
a blanket policy which will cover fraud committed by any employee.

Fraud_ThumbprintIf the company has access to other customer’s money, securities or property, the policy can be endorsed to include third party coverage. With the third party endorsement coverage is extended to a customer or client with whom you are under contract to perform services. As an example, employees often have access to patients credit card numbers. Does your insurance cover you if an employee steals that credit card information and uses it? Employee dishonesty coverage can typically be added to another insurance policy, such as the property or the fiduciary liability policy. The coverage may be extended to include forgery or alteration, funds transfer fraud, computer fraud, credit card fraud, money order and counterfeit fraud.

With fraud and identity theft at an all-time high, you may want to review your policies and make sure you are covered!

By: Jenny Furey, CPA

Real Estate Investment: 1031 Exchange

What is a 1031 exchange (also called a like-kind exchange) and why would you want to do it? If you own investment real estate you may have already engaged in this activity and reaped the benefits, but for others just getting into real estate investment this may be a new topic of conversation.

A 1031 exchange is a swap of one investment asset for another. If done under the rules of 1031 you will in most cases be able to defer any tax due at the time of exchange, which allows your investment to grow tax deferred. You can roll any gain on the swap over into the new investment asset until you actually sell that investment asset for cash at which time you would then recognize any gain.

realestate

There are special rules that apply when depreciable property is exchanged. It can trigger gain known as depreciation recapture that is taxed as ordinary income. In general if you swap one building for another building you can avoid this recapture.

Some general guidelines regarding this provision: It is only for investment and business property, most 1031 exchanges are for real estate. Properties are of like-kind if they are of the same nature or character, this can have a broad interpretation. If you receive cash after the exchange is complete this cash may be taxed as partial sales proceeds and is generally considered capital gain.

This is a general overview and there are many other rules and regulations to complete a successful 1031 exchange transaction for which you would want to consult your accountant.

By: Christine Schultz, Accountant