| Winter 2006 |
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INFOLETTER
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BMF&C to Relocate in Fall,
2006
By Richard C. Fedorovich, CPA, Managing Partner
 As
we announced in early September, Bober, Markey,
Fedorovich & Company will be moving into a new building
being constructed in Fairlawn, Ohio, approximately seven miles
from our current location.
Our new home will position the firm to better serve its clients
with improved meeting space and a convenient location.
Construction crews expect to break ground on the site near the
first of the year, ending a year-long search for a solution to
crowded office space made more cramped by our firm's recent
growth spurt.
"We gave ourselves the same advice that we give to clients about
whether to invest in real estate," said Rick Fedorovich, BMF&C
Managing Partner. "Our analysis considered whether the best
financial course for the firm pointed to staying in our current
space, leasing other space, building, or buying an existing
building. In our case, the new development in Fairlawn turned
out to be a tremendous opportunity for us to make both our
clients and our employees more comfortable, while being a good
business move."
The new building will be part of an office park being developed by a high
quality regional construction management firm, which will be a co-tenant and
co-owner with BMF&C in its new headquarters, on a 5.8 acre site on Ridgewood
Road near Cleveland-Massillon Road, with nearby access to I-77. The new site
keeps BMF&C close to its regional client base and is even more convenient to the
Cleveland area.
Artist rendering of new BMF&C headquarters. Construction crews expect to
break ground near the first of the year. |
BMF&C will occupy the entire third floor of the building. On the ground floor
the firm will have storage and an educational training facility that seats 70 to
80 people, bringing the firm's total square footage to about 20,000. The
training facility will make it easier to sponsor industry roundtables, large
client meetings, educational seminars for our staff, and classes for business
owners. The project remains on track for a fall, 2006 move-in date.
BMF&C
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Partner's Perspective |
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Avoid Tax Burdens and Family Feuds by Updating
Estate Plans
By Cindy S. Johnson, CPA, CIT, Partner Director
of Family Business Services
What's the problem? Sometimes people aren't comfortable contemplating their
own mortality and find it easy to put off dealing with the subject. Also, as
individuals age, they often become cautious about making any major decisions,
and therefore neglect to create or update their wills. And wills can be useless
- or even create unintended negative consequences - when they're out of date.
It's important to regularly review your will and estate plan to accommodate
changes in the law and in your family circumstances. This can be as simple as
setting up a short meeting with your attorney, accountant and trust officer.
Consider the many variables that can impact your estate plan:
Life events: Births, deaths, divorces, marriages and special health
needs may call for will and estate plan alterations. Even a move out of state
can impact a will because of different estate laws.
Asset value fluctuations: Real estate values up? Stock values down?
Asset value fluctuations raise the question of which assets a specific heir
should receive. For example, a business often goes to a child actively working
in it, while additional assets are used to "even out" the estate with other
children. But if the business has gone to one extreme or the other, an
adjustment may be needed.
Designated beneficiaries: What happens when the beneficiary of an
asset is designated in a manner that contradicts the will? For example, say
the parents set up a modest savings account to handle routine household bills
while they're away, with one child listed as joint owner or sole beneficiary.
Over time, CDs and other assets have been transferred to this account as a
matter of convenience. At the parents' death, this single child legally
receives all of the account because it is not covered by the will.
Living trusts: This type of trust is popular in estate planning, but
frequently, people forget to place new assets in the trust, or the instrument
becomes outdated due to changes in laws.
Heirs: Should a change be made regarding heirs? For example, do you
wish to change which charities are given a bequest? Should all children still
be treated equally?
Executor: Perhaps your named executor now has circumstances that
will make it difficult to serve. Who should replace him or her? Another family
member? A professional trust officer?
Living wills: The Schiavo case inspired many to pay closer attention
to the handling and wording of advance healthcare directives. These documents
can prevent chaos and resentment among everyone involved with the suffering
and loss of a loved one.
Income with respect to a decedent: Surprisingly, after one's death,
certain assets (such as interest on savings bonds and most retirement plan
benefits) are still subject to regular income taxes. Investments in regular
IRAs are a good example. If these accounts are improperly handled, the heirs
may have to immediately pay all the income taxes - at a higher tax bracket.
Your family circumstances - as well as state and federal estate tax laws -
are continually changing. Work with your trusted advisors to regularly tweak
your estate plan to avoid unwelcome results. If you would like to discuss
updating your estate plan, please call or email me at
cindyj@bobermarkey.com, or your
partner/manager contact. BMF&C
What You Should Know About
the R&E Tax Credit
By James M. Bowen, CPA, MT,
Partner and James E. Merklin, CPA, CFE, M.Acc., Partner
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James M. Bowen
James E. Merklin |
Ever heard of the research and experimentation (or R&E) tax credit? Maybe you
have, but you didn't think you'd qualify if you're not a "technology" company.
Or maybe you thought that you were too small to qualify for the credit.
Think again. Statistics reveal that 67 percent of companies that claim the
R&E credit are manufacturers, and companies with sales from $1 million to $10
million claim 36 percent of all R&E credits.
In addition, updated federal regulations have broadened the definition of
qualified research activities and loosened and clarified the research
requirements firms must meet to qualify. These changes include more relaxed
recordkeeping rules pertaining to software development. As a result, more R&E
activities now apply to the credits, and you may now be able to take advantage
of them.
History of the Credit
The R&E tax credit (formerly the research and development, or R&D, credit)
was originally established in 1981 as a temporary credit designed to increase
R&D spending. Since then, it has expired and been extended 11 times.
While the credit is currently scheduled to expire at the end of 2005, history
would suggest that it will be extended again, most likely in the spring of 2006.
In the meantime, the best strategy is to make sure you've captured eligible
credits from prior years. The credit is retroactive, so you can go back to any
open year and amend your tax return to recapture lost credits.
You may now be able to claim the R&E tax credit if your company:
- Develops new or improved products, prototypes or patents.
- Possesses any trade secrets or proprietary information.
- Modifies production processes.
- Employs technical personnel on an employee or contract basis.
- Evaluates new materials, compounds or components.
- Designs new manufacturing facilities.
- Automates processes or develops sophisticated software.
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Meeting the Qualifications
Qualified research activities for the purpose of the R&E tax credit must meet
four separate criteria. Note that each business component (e.g., product,
process, formula, invention or technique) must meet the criteria:
- New or improved business component - The activity must be designed
to create a new or improved product or process. While it doesn't have to be
brand new to the marketplace, it must be new in terms of function,
performance, reliability or quality.
- Technological in nature - The activity must be undertaken for the
purpose of discovering information that is technological in nature. While the
research doesn't have to be laboratory-based, it must fundamentally rely on
the principles of physical or biological science, engineering or computer
science. The research cannot be in a "soft" science such as psychology.
- Elimination of uncertainty - Activities must be intended to
discover information that is currently unknown about how to improve or develop
the product or process. Even if the outcome is unsuccessful, related
activities can still qualify.
- Process of experimentation - Activities must include a "process" to
evaluate alternatives. This may involve developing a hypothesis and then
testing, refining or eliminating it through modeling, simulation or trial and
error.
Internal-use software must also pass an additional three-part test: it must
be commercially unavailable, pass a high threshold of innovation and pose
significant economic risk.
Look Beyond R&E
Remember that the R&E tax credit includes many aspects of manufacturing as
well as research and experimentation. So look beyond R&E to your operations,
manufacturing and IT areas for more opportunities to claim the credit.
The details of the R&E tax credit are complicated, so it's smart to consult
with an expert for help in reviewing your definition of qualified research
activities and evaluating historical activities in light of the new
qualifications. If the credits result in significant tax savings for your
company, your efforts will likely prove worthwhile.
If you believe that you may have business activities that would qualify for
the R&E tax credit, please call or email either of us at
jimb@bobermarkey.com
or jimm@bobermarkey.com, or
your partner/manager contact. BMF&C
Buy-Sell Agreements: An
Essential Part of Your Business Succession Plan
By Dale A. Ruther, CPA, CIT, Partner
 Imagine
this scenario: Since starting their business five years ago,
Delta Data Processing Systems, partners Ron Baker and Wes
Collins had grown the company to a healthy $5 million in annual
revenue. As they were planning for their next stage of growth,
however, Baker, a licensed pilot, was killed when his
twin-engine plane crashed on a takeoff.
The human tragedy was only the beginning, though. The partners had done no
succession planning, which threw the business into turmoil. Conflicts between
Collins and Baker's heirs over Baker's ownership interest and control/direction
of the company had brought things to a virtual standstill. Key employees,
uncomfortable with the strain and uncertainty, were leaving in droves - and
clients right along with them.
Business succession planning can help companies avoid a fate like this.
Proper planning can help ensure the smooth transfer of an owner's interest to
the remaining partners or his or her heirs while also minimizing estate taxes.
Role of a Buy-Sell Agreement
An essential part of any succession plan for a closely held business is
what's known as a buy-sell agreement. This is a formal, legal document that
details business continuation and succession plans in the event of an owner's
retirement or sudden death or disability. Specifically, it provides for the sale
of an owner's interest in the business at a pre-determined price - either to
another owner (or owners) of the business, a key employee or, in the case of a
sole proprietor, someone outside of the company.
A properly structured buy-sell agreement protects both the remaining
partner(s) and the heirs and is the best way to avoid conflicts - and possibly
even litigation - between them. It helps ensure the orderly transfer of an
owner's interest, as well as a smooth transition of complete control and
ownership to the parties most able to keep the business going.
The agreement establishes a mutually agreed-upon sale price for each owner's
interest ahead of time, spells out the terms of the payment and places a value
on the business that is potentially binding on the IRS for federal estate tax
purposes. Just as importantly, it provides much-needed stability for employees,
customers, creditors and investors, and it allows remaining partners to maintain
control of the business.
Choosing the Right Type of Buy-Sell Agreement
Different types of buy-sell agreements are appropriate for different forms of
business entities, so you should examine them carefully with professional tax
and legal counsel.
Buy-sell agreements are usually funded with life insurance, which provides
the remaining partners with leverage to purchase the retired, disabled or
deceased partner's share. The two most common types of buy-sell agreements are
the cross-purchase agreement and the entity purchase agreement.
In a cross-purchase agreement, each partner will be the owner and beneficiary
of a life insurance policy on the lives of the other partners. At the time of a
partner's retirement, death or disability, the remaining partner(s) collect
insurance proceeds and use these funds to buy the partner's business share. The
remaining partners also receive a tax benefit, known as a "step-up" in cost
basis, when they purchase that interest. This step-up in basis reduces the
amount of taxes paid if the business is subsequently sold.
With a cross-purchase, since each partner owns a policy on the lives of the
other partners, a large number of policies may be required (for example, a
business with four owners would require twelve policies). Also, the younger
partners will be forced to pay the higher insurance premiums on the older
owners.
The entity purchase agreement (also sometimes referred to as a stock
redemption plan) stipulates that the business, rather than the remaining
partners, will purchase the retiring, disabled or deceased partner's interest.
This interest may then be divided among the surviving owners. When funded with
life insurance, the business is the owner and beneficiary of a life insurance
policy for each owner, in proportion to his or her ownership interest in the
company.
The entity agreement effectively addresses the disadvantages of the
cross-purchase plan, since only one policy is required for each owner. Also, the
company pays all premiums, thus removing the inequality of the younger owners
subsidizing the elder partners. The primary disadvantage to the entity purchase
agreement is the loss of the step-up in cost basis for the surviving partners.
Determining the Business' Value
A key issue in the drafting of any buy-sell agreement is how the value of the
business will be determined. This may be accomplished via a formal business
valuation or appraisal, or the parties may be able to agree on their own
framework for determining a value (such as book value or some multiple of sales,
for example). The agreement may be structured so that a valuation must be
performed upon the occurrence of specific events (such as an owner's retirement,
death or disability).
Once drafted, a buy-sell agreement should be periodically evaluated by all
parties (owners and heirs) to make sure that it still reflects the intentions of
everyone involved, as well as the changing circumstances of each individual and
of the business itself.
Keep in mind that having a poorly constructed buy-sell agreement can be worse
than having no agreement at all. Such an agreement may end up being little more
than a liquidation agreement, which may not be what anyone really desires.
For help in succession planning and drafting a buy-sell agreement, please
call or email me at dale@bobermarkey.com,
or your partner/manager contact. We can help you determine which type of
agreement is best for your company and then navigate the nuances and
complexities involved. BMF&C
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In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
Mark Bober,
CPA/ABV, CVA
Partner, Director of Valuation/Forensic Services |
Mark Bober specializes in a variety of industries including manufacturing,
distribution, professional practices, energy and construction. He also serves as
the firm's Director of Financial Advisory Services, which includes business
valuation, litigation support, forensic accounting and transaction support
services. Mark maintains extensive expertise in performing M&A transaction
support services on behalf of equity sponsors and subordinated debt lenders.
Mark is highly knowledgeable in dealing with the accounting & auditing, tax
and financial challenges facing S Corporations, C Corporations, LLCs, and
Partnerships, along with ESOPs.
A 1983 graduate of Miami University, Mark was with Price Waterhouse from 1983
- 1992. In addition to the above credentials, he has received the AICPA Business
Valuation Certificate of Educational Achievement and is a member of the
Institute of Business Appraisers, the National Association of Certified
Valuation Analysts, and the American Society of Appraisers.
Mark is currently Vice-Chairman of the PKF Legal Services Committee, a Board
Member of the Akron Community Foundation, a Board Member of the Hospice Center,
President Elect of the Shaw Jewish Community Center of Akron, Vice President of
the Jewish Community Board of Akron and a member of the Board of Trustees of
Community Improvement Corporation.
Mark is a frequent speaker on business valuation issues, and has had speaking
engagements at the Ohio Employee Ownership Conference, The University of Akron
MBA Program Guest Lecturer, The Cleveland Bar Association, and the Northeast
Ohio Employee Ownership Center. He has also authored a number of articles that
have appeared in Crain's, the Cleveland Plain Dealer, and Smart
Business Network. BMF&C
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