there may be boons or pitfalls clients are overlooking.
by blake christian
it is important for clients to understand when they need to contact you prior to making significant business or personal decisions or commitments.
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for example, our experience has proven that unwinding a business deal is more costly as deals progress than being involved before clients start negotiations. here’s a short list of issues clients clients should know about:
1. formation, acquisition or disposition of ownership in a business entity. when clients form a business, one of the most important decisions is the type of entity to use (i.e. llc, sole proprietorship, c corporation, s corporation and partnership, etc.). as they look to acquiring a business, it is important to know that how they acquire the business will
determine if they receive a tax step-up in basis in the assets acquired. if they plan on disposing of their business, they should ask about their effective tax rate to understand the net cash they’ll receive, and ways to optimize the net cash they receive.
2. change in marital status. addition or loss of family members. it is important to communicate any change in marital status (including a death) because this will affect filing status and effective income tax rate, and possibly require additional tax return filings. if there was a birth or adoption of a child, they may be entitled to additional deductions, exemptions or tax credits.
3. change in location of a business or residential location. there are many location-based tax incentives and credits. before deciding to move, they should ask if any of the locations under consideration offer tax advantages or disadvantages. the time of the year for making the change can also have a material impact on taxes.
4. acquisition or disposition through purchase or lease of large-ticket items, whether business or personal. this includes a suggested review of any purchase/sale or lease agreements. there are several differences in accounting for purchased versus leased assets. there are also a wide variety of concessions that can be negotiated with the lessor. cpas can review the agreements prior to purchase or lease so clients fully understand both the financial and tax impact.
5. changes in insurance underwriting for health, property, life or business properties. it is always a good idea when renewals come due so that they can re-evaluate their insurance needs for both personal and business. cpas can assist in evaluating your needs and offer price comparisons or referrals.
6. any significant hiring or firing events, including expansion or contraction of business operations. there are several tax incentives if significant hiring or business expansion is anticipated. if clients are faced with potential layoffs or contraction of their business that would result in a net operating loss, it is important to discuss the potential for refund claims for back taxes paid. if they are working for a company and either retiring or unexpectedly get laid off, they need to immediately discuss their rights and economic issues with their attorney and cpa.
7. securing a new personal or business loan, or changing your banking or investment management relationships. the personal and business loan market is very competitive. it may help to discuss loan needs prior to getting a loan to understand what loans may be available. also, if they decide to pay off a loan early, the cpa should review the loan terms to ensure there are no pre-payment penalties or other “trigger” clauses.
8. expansion of sales or operations to other states or countries. most states and many counties offer tax incentives. prior to expanding, cpas can help determine if the states or counties under consideration offer any tax incentives and what the overall tax costs will be in that taxing jurisdiction. securing all permits and registering with the state and local payroll and income tax authorities is also important.
9. expanding into a new line of business. why? are there any tax benefits available for the new line of business? the “california competes program” provides credit specifically geared to businesses expanding in california. cpas can investigate advantages to forming a new entity for the new line of business.
10. setting compensation or distribution policies for your business entities. depending on the business structure, it is important to understand how compensation and distributions will impact both the business and the client personally. some entities require pro-rata distributions based on ownership percentage whereas other entities allow for disproportionate owner distributions. furthermore, some entities such as partnerships do not allow partner/member compensation via a form w-2 like traditional employees.
clients need to know: if in doubt, contact your cpa.
many of these calls or emails will take very little time, but they can save clients significant dollars and headaches.