Beware when liquidating following a section 336(e) transaction

Contingent consideration in a stock acquisition with a section 336(e) election may cause tax consequences when followed by a section 331 liquidation.

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Beware when liquidating following a section 336(e) transaction

TAX ALERT | February 27, 2023 | Authored by RSM US LLP

Executive summary: Contingent consideration/liability effect on section 336(e) elections

Transactions involving section 336(e) elections present the buyer with the opportunity to achieve a step-up in the tax basis in the underlying assets of a purchased corporation. Where a purchaser wants to operate the business in a pass-through structure, the corporation is often converted into an LLC or otherwise liquidated for tax purposes. The liquidation generally does not result in corporate, or shareholder gain under section 331 and 336. However, in transactions involving the issuance of contingent consideration or the assumption of contingent liabilities, unexpected corporate and shareholder gain could occur. This alert addresses potential tax pitfalls from a buyer’s perspective.

Contingent consideration and liabilities can result in unintended gain

Section 336(e) transactions followed by a section 331 liquidation

Similar to the section 338(h)(10) transactions, section 336(e) provides for asset sale/acquisition treatment for a qualifying stock transaction a qualified stock disposition1 (QSD). The election is available upon a QSD of an S corporation stock, a domestic corporation in a consolidated group, or an affiliated but non-consolidated domestic corporation.

In general,2 when a section 336(e) election is made a series of transactions are deemed to occur:

  1. The target corporation, (old target) is treated as selling its assets to an acquiring corporation (new target) and realizes gain or loss on the deemed sale and then old target liquidates; 
  2. New target is treated as acquiring all of its assets from old target and allocates the consideration paid (the adjusted grossed up basis) under the rules of section 338.3  

One of the benefits of a section 336(e) transaction to noncorporate taxpayers, is the ability to operate the target business in pass-through format post-transaction as there is no requirement to have a corporate acquirer. To get to pass-through treatment, the target corporation needs to convert into an LLC (taxed as either a partnership or disregarded entity), which represents a liquidation for tax purposes. Since the acquirer in this case is a noncorporate taxpayer, the liquidation does not fall under sections 332 and 337 but rather sections 331 and 336.

Liquidations that are covered under sections 331 and 336 are taxable liquidations where both ethe corporation and shareholder could recognize gain if the fair market value of the property exceeds the tax basis in the assets or stock of the target. A section 331 immediately after a transaction to which a section 336(e) election was made would generally not create any additional tax liability because the assets received a stepped-up basis in the section 336(e) transaction. However, taxpayers should look closely at the transaction consideration before assuming a liquidation will not generate gain. For example, contingent consideration, such as an earnout, is common when the buyer and seller are not able to agree upon the purchase price at closing, which results in purchase price being paid post-closing. Here in lies the potential trap for the unwary.

Contingent consideration in deemed asset sales

As a result, if the corporation liquidates prior to paying the contingent consideration, gain could result to both the corporation and shareholder.

Example of the pitfall

The following example is meant to illustrate a scenario where a buyer may have unanticipated taxable gain as a result of a section 336(e) election followed by a 331 liquidation.

Situation 1

Facts: An S corporation (Target) is acquired by a partnership (Acquirer) in an acquisition which qualifies as a QSD for $100x. The parties make a section 336(e) election; however, Acquirer ultimately wants to hold the assets out of the corporate solution, and thus causes Target to convert under local state law into an LLC that is disregarded for tax purposes. This conversion is treated as a taxable liquidation under section 331.

Analysis: In this scenario, a new target is deemed to have acquired all of the assets of old target and has fair market value basis in the assets, as such the liquidation under section 331 does not trigger any additional gain.

Situation 2

Facts: Same as above, except they the Acquirer and Target shareholder are not able to agree on the purchase price and so in addition to the $100x paid, Acquirer also provides contingent earnout of up to $50x to be paid to seller if certain financial objectives are met. Assume that for financial statement accounting purposes the earnout receives $25x in value and the assets are reported as $125x.

Analysis: Here, the fair market value of the assets acquired appears to equal $125x, but the tax basis at the time of the liquidation is only $100x. The section 331 liquidation triggers a $25x of gain and corporate tax liability at new target. Moreover, the shareholder may also have a short term again of approximately $25x short term gain at the Acquirer level. Once the contingent amount is actually paid out, the Acquirer would then arguably recognize a capital loss.

Assume further that the full $50x is actually paid out (as opposed to the $25x estimated value at closing), Acquirer would not receive an additional $25x in asset basis, rather Acquirer would reflect the $50x as a capital loss on the stock of new target.

Planning Considerations

The safest course of action to avoid this situation is to perform a pre-transaction F reorganization on the Target prior to the sale as follows:

  1. Target shareholders form a new corporation (Holding)
  2. Target shareholders contribute Target to Holding in exchange for all of Holding’s shares. 
  3. A qualified subchapter S subsidiary election is made, and or, Target is converted into a limited liability company disregarded from Holding.4

At this point the target is an LLC disregarded from holding and the acquisition of Target by Acquirer represents an asset acquisition for federal income tax purposes and Target is already in pass-through form and no section 331 liquidation is necessary, thus avoiding the potential for gain recognition.

In the case of a sale of a consolidated subsidiary, an alternative to an F reorganization would be for the Target to convert under state law into an LLC and in turn a disregarded entity. Thereafter the acquisition of Target by Acquirer represents an asset acquisition for federal income tax purposes and thus no section 331 liquidation is necessary.


1 See Treas. Reg. Sec. 1.336-1(b)(6).

2 Other than transactions falling under sections 355(d)(2) or 355(e)(2); See Treas. Reg. Sec. 1.336-1(b)(3).

3 Treas. Reg. Sec. 1.336-1(a)(1).

4 IRS, Rev. Rul. 2008-18, 2008-13 I.R.B. 674.

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This article was written by Nick Gruidl, Nate Meyers and originally appeared on 2023-02-27.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2023/Beware-when-liquidating-following-section-336-e-transaction.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

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Retirement plan changes for long-term, part-time employees

SECURE 2.0 changes the rules for how long-term, part-time employees are treated for purposes of 401(k) and 403(b) retirement plans.

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Retirement plan changes for long-term, part-time employees

ARTICLE | February 20, 2023 | Authored by RSM US LLP

The Internal Revenue Code (the Code) has historically allowed employers to exclude employees who never worked at least 1,000 hours in a 12-month period from an employer sponsored retirement plan. Because of this, part-time employees who never reach this threshold often miss out on an opportunity to set aside money for retirement. Such employees include individuals who have limited time to devote to work, such as parents, caregivers, and students. Additionally, some people have multiple part-time jobs, due to a need for flexibility. Based on data from the Bureau of Labor Statistics, there were close to 25.5 million people working part-time in 2021.

Congress has long been concerned about increasing retirement savings for individuals and included changes to the Code to benefit long-term, part-time (LTPT) employees with the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0). In short, effective in 2024, SECURE 1.0 requires that 401(k) plans allow employees with more than 500 hours of service in three consecutive 12-month periods to contribute elective deferrals to the plan.

The SECURE 2.0 Act of 2022 (SECURE 2.0), brought forth enhancements to Secure 1.0’s LTPT provisions, effective for plan years beginning after Dec. 31, 2024, which furthers the goal for more individuals to have retirement savings. The 401(k) plan requirement to allow employees to contribute elective deferrals was expanded to 403(b) plans and the period of service was reduced from three to two consecutive 12-month periods. SECURE 2.0 also added clarity to changes made by SECURE 1.0.

401(k) plan sponsors may believe the SECURE 2.0 provisions override SECURE 1.0 and that they do not need to act until 2025. This is not the case. Employers, plan sponsors, and third-party administrators need to understand how plan operations will be affected for plan years beginning in 2024 and what they must do now to be prepared for the changes. They also should be cognizant that the IRS will likely issue additional guidance on these provisions.

Summarized below is a discussion of how the SECURE 1.0 and 2.0 LTPT provisions apply to retirement plan operations. It should be noted that collectively bargained employees and non-resident aliens with no U.S. source income are excluded from the LTPT provisions.

401(k) plans

Plan eligibility

For plan years beginning in 2024, if an employee has three consecutive 12-month periods with more than 500 hours of service in each, the employee must be eligible to enter the plan. Periods beginning prior to Jan. 1, 2021, are not considered when determining eligibility; therefore, 2024 is the first possible year LTPT employees must be allowed to participate in a 401(k) plan for purposes of elective deferrals. An employee’s initial 12-month period ends on their first anniversary date of employment. Subsequent periods can continue to be based on anniversary year or can switch to the plan year. The LTPT employee rules apply to employees who are at least age 21.

Examples (assumes the employee is at least 21):

Oliver was hired in 2018 and has never been eligible to participate in the employer’s 401(k) plan, which operates on a calendar year. He works 750 hours in 2021, 2022 and 2023. He has completed three consecutive 12–month periods (plan year method) with more than 500 hours and can enter the plan on Jan. 1, 2024.

Felicity is hired June 13, 2021 and works 650 hours in her anniversary years ending June 12, 2022, 2023 and 2024. Her employer sponsors a calendar year 401(k) plan with entry dates of Jan. 1 and July 1. She has completed three consecutive 12-month periods with more than 500 hours on June 12, 2024; therefore, she can enter the plan on the next entry date, July 1, 2024.

For plan years beginning in 2025, the employee needs only two consecutive 12-month periods with more than 500 hours of

Examples (assumes the employee is at least 21):

Roy was hired in 2022. He worked 300 hours in 2022, and 650 hours in both the 2023 and 2024 plan years. He is eligible to enter the plan in 2025 on the next plan entry date.

John was hired in 2022 and worked 550 hours in both the 2022 and 2023 plan years. However, he only worked 300 hours in 2024. Is he eligible to enter the plan in 2025 on the next plan entry date? Yes, since he had satisfied the two-year requirement in 2022 and 2023, he would be eligible at the earliest possible time to enter the plan, which would be 2025.

Top heavy rules

Plans that are top heavy must satisfy minimum contribution and vesting requirements. An employer can elect to exclude the LTPT employees from these requirements.

A defined contribution plan is a top-heavy plan if the aggregate of the accounts of key employees exceeds 60 percent of the aggregate of the accounts of all employees under the plan.

In determining whether the plan is top heavy, it will not be considered top heavy merely because employer contributions are not made to LTPT employees.

403(b) Plans subject to ERISA

Plan eligibility

The first year a 403(b) plan must allow an LTPT employee to enter the plan is 2025. For plan years beginning in 2025, an employee must have two consecutive 12-month periods with more than 500 hours of service in each. Periods beginning before January 1, 2023, will not be taken into account when determining if the employee has satisfied the two consecutive 12 month periods requirement. Consistent with 401(k) plans, the employee must be at least age 21.

403(b) plans are subject to the universal availability rules and there are employee exclusions unique to the plans. For example, students enrolled in and working at a school can be excluded from participating in the school’s 403(b) plan. The LTPT provisions will likely result in some students being eligible for the plan. However, we expect additional guidance to be released on how these LTPT requirements will interact with the universal availability rules.

401(k) Plans and 403(b) Plans subject to ERISA

Employer contributions

Employers are not required to, but can, make match or nonelective contributions to the accounts of LTPT employees. This includes contributions under the safe harbor 401(k) plan provisions.

Nondiscrimination testing

An employer can elect to exclude LTPT employees from nondiscrimination testing related to elective deferrals (ADP), employer match (ACP) and nonelective contributions (section 401(a)(4)). Additionally, they can be excluded from coverage testing under section 410(b).

Vesting service

A LTPT employee is credited with a year of vesting service for each 12-month period the employee has at least 500 hours of service. For 401(k) plans, 12-month periods beginning prior to Jan. 1, 2021, are not counted. For 403(b) plans, periods beginning prior to Jan. 1, 2023, are not counted. If an employer chooses to make a non-safe harbor employer contribution for LTPT employees, the plan’s normal vesting schedule will apply.

Other operational considerations

There are many factors that come into play for proper administration of the LTPT provisions, including appropriate tracking of hire dates and hours worked in the employer’s HRIS or payroll system, transmission of the information to the plan’s third-party administrator and recordkeeper, and timely notification to LTPT employees of their eligibility for the plan. 401(k) plan sponsors should have already laid out a strategy for how to handle tracking of the appropriate data since periods beginning in 2021 count towards eligibility. Sponsors of 403(b) plans will now need to do the same.

Employers should evaluate their systems and the additional administrative burden involved with operating their plans under the LTPT provisions. Furthermore, sponsors should review their plan design and consider whether allowing all employees to enter the plan for purposes of deferral contributions immediately upon hire would be worthwhile. All employees could be treated the same, avoiding the need to carve out employees for different purposes.

Service requirements can continue to be applied for purposes of employer contributions. However, employers should consider whether they want LTPT employees to share in employer contributions and, if so, how to track hours for vesting purposes.

Conclusion

The LTPT provisions are only the tip of the iceberg when it comes to retirement plan changes brought about by SECURE 2.0. This is the perfect time for a holistic review of an employer’s retirement plan design and operations against the required changes and discretionary provisions of SECURE 2.0. In any such review, the employer should work closely with their retirement plan advisors as they need to consider if and how recordkeepers and third party administrators can accommodate their desires.

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Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Christy Fillingame, Catherine Davis, Chloe Webb and originally appeared on Feb 20, 2023.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/retirement-plan-changes-for-long-term-part-time-employees.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Generative AI: Disruptive or flawed innovation for real estate?

Generative AI has a wide range of applications that will revolutionize the real estate industry.

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Generative AI: Disruptive or flawed innovation for real estate?

REAL ECONOMY BLOG | February 17, 2023 | Authored by RSM US LLP

“The real estate investment industry is undergoing a rapid transformation due to advancements in technology. From customer engagement to asset management, digital tools and platforms are changing the way real estate investment companies operate. Here are five key trends shaping the future of the industry.

  • Automation of back-office operations: Real estate investment companies are adopting artificial intelligence and machine learning to automate manual tasks, such as contract generation, property valuations, and market analysis. This helps reduce the risk of errors and save time, allowing investment companies to focus on high-value tasks and better serve their clients.
  • Customer engagement: Investment companies are leveraging chatbots and virtual assistants to provide 24/7 customer support, answer frequently asked questions, and guide users through the investment process. By automating these tasks, investment companies can enhance the customer experience and increase customer satisfaction.
  • Use of data and analytics: Real estate investment companies are using big data and analytics to gain insights into market trends, property valuations, and investment opportunities. This allows them to make informed investment decisions, identify and target potential leads, and enhance their overall performance.
  • Mobile and cloud technologies: Mobile and cloud technologies are becoming increasingly important in the real estate investment industry. Investment companies are using mobile apps to manage their assets, monitor market trends, and communicate with clients. Cloud technologies are allowing investment companies to store and access data from anywhere, improving efficiency and collaboration.
  • Integration with proptech: Real estate investment companies are partnering with proptech firms to access innovative technologies, such as virtual reality, augmented reality, and blockchain. These technologies allow investment companies to provide a more immersive and secure investment experience for their clients.

In conclusion, the digital transformation of the real estate investment industry is ongoing, and investment companies must adapt to stay ahead of the curve. By embracing these trends, investment companies can enhance their operations, improve the investment experience for their clients, and remain competitive in a rapidly changing market.”

Source: ChatGPT

It’s hard to imagine the passage above is a direct output of innovative technology, ChatGPT. We were intrigued by what the chatbot driven by generative artificial intelligence could tell us about digital transformation in real estate, and it took only seconds for it to come back with the response.

While several of these AI-powered text generators exist, ChatGPT is perhaps the best known. The technology was launched in November 2022 by San Francisco-based OpenAI. ChatGPT builds on Generative Pre-trained Transformer (GPT) architecture that uses unsupervised machine learning to find patterns in a dataset without being given labeled examples or explicit instructions. The training process of generative AI involves powerful algorithms and advanced computer hardware, allowing the chatbot model to learn from vast amounts of data ingested from the internet, with the objective of generating informative communication.

Generative AI has a wide range of applications that will revolutionize the real estate industry. Already, AI-powered solutions are helping transform real estate organizations by:

  • Streamlining workflows: Real estate organizations analyze large amounts of data, such as property listings, contracts, and client information. Generative AI can help automate many of these manual processes and eliminate repetitive responsibilities, freeing up time for real estate professionals to focus on more important tasks. For example, AI can be used to quickly analyze property listings to identify potential matches for investment or tenancy, reducing the time necessary to execute the transaction.
  • Improving decision-making: Real estate organizations can leverage AI to make data-driven decisions. AI algorithms can be trained on large amounts of real estate data to identify patterns and trends that can be used to inform investment decisions. For example, AI can be used to identify geographies, asset classes, and capital market trends, to project real estate demand, allowing organizations to invest with strategic precision.
  • Enhancing customer experience: Generative AI can help real estate organizations provide a better experience for their clients. For example, AI-powered chatbots can be used to provide quick and personalized responses to client inquiries. Additionally, AI can be used to provide virtual tours, allowing clients to experience properties without the time, cost or inconvenience associated with travel.
  • Reducing risks: Real estate transactions often involve large sums of money, making it important to minimize risks. Generative AI can help real estate organizations identify potential risks early on, such as fraud or technology gaps. By using AI to analyze data and identify potential risks, real estate organizations can make informed decisions and reduce the likelihood of losses or breaches.

Limitations with demand

As usage of generative AI spreads globally, so does widespread criticism of its potentially serious flaws. The technology is trained to absorb and learn from multiple sources including unverified, unsourced and second-hand data, which creates a material risk of disinformation that may be incomplete, biased or wrong.  Additionally, Generative AI systems might not pick up on controversial or unethical nuances, and therefore could multiply the spread of misinformation and, in extreme cases, serve as potential weapons for deceit.

Regardless, the popularity of Generative AI continues to grow. ChatGPT is the fastest-growing consumer application to date, having reached over 100 million users in January 2023, according to Wikipedia. Intense demand for the technology has resulted in server bottlenecks that have affected user access during high-volume periods, which will hopefully be alleviated with the launch of subscription models.

Illustrating the speed of this trend, the below visual represents Google searches for “Generative AI” over the past 12 months, with numbers representing search interest relative to the highest point on the chart for the given time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.

Chart showing Google Trends 12-month analysis of "Generative AI"

Source: Google Trends; RSM US

Competitive market

Despite the present risks, technology giants are betting heavily on Generative AI. Microsoft deepened its relationship with OpenAI in January, with a multi-year investment valued at $10 billion that gave it a part-claim on OpenAI’s future profits in exchange for the computing power of Microsoft’s Azure cloud network. In addition, Microsoft is integrating the technology into its Bing search engine.

According to media reports, Google employees are intensively testing a chatbot called “Apprentice Bard”, and Google is preparing to use this “apprentice” to compete with ChatGPT. The Chinese search engine firm Baidu announced it would be launching a ChatGPT-style service called “Wenxin Yiyan” in Chinese or “ERNIE Bot” in English sometime in March.

Generative AI is rapidly becoming a reality. According to Bloomberg Business, the AI market is projected to reach $422.37 billion by 2028. Illustrated below, most large technology companies have already boosted capital spending on generative AI through the incorporation of large language models (LLM) into their cloud infrastructure.  LLMs are used in systems such as generative AI and machine learning.

Chart showing capital spending on generative AI.

Source: Bloomberg Intelligence

The takeaway

Generative AI further expands the AI landscape that includes predictive analytics, computer vision and machine learning. Swiftly moving toward the point of singularity, technology is transforming our reality as we know it, and while there is room for improvement and a need for oversight, we expect to see increased adoption across every sector of real estate as a key driver of the industry’s digital transformation.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Matt Riccio, Chris Wetmore and originally appeared on 2023-02-17.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/generative-ai-disruptive-or-flawed-innovation-for-real-estate/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Ten quick year-end reminders for GILTI

Don’t be guilty. Year-end planning and analysis is still required for GILTI due to the ever-changing tax law.

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Ten quick year-end reminders for GILTI

TAX ALERT | February 15, 2023 | Authored by RSM US LLP

Executive summary: GILTI in a nutshell

It has been more than five years since the Tax Cuts and Jobs Act of 2017 (TCJA) introduced the concept of global intangible low-taxed income (GILTI). Broadly speaking, the GILTI rules require a 10% U.S. shareholder of a controlled foreign corporation (CFC) to include in current income their pro rata share of the GILTI income of the CFC, beginning with 2018 tax years. While the rules are applicable to C corporations, individuals and trusts, the GILTI rules affect different taxpayers in various ways. For instance, only C corporations (or individuals (including a trust or estate) that make a section 962 election) are eligible for a section 250 deduction and foreign tax credit (FTC).

While GILTI itself may no longer be considered new to many taxpayers, what is new is the ever-changing tax law and analysis. As taxpayers begin to plan for the 2022 compliance season and beyond, it’s important to be cognizant of certain filing deadlines and understand which tax law changes could have an indirect impact on GILTI. Failure to plan ahead and apply the changing law could result in penalties, tax inefficiencies and lost opportunities. Here are ten important reminders for year-end planning.

Aggregate treatment for pass-through entities

On Jan. 25, 2022, Treasury and the IRS released final regulations (T.D. 9960) clarifying stock ownership under section 958. These regulations treat a domestic partnership (and S corporation) as an aggregate of its partners (shareholders) for purposes of sections 951 and 951A.

This “aggregate” treatment is a major shift from historical pre-TCJA “entity” treatment of subpart F inclusions. Pre-TCJA, partnerships (and S corporations) would compute subpart F at the partnership level and allocate the tax impact to its partners (shareholders). Post TCJA, partners (and shareholders) take into account their pro-rata share of subpart F components to compute their own tax liability. 

The final regulations apply to taxable years of foreign corporations beginning on or after Jan. 25, 2022, and to taxable years of U.S. persons in which or with which such taxable years of foreign corporations end. Taxpayers may apply these regulations to tax years beginning on or after Dec. 31, 2017, subject to certain requirements (e.g., consistency).

While aggregate treatment has applied to GILTI inclusions for taxable years beginning on or after Dec. 31, 2017 (and continues to apply), aggregate treatment for general subpart F inclusions will no longer be optional. For most taxpayers, these final regulations should not impact GILTI tested income. For GILTI purposes, tested income and tested loss are determined without regard to any gross income taken into account in determining the CFC’s subpart F income, and any gross income that is excluded from the CFC’s subpart F income under the section 954(b)(4) high-tax exception regardless of early adoption. 

Proposed changes for elections made on behalf of controlled foreign corporations

Also on Jan. 25, 2022, Treasury and the IRS released proposed regulations (REG-118250-20) regarding passive foreign investment companies (PFICs) and CFCs held by domestic partnerships and S corporations. Of importance, these proposed regulations contain guidance relating to the determination of a controlling domestic shareholder (CDS) of a foreign corporation. The CDS(s) of a CFC is defined as the U.S. shareholder(s) that, in the aggregate, own more than 50% of the total combined voting power of all classes of stock of the CFC entitled to vote and that undertake to act on the CFC’s behalf. The CDS is extremely important in a GILTI context because they are responsible for making (or not making) certain elections with respect to CFC(s) (i.e., the GILTI high-tax exclusion election (HTE)).

The final section 958 regulations discussed above do not apply aggregate treatment for purposes of determining a CFC’s CDS. The regulations clarify that partnerships (and S corporations), as opposed to their partners (or shareholders), would be considered a CDS, assuming the ownership requirement is met. However, Treasury and IRS state in the proposed PFIC regulations that they believe aggregate treatment should apply to domestic partnerships (and S corporations) for purposes of determining the CDS(s) of a CFC. The rationale behind the flip is that such actions should generally be taken by those persons whose tax liability is directly affected. In other words, partners (and shareholders) bear the tax liability and they should be responsible for the decision. This change in thought has been provided in the proposed PFIC regulations to give taxpayers an additional opportunity to comment. 

The proposed regulations generally apply to tax years beginning on or after the date the regulations become final.  

Taxpayers looking for additional information on the proposed PFIC regulations can view RSM’s previous tax alert (Proposed PFIC regulations revise reporting by US partnerships).

Section 174 research and experimental expenditures

As the 2022 tax year-end has come and gone, taxpayers closely monitoring Capitol Hill in hopes of a fix to the impending changes coming to section 174 will be devastatingly disappointed. The now in-force changes result from a delayed provision under TCJA, effective beginning with tax years beginning after Dec. 31, 2021 (i.e., 2022 calendar year taxpayers), which requires mandatory capitalization and amortization of costs incurred under section 174. 

Prior to Dec. 31, 2021, research and experimental (R&E) expenditures under section 174 (R&E expenditures) were by default deducted as incurred. As such, taxpayers following that treatment did not typically track and categorize R&E expenses based on the Code’s definition of such costs. Going forward, taxpayers will need to identify the R&E expenditures not only of their U.S. companies, but of their foreign subsidiaries as well, in order to comply with the capitalization requirement. Foreign R&E expenditures must be capitalized and recovered over 15 years, while domestic costs may be recovered over five years. A half year convention applies in year one.

Taxpayers will be faced with hardships associated with implementation (e.g., identifying R&E costs of foreign subsidiaries), and should consider that these changes could have unanticipated GILTI tax consequences. For instance, capitalization could drastically affect GILTI through increased tested income, a modified GILTI inclusion percentage, and/or altered ability to claim the HTE. 

The good news is that Rev. Proc. 2023-8 provides an automatic accounting method change for taxpayers to adopt these new capitalization and amortization rules for R&E expenditures under section 174 for tax years beginning after 2021.

Taxpayers looking for additional information on section 174 R&E can view RSM’s previous tax alerts (Looming required capitalization of section 174 expenditures and IRS issues method change procedures for sec. 174 R&E expenditures).

Section 163(j) interest

Similar to section 174, taxpayers will be disappointed to hear that there has been no fix implemented before year-end to the impending changes coming to section 163(j). Another delayed provision under TCJA, these changes apply to tax years beginning after Dec. 31, 2021 (i.e., 2022 calendar year taxpayers). 

Beginning Jan. 1, 2022, depreciation, amortization and depletion may no longer be added back to a company’s adjusted taxable income (ATI) calculation. ATI, which closely mimicked EBITDA (earnings before interest, taxes, depreciation and amortization), will now more closely resemble EBIT (earnings before interest and taxes). This update could significantly impact a taxpayer’s ability to deduct interest expense beginning after Dec. 31, 2021. The application of section 163(j) is relevant when calculating tested income for GILTI purposes and/or in determining whether a CFC group election should be made, and may also impact application of the HTE for GILTI purposes.  

Taxpayers looking for additional information on section 163(j) business interest expenses can view RSM’s previous tax alert (With no year-end tax package, businesses face unfavorable changes).

High-tax exception election and amended returns

An annual election is available under section 951A which allows eligible taxpayers to exclude certain high-taxed income of CFCs from their GILTI computation on an elective basis (i.e., the HTE). A CFC’s tested unit tested income is considered high-taxed when that income is subject to an effective tax rate (ETR) in the relevant foreign country greater than 90% of the U.S. corporate tax rate (i.e., 18.9%). In general, in order to be valid, the election must be made by the CDS, notification to non-CDS U.S. shareholders must be provided and the consistency requirement must be maintained.

The regulations generally allow taxpayers to make (or revoke) the GILTI HTE with an amended tax return to the extent the following conditions are met: 

  • All U.S. shareholders of the CFC(s) file amended federal income tax returns within 24 months of the unextended due date of the original federal income tax return of the CDS’s inclusion year with or within the CFC inclusion year,
  • The amended federal income tax returns of all U.S. shareholders must be filed within a single six-month period, and
  • Any tax due, as a result of such adjustments, must be paid within such six-month period.

Additional analysis is required when amending a tax return due to a foreign tax redetermination (i.e., a change in a taxpayer’s foreign tax liability) and how this impacts the validity of the GILTI HTE.

Calendar year-end pass-through entities have until March 15, 2023, and C corporations have until April 18, 2023, to amend their 2020 tax returns. In case-by-case scenarios, the IRS may issue an extension of time to file outside the normal 24-month window. On Nov. 25, 2022, the IRS released PLR 202247008 granting such an extension. 

Taxpayers looking for additional information on the GILTI HTE can view RSM’s previous tax alert (GILTI high tax kickout rules finalized).

New foreign tax credit guidance 

Over the course of this past year, Treasury and the IRS have released final 2022 regulations (T.D. 9959), a set of technical corrections (2022-15867 and 2022-15868) and proposed 2022 regulations (REG-112096-22) all aimed at addressing the creditability of foreign income taxes for purposes of the FTC. In general, these new rules revised the net gain requirement, ensuring that a foreign tax is only a creditable net income tax if the determination of the foreign tax base conforms in essential respects to the determination of taxable income under the Code. This effectively shifts the definition of a creditable tax from an income tax (i.e., a tax on income) to being a tax that is sufficiently similar to the Code. Under these new rules, a foreign tax will only satisfy the net gain requirement if the tax satisfies four sub requirements: realization, gross receipts, cost recovery (i.e., formerly the net income requirement), plus a new attribution requirement. 

The 2022 final regulations further stipulate that determining whether a foreign tax satisfies each component of the net gain requirement is generally based on the terms of the foreign tax law governing the computation of the tax base rather than empirical analysis. Also, the 2022 final regulations maintain the long-standing all-or-nothing rule. A foreign tax either is or is not a foreign income tax, in its entirety, for all persons subject to the foreign tax. 

The technical corrections to the 2022 final regulations closed a loophole with respect to the section 901(m) haircut. The technical corrections amend the GILTI HTE regulations to now refer to “eligible current year taxes” as opposed “current year taxes” when determining foreign income taxes paid or accrued with respect to a tentative tested income item. This seemingly small revision ensures that when computing the ETR for purposes of the GILTI HTE, only creditable foreign income taxes, not those for which an FTC is unavailable, are taken into consideration. Eligible current year taxes exclude taxes for which a credit is disallowed at the level of a CFC (e.g., under sections 245A(d) or 901(j), (k), (l), or (m). In other words, taxpayers must compute the ETR after applying the section 901(m) haircut to their foreign income tax.

In terms of GILTI, these changes could have a drastic impact on a taxpayer’s ability to claim the HTE and / or FTC. Under the new rules, historically creditable taxes may no longer be creditable for tax years beginning on or after Dec. 28, 2021 (i.e., 2022 calendar year taxpayers). Note that while certain foreign income taxes may no longer be creditable, non-creditable taxes are still deductible for tested income purposes.

Taxpayers looking for additional information on the 2022 final FTC regulations and 2022 proposed FTC regulations can view RSM’s previous tax alerts (Treasury releases technical corrections to final FTC regulations and Treasury releases much anticipated proposed FTC regulations).

Schedule K-2 / K-3 reporting

Domestic partnerships (and S corporations) are no longer required to complete Form 8992, U.S. Shareholder Calculation of GILTI, or Schedule A (Form 8992), Schedule of CFC Information to Compute GILTI. Instead, domestic partnerships (and S corporations) must complete Schedule K-2 (Form 1065), Partners’ Distributive Share Items – International, Part VI – Information on Partners’ Section 951(a)(1) and Section 951A Inclusions, and Schedule K-3 (Form 1065), Partner’s Share of Income, deductions, Credits, etc. – International, Part VI – Information on Partner’s Section 951(a)(1) and Section 951A Inclusions (or Schedule K-2 (Form 1120S), Part VI, and Schedule K-3 (Form 1120S), Part VI).

Note that eligible taxpayers looking to make a section 962 election will likely need additional information outside of Schedule K-3. The current schedule still does not include a line to report a taxpayer’s pro-rata share of tested foreign income taxes. 

Taxpayers looking for additional information on Schedule K-2 / K-3 reporting and section 962 elections can view RSM’s previous tax alerts (Schedules K-2 and K-3 draft instructions for tax year 2022 and Cushioning the double-tax blow: The section 962 election).

Section 250 deduction limitation

The TCJA and the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) significantly reformed the use of net operating losses (NOLs) for corporate taxpayers. In general, NOLs generated in tax years beginning in 2018 and later (i.e., post-TCJA) can no longer offset 100% of taxable income and can reduce no more than 80% of modified taxable income. With respect to these NOLs, taxpayers no longer have the option for NOL carryback, but will be able to carryforward NOLs indefinitely. The CARES Act did provide some relief to the 2018, 2019 and 2020 tax years. However, this relief is not available for tax years beginning in 2021. It’s important to note that pre-2018 (i.e., pre-TCJA) NOL carryforwards can still offset 100% of taxable income for tax years beginning in 2021 and later.

Corporate taxpayers (or those that make a valid section 962 election) have the ability to claim a section 250 deduction against their GILTI inclusion. The deduction is typically equal to 50% of the GILTI inclusion and associated section 78 gross-up, subject to a taxable income limitation which includes complex interplay with NOLs. At a high level, it is important to remember that the section 250 deduction is computed after the application of NOLs. For instance, to the extent a taxpayer has a pre-2018 (i.e., pre-TCJA) NOL carryforward that brings 2021 taxable income, including GILTI, down to zero, there is no ability to utilize a section 250 deduction. 

When dealing with post-2017 (i.e., post-TCJA) NOLs that do not bring taxable income, including GILTI, down to zero, the section 250 deduction is limited to the lesser of 50% of the GILTI inclusion and associated section 78 gross-up or 50% of modified taxable income. Given the expiration of the CARES Act, taxpayers with NOL carryforwards may begin claiming some section 250 deduction against residual taxable income after NOL. 

The section 250 deduction is set to reduce to 37.5% starting in 2026. This will result in an ETR of 13.125% for GILTI inclusions.

Election to close the controlled foreign corporation’s taxable year

When entering into mergers and acquisitions (M&A) like transactions, taxpayers should be cognizant of the fairly recent final regulations (T.D. 9909) under sections 245A and 954(c)(6). Of importance, in terms of GILTI, the regulations purport to close certain loopholes that, according to the IRS, use the section 245A dividends received deduction (DRD) contrary to legislative intent. 

Particularly, the IRS is concerned with planning based on the interaction of section 951(a)(2)(B). This code section effectively reduces a U.S. shareholder’s pro rata share of CFC subpart F income or GILTI tested income for dividends a different taxpayer receives in respect of the same CFC stock, and the section 245A DRD. This situation arises when a CFC issues a dividend before the date of sale. In this transaction, the seller receives the dividend while the buyer receives the subpart F / tested income reduction with no corresponding income pick-up. To restrict such planning, the regulations treat dividends (or deemed dividends) that occur in the same tax year as an “extraordinary reduction” ineligible for the DRD to the extent of the U.S. shareholder’s pre-reduction, pro rata share of the CFC’s subpart F income or GILTI tested income. An extraordinary reduction occurs when:

  • A controlling section 245A shareholder (generally, a U.S. corporate shareholder that owns more than 50% (by vote or value) of the stock of the CFC) transfers more than 10% of its stock in a CFC, or 
  • There is a greater than 10% dilution in the controlling section 245A shareholder’s overall ownership of the CFC.

Absent an exception, an extraordinary reduction can lead to some harsh results. In other words, the controlling section 245A shareholder (e.g., the seller) must include the dividend in income without the availability of an offsetting section 245A deduction.

Once such exception for preserving the section 245A DRD is the “elective exception to close CFC’s taxable year” (the election). The controlling section 245A shareholder affirmatively elects to close the tax year of the CFC at the time of the sale and recognize its pro rata share of subpart F income or GILTI for the short year. In general, for the election to be considered valid, the following requirements must be met:

  • Before the filing of the election, each controlling section 245A shareholder must enter into a written, binding agreement with each U.S. tax resident that on the end of the date on which the extraordinary reduction occurs owns directly or indirectly, stock of the CFC and is a U.S. shareholder with respect to the CFC, and
  • The written, binding agreement must state that each controlling section 245A shareholder will elect to close the taxable year of the CFC.

The regulations make clear that this is a bilateral election. The controlling section 245A shareholder that has the extraordinary reduction amount is responsible for filing the election with their tax return. Special rules apply if the extraordinary reduction amount occurs by reason of multiple transactions and / or when consolidated groups/partnerships are involved. 

The election to close the CFC’s tax year will be treated as a change in accounting period.

Taxpayers looking for additional information on the final section 245A regulations can view RSM’s previous tax alert (Final regulations close section 245A loopholes).

Accounting method review

For purposes of GILTI, a CFC’s tested income generally is calculated using the same tax principles that apply to domestic corporations, including, for example, revenue recognition standards under section 451, rules regarding the timing of deductions under sections 461, capitalization rules under section 263(a), and the requirement to account for inventories. Further, once a method of accounting is established with respect to calculating the CFC’s tested income, such method must continue to be used until the CFC obtains consent to change the method.

U.S. shareholders need to assess each tax year whether they have GILTI inclusions. A U.S. shareholder may be able to reduce their GILTI inclusion through an accounting method review that optimizes the CFC’s methods of accounting. Alternatively, if an improper method of accounting has been established (e.g., merely following book for immaterial items), proactively requesting an accounting method change could provide the U.S. shareholder with audit protection for the prior-year improper treatment.

An accounting method review for a CFC involves the identification of one or more specific technical accounting areas where the U.S. shareholder may be applying an improper or unfavorable method of accounting to determine the CFC’s tested income, the related research into permissible methods, and the selection/implementation of the ideal accounting method given the facts, circumstances and tax strategy of the CFC’s U.S. shareholders.

Bonus

ASC 740 considerations

For most taxpayers, GILTI represents a permanent adjustment item and is therefore a key rate driver for ASC 740 purposes. It will be critical to consider all of the above for 2022 income tax provisions. In particular, increased CFC tested income from R&E capitalization and interest expense limitations may drastically increase GILTI inclusions over prior periods, especially if these items drive ETRs downward enough to put the HTE out of reach.

If legislative relief does not come until 2023, 2022 income tax provisions will still need to reflect the enacted law for the period. Thus, tax provision and ETR impacts of R&E capitalization and section 163(j) changes may be felt through GILTI for 2022 even if Congress acts on these items in 2023.

Breaking guidance

Single entity treatment

On Dec. 9, 2022, the IRS and Treasury released proposed regulations (REG-113839-22) treating consolidated group (the group) members as a single entity for purposes of determining income inclusions from CFCs under the subpart F and GILTI regimes. The proposed regulations are aimed at combating a narrow fact pattern, which involves distributions of previously taxed earnings and profits (PTEP) coupled with a CFC re-organization (i.e., changing the location of the ownership of stock of CFC) within the group. In such scenarios, the group’s aggregate subpart F and GILTI inclusions could be significantly reduced via the application of section 951(a)(2)(B). The proposed regulations would preclude taxpayers from taking advantage of this narrow exception.

If regulations are finalized by April 15, 2023, the rules would be applicable for the 2022 tax year for calendar-year taxpayers.

New Pillar Two global minimum tax guidance

On Feb. 2, 2023, the Organisation for Economic Co-operation and Development (OECD) released highly anticipated guidance under the new global minimum taxation framework. The new guidance addresses many key issues and, of special importance for U.S. taxpayers, includes an allocation formula for GILTI.

The Pillar Two initiative, referred to as Global Anti-Base Erosion (GloBE), aims to impose a global minimum corporate tax of 15% on adjusted net income on large international businesses (i.e., companies with consolidated revenues above 750 million euros or equivalent) regardless of the location of the business’ headquarters or jurisdictions in which the business operates. In essence, the GloBE rules will “top up” the tax burden on a jurisdiction-by-jurisdiction basis to ensure that each jurisdiction is at a 15% tax rate. 

There are a few major differences between GILTI and the new GloBE rules, including:

GILTI

GloBE

Threshold

No minimum revenue

Above 750 million Euros (or equivalent)

Calculation

Worldwide

Jurisdiction

Tax rate

10.5%*
coupled w/ section 250 deduction

15%

As a result, this left many taxpayers wondering how the GILTI regime would coexist with the new GloBE rules. This uncertainty has been calmed through the new administrative guidance. All countries adopting the GloBE rules will treat the GILTI regime as a “blended controlled foreign corporation tax regime.” The guidance provides for a mechanical approach on allocating the worldwide GILTI tax to individual jurisdictions when calculating the ETR under the GloBE rules.

These rules will be reevaluated at the end of 2025 to align with the scheduled GILTI tax rate increase.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Adam Chesman, Jennifer Brunell, Mandy Kompanowski and originally appeared on 2023-02-15.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2023/ten-quick-year-end-reminders-GILTI.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Nonprofits after the Great Resignation: Overcoming the workforce shortage

Nonprofits need to overcome the workforce shortage. Organizations must innovate because the labor market will remain tight for the foreseeable future.

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Nonprofits after the Great Resignation: Overcoming the workforce shortage

ARTICLE | February 13, 2023 | Authored by RSM US LLP

Nonprofit leaders are accustomed to doing more with less. They thrive despite limited funding, staffing, supplies and reimbursement rates. Over the past few years, however, nonprofits have had to do more with less of their most critical asset: employees.

The Great Resignation was more than a pandemic-era problem. It was part of a long-term trend in employment rates driven by several factors—although the pandemic and its economic implications certainly intensified it. Nonprofits need to accept that and prepare for this employment struggle to be the new normal—not a short-term blip.

The pandemic-era employment drop and recovery

In the first three months of the COVID-19 pandemic, “nonprofits lost a conservatively estimated 1.64 million … jobs, reducing the nonprofit workforce by 13.2% as of May 2020.”[1] In fact, it wasn’t until October 2022 that the number of jobs in the nonprofit sector rebounded to the baseline measurement in 2017 (the most recent nonprofit-specific count from the Bureau of Labor Statistics).[2] The sector’s employment has continued a positive trajectory month over month, much like the American economy.

Despite staff shortages, however, the nonprofits’ work never eased up. So how did nonprofits continue serving their members and constituents? They had to get creative and work smarter.

tl-nt-all-nfp-0223-nonprofits-after-the-great-resignation-article-graphs

Looking further back

As catastrophic as the pandemic was—in the early months especially—a look further back clarifies an important trend in American employment. Since unemployment peaked around 10% during the Great Recession of the late 2000s, it has been in a steady decline toward the 3.5% rate at the end of 2022—well below the assumed natural unemployment rate (4.4%).[3] For the two years leading up to the pandemic, and then again starting in 2022, there simply were not enough workers to fill job openings. This worker shortage is noticeably true in the nonprofit sector. As of the end of 2021 (the most recent data currently available), three-quarters of nonprofits indicated that they had job vacancy rates of 10% or more.[4] Factors in American demographics, such as the Baby Boomer generation entering retirement age and the decrease in immigration rates, indicate that this trend of a tight labor market is unlikely to reverse anytime soon.

Getting creative with staffing models

Many nonprofit employees don’t have easily definable job descriptions. And as work boundaries fade, burnout and turnover can increase.

Therefore, many nonprofits have looked outside the traditional workforce for support, engaging with outsourcing firms and independent contractors. Outsourcing the nonprofit’s administrative operations has the double benefit of leveraging efficiencies and the provider’s expertise along with alleviating staff members of the burdens of critical functions like finance, human resources and information technology.

Nonprofits have long been adept at hiring consultants who are experts and leaders in their field, but what about the vast number of individuals active in the gig economy who have talents and skill sets that meet other niche needs? Independent contractors can be a useful, timely supplement to existing staff—not only as subject matter experts but in any number of mundane or routine operations. Examples for nonprofits include staffing for events, graphic and web design, and even monitoring and evaluation techniques. While nonprofit staffing is at critically short levels, outsourcing firms and the gig economy of independent contractors have never been more robust.

Working smarter with automation

In Economics 101, we learned that productivity is a function of labor (human resources) and capital (technological resources). As one decreases, the other will need to increase to maintain a consistent output level. The Great Resignation has shown this principle to be especially pertinent, with modern technological capabilities rising to the challenge of limited human resources. Nonprofit leaders may balk at terms like “artificial intelligence” and “machine learning” (though these tools are more accessible than ever). But effectively leveraging standard, modern technology can drastically reduce the human hours required for almost any task.

One area in which nonprofits commonly have an issue is financial data. Organizations may have different departments looking at the same donor or member revenue in multiple software platforms. Nonprofits can reduce the touch points and manual human engagement by half or more by using techniques like data warehousing, business intelligence tools and system integration.

The other area for significant efficiency opportunities is data monitoring and evaluation. By tracking internal and external data points and responses to activities, nonprofits can easily spot trends and analyze the effectiveness of programs, communications and campaigns to help focus resources on the most successful strategies.

The Great Resignation or the new normal?

Nonprofits need to adapt to current staffing levels with the mindset that this is the new normal. Unemployment is still historically low, and older workers are retiring in massive numbers. Rather than riding out the Great Resignation, nonprofits need to take action now to leverage nontraditional staffing models and optimize technology for their organizations. There are modern alternatives to “doing more with less,” and proactive nonprofit leaders will readily adapt to these strategies.


Nonprofit employment during the COVID-19 Crisis, Center for Civil Society Studies Archive
Nonprofit Employment Estimated to Have Recovered from COVID Pandemic-Related Losses as of December 2022, George Mason University:
3 U.S. Federal Reserve
National Council of Nonprofits, The Scope and Impact of Nonprofit Workforce Shortages

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Matt Haggerty and originally appeared on 2023-02-13.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/nonprofit/nonprofits-after-the-great-resignation.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Business ownership: Startup challenges and opportunities

Starting a business is exhilarating and daunting. KDP advises business owners in all phases of the business lifecycle.

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Business ownership: Startup challenges and opportunities

ARTICLE | February 08, 2023 | Authored by RSM US LLP

 

Startup challenges and opportunities

You’re refining your idea and modeling your business. As you invest in your product, you’re probably losing sleep over cash considerations. How much do you need? What’s your burn rate? Which type of financing will work best? While you’re elbow-deep in those issues, be sure you’re also asking yourself these critical questions.

Questions and answers:

Q: Is my business strategy rock-solid?

Be sure you have a deep understanding of your market and have specific strategies to address the critical issues of what your competition looks like, how you’ll define and differentiate yourself in the market, and what your specific plans are to scale. Make sure you have all your t’s crossed and your i’s dotted but don’t delay launch unnecessarily to chase perfection.

Q: Do I have all essential skill sets covered?

As an entrepreneur, it’s impossible to be good at everything. Early on, be brutally honest with yourself in determining the internal functions with which you need help. Acknowledging where you have skills gaps goes a long way toward building a solid company foundation from the beginning.

Q: What tax structure or entity type works best?

It’s never too early to think about your company’s value at exit because you will begin creating this at inception. To that end, think through your entity type options and what those will look like at exit: family transition, franchise, or an outright third-party sale. After all, starting a company with the intent of selling within 10 years looks very different from starting one that you, and possibly your family, will own and run for decades. Thinking about this early on can help prevent wrong turns along the way.

Best practices for owners of growth stage businesses

People, process, and technology

Arrow hitting bullseye target

People

Time is critical at this stage. Can you afford to spend your time managing people versus getting your product ready?

Best practice

Outsourcing can help you focus on the product and market while others ensure the business is in compliance and ready for your next move.

Arrow hitting bullseye target

Process

Most startups will need additional cash before they get to market. The faster you can procure it, the steadier your forward momentum will be.

Best practice

Understand your available options and build relationships with investors and bankers. By projecting cash uses, you can more clearly see when you will reach that minimal viable product point to start bringing money in the door.

Arrow hitting bullseye target

Technology

Many founders at this stage believe technology is too expensive.

Best practice

Take the time to make a minimal investment at startup so you can scale your tech capabilities as your business moves forward.

Tax Tip

Protect your personal wealth. For business owners who have already accumulated significant wealth, consider starting your new business in a trust for your heirs’ benefit.
This will allow the value to grow outside of your estate and protect the wealth that you have already generated from what is usually a riskier investment.

Look for research and development credits. Research can often be a large component of startup. Certain R&D expenditures may be eligible for a tax credit. While the credit is often related to income generation, there are exceptions and elections that can provide a benefit to organizations that are not yet profitable.

How do entrepreneurs address the various lifecycle stages of business ownership?

Owning a business takes a certain confidence and grit. All owners are different, but all face similar challenges. Our business ownership lifecycle ebook shares insights gleaned from helping business owners face these challenges head on.


Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2023-02-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/business-ownership-startup-challenges-and-opportunities.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Other Articles in This Series

Business Launch

BusinessGrowth

Mature Business

Business Transition

 

 

Business ownership: A focus on growth

The business startup lifecycle: Answers to common questions business owners ask in the growth stage.

< back to insights gallery

Business ownership: A focus on growth

ARTICLE | February 08, 2023 | Authored by RSM US LLP

 

A focus on growth

This is probably the most thrilling and daunting stage you’ve encountered yet. You’re running on all cylinders now, investing on fronts like the sales process, manufacturing and production, and scalability. The business has reached a point where it cannot operate without structure, process, and expertise. Below, find answers to common questions business owners ask in the growth stage.

Questions and answers:

Q: What is my growth strategy?

Most organizations rely on a mix of organic growth and growth by acquisition. It’s important to formulate and evaluate a strategy and stick with it. Don’t chase value for value’s sake. If organic growth is your route, an investment in data analysis may pay off in the long run. If acquiring, realize that each acquisition will require due diligence and integration. Rapid expansion requires analysis to ensure that it is a profitable expansion. Always be open to where you might make changes to capture value.

Q: Do I have an airtight leadership strategy and succession plan?

No business owner can be an expert at everything, and, at this point in your company trajectory, tap specific individuals to take on leadership roles across the enterprise that dovetail with their skills and passions to ensure a solid management structure. Also, be open to bringing in outside advisors to evaluate your team’s ability to take the organization to the next level if you were gone.

Value is based on an organization’s ability to create additional profits after key leaders exit, which is why succession and contingency planning are important.

Q: Is now the time to consider outsourcing key department responsibilities?

While you may have had success up to this point tapping in-house talent to cover basic functions, you might now benefit, for example, from a more sophisticated finance and accounting skill set. Such a team can run complicated projections and ROI analysis for a possible new market penetration, produce detailed budgets and analyze forward-looking business intelligence. Consider outsourcing to derive better strategic value from specific, important departmental functions.

Q: Do I understand the changing regulatory footprint?

Each new customer can create new regulatory or compliance exposure. As your company grows these changes can be rapid, and if left unchecked can lead to pain and financial loss. Make sure that your growth plan includes evaluation of new markets so you understand your exposure, the true profitability of these transactions, and are ahead of regulatory requirements. Planning will help you avoid unpleasant surprises.

Q: Is my entity type still optimal?

Although you began thinking about what company entity type works best for your business at startup, and likely cemented your type during launch, entity becomes critical during the growth phase when many companies see their first profit. That coupled with the need for investment dollars and increased regulatory complexity may necessitate a shift in structure priorities. And it will need to be revisited again, since goals and laws continue to change. Entity type is one of those evergreen issues that should always be dancing at the edge of your consciousness.

Best practices for owners of growth stage businesses

People, process, and technology

Arrow hitting bullseye target

People

What’s important:

  • You can’t do it all yourself anymore.
  • Don’t get over your skis.

Focus is a “nice to have” at launch. In growth mode, it is a necessity. Companies will often sell at some point during growth mode to capture the value for their owners. Value is created in many ways, but owners that are too involved in all aspects of the business often decrease the value as the enterprise can’t operate without them.

Value is created in many ways, but owners that are too involved in all aspects of the business often decrease the value as the enterprise can’t operate without them.

Best practice

Understand what you are good at and if you are the right person to lead the organization into this next phase. Also, work to surround yourself with the right people to compliment your weaknesses. It usually requires outside advice to assess this honestly:

  • Understanding your weaknesses and the most important roles you should take today and tomorrow.
  • How to compensate those individuals tapped to help the organization reach its goals. What compensation is right for these people, and what sort of incentives are being offered in the market?
Arrow hitting bullseye target

Process

Growth mode is going to require the organization to hit on all cylinders and, often, decentralize decision-making.

In some situations, you may find out at the last minute—or when you file your taxes—that a new customer adds another state to your regulatory footprint, adding unexpected costs that make that customer unprofitable. The data you started collecting during the launch phase can help you build models to understand trends in customer buying behaviors and forecast profitability more reliably.

Best practice

Decentralization will require communication and teamwork to ensure the correct decisions are made and that nothing is missed. A common issue in fast-growing companies is understanding the impact of a new customer on the organization. Without collaboration among sales, operations and finance, you won’t fully understand the impact of this new customer and whether the sale will be profitable.

Arrow hitting bullseye target

Technology

Small businesses can scale faster and compete with bigger players in the market with the right technology solutions.

Growing businesses are especially vulnerable to cyberattacks as criminals seek to exploit perceived vulnerabilities. A cyberattack is not only disruptive, but it can also invite lawsuits and tarnish the brand. At its worst, it can even bankrupt a company.

Many growing businesses do not have the internal resources to fortify their defenses—or cannot afford them. Outsourcing cybersecurity responsibilities is often a viable and sound strategy.

Best practice

Now’s the time to invest in enterprise resource planning (ERP), customer relationship management (CRM), business intelligence, data analytics and other critical technologies that provide visibility into operations and customers and help forecast and act on data insights. Determining a cloud strategy at this time can help optimize your technology investments. Advisors can connect you with the right professionals—in finance, technology or human resources—to fill in gaps by outsourcing where it makes sense.

Tax Tip

Focus on these important details

Pay attention to state tax liabilities:Things are happening quickly. Paying attention to new state tax liabilities can be key to controlling your regulatory and tax footprint.

Increase ROI of your investment: If you’re planning to grow inorganically, thinking strategically can help to increase the ROI from your investment. Structure, placement and existing risks all enter into these decisions.

How do entrepreneurs address the various lifecycle stages of business ownership?

Owning a business takes a certain confidence and grit. All owners are different, but all face similar challenges. Our business ownership lifecycle ebook shares insights gleaned from helping business owners face these challenges head on.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2023-02-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/business-ownership-a-focus-on-growth.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Other Articles in This Series

StartupChallenges

Business Launch

Mature Business

Business Transition

 

 

Business ownership: The dynamics of a mature business

Mature businesses need to prepare for what lies ahead. RSM advises business owners in all phases of the business lifecycle.

< back to insights gallery

Business ownership: The dynamics of a mature business

ARTICLE | February 08, 2023 | Authored by RSM US LLP

The dynamics of a mature business

The relative stability of the maturity phase may be a welcome development. But it can be accompanied by declining sales and thinner profit margins. The urgent tasks for your business are to differentiate itself and innovate with an eye toward restarting the growth engine.

Questions and answers:

Q: How will I sustain my business and avoid a downward spiral?

Most successful mature companies determine what they are truly good at and strive to better differentiate themselves in the market while not losing sight of costs and risk. Your path will often depend upon your product and the strengths of the enterprise.

Q: How can technology help?

Technology solutions (e.g., BI and data analytics, automation, AI, CRM) help with cost savings and margin focus. They can also help your company’s transformation journey. Better customer understanding allows you to focus your efforts and capitalize on what customers value.

Q: Do I have a detailed exit strategy?

You’ve grown something substantial and continue to lead the organization. Your focus will be different than with a purely growth-focused company, and your succession plan with specific grooming and transition protocols will be very important at this company stage.

Best practices for owners of growth stage businesses

People, process, and technology

Arrow hitting bullseye target

People

In maturity, innovation can be the difference between a struggling company and a company that thrives.

Best practice

Engaging the entire team in an idea can help drive innovation. If this is a big cultural change for your organization, then it might make sense to engage with an advisor who is accustomed to making these changes on a grand scale. After all, change is hard.

Arrow hitting bullseye target

Process

Growth and margins are no longer able to mask the consequences of bad processes. You are likely relying upon many others to accomplish a standard goal.

Best practice

To create standard outcomes, establish uniformity to production of products, services and internal functions.

Arrow hitting bullseye target

Technology

When trying to innovate and keep margins up in a more commodity focused business, data and technology can be the keys to success.

Best practice

Have systems in place to understand waste and concentrate mitigation efforts, which can lead to huge gains. Also, understanding customer buying habits allows you to know more quickly if changes are effective or if you need to keep tweaking.

Tax Tip

Heed the tax implications of strategy shifts

Strategic shifts in the business often lead to changes in tax structure and planning. Talk with your tax advisor about new opportunities that may exist based upon the strategic choices you are making.

How do entrepreneurs address the various lifecycle stages of business ownership?

Owning a business takes a certain confidence and grit. All owners are different, but all face similar challenges. Our business ownership lifecycle ebook shares insights gleaned from helping business owners face these challenges head on.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2023-02-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/business-ownership-the-dynamics-of-a-mature-business.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Other Articles in This Series

StartupChallenges

Business Launch

BusinessGrowth

Business Transition

 

Business ownership: Business transition

Preparing for the sale or transition of a business. RSM advises business owners in all phases of the business lifecycle.

< back to insights gallery

Business ownership: Business transition

ARTICLE | February 08, 2023 | Authored by RSM US LLP

Business transition

With the business either proving successful or buoyed by promise, owners can home in on how their professional and personal objectives align, while ensuring the business proceeds according to their wishes.

An exit can take many forms, whether it’s a strategic buyer, employee purchase, a sale to a private equity firm or a transfer to a family member. Just as importantly, a business transition is a nonsequential step that can happen at any point. That simply underscores the importance of planning.

Questions and answers:

Q: Have I started planning far enough in advance of the sale or transition?

Effective planning to maximize value while decreasing tax cost and ensuring your legacy takes strategy and time to execute. The most effective planning can take at least three years in advance of exiting a company. Although tax is usually the largest transaction cost in an exit scenario, this is also a great opportunity to use estate and charitable planning techniques to ensure your legacy aligns with your wishes. The topics you consider can include investments, the relevance of a family office model for your situation, a private foundation, how to support education or environmental causes or the arts, and the best mechanism for transfer of funds, such as grants and gifts.

Q: What happens in the final chapters of my business?

This is the last chance to ensure that your tax structure aligns with your personal and professional goals, whether you’ve decided on a successor strategy (either next-generation or management hand-over) or an outright third-party sale. Each brings a different set of questions. Also, a private-equity-backed exit looks very different from a private company exit.

Q: Am I doing everything necessary to be sure the company value holds steady?

Many business owners don’t realize that ignoring late-stage risks can put their company value in peril at the eleventh hour. Be sure you’re paying close attention to risks like cybersecurity, underutilized or inefficient ERP and CRM systems, maintaining your strategic market advantage and having capable succession leadership. Never coast, so that your company finishes as strongly as it began, and you maximize value all the way through to the time of sale or transition. Q: Have I considered my estate and legacy plans? With personal wealth comes tremendous responsibility. Your estate planning and legacy strategy should encompass many things: legacy (both personal and corporate), philanthropy, tax implications, where to live, what and where retirement looks like for you and more.

Q: What is the value of using an advisor?

Every business owner, regardless how mature the company is, will sometimes benefit from advice on complex issues. External advisors have a breadth and depth of knowledge and experience they can bring to your specific professional and personal situation. They provide an impartial, big-picture perspective. Their involvement can be fluid and scale as your business evolves. By forging a relationship with them early in your company’s life, they can become a valued partner whom you trust and consider a true business asset.

Best practices for owners of growth stage businesses

People, process, and technology

Arrow hitting bullseye target

People

As your professional and personal goals align, the people component has two aspects: employees and family.

Best practice

From an employee standpoint, keep in mind that transaction value is related to your company’s ability to continue without you. Key employees are important, and planning for them to stay once you no longer own the company can be equally important. This could be carve-outs in the purchase agreement or maybe a specialized executive compensation arrangement. From a family perspective, this is an ideal time to make sure that any legacy planning is taken care of, and that the family is ready for life beyond your ownership of the business.

Arrow hitting bullseye target

Process

Value in your business will also be ascribed to whether your ability to make money is in an adopted well-defined process, including the sales process.

Best practice

Being prepared will accelerate closing and get rid of the biggest enemy—transaction time. Ensure that processes are well established and documented throughout the business.

Arrow hitting bullseye target

Technology

Old or outdated technology can also provide for a price concession in the final transaction.

Best practice

Investing in technology as early as possible will help you establish processes and controls that attract potential suitors.

Tax Tip

Start planning your business transition early

In a transition or exit, one of the largest expenses is often tax. Much planning can be done to minimize this expenditure, but it will often take time to implement. The best scenario is to start planning for an exit 36 months before the event to capture tax planning ideas that can help increase your after-tax cash flow.

How do entrepreneurs address the various lifecycle stages of business ownership?

Owning a business takes a certain confidence and grit. All owners are different, but all face similar challenges. Our business ownership lifecycle ebook shares insights gleaned from helping business owners face these challenges head on.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2023-02-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/business-ownership-business-transition.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Business ownership: Launch with confidence

Discover the opportunities and challenges as you get ready to take your business to the marketplace. RSM advises business owners in all phases of the business lifecycle.

< back to insights gallery

Business ownership: Launch with confidence

ARTICLE | February 08, 2023 | Authored by RSM US LLP

 

Launch with confidence

You’re ready to get to market and start building customer relationships. As your business debuts, your challenges will likely include funding, talent, money management and market share growth. Your need for cash may outpace your access to it. Being undercapitalized can mean scaling back your business plans and adjusting your strategy.

Questions and answers:

Q: What are my financing options?

Based on your business model, there are several financing options and cash sources available. Do your due diligence to determine which is best: mezzanine financing, bank financing, convertible debt, straight equity. When tackling financing there are myriad issues involved: corporate finance, tax, accounting, and legal. No one has all the answers, so your team of advisors is critically important here.

Q: How is my leadership role evolving?

Remember that a founding entrepreneur can’t do it all. By understanding your blind spots and putting your ego aside, you will enable yourself to hire as needed to build a capable team.

Q: Have I revisited my tax structure?

As your strategy or ownership changes so may your tax structure. And as your company grows your regulatory footprint will change significantly. Expansion into multiple state (and even internationally) makes taxation much more complicated. Entity type has ramifications for cash flow, regulatory burden, and eventual exit from the business, so it should be revisited often as the business grows and strategies evolve.

Best practices for owners of growth stage businesses

People, process, and technology

Arrow hitting bullseye target

People

As the business owner, you need to be able to focus on what you are good at and start building a team around you to grow the business. This need will only become more pressing as you grow.

Best practice

Outsourcing solutions may provide you the ability to afford more expertise than you could on a full-time basis. For example, many companies at this point cannot afford a full-time tax professional on staff. By outsourcing these services, you can make sure that you aren’t making decisions with surprising consequences.

Arrow hitting bullseye target

Process

By planning for various scenarios and the actions you would take accordingly, the organization can sharpen its focus on short-, medium- and long-term goals.

Best practice

Develop a strategic planning framework. In addition to the benefits of formalizing objectives, it will also help to create value as sales start to come in the door, decentralizing the knowledge so it is not tied only to the entrepreneur. Not many companies have the expertise to accomplish this effectively without outside assistance. An advisor who specializes in strategic planning can help.

Arrow hitting bullseye target

Technology

You start to have access to data that can guide decision-making and help you predict various factors that influence your business.

Best practice

Quick access to timely data can help you not only understand your financial performance but also changing trends. This will allow you to prioritize investments and better understand the customer attributes that create your margin. This can also provide valuable information about win rate and what’s working in sales.

Tax Tip

Consider the implications of entity type

Entity selection can become an important and strategic decision throughout the life of the business. Some types of taxation may allow earlier utilization of losses while others can allow better current cash flow. Apply your company’s strategic plan so you don’t make this decision in a vacuum.

How do entrepreneurs address the various lifecycle stages of business ownership?

Owning a business takes a certain confidence and grit. All owners are different, but all face similar challenges. Our business ownership lifecycle ebook shares insights gleaned from helping business owners face these challenges head on.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





 
  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2023-02-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/business-ownership-launch-with-confidence.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Other Articles in This Series

StartupChallenges

BusinessGrowth

Mature Business

Business Transition