IRS Proposes Rules on Calculation of GILTI
The IRS has released guidance on the taxation of “global intangible low-taxed income” (GILTI) reported by US shareholders of corporations outside of the U.S. known as “controlled foreign corporations” (CFCs).
Calculating Taxable Income Under GILTI
In short, the TCJA created a current-year tax on income from a CFC that exceeds 10 percent of the net book value of its depreciable assets. These proposed regulations offer insights on how the U.S. owner of the CFC calculates the amount of taxable income to include in a specific year, as follows:
Items included in the GILTI calculation GILTI considers new terms such as “tested income,” “tested loss,” and “qualified business asset investment” (QBAI).These items are then aggregated to determine a GILTI inclusion amount. The proposed regulations provide additional guidance for the computation of these items.
- Modify “pro-rata share” calculations: The proposed regulations provide for modifications to reflect the differences between Subpart F income and other CFC items needed to calculate GILTI in determining a U.S. shareholder’s pro rata share.
- Partnerships that own CFCs: The rules apply the use of both an entity and aggregate approach for a domestic partnership that is a US shareholder of a CFC.
- Consolidated groups: A consolidated group may aggregate each member’s pro rata share of GILTI items so that the GILTI inclusion is calculated on a consolidated basis.
- Anti-abuse: Some anti-abuse rules have been defined in order to disallow certain transactions that may have been undertaken with the intent of reducing GILTI.
Talk to a Freed Maxick International Tax Expert
We’ll be updating you on new guidance as it’s released. In the meantime, if you have any questions or concerns about how the TCJA’s changes affect the tax treatment of income from your foreign subsidiaries, please contact Freed Maxick via our contact form, request a Tax Situation Review by clicking on the button, or call us at 716.847.2651 to discuss your situation.
How to determine the correct transfer pricing strategy for your business in the new tax environment
On December 22, 2017, the federal Tax Cuts and Jobs Act (“The Act”) was signed into law creating one of the largest tax overhauls in history. Though there were no direct changes to the transfer pricing requirements, certain international provisions implemented through the Tax Act may create an impact on transfer pricing.
These provisions include, but are not limited by, Foreign-Derived Intangible Income (“FDII”), Global Intangible Low-Taxed Income (“GILTI”), Base Erosion Anti-Abuse Tax (“BEAT”), and the definition of intangible property. It is important that companies review their existing transfer pricing policies or take these provisions into consideration when creating a new policy to ensure that they comply and maximize all tax planning opportunities.
Foreign-Derived Intangible Income (“FDII”) & Global Intangible Low-Taxed Income (“GILTI”)
The FDII provision of The Act creates an incentive for U.S. corporations that sell, lease or license intellectual property to retain their assets in the United States by providing a preferential tax rate on that foreign-derived income. Thus, with a special rate of 13.125 percent, a domestic corporation with foreign affiliates might find it advantageous to shift intangible leasing profits into the United States.
As the counterpart to FDII, The Act’s provision on Global Intangible Low-Taxed Income was designed as a safe-guard to combat a U.S. corporation’s attempt to shift profits overseas to take advantage of the new territorial system. Briefly, GILTI imposes penalties on organizations that derive income from foreign intangibles harbored in low-tax jurisdictions. The tax subjected could render a territory less advantageous when contrasted to pre-tax reform.
A U.S. corporation should consider FDII and GILTI in determining which taxing jurisdiction to house its intangible assets. Tax incentives to source profits to the U.S. include lower rates and avoiding penalties which might outweigh the tax benefits of foreign sourcing going forward.
With the above provisions affecting the tax of intangible assets, it is relevant to note that the definition of intangibles has also been amended with The Act to include anything with potential value that is not attributable to tangible property. Further, valuation of intangibles has been challenged with The Act, giving the IRS the authority to value transfers of intangible assets on an individual basis, in the aggregate, or by any other means deemed reasonable. The modification of the definition itself could potentially diminish the reliability of existing transfer pricing policies and the wording of said policies should be reviewed.
Base Erosion Anti-Abuse Tax (“BEAT”)
BEAT is an additional tax that applies to corporations that have average annual gross receipts of $500 million and have foreign deductible related-party payments totaling at least 3% of the sum of all annual deductions. The tax is computed as a multiple of the sum of the corporation’s taxable income and the deducted foreign related-party payments. Although BEAT does not apply to all related-party payments, susceptible corporations should be wary of large base erosion transactions that are material to total deductions going forward. The adverse cost of BEAT could perhaps outweigh the advantages of transacting with foreign affiliates.
Assessing the Impacts on Your Company’s Transfer Pricing Strategies
With all of the above provisions being effective January 1, 2018, now is a good time to assess their impact on your transfer pricing strategy and policies. If you have not done this already, there are still plenty of transfer pricing planning opportunities that can be utilized for the 2018 tax year.
The International Tax team at Freed Maxick CPAs, P.C. has been monitoring these provisions closely and is ready to discuss how your business may be impacted. Connect with us to schedule a Tax Situation Review so we can provide guidance on how to maximize planning opportunities and optimize your transfer pricing strategy.
You can reach us at 716.847.2651 to schedule a review today.View full article
Make sure you are using the right cybersecurity test for the right purpose.
Many companies (and sometimes their cybersecurity consultants) refer to a vulnerability assessment and a penetration test as the same thing, and while they both serve to protect a networked environment, they are not. Unfortunately, the interchangeable use of these two terms blurs the lines between these two very distinct activities and can result in missed opportunities to find, repair and defend an organization against cyberattacks.
A simple way to understand the differences is that a vulnerability scan, which can be automated, searches for network issues like missing patches and outdated protocols, certificates, and services. A penetration test is a proactive attempt to actively exploit a weakness once found.
Though both a vulnerability assessment and a penetration test are individually important elements of a well-rounded cybersecurity program, they are designed with different goals.
What is a Vulnerability Assessment?
A vulnerability assessment is a scan intentionally designed to identify configurations on your systems that could possibly be exploited by an attacker. A good vulnerability assessment scan will identify all system vulnerabilities, assign a level of risk or score to each and prescribe a fix.
Many companies look to third parties to perform this assessment, and their report of findings should provide a clear understanding of what vulnerabilities exist and what needs to be fixed first. This type of assessment needs to be executed regularly to maintain network security, with attention paid when network changes like new equipment installation occurs or when new network functionality or services are added.
What is a Penetration Test?
A penetration test is a fundamental part of most required cybersecurity regulatory or compliance program requirements, like PCI compliance.
A penetration test is more complex than a vulnerability assessment, with multiple steps involved. It’s designed to identify system or network vulnerabilities that can be exploited by a hacker; and attempts to exploit those vulnerabilities and illustrate the level of risk involved by simulating a hypothetical attacker’s attempts to gain unauthorized access to critical systems or networks.
Penetration testing is a form of “ethical testing” that gives qualified and trusted cybersecurity consultants a green light to break into their client’s computers or devices to test their network’s defenses. If successful, the client gets the opportunity to shore up their network’s defenses, and even an unsuccessful attempt at a break-in holds a positive outcome, as it is an indication – although not an absolute certainty – that the organization’s defenses are secure.
Freed Maxick Cybersecurity Services
Today, companies need both vulnerability assessments and penetration testing to protect their company’s assets (and reputation), their employees, and the data they hold about their clients. In either case, having the knowledge to decide which is truly needed for your organization now and in the future, and most importantly, which service you are receiving from a vendor, is vital information for you and your company.
We can help.
Freed Maxick’s dedicated team of cybersecurity risk experts performs vulnerability assessments, penetration tests and designs comprehensive cybersecurity risk management programs. We work closely with your team through each step in our proven process to reduce any concerns or impacts and provide our industry recognized consultation.View full article
New Tax Law, Same Old Question: What’s the Best Entity for Your Business
The Tax Cuts and Jobs Act of 2017 (TCJA) made some of the most consequential changes to business income taxation in decades. With a new, significantly lower and flattened corporate tax rate, reduced personal rates, and a 20 percent deduction for income from flow-through entities, the act altered several variables in the equations that executives use to determine the most tax-efficient structures for their businesses. As a result, many leaders are asking how to re-evaluate the choice of entity and what amount of tax advantage warrants such a fundamental change. There are no simple answers to these questions, but this discussion provides a quick overview of some of the key criteria.
The “Simple” Math of Business Entity Choice
Many executives are surprised to learn that the new tax rates and the 20 percent deduction are actually some of the less complicated factors to analyze in a choice-of-entity re-evaluation. Here’s a quick review of C-corporation v. flow-through taxation and the effect of the new law on each:
- C Corporations pay an entity-level income tax and income distributed to shareholders is taxed again at the individual level.
The TCJA significantly decreased the corporate tax rate from a top marginal rate of 35 to 21 percent. As a result, a sole shareholder of a C Corporation that distributes all of its after-tax earnings would face an effective federal income tax rate of approximately 39.8 percent.
- Flow-through entities are not subject to federal income tax at the entity level. All income generated from the business is reported and taxed on the owners’ individual income tax returns.
TCJA did reduce the tax rates on individuals, but the drop was not as significant as the reduction in corporate rates. Top earners went from a maximum rate of 39.6 to 37 percent (40.8 percent once the Medicare surtax is tacked on).
So C Corp seems to be the way to go right? Not so fast…
A New Twist – A Deduction for “Qualified Business Income”
Congress also created a new deduction for qualified business income from eligible flow-through entities. The new deduction allows for a deduction of up to 20 percent of qualified income. Owners of a business that qualifies for the full deduction amount could face a top federal effective tax rate of 33.4 percent.
So who qualifies for this special new deduction?
Unfortunately, the new law has temporarily left us with more questions than answers. What we know at this point (Fall 2018) is that income from businesses in the fields of health, law, accounting, investment management and consulting is not subject to the deduction if it exceeds $157,500 in a year ($315,000 in the case of a joint return).
In addition, a business is ineligible for the deduction if its “principal asset” is the “reputation or skill” of one or more employees and/or owners. The Freed Maxick Tax Team is still awaiting further guidance as to what the lawmakers meant to exclude with this language.
But Wait, There’s More…Other TCJA Provisions that Should be Considered in a Business Entity Selection Evaluation
The rate changes and flow-through deduction are the most obvious changes to the entity choice calculation, but the tax code is full of other provisions that should be considered in a re-evaluation, including:
- Taxes on international income will play a much bigger part in the choice of entity under the TCJA. Businesses with any type of international operations will need to consider the new global low-tax intangible income (“GILTI”) and foreign-derived intangible income (“FDII”) provisions.
- GILTI applies to income generated by a company’s controlled foreign C corporation and creates an additional U.S. tax liability on the overseas profits.
- FDII provides a tax advantage for income generated by a U.S. taxpayer from:
- The sale of tangible property for foreign use, or
- The performance of services for foreign customers where the benefit is derived by a foreign customer in a foreign location.
For a more extensive discussion of these two provisions read our related articles about GILTI here.
- Qualified small business stock (QSBS) treatment may allow individuals to exclude gain on sale of their stock if it meets certain criteria including but not limited to:
a.) acquired as part of an original issue by a domestic C corporation
b.) had no more than $50 million in assets as of the date of stock issuance
c.) engaged in a “qualified trade or business”, examples of certain types of business specifically excluded from the definition of “qualified trade or business” include health, law, engineering, architecture, accounting, consulting, athletics, banking, insurance, investing, restaurants, and hotel/hospitality
State Tax Considerations Regarding Business Entity Selection Choices
Your business cannot afford to forget that state and local taxes play a huge part in determining the tax advantages of a particular entity choice. Depending on where your business operates, the amount and type of activities it performs in those locations, and the applicable tax rates, the impact of non-federal taxes can always sway an entity choice to one side of the fence or the other.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.
As with many tax discussions the devil is in the details. Given the amount of guidance still to come from the IRS, we don’t even have all of those details yet. Be sure to subscribe to Freed Maxick’s e-mail service for updates as new information becomes available.
Meanwhile, if the issues discussed in this article have you wondering about choosing a business entity and if you need to reevaluate your selection, it’s never too early to start the discussion. Please contact Freed Maxick via our contact form, request a Entity Selection consultation, or call us at 716.847.2651 to discuss your situation.
Uncertainty still exists about what businesses should expect after the Wayfair decision
The recent Wayfair decision has sent states and businesses alike scrambling to make sense of what taxes are owed in which jurisdictions. Many business owners and officers may be tempted to backburner the issue. After all, you have enough other fires to put out. You’ll get to sales tax compliance when you get to it.
Not so fast. Remember that sales tax, much like employment tax, is considered a “trust fund” transaction. Sales tax isn’t additional revenue that is billed to your customer. Rather, it’s money that you are deemed to hold as a trustee of the state. You are responsible for collecting and remitting the appropriate sales tax. If you fail to do either, it’s not just the company’s assets on the line. “Responsible Persons” can be held personally liable for any unpaid liability.
Who is Responsible for Charging and Collecting Sales Tax?
Most businesses don’t run into problems by failing to remit the sales tax they collected. The greatest risk arises from failing to charge and collect sales tax on taxable transactions. In the event of a sales tax audit, the company could be assessed the amount of sales tax that it should have collected and remitted, plus penalties and interest. But because of the trustee relationship, that liability could extend to responsible persons. Who are they?
In New York, owners, corporate officers, LLC members, general partners, and any limited partners who actively run the business or who have at least 20% ownership are automatically responsible persons. In addition, the list of responsible persons generally includes anyone who:
- Is actively involved in operating the business on a daily basis,
- Decides which bills are paid,
- Has hiring and firing authority, or
- Has check signing authority.
If the business has the money to settle the sales tax liability, the responsible persons can breathe a sigh of relief. If the business is unable or unwilling to pay, the responsible persons can be held liable. Generally, your directors and officer’s policy will not protect you against this type of omission, so don’t think of that as your fail safe.
Long Term Effects and Impacts of Wayfair
There is still a lot of uncertainty about the long-term effects of Wayfair. Will there be a uniform minimum threshold on either dollar volume or transaction volume? Will there be small business exceptions?
As we wait to see how questions like these are resolved, we recommend starting at the basics: what states are you currently registered in? Are you selling into any states where you are unregistered? What products or services are you selling? Do you have employees or contractors in states other than your home state? Taking stock of your current selling practices is the best first step.
Talk to a Freed Maxick Sales Tax Expert
The sales tax experts at Freed Maxick work with hundreds of US and Canadian companies to help them understand and comply with state and local sales tax requirements. All our experts agree that after the Wayfair decision, sales taxation will become an increasingly complex endeavor.
If you need help understanding how the Wayfair decision affects the sales tax compliance of your business, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.View full article
The IRS has released a new notice aimed at clarifying the effect of the TCJA on the deductibility of business meals and entertainment. According to the Service, "Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact."
The notice lists 5 tests for deductibility. Taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under section 162(a) paid or incurred during the taxable year in carrying on a trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The notice also announces that Treasury and IRS plan to publish proposed regulations on the issue. Comments are requested by December 2 of this year regarding the guidance in the notice, so it seems likely that the regulations would be published some time after that.
To learn more about how this notice affects the deductibility of your business meals and entertainment, or address any questions you may have, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.View full article
Microbreweries often experiment with flavors and processes in ways that may qualify for a significant federal tax credit.
When craft brewing is done right, it often seems more like art than science. So it should come as no surprise that many craft-brewers overlook a tax-saving opportunity that is more closely associated with science-based industries like pharmaceuticals and tech companies.
The Federal Research & Development (R&D) tax credit provides a federal tax credit based on certain expenditures business spend on “qualifying research activities” (QRAs). Additional incentives are available for certain startups and smaller breweries, such as credit against certain payroll taxes and not being limited by the alternative minimum tax.
Qualifying Research Activities for Breweries and Microbreweries
That phrase “Qualified Research Activities” is the heart of the argument for applying the credit to certain microbrewery expenditures. Costs related to an activity that meets the four-part test to qualify for the R&D credit, regardless of the industry in which the business operates.
Examples of qualified activities for Breweries and Microbreweries include, but are not limited to:
- Developing new or improved hopping techniques, including testing new varieties or combinations of varieties. In fact, according to gardeningknow.how.com, there are about 80 different hops types commercially available. It’s not unreasonable to think that many others are in development.
- Develop new or improved malting, lautering, fermenting, or conditioning processes.
- Developing new or improved bottling processes to improve shelf longevity, lower cost, or other functional improvements,
- Improvements to your brewing process to reduce waste, improve water recycling throughout the process, improve filtration, reduce cycle time, or other functional aspects,
- Development related to new product formulations, including use of different ingredients or preservatives.
Deductibility is in the Details
The potential benefits of the R&D credit are significant, so the government requires thorough documentation. If you’re planning to claim the credit, you’ll want to set up your accounting system to track QRAs in separate accounts. Time allocations for employees engaged in R&D are an important part of your records. Actual timesheets and payroll records are the strongest support. These can be supplemented with post-completion analyses of resources used, design drawings for proposed developments/improvements, meeting notes, and testing documentation.
Extra Benefits for Start-Ups and Small Businesses
The IRS rules don’t go into specifics about what constitutes sufficient documentation for any particular claim, but they do express a strong preference for contemporaneous documentation. If you’re planning to claim the R&D tax credit for your brewery or microbrewery, it’s important to consult with a knowledgeable professional at the outset (or as soon as possible after starting!) to build the system that will document your costs accurately as you go.
The PATH Act of 2015 made the R&D credit permanent and even more valuable to microbrewery start-ups and small businesses. If you are a brewer with less than $5 million in current-year gross receipts and no gross receipts for any tax year that precedes the fourth preceding tax year, you can elect to claim up to $250,000 of the credit against your employer portion of Social Security tax. Partnerships, sole proprietorships and privately held corporations whose average annual gross receipts for the last 3 years that do not exceed $50 million, can also claim the credit against an alternative minimum tax liability.
State Incentives for Brewers in New York
The Empire State also offers several incentives for brewers operating within its borders. Credits for investment in buildings and equipment apply to brewers, as do income and property tax credits for manufacturers. New York also provides an alcoholic beverage production credit and, for locally sourced beers, some reduced permit requirements. In addition, breweries can qualify for the state’s START-UP NY business incentive program, depending on their location.
Brewing Up Your Credit
Securing both Federal and New York State credits and incentives requires detail analysis and documentation. In some cases this will require presentation to tax authorities in an audit to defend your position.
That’s why you’ll want to work with a team of experts with impeccable credentials in helping businesses of all types and sizes use the R&D Credit -and other tax minimization strategies – to lower their tax burden.
For more information about how your microbrewery could benefit from the R&D tax credit, please contact Freed Maxick at 716.847.2651.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
Employee Benefit Plan data is an attractive target for cybercriminals
Today’s businesses learn more about cybersecurity every day, but it’s still a challenge to stay ahead of those who could hack their systems for fun or profit. With stories of cyber breaches reported in almost every news cycle, executives have come to appreciate the importance of protecting customer data from outside attacks. But customers aren’t the only people who share private data with businesses.
Employees submit sensitive personal information to their employers and the benefit plan managers that employers choose. The data shared can range from the same type of financial information that businesses get from customers to much more sensitive health and personal information than most companies would ever request from clients or customers. Cybersecurity efforts generally offer some benefit to every type of information a business needs to guard, but employee benefit plan (EBP) data deserves some extra attention.
EBP data is a prime target for cyber-attacks because:
- It’s almost entirely electronic,
- It’s typically maintained on multiple systems (e.g. the employer’s, the third party administrator’s, the payroll provider’s), and
- Updates are transmitted regularly among the parties.
Protecting Sensitive Employee Benefit Plan Data From a Cybersecurity Attack
Hackers can approach from a variety of directions. They can phish in the employer’s environment, attack firewalls at a plan administrator, or intercept transmissions of data passing between the parties. It’s not hard to figure out when your paydays are, or when you transmit W-2s to your employees.
With so many potential vulnerabilities, what steps can employers take to protect sensitive employee benefit plan data? Here are five strategies your organization can deploy:
- Internal Cybersecurity Strategy – Prepare a Cybersecurity Risk Management Plan
The first step every employer needs to take to protect EBP data is to account for it in a . Everybody lives in fear of hearing that their customers’ credit card info has been stolen and posted to the web, so they focus efforts on protecting customer transactions. Employers need to treat EBP data with the same sense of urgency and make sure that internal cybersecurity plans address specific needs in this area.
- Point out that phishing scams can target benefit information just as easily as they target customer databases.
- Coordinate with benefit providers to train employees on how they initiate contacts. If your 401(k) provider says, “We never initiate a contact via e-mail,” your people need to be suspicious if they get an unexpected e-mail from them.
- Cybersecurity penetration tests need to include EBP systems.
- External Cybersecurity Strategy – Have an Expert Prepare a System and Organization Control Report (SOC Report)
EBP service providers typically place a high premium on cybersecurity. They understand how attractive their systems are to hackers and how much their reputation depends on protecting client data. But how can you evaluate the effectiveness of a provider’s data security precautions?
These external service providers can hire CPAs to prepare “System and Organization Control” (SOC) reports that communicate relevant information about the effectiveness of their cybersecurity risk management programs. Employers who outsource employee benefit functions can review these reports to learn more about how a provider protects the sensitive information it receives.
- Transmissions - Evaluate the Security of Your Communication Channels
Don’t overlook the fact that employee benefit plan data needs to get from your protected environment to your provider’s protected environment without being hijacked along the way. Be sure to evaluate the security of your communication channels and consider options for encryption and securing shared servers.
In the event two providers share data directly (such as a payroll service transmitting data to a 401(k) provider), take time to verify that their handoffs meet your requirements.
- Mitigation of Cybersecurity Damages – Basic Alerts
As much as businesses plan to manage cybersecurity risks, no system is invincible. For this reason, your EBP cybersecurity plan must provide for the mitigation of damages in the event of a breach. You should have some basic alerts drafted to notify affected individuals as quickly as possible, and you should consider providing benefits like credit monitoring so that employees can protect themselves before their data is used fraudulently.
- Connect with Freed Maxick Cybersecurity Experts
In a competitive employment market, businesses need to take every step possible to make themselves attractive to potential employees and to avoid the kind of damage that an EBP breach can cause to a reputation.
If you’re wondering whether your cybersecurity risk management plan adequately covers your EBP needs, Freed Maxick can help. We have the experience to evaluate all facets of your EBP security and to help you remediate any issues that may exist.
For more information, please contact us here or call 716.847.2651.View full article
Valuing a closely-held business can be a subjective and complex process that requires a strong understanding of finance, investments, economics and accounting. At Freed Maxick, our team of valuation experts have the experience necessary for nearly any valuation consulting project. The team has performed valuations for numerous purposes including estate and gift, succession planning, litigation support, mergers and acquisitions, and financial reporting. While all members of our team have worked on valuations for each of these purposes, each member also has specific areas of focus as follows:
Timothy J. McPoland, CPA/ABV, CFE, CVA is a Director and the leader of the firm’s Business Valuation and Litigation Support team. Tim has regularly provided expert witness testimony relating to valuation issues, antitrust litigation, contract disputes and lost profit analyses over the past three decades. Tim also has a significant amount of experience advising clients on mergers and acquisitions.
Joseph M. Aquino, CPA, CVA is a Director with over two decades of experience providing valuation and consulting services to clients. Joe leads the majority of the team’s valuation engagements for financial reporting purposes, including purchase price allocations and intangible impairment analysis. Because of the experience in these types of engagements, our team is able to help determine the value of many intangible assets, including customer lists, patents, trade names, and non-compete agreements. Joe also has a considerable amount of valuation experience in the manufacturing and healthcare industries, with valuations for gift and estate tax purposes and merger and acquisitions, and has also testified as an expert witness on valuation issues.
Ronald J. Soluri, Jr., CPA, CVA is a Director with over two decades of experience providing valuation consulting and litigation support services to clients. Ron leads many of the firm’s valuation engagements for estate and gift tax purposes. Ron has a significant amount of valuation experience in manufacturing, wholesaling, distribution, and professional service industries as well as with real estate and investment holding entities. Additionally, Ron has advised many clients on mergers and acquisitions and has also provided expert witness testimony on valuation issues.
Thomas C. Insalaco, CFA, CVA is a Manager with a decade of valuation and securities analysis experience. Tom brings unique investment experience to the team as he was a stock analyst at a large bank for five years before joining the firm. Tom has a significant amount of experience performing valuations for gift and estate taxes and has also worked on valuations for financial reporting, litigation support and mergers and acquisitions. Tom also works with closely-held business owners to help incorporate their private business investments into their overall wealth planning.
If you are in need of a professional opinion on the value of a closely-held business interest for any reason please call our office at 716-847-2651.View full article
The first steps towards viewing – and treating – your business as an investment
It is estimated that 75% of all private businesses are owned by households for which the business constitutes over half of the household’s net worth.
If you own a private business, it’s likely that the value of your business represents most of your net worth, but do you know what the value of your business investment is or what your returns on your business investment have been over the past few years?
Make Your Private Business a Part of Your Wealth Planning
It’s a wise move to think about your private business as a part of your total wealth portfolio.
Private businesses are risky assets. It is not uncommon to see a 20+% return on a private business one year, and then a negative return the next year. And since your private business is likely a significant portion of your total wealth, this can create large swings in your net worth.
This means that it’s important to incorporate your business into your personal wealth planning – in order to fully understand your true asset allocation (including your business investment) which will allow you to work towards diversifying your portfolio so you can reduce the overall volatility of your investment portfolio returns. When structuring a wealth management plan, wealth managers typically don’t recommend putting all your eggs (or most of them) in one basket, and generally recommend mixing in assets with more stable expected returns to reduce overall risk and volatility of returns.
So, it is strongly recommended that the stake you have in your business and the valuation of your business be considered and accounted for in your overall asset allocation strategies and planning.
When you complement this approach with investments in actions and plans for reducing risks affecting the value of your business, enhancing returns from your business investment, and diversifying away from your business investment over time, you’ve taken a positive step toward a comprehensive wealth management strategy that will protect and grow your overall wealth portfolio.
Set a Budget for Managing the Wealth of Your Business
Similar to how you pay a wealth manager for managing personal or family financial assets, we recommend setting a budget for managing the wealth of your business ownership investment based on a percentage of your businesses’ value. This budget would be used for annual valuations, annual reviews of legal documents, reviews of insurance needs, succession planning activities and estate and tax planning.
Over the long-term, the benefits of treating your business as a part of your total investment portfolio will far outweigh expenses , and will significantly increase the likelihood of achieving your personal and family financial goals.
Let’s Discuss Best Practices for Managing the Wealth of Your Business
For a much more thorough discussion of managing the wealth in your business, please download our whitepaper, How Smart Business Owners Protect and Grow Their Wealth, or contact me (Tom Insalaco, 716-332-2667, email@example.com) or another member of the Freed Maxick Business Valuation Team.
Let’s discuss getting an updated business valuation as a key milestone. Freed Maxick will conduct a comprehensive analysis of your company, perform market research, and develop documentation showing the true financial operating potential of your business.