For many people, there are few things more important to them than their family and their business; sometimes the two are intertwined. By taking steps to protect their business, they are also protecting their family. Every day that value is added to a business without a plan for future transition, it increases the owners’ financial risk.
Ideally, the co-owners of every multi-owner business puts in place a buy-sell agreement at the time his or her company is formed as part of the start-up process. A buy-sell agreement protects both the remaining business owners and the co-owner who leaves the business should what is referred to as a “triggering” event occur. If a co-owner wants to: retire, sell his or her interest, goes through a divorce, declares bankruptcy, or dies, a buyout agreement acts in a similar way to a “prenuptial agreement” by protecting everyone’s interests, either setting the price and terms for a buy-out, or the process for determining them.
No one likes to think about divorce but, if a co-owner of a business is divorcing, can his or her spouse ask for part ownership in the business? That risk does exist. In community property states such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, all monies earned and all property acquired with those earnings are included in the community property, owned equally by both spouses and each can claim a right to such property. A spouse in a non-community property state (such as Florida) may argue for a partial interest in the business since marital property laws require the equitable (not necessarily equal) distribution of property in a divorce.
The best way to avoid this eventuality is to make sure that the buy-sell agreement requires the ex-spouse to sell any interest received as a result of the divorce back to the company, or other co-owners, in accordance with the provisions specified in the buy-sell agreement and include the then spouse as a signatory.
It helps for the co-owners to agree on the process to be used to value the company in advance from the beginning within the buy-sell agreement. Agreeing on the valuation process ahead of time will reduce conflict if and when the situation requiring a buyout comes about.
However, another issue can be the funding of such a redemption. If a lump-sum payment is required, it can inhibit the company’s ability to repurchase a co-owner’s interest. Building flexible payment terms into the buy-sell agreement may (again) prevent problems from occurring at a later date with execution of the buy-out or having an adverse affect on the business itself from stretching its resources too thin in order to rebuy the interest.
Buy-sell agreements have been used successfully to reduce estate taxes in businesses where one or more of the co-owners wish to bequeath his or her interest to family members without burdening them with avoidable estate taxes caused by an overly zealous valuation of the business enterprise. By choosing a more conservative valuation formula or process for the business in the buy-sell agreement, the value of the ownership interest may be significantly less than its sales price determined upon the death of the owner. Provisions can also be made in the buy-sell agreement that allow insurance to be used to fund the repurchase of the deceased owner’s interest.
There are many situations such as those mentioned in this article that can occur where a buy-sell agreement could benefit all parties concerned. Without a proper buy-sell agreement in place, a business co-owner may find himself running his business with an outsider or an ex-spouse. An owner nearing retirement may discover the company is not obligated to buy back his or her stock. Even worse, a majority owner who desires to sell his or her interest may have its sale vetoed by minority owners. These kind of situations can be avoided with a well-crafted buy-sell agreement.
What’s the message here? It is in the best interests of all business co-owners to protect themselves by making sure there is a thorough, well thought out buy-sell agreement in place. The future of their businesses, their families and themselves may depend on it.
About the Author: Sharon Foote, ASA, CFE, is a manager in the Business Valuation and Litigation Support Practice of Berkowitz Pollack Brant. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or by email at email@example.com
Posted on November 27, 2015 by
With the season of giving upon us, individuals should remember that giving money and property can yield significant tax and estate-planning benefits. In fact, there are several gifts you can make anytime throughout the year without incurring federal gift tax. They include the following:
- An unlimited number of gifts that are less than the annual exclusion amount of $14,000 per gift from individuals or $28,000 from married couples in 2015 and 2016,
- Gifts to a spouse, including legally married same-sex spouses,
- Gifts of tuition or medical expenses paid for someone else directly to an educational institution or medical provider,
- Gifts to a political organization, and
- Gifts to qualified charities, which provide donors with the added benefit of a charitable deduction on their federal income tax.
When making any significant gift of money or assets, individuals should seek the counsel of an experienced CPA and financial advisor to ensure that the transfer is structured to be both tax-efficient and in line with one’s overall estate-planning goals.
About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is a director with the Taxation and Personal Financial Planning practice of Berkowitz Pollack Brant, where he works with entrepreneurs and multi-generational family businesses to develop tax-efficient estate, succession and financial plans. He can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email firstname.lastname@example.org.
Mergers and acquisitions involve an exhaustive amount of legal and financial due diligence before a deal can close. Among the preliminary factors both buyers and sellers should consider during this process are the tax-qualified retirement plans each offers to its employees and the implications a merger or acquisition will have on those plans, their employees and their ongoing operations. Depending on the circumstances, both buyer and seller may need to take action before the transaction is complete.
Considerations for Asset Sales and Stock Sales
A business acquisition can take one of two forms: an asset sale or a stock sale.
In an asset sale, the buyer agrees to purchase all or a portion of the seller’s assets, including its employees, which, under IRS rules, results in the seller’s termination of its employees and an existing retirement plan. Consequently, a seller is required to make matching or profit-sharing contributions to an existing retirement plan, regardless of established vesting schedules, to ensure employees become 100 percent vested in all accrued benefits at the time of plan termination. Moreover, plan termination will trigger the seller’s responsibility to distribute plan assets to its participants, who may roll over their benefits to another qualified plan or Individual Retirement Account (IRA). Doing so will require the seller to issue notices to plan participants of their election rights 30 to 180 days before the date of benefit distributions.
Prior to closing, the buyer in an asset sale must determine how it will treat retirement benefits for employees it will continue to employ after the merger/acquisition. The buyer is not required to recognize employees’ prior arrangements with the seller nor any prior retirement plan eligibility or vesting obligations. However, the buyer may elect to amend the existing plan to continue prior coverage or merge it into its own retirement plan, as long as the amendment is in effect before or on the date of the sale.
In a stock sale, a buyer agrees to purchase all of the seller’s corporate stock, including its assets and liabilities, employment arrangements and benefits plans. In effect, employees involved in a stock sale maintain employment and continuation of retirement plan benefits.
However, when both seller and buyer have existing qualified retirement plans in place, the buyer must make a decision. It may opt to terminate its 401(k) plan before the acquisition closes and take advantage of IRS rules that prohibit plans to distribute benefits between the plan termination date and the 12 months after assets are distributed when the employer maintains another defined contribution plan. Alternatively, the buyer may elect to enroll the seller’s employers in its existing retirement plan, at which point the seller must freeze the prior plan to avoid distributions or the buyer must impose a 12-month waiting period on employees to enter the plan after assets are distributed. In both instances, plan sponsors must issue notices to participants detailing the changes in benefits and investment options as well as a 30-day notice of any blackout period exceeding three days, during which time participants will not be permitted to change investments or request a loan or distribution from their plans.
Regardless of the method selected, it is important that the buyer conduct adequate due diligence on the qualified plan of the company it plans to purchase. Merging the plans can create greater economies of scale and drive down the investment and administrative costs of the retirement plan. This potential savings must be balanced against the liability inherited of all historical actions of the acquired company. As sale negotiations progress, your plan consultant should work closely with an ERISA attorney to provide actionable advice on handling the qualified plan.
The professionals with Provenance Wealth Advisors work with businesses of all sizes, through start-ups, mergers and acquisitions, to design benefits plans and implement best practices to meet regulatory compliance and serve the needs of plan sponsors and participants.
About the Author: Sean Deviney is a CFP®* professional and retirement plan advisor with Provenance Wealth Advisors, an independent financial services firm that often works with Berkowitz Pollack Brant Advisors and Accountants. For more information, call (800) 737-8804 or email email@example.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
As another calendar year draws to a close, taxpayers again face the question of whether or not Congress will extend a package of 52 tax breaks for individuals and businesses that expired at the end of the last year. If the past is any indication of the future, congressional lawmakers will pass some, if not all, of these “tax extenders” at the very last minute, leaving taxpayers with little time to act and take advantage of them.
In this uncertain and unpredictable environment, taxpayers must be flexible in their year-end tax planning and be prepared to take immediate steps to take advantage of any congressional action. Meeting with a qualified tax accountant now can help prepare taxpayers to maximize opportunities, regardless of congressional action. Following are just a few of the provisions taxpayers should keep on their radar.
What’s at Stake for Businesses?
Section 179 Expensing and Bonus Depreciation. In prior years, businesses that purchased and put into service qualifying equipment and property were permitted to take an immediate depreciation deduction of $500,000 and a first-year bonus depreciation of up to 50 percent on the cost of the equipment. However, without Congressional action, the Section 179 deduction will be limited to $25,000, and bonus depreciation will disappear in 2015, leaving many businesses and their cash flow in a state of limbo. The question of whether or not to make a large investment of profits to upgrade equipment and technology now must be weighed against the risk of receiving a limited depreciation benefit.
One way around Section 179 expensing uncertainty is to rely on the safe-harbor provisions of the Tangible Property Regulations that allow qualifying businesses to take an immediate deduction on certain expenses rather than capitalize and depreciate those costs over time.
Research and Development Tax Credits. For 16 years, Congress has renewed the federal Research and Development tax credit that allows business to qualify for a dollar-for-dollar tax reduction for qualifying research expenses. Up for renewal once again, the R&D credit applies not only to those businesses with dedicated research labs but also to entities in a wide range of industries that invest time and resources to design, develop or improve products, processes, techniques or technology. Until Congress takes action, business may take advantage of prior-year R&D activity tax benefits and the R&D tax credit offered by many states.
Hiring Tax Credits. Prior to Jan. 1, 2015, businesses could reduce their federal tax liabilities by thousands of dollars when they hired and retained certain employees, including military veterans, active reservists, supplemental security income and food stamp recipients, ex-felons, residents of empowerment zones and individuals who live or work near an Indian reservation. Without an extension of these provision, business will miss out of significant cost savings.
15-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements. Under this now expired tax provision, real estate owners could, under certain circumstances, depreciate leasehold improvement to nonresidential property, over a 15-year period, rather than the requisite 39 year period. One way to get around this uncertainty is to conduct a cost segregation study that may breakdown the total cost of real property improvements into separate and distinct components, some of which may be depreciated over shorter lives than the building itself. These studies may also help a real estate developer determine the cost basis of each independent component of a building, which may serve as a benchmark to simplify future repair and capitalization decisions.
What’s at Stake for Individuals?
Mortgage Debt Relief. In 2007, Congress enacted this provision that allows homeowners to exclude from income up to $2 million of canceled or forgiven debt (for married taxpayers filing jointly) related to mortgage modifications, short sales and foreclosures. Without an extension of this relief, owners would need to include the amount written off by their lenders as ordinary income, which could result in significant tax liabilities.
Deduction for State and Local Sales Tax. Under this provision, taxpayers may elect to take an itemized deduction for state and local sales tax instead of the itemized deduction for state and local income tax. That’s huge savings for taxpayers who live in states that do not impose state income taxes or who purchased big ticket items during the year.
Tax-Free Charitable Distributions from IRAs. Should this provision be extended, taxpayers over age 70 ½ would be permitted to rollover required IRA distributions directly to charities and exclude the amount from their income. This would be especially beneficially for those taxpayers who rely on other sources of income in their retirement or who seek to lower their taxable income, especially when considering the limits on personal exemptions and itemized deductions based on a taxpayer’s adjusted gross income.
About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps businesses and individual navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email firstname.lastname@example.org email@example.com.
The Section 199 Domestic Production Activity Deduction (DPAD) is a significant tax savings tool for qualifying business that sell, rent, lease or exchange property that is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States. The deduction is equal to the lesser of 9 percent of taxable income or the income generated from the qualified production activity. The amount of the deduction allowable under Section 199 for any taxable year should not exceed 50 percent of the W-2 wages of the taxpayer for the taxable year. Recently, the IRS issued temporary and proposed regulations (Treasury Decision 9731) clarifying how businesses should calculate W-2 wages when applying the Section 199 DPAD during a taxable year in which:
- There exists an acquisition or disposition of a trade or business, or
- A short taxable year
Effective for tax years beginning on or after August 27, 2015, a business involved in an acquisition or disposition, including a formation, an incorporation, a reorganization, a liquidation, or a purchase or sale of assets, must allocate W-2 wages based on the period in which the employees of the acquired or disposed of trade or business were employed by the taxpayer, regardless of which method is used for reporting W-2 wages on Form W-2. If a taxpayer has a short taxable year that does not contain a calendar year ending during such short taxable year, wages paid to employees for employment by such taxpayer are treated as W-2 wages for such short taxable year for purposes of Section 199.
About the Author: Angie Adames, CPA, is a senior manager with the Tax Services practice of Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
With less than 60 days left in year, individual taxpayers should be thinking about and preparing for their tax obligations in 2015. In fact, there is still time for individuals to take action now to reduce their tax liabilities come April 15, 2016. Following are just a few strategies to consider.
Accelerate Deductions in 2015 and Defer Income to 2016
This tried-and-true rule of tax planning continues to provide individuals with opportunities to reduce their tax liabilities in any given year. Accelerating deductible expenses to reduce taxable income may include paying state and local income taxes, interest payments and real estate taxes in the current year, before they are due. However, taxpayers should be aware that certain deductions, such as mortgage interest and charitable contributions, will be reduced when an individual’s adjusted gross income (AGI) exceeds applicable threshold. For 2015, the amount is $258,250 for single taxpayers and $309,900 for married couples filing jointly.
To defer receipt of taxable income, individuals may postpone distributions, sales of appreciated assets or self-employment income. Another strategy to consider is making pre-tax contributions to a qualified retirement plan, such as an IRA or 401(k), which will essential defer income up to a maximum of $18,000.
Harvest Capital Losses
Taxpayers who cashed in their investments for a profit in 2015 may consider looking through their portfolios to identifying assets that have incurred losses and that they may sell to offset, or limit, their recognition of any capital gains. Tax-loss harvesting should be conducted under the counsel of a CPA or qualified financial advisor to ensure that any asset sales do not jeopardize an individual’s long-term financial goals and do not qualify as a wash-sale, in which investors claim a loss on a sale and repurchase the same or a similar security within 30 days before or after the sale.
Keep an Eye on AMT
Year-end tax planning strategies may inadvertently trigger an Alternative Minimum Tax (AMT) liability, which follow rules separate from those governed by the regular tax system in the treatment of income and deductions. Individuals should speak with a CPA to project tax liabilities and take action to time income and deductions in an effort to reduce or eliminate their exposure to the AMT.
Beware the Net Investment Income Tax
The IRS imposes a 3.8 percent surtax on the lesser of the taxpayer’s annual net investment income (NII), including interest, dividends and capital gains, or the amount by which the taxpayer’s modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers and $250,000 for married couples filing jointly. Reducing one’s NII tax requires taxpayers to reduce their NII or MAGI. Strategies to consider under the guidance of a CPA may include maximizing contributions to retirement accounts, such as 401(k)s and IRAs; converting a traditional IRA to a Roth IRA to exclude distributions from modified adjusted gross income; or spreading out gains over multiple years.
Give to Charity
Donations of money or property to qualified charitable organizations are fully deductible against income tax and AMT. Taxpayers who give appreciated property that they owned for more than one year will receive a deduction on the property’s fair market value at the time of the donation, rather than the taxpayer’s basis when they acquired the property. When giving to charity, taxpayers should consult with their advisors to weigh the risks and benefits of making donations of appreciated stock or property or establishing a charitable remainder trust.
Give a Gift
Individual’s may consider giving gifts that are less than the annual exclusion amount of $14,000 for singles, or $28,000 for married couples, to reduce taxable income and shelter assets from estate and gift taxes. The exclusion applies to gifts made before December 31 to an unlimited number of recipients. So, a single taxpayer can essential give gifts of $14,000 or less to as many people as they wish. Exclusion from gift taxes also applies to gifts of any amount given to a spouse or paid to an educational and medical institution to pay tuition or medical expenses on behalf of someone else.
Convert an IRA
Taxpayers anticipating lower-than-average income in 2015 may consider converting a traditional IRA to a Roth IRA to benefit from tax-free withdrawals in the future. However, if a taxpayer already made a conversion in 2015 and the value of the portfolio declined, the taxpayer may consider re-characterizing the conversion back to a traditional IRA before October 2016.
Take Required Minimum Distributions from Retirement Accounts
Taxpayers ago 70 ½ and above must take a required minimum distribution (RMD) from their traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k), 403(b) and 457(b) retirement plans by December 31, 2015, or risk a penalty of 50 percent of the undistributed amount. RMDs are treated as taxable income, excluding any amount that was previously taxed. Taxpayers who continue to work after 70 ½, may postpone their RMD until the year of their retirement.
The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work throughout the year with U.S. and foreign citizens and businesses to develop tax-efficient solutions to meet evolving financial needs.
About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Berkowitz Pollack Brant’s Tax Services practice, where he works with individual taxpayers and entrepreneurs on estate planning, tax structuring and business consulting. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email email@example.com.
In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued new revenue recognition guidance that will affect substantially all businesses, including those in the real estate, construction, software, telecommunication, manufacturing and distribution industries, as well as certain not-for-profit entities. Privately held companies must implement the guidance for annual reporting periods beginning after December 15, 2018, but they may adopt the new requirements as early as 2017.
While 2018 may seem like a far-off date, businesses would be well-served to begin assessing their current contract procedures now and establishing new systems and policies to ease the transition to the new revenue recognition standard in the not-so-distant future.
Why is there a New Standard for Recognizing Revenue?
The new guidance moves away from the traditional industry- and transaction-specific financial reporting requirements under U.S. Generally Accepted Accounting Principles (GAAP.) The new standard is more principles-based and requires enhanced financial statement disclosures, which are intended to facilitate the comparability of financial results of business operations across all industries and capital markets.
What is included in the New Provisions?
Under the new standards, all businesses will be required to recognize revenue from contracts with customers using the same five-step model. However, based on the results of applying this new model, different businesses will account for revenue either at a particular point in time or over time using a percentage-of-completion method of performance measurement.
Step One: Identify the Contract
Under the new standard, a contract is defined as an agreement between two or more parties that creates specific, enforceable rights, as a matter of law. Furthermore, a contract will exist when the agreement has commercial substance, when it identifies rights to goods and services and related payment terms, when entitled collection is “probable,” and when the parties approve the agreement and commit to their contractual obligations. An important point to consider is that subsequent modifications to a contract could result in the creation of a new contract, an addition to the existing contract, or both.
Step 2: Identify the Contract Performance Obligations
Performance obligations are contractual promises to deliver goods or services to a customer. A performance obligation may be distinct, or it may be combined with other goods or services. Identifying if goods and services are “distinct” requires they meet the following criteria:
- The customer can benefit from the good or service, on its own or together with other resources that are readily available to it, and
- The promise to transfer the good or service is separately identifiable from other promises in the contract.
The new model of revenue recognition offers additional guidance to help businesses determine when goods and services are not distinct. More specifically, promised goods or services may be bundled or unbundled more frequently under the new guidance. As a result, businesses must carefully analyze the various goods and services they sell and how they relate to each other in meeting the contract terms.
Step 3: Determine the Transaction Price
Transaction prices, or the amounts that businesses expect as payment in return for transferring goods or services to a customer, must include an assessment of the following components:
- Variable consideration and constraining estimates (including discounts, credits, price concessions, returns, or performance bonuses and penalties)
- Consideration payable to the customer
- The existence of a significant financing component
- Noncash consideration
These factors will weigh on the ultimate transaction price a business will estimate it will be entitled to receive and how and when it will recognize the resulting revenue on its financial statements.
Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract
To allocate an appropriate transaction price to each performance obligation, a business must first determine at contract inception the stand-alone selling price of each distinct product and service it promises to deliver. These amounts may not be easily recognizable due to volume discounts or bundling. In these instances, businesses will need to develop new processes and procedures for estimating stand-alone selling prices of the goods and services to be delivered.
Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation
Businesses will recognize revenue either at a point in time or over the period in which it satisfies a performance obligation. Transfers that occur over time include those in which:
- the customer simultaneously receives and consumes the benefits of the business’s performance, often as part of routine or recurring services, or
- the business’s performance creates or enhances an asset that the customer controls, such as a product the business builds on the customer’s site, or
- the business’s performance creates or customizes an asset that only the customer can use and has an enforceable right to payment for performance completed to date.
In these situations, the business will recognize revenue over time using performance measurements that may include its output (i.e. units produced) or its input (i.e. hours of labor or costs incurred). Applying these methods of measurement for satisfaction of an obligation that occurs over time further requires a business to identify the moment at which it transfers control, which may include the time at which the customer accepts the asset and takes significant risks and rewards of ownership or takes physical possession or legal title to it. Additionally, the point of time may occur when the business has a present right to payment for the asset. Special rules will apply when performance obligations involve the licensing of intellectual property.
In addition to this five-step model of revenue recognition, businesses should begin preparations to comply with enhanced disclosure requirements about customer contracts under the new standard. Businesses should begin to take the time to identify data gaps between existing practices and those required in the future, and making significant changes, as needed, to existing policies, processes and IT systems.
The advisors and accountants with Berkowitz Pollack Brant work with businesses across all industries to develop and implement strategies that meet ever-changing, often complex, financial-reporting and disclosure requirements.
About the Author: Christopher Cichoski, CPA, is a senior manager of Audit and Attest Services with Berkowitz Pollack Brant, where he provides business consulting services and conducts reviews, compilations and audits for clients in the real estate and construction sectors. He can be reached in the Miami CPA firm’s office at (305) 379-7000 or via email at firstname.lastname@example.org.
November 1 marked the first day that individuals could sign up for a 2016 health insurance plan via the federal marketplace at www.healthcare.gov. During the enrollment period, which lasts through Dec. 15 for coverage starting Jan. 1, 2016, or Jan. 15 for coverage starting on Feb. 1, 2016, individuals may renew or change their plans from the prior year by completing on online Health Insurance Marketplace application.
Under the provision of the Affordable Care Act, all U.S. taxpayers and members of their families must have “minimum essential” health coverage secured through a marketplace or purchased directly from an insurance company or through a broker or agent for all months of the year or be prepared to make an individual shared responsibility payment when they file their individual tax returns in 2017. For 2016, the shared responsibility penalty for failing to have health insurance will be significantly higher than the penalty was in 2015. More specifically, individuals who do not have health insurance during 2016 and who do not qualify for an exemptions will be required to pay the higher of:
- 2.5 percent of a household’s modified adjusted gross income (including foreign earned income and tax-exempt interest received during the taxable year) above the filing threshold
- A flat payment of $695 per adult and $347.50 per child under 18, up to a maximum of $2,085 per family
The final penalty amount will be limited to the national average cost of a bronze healthcare plan, which will be announced in early 2016 but is expected to be higher than the 2015 monthly cost for a family of five, which is $1,035.
One important note for taxpayers to consider is that failing to make a shared responsibility payment will result in the IRS withholding the penalty amount from a taxpayer’s future tax refunds. No additional fines or criminal penalties will be levied.
The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practices work with individuals and businesses of all sizes to understand and comply with the provisions of Affordable Care Act.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail email@example.com.
Physicians operating in a highly scrutinized and demanding regulatory environment with lower reimbursements are continuing to sell their practices to hospital networks at a rapid rate. In most instances, this consolidation results in a win-win for all parties. Physicians gain steady salaries while losing the administrative headaches of managing a private practice; hospitals receive the benefit of new revenue streams and referrals from their newly-employed on-staff physicians. However, these arrangement are not without risks. Both independent practices and the healthcare facilities seeking to purchase them should engage in an exhaustive process of preparation and due diligence to improve the likelihood that the merger will yield the positive benefits that all parties hope to receive.
Considerations for Physicians
Compliance with patient privacy laws and the Affordable Care Act, and requirements for electronic health records and the transition to ICD-10 are just some of the burdens of managing a private practice. They take time away from delivering patient care and drain resources that together may spur a decision to sell a practice. Before pursuing a sale, physicians should consider their own goals and needs and weigh them against the financial, legal and emotional ramifications of their actions, including how a sale might affect their time, independence, compensation, tax liabilities, net earnings and ownership of assets; or how will it impact existing staff and patients. When a decision to sell is made, physicians must begin the arduous and time-intensive process of preparing their practices to fetch the best possible sale price.
Prepare the Practice for Sale
Preparation is key to consummating a sale in which physicians can receive top-dollar for their practices. By demonstrating a trend of sound financial performance, physicians can often command a higher sales price. If profits are trailing, physicians should take the time to make improvements or enhance operations before putting the practice up for sale.
Engage professional counsel. The earlier a physician consults with legal, tax and financial counsel, the better the chances he or she will be prepared to commence the sale process. Lawyers and accountants understand the physician’s practice and have the experience required to maximize a practice’s purchase price and secure the best terms to meet the physician’s needs and desires.
Clean Up Financial Records. Physicians should gather at least three years of tax returns and clean financial records to substantiate claims of positive practice performance. Look at physician compensation and personal expenses paid by the practice, CPT codes and relative value units (RVUs), insurance reimbursements and payor mixes, and ensure all the numbers are accurately reported and have underlying source documentation which can be provided during the due diligence process. The accrual method of accounting should be employed to demonstrate a more accurate picture of the practice’s operating activity and practice profitability.
Don’t Overlook the Practice’s Non-Tangible Assets. In addition to hard assets, such as furniture and equipment, the value of a medical practice is influenced by the skills and reputation of its physicians and staff as well as the relationships these individuals have developed with patients and insurers. Prepare information to support claims of active patients and favorable reimbursement agreements with insurers.
Benchmark Practice Metrics against Similar Practices. A medical practice that can demonstrate it performs better than similar practices in the same market may be able to command a higher sales price. By compiling data that compares the number of patient visits the practice sees in a year, RVUs, cash collections and insurer reimbursements with similar practices, the practice may be able to earn a higher appraisal. If the numbers are not impressive, the physicians should consider holding off on a sale until they can turn things around for the better.
Keep Cash Flow in Reserves. Should a medical practice succeed in attracting a buyer and securing a positive valuation, the managing physicians should ensure they maintain ample cash flow in reserves to cover a potential slowdown in reimbursements before the transaction is consummated.
Considerations for Hospitals
Engage Professional Counsel. Just as physicians want the best terms for the sale of their practices, hospitals and health care facilities want real value for their investment in a private practice. Proper due diligence with the assistance of experienced lawyers and accountants will help the hospital make an informed decision and avoid potentially expensive missteps.
Carefully Analyze Financial Records. Arriving at a fair valuation for a medical practice requires hospitals to examine the underlying financial aspects of the practice’s operations, which are not always easily apparent. What is the quality of the practice’s billing and collection efforts? Are receivables in line with reimbursements and expenses or are they inflated? Are the reimbursement agreements favorable? What tangible assets does the practice own and what assets will the hospital need to maintain? What expenses can be carved out of the valuation (i.e. physicians’ personal, discretionary expenses) to identify the practice’s true earnings?
Consider the Non-Financial Aspects of the Practice’s Operations. Because medical practices and hospitals operate in a highly litigious and regulated environment, it behooves hospitals to assess a practice’s internal controls, compliance history and legal judgements before pursuing a practice purchase. Similarly, hospitals must consider their own legal responsibilities when structuring purchase agreements to avoid potential violations of tax laws, anti-kickback statutes and the Stark Law, which prohibits medical providers from making referrals to others with whom the provider has an existing financial relationship.
Prepare for Negotiations. The best way to ensure a smooth buy-sell transaction is for all parties to engage in open dialogue, build consensus and leave nothing to misinterpretation. Specificity and attention to detail can go a long way to ensure a win-win for all. Be clear on the terms of the sale, employment agreements and compensation for physicians and support staff; how the transaction will be structured; how the hospital will roll the practice into its existing operations; and the responsibilities of all parties prior to and during the closing and through the transition.
The accountants and advisors with Berkowitz Pollack Brant’s Audit and Attest Services practice have a long history of working with hospitals, health care facilities and medical professionals to audit financial statements, assess internal controls and implement processes and procedures to ensure regulatory compliance and improve profitability and tax-efficiency.
About the Author: Whitney K. Schiffer, CPA, is a director with the Audit and Attest Services practice of Berkowitz Pollack Brant, where she works with hospitals, health care providers, HMOs and third-party administrators. She can be reached in the firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
The Tangible Property Regulations, also referred to as the Repair Regulations, include some of the most sweeping changes to the U.S. tax code and the way in which certain taxpayers account for the costs associated with the acquisition, production, improvement, repair and/or maintenance of assets used in a trade or business.
While the regulations may help individuals minimize tax liabilities, achieving this benefit can be an arduous and time-consuming task. For example, taxpayers will need to review, among other things, existing depreciation schedules to identify opportunities where they may accelerate depreciation rather than capitalize costs associated with the acquisition, production, improvement and maintenance of assets. Moreover, most taxpayers aiming to take advantage of these benefits will also need to apply for a change in accounting method or accounting treatment of an asset.
With the convalescing economy and the Tangible Property Regulations on so many businesses’ minds, many taxpayers are taking advantage of cost segregation studies.
Cost Segregation Study
A cost segregation study requires the engagement of experienced engineers and accountants to breakdown the total cost of real property into separate and distinct components – some of which may be depreciated over shorter lives than the building itself. Such a study may also help a business owner, including a real estate developer, determine the cost basis of each independent component of a building, which may serve as a benchmark to simplify future repair and capitalization decisions.
Federal tax law provides that the basis of a depreciable asset is deducted over the applicable recovery period assigned to that asset. For a non-residential building, the recovery period is 39 years. For residential property, the asset recovery period is 27.5 years. However, a cost segregation study may identify additional structural components attached to, contained in or associated with a property or non-structural land improvement, each of which may qualify for shorter depreciation periods of five or seven years, or 15 years for land improvements.
Although these studies are nothing new, the new Tangible Property Regulations have expanded the purpose and benefits the studies can provide.
Unit of Property
When considering a cost segregation study as it applies to the new Tangible Property Regulations, taxpayers should be mindful of the newly defined unit of property (UoP), which determines whether an expenditure should be capitalized or expensed. For example, if a taxpayer replaces the roof on a building, if the UoP is the roof, then replacing it would clearly be a material improvement. However, if the UoP is the building, then it might not be as clear to say that the building was improved by replacing the roof; careful consideration as to what constitutes a roof replacement versus a repair is needed.
Under the new rules, a single UoP consists of a building and all of its structural components, including walls, floors, windows and doors. Eight additional UoPs exist for building systems, such as HVAC, plumbing, electrical and security systems; fire protection and alarm systems; escalators and elevators; gas-distribution systems; and other structural components identified in published guidance by the IRS. Additional rules are provided if a taxpayer has assigned different tax recovery periods or depreciation methods to components of property.
In most circumstances, taxpayers will need to capitalize expenditures related to the betterment of a UoP, its adaptation to a new or different use, or the restoration of the UoP; repairs are generally deductible.
A cost segregation study can be valuable in determining the cost basis of the UoP and building systems.
Partial Asset Disposition
Cost segregation studies are not only beneficial in breaking out personal assets from real property, but they can also be advantageous to determine the adjusted basis of components that are removed for repair, renovation and disposition. As part of the new provisions in the Tangible Property Regulations, a taxpayer may elect a partial asset disposition of a component of a UoP and subsequently reap tax savings by recognizing a loss in the amount of the remaining adjusted basis of the asset. The cost for replacing or repairing the disposed portion of the asset would be capitalized.
If it is impracticable to use the taxpayer’s records to determine the adjusted basis of the disposed asset, the Tangible Property Regulations provide that a taxpayer may use a reasonable method to determine the amount. Reasonable methods include, but are not limited to, the use of a cost segregation study to allocate the cost of the asset that was disposed. Once a taxpayer applies a method for determining the adjusted depreciable basis of that portion of the asset, he or she must apply the same method to all portions of that asset, or file a request for a change in accounting method.
Consider a taxpayer who buys a warehouse, which is depreciable over a 39-year period. After five years the roof leaks. The Tangible Property Regulations allow the owner to write off the un-depreciated basis of the old roof and capitalize the cost of replacing it with a new roof. To apply these benefits, or to elect a safe harbor, the taxpayer would need to file with the IRS a request for one or more accounting method change(s).
Accounting Methods Changes
Many taxpayers undertaking cost segregation studies as part of their compliance with the Tangible Property Regulations will file one or more Form(s) 3115, Application for Change in Method of Accounting. Changes in accounting methods related to dispositions may include recognizing a prior year disposition of a whole asset or making a late partial disposition election. The ability to make a “late partial” disposition accounting method change is available only for years beginning before 2015.
Small businesses with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years may, in some circumstances, be exempt from this requirement.
Taxpayers have long relied on cost segregation studies to identify assets that may benefit from accelerated depreciation. However, the value of these studies to help improve cash flow and minimize tax liabilities are more important than ever in light of the mandatory Tangible Property Regulations. The advisors and accountant with Berkowitz Pollack Brant’s Real Estate Tax Service practice work closely with real estate developers, investors, property owners and related construction entities to maintain tax efficiency while meeting a range of compliance obligations.
About the Author: Angie Adames, CPA, is a senior manager with the Tax Services practice of Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.