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Why Deal Structure Counts

Comparing and Contrasting Asset and Stock Deals

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Author: Matt Peck, Partner of Tax

The merger and acquisition market is picking up along with the performance of the manufacturing sector. Today’s market is generally more seller-friendly than during the recession, when buyers were primarily trolling for distressed companies. Healthy, profitable companies can typically sell at higher pricing multiples today than five years ago, which means sellers don’t necessarily have to concede to their buyers’ every demand.

If you’re planning to buy or sell corporate assets or stock, you’ll need to negotiate more than just the selling price. How you structure the deal can have a major impact on how much cash and potential liabilities you’ll wind up with after the dust settles.

 

Asset vs. Stock Sales

A fundamental choice in a corporate deal is whether its stock or its assets will be sold. In a stock sale, all the outstanding shares of stock transfer to the buyer, and the business can continue to operate uninterrupted.

Asset sales are more complex. The buyer purchases all (or most) of the corporation’s assets and liabilities, renegotiates contracts and applies for new licenses, titles, and permits.

From a tax and liability perspective, sellers generally prefer a stock sale, while buyers typically prefer an asset sale.

A Seller’s Point Of View

With a stock sale, sellers pay tax on the difference between the selling price and their basis in the stock—and at the more favorable long-term capital gains rate as long as they’ve held the stock for more than 12 months.

But asset sales trigger double taxation for C corporations. The shell corporation—which the seller retains and winds down in an asset sale—pays tax on the gains from selling assets. And the shareholders pay tax on cash distributions.

Asset sales also can leave sellers vulnerable to future lawsuits, such as employee discrimination or intellectual property claims. Another consideration is depreciation recapture—it’s often overlooked even though it has the potential to significantly reduce the amount of cash taken away from the sale.

View from the Buy-Side

When buyers purchase stock, assets stay at book value and existing depreciation schedules apply. Although simpler to execute, stock sales typically result in higher taxable income for the buyer than do asset sales. With a stock sale, the buyer may be vulnerable to future lawsuits and other legal claims.

Asset sales enable the buyer to report assets, such as equipment and furniture, at fair market value. The value allocated to each fixed asset provides a fresh basis for depreciation, thereby lowering taxable income in the future. Under this arrangement, the buyer can avoid certain legal claims associated with the seller’s corporation.

Outside Perspectives

Asset and stock sales aren’t something owners of manufacturing and distribution companies handle on a daily basis. When you decide to buy or sell, it’s critical to structure the deal in the most advantageous way possible from both legal and financial perspectives. Attorneys and CPAs for both the buyer and seller should be intimately involved throughout the process to help you make informed choices.

To reach a manufacturing and distribution industry specific CPA or for an attorney recommendation who is fluent in your field, call or email a professional at LGT.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a professional advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

 

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Upcoming Sales Tax Holiday for Emergency Preparation Supplies

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Author: Jon Wellington, State and Local Tax Principal

The Texas Comptroller’s Office is offering taxpayers a sales tax holiday between 12:01 A.M. on Saturday, April 23, and midnight on Monday, April 25, for purchases of certain emergency preparation supplies.  During the sales tax holiday, those items may be purchased tax-free without limit and with no need for an exemption certificate.

Qualifying items include:

  • Portable generators (purchase price of less than $3,000);
  • Hurricane shutters and emergency ladders (purchase price of less than $300); and
  • Batteries, single or multipack (AAA, AA cell, C, D, 6 volt, or 9 volt), first aid kits, fuel containers, ground anchor systems and tie-down kits, hatchets axes, mobile telephone batteries and mobile telephone chargers, nonelectric coolers and ice chests for food storage, nonelectric can openers, portable self-powered light sources (flashlights), portable self-powered radios (including two-way and weather band radios), reusable and artificial ice products, smoke detectors, fire extinguishers and carbon monoxide detectors, and tarps and other plastic sheeting (purchase price of less than $75).

Non-qualifying items include:

  • Batteries for automobiles, boats, and other motorized vehicles;
  • Camping stoves or camping supplies;
  • Chainsaws
  • Plywood;
  • Extension ladders or stepladders;
  • Tents;
  • Repair or replacement parts for emergency preparation supplies; and
  • Services performed on, or related to, emergency preparation supplies.

Delivery, shipping, handling, and transportation charges are included as part of the sales price, and if the supplies are taxable, these charges would also be taxable.  For example, the purchase of an emergency ladder for $299 with a $10 delivery charge would not qualify for the holiday and the purchase would be taxed based on a $309 purchase price.

Have questions regarding the sales tax holiday and qualifying items? Contact a state and local tax professional at LGT today.

To see the Comptroller’s Office official release, see Tax Publication 98-1017 (Emergency Preparation Supplies Sales Tax Holiday, Texas Comptroller of Public Accounts, 03/01/2016) at http://www.cpa.state.tx.us/taxinfo/taxpubs/tx98_1017.html.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

 

 

Your Dealership Real Estate May Offer You a Significant Tax Advantage

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Author: Britt Keener, Tax Manager

Could you use a tax strategy that can save you significant tax dollars and boost cash flow? If so—and who doesn’t want to save tax?—consider looking into a cost segregation study on the dealership real estate you own. It could save you a bundle.

Accelerating Depreciation—Newly constructed real estate as well as previously acquired

You may be eligible to save taxes through accelerated depreciation on both newly constructed real estate, as well as retroactively save taxes if you have purchased real estate, built a new showroom, renovated facilities or expanded property in the last decade or so.

 

Traditionally, dealers depreciate nonresidential buildings and improvements over 39 years using the straight-line depreciation method. A cost segregation study allows you to depreciate certain property components more quickly and boost your cash flow.

How? The study identifies, segregates and reclassifies qualifying property into asset groups with shorter depreciable lives of five, seven or 15 years. These shorter-lived assets are also typically eligible for the modified accelerated cost recovery system (“MACRS”) rather than straight-line depreciation. Net result: You get larger deductions in the earlier years of an asset’s life.

Take a look at what’s included in the value of your real estate. Generally, the gross amount will include such things as carpeting, window treatments, wiring dedicated to personal property, cabinetry, lighting, driveways, wall coverings and cubicles, landscaping and drainage. Soft costs, such as architectural fees, might also be counted. All of these items and others potentially can be carved out and depreciated more quickly than standard real estate.

As stated above, these tax savings can be obtained on newly constructed real estate. For an example with previously acquired real estate, suppose a dealer spent $6 million on a new showroom in 2005. In 2015, his CPA works with specialized professionals who conduct a cost segregation study and determine that the following assets can be reclassified:

  • Parking lot ($530,000),
  • Landscaping and drainage ($53,000),
  • Carpeting, blinds and wallpaper ($21,200),
  • Cabinetry ($26,500),
  • Flooring ($6,900), and
  • Lighting ($5,300).

This study enables the dealer to reclassify and accelerate depreciation on $642,900 of its fixed assets. In 2015, he can deduct all the depreciation he could have taken since the building was acquired 10 years ago.

Auto retailers tend to achieve very substantial savings from cost segregation. That’s because dealerships own significant fixed assets—including retail display areas (such as the showroom and specialized mechanical systems in service and body)–that can be mistakenly classified as real property.

Regarding all of this accelerated depreciation, it’s important to keep in mind that cost segregation studies adjust only the timing of deductions. They don’t affect the total deductions taken over an asset’s life.

Accelerating Initial Savings and Capturing Retroactive Savings

Since 1996, dealers have been able to accelerate depreciation deductions from cost segregation studies when initially constructing real estate, as well as capture immediate retroactive savings for real estate that was previously acquired. Before then, taxpayers had to spread depreciation savings after a study over four years. Today, you can deduct the full amount as soon as your study is complete, thereby dramatically lowering your current tax bill. Of course, if you’re buying, building or renovating a dealership currently, this is also an ideal time to perform a study.

Some Considerations

If you plan to sell the real estate soon, or at this time have real estate with a smaller cost, it sometimes may not be as desirable to incur the cost of the study. We can help you with this determination.

Also, the timing of a cost segregation study can provide additional opportunities as well. If you predict that 2016 will be more profitable than 2015 and that puts you into a higher tax bracket, it may be better to wait until 2016 to have the study performed.

Providing Support

Formal cost segregation studies are required to support accelerated deductions on your tax return in accordance with IRS guidelines. We work with experienced professionals who can analyze a dealership’s blueprints, engineering drawings and electrical plans to determine exactly which assets qualify as personal property.

The bottom line? The current tax savings from a formal cost segregation study may far exceed the cost of obtaining a properly prepared study and will prove its worth should the tax man come a-knocking. For many years, we have helped our clients work with superb cost segregation firms, and our clients have had very substantial tax savings as soon as possible.

Sooner Rather Than Later

Faster depreciation lowers taxable income today. Shorten up the standard useful life of property, if you’re eligible, and enjoy a tax savings sooner than expected.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

© 2015

Is Your Company Ready to Bring on a CFO Or Controller?

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Author: Patrick Reilly, Principal of Audit

Bringing on a CFO or a controller to handle the financial operations at an auto dealership is a big decision, and there a number of factors that management must consider, including the dealership’s size, the benefits of the hire and the time and money involved in such a commitment.

Take a hard look before adding a financial executive

Do you think your dealership is large enough for—and can afford hiring—an executive to direct your financial operations? Before contacting your industry connections for candidate suggestions or lining up a headhunter, there are a couple items you need to consider carefully before making your move.

Is your current structure impeding growth?

There is no magic number that your dealerships usually need to reach before it’s financially feasible for them to hire a financial executive, but generally, a good rule of thumb is: 1) If your business has revenues of around $75 million, or you operate multiple smaller stores, you may be ready to hire a controller, and 2) if you have revenues of around $300 million and run multiple locations, it may be time to hire a CFO.

If your dealership has already met one of these thresholds, or soon will, hiring a financial executive can have significant benefits. Perhaps the biggest is the ability of this kind of professional to bring a higher level of strategic and analytical skills to the financial management of your dealership; those skills go far beyond basic number-crunching.

The strategic direction that a CFO or controller can bring to the game includes looking beyond day-to-day financial management to more holistic, big-picture planning of financial and operational goals. This individual will take a seat at the executive table and serve as the owner’s go-to person for all matters related to dealership finances and operations.

Interpreting data

A CFO or controller will be able to go beyond merely compiling financial data to providing an interpretation of the data that shows how financial decisions will impact all areas of the dealership. He or she can plan capital acquisition strategies so your dealership has access to financing as needed to meet working capital and operating expenses.

In addition, a CFO or controller will serve as the primary liaison between your dealership and its bank to ensure your financial statements meet the bank’s requirements and help negotiate any loans. Analyzing possible mergers, acquisitions and other expansion opportunities also fall within a CFO’s or controller’s purview.

Financial oversight

A CFO or controller typically have a set of core responsibilities that link to the financial oversight of your operation. That includes making sure there are adequate internal controls to help safeguard the dealership from internal fraud and embezzlement. This individual also should be able to:

  • Implement improved cash management practices that will boost the dealership’s cash flow and improve budgeting and cash forecasting,
  • Perform ratio analysis and compare the dealership’s financial performance to benchmarks established by similar-size dealerships in the same geographic area, and
  • Analyze the tax and cash flow implications of different capital acquisition strategies—for example, leasing vs. buying equipment and real estate.

If you have multiple franchise locations, a CFO or controller can analyze and compare the different operations from a financial perspective, and look for ways that your business can benefit from economies of scale.

Other benefits

Along with the financial oversight and analysis noted above, a CFO or controller add additional benefits that help protect of your dealership. A CFO or controller should play a key role in the dealerships compliance and regulatory issues such as:

  • Develop and implement policies and procedures for the accounting department.
  • Ensure all company policies and procedures are being followed both fairly and consistently.
  • Evaluate, hire and monitor key personnel positions including office managers, HR and IT.
  • Maintain record filing procedures for all federal and state regulations.

 

Time and money

Hiring a full-time CFO or controller represents a major commitment in both money and time. This executive likely will command a six-figure salary and an attractive benefits package, so first make sure your dealership has the financial resources to support this level of compensation.

Bringing in a financial executive also will require a time commitment by the existing ownership and management team. They’ll have to bring the CFO or controller up to speed on all aspects of the dealership’s finances and operations. If this training doesn’t go well, or the new executive isn’t granted enough decision-making authority afterward, this person could become bored and leave your employ—wasting your efforts and disrupting the business.

Weighing the alternatives

Hiring a CFO or controller may be the right decision if your dealership is large enough and has the cash flow to support the requisite compensation. However, if you’re reluctant to take this step—but still seek improved financial oversight—your CPA, together with your existing financial staff, can supervise the outsourcing of these higher-level responsibilities.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

© 2015


 

Road Rules: Deducting Business Travel Expenses

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Author: Meghan Dunshee, Senior Manager of Tax

If you travel for business, you will want to ensure that the expenses you incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can cost you.

Away From Home Rule

Generally, ordinary and necessary expenses of traveling away from home for work are deductible. For the expenses to qualify, you must be away from your tax home (the general location of your regular place of business) substantially longer than an ordinary day’s work and need to sleep or rest to meet the work demands while away.

You don’t necessarily have to stay away from home overnight to satisfy the rest requirement. If you travel for business purposes throughout the day but return home that night to sleep, you may still be considered “away from home” for tax purposes. In this case, expenses you incur for such trips are still deductible.

Also, the trip must be primarily for business purposes. If your trip involves both business and personal activities, a portion of the travel expenses may be nondeductible personal expenses.

Deductible Travel Expenses

Most airfare, taxis, rental cars, lodging, meals (with exceptions), tips and business phone calls are tax deductible. However you can’t write off “lavish or extravagant” travel expenses, so be prepared to prove that your patronage of a high-end restaurant or five-star hotel was reasonable under the circumstances.

Generally, only 50 percent of business-related meal and entertainment expenses are deductible. If your employer reimburses you under an accountable plan (see below), the 50 percent limit applies to your employer rather than to you.

You must substantiate deductions for lodging and other travel expenses greater than $75 with adequate records. These include credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose (the business reason for or business benefit derived or expected from the trip).

Be Accountable

If your employer reimburses your travel expenses, an accountable plan enables the company to deduct the reimbursements. However, the reimbursements aren’t included in your income as salary and aren’t subject to The Federal Insurance Contributions Act (“FICA”) and other payroll tax obligations. Although you may still be able to deduct some or all business travel expenses without an accountable plan, such deductions are available only if you itemize and your expenses and other miscellaneous deductions exceed 2 percent of your adjusted gross income.

For reimbursed expenses to qualify under an accountable plan, you must have paid or incurred them while on company business and have reported the expenses to your employer within a reasonable time (usually within 60 days). You also must return any excess reimbursements within a reasonable time period (usually within 120 days after they were paid or incurred).

Generally, to be reimbursable on a tax-free basis, your travel must meet the “away from home” rule discussed earlier. However, your employer can reimburse local lodging expenses if the lodging is temporary and necessary for you to participate in or be available for a bona fide business meeting or function. The expenses involved must be otherwise deductible by you as a business expense (or be expenses that would otherwise be deductible if you paid them).

Exceptions Happen

As with most IRS rules, there are exceptions to which travel expenses you can deduct. If you’re unsure about some expenses, give us a call.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

© 2015

 

Are You Aware Of Your State and Local Tax Liabilities?

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Author: Jon Wellington, Principal of State and Local Tax

Does your company operate in multiple states? If so, you may owe state and local taxes to some of those states, even if you do not realize it. While it may be difficult to determine whether your activity in other states triggers a tax liability, ignorance is no defense, and the penalties for noncompliance can be steep, making this a critical issue for small businesses.

“Nexus”

The concept of nexus is the degree of business activity in a state necessary to make your business subject to some or all of that state’s taxes. To further complicate matters, what establishes nexus for one type of tax might not establish nexus for another. For example, a physical presence is needed for sales tax nexus, but not necessarily for income or franchise taxes. Even determining what constitutes a physical presence varies by state.

For example, consider income taxes. If your company has income tax nexus in a state, you must file income tax returns and pay income tax in that state. A number of situations can trigger income tax nexus in a state, including but not limited to:

  • Employing workers,
  • Performing installations, repair or warranty work,
  • Leasing or owning property (including inventory),
  • Attending trade shows,
  • Leasing to customers, and
  • Holding meetings or conducting training.

In addition to the above, some states consider nexus to be created simply by having sales to customers above a certain threshold amount, even without any physical presence. Since states vary so much, a nexus determination for one state may not hold true for another state.

Importantly, there is a federal law that provides that no income tax filing responsibility is created, even if a business has nexus, provided that certain conditions are met. Specifically, if a business sells tangible personal property, no income tax returns are due if: (1) the business’s only activities in the state are the solicitation of sales and taking and accepting orders by employees or independent contractors from customers in that state, and (2) such orders are approved and fulfilled from outside that state. No such protection is offered to service providers.

Next Steps

In the wake of the recession, states and municipalities are seeking to boost revenue by prioritizing the collection of taxes from out-of-state companies. Some states have even created new departments devoted exclusively to finding out-of-state companies that should be paying taxes but are not (In Texas, this is known as the Business Activity Research Team, or “BART”). States are also taking advantage of cross-border agreements with other states’ departments of revenue to share information and are collaborating with federal customs agents. In this environment, it is critical that businesses identify their state tax obligations (known as a nexus study).

If you discover after the fact that you owe state and local taxes, you may be able to take advantage of a voluntary disclosure program. Most states now offer such programs, which eliminate or lower penalties and interest on unpaid taxes and limit the look-back period. The Multistate Tax Commission offers a voluntary disclosure program that allows you to negotiate a favorable settlement agreement with multiple states through a single point of contact. It is important to note that such programs are only available if a business comes forward prior to being contacted by a state’s department of revenue.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

 

 

How Small Employers Could be Penalized by the Affordable Care Act

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Author: Donna Nuernberg, Manager of Accounting and Consulting Services

An IRS Revenue Ruling went into effect on July 1, 2015 that could cost your company a penalty of $100 per day, per employee (up to $500,000). Under Internal Revenue Code § 4980D, the penalty could be $36,500 per year per employee for employers who do not offer insurance coverage but instead seek to reimburse their employees for insurance purchased on the individual market. If you’re not in compliance, this penalty could put you out of business.

Many small employers with less than 50 employees think that nothing in the Affordable Care Act (“ACA”) will impact them. However, this penalty can be assessed to employers with as few as two employees. Many small employers have used payment arrangements such as reimbursing the employee for premiums or making the payment directly to the insurance company to help employees obtain health coverage without the trouble and cost of providing a full-fledged company group health insurance plan. Some employers have done this because they could not obtain an affordable group policy or they may not have enough employees to meet the insurance companies’ criteria. According to the IRS, this penalty can be assessed to employers for simply offering plans which reimburse employees for premiums paid by them for individual health insurance policies. The penalty may also apply to direct employer payments of premiums for employees’ individual health policies (Jerry Love, 2016).

Unlike early reports stating the ACA would only affect larger companies, this penalty applies to any company that reimburses more than one employee.

This penalty is huge. It is more than 18 times greater than the $2,000 employer-mandate penalty under ACA for not providing qualifying health insurance for employees. It is very important to note employers with fewer than 50 workers are not exempt. The basic issue is how an employer may be paying for an employee’s health insurance. Many small employers will reimburse their employees for premiums on their individual health insurance policies or the employer may pay the premium directly on behalf of the employee. These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage (Jerry Love, 2016).

There are a few exceptions to this penalty, but caution should be taken.

Penalty Exception if Only One Employee

The penalty will not apply if only one employee is recompensed for individual health insurance and/or other medical expenses.

Shareholders of Sub S Corporation Exception

“IRS Notice 2015-17 also clarifies that S corporations may continue to report reimbursements of health insurance of 2% (or greater) shareholders pursuant to Notice 2008-1. Until further guidance is issued, and in any event through the end of 2015, the excise tax under Internal Revenue Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement (Jerry Love, 2016).”

Clearly, ACA was written with the intention of helping everyone in America obtain health insurance. Further, the ACA has a clear mandate to the larger employers (those with over 50 full time employees (“FTE”)) to provide affordable health insurance to all of their full time employees. According to the IRS and Department of Labor (“DOL”), these individual market policies cannot be integrated to meet the market reform provisions. Specifically, the IRS stated these plans violate the Essential Health Benefits provision of the ACA, as well as the prohibition on spending caps on these mandatory benefits.

There are options if you think you fall into the above situation:

  • If you are reimbursing employees or paying for their policies directly, you can require them to pay for the insurance themselves. This can be achieved by increasing their salary. This option requires the payment of both employee and employer portions of Medicare and Social Security tax.
  • Research setting up a group policy that covers the employees (Jerry Love, 2016).

 

References

Jerry Love, C. C. (2016, January 27). Will Your Clients Run Afoul of ACA’s Largest Penalty? Retrieved from CPA Tax Magazine: http://www.cpataxmag.net/news-front-page-featured-articles/1394-will-your-clients-run-afoul-of-aca-s-largest-penalty

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

© 2016

Proudly Introducing Our New Partners

DALLAS – Lane Gorman Trubitt, PLLC (“LGT”) and their affiliate company, LGT Financial Advisors LLC (“LGT FA”), embraced the New Year with two new additions to their partner groups and several staff level promotions. Kevin Warneke, CPA, an assurance services professional of LGT, and Scott Gunn, JD, CFP®, CPFA, a financial planning consultant at LGT FA, have both been asked to join their respective partner groups.

 

 

 

 

SGunn-1“LGT has provided the platform, resources and support to help me excel in my role as a trusted wealth advisor. Moreover, LGT has enabled me to be creative and innovative in our offerings, which has been critical to the success of LGT FA,” says Gunn. “Our clients truly benefit from customized solutions which serve to protect their financial well-being. As a new member of the LGT FA partnership group, I am proud to call LGT my family and look forward to helping the firm grow in the “nontraditional” services space.” 

Scott has more than 20 years of investment consulting and financial planning experience which includes working for The Ayco Company, L.P. (a boutique financial planning firm) and Merrill Lynch (a global wealth management firm). Scott joined LGT FA as a Principal in January 2009. Scott’s day-to-day responsibilities include investment advisory services, comprehensive financial planning and qualified plan consulting to employers. To this end, Scott works with business owners, senior-level Fortune 500 executives, professional athletes and other high net worth individuals providing investment and financial advice. Scott also serves as LGT FA’s Chief Compliance Officer and conducts due diligence on the firm’s investment strategies.

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“I am extremely proud and humbled to be the newest member to the Partner group here at LGT,” says Warneke. “It is a true blessing to have been called to service in such a place as this! To come to work each day with an opportunity to serve clients, interact with folks of integrity and intelligence, to continuously grow both personally and professionally, and to develop long-standing friendships and business relationships is all one could wish for in a career.”

Kevin joined LGT in 2000 and was asked to join the firm as a partner this January. His primary focus is on client service and he has more than 15 years of public accounting experience. His experience includes the audits of a broad range of financial statements. Kevin’s responsibilities include all aspects of audit and consulting engagements from planning, assessing risk, and supervising staff to the review and presentation of final deliverables to management and boards of directors. Kevin has extensive experience with healthcare entities and provides internal control and practice consultation.

In addition to Warneke and Gunn’s new titles, LGT recently promoted several other employees. In the assurance services department, Babita Sherchan and Shehzana Ali became managers; Callie Nixon and Elliot Nolan were promoted to Senior I employees; and Rachel Luker and Britney Castilleja graduated to Staff II. Lastly, in the tax department, Trey Hardy was promoted to Senior I.

LGT proudly promotes all employees knowing that they will strengthen the firm by being a brand ambassador and will help support clients by understanding all their current and potential needs.

 

About Lane Gorman Trubitt, PLLC

Founded in 1950, Lane Gorman Trubitt, PLLC (“LGT”) is one of the largest certified public accounting firms headquartered in the Southwest. Dedicated to serving the middle market, the firm represents a broad range of clients, from individuals to public companies, in a variety of industries. LGT offers traditional accounting, audit and tax services, as well as various other specialized professional services. In an effort to expand the services provided to valued clients, LGT has launched three affiliated companies, LGT Financial Advisors, LLC (“LGT FA”), LGT Insurance Services Inc. and LGT Retirement Plan Solutions.

To learn more, visit www.lgt-cpa.com.

 

For more information, press only:

Elizabeth Dahlgren, Communications Coordinator, LGT

(214) 461-1403 or edahlgren@lgt-cpa.com

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Don’t Neglect the Cost to Complete

Author: Donna Nuernberg, Manager of Accounting and Consulting Services

Author: Donna Nuernberg, Manager of Accounting and Consulting Services

On long-term construction projects, it’s critical for contractors to have systems in place to accurately estimate the cost to complete (“CTC”). Knowing a project’s CTC helps you develop a more accurate picture of the project’s performance to date, avoiding surprises that can hurt your profitability and shake the confidence of lenders and sureties. By getting a handle on your CTC early in a project, you have an opportunity to address problems that are hindering your productivity or otherwise increasing your costs.

Estimating the Percentage Complete

Typically, contractors use the percentage-of-completion (“POC”) method to account for long-term contracts. That method recognizes income as a contract progresses, in contrast to the completed contract method, which doesn’t recognize revenues or expenses until a project is substantially complete. Following is a simple example that illustrates the critical role CTC plays in measuring profitability.

Suppose a contractor enters into a contract to construct a commercial building. The contract price is $1 million and the contractor estimates its costs to be $900,000. At the end of year one, the contractor has incurred $300,000 in costs and believes its original cost estimate of $900,000 remains accurate—that is, its CTC is $600,000. Based on the costs incurred to date, the project is one-third complete, so the contractor’s first-year profit is $33,000 [$333,000 (33.3% of the contract price) – $300,000 in costs].

There are several steps contractors can take to ensure they prepare accurate CTCs, such as developing solid project budgets and labor schedules.

But what if productivity issues have substantially increased the contractor’s labor costs? Suppose that, assuming current productivity rates continue for the remainder of the project, its actual CTC is $700,000. This would reduce the POC to 30 percent, wiping out the contractor’s profits. In addition, it’s likely that the contractor would need to increase its labor costs down the road in order to meet the original target completion date, turning a profitable job into a loser.

Misjudging CTC Comes At a Steep Price

Failure to understand a project’s true CTC can cause a contractor to improperly recognize revenue, which in turn can lead to “profit fade.” If the contractor in the example above uses the inaccurate figure of $600,000 as its CTC, it will over-report its year-one profitability and experience significant profit fade in the project’s remaining years.

If, on the other hand, the contractor estimates CTC accurately, two important things will happen: First, more accurate, consistent reporting will inspire confidence on the part of banks and sureties. And second, it will provide an opportunity for the contractor to address its productivity issues or find other ways to reduce costs and boost its profitability.

There are several steps contractors can take to ensure they prepare accurate CTCs. These include:

  • Developing solid project budgets and labor schedules (and updating them to reflect change orders and unforeseen developments),
  • Implementing accurate systems for tracking and reporting productivity,
  • Holding project managers accountable for monitoring a project’s financial performance,
  • Accurately estimating the direct costs of all remaining work, and
  • Meeting or beating the budget.

A Wise Investment

It pays to invest needed time and resources in developing accurate CTC estimates for your projects. The benefits include more accurate financial statements, stronger relationships with banks and sureties and higher, more consistent profits.

 

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

© 2016

Lease Option or Sale? It Matters to the IRS

Author: Shea Kracheck, CPA, Tax Principal

Author: Shea Kracheck, CPA, Tax Principal

Lease options are often used in real estate transactions, especially when property owners run into difficulty finding a buyer. If you’re not careful, though, the IRS might recharacterize the arrangement as a sale in the form of a contract for deed.

Lease option vs. contract for deed

A lease option is a traditional lease with a purchase option that gives the tenant the exclusive right to buy the property at the price typically set from the beginning. The tenant can exercise the option at any time during the option period, which usually runs concurrently with the lease period. The seller benefits from market appreciation or, alternatively, can claim depreciation as a tax deduction as long as the option isn’t exercised. In addition, the IRS doesn’t deem the arrangement a sale until the option is exercised, so the seller can defer its gains.

With a contract for deed, the buyer makes installment payments and receives equitable title in the property, while the seller holds legal title as security for the payments. Legal title is transferred after the final payment. Because the IRS considers a contract for deed to be a sale, the buyer reaps the tax benefits of ownership, such as mortgage interest deductions. When the buyer makes the final payment, the entire balance paid constitutes capital gains for the seller, and the seller also must pay any transfer tax.

Signs of a sale

When determining whether a transaction is a lease option or a sale, the IRS looks at the “economic reality.” For example, if the circumstances when the agreement is executed suggest the buyer is very likely to exercise the option, it may be considered a sale.

Another indicator of a sale is an arrangement with artificially high rents and a below-market option price. These features can lead to the conclusion that the buyer is acquiring equity in the property during the lease term (equity = rent paid less fair market value rent). In such circumstances, the option price may be seen as a down payment. The low-priced option alone won’t establish a sale, though, if the price is a substantial percentage of the property’s fair market value and the rent payments aren’t applied to the purchase price.

A lease that requires the tenant to make substantial improvements may also evidence a sale. As in the case of inflated rents, the theory is that the only way the tenant can recover its investment is by exercising the option.

Proceed with caution

A lease option can provide strategic value for both buyers and sellers, but you must take care to avoid IRS recharacterization. An appraiser can help you set the payments and option price at market values to boost the odds of surviving scrutiny.

 

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

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