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M&D Lenders Symposium Hosted by Grassi & Co.’s M&D Practice.

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Presentation on theme: "M&D Lenders Symposium Hosted by Grassi & Co.’s M&D Practice."— Presentation transcript:

1 M&D Lenders Symposium Hosted by Grassi & Co.’s M&D Practice

2  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

3 M&D Market Outlook Survey Results Summary Presented by Michael A. Violano – Manager

4 M&D Market Outlook Survey Results

5 M&D Market Outlook Survey Advisory Board In 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 AronicaVince Gallo Owner/Chief Financial OfficerPresident & CEO Graphic Paper, Inc.LIF Industries, Inc. Andy GoodmanJohn Harkin President & CEOVice President Sherwood LumberBusby Metals Brian LiVince Palazzolo PresidentChief Financial Officer A&Z PharmaceuticalsCPI 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.

6 M&D Market Outlook Survey Participating Companies

7 M&D Market Outlook Survey Participating Company Size

8 M&D Market Outlook Survey Manufacturing Operations

9 M&D Market Outlook Survey International Sales

10 M&D Market Outlook Survey Working Capital

11 M&D Market Outlook Survey Primary Growth Strategies

12 M&D Market Outlook Survey Sourced Inventory

13 M&D Market Outlook Survey Importance of Technology

14 M&D Market Outlook Survey Health & Benefit Programs

15 M&D Market Outlook Survey 2014 Market Outlook

16 M&D Market Outlook Survey 2014 Revenue Expectations

17 Private Company Accounting Presented by Stephen J. Mannhaupt, CPA – Partner

18 Private Company Reporting Two Initiatives:  AICPA Financial Reporting Framework for Small to Medium Sized Entities (FRF for SME)  FASB – Private Company Council

19 Private Company Reporting FRF 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

20 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

21 Private Company Reporting FRF 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

22 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

23 Private Company Reporting FASB – Private Company Council:  Two Accounting Standards Update (ASU) – ASU – Accounting for Goodwill, a consensus of the Private Company Council – ASU – 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

24 Private Company Reporting FASB – Private Company Council: ASU – 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

25 Private Company Reporting FASB – Private Company Council: ASU – 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

26 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

27 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

28 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

29 Tax Savings Strategies for the M&D Industry Presented Jeffrey G. Cohen, CPA – Partner

30  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

31  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

32  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)

33  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 & Development Studies

34  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

35  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 Production Deduction

36  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

37  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

38  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

39  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

40  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

41  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

42  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

43  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

44  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

45  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 on 12/31/13

46  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 on 12/31/13

47  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

48  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

49  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

50 Q&A

51 For more information… Grassi & Co. 50 Jericho Quadrangle Jericho, NY Michael A. Violano Audit Manager (516) Madison Avenue New York, NY Jeffrey G. Cohen, CPA Tax Partner (516) Robert E. Grote, CPA Audit Partner M&D Practice Leader (516) Stephen J. Mannhaupt, CPA Audit Partner (516)


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