Tag Archives: small business

M&A Shop Talk VII

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The most recent M&A Shop Talk highlighted the major tax advantages of completing a leveraged ESOP buyout transaction as an exit strategy for S corporation structured small businesses with no liquidity except its workforce. Now, we’ll cover a parallel discussion in the context of a C corporation target.

Currently, IRC Section 1042 tax provisions allow owners with at least 30% ownership stake in a qualifying C corporation selling target to complete a leveraged ESOP transaction, and invest their entire net cash proceeds received from the transaction into a qualifying replacement property (QRP). Thereby deferring 100% of the underling gain until such QRP is subsequently liquidated. In order to carry out this exit strategy, the following criteria must be met.

  • The qualifying C corporation target must be a domestic corporation organized under state law and actively engaged in a trade or business. For more information on how an LLC can convert and complete an ESOP leverage transaction, and take advantage of the Section 1042 deferral strategy, visit this previous blog post.
  • The sales transaction must be a stock ownership sale transaction with no stepped-up tax election treatment under Section 338 and/or Section 336.
  • The buyer party must be a qualified sponsored ESOP plan. For general background information regarding what constitutes a qualified ESOP plan, including intricacies regarding how to carry out a leverage buyout, please visit the National Center for Employee Ownership (NCEO).
  • The minimum stock ownership sold must represent at least 30% of all voting shares including preferred with voting rights or all stock ownership value except pure preferred non-voting shares of the selling target.
  • The selling shareholder or shareholders if more than one, must all be qualifying individuals with a minimum holding ownership period of three years (i.e., measured at the date of sale).
  • The replacement property rules under Section 1042 must be satisfied within a 15 month prescribed period, commencing 3 months before the date that the sale of the qualified securities occurs, which ends 12 months after the date of such sale.
  • The replacement property generally consists of common and/or preferred stock, bond debenture obligation, etc., as defined by IRC Section 165(g) (2) issued by the qualifying C corporation target.

In addition to the described IRC Section 1042 gain deferral provision, qualifying C corporation businesses can also take advantages of the following favorable tax provisions that are not available under an S corporation transaction format as discussed here.

First tax provision, dividend distributions received by the ESOP constitute an additional pension contribution fully deductible to arrive at the regular corporate taxable income. This is not deductible from the alternative minimum tax calculation by the qualifying C corporation target. Accordingly, this contribution is subject to the normal 25% aggregate employee compensation limitation and overall pension contribution ceiling limitation per eligible ESOP employee participant under IRC Section 415.

Second, the cash contribution portion used by the ESOP to satisfy the interest expense portion with respect to the leverage buyout loan is generally not subject to the aforementioned overall 25% aggregate employee compensation limitation. Further, it is not counted as an employer contribution for purposes of the aforementioned IRC Section 415 tax provisions provided that less than 1/3 of the current year employer contributions are credited to highly-compensated employees.

If you are a small business and your workforce is your most valuable asset, the described leverage buyout sales transaction via an ESOP might be the ideal exit strategy for you. If you have any questions or need additional information, please contact Jorge Rodriguez at 301-222-8220 or  jrodriguez@aronsonllc.com.




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Small Businesses: Don’t Overlook the Disabled Access Tax Credit

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Did you know that you might be eligible to receive a big tax credit for expenditures to make your business ADA-compliant?

The Americans with Disabilities Act of 1990 (ADA) prohibits discrimination against individuals with disabilities in everyday activities. The law requires that businesses offering public goods or services (including doctors’ offices) be accessible to individuals with disabilities.

To comply with ADA and to encourage private business facilities to be more accessible to disabled individuals, a Disabled Access Credit is available to eligible small businesses. For any tax year, the amount of the Disabled Access Credit equals 50% of the amount of the eligible access expenditures for the tax year that exceed $250 but do not exceed $10,250. Thus, the maximum amount of the Disabled Access Credit is $5,000.

For purposes of the Disabled Access Credit, an eligible small business is any business that has gross receipts for the preceding tax year of $1 million or less; or employed 30 or fewer full-time employees during the preceding tax year.

Eligible expenditures include amounts incurred or paid for the following:

  • Removing architectural, communication, physical, or transportation barriers (in connection with any facility first placed in service before November 6, 1990) that prevent a business from being accessible to or usable by disabled individuals;
  • Providing qualified interpreters or other effective methods of making audio materials available to hearing-impaired individuals;
  • Providing qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments;
  • Acquiring or modifying equipment or devices for individuals with disabilities; or
  • Providing other similar services, modifications, materials or equipment.

In order to qualify for the Disabled Access Credit, the expenditures must be reasonable and necessary to accomplish the above purposes (e.g., accessible medical equipment used in doctors’ office such as adjustable-height exam tables and chairs, wheelchair-accessible scales, adjustable-height radiologic equipment, portable floor and overhead track lifts, and gurneys and stretchers). However, in another example, X-ray machines purchased by a dentist were not eligible access expenditures and did not qualify for the Disabled Access Credit because the dentist did not purchase the machines to comply with ADA requirement, but rather to provide better dental care for the dentist’s patients.

For more information, please contact your Aronson tax advisor or Tonny Tani at 301.231.6200.

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Act by Dec. 31st to Benefit from the Advantages of a Solo 401(k)

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As a self-employed individual or a small business owner you have several alternatives to consider in selecting the right retirement plan that fits your needs and objectives. The two most common choices are a Simplified Employee Pension (SEP) and a solo 401(k). Contributions to either plan are tax-deductible and allow for the tax-deferred growth of your contributions and the investment earnings.

Choosing the right retirement option can be confusing, and the subtle but very important differences between the plans can often be overlooked.

Many defer to the SEP because it is easier to set up than a 401(k), which is more complex and can be more costly to administer. However, a 401(k) allows you to contribute a greater amount toward your retirement.  If you think you may be earning $25,000 or more every year, it may be worth the additional expense and hassle of setting up the solo 401(k). Since with a solo 401(k) plan you are treated as both the employee and the employer, the contributions can be made to the plan in both capacities. As an owner, you can contribute as follows:

  • Employee Share/Elective Deferral – $17,500 ($23,000 if age 50 or over)
  • Employer Share/Nonelective Contribution – 20% of net self-employment income (which is your business income less ½ of self-employment tax)

Total contributions cannot exceed the IRS prescribed limit of $52,000 (not including the catch-up contributions of $5,500) for 2014[1].

To better illustrate: Let’s say you are a 55-year-old consultant with $80,000 of self-employment income. With a solo 401(k) plan you would be able to contribute $23,000 for the employee portion plus 20% of net self-employment income $14,870 for a total contribution of $37,870. Using the SEP scenario, you would only be able to contribute $14,870.

In order to take advantage of the benefits of the solo 401(k), you must act quickly. You must open the solo 401(k) by December 31, 2014 to qualify to make 2014 contributions, even though you have until April 15, 2015 to contribute the money.

In addition to higher annual contributions, a solo 401(k) has a loan feature similar to a traditional company 401(k) plan. Individual 401(k) loans are permitted up to 50% of the total account value with a $50,000 maximum, a nice benefit if you need extra money.

For more information on your individual retirement planning options, please contact your Aronson advisor or Anatoli Pilchtchikov of Aronson’s Personal Financial Services Group at 301.231.6200.



[1] Based on the IRS COLA adjustments the limit for 2015 has been increased to $53,000 ($6,000 for catch-up contributions).

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Changes to the Healthcare Tax Credit for Small Business Employers

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As small businesses work to keep up with the evolving state of healthcare in the U.S., recent tax changes may be a double-edged sword for employers. The good news is that the available tax credit, for plan years beginning after December 31, 2013, has increased from 35 percent up to 50 percent of premiums paid by small business employers. The bad news is that, to be eligible, plans must be offered through a Small Business Health Options Program Marketplace (i.e., through healthcare.gov or a state-run marketplace). A second new limitation is that the credit may only be taken for two consecutive years.

Other eligibility requirements remain the same. To qualify:

  • A small employer must have fewer than 25 full-time equivalent employees (e.g., two half-time employees count as a full-time equivalent employee).
  • The average wages for employees (excluding owners) must be less than $50,000 per year (total wages divided by the number of full-time equivalent employees).
  • The employer must pay at least half of the cost of the employees’ individual (not family) health insurance premiums.

For small employers who qualify, the credit can be a significant tax savings. For “flow-through” businesses, like a small medical practice partnership, the credit would flow through to the individual owners’ tax returns.

If the credit exceeds the 2014 tax liability, it may be carried back to a prior year for a refund or carried forward to reduce next year’s taxes. For employers who missed the credit in 2012 or 2013, a quick calculation may help determine if amending a prior year return to claim the credit would be worthwhile.

For more information, please contact your Aronson tax advisor or Ellen Boulle-Lauria of Aronson’s Professional Services Industry Group at 301.231.6200.

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IRS 2014 Exam and Enforcement Initiatives

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Faris R. Fink, IRS commissioner of the Small Business and Self-Employed Division, announced that 2014 will be the year the IRS moves its examination focus from C corporations to flow-thru entities. A flow-thru entity is any business whose tax is imposed at the owners’ level, on their individual income tax returns. Such entities include partnerships, limited liability companies, and S corporations.

In 2011 the average audit rate for corporate and individual returns was about 1%. For flow-thru entities, it was about 0.4%, reflecting the IRS’s long-standing focus on corporations. Given the rising number and complexity of flow-thru entity returns, however, the IRS believes that the level of noncompliance, unintentional or otherwise, needs to be more formally addressed. Flow-thru returns also provide a gateway to examining the owners’ individual returns and related entities.

Past efforts at targeting the noncompliant, while not imposing exam-induced hardships on the innocent, has been a challenge for the IRS. Various TIGTA (Treasury Inspector General for Tax Administration) found that the incidences of no-change exams was over 50% for flow-thru entities, significantly higher than for individuals and corporations.

While the IRS works out how they are going to do a better job at selecting returns more likely to bear fruit, we expect agents to concentrate on the following, among other areas:

  • Basis substantiation
  • Related party transactions, including loans
  • Probe for personal expenses buried in deductions on the business return
  • Compliance with required disclosures
  • Allocation of income
  • Treatment of withdrawing partners

Submitting a tax return to the IRS is the first step in a potentially disastrous relationship. Investing the time necessary to prepare a return that will withstand IRS scrutiny is the best defense, not only to achieve a no-change audit but to also eliminate the risk that other returns will be pulled into the exam. At minimum, you should understand what aspects of the return carry risks of an adverse finding, and make an informed decision on those tax positions prior to filing.

For further information or to discuss your specific situation, please contact your Aronson tax advisor at 301.231.6200.

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