Akron Certified Public Accountant

Accounting and Tax Ramifications of Issuing Stock Options

 Click here to view Part 1 of our series and learn more about the stock option landscape.

To give you more perspective, first let us review the accounting treatment for the issuance of stock options (rest easy - this will not be too painful). When stock options are issued, an expense must be recorded based on the value of the option. A stock option’s value is derived from a variety of factors, two of which are the value of the stock as of the date of the option grant and the exercise price of the option (the price at which the option holder can purchase a share of stock). Determining the value of a company’s stock is not difficult when it is publicly traded, but privately-held companies do not have readily available market prices, which necessitates the services of a valuation expert. Unless the option is properly valued, a company cannot correctly record the associated compensation expense. If a company is unable to correctly record the results of its operations, it may find obtaining a clean audit opinion to be a difficult, if not impossible, task.

Now that I have warned you about the headaches that you may encounter on the “accounting” side of issuing stock options, let me further alarm you with the tax ramifications. If a company sets the stock option exercise price lower than the fair market value of its stock on the grant date, the stock option could be deemed to be deferred compensation according to Internal Revenue Code 409A. Under 409A, such deferred compensation would be immediately taxable to the employees receiving the grant and subject to regular income tax rates plus 1%. Perhaps even more distressing, a 20% penalty plus interest would also be triggered. In addition, employers would be responsible for withholding income taxes for employees on these types of option grants, which if not done, could result in additional tax penalties. The immediate taxability, penalty and withholding requirements do not apply when the stock option exercise price is equal to or greater than the fair market value of the company’s stock on the grant date. It is impossible to compare the exercise price of a stock option to the fair market value of a company’s stock unless a valuation of the company’s stock has been performed. In addition, when a valuation has been performed to establish the fair market value of a company’s stock, the burden of proof shifts to the IRS to disprove the appraised value. Therefore, unless there is documentation to support the fair market value of a company’s stock near the option grant date, there could be significant tax issues in addition to the accounting issues alluded to earlier.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 3: What to Do?

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.
 

When selling your home, it is common to use an agent to list, promote and show the property. In exchange, you pay a portion of the sales price as a commission to the agent. The benefits of using an agent include: 1) the listing of your home in a database so that homebuyers can access information about it; 2) the agent acting as your middleman during the negotiation process; and 3) the incentive it gives the agent to sell your home quickly (so that her or she can earn their commission). 

Some people choose to sell their home by owner and forego using an agent. These are typically the homes that have “For Sale” signs in their yards for many months, sometimes even years (you know the ones), before they are actually sold. These people often believe that the benefit of not having to pay an agent commission on the sale of their home is worth the prolonged period it will likely take to sell the property. 

What does the choice of hiring a real estate agent or selling your home by owner have in common with private companies issuing stock options? The strange answer is: Much more than many of us realize. 

The Stock Option Landscape

More and more private companies are issuing stock options as part of their key employees’ compensation plans. This may be driven by the ideas that: 1) stock options don’t “cost” anything to the company; 2) stock options will positively influence employees’ performance; or 3) since public companies issue stock options, it must be a good idea and private companies should follow suit. Regardless of the motivation, what most private company owners and executives do not realize is that accounting for stock options, for both tax and financial reporting purposes, may actually have an out-of pocket cost that is greater than the value of the options themselves.

In order to value stock options issued by private companies, there are two major steps that must be undertaken:

1. Determining the value of the company’s equity (which is a key input to valuing a stock option)

2. Determining the value of the stock option

There are not many privately-held companies with the in-house resources or expertise necessary to perform either of the requirements above, both of which are essential in accounting for the issuance of stock options. This often puts accountants in the awkward position of trying to explain to business owners the “unseen” costs and accounting ramifications associated with issuing stock options.

Back to our analogy, hiring a valuation expert to determine the value of stock options is much like hiring a real estate agent to sell your home. A valuation expert is able to perform both of the tasks identified above that are necessary to value the stock options issued by a private company, much like a real estate agent takes care of the necessary steps to sell your home. This work is not free, however, and depending on the complexity of the company and the options issued, the cost to value a private company’s stock options can range in cost from thousands to tens of thousands of dollars. When private companies issue stock options, they often do not consider the “commission” that they will have to pay to a valuation expert to ensure that the options are properly valued. Unlike real estate agent commissions, however, which are based on the sale price of the home, valuation fees are relatively fixed. 

Just like selling a home “by owner,” some companies will issue stock options and try to determine the value themselves (or even worse, not value them at all). By not using a real estate agent, homeowners often find themselves making no headway in the sale of their home. Similarly, by not hiring a valuation expert to value the stock options that they have issued, private companies create the risk that their auditors will not sign off on their financial statements. Maybe even more importantly for business owners and employees, unsubstantiated option values leave both companies and their employees in danger of stiff tax consequences.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 2: The Accounting and Tax Ramification of Issuing Stock Options

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

In today’s economy, it is crucial to keep good tenants. The following nine points will help you maintain maximum occupancy in an uncertain environment:

1. Understand the tenant’s business. Research their industry so you can credibly talk about their business, and make them feel that you understand their concerns in today's economic conditions. 
2. Respond reasonably to rent relief or downsizing. This entails a two-step process consisting of listening to the request, and then formulating a personal response within three days. Establish limits to these requests and button down your parameters. If the tenant is downsizing, request their financials or tax returns to understand that their current financial position warrants this action. Make sure not to open the floodgates to requests every month, however.
3. Happy tenant employees means happy tenants. This is as easy as keeping the common areas clean and neat.
4. Go green, well. Reducing the amount of water or soap could get employees irritated. Also, automatic motion lighting in conference rooms or offices could be more of a hassle than a money saver, whereas they may work well in a hallway or a closet. Find other ways to go green that will help the environment and not hinder employees. Also, watch individual tenant leases when attempting to pass-through Green costs.
5. Follow up with tenants. Make sure to follow up with your tenants on a timely basis. There is a difference between "quick response" and "at their beck-and-call."
6. Be consistent with responses to tenants. Tenants talk to each other. Tenants get angry when your message is not consistent, whether it be costs, timing of an event (like cleaning), rent relief, management deferred maintenance plan, etc.
7. Tightly manage your broker’s promises. The easiest way to do this is to make sure that the broker and the property manager are on the same page - enforce constant and effective communication. Understand what the broker wants or needs so you can deliver. Also, promising occupancy before the tenant has signed the contract can get you into trouble - never anticipate a tenant's intentions until it is in writing. 
8. Keep current with billing. Tenants need predictability for cash flow purposes. Keep them updated and give them an estimated time frame when to expect the invoice if it will be late. Consider personally communicating changes in pass-through estimates each year - tenants appreciate the personal touch and the advanced notification.
9. Be strong, be fair, be smart. Remember that retaining the tenant may not be in the best interest for both parties involved. Also, don’t give up too easily, but if it is clear the tenant will not make it financially, come to an agreement. If the lease is more than 10 years old, update the lease to the way the property is operated today. Items specific to the lease that could have changed are holidays, weekend hours of operation, pass-through costs, timing and collection of rents; prohibited activities, sub-leasing, etc.

***This summary was based on a webinar from the members-only section of the NAIOP website. Most of the points have been modified pursuant to the blogger's experience.

Looking for a Cleveland or Akron accounting firm that provides services to the real estate industry? Contact the Real Estate and Construction Group at Skoda Minotti at 440-449-6800.

Unfortunately, the downturn in the economy has effected many not-for-profit organizations that provide invaluable services to numerous communities and individuals.  For some of these organizations, management has thrown its hands in the air, determined that they just cannot provide these services anymore, and closed their doors.

A recent survey of about 100 not-for-profit organizations indicated that about 90% of those organizations have been directly affected by the downturn in the economy, some even severely.  Another survey indicated that, of approximately 1,000 not-for-profit organizations, only 16% expect to cover operating costs in 2009 and 2010.

Public funding is down, endowments are down and earned income is likely down.  There are a few steps that organizations can take to try and stop the bleeding, or at least slow it down:
 

• Take a closer look at how you are operating internally and how you are administering your programs.  Do the programs align with your mission?  Can you change the way you administer programs, achieving the same results but in a less costly manner?
• Make your mission known.  Let others know how important your services are, and how you are providing benefit to the community and individuals.  Be vocal.
• Take advantage of the situation to eliminate inefficient programs and expenses.  
• Work with existing funders to try and overcome the roadblocks.
• Take the time to analyze the situation, and develop a realistic plan to deal with the situation at hand.

We have seen first-hand how the downturn in the economy has effected not-for-profit organizations.  These are just a few steps you can implement to help your organization survive, and continue to provide the invaluable services that it does.  

For more information on the issues facing the not-for-profit industry, contact Skoda Minotti at 440-449-6800 or visit us online.

Topics covered: Cleveland Accounting Services, Akron Accounting Services, nonprofit organizations

A business valuation is a just a business valuation – isn’t it? This would be akin to saying that a steak is just a steak when, in fact, there are ribeyes, strips, sirloins, and filets (just to name a few). Likewise, business valuations come in two distinct “flavors” – conclusions of value and calculations of value.

As of January 1, 2008, valuation analysts who hold either the Certified Valuation Analyst (CVA) credential supported by the National Association of Certified Valuation Analysts or the Accredited in Business Valuation (ABV) credential supported by the American Institute of Certified Public Accountants have been required to follow new standards that clearly delineate between two types of valuation engagements. Similar to the differing levels of service traditionally offered by accounting firms in performing audits, reviews, or compilations, business valuation engagements are now separated into two defined service categories:

Conclusion of Value

-          All three valuation methods (asset-based, income-based, and market-based) are required to be considered

-          Detailed development and reporting requirements must be adhered to by the valuation analyst, making the engagement more time consuming than a calculation of value

-          This is the required type of report for estate and gift tax filings; Also typically required for instances in which the valuation analyst will need to defend his or her findings and report (i.e. in litigation)

-          The valuation analyst opines on the value of the business or business ownership interest

Calculation of Value

-          The valuation methods to be used in determining value are discussed and agreed upon beforehand between the client and the valuation analyst

-          Reduced development and reporting requirements compared to conclusion of value engagement

-          Ideal for planning purposes (e.g. strategic planning, transaction (purchase or sale) planning, or litigation or divorce proceedings in the settlement stage)

-          Valuation analyst does not opine of the value of the business or business interest, rather, the valuation analyst applies the valuation methodologies agreed upon with the client

-          Generally not defensible in litigation settings because the valuation analyst is not offering an opinion of value, rather, the analyst “calculates” a value based on methods agreed upon with the client

-          Typically costs less than a conclusion of value

-          Has been found to be useful in divorce situations in which a spouse will obtain a calculation of value to aid in the settlement process; If a settlement is not reached, the engagement can then escalate to a conclusion of value so that the valuation analyst can opine on a value and defend it in court, if needed

As you can tell from the discussion above, all “valuation” work is not created equal. For business owners, as well as their attorneys and other advisors, it is important to be aware of the varying levels of valuation service offered so that the appropriate type of report is obtained. You should discuss the purpose of the valuation with the valuation expert in detail as the engagement is forming so that the level of service can be tailored to your specific needs. 

The last thing that you want to do when having a valuation performed is pay too much to obtain a conclusion of value that will only be used for planning purposes or pay too little to obtain calculation of value that will not hold up in litigation or under IRS scrutiny.

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

Topics: Cleveland Business Valuation, Akron Business Valuation

This week is our final update in our series on the changing rules and regulations and their impact on employee benefit plan audits.

This week’s topic:

2009 Cost of Living Adjustments for Qualified Retirement Plans

The Internal Revenue Service announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009.

Click here for more of this article.

Looking for assistance with your benefit plan audit? Contact the CPA’s business and financial advisors at Skoda Minotti at 440-449-6800.

According to an article in Retail Traffic, major big-box retailers have informed about 700 shopping center owners that they will be reducing their rent 25%, no questions asked. Included in the letter was their first rent check, at the reduced rate. Owners and retailers have both been hurting in this poor US economy and each are trying to keep their head above water by reaching a common ground. With vacancy rates rising and retail sales decreasing, roles have switched from the past ten years and retailers are now setting the precedent.

Owners, however are giving pushback and evaluating who actually needs and deserves the rent relief. This issue has caused a dilemma for owners; either decrease their income or have a chance at losing the retailer entirely.   

How does the owner know that the retailer relies on rent relief for the longevity of their business, not just because their next door neighbor received it? According to the article "you can always tell which retailers really need help because they're willing to give up some of the options they have in their lease.” 

Read the whole article here.

Skoda Minotti asks: Is it time to restructure using percentage rents or lowering the break point for overage rents? Whatever the answer, communication between landlord and tenant is imperative.

Has your rent changed over the past year? Have you and your landlord adjusted your rent to meet at a common ground? Leave us a comment and let us know.

Looking for a Cleveland or Akron accounting firm that provide services to the real estate industry? Contact the Real Estate and Construction Group at Skoda Minotti at 440-449-6800.

Topics: Cleveland Real Estate Accounting

The Magis Advisory Group of John Carroll University is offering a seminar providing continuing legal education credits for attorneys, continuing education credits for certified financial planners, and continuing professional education credits for certified public accountants in estate planning, advanced planning for the family owned business and business and asset valuation.

Our own Robert A Ranallo, CPA/ABV, JD, CVA, CFF, will be presenting the "Business and Asset Valuation" session on Friday, June 19th, 2009.

Click here for more seminar imformation or to signup for the seminar.

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.

Topics: Cleveland Business Valuation, Akron Business Valuation

Looking for a low-cost construction financing option? The American Recovery and Reinvestment Act of 2009 created a new category of bonds - Recovery Zone Bonds (RZB). These bonds are intended to stimulate economic recovery in designated “recovery zones”. There are two categories of RZBs – Recovery Economic Development Bonds ($10 billion allocated) and Recovery Zone Facility Bonds ($15 billion allocated).

Recovery Zone Economic Development Bonds – These are governmental bonds to be used for governmental purposes that will allow the county/large municipality to borrow on a lower cost than traditional tax-exempt financing.

Recovery Zone Facility Bonds – These are private activity bonds that permit counties/large municipalities to provide tax-exempt financing for private projects which historically would not qualify (e.g. large manufacturing plants, distribution centers, hotels, research parks, etc).

The government will allocate each category of RZBs to states based on each state’s decrease in employment compared to the national decrease in employment. The state then allocates the bonds to counties and large municipalities based on their decrease in employment compared to the state’s decrease in employment. We will provide an update once these bonds have been allocated.

To learn more about how Recovery Zone Bonds may benefit your business, click here to view a more detailed summary from Benesch Attorneys at Law.

Looking for a Cleveland or Akron accounting firm that provide services to the construction industry? Contact the Real Estate and Construction Group at Skoda at 440-449-6800.

“Corporate Vigilance in Desperate Times” was the title of a presentation I made to a group of corporate controllers on behalf of the Ohio Society of Certified Public Accountants.

It’s hard not to pick up a newspaper these days and see dismal economic results. The next article discusses employee layoffs. “Happy Days Are Here Again” will not be heard on your car radio on the way home. And once home, chances are that you don’t want to look at your stock portfolio or 401k statement that came in the mail. 

Many employees are scared. Financial pressures are fierce. A spouse may have been laid off thus crippling the family cash flow. Retirement, carefully planned for years, may now have to be delayed since the market has halved your nest egg. With foreclosures at record numbers not seen since the Great Depression, many must evaluate whether they can provide a house for one’s family?

In troubling times such as this severe economic downturn, the opportunity is ripe for fraudsters to shake cash from unsuspecting companies. Companies must be more vigilant than ever to protect their financial resources.

Unfortunately, we have become aware of some companies cutting jobs within accounting departments and as a result potentially compromising their internal controls – controls vital to not only good financial reporting, but safeguards in general to the overall corporate assets.

Is there a correlation between a downturn in the economy and an increase in fraudulent acts such as embezzlement? Sure there is. In larger corporations there is intense pressure to “make the numbers” thus resulting in tempting financial statement crimes.

Eliminating staff in an accounting department will usually reduce the effectiveness of established internal controls.   Less effective internal controls is an invitation for embezzlement. And don’t think that the thieving opportunist doesn’t recognize the void suddenly created. 

The CPAs, business and financial advisors in Skoda Minotti's Real Estate and Construction Group recently authored an article for Builders Exchange Magazine.

The article summarizes some important accounting and tax provisions that construction professionals need to keep in mind. The article highlights the American Recovery and Reinvestment Act, the Energy Policy Act of 2005, qualified rehabilitation and low income housing tax credits.

To view this helpful article, click here.

Looking for a Cleveland or Akron accounting firm that provides services to the construction industry? Contact the Real Estate and Construction Group at Skoda Minotti at 440-449-6800.

We are very pleased to announce that on December 1st, we will be opening the doors to our new Akron office. The office will be located at 3875 Embassy Parkway, Suite 200, in Fairlawn.

With an increasing portion of our clients and employees based in the Akron area, we realize the significant potential for growth that the area holds. An Akron office will allow us to serve our Akron client base more efficiently and effectively. Additionally, this office will further our goal of continuing to attract the best and most talented staff in order to continue delivering on the promise of outstanding client service.

Our new Akron office will be fully integrated with our current Mayfield Village office and our professionals will be able to fully serve clients from either location. If you are in the Akron area this December, we invite you to stop by and check out our new office space. Click here for directions. 

Looking for a Cleveland or Akron accountant? Contact us at 440-449-6800 (Cleveland) or 330-668-1100 (Akron).