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

Transcription

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

2 Agenda 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

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 Aronica Owner/Chief Financial Officer Graphic Paper, Inc. Andy Goodman President & CEO Sherwood Lumber Brian Li President A&Z Pharmaceuticals Vince Gallo President & CEO LIF Industries, Inc. John Harkin Vice President Busby Metals Vince Palazzolo Chief Financial Officer 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.

6 M&D Market Outlook Survey Participating Companies Breakdown of Participating Companies by M&D Industry Sub-Segment Other 24% Building Materials / Construction Supply Chain 13% Pharmaceuticals 7% Transportation 3% Technology 9% Consumer Goods/Retail Products 14% Food & Beverage 20% Aerospace & Defense 10%

7 M&D Market Outlook Survey Participating Company Size 30% Total Company Headcount 25% 20% 15% 10% 5% 0% < > 200

8 M&D Market Outlook Survey Manufacturing Operations Manufacturing Raw Materials into Finished Goods % of Survey Respondents 30% 25% 20% 15% 10% 5% 0% 1-25% 26-50% 51-75% % % of Business Outsourcing Partial Manufacturing % of Survey Respondents 30% 25% 20% 15% 10% 5% 0% 1-25% 26-50% 51-75% % % of Business

9 M&D Market Outlook Survey International Sales 64% International Sales as % of Total Sales 17% 5% 2% 1-25% 26-50% 51-75% %

10 M&D Market Outlook Survey Working Capital Initiatives to Improve Working Capital Implementation of Lean Manufacturing Principles 7% Other 2% Capital Infusion/ Private-Public Offerings 3% Bank Borrowing 18% Inventory Management 25% Accounts Receivable Management 18% Cash Flow Management 27%

11 M&D Market Outlook Survey Primary Growth Strategies Primary Growth Strategies 68% 39% 44% 32% 12% New product development New vertical market identification Implementation of new processes Implementation of new business model/strategy Other

12 M&D Market Outlook Survey Sourced Inventory Sourced Inventory In the Unites States Internationally 40% 27% 17% 18% 20% 13% 13% 5% 8% 7% 0% 1-25% 26-50% 51-75% %

13 M&D Market Outlook Survey Importance of Technology Importance of Technology 45% 47% 8% Very important Moderately important Not important at all

14 M&D Market Outlook Survey Health & Benefit Programs Health and Benefit Programs 46% 36% 24% 24% 15% 15% 11% Higher Deductible Plans Health Reimbursement Arrangements (HRAs) Health Savings Accounts (HSAs) Wellness Programs Self-Insurance Higher Employee Contributions None of the above

15 M&D Market Outlook Survey 2014 Market Outlook 2014 M&D Market Outlook 61% 37% 2% Better than 2012 and 2013 Worse than 2012 and 2013 Same as 2012 and 2013

16 M&D Market Outlook Survey 2014 Revenue Expectations Revenue Expectations 83% 13% 4% Revenue will increase from previous year Revenue will decrease from previous year Revenue will remain the same from previous year

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 Agenda 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

31 Tax Incentives and Estate Planning Cost Segregation Studies Research and Development Studies IC-DISC Empire Zone Credits/Excelsior Program Domestic Production Deduction Captive Insurance and ESOP

32 Cost Segregation Studies (CSS) 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

33 Research & Development Studies 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

34 IC-DISC 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

35 Domestic Production Deduction 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

36 Case Studies $200M Food Manufacturer 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

37 Other Tax Incentives 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

38 ESOP 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

39 ESOP 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

40 ESOP 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).

41 ESOP 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

42 ESOP Candidates 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

43 ESOP Gain Deferral 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

44 ESOP Issues 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?

45 Extenders that Expired on 12/31/13 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

46 Extenders that Expired on 12/31/13 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 % bonus depreciation: ability to write off 50% of all non real property plus qualified leasehold improvements

47 New Tax Rates 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

48 New Tax Rates 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

49 New Tax Rates 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

50 Q&A

51 For more information Grassi & Co. 50 Jericho Quadrangle 488 Madison Avenue Jericho, NY New York, NY Robert E. Grote, CPA Audit Partner M&D Practice Leader (516) Michael A. Violano Audit Manager (516) Stephen J. Mannhaupt, CPA Audit Partner (516) Jeffrey G. Cohen, CPA Tax Partner (516)