Cleveland Financial Advisor

Seven Steps for Delegating Work
 
Do you own a small business? You may feel that the success-or the failure-of the business rests entirely on your shoulders. So you try to be in all places at all times. However, in most cases, this will result in problems for the operation and decreased productivity by other workers.

Solution: Practice the fine art of delegation. (It is an art, not a science.) If you parcel out certain jobs among other staff members, you can devote more of your time to areas with greater profit potential. Furthermore, this will enable you to develop a workforce of thinkers, not just doers.

Of course, you will still have to fight your natural tendencies.

Click here for seven practical suggestions for getting or here if you'd like to learn more about how your staff can learn to better use QuickBooks.

Locking in a Partial Home-sale Exclusion

Despite the recent nationwide real estate slump, you may realize a significant gain if you sell your home, particularly if you bought the place before prices soared in prior years. What about the tax consequences? Generally, the amount of the proceeds is subject to tax at capital gain rates. Currently, the maximum tax rate on net long-term capital gain is 15%, but rates are scheduled to increase in future years.

Click here to read more.

Prescription for the New Health Care Credit
Federal Reserve Board Compensation Guidance
By: Theodore R. Ginsburg, JD, CPA

As we are all aware, one of the side effects of the nation's recovery from the financial crisis has been a dramatic increase in financial institution regulation from Congress, the executive branch   and from the Federal Reserve Board ("FRB").  One of the primary areas of the FRB's focus has been the compensation practices of member banks.  On June 21, 2010, the FRB (in conjunction with the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation) issued its "Final Guidance on Sound Incentive Compensation Policies" (the "Guidance"). 

In general, the FRB believes that incentive compensation programs caused bank employees to take actions that put their employers at risk.  While this is important information for banks, the overall guidance that the FRB provides is worth noting by all employers.

This brief article will summarize some of the key points of the 47 pages of guidance that the FRB issued.

Aurum Capital Markets Summary

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of June as well as a recap of the significant events influencing the markets.

Click here for 2010 Second Quarter Commentary from Aurum.

Florida Tax Amnesty

The state of Florida is currently administering a tax amnesty program that runs through September 30, 2010. Eligible taxes are sales tax, fuel tax, corporate income tax, communications services tax, gross receipts tax, and Florida's intangible tax. The amnesty applies to tax liabilities due prior to July 1, 2010.

If a taxpayer owes any tax liabilities to Florida, this could be an excellent opportunity. Florida will waive ½ of the interest and all penalties on the tax due.

Click here to learn more.

Go Directly From a 401(k) to a Roth  

Do you want to transfer your 401(k) plan assets to a Roth IRA? Under a recent tax law change, you can make the move in one fell swoop. Previously, it took two separate steps. In addition, another tax law provision taking effect this year may encourage this direct approach.

Click here to read more or here to register for our free Roth IRA Conversion Seminar.

To read this issue of Special Delivery in its entirety, click here.

Advisor Insights

For the past several months, our Real Estate and Construction Group has been authoring a monthly column in Builders Exchange Magazine that offers advice to real estate and construction professionals.

So far this year, the following topics have been covered:

• The Benefits of Subprime Bonding  
• Selecting and Implementing Financial Software  
• The Value of a Niche Marketing Plan 
• Lessons Learned From the Construction Industry  
• Cancellation of Debt Income 
• Preventing Financial Fraud 
   

• Health insurers and group health plan sponsors are now prohibited from imposing pre-existing condition limitations on individuals who have not yet attained age 19 and from denying coverage to such individuals based on the existence of a preexisting condition. All such limitations and coverage denials, regardless of age, begin in 2014.
• Health insurers and group health plan sponsors are prohibited from imposing lifetime dollar limits on essential health benefits, and are required to sharply increase annual dollar limits on essential health benefits. Such annual limits will be eliminated starting in 2014.
• Coverage rescissions (except in the case of fraud or intentional misrepresentation) are prohibited.
• Plan-covered and insured individuals are given greater control over choosing a primary care physician and greater access to emergency services and related care.

To read more about these new rules, see this Executive alert from Baker Hostetler.

Go Directly From a 401(k) to a Roth  

Do you want to transfer your 401(k) plan assets to a Roth IRA? Under a recent tax law change, you can make the move in one fell swoop. Previously, it took two separate steps. In addition, another tax law provision taking effect this year may encourage this direct approach.

Click here to read more.

Should You Give to a Donor-advised Fund?

Wealthy entrepreneurs with charitable intentions may choose to set up a private foundation. But a more convenient alternative is gaining in popularity: the donor-advised fund.

This technique may be especially appropriate if you need to devote more time to business activities in the current economic environment. The fund does most of the hard work for you and requires less personal attention than a private foundation. In some cases, you might even convert an existing private foundation into a donor-advised fund.

Click here to read more.

New Law Revamps Student Loan Program

The new Health Care and Education Reconciliation Act of 2010—recently signed in conjunction with the monumental new health care law—includes dramatic reforms in the federal student loan program. This new legislation could affect families of all stripes for years to come.

Click here for a brief summary of four points you should know about.

Aurum Capital Markets Summary 

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of May as well as a recap of the significant events influencing the markets.

With apologies to all of you non-basketball fans out there, this blog entry will once again focus on LeBron James and his impending free agency.  After all, it is the primary (only?) sports story in Cleveland this summer.  As my colleague wrote in a previous entry, LeBron’s decision to stay or go this summer will have a dramatic impact the value of the Dan Gilbert’s investment in the Cavaliers.  Here’s another perspective on how LeBron’s decision might be illustrative of the value of your business. 

The concept of the “key person discount” is often bandied about in valuation circles.  The idea is that a certain employee of the subject company, typically the owner-operator and founder, creates value due to his or her unique ability to run the business, enhance performance, or generate revenue.  One might ask, "Why would that be considered a reason to discount the company’s value?"  It seems as though such an individual creates a competitive advantage, and thus, a higher value.  The key person discount contemplates the impact of the potential exit of that individual from the business, and the resulting sustainability (or lack thereof) of the business after that exit.  In other words, the key person discount is a component of risk due to the fact that the success of the company is inordinately tied to a single person. 

To get back to the LeBron analogy, think of the “stay” or “go” scenarios and the impact on the Cavaliers’ ability to perform with or without him.  Take it one step further, and consider what the odds makers in Vegas are thinking right now as LeBron’s future is in question.  One thing is certain – whichever team is able to sign LeBron will see a significant uptick in its likelihood to win the NBA Championship next year (i.e., improved odds).  This volatility and uncertainty is simply an added risk associated with Cavaliers’ ability to win basketball games in the future. 

In business valuations, we handle volatility through the discount rate.  Therefore, an additional component of risk would be included in our discount rate for a key person, such as LeBron is for the Cavaliers.  In the valuation world, this would drive a lower value due to the added risk of the related investment.

Of course, many subscribe to the “Ewing Theory” which was popularized by Bill Simmons.  A summary of the theory is linked above, but the basic idea is a team may be better off without its superstar and, under the right circumstances, will actually perform better if the superstar gets injured, is traded, or leaves through free agency.  In other words, it is a scenario of addition by subtraction.  Simmons offers some very compelling examples of this notion.  It is common for valuators to encounter this situation (e.g., an owner taking excessive compensation) from time-to-time, but we will hold that back for a later entry.

For more information on the key person discount, post a comment below or contact our Valuation & Litigation Advisory Services Group at 440-449-6800.

Click here to view Part 1 of our series and learn more about the stock option landscape or Part 2 to learn more about the accounting and tax ramifications of issuing stock options.

What To Do?

As discussed above, there are significant risks that a company brings upon itself if it decides to issue stock options without properly valuing the options and the equity of the company. Rather than issuing stock options, if a company wants to offer an employee the opportunity to obtain an ownership interest, the most efficient and “clean” method may be to allow the employee to purchase shares from the company or from existing owners. There is no valuation requirement in this case (unless a party wants to hire an expert to ensure that they the transaction price is fair and reasonable) which also eliminates the out-of-pocket cost for the employer. In fact, a business actually recognizes a cash inflow when an employee purchases shares directly from the company. 

I am a valuation expert and I directly benefit from work associated with the valuation of stock options, so why am I telling you to consider alternative routes of compensation? Too often, the companies that issue stock options without having them professionally valued are the same companies that will fight against having their options valued at all due to the cost associated with the valuation. I simply want to spread awareness that there are other avenues of compensating employees and giving them opportunities for equity ownership that may be more cost efficient for companies that are under the illusion that issuing stock options does not require a cash outlay.

If you take anything away from this article, remember that issuing stock options is not a “cashless” expense. Consider that there are other alternatives for compensating employees other than using stock options. Remember that there are transaction costs associated with issuing stock options, specifically, hiring a valuation expert, that will create real out-of-pocket cost for any company. Unless you are ready to comply with the valuation requirements associated with issuing stock options, you may be better off simply not using them and compensating employees in another manner. Finally, just like selling a home, if you are going to issue stock options make sure that you bring in an expert to ensure that the value of the company and options are determined and documented appropriately – and be prepared to pay the “commission” for these services.

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 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.

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.

There are many incentive programs available through various state and Federal agencies to assist businesses in a variety of different ways to expand and grow. One program available through the Ohio Department of Development’s Technology and Innovation Division is an investment tax credit for early stage companies. 

Through this program, qualified investors who invest in qualified technology-based companies receive a credit towards Ohio taxes for 25% of the amount they invest. Certain entities apply for an increased credit of 30%. 

If an investor invests the maximum amount permitted by this credit at the individual level the credit obtained as a result of the investment will offset approximately $1 million of Ohio taxable income. This is a unique opportunity to invest in Ohio’s future as well as reap excellent tax benefits.

The TITC is one of many incentive opportunities available through the Ohio Department of Development and Third Frontier Program. The program was renewed by voters on May 4, 2010 and extended through 2016 with the issue of a $700 million bond program.   

To learn more about incentive opportunities available to you, your company and your industry please contact Skoda Minotti’s Bio-Tech and Technology Industry Group at 440-449-6800. 

Real estate professionals may want to keep a close eye on the American Jobs and Closing Tax Loopholes Act (H.R. 4213). The bill, which would extend the filing deadline for existing tiers of unemployment benefits and extend COBRA health care subsidies for the unemployed, contains a provision to alter the way “carried interest” is taxed.

Carried interest, according to Building Owners and Managers Association International, is described as follows –

“Real estate is a long-term, risk–based investment which is regularly structured as a partnership, and therefore often involves a component known as “carried interest.” The partnerships are made up of limited partners and general partners. The limited partner(s) provides the money and capital, has very little say in the operation of the investment and is simply looking for a particular return on the investment. The general partner(s) brings the “sweat equity” to the investment and does the day-to-day work making sure the property is properly managed and is compensated by a flat fee that is taxed as ordinary income. They are also offered an additional percentage of the profits as incentive to make the investment prosperous without contributing any capital of their own; this compensation is what is known as “carried interest.” When the general partner receives the “carry” it is taxed as a capital gain. It is paid only when, and if, the real estate investment actually is successful.”

Current law taxes the “carried interest” of a general partner in a real estate partnership as a capital gain. The House bill treats carried interest as 50% ordinary income and 50% long-term capital gains for two years, then moves to a permanent 25/75 split (25% long-term capital gains/75% ordinary income) with an effective date of Jan. 1, 2011.  

This change in tax law could disrupt the investment relationship between entrepreneurs and their capital finance partners.

The U.S. Senate is expected to consider action on the House bill this week. Real Estate professionals who will be affected by the new law may want to consider contacting their senator.

For more information on how this potential law change may affect your real estate operation, please contact our Real Estate & Construction Group at 440-449-6800.

Details

The Internal Revenue Service has announced that its Employee Plans Compliance Unit (“EPCU”) will be mailing out a letter and instructions to a random sample of 1,200 employers that sponsor 401(k) plans asking them to complete a “401(k) Compliance Check Questionnaire.”

Background

The Service is well aware that 401(k) plans have far surpassed defined benefit plans as the preferred retirement vehicle for the majority of employers. A recent IRS Employee Plans Examination Study of 79 market segments indicates that 401(k) plans are by far the most non-compliant type of retirement plan. Inasmuch as these plans comprise more than 60% of all retirement plans, the Service believes that it is important to the future of the private retirement system that 401(k) plans maintain the highest level of compliance possible.

Summary

Through a secure Web site, the EPCU will collect responses on:

• demographics,
• participation,
• employer and employee contributions,
• top-heavy and nondiscrimination testing,
• distributions and plan loans,
• other plan operations,
• automatic contribution arrangements,
• designated Roth features,
• IRS voluntary compliance and correction programs, and
• plan administration.

The Service says that the information gathered will provide comprehensive information on 401(k) plans, and will help EPCU maximize resources for education, outreach, guidance, and enforcement efforts while minimizing the burden to compliant plan sponsors.

All plan sponsors will complete the same questionnaire but there are some questions that only pertain to plans with certain features. Employers that fail to respond to the questionnaire or provide complete information will result in further action or examination of their plan, the Service cautioned.

A team from all different areas of the Employee Plans office of the Tax Exempt and Government Entities Division of the Service worked to create the questionnaire. The employers selected to participate were taken from a random sample of 401(k) plan sponsors that filed a Form 5500, Annual Return/Report of Employee Benefit Plan, for the 2007 plan year.

If you have any questions, post a comment below or contact our Benefit Plan Audit Group at 440-449-6800.

With increased attention from the IRS in the areas of foreign operations and investments/holdings, it is important to review your situation to determine whether you will need to comply with the FBAR disclosure requirements.  The report is due at the end of June and it must be received, not postmarked, by the end of the month.  Although the reporting is technically a disclosure, the penalties for failure to do so can be severe and in some cases the penalties can be in excess of the actual amount invested or held in the foreign account!  Typically, a FBAR filing requirement is needed if either of the following is applicable:

1.      Ownership of a foreign bank account, or

2.      Control over or signing authority for a foreign bank account  

Please note, these disclosure requirements apply at the entity and individual level.  One bank account owned by an entity can result in multiple filings since the entity owns the account, but there may be a number of individuals employed by the entity that have control over or signing authority for the same account.  Controllers, cash management personnel and CFO’s are likely to have the requisite control or signing authority to meet the filing threshold.  Individual accounts held jointly or accounts held by pass-through entities also present the potential for disclosure.

In addition the information above, you can click here to learn more about some of the technical details that might be applicable or helpful to your situation.

To learn more about our tax planning and preparation services, call us at 440-449-6800.

• The application for credit or grant must be made on Form 8942, which must be released by the IRS by June 21, 2010.  That means that taxpayers that have been preparing to file the application early must now wait for the Form 8942 to be released.
• The Form 8942 will require a good deal of additional information, and that portion of the filing has some very specific requirements as to structure and content.  Many of the questions relating to whether a project qualifies will be limited to 250 words.  This means that any applicants must be very concise and descriptive in their application.
• Applications for the credit must be filed by July 21, 2010.  A preliminary review of timely applications will be completed by September 30, 2010 and all applications will be considered to have been made on that date.  As a result approval will happen by October 29, 2010, 30 days after the deemed application date.
• If a taxpayer is claiming the credit (rather than the grant) the applications can be made for costs incurred in 2009 and expected to be incurred in 2010.  An application can be made for 2009, 2010 or both, even though the 2010 tax year has not yet ended.  This does not apply for applicants seeking a grant.
• A separate application for certification must be submitted for each project for which a taxpayer is seeking certification.
• Taxpayers have no right of appeal on the certification ruling.
• The application on Form 8942 will allow taxpayers to elect the grant instead of the credit.
• Similar to the submission requirement of the credit, grant applications filed by July 21, 2010 will be subject to a preliminary review, which will be completed by the Treasury by September 30, 2010.  The Department of Treasury will authorize grant payments for certified costs no later than October 29, 2010.
• A request for a grant instead of a tax credit has some very special rules.  Unlike the credit, in order to request the grant for 2010, the application can’t be submitted any earlier than the day after the end of the 2010 tax year, January 1, 2011 for most companies.
• All grant applicants must have a Data Universal Numbering System (DUNS) number from Dun and Bradstreet, and, must be registered with the Central Contractor Registration (CCR).
• But here’s an interesting observation: If a taxpayer requests a credit (and includes expected expenditures for 2010) then the application can be later amended to instead request a grant.  One strategy might be to apply for the credit, including 2009 and the 2010 expected investment, and on January 1, 2011 amend the application to claim the grant for 2010.  Assuming the funds have been allocated as part of the original filing they should be available as a grant, even if the $1billion allocation has been expended.
• Note: The Service will publicly disclose the identity of the applicant and the amount of the credit or grant issued for certified costs.  In addition, with respect to applicants who elect to receive a grant in lieu of the credit for the 2009 tax year or provide a consent to disclose information concerning the allocation, the Service will also publish the type and location of the project which costs were certified.
• The Appendix A to Notice 201-45 provides very specific filing information with what to include with Form 8942.  The information is very limited, many sections limited to 250 words or less.  The appendix also provides more detailed guidance on what will be deemed a Qualifying Therapeutic Discovery Project.  Obviously the words used in the appendix should be used in drafting the application question responses wherever possible.
   

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

Here are some questions that can help you start thinking about the amount of life insurance you need:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
• How much of your salary is devoted to current expenses and future needs?
• How long would your dependents need support if you were to die tomorrow?
• How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?
• What other assets or insurance policies do you have?

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy's death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time.

Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in the cash value account. During the early years of the policy, the cash value contribution is a large portion of each premium payment. As you get
older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow--tax deferred--as
long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.

Many different types of cash value life insurance are available, including:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims paying ability of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.
• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the  subaccounts in which the cash value should be invested. 
• Universal variable life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.

Good retirement plans are often hallmarks of great employers, but finding a good one and setting it up can be a complex endeavor. There is a plan out there for every company, though. It may take some time and effort to find one, but once you do, it can be well worth the effort.

Creating and maintaining a retirement plan benefits both the business owners and the employees. Following are tips on determining what type of retirement plan is right for your company:

How does creating and maintaining a retirement plan benefit a business owner?

A good retirement plan can help you attract and retain quality employees. In addition, a retirement plan gives both the employee and employer ability to defer income in a tax favorable vehicle.

The tax advantages associated with retirement plans are key. Contributions made to the retirement plan are deductible when deposited and grow from there on a tax deferred basis.

On a side note, employees today get confused between a benefit and an entitlement. A retirement plan is not an entitlement; it is a benefit. That is important to state, and it needs to be expressed to the employees.

Click here for more FAQs about retirement plans and post a comment below or contact the Financial Services Group at 440-449-6800 with any questions.

The Tax Court has held that, under the regs, a land surveying firm is treated as performing engineering services even though it employed no engineers. As a result, the Tax Court found that the firm was a qualified personal service corporation subject to a flat 35% tax rate.

Background. C corporations generally are subject to tax at graduated rates on their taxable income. (Code Sec. 11(b)(1)) The benefits of the graduated rates phase out after taxable income reaches a specified amount. By contrast, qualified personal service corporations are subject to a flat 35% tax rate. (Code Sec. 11(b)(2))

A corporation is a qualified personal service corporation if it meets the function and ownership tests: 

• Substantially all of its activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. “Substantially all” means that 95% or more of the time spent by the corporation's employees, serving in their capacity as employees, is devoted to performing such services. Brokerage services, including commission-based financial services, are exempted from consulting services.
• Substantially all (95% or more) of the stock (by value) is held directly or indirectly by: employees performing the services or retired employees who had performed such services; or the estates of such employees, or any other person who, during the two-year period starting with the date that such an employee died, acquired that individual's stock because of his death. (Code Sec. 448(d)(2); Reg. § 1.448-1T(e)(4))

Facts. Kraatz & Craig Surveying Inc. (Firm) is engaged in land surveying in Tennessee. Land surveying is Firm's only activity. It does not employ any licensed engineers, is not associated with any firm that employs licensed engineers, and does not provide any services that State law requires to be performed only by a licensed engineer.
IRS determined a deficiency of $9,762 in Firm's Federal income tax for its tax year ending Dec. 31, 2005. In the notice of deficiency, IRS determined that Firm is a qualified personal service corporation under Code Sec. 448 subject to a flat 35% tax rate under Code Sec. 11(b)(2).

Parties' arguments. Firm argued that it did not meet the function test because it was not engaged in any of the types of services specified in the statute. Firm did not dispute the ownership test.

IRS argued that Firm's land surveying constituted the performance of services in the field of engineering pursuant to Reg. § 1.448-1T(e)(4)(i), which specifically treats land surveying and mapping as engineering.

Firm argued that the reg was invalid. Alternatively, it argued that if the reg is valid, it means that surveying and mapping services, if performed by an engineer, would qualify as services in the qualifying field of engineering. Under this argument, the reg would not apply in Firm's situation since it has no engineers.

Firm said that the Court should look to State law to decide whether surveying is in the field of engineering. Firm also contended that land surveying in Tennessee can be performed only by a licensed land surveyor and that it is not licensed to perform any activity which State law requires to be performed by a licensed engineer.

Court sides with IRS. The Tax Court held that whether a service is performed in a qualifying field under Code Sec. 448(d)(2) is to be decided by examining all relevant indicia and is not controlled by State licensing laws. It found that Reg. § 1.448-1T(e)(4)(i) is supported by the legislative history, by the ordinary meaning of the term “civil engineering,” which encompasses surveying, and by other indicia that surveying is regarded as within the field of engineering. As a result, it concluded that the reg is valid. Accordingly, it held that Firm's land surveying is a service performed in the field of engineering under Code Sec. 448(d)(2) and Firm is subject to the flat 35% income tax rate under Code Sec. 11(b)(2).

The Moral of the Story.  Professional service firms that may provide personal services that subject the Corporation to the flat 35% income tax rate should consider all viable options for organizing the business.  Other options of business organization may allow the stakeholders to take advantage of graduated rates.

References: For the tax rate for qualified personal service corporations, see FTC 2d/FIN ¶  D-1006 et seq.; United States Tax Reporter ¶  114.02; TaxDesk ¶  600,901 et seq., TG ¶  650. Information Courtesy: Thomson Reuters

We would like to make you aware of a new tax credit that could significantly benefit your business.

As you know, on March 23rd, President Obama signed into law the Patient Protection and Affordable Care Act. As part of this Act, new Internal Revenue Code Section 48D was created. Section 48D provides an incentive that may offer you a significant benefit.

Overview of Benefit

• The Act establishes a new investment tax credit for certain expenditures related to “Qualifying Therapeutic Discovery Projects” (QTDPs) made in 2009 and 2010.
  
• Section 48D provides a tax credit equal to 50 percent of the “qualified investment” of an “eligible taxpayer.”
  
• In an interesting variation from other tax credits, companies that cannot currently use tax credits may apply for a cash grant for the same amount as the credit.

What is a “Qualified Investment”?

The amount of the credit depends on a business’s investment in a “Qualifying Therapeutic Discovery Project (“QTDP”).

The government defined QTDP Objectives are:

• The development a product, process, or technology to further the delivery or administration of therapeutics;
• The diagnosis of diseases or conditions, or determination of molecular factors related to diseases or conditions, by developing molecular diagnostics to guide therapeutic decisions; or
• The treatment or prevention diseases or conditions by:
  • Conducting pre-clinical activities, clinical trials, and clinical studies; or
  • Carrying out research protocols, for the purpose of securing approval fo a product government guidelines.

In order to qualify for the grant/credit, certification by the Treasury Department is required; therefore, the ability to qualify for the credit requires careful consideration and presentation.

In deciding which projects to certify, Treasury must find that the projects show “reasonable potential” to:

• Result in new therapies to treat areas of unmet medical need, or prevent, detect, or treat chronic or acute diseases or conditions;
• Reduce long-term health care costs in the United States; or
• Significantly advance the goal of curing cancer within 30 years.

As part of their determination, Treasury also will consider which projects have the greatest potential to:

• Create and sustain, directly or indirectly, high-quality, high-paying jobs in the United States; and
• Advance United States competitiveness in the fields of life, biological, and medical sciences.

Treasury is required to take action to approve or deny applications within 30 days of their submission.

Who is eligible?

• A taxpayer that employs 250 employees or less in all its related businesses at the time it submits an application is eligible, but complex rules determine related businesses.
  
• Eligible taxpayers include C corporations as well as pass-through entities like S corporations, LLCs, and partnerships.
  
• Most not-for-profit entities are not eligible for grants.

Application Process

The application guidelines are required to be published no later than May 21, 2010, within 60 days of the Act’s signing, and could be published even sooner.

No one knows what the application will look like just yet, but due to the complex rules, the application will likely be complicated, particularly since a considerable amount of information will be required related to the QTDP merits and the likelihood of job creation. We believe the application could be as complex as any government grant request.

Only $1 billion is available for expenditures in 2009 and 2010. If past history, like the credits for Advanced Energy Projects are any indication, the funds could be depleted quickly, so time is of the essence.

As the available funds (only $1 billion) may go quickly, we encourage you to contact Skoda Minotti as soon as you have identified that you may be eligible for a credit or grant. As we have been researching and studying this opportunity since its announcement, we are most qualified to help you position yourself by gathering and organizing the information that will be needed to demonstrate your qualification for the grant/credit. It is advisable to be prepared to fill out the application and prepare the grant request as quickly as possible once guidance is released in order to put yourself in the best position to receive funding.

If you have any questions about moving forward with a Section 48D application, feel free to contact Jim Sacher at Skoda Minotti at 440-449-6800.

This is the fifth and final installment of our five part series on niche marketing.

Clearly it is imperative that you put some kind of system in place to monitor and evaluate your efforts. Without a tracking mechanism it is difficult to know what strategies work best and those that should be either revised or not carried forward in the future. My advice would be to design or invest in some kind of CRM system that will track new and repeat customers and allow you to determine how they learned about your product and/or services. And, should they be repeat customers, why they have returned and what new or additional services or products they purchased. An­other way to track your efforts is, as you get to know your repeat customers better, to meet with them for detailed feedback and ask them for ideas and suggestions about how you can introduce your prod­ucts and services to more prospects that are just like them. 

Click here for part one, part two, part three or part four of this series. Or, for more information on niche marketing or any of our other Marketing Services, contact Jonathan Ebenstein at 440-449-6800 or visit our marketing web page.

You've heard about it on the radio; you've read about it in various newspapers.  The Issue 1 bond renewal, which funds the Ohio Third Frontier (OTF) program, will be on the state-wide ballot on May 4.  Some facts and figures since OTF's inception in 2002:

• 570 new companies created
• Over 300 projects state-wide
• 48,000 direct and indirect jobs created; goal of 96,000 jobs over the OTF period
• Estimated $6.6 billion in economic impact
• $2.4 billion in wages and benefits to Ohioans
• Over 65% increase in private equity investment in Ohio due to OTF
• Since 2000, the number of bioscience jobs has increased by almost 18%

Issue 1 is not a new tax, but rather an extension of a bond issue initially approved in 2005 for $500 million.  OTF funds are highly competitive, and are available throughout the state.  Large, notable beneficiaries of the funds include the Cleveland Clinic Foundation and Case Western Reserve University in Cleveland, the University of Akron, CincyTech and Children's Hospital Medical Center in Cincinnati, the University of Dayton and GE Aviation in Dayton, and the Regional Growth Partnership in Toledo.

OTF supports research, entrepreneurship, private investment, and jobs by focusing on technology and innovation.  Some of the programs OTF funds include:  Advanced Energy, Entrepreneurial Signature Program, and Biomedical Research and Commercialization.

Despite the economic impact, there are numerous barriers to passage: 

• The stigma of "stimulus", and bigger government hand-outs
• The long-term payback of such endeavors
• The need for funds throughout the state for transportation and infrastructure

Advisor Insights

This month, our monthly Advisor Insights column in Smart Business Cleveland Magazine takes a look at lessons learned from the restaurant industry.

The restaurant industry is still feeling the sting of the recession, and the general consensus is that consumers are very pessimistic about 2010.Therefore, restaurants have had to adapt to survive as their longtime patrons trim their dining-out budgets.

What can other industries learn from the restaurant industries struggles? Click here to read the full article, "Lessons Learned from the Restaurant Industry."

HIRE Act Provides Employers with Tax Incentives to Hire Unemployed Workers

The Hiring Incentives to Restore Employment, or HIRE, Act, was recently signed by President Obama after being approved by the Senate by a 68-29 bipartisan vote on Wednesday, March 17th. It is the first of a series of bills that the administration and Congress plan to introduce to reduce the unemployment rate.

Some key points are listed in our blog post here.
 
FRx Discontinued; Paves Way for Microsoft's New Business Intelligence Program

Microsoft currently offers three Corporate Performance Management (CPM) programs: FRx, Forecaster and Enterprise Reporting, which aid businesses in the areas of financial reporting, planning/budgeting/forecasting, and consolidation. Starting in May 2010, the capabilities of these CPM programs will gradually be combined into one program, Microsoft Dynamics Management Reporter, as part of an integration process that will take place over the next four years.

Click here to read more.

Skoda Minotti College Planning Seminars

In the coming months, we will be hosting free college planning seminars (great for current high school freshman, sophomores or juniors) on a monthly basis. We invite you to join us at one of the events listed below. All events will be hosted at our offices. Click the link to register. 

• April 27
• May 25
• June 29
• July 27 

• Analyze your ability to qualify for college funding and to what extent by computing your expected family contribution.
• Develop "college aid planning" concepts that may lower your out-of-pocket costs by increasing your eligibility for funding.
• Assume responsibility for the completion of the complicated FAFSA form annually. And at no additional cost, complete such other forms as may be required by individual colleges.

Click here for more information on Skoda Minotti College Planning Services.

Working at a Downsized Company

OK. You did it!  After listening to the advice of your experts and looking at the balance in the checkbook, you downsized 25% of your personnel and cut management salaries by 10%. It wasn’t easy and, in fact, it was a terrible experience. You order a complete review of job descriptions and issue a hiring freeze. But how do you keep the employees operating at optimum efficiency with only 75% of the workforce?

Click here to read more.

Combining a Business Trip with a Vacation

With the warmer weather approaching, you may be looking to spend some time at the beach, on the golf course or just relaxing by the pool. If you can add a few days of vacation onto a business trip, so much the better. Besides saving money, you may qualify for some generous tax breaks.

Click here to read more.

New Case Allows Deduction for Business Education

No matter how old you are, you can still learn to do your job better. For example, you might take a refresher course to stay on top of the latest developments in your field. Or you may enroll in a curriculum that will start you toward a new career.

Click here to read more.

Six Estate-planning Steps for This Year

The scheduled one-year repeal of the federal estate tax in 2010, plus the related changes in the federal estate- and gift-tax system, have certainly clouded estate-planning matters this year. It is expected that Congress will eventually take some legislative action, but that does not mean you should stand by idly. It is important to have your estate plan reviewed to ensure it still meets your objectives and that it is positioned to accommodate future developments.

Here are six steps you may take to shore up your estate plan under the current conditions.

Aurum Capital Markets Summary

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of February as well as a recap of the significant events influencing the markets.

Skoda Minotti Blood Drive

We are pleased to announce that we will once again be supporting the American Red Cross by hosting a blood drive for our employees on April 26th at our Mayfield Village office.

Last year, our employees donated 69 pints of blood through these blood drives and we are aiming to top that number in 2010.

If you have any questions about any of these articles, post a comment below or contact us at 440-449-6800.  Or, if you would like to subscribe to this free, monthly e-newsletter, please send an email to information@skodaminotti.com.