September 17, 2013

An Employee Buy Out May Not be Out of the Question with the Right Exit Plan

Many, probably most, business owners would like to sell their businesses to their employees, but for one nagging problem: The employees have no money. And owners simply cannot risk selling a business to employees who have no cash.

Exit Planning

If you would like your employees to one day own your business, ask yourself this question: “When do I want to leave the business?” If the answer is NOW, you are probably out of luck. However, if the answer is “five to eight years,” a well-designed Exit Plan can make that happen—if you start today.

Any buy-out plan must accomplish three goals:

  1. Minimize owner’s, company’s and employees’ risk, by keeping the owner in control of the business and sale process until the owner receives entire purchase price.
  2. Ensure owner receives full value for ownership interest.
  3. Minimize income taxes of both owner and employees.

Unless a buy-out plan meets these goals, owners are wise to reconsider selling to employees. If, on the other hand, owners plan and begin to execute a transfer plan well in advance of leaving, achieving these goals is possible. Special planning is required to meet the income tax minimization goal.

A plan to execute an employee buyout has two stages:

1. Each year employees buy small amounts of stock until they have purchased and paid for approximately 35% to 40% of the ownership (usually non-voting). Ordinarily, this stage takes five to eight years. At the end of this stage, key employees are in a position to approach a bank.

2. Assuming the business continues to be profitable, paid-up owners of 40% of a company are usually able to secure bank financing to purchase the remaining balance of the owner’s stock.

This buy-out plan keeps an owner in full control until all monies are received, significantly reducing the risk of not receiving full value. Under this scenario, an owner can successfully cash out of the business because exit planning is initiated well in advance of leaving.  This allows the owner to choose a successor, exit on the desired timetable, and leave with the desired cash.

This Two-Stage Plan is a very brief summary of a relatively involved buy-out plan. Of course, there are many additional design issues specific to individual businesses. . If you would like to talk about Exit Planning for your business, please contact your Anders advisor.

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September 10, 2013

The Complexity of State Income Tax Reporting for Professional Athletes

Should you rely on your W-2?

Many taxpayers receive their W-2 in the mail January or February and immediately file their income tax return without thinking the W-2 could be wrong, but for professional athletes, these W-2s may not be reliable.

Thanks to the “Jock Tax” that allows states to tax the income of professional athletes on income earned within its state lines, professional athletes must file a tax return in almost every state they were active in during the season, regardless of the dollar amount this comes to.  The professional sports teams make an effort in allocating a portion of the salaries to multiple states during the year, but many times the allocations are incorrect and sometimes exclude an entire state in which an athlete played during the year.  With these athlete’s schedules easily accessible to the public, there is not much room for filing errors.  Many athletes send their W-2’s to CPA firms, where accountants will allocate income among each state using a Duty Day Calculation, a widely accepted calculation method accepted by many state taxing authorities.

The Duty Day calculation takes the number of days an athlete was active in its state over the total number of active days for the season (from pre-season training to the last game in which they compete).  Being active in a state includes games, practices and meetings including promotional games such as the MLB All-Star Game.

W-2’s can often times be relied on to be correct, but on certain occasions a broader calculation is needed where it is best to bring in a qualified tax professional for advice.

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