Patrick Mulherin, CPA, Tax Manager at Smith Elliott Kearns & Company, LLC presented this deck on Tax and Succession planning to attendees at Strickler Insurance's Annual Crop Insurance Seminar
2. Firm Background:
Founded in 1963
5 office locations (Chambersburg, Carlisle, Hagerstown, Hanover,
Camp Hill)
Locally owned and operated
Large variety of traditional and non-traditional accounting and
consulting services
Traditional – tax preparation, tax planning, financial statement
preparation, audits, business consulting
Non-Traditional – retirement plan administration, payroll
preparation, valuation services, business succession and estate
planning, QuickBooks consulting, Peachtree consulting
Community focus – volunteer work, fund raising, donation,
scholarship
Commitment to Excellence – client service, final product accuracy,
level of consulting, honest, ethical
3. My Background:
Originally from York County
Graduated from Shippensburg December 2006
Internships with SEK & CO followed by full time position
Work in Chambersburg Office on closely-held (or family-owned)
businesses and individuals providing consulting, tax planning, tax
preparation, and financial statement preparation
Focus on agribusiness with a mix of other business segments
Member of the Pennsylvania Institute of Certified Public
Accountants and American Institute of Certified Public
Accountants
4. Presentation Overview
Focus on thinking about managing risks can help preserve cash flow
along with managing the ability to transition a business internally to
family or to external buyer
Topics:
Tax planning and management
Entity structure and set-up
Business transition
6. TAX PLANNING AND MANAGEMENT
Manage tax brackets effectively
Try and avoid “peak and valley” tax years
Consistency in paying some level of tax can be beneficial
over time
Trying to avoid taking tax deductions in a lower bracket and
deferring income tax to a year with a higher bracket
Utilize farm income averaging
Allows for the spread of farm income over current year and
three previous years
Benefit is the ability to get more income taxed in the lower
tax brackets (10-25%)
Analyze benefit on year to year basis and can be elected
yearly without issue
Does not affect 15.3% self employment tax for sole
proprietors , partners in partnerships, and members in an
LLC
Agribusiness is incredibly difficult to predict. So future income
is tough to determine. However, think longer term when looking
at options to lower taxable income.
7. TAX PLANNING AND MANAGEMENT
Current U.S. Income Tax Brackets (Married filing jointly)
45.0%
40.0%
35.0%
30.0%
25.0%
2013 MFJ
20.0%
2012 MFJ
15.0%
10.0%
5.0%
0.0%
Up to
$17,850
$17,850$72,500
$72,500 $146,400
$146,400 $223,050
$223,050 $398,350
$398,350 $450,000
Over
$450,000
8. TAX PLANNING AND MANAGEMENT
Effectively planning for capital expenditures
Ability to write off equipment in year of purchase (Section 179)
Decreased from $500,000 (2013) to currently $25,000
(2014)
50% “Bonus” depreciation
Currently eliminated
Things to consider:
Current year capital expenditures and how taxable income
may change compared to prior years based on how
aggressively assets were written off in the past
Consult with advisor on ability to potentially amend returns
to reduce depreciation to effectively lower overall tax
bracket
Consult with advisor about annual capital expenditures and
what depreciation is available
Team Meetings are great ways to discuss potential
9. TAX PLANNING AND MANAGEMENT
Other Tax Planning Considerations
Future of the Domestic Productions Deduction
Many coop’s now pass through a relatively substantial
deduction
Tests for prepaid farm expenses (does not cover insurance and
rents)
Test 1: Must be purchase, not deposit
Test 2: Made for a business purpose, not to avoid taxes
Test 3: Must not result in material distortion of income
Mixed expenses (business versus personal)
Consider reasonable allocation of expenses that are for
both business and personal
Real estate taxes
Utilities
Insurances
Professional fees
Vehicle expenses
Consider retirement plan
11. ENTITY STRUCTURE AND SET UP
Benefits of entities
Setting your business up in a separate entity can provide future
benefits
Liability protection
Protecting your personal assets in the event that a
claim arises that goes above and beyond insurance
coverage
Business segregation
Maybe it’s beneficial to separate pieces of your
business up for future transition (i.e. real estate and
operations)
This segregation can help show outside parties profit
levels and cash flow for potential sale of business
segments
Valuation discounts
Allows for discounting the value of the entity
Can make transition to next generation more
affordable
Can help better manage potential estate issues
12. ENTITY STRUCTURE AND SET UP
Types of entities available
General partnerships
Doesn’t provide the liability protection of other options
Limited partnerships
Needs to have at least 1 general partner that is responsible
for the entity and it’s liabilities
Limited liability companies
Provides personal liability protection for all members
All income from business operations is subject to selfemployment taxes
S-Corporations
Can potentially help limit, but not eliminate, self-employment
tax
Has to have a payroll and owners working in business should
be on payroll making a competitive wage
C-Corporations
Limited use in today’s tax regulations due to double taxation
13. ENTITY STRUCTURE AND SET UP
Steps to Consider with an Advisor
Is there a need for an entity?
What is purpose of entity? (i.e. transition, liability
protection, etc.)
What is the future of the entity?
How many partners owners are going to be involved?
How will the entity be funded initially?
Transition of agricultural land into an entity no longer causes 1%
transfer tax
15. BUSINESS TRANSITION
Difficulty in transition an agribusiness entity
Identifying successors
Setting a price in coordination with desired level of cash flow in
retirement
Considering gifting and the overall effect for the individual
gifting
Giving up control
16. BUSINESS TRANSITION
Identifying Successors
For agribusiness this can be relatively easy depending on the
involvement of family
(sons, daughters, brothers, nephews, nieces, etc.)
Consider the traits and abilities of those that would be
taking on the operation of the business
Consider the ability of those individuals to be trained and
what level of involvement you desire going forward to help
with training
However, if a family succession doesn’t appear to be an
option, then what?
Starting relatively early to seek out businesses or
individuals that would have interest in purchase/rent
arrangement for land, buildings, equipment, livestock, etc.
Consider surrounding farmers, contact vendors that have
frequent contact with other agribusiness operators
Accountant
Loan officer
Insurance broker
17. BUSINESS TRANSITION
Setting a Price in Coordination with Desired Level of Cash Flow in
Retirement
Determining what you need in retirement will help determine
what type of options there are for transition
Selling the farm, equipment, inventory, and livestock
Cash Sale - secures the cash in the year of sale and
then has to be managed to derive a rate of return in
retirement years. This also causes the most significant
tax liability in a single year
Seller financed – limits the tax liability (only on real
estate and buildings), puts seller at risk of future
default on note, needs to have established legal
documents (mortgage, notes, etc.) to help cover the
seller
Renting the farm, equipment, and livestock
Leases can leave the retiring party at risk of losing
lessor and therefore the stream of income
It can manage taxes to a certain degree
18. BUSINESS TRANSITION
Setting a Price in Coordination with Desired Level of Cash Flow in
Retirement
Piecemeal sale
Selling certain assets and renting other assets for
purchase over time or at a later date
This option can have benefits for both sides of the
transaction.
Cash flow can be managed for the buyer to a level that
makes sense while still gaining ownership of certain
pieces of the operation or real estate
Seller can limit exposure by getting piece of business
sold financed by third party while renting remaining
pieces of business
There is plenty of flexibility to figure out what can work
for both parties when after a successor is identified.
Price and rent both need to be considered by the buyer
based on historical performance of the company and
19. BUSINESS TRANSITION
Considering gifting and the overall effect on the individual gifting
Gifting can help bridge the cash flow gap for family transitions
Any gift over $14,000 of value in a year needs a tax return
to be filed
No tax paid until over $5,340,000 of gifts.
Each gift over the annual limit reduces the individuals
future estate exemption and potentially exposes them to
estate tax
Estate exemption is $5,340,000 for both husband and
wife and is portable currently
Gifting gives successor the tax attributes of the asset at
the time of the gift. (i.e. the successor doesn’t get any
future tax benefit for the value that was gifted)
20. BUSINESS TRANSITION
Giving up Control
This is the hardest part of any business transition when an
owner has been in control for many years
The emotions of losing control and watching somebody run your
operation differently then you can be difficult
Family transitions can be even harder then third transitions or
sales because of the emotions
It’s important to be surrounded by a team of advisors that is
looking out for your best interest and can be completely
impartial if representing both sides of the transaction
Thoughts that may help:
Begin training early
Slowly include those identified in business level decisions
and meetings
Slowly transition work load responsibilities to that person to
allow for a smoother transition at retirement
Be available for consulting after transition but allow for
growth and changes within the business after retirement