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Strategic Planning: Best Practices for Business Owners

“[Strategic planning helps] you get more people engaged. You get people thinking about the future. You get people to look up from their desk or whatever role they play and see where the company could go.”

What happens if some of your key employees leave? What if there is a major change in your industry? And while it’s definitely a win if your business is growing beyond what you’ve ever imagined, what happens if that growth leads to systems, procedures, and resources that are no longer sustainable? In this episode of Savvy & Sensible, ARB principal, David Jean, and special guest and president of Nu-Yar Consulting, Michelle Neujahr, discuss some strategic planning best practices for business owners.

Strategic planning can be intimidating for a lot of business owners. In terms of the deliverable, you want to think about the bigger picture and focus on a few key things. Performing a SWAT analysis can help you determine your strengths and weaknesses and, therefore, where to focus. It’s not just about the retreat or the strategic plan deliverable itself. It’s more about the research and pre-work that is done to bring a really solid agenda to the strategic planning event. Involve your entire time. Find out what’s working and what isn’t. Create a list of the strategic priorities based on what’s meaningful to the group.

The most important piece in your strategic planning efforts is the implementation and communication. Listening circles can help your organization get everyone on board and keep the goals at the forefront. The standard should be set from the top, so leaders have to set the bar and address how to hold the team accountable. And keep in mind, there will be necessary diversions from your initial strategic plan, so flexibility is key. There’s never going to be a more opportune time than the present. You’re always busy! So the best time to start strategic planning is now.

If you want to talk about your strategic planning needs, contact Michelle Neujahr. And if you have questions or other business advisory needs, contact David Jean today.

Using State-Level PTE Tax To Bypass TCJA’s SALT Limitation

“[The PTE tax] really can get a little complicated. You really have to just draw it out, no matter what situation you’re in, and put everything to paper and figure out [] how much of a benefit is this, and how much is it for each individual.”

The pass-through entity (PTE) tax has been a hot topic for many states, and it has evolved significantly over the 2021 tax year. In this episode of Savvy & Sensible, ARBers discuss the progression of the PTE tax and what partnerships, their partners, S corporations, and their shareholders need to know. 

In 2017, the Tax Cuts & Jobs Act (TCJA) limited the amount of state and local taxes (SALT) – including income tax, real estate tax, personal property tax, and excise tax – that individuals can deduct against their federal taxable income to $10,000. Since then, many states have developed creative methods to circumvent this limitation. 

Connecticut was the first state that introduced a workaround whereby the pass-through entity pays a PTE tax that’s deductible at the business level; therefore, the partners or shareholders of these pass-through entities can bypass the TCJA’s $10,000 limit. The IRS has since issued a notice that essentially states that this is a valid workaround applicable to partnerships and S corporations; however, the notice is not substantial authority, and future official regulations may change the way these workarounds apply.

Originally, there were eight states with PTE tax, but by the end of 2021, there were more than 20. In the New England region, that includes Connecticut, Massachusetts, Rhode Island, and the neighboring State of New York. Every state is implementing this differently, so each state’s system differs slightly in terms of whether it’s elective or required, how it’s computed, and how it’s potentially credited to the shareholders or partners. 

Pass-through entities need to look at it on a state-by-state level. Start by looking at the partner/shareholder states of residence to determine if the credit they get for tax paid to other jurisdictions is more valuable than the deduction for federal purposes and whether there is value in the credits for taxes paid to other states. Pass-through entities should also determine if the benefit of the credit outweighs the administrative headaches, as there may be issues related to ownership dynamics or S corporation distributions. And because the SALT limitation is one of many TCJA tax provisions set to sunset after 2025, the PTE deduction may not be an effective long-term solution. 

Contact Albin, Randall & Bennett

To determine the best solution, you really have to put everything on paper and figure out how much it will benefit each individual. But it’s a great conversation to have because it may be beneficial in your situation. Please feel free to reach out to John Hadwen or David Jean if you have any questions.

The IRS’s New BBA Audit Rules | Options for Partnerships

“It’s really important to have an annual conversation, discussion, with your tax advisor on what is the [] best, you know, route to proceed with [the BBA Rules] because it’s not a one-size-fits-all. [] Businesses are complicated and, certainly, opting out may seem great, but there could be reasons why it doesn’t make sense to do that.”

The Bipartisan Budget Act of 2015 (BBA) changed the IRS’s audit rules for partnerships for years beginning January 1, 2018. But with everything else going on in the world and in business, including the Tax Cuts & Jobs Act (TCJA) and other tax reform, these changes have flown a bit under the radar. And even though they may seem like subtle changes on the outside, the new BBA audit rules really have far reaching implications to members of partnerships. 

The IRS initiated the change in audit procedures for partnerships to streamline the audit and tax collect process. The new BBA rules create a default rule in which the IRS is going to come in and make an assessment, and the partnership is going to pay the tax at the highest marginal rate. The new procedure can be problematic for partnerships because taxes are paid at the highest marginal tax rate. And, when you get down to the individual returns, there are other income deductions and credits that could ultimately reduce that tax liability. 

One thing the IRS did when they passed these new BBA rules is provide some flexibility that allows partnerships to elect out of the new rules and continue to use the existing partnership audit rules. The election is made on an annual basis. In order to qualify to make the election you need to have fewer than 100 partners. Eligible partners include individuals, C corporations, S corporations, and tax exempt entities. So having partners that are other partnerships, LLCs, or trusts, even if you hold a trust as a revocable trust, disqualifies you from this election. If you do not opt out, it’s equally essential to review and update your operating agreement accordingly. 

Under the old rules, the tax is collected by the partners of that tax year. So it allows the partners to use other tax attributes at their own personal level to potentially reduce the tax. On the other hand, the default BBA rule is very penalizing, as you could have potential issues where the partnership gets audited and you may have a different set of partners that are paying for the tax. It also restricts your ability to amend returns, kind of old school style, you know, amend the partnership returns issue amended K-1s because you have to go through this new procedure.

In a pushout election, there is really no substantial tax savings. The reason you may want to do the pushout election is if you had a different ownership in the year that the audit covers versus the tax year the IRS is auditing. One downside to the pushout election is that, when the partner does pay the tax on their personal return, there is a 2% interest charge with it. 

Contact Albin, Randall & Bennett

Partnerships need to understand the pros and cons of electing out, using the preexisting IRS audit rules, or the pushout provision. The best route to proceed is not a one-size-fits-all solution, but ARB’s Business Tax Team is here to help. Contact John Hadwen for more information

Next Level Management Development in Succession/Exit Planning

“Like a lot of different processes, [] sometimes the benefits aren’t immediate… but, you know, you’ve seen it, and I’ve seen it… and [next level] management development plans can be cultural-shifting and can really add significant value to businesses.”

In succession and exit planning, business owners often face unique challenges related to grooming, growing, and strengthening their next level management. In this episode of Savvy & Sensible, David Jean, principal at Albin, Randall & Bennett (ARB), and Art Boulay, CEO of Strategic Talent Management (STM), discuss how next level management development plans can help business owners meet these challenges, while increasing their business’s value.

Most business problems or challenges are either process-oriented or people-oriented. Every business owner will face a handful of challenges as they create and implement a succession or exit plan for their business. While CPAs, financial advisors, and attorneys take care of many of the process-oriented issues, succession and exit planning problems can also be people-oriented, which is where talent management consultants can help. 

Just as ARB uses industry experience, technical knowledge, and particular tests and standards to evaluate data and processes, such as finances and accounting systems, STM uses world-class assessment systems to do the same for people, particularly those in a management or a leadership role. STM’s system can measure 97 unique data points, which they use to help business owners and leadership teams clarify their culture, management style, communication style, and the things that make them unique. By combining the assessment with the firm’s experience, knowledge, and data from prior assessments, STM can accurately measure and even predict how somebody will do in a particular role in a particular firm, and, perhaps more importantly, the risk factors when you’re expecting to depend on that individual to lead the next generation of your firm, handle the exit, or whatever the challenge may be. 

Buyers want to see a strong management team in place; it’s actually the number one driver of business value. Whether a business owner is going into a third-party sale, an internal transfer, an ESOP, or any other exit path, the depth and strength of management is really critical to enhance the business’s value. Like a lot of different processes, the benefits aren’t always immediate, but business owners shouldn’t sell next level management development plans short. The assessment works because it pinpoints exactly what the individuals (and therefore the team) are good at and where they need development. It removes the guesswork for business owners and leadership, so they can make logistical decisions and take the appropriate actions. David and Art have witnessed these plans in action, both from the process-side and the people-side, and can attest to their ability to add significant business value.

Contact Albin, Randall & Bennett

Since no one person can be a specialist in all areas of succession and exit planning, business owners really need a collaborative team. As a CPA firm, ARB brings the technical knowledge and tax experience in the process-side of succession and exit planning. As talent management consultants, the team at STM specializes in the people-side of the equation. And, as a certified exit planner (CExP), David Jean helps business owners reach a successful exit by bringing together and leading a team that includes all of their professional advisors.

Reach out to Art Boulay to learn more about STM’s next level management assessments or discuss your talent management needs. And if you have questions or would like to discuss your succession and exit planning strategy, contact David Jean today.

Stalled 2021 Tax Legislation: Where Do Things Stand Now?

“There was a lot to fear about what might happen on the estate and gift side early on in this process. A lot of proposals that were really quite drastic and sort of scared a lot of people that do estate and gift planning. And most notably, and sort of as a sigh of relief to a lot of people, just about all of these provisions have just fallen out and are no longer on the table.”

Things really continue to be far from settled in Congress regarding what sort of income tax changes are going to be enacted. But, while a proposed tax bill remains stalled in Congress, it is not the same as the 2021 tax legislation proposed last fall. In today’s episode of Savvy & Sensible, ARB partners Holly Ferguson and Dan Doiron discuss where things stand for several previously proposed provisions.

The latest proposal drops off several provisions previously proposed in the 2021 tax legislation: 

• While previous proposals mentioned increasing the ordinary income tax rates to 39.6%, under the latest proposal, they would remain at 37%. 
• There was also a lot of talk about increasing the highest long term capital gains and qualified dividend rate up to 25%. However, under the current proposal, that would remain at its current highest rate of 20%. 

The latest proposal changes some provisions previously proposed in the 2021 tax legislation:

• There was talk about imposing a 3% surtax when AGI exceeded $5 million dollars. Under the current proposal, individuals would face a 5% surtax when their AGI exceeds $10 million. When an individual’s AGI exceeds $25 million, an additional 3% surtax would be assessed. 
• The problem is that they’ve instituted similar surtaxes on trusts at income levels that are way lower than those amounts. 
  • When a trust hits $250,000 of AGI it would face the 5 % surtax
  • When a trust hits $500,000 of AGI, it would face the additional 3%
• Under the latest proposal, the 3.8% net investment income tax (NIIT) would be expanded to include income derived in the ordinary course of a trade or business. 

The latest proposal adds some new, more obscure provisions, and there are some efforts underway to try to increase the $10,000 itemized deduction limitation for state and local taxes. The House bill has increased the limit up to $80,000; however, the Senate has been silent on this from a negotiation standpoint. There is talk of trying to increase that itemized deduction cap that came into existence back in 2018. 

On the estate and gift tax side of things, there was a lot to fear about what might happen early on in this process. A lot of proposals were really quite drastic and scared a lot of people that do estate and gift planning. However, there has been a notable sigh of relief for many, since just about all of these provisions are no longer on the table, as the latest proposal would NOT:

• decrease the lifetime exemption;
• eliminate certain gift and estate tax reduction techniques;
• eliminate the step up in basis and date of death to fair market; or 
• make death an income recognition event. 

We’re Here To Help

ARB’s tax professionals are dedicated to helping individuals and businesses understand and comply with new and evolving legislation. If you have any questions, contact Dan Doiron or Holly Ferguson today.