m&d lenders symposium hosted by grassi & co.’s m&d practice
TRANSCRIPT
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M&D Lenders SymposiumHosted by Grassi & Co.’s M&D Practice
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Welcome and Introduction Presented by Robert E. Grote, CPA
2013 M&D Market Outlook Survey Results Summary Presented by Michael A. Violano
Private Company Accounting Presented by Stephen J. Mannhaupt, CPA
Tax Savings Strategies Presented by Jeffrey G. Cohen, CPA
Q&A
Agenda
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M&D Market Outlook Survey Results SummaryPresented by Michael A. Violano – Manager
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M&D Market Outlook Survey Results
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M&D Market Outlook Survey Advisory BoardIn order to ensure that the 2013 M&D Market Outlook Survey addressed the most pertinent issues facing the M&D Industry and its executives, we enlisted the assistance of the following Advisory Board for their insights and recommendations.
Anthony Aronica Vince Gallo
Owner/Chief Financial Officer President & CEO
Graphic Paper, Inc. LIF Industries, Inc.
Andy Goodman John Harkin
President & CEO Vice President
Sherwood Lumber Busby Metals
Brian Li Vince Palazzolo
President Chief Financial Officer
A&Z Pharmaceuticals CPI Aero
Grassi & Co. would like to express a special thanks to all the participants on the Advisory Board for the help and advice they provided during the development of the survey.
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Building Materials / Construction Supply
Chain13%
Pharmaceuticals7%
Technology9%
Food & Bev-erage20%
Aerospace & Defense10%
Consumer Goods/Retail Products
14%
Transportation3%
Other 24%
Breakdown of Participating Companies by M&D Industry Sub-Segment
M&D Market Outlook Survey Participating Companies
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< 25 26 - 50 51 - 75 76 - 100 101 - 150 151 - 200 > 2000%
5%
10%
15%
20%
25%
30%
Total Company Headcount
M&D Market Outlook Survey Participating Company Size
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1 - 25% 26 - 50% 51 - 75% 76 - 100%0%
5%
10%
15%
20%
25%
30%
Manufacturing Raw Materials into Finished Goods
% of Business
% o
f S
urv
ey R
esp
on
den
ts
1 - 25% 26 - 50% 51 - 75% 76 - 100%0%
5%
10%
15%
20%
25%
30%
Outsourcing Partial Manufacturing
% of Business% o
f S
urv
ey R
esp
on
den
ts
M&D Market Outlook Survey Manufacturing Operations
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1 - 25% 26 - 50% 51 - 75% 76 - 100%
64%
17%
5%2%
International Sales as % of Total Sales
M&D Market Outlook Survey International Sales
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Capital Infusion/Private-Public Offerings3%
Bank Borrowing18%
Accounts Receivable Man-agement
18%Cash Flow Management
26%
Inventory Management25%
Implementation of Lean Manufacturing Principles
7%
Other 2%
Initiatives to Improve Working Capital
M&D Market Outlook Survey Working Capital
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New product development
New vertical market identifi-
cation
Implementation of new processes
Implementation of new business
model/strategy
Other
68%
39%
32%
44%
12%
Primary Growth Strategies
M&D Market Outlook Survey Primary Growth Strategies
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0% 1 - 25% 26 - 50% 51 - 75% 76 - 100%
5%
13% 13%
18%
40%
8%
27%
17%
7%
20%
Sourced Inventory
In the Unites States Internationally
M&D Market Outlook Survey Sourced Inventory
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Very important Moderately important Not important at all
45%47%
8%
Importance of Technology
M&D Market Outlook Survey Importance of Technology
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Hig
her D
educt
ible
Pla
ns
Hea
lth R
eim
bursem
ent Arr
angem
ents
(HRAs)
Hea
lth S
avin
gs Acc
ounts
(HSAs)
Wel
lnes
s Pro
gram
s
Self-In
sura
nce
Hig
her E
mplo
yee
Contr
ibuti
ons
Non
e of
the
abov
e
46%
14%
24%
14%11%
36%
24%
Health and Benefit Programs
M&D Market Outlook Survey Health & Benefit Programs
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Better than 2012 and 2013 Worse than 2012 and 2013 Same as 2012 and 2013
61%
2%
37%
2014 M&D Market Outlook
M&D Market Outlook Survey 2014 Market Outlook
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Reven
ue will
incr
ease
from
pre
viou
s ye
ar
Reven
ue will
dec
reas
e from
pre
viou
s ye
ar
Reven
ue will
rem
ain t
he sa
me
from
pre
viou
s ye
ar
83%
4%13%
Revenue Expectations
M&D Market Outlook Survey 2014 Revenue Expectations
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Private Company AccountingPresented by Stephen J. Mannhaupt, CPA – Partner
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Private Company Reporting
Two Initiatives:
AICPA Financial Reporting Framework for Small to Medium Sized Entities (FRF for SME)
FASB – Private Company Council
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Private Company ReportingFRF for SME: Non-authoritative
− Additional non-GAAP financial reporting option
Concise set of principle − Cash, tax and other OCBOA methods are too vague and available for
manipulation
Accrual based concepts that include some tax based methods
Simplified principles and focuses on the most relevant information needs of businesses and their financial statement users
Principles based− Not rules based
Stakeholders demonstrated the need for such an accounting framework
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Private Company Reporting
FRF for SME:
Framework is intended for –
Owner managed companies− Greater interest in cash flow, liquidity and financial position
Companies with limited accounting resources
Not for highly specialized industries
Users of the statements want to determine− Can the Company perform under a contract
− Will the Company be able repay a loan
− Have access to entity’s management
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Private Company ReportingFRF for SME:Principles include -
Subsidiaries – accounting is based on control– Elect either consolidation or equity method– Parent only financial statement are permitted– Variable Interest Entities – concept does not exist
Employee benefit – DB Plans– Record based on contribution attributable to current period - disclose relative
info– Option for recognition based on actuary calculation
Goodwill– Amortized over same period for tax purposes – 10 years if not amortized for
tax
Income taxes – allows for an accounting policy choice– Taxes payable method would reflect only current taxes payable– Deferred method could be elected – same as GAAP– No requirement specific to uncertain tax positions
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Private Company Reporting
FASB – Private Company Council: GAAP Exceptions for Private Companies
– These are still GAAP Basis financial statement – Can still obtain unmodified opinion
“Private Company” defined
Private Companies would be able to elect the exclusion – Not required to elect all
Different from discussion on FRF SME – these are GAAP statements
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Private Company Reporting
FASB – Private Company Council:
Two Accounting Standards Update (ASU)– ASU 2014-02 – Accounting for Goodwill, a consensus of the Private
Company Council– ASU 2014-03 – Accounting for Certain Interest Rate Swaps – Simplified
Hedge Accounting Approach, a consensus of the Private Company Council
Currently in exposure daft:– Accounting for Identifiable Intangibles Assets in a Business
Combination– Accounting for VIE in Common Control Leasing Arrangements
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Private Company Reporting
FASB – Private Company Council:
ASU 2014-02 – Accounting for Goodwill
Amortize goodwill on a straight-line basis over 10 years
Choose to test goodwill for impairment at either the entity level or the reporting unit level
Test goodwill for impairment only when there is a triggering event instead of having to test it every year
Feeling is value of goodwill within a company is depleted over the years due to changes in the company and the market
Reduces the cost associated with valuation
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Private Company ReportingFASB – Private Company Council:
ASU 2014-03 – Accounting for Certain Interest Rate Swaps – Simplified Hedge Accounting Approach
Allows private companies to apply a simplified hedge accounting – Prior accounting standards for achieving hedge accounting were
complicated
No hedge effectiveness is assumed in the hedging relationship
Swap can be recorded at the settlement value not fair value
Hedge accounting is better at avoiding income statement volatility
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Private Company Reporting
FASB – Private Company Council:
Exposure Draft - Accounting for identifiable Intangibles assets in a Business Combination
Modifies the requirement for private companies to separately recognize fewer intangible assets in a business combination
Intangibles would be based on the existence of a contract – i.e. covenant not to compete
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Private Company Reporting
FASB – Private Company Council:
Exposure Draft - Exposure Draft - Accounting for VIE in Common Control Leasing Arrangements
Eliminates the consolidation of Variable Interest Entities (VIE) in relationships with related parties under common control
VIE entity is an organization in which consolidation is not based on a majority of voting rights
Traditional operating and rental company with common ownership– Was not the intent under current accounting standards
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Private Company Reporting
FASB – Private Company Council:
Grassi responded in favor of each of these exposure drafts.
Future Agenda Item:
Disclosures related to Defined Benefit Pension Plans
Fair value Disclosures for Level III investments
Other Comprehensive Income
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Tax Savings Strategies for the M&D IndustryPresented Jeffrey G. Cohen, CPA – Partner
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Cost Segregation Studies Research and Development IC-DISC Domestic Production Case Studies Other Tax Incentives ESOP Extenders that Expired on 12/31/13 New Tax Rate
Agenda
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Cost Segregation Studies Research and Development Studies IC-DISC Empire Zone Credits/Excelsior Program Domestic Production Deduction Captive Insurance and ESOP
Tax Incentives and Estate Planning
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A CSS− identifies the non-structural components of an
owner’s building;− assigns costs to components;− increases owners depreciation by lowering the
component’s tax life; and− allows the grantor trust to be the owner of real
estate from day one.
By decreasing your current income you defer income taxes to a later tax period
Cost Segregation Studies (CSS)
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Companies who have invested in the development of a new or improved business component qualify for this credit
Government sponsored programs backed by the IRS
Immediate source of significant cash and permanent tax savings
Not a deduction, dollar-for-dollar credit Scientific in nature 6.5% credit
Research & DevelopmentStudies
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Export sales tax incentive for LLC’s, Partnerships, S-Corporations, and closely held C-Corporations
Pay capital gain rate of 23.8% instead of ordinary tax rate of 39.6% and payroll tax on export sales
Creates a deductible dividend to shareholders Eliminate double tax for C Corporations Make Grantor Trust the owner
IC-DISC
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The following can result in a 9% deduction:− Qualifying production activities for manufacturers
in the US− Distributors of items manufactured in the US or
“mostly assembled”− Construction services in the US− Software development in the US
Domestic ProductionDeduction
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Cost segregation study resulted in a $200,000 savings
R&D Study resulted in a $150,000 savings
Prior CPA had erroneously filed in NYC resulting in a $50,000 savings
Established phantom stock plan, built management team to transition company for growth and eventual sale
Assisted client to focus on EBITDA to improve current profits and eventual sale price
Case Studies$200M Food Manufacturer
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Captive Insurance Company: − 831B small insurance co with premiums under
1.2M Use of Risk Pool− Deductible insurance premiums and tax free
premium income in separate C. Corp Captive− Captive ownership in Trusts
Other Tax Incentives
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Sale of Company to Employees ESOP is a qualified retirement plan The company establishes an ESOP plan and trust
and appoints an ESOP trustee The ESOP trustee negotiates with a selling
shareholder to establish the terms of the sale of stock to the ESOP
ESOP
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The company borrows a part or all of the funds necessary for the ESOP to purchase the stock from the selling shareholder from a third-party lender (outside loan).
The lender evaluates the ESOP company in the same way other potential borrowers are evaluated
Loans are based on the company's ability to collateralize and repay the loans
ESOP
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The company loans the funds to the ESOP (inside loan)
The terms of the loan are based on the credit markets
The ESOP uses the funds borrowed from the company to purchase the stock from the selling shareholder
To the extent of available funds, the selling shareholder would receive cash and take back a note for the balance (subordinated note).
ESOP
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The company makes annual tax-deductible cash contributions to the ESOP
The ESOP uses the cash contributions received from the company to repay the inside loan
The company uses the payment received from the ESOP to make payments on the outside loans
ESOP
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Good ESOP candidates generally have − solid operating performances;− stable or predictable cash flows;− a good senior management team, and − payroll sufficient to support the contributions
necessary to fund the repayment of the ESOP loan.
As mentioned previously, only corporations can adopt an ESOP
ESOP Candidates
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IRC 1042: proceeds invested in QRP (Qualified Replacement Property)
QRP includes stocks, bonds, or other securities of operating companies incorporated in the U.S.
QRP does not include government bonds, mutual funds, real estate investment trusts (REITs), or ownership through means other than a security, such as interests in a partnership or limited liability company
ESOP Gain Deferral
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Common ESOP issues are− Cant Sell QRP before death of holder− Must die holding QRP to obtain Step Up on QRP
assets− Must margin QRP assets to get money out of the
ESOP for personal use. If Value of QRP assets drop or Bonds Called, could be gain recognition
The question to ask is…“Is an ESOP right for you?”
ESOP Issues
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R and D credit Work Opportunity Credit: $2,400 per employee
(40% of first 6K) for employees who work more than 400 hours
War Vets injured is 12K credit and 14K unemployed for 6 months
Section 179 expensing: 500K with 2M investment limit going down to 25K with 200K investment in 2014
Extenders that Expired on12/31/13
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Section 179 of 250K for 15 year qualified leasehold improvements, qualified restaurant property and retail property
In 2014 all leasehold is 39 year property and no 179
50% bonus depreciation: ability to write off 50% of all non real property plus qualified leasehold improvements
Extenders that Expired on12/31/13
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Estate tax: Federal Rate at 40% Basic Exclusion $5,340,000 plus portability of spouse to total $10,680,000.
NYS: 16% over 1M in taxable estate however, NYS tax commission may use 5.34M federal exemption and lower 10% tax rate in 2014 and future years losing everyone to Florida
New Tax Rates
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Federal Tax Rate: 39.6% Federal over 400K and 450K married is same for 2014
Capital Gains Rates: 20% (same for 2014) plus 3.8% Obama tax
0.9% Additional Medicare Tax: 250K threshold married and 200K single
125K married filing separate
New Tax Rates
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3.8% Net Investment Income Tax: Married 250K threshold and 200K single
Not just typical portfolio income and capital gains, but also includes Passive Income
2013 tax returns must make grouping elections for activities or IRS will re-class certain pass-through entities as passive for 3.8% Net Investment income
New Tax Rates
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Q&A
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For more information…Grassi & Co.
50 Jericho QuadrangleJericho, NY 11530
Michael A. ViolanoAudit Manager(516) [email protected]
488 Madison AvenueNew York, NY 10022
Jeffrey G. Cohen, CPATax Partner(516) [email protected]
Robert E. Grote, CPAAudit PartnerM&D Practice Leader(516) [email protected]
Stephen J. Mannhaupt, CPAAudit Partner(516) [email protected]