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The Better Way


Now that Hi Bracket has retired, his tax return is pretty simple. Recently he got an offer to sell some land he owned, which had been handed down through the family for many years and had a large gain associated with it. He knew it would be a capital gain which was generally taxed at 15% (pretty good rate) so he decided to take the money and run. He went ahead and paid the federal and state estimated tax on the gain. But when his tax return was prepared, the tax he owed was way more than the 15% on his $500,000 gain! Now what went wrong?

Lots of “bad” things can happen when income shoots way up, all of which cost money. He learned that his rental loss domino effectdeduction on the property was no longer allowed. He got no personal exemptions, he didn’t get all of itemized deductions, part of the capital gain was taxed at 20%, not 15% and he owed an extra 3.8% on the gain for what is commonly called the Obamacare tax. To make things worse, the Alternative Minimum Tax (AMT) kicked in so he got no federal benefit from paying his state income tax. And to add insult to injury, his Medicare premiums will triple for the following year!

The Better Way would be (you guessed it) to have the calculations done up front. The timing of when a sale takes place can affect the timing of estimated payments which can allow the federal benefit to be deferred to a year when AMT isn’t applicable. Also, to spread the gain into more than one year could keep income lower, saving the higher tax rates and even help the Medicare premiums. Heck, rental losses might be deductible, exemptions available and even things like child credit and education costs might not be wiped out!

If you are considering an unusual transaction, please check with us up front to save as much as possible.

Delivering Retirement Plan Participant Disclosures Electronically


electronic notificationThe Department of Labor (DOL) and Internal Revenue Service (IRS) allow retirement plan participant disclosures and notices to be delivered electronically. This may be an effective way of reducing the time and expense involved in providing all of the required communications to the participants in your retirement plan. Some of the items that may be sent electronically rather than in paper format include the following:

  • Participant Statements
  • Safe Harbor Notice
  • Participant Fee Disclosures under 404(a)(5)
  • Qualified Default Investment Alternative (QDIA) notices
  • Summary Plan Description (SPD)
  • Summary of Material Modifications (SMM)
  • Summary Annual Report (SAR)

Electronic Disclosure Rules

computer_w-junkmailComplying with the following rules will ensure that the use of electronic communication meets DOL and IRS standards:

At the time that the participant receives the electronic notification, they must also be notified of what they are receiving and why it is important. This may be done in the body of an email that is sent to the participant.

Every participant should also be told that they have the right to request a paper copy of the disclosure if they would like.

The electronic delivery system should be designed in such a way as to ensure that the participant’s personal information is handled in a confidential manner and that the electronic communications are actually received. This may be accomplished through periodic surveys to confirm receipt or by sending the disclosure email with return receipt enabled.

Selecting Which Notices to Send Electronically and to Whom

Deciding to send disclosures and notices electronically is not an all or nothing proposition. You can choose to send a particular disclosure electronically and continue to disseminate other disclosures in the traditional paper format. In addition, you may elect to send disclosures electronically to some participants (e.g. current employees) while sending those same disclosures in paper format to other participants (e.g. former employees who retain a balance in the plan).

retirement plan participant's consentPermission Required?

Whether or not you need to obtain the participant’s consent to electronic communication depends upon whether or not they have a computer at work that they have access to at any location where they are expected to perform their duties as employees. If they do, then consent is not required. Merely having access to a computer at the workplace is not sufficient; the computer must be at their designated workstation(s) and the use of the computer must be an integral part of their job. For any participants who do not meet this standard, such as former employees or current employees who do not use a computer at work, consent is required before you are able to electronically provide disclosures and notices.

Getting the Plan Participant’s OK

retirement plan participant's consentIf consent is required, then you will need to have a system in place to collect and track the participants’ responses so that you are able to prove that a participant consented to electronic delivery. To obtain participant consent to electronic delivery, you may either send an email or a letter to the participant that includes the following:

  • A list of the notices / disclosures to which the consent applies
  • A notification to the participant that they may withdraw their consent at any time for no cost and instructions on how to do so
  • Information on how to update their contact information for electronic delivery or physical delivery
  • A notification to the participant that they may receive a paper copy of any notice / disclosure at any time and the cost of the paper copy (if applicable)
  • Information on any hardware/software requirements for accessing and retaining the documents

The rules for obtaining consent and maintaining records of that consent make it difficult for plan sponsors to comply. Therefore, many sponsors who provide disclosures electronically to current employees who use computers as an integral part of their job continue to provide disclosures to everyone else in the traditional paper format by either handing them out or via first class mail.

Nathan T. GageNathan T. Gage, QKA, MBA works in the firm's Retirement Plan Services Group. He joined the firm in 2014, bringing with him over 11 years of experience in retirement plan services and business analysis. His responsibilities include the design, implementation and third party administration of retirement plans. Nate holds the ASPPA designation as a Qualified 401(k) Administrator (QKA), which is offered to retirement plan professionals who work primarily with 401(k) plans.

Final Guidance by FRB on Bank Income Tax Allocations


Implementation should be completed no later than October 31, 2014

Federal regulators have issued final guidance on income tax allocation agreements involving holding companies and insured depository institutions to reduce confusion regarding ownership of tax refunds.

In 1998, the interagency policy statement said that a holding company that receives a tax refund from a taxing authority obtains these funds as an agent for its subsidiary insured depository institutions and other affiliates. The new guidance instructs the insured depository institutions and their holding companies to review their tax allocation agreements to ensure:

1.  Agreements expressly acknowledge that the holding company receives any tax refunds as agent.

2.  All bank organizations insert specific language in their tax allocation agreements to clarify refund ownership.

3.  Clarity on how certain requirements of sections 23A and 23B of the Federal Reserve Act apply to tax allocation agreements between depository institutions and their affiliates.

We are here to help with implementation. For questions about how the new guidance affects your institution, contact Luke C. Martin, CPA, Member of the Firm, or Nicole E. Wilson, CPA, Supervisor at 717-263-3910.

Click here to download the complete addendum.


                                 Luke C. Martin, CPALuke C. Martin, CPA           Nicole E. Wilson, CPANicole E. Wilson, CPA

Minimum Wage Rate in Maryland Changes January 1, 2015


Maryland flagGovernor O'Malley has signed a bill that will raise the minimum wage rate from $7.25 per hour to:

(1) $8.00 per hour on Jan. 1, 2015;

(2) $8.25 per hour on July 1, 2015;

(3) $8.75 per hour on July 1, 2016;

(4) $9.25 per hour on July 1, 2017; and

(5) $10.10 per hour on July 1, 2018.

The legislation also freezes the minimum cash wage for tipped employees at $3.63 per hour.


Restatement Time for Your Retirement Plan


retirement plansEmployers who sponsor a retirement plan must “restate,” or rewrite, their plan to include recent law changes, including the Pension Protection Act. This restatement, referred to as the “PPA Restatement,” can be done as early as this summer. PPA restatements must be completed no later than April 30, 2016.

This might be a good time to consider some enhancements to your retirement plan, such as:

  • Adding a Safe Harbor matching or nonelective contribution to do away with the pesky test that can otherwise limit 401(k) deferrals for highly-compensated employees

  • Allowing Roth 401(k) deferrals

  • Allowing in-plan Roth rollovers to convert accounts to future tax-free income

  • Adding or removing participant loans

  • Adding or removing hardship distributions

We can help you decide if any of these changes would make sense for your retirement plan. We will be reaching out to our clients who utilize our Third Party Administration services; otherwise, give our office a call to discuss how we may be able to enhance your current retirement plan. Contact the Retirement Plan Services Group at 717-263-3910 to speak with a team member.

Terry EisenhauerTerry Eisenhauer, CPA has chosen to focus his professional development to the design, implementation and third party administration of retirement plans. As a Member of the Firm, Terry provides overall leadership and guidance to the Retirement Plan Services Group, which actively provides plan consulting and third party administration to over 300 clients.

New Financial Statement Options for Smaller Privately Held Entities


A natural consequence of the well-publicized financial scandals of the last decade has been a proliferation of highly complex and costly accounting standards designed to prevent the next accounting scandal. Unfortunately, many of these new standards added much complexity to smaller entity financial statements without providing any significant additional useful information.

However, relief is finally on its way! Several new options have become available in the past half year that promise to balance the need for complete and transparent financial statements for the users of smaller entity financial statements like banks and bonding companies.

First, what is a smaller entity? Generally, a business that is closely held and owner managed without significant outside investors would qualify. An eligible entity generally does not have foreign operations and does not operate in a highly regulated industry or have any intention of going public.

Accounting standards in the US are established by the Financial Accounting Standards Board (FASB). The FASB has worked closely with international standard setters as large multi-national businesses created the need for consistency of standards. Therefore the same standards used by the largest businesses in the world also applied to small closely held entities. However, the FASB recently created the FASB Private Company Council (PCC) that is responsible for reviewing new and existing standards for opportunities to simplify standards applicable to­ smaller entities. The PCC has already identified several areas where smaller entities can be granted relief from following the same rules that apply to the largest multi-national corporations.

Another option for smaller entity financial statements came from a grass roots effort of CPA practitioners (including SEK) and the American Institute of CPAs. This effort resulted in a FRF for SMEsTask Force that created the Financial Reporting Framework for Small and Medium Entities, commonly known as FRF for SMEs™. This framework represents an alternative accounting and financial reporting system different from the FASB standards. FRF for SMEs is a comprehensive accounting framework that is based on historic cost. The framework takes a basic approach to financial statement presentation related to many of the more complex areas of FASB standards, eliminating the need for fair value measurements, consolidation of variable interest entities, hedge accounting and many more. The result is financial statements that are easier to prepare and easier to understand.

Michael P. Manspeaker, CPA, CGMA is a Member of the Firm. Mike is the firm-wide Director of Michael P. Manspeaker jpg[1]Accounting and Auditing Quality Control. His experience includes working with manufacturing, retirement plan, construction, fi nancial institutions, nonprofi t, and local government clients. In addition, Mike provides clients with business planning and has significant experience in mergers and acquisitions and publicly traded companies.

The Better Way


house for Better WayAs we know, Hi Bracket has been a student in the Tax School of Hard Knocks for a long time. He has learned that tax planning has to be done up front so when he heard about the new Net Investment Income Tax on passive income (interest, dividends, capital gains, rents, etc.) of 3.8% for high income people, he was determined to keep the rental income from many of his business rental properties from being subject to this tax. He found out that if there was a certain relationship between the owner and tenant of the property that the income would not be classified as “passive” and therefore would escape the tax. He figured out what to do. He rearranged the ownership of several of the properties that were rented to companies in which he was an owner to meet the test. Alas, he had saved the additional tax and felt very proud.


Guess what? Now the profit on those properties was not available to offset losses on other rentals so those losses were not currently deductible. Great, he had saved the 3.8% tax only to lose deductions in the 35%+ bracket. Guess it didn’t work out too well!


The Better Way would be to carefully consider the ramifications of tax law changes, not just react to the obvious implications. To his defense, many people do just that and the true understanding comes later, often at a price. We can assist in such understands and utilize computer modeling to study the true impact on our clients. Please give us a call if you have planning concerns.


Photo Credit: G & A Sattler via photopin cc

New IRS Amnesty Program


describe the imageAre you a business owner with a retirement plan for only one employee, probably yourself?  Do you know that you need to file an annual form 5500-EZ with the IRS, unless you meet both of the following exceptions?

  • The form is not required for SIMPLE IRA, SEP, or SARSEP plans

  • The form is not required for plans with less than $250,000 at the end of the plan year

Form 5500-EZ is due the last day of the seventh month after the end of the plan year. The due date is extendable for an additional two and one-half months.

You must also file a form 5500-EZ within seven months after closing a retirement plan, even if the assets never exceeded $250,000.

The penalty for failing to timely file form 5500-EZ is $25 per day, with a maximum of $15,000 per return.

If you didn’t know about the filing requirements, you are not alone. Apparently the IRS thinks there are many others who aren’t meeting the filing requirements, because they recently announced a pilot program to allow delinquent or non-filers to file without any late-filing penalties.

No penalty is assessed if the delinquent return and appendix is filed between June 2, 2014 and June 2, 2015.

If you want to discuss if this applies to you, please contact our Retirement Plan Services Group at 717-263-3910.

Will the Real Buy-sell Please Stand Up?


divorce 02Divorce courts don’t always accept these agreements

Buy-sell agreements come into play in many situations. They facilitate ownership changes during shareholder disputes and when a partner exits the business. But oversimplified or outdated agreements sometimes come back to haunt divorcing shareholders.

Three-factor test

Buy-sell agreements provide evidence of value. But they may not necessarily bind the parties in a divorce — especially if both spouses didn’t sign the agreement. In evaluating whether to accept a formula set forth in a buy-sell, courts often look to a test that originated with the 1994 In re Marriage of Nichols decision. The test looks at three factors:

  1. Proximity of the agreement date to the separation date to ensure that the agreement was not entered into in contemplation of marital dissolution,
  2. Existence of an independent motive for entering into the buy-sell agreement, such as a desire to protect all partners against the effect of a partnership dissolution, and
  3. Whether the value resulting from the agreement’s purchase price formula is similar to the value produced by other approaches.

The last part demonstrates that there are no shortcuts when valuing a business. For divorce purposes, you cannot simply expect to value a private business interest using a valuation formula (or fixed price) set forth in the company’s buy-sell agreement. The buyout formula should be reconciled against appraised values derived under the cost, market and income approaches.

If the values derived using these methods vary substantially from the value derived from the buy-sell formula, the appraiser should identify reasons for the discrepancy in his or her valuation report. (See the sidebar “Is my buy-sell agreement still relevant?”)

describe the imageNo hard and fast rules

Divorce courts give buy-sell agreements varying degrees of consideration. At one end of the spectrum, some courts accept buy-sell agreements as objective indicators of value.

For example, in In re Marriage of Baker, an Iowa appellate court ruled that the $1,000 value
indicated by the buyout provisions of the owners’ agreement was within the“permissible range of evidence” for the husband’s interest in a general surgery clinic. His wife estimated the value of the interest at roughly $84,000, using other valuation methods.

On the opposite end of the spectrum, a Missouri appellate court rejected a formula set forth in a buy-sell agreement in Wood v. Wood, because it applied an inappropriate standard of value. The case was remanded to a trial court for a proper determination of business value on the divorce date.

State case law sometimes provides contradictory guidance about how to handle buy-sell agreements. For example, in Mandell v. Mandell, a Texas appellate court upheld an unsigned
buy-sell agreement when valuing the husband’s interest in a medical practice. But in Hasselbach v. Hasselbach, another Texas appellate court rejected the use of a buy-sell agreement to value the husband’s interest in a privately held company.

Goodwill is another factor that confounds the use of buy-sell formulas to value businesses in divorce cases. A recent Oklahoma appellate court case, In re Marriage of Kingery, points out that some buy-sell formulas include a “practice acquisition” or goodwill component. If so, a buy-sell may overstate the value of an owner-spouse’s business interest to the extent that state law excludes all or part of company goodwill from the marital estate.

Lessons to be learned

Buy-sell agreements can provide worthwhile valuation evidence. Shareholders and their attorneys should always consider buyout formulas in divorce cases — but reconcile them against values obtained using the cost, market and income approaches. A valuation professional can help parties understand discrepancies and defend appraisals in divorce court.

Sidebar: Is my buy-sell agreement still relevant?

Suppose you’re a business owner who bought 10,000 shares of a startup venture for $1/share based on the company’s buy-sell agreement 20 years ago. Since the date of your buy-in, sales have tripled, the number of employees has doubled and $3 million in new equipment has been added. You and the other three owners have been so busy growing the business that you forgot to update the buy-sell agreement.

When your spouse files for divorce two decades later, can you rely on this buy-sell agreement to value the business? The answer depends on relevant legal precedent. But most family court judges would consider this buy-sell agreement invalid for several reasons.

First, even if the buy-sell agreement has never been violated by any other buy-in or buyout transactions, the company has grown substantially, so the fixed price of $1/share is probably outdated. Twenty years is a long time for a contract or a fixed price to remain valid. Divorce courts also may disregard buy-sell agreements if they involve related parties or aren’t legally enforceable under state law.

On the other hand, the buy-sell may have some validity to the extent that your spouse signed the agreement — and if it has been used for recent arm’s-length shareholder buy-ins or buyouts. The agreement also may be valid if the results of the buy-sell formula are comparable to appraised values derived under the cost, market and income approaches.

View our Business Valuation Services page for more information.

Jacob KaufmanJacob Kaufman, CPA, CVA is a Member of the firm of Smith Elliott Kearns & Company, LLC. Jake joined SEK&Co in 1989. He is the lead member of the Business Valuation Team and serves as a consultant to the Accounting Services and Tax Departments in the firm's Chambersburg office. Jake's valuation experience was learned through years of study and practical experience. In addition to valuation theory and implementation, Jake possesses the relative tax, finance, and accounting experience necessary to perform a thorough quality valuation.

Hold on to Key Employees During a Merger/Acquisition Deal


staff retentionRyan’s software company was being courted by a large corporation with financial resources that would enable him to expand his offerings and reach new markets. The transaction was progressing according to plan — until the two companies announced their impending merger. That’s when Ryan’s Chief Technology Officer and several of his key developers resigned. A few weeks later, the deal fell apart.  

This scenario is more common than you might think. If a handful of key players are critical to your company’s value, you need to provide them with incentives to stay while you close a merger and acquisition (M&A) deal, as well as through the integration process.

Emotional stakes

As soon as initial negotiations with a buyer begin, identify your most valuable employees — for example, executives who will be responsible for integrating the company, top salespeople,
product developers, and managers responsible for a significant percentage of revenues. Such employees typically represent less than 10% of a business’s workforce.

Almost nothing can damage the morale of a valuable employee faster than learning about a merger through the grapevine. Therefore, keep your key staff members in the loop, informing them of your plans as soon as possible and even involving them in the M&A process. You might, for example, add them to your deal team and assign them to preintegration tasks that enable them to work with employees from the buyer’s company. All of this gives key people an emotional stake in the deal.

Financial incentivesmonetary incentive

Along with the need to feel like they have a role in your company’s future, key employees are likely to respond to various financial incentives. Stock options in the newly-merged company are one of the most common. Typically, they’re offered to executives and top managers and can be an excellent way to motivate their performance during integration and beyond.

Or you might offer a stay bonus, which rewards employees who agree to stay for a specified period, such as two years. It can be paid in a lump sum (usually a percentage of their
current salary). As an alternative to stay bonuses, some companies offer key employees a deferred bonus, with interest, due to be paid at some specified time in the future or when they reach certain department or company milestones. Employees may even respond positively to the offer of extra vacation time, an improved health care package or supplemental insurance policies such as disability or long-term care.

Some of these incentives have the potential to become costly over the long term, so consider offering task-specific rewards. You might, for example, promise a completion bonus for projects essential to your M&A deal, such as successfully conducting layoffs of redundant staff or integrating your IT network with your buyer’s. You also could offer “management-by-objectives” bonuses, which reward employees for completing tasks that might otherwise be neglected during the course of a merger.

Attractive supplements

There’s a limit, of course, to the financial incentives you can offer employees to stay on board. To supplement financial incentive plans or engage employees who aren’t necessarily motivated to stay by the offer of more money, work with your buyer to come up with some nonfinancial perks that you can selectively offer to holdout employees.

Often, these are relatively easy to provide, such as the guarantee of a new job title or responsibility for particular client accounts. Some employees may be more likely to remain loyal if they can take essential employees such as a trusted executive assistant or IT technician with them to the new company. Others may be motivated by the offer of more-flexible work hours or the ability to telecommute from home.

business people 10Cost is relative

Business owner Ryan learned the hard way that you can’t afford to take key employees for granted. Providing incentives can be costly, but they tend to cost less than the loss of essential staff when you’re trying to close an M&A deal. 


View our Business Valuation Services Page

Jacob KaufmanJacob Kaufman, CPA, CVA is a Member of the firm of Smith Elliott Kearns & Company, LLC.   Jake joined SEK&Co in 1989. He is the lead member of the Business Valuation Team and serves as a consultant to the Accounting Services and Tax Departments in the firm's Chambersburg office. Jake's valuation experience was learned through years of study and practical experience. In addition to valuation theory and implementation, Jake possesses the relative tax, finance, and accounting experience necessary to perform a thorough quality valuation.

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