October 29, 2013

Cash Flow Forecasting: The Ultimate Reality Check in Your Exit Plan

As you prepare to transition out of your business, it is imperative that you secure an accurate future cash flow model.

Why is the Future Cash Flow Model so Important?

  1. In a sale to employees, co-owners or children, cash flow may be the sole source of payments to you. These inside buyers may not have enough money of their own to pay you. Without significant planning and implementation, inside buyers may not be able to quickly acquire or borrow that cash.
  2. If you choose instead to sell to a third party, the valuation of your company is likely to be based on a multiple of cash flow.
  3. Should you plan to sell part or all of your business beginning in 2013, your CPA should make cash flow projections for 2013 through 2017.
  4. If you are preparing your own cash flow projection, resist the temptation to create an overly-optimistic forecast. To avoid this temptation, owners usually ask their CFOs or CPAs to create these forecasts.
  5. With a realistic cash flow projection in hand, you can begin to plan the most tax-effective way possible to achieve that future cash flow.
  6. Remember! The future cash flow of the business may be your buyer’s only source of funds to pay you, particularly in the early years. If under new ownership, the company cannot achieve the cash flow numbers you project, you may not receive the expected payoff.

The only exceptions for not needing a cash flow model are either liquidation or in some cases, a gift of the company to your children.

How to Use the Cash Flow Forecast
Determining the net after-tax distribution to you is the goal of this exercise.

  • Step One is forecasting cash flow
  • Step Two is to calculate how that cash flow will be allocated during the ownership transition.

To do so, you must calculate, for each year of your exit plan period, the expected available cash flow reduced by:

  1. Reasonable compensation to you, and
  2. The cash the company must retain for growth, working capital, etc.

The remaining cash flow is distributed to the shareholders, you, and—to the extent you have sold part of your company—the new owners.

New owners use that distributed cash to pay you for shares of ownership. If the projected cash flow to new owners is insufficient to pay you through an installment note, your exit is at best temporary.

Since Cash Flow is Core of an Exit Plan, How do you Increase Cash Flow and Use it Wisely?

A successful Exit Plan minimizes taxes for both seller and buyer and keeps sellers in control (and minimizes their risk) until they receive full value for their ownership. All plans begin with an informed understanding of current and future cash flow and require considerable planning and action to achieve these goals.

Your Exit Plan is founded upon your exit objectives  – when you want to leave, how much money you want and need, and who should own the business after you –  and upon the likely future cash flow of the business. Forecasting the amount of cash flow and determining how that cash flow is used is, indeed, the ultimate reality check for your business exit.

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October 22, 2013

Replace your RMD with a Qualified Charitable Distribution

The American Taxpayer Relief Act of 2012 (ATRA) brought significant changes to many taxpayers.  As 2013 draws to an end, high-net worth individuals should take note of the provision in ATRA which extended the qualified charitable distribution (QCD) rules to 2013.

A QCD is an otherwise taxable distribution from an IRA owned by an individual age 70 ½ or over that is paid directly from the IRA to a qualified charity.  These distributions allow taxpayers to exclude up to $100,000 from gross income and satisfy their annual required minimum distribution.

You may be wondering if the newly enacted tax laws make this caveat in the tax code more powerful than it was in years past.  The answer is YES.  Here’s why:

  • The return of the Pease limitation reduces itemized deductions for single filers with adjusted gross income (AGI) over $250,000 ($300,000 if you’re married ) by 3% of their AGI.  If you’re in this situation, taking a $100,000 RMD in the form of a QCD saves you from a $3,000 haircut on your itemized deductions.
  • If the use of a QCD keeps your taxable income below $400,000 ($450,000 if you’re married) you will avoid taxation at the new 39.6% federal tax rate and the 20% dividend and long term capital gain tax rate.
  • Keeping your AGI below $200,000 ($250,000 if you’re married) will help you to avoid the new 3.8% Medicare surtax on investment income.

Please contact your Anders tax advisor if you’d like to discuss the most tax efficient way to satisfy your 2013 RMD.

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October 15, 2013

Missouri Department of Revenue Issues Guidance on New Apportionment Method

Missouri taxpayers with business activity in multiple states now have guidance for the new optional Single Sales Factor Apportionment Method.  This method is a result of the passage of HB 128 by the general assembly that was signed by the Governor on July 12, 2013.  The law took effect on August 28, 2013.  The Department of Revenue is taking the position that the law is effective prospectively and applies to any return filed on or after the effective date.  The new method is not available for any return filed prior to August 28, 2013 and is also not available for amended returns since once an apportionment election is made on an originally filed return it cannot be changed.

The Department of Revenue has issued revised forms and instructions which are available on its website at http://dor.mo.gov/forms/index.php?category=4.  The new optional apportionment method may result in significant tax savings for Missouri taxpayers that have sales outside Missouri.  The new method results in Missouri taxpayers paying income tax on only their Missouri source sales.  The Anders Manufacturing and Distribution Group is prepared to assist taxpayers determine the most advantageous apportionment method to minimize their state tax burden.  For more information please contact us.

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October 8, 2013

Six Estate Planning Questions Business Owners Must Ask Themselves for a Smooth Transition to the Next Generation

You’ve heard the story before: the head of a family business dies, leaving each of two children a 49 percent interest in the business, with the remaining 2 percent, the swing vote, left to the surviving spouse, who does not have much hands-on business experience.

Frequently in these scenarios, one child takes on the leadership role; the other a lesser position. As the surviving spouse ages, he/she becomes more influenced by one of the children and family friction mounts. A confrontation is inevitable and the child in the leadership role is voted out. While this is certainly a bad situation for that individual; it can be an even graver one for the family business.   

By failing in one of life’s most important remaining task—to plan his/her estate—the founder of the business causes one of his heirs to be an unintended victim. Make sure this doesn’t happen to your family business.

The unfavorable business transition experiences described above may have been avoided had the head of the family business asked—and answered these six critical questions.

  1. How can I provide for an equitable distribution of my estate among my children?
  2. Who should control and eventually own the family business?
  3. How can I use my business to fuel the growth of my estate outside of my business interests?
  4. How do I provide for my family’s income needs, especially those of my spouse and dependent children, after my death?
  5. How can I help preserve my assets from the claims of creditors during my lifetime and at my death?
  6. How can I minimize estate taxes?

An owner’s thoughtful answers to these questions, followed by appropriate implementation of an Exit Plan, may well prevent a similar experience in your family and support a smoother business transition for all parties involved.

If you have any questions about creating an estate plan prior to your business exit, please contact us to discuss your family business.

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October 3, 2013

Performed Tax Savings Analysis on Solar Panels

In less than 24 hours, we were able to provide a tax savings analysis for our client who was installing solar panels.  The analysis illustrated how the 1st year after-tax cash outlay would be less than 0.7% of the initial solar panel investment.

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October 1, 2013

Are Golf Courses Collecting Unnecessary Sales Tax?

The Missouri Director of Revenue and PF Golf, LLC took a case to the Supreme Court of Missouri regarding sales tax on the “mandatory” rental of golf carts in March of 2013.  The Director of Revenue issued an assessment of more than $100,000 in unpaid sales tax.  The outcome of the case was finalized in July 2013, with PF Golf, LLC chalking up the win.

Missouri golf courses are NOT required to collect and remit sales tax on the rental of golf carts, if tax was paid on the purchase of the carts.  Additionally, even though golf fees and cart rentals are priced together, the customers’ receipts must separately itemize the greens fees and the cart rental fees.  The greens fees are subject to sales tax, while the cart rental fees could be exempt from sales tax.  Implementing a good point of sale system with services and products properly coded as “taxable” or “exempt” is crucial to a smooth operation at any golf course.

If you have any questions related to a sales tax issue at your golf course, please contact your Anders tax advisor.

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