Ready to file: CPAs share the tax facts CEOs need to know in 2017 and beyond


TD Bank

Compiled by Alyssa Hurst

Photography by Zach Teris

This roundtable discussion will be published in the Spring 2017 issue of SmartCEO. The following transcript reflects highlights of the discussion. It is not a complete transcript.

This year promises to be an especially turbulent one for your tax planning, as a new Republican administration and Congress work on plans to overhaul the tax code. SmartCEO and TD Bank gathered a group of expert accountants to discuss what you should expect in 2017 and beyond. The CPAs also weigh in on what it takes to prepare for an audit, to conclude a successful M&A transaction, and to protect your business against fraud.

Roundtable panelists:

  • Moderator: Cheryl Beth Kuchler, founder and president, CEO Think Tank
  • William C. Briggs, CPA, partner, Citrin Cooperman
  • Michael C. Troped, CPA, audit partner, Isdaner & Company LLC
  • Kevin J. Conner, CPA, MST, managing director, Conner & Associates, PC
  • Stuart A. Katz, CPA, MST, senior manager, Friedman LLP
  • Martin H. Abo, CPA, ABV, CVA, CFF, managing/founding member, Abo and Company, LLC and Abo Cipolla Financial Forensics, LLC
  • Brian P. Pugliese, MT, CPA, director, tax strategies, GMS Surgent
  • Donna L. Urian, CPA, MST, shareholder, director of taxation, Fischer Cunnane & Associates Ltd.
  • Sponsor: Michael MacFarland, regional VP, Philadelphia, TD Bank
  • Sponsor: Michael Trimble, vice president – commercial lending, TD Bank
  • Sponsor: Ray Friend, vice president, TD Bank

Click here to listen to the entire Roundtable discussion, or read an edited transcript of the conversation below.


Kuchler: Good morning, and thank you all for joining us at SmartCEO’s roundtable discussion on tax facts CEOs need to know, hosted in partnership with TD Bank. Today, we will be discussing what Philadelphia-area CEOs need to know about tax issues. I’m Cheryl Beth Kuchler, the founder and president of CEO Think Tank. We provide strategic planning and execution-management services, as well as running executive roundtables for the small and mid-market community. Let’s begin by meeting our panelists. We will go around the table and have each person introduce him or herself. Please include your name, title and company.

Briggs: Bill Briggs. I’m the head of the tax department for Citrin Cooperman here in Philadelphia.

Pugliese: Brian Pugliese, I’m director of tax at GMS Surgent in Devon, PA.

Katz: Stuart Katz, CPA — a senior tax manager at Friedman LLP here in Philadelphia.

MacFarland: Mike MacFarland. Regional VP, Philadelphia for TD Bank.

Troped: I’m Mike Troped. I’m also a CPA and audit partner at Isdaner & Company in Bala Cynwyd.

Conner: I’m Kevin Conner. I’m a CPA and managing director of Conner & Associates in Newtown, PA.

Urian: I’m Donna Urian and I’m the chair of the tax department at Fischer Cunnane, based in Chester County.

Abo: I’m Marty Abo with Abo & Company and its affiliate Abo Cipolla Financial Forensics, based in Mount Laurel and Morrisville, lower New Jersey.

Challenges for 2017

What are some of the key topics that clients are concerned with right now, and what tax issues may companies be facing as we go into 2017?

Pugliese: One of the big issues that we see involves states and tax nexus. What that means is, in addition to a federal tax filing, there’s also state tax filings. Historically, going back 20 or 30 years, more tax payers were selling a product, and it was simpler to determine where you had a state tax filing requirement. It was mainly where you had a property or where you had potentially an employee, depending on what they were doing. Those were the main two factors. But now, as the economy has transitioned to a service-based economy, … some of the rules from some of the states have started to change.

So for example, if you are a service-based business, then the states have crafted some of their rules to say that you, as a taxpayer, have a tax-return-filing requirement in this state. … Let’s say you have more than a half of a million dollars in a given state, or you have more than x amount of payroll in a given state — that’s considered nexus in that state and there’s a filing requirement. And I’m not sure all service-based businesses necessarily know that, but what goes along with that is there’s something called market-based sources, and what that says is that even if your home base and all of your business activities are right here in Center City, Philadelphia, you may have to source your receipts to other states based on where the ultimate customer received that benefit. What that means is, if you’re — I’ll just make it up — if you’re a credit card company headquartered in Center City, and you’re mailing credit cards or credit card offers to customers in all 50 states, some of those states might say, in fact a lot of them might say, that because you are directing your business activities into this state, and because you’re conducting your business activities in this state, you have a filing requirement here, and the amount of sales that you source to the state is based on the amount of sales that you’ve generated from customers in our state. So, it’s just something to be aware of.

Kuchler: Particularly if you are in a service industry. You should be talking with your accountant, and make sure that you are following the new regs.

Pugliese: Exactly. And just as a story, me and one of the partners from the firm were up in New York talking about this exact issue to a client, and we were on the train back and weren’t even halfway back to Hamilton Station, and we both get an email from what is now a new client saying “I just received a correspondence from a particular state. We’ve never set foot in that state.” But it basically was all of their laws, and it says that Wisconsin’s message to them was, “We think based on what you’re sending to the people in our state, and based on the service you are providing, the recipients of which are based in this state, we think you might have a filing requirement here.” So, it’s a real issue to think about.

Kuchler: Thank you, thank you. Mike. Additional topics that are coming up?

Troped: Well I think Brian did a great job with that local issue. Just kind of on the federal side, all of my clients are asking what is going to happen with the Republican administration and with the new [president]. And so all of the planning that we were doing at the end of ’16, our clients are a little apprehensive, and want to know what exactly is going to take place, probably this summer, with respect to legislation that comes through and how it’s going to affect their bottom line. … Most of them are non-taxpayers, because our clients tend to be either S corporation owners or partners in partnerships, or members of LLCs or even the C corporations, which have docketed changes in the rates that they are going to end up paying, and this impacts decisions about all the way from new hiring to capital planning to expansion plans. And this is obviously an area of uncertainty. Our clients would really like to know exactly what their tax liability is going to end up being for 2017.

Kuchler: But at this point, we don’t know a lot of the answers, do we?

Troped: Well, there’s a lot of thought. Paul Ryan’s drafted tax legislation still sits in committee, and is presumably pretty closely tied to [President] Trump’s — at least website-broadcasted — tax initiatives. Although, [we expect] some changes, and obviously some requirements for reconciliation between the Republican majority and the Democratic side of the legislature, which is going to try to push back on some of these changes. But I think we can expect some of these changes to take place. And probably no matter when in 2017, we expect to see them retroactive to Jan. 1.

Kuchler: Are you advising your clients to check in with you after the first quarter as a good best practice? A lot of the time, companies will wait until the end of the year to worry about taxes.

Troped: My clients tend to check in with us. We are very lucky in that way.

Abo: I’ll probably bridge what Brian and Mike just said when we talk about concerns. What’s going on? The state level and local level is unbelievable. And you bridge this with the uncertainty he’s pointing to. Everybody is looking for money, from the nonprofits to the client. We happen to be positioned in a heavy-tax-burden locality. Domicile is really key, not only for the CEOs. I deal in the closely held business market. So we are dealing with a virtual community. We want to move down to Florida. Jersey now just passed something. They are trying to mitigate the outflux, because my business is portable and I’ll do most of it out of Florida. New York is on a rampage to suck people in, in defining domicile and what you are doing business with, as well as the intersection of estate planning and tax planning and sales and local. Especially in a closely held business, it’s three pockets on the same pair of pants. So when you combine that uncertainty that Mike brought up, the search for funding and my business has so drastically changed — this is why I’m 5’7.5”. I used to be 6’2” with curly hair. This is what it does to us, the tax reform.

New regulations

What are some regulations that will be kicking in this year, or even next year, that business owners should be aware of and prepare for?

Briggs: There have been some changes that were put into place last year that are continuing this year. What had happened, or what historically happened or had been happening, is that certain tax changes would be put in place, and then they’d have an expiration date. And we would never know in the past maybe until the end of December, early January, whether these provisions were going to be expanded. What had happened over the past couple of years is that some of these expiring provisions have been included for several years going forward. Mostly it had to do with writing equipment off, depreciation — things of that nature — where you can write off 50 percent of the cost of equipment that you are placing in service, or write 100 percent off if you’ve placed a certain amount or less into the service, mostly for small businesses. So that’s one of the key changes.

But what I really wanted to talk about was to echo what Mike said. The election took a lot of people by surprise — the business owners. I know the election was on a Tuesday. By Wednesday I was getting calls from clients. “[Is] this result going to have an impact for us?” And I think that what we are going to see in 2017, as Mike said, is probably one of the most dramatic tax law changes that we’ve seen in years. As you said Cheryl, we don’t know anything just yet, but when you take a Republican president with some very strong ideas, followed by a Republican House and a Republican Senate, the chances are very strong that something is going to pass this year. And some of these proposed changes are pretty drastic. The reduction from a high of 34 percent for business taxes down to 15 [percent] — that’s a pretty dramatic change, and I know that a lot of my clients and a lot of the listeners will say, “Well, geez, I’m not a C corporation, I’m an S corporation or an LLC. How could this affect me?” And what we’ve read is that that 15 percent will stay if it’s passed for the pass-through businesses and their owners, as long as they keep those profits invested in their business. So, that’s a very dramatic change.

Combine that with the potential repeal of the estate tax and the reduction of the individual rates. It really presented a big opportunity for planning, and I’m sure all of us recommended that at the end of the year, if there’s any possible way to defer income into ‘17, it makes sense, which is completely opposite of what happened last time there was a dramatic change in the tax laws. In 2013, we knew the rates were going to go up, so everyone accelerated income into 2012 so that they wouldn’t have the effect of that bite in that first year. So, this is the direct opposite, and I think it is something.

Cheryl, as you mentioned, business owners should be contacting their accountants almost on a monthly basis this year. It’s going to be probably one of the most important years from that perspective.

Urian: Just to echo the comments that have been said already, we are seeing a lot of clients’ estate, local, nexus, income and sales tax issues, as well as what the 2017 taxes are going to be. We’ve got some clients that are concerned that the only credit that’s going to be allowed out there is going to be the R&D credit. I think both plans allow the R&D credit to stay. So, they are monitoring that. Also, we have some clients that are manufacturers who are concerned about the 199 deduction going away. It speaks to what their taxable income is going to be for 2017.

The other thing we are working with as far as clients for 2017 right now is what the due dates are going to be for 2016 returns. So, for pass-through entities, which are the partnerships and S corps, they are going to be due March 15 now. Calendar-year C corps, I’m speaking calendar year for the pass-throughs as well, but calendar year C corps are going to be due April 15, and everything can be extended to Sept. 15. But we have been working with our clients to make sure that they’ve got their records — that there’s no surprises. They are used to filing on April 15; they may have to file on Sept. 15 now. The end result is, it’s going to help the individuals get their returns timely filed by having all of those K-1s to them sooner.

Katz: I want to take this to a slightly different angle. This isn’t purely tax, but certainly something that every CEO has to be aware of, and that is identity theft. Identity theft is an increasing malignancy throughout business. I have had clients — doctors at well-known Philadelphia hospitals — get hacked. There have been reports of accounting firms getting hacked directly through their tax software. So, CEOs definitely have to work with their IT departments, protect those Social Security numbers and all account information. The IRS and states have been working together to prevent identity theft, requiring more information such as driver license information when you file your return. We’ve even seen situations where — the IRS even announced last night, I saw this on the news — that they are holding up refunds even for low-income people for up to 60 days while they run additional verifications to determine that it’s the correct identity. So, CEOs definitely have to work in that area.

M&A trends

There has been a lot of M&A activity or attempted activity over the last few years. What are some of the preparation steps that you’ve seen in some of the more recent successful deals, and which markets might see more activity?

Conner: Our primary focus in the M&A area has been technology companies and working with turnaround and restructuring of M&A transactions. There has been a flurry of activity in the technology space in the last 24 to 36 months, and within that, I think the number-one issue that we have is corporate governance. … Whether it be a stock transaction or an asset acquisition, the primary focus is corporate governance and making sure that all of the things around the transaction, not just the tax issues, are dealt with. When I speak of corporate governance, I speak of shareholder issues. We are in the middle of a shareholder suit right now that involves a technology company, and they have shareholders that are trying to force the board to sell the company at this point. So, dissident-shareholder suits and various litigation matters that come across our desk are paramount right now.

Kuchler: Is there anything that can be done proactively to mitigate those types of issues?

Conner: Having a fully-staffed board of directors and senior management team that really gets it. They really understand what they need to do to take the company to a new level or cash out or whatever they are looking to do as far as the M&A transaction is concerned. But they really need to have their corporate governance in place.

Briggs: Kevin hit on a very excellent point on the governance, but once again, the tax issues in an M&A are important as well. Sometimes it can make the difference on whether a deal goes through or doesn’t go through, because the seller wants to make sure not necessarily how much he receives, but how much he gets to keep. And the buyer of the business or the acquirer wants to, if possible, have the ability to write off part of their purchase price. So, there are a lot of different techniques. Whether it’s, as Kevin said, an asset purchase or whether it’s the purchase of stock, many times the buyer and seller are at odds, because the tax treatment is different under each of the circumstances for both the buyer and seller. But there are alternatives where both parties can possibly get what they are looking for. So, that’s one [reason to] bring your accountant in, because a lot of times they’ll look at the investment bankers or the attorneys as the key players in this, when in reality the accountant should be as well because the tax issues are important as well.

Getting ready for audits

What do you do to prepare adequately for an audit? How do you stay out of the audit area?

Urian: Whether you receive a notice of audit, or I’d even say a nexus questionnaire, get it to your CPA right away and have us involved from the very beginning. We will have a power of attorney completed, but I can’t emphasize enough that we should be involved from the very, very beginning, because we can get a good understanding as to why the audit is going on. Having the audit in our location rather than your location is often recommended, and let us prepare the information and the documents with your assistance to present them to the auditor. So once again, have us involved from the very beginning.

Abo: I may be one of the older people at this table, but the pendulum is quite subtle. A number of years ago, if you got a room full of CPAs and you raise a hand, how many have had an actual audit, hardly any were raising their hand. They didn’t have the resources. The pendulum has swung somewhat. Everybody is getting all the notices and handling it. So, we are seeing an uptick in the audits. And by the way, they are coming very prepared. So, the cautiousness, beyond having somebody independent than the client there, it’s no problem, whatever.

The government agencies, the state, are really looking for that. And by the way, again, I don’t go to the doctor and say, “Wow, they are wasting money. I can’t believe she didn’t find anything wrong with me.” I don’t think you can over-prepare. I think some of the seasoned people around here have the questions answered before they are asked. …

I just had this two weeks ago, and they asked me about independent contractor, which goes into another thing. He already knew it. He went to the website and saw that person’s name on it involved. They are really prepared. And the nice part about the tax arena is — either that or it’ll make you totally neurotic — is you have got to stay on top of this. I just read two days ago, a non-technical thing, it was from Bottom Line Personal, and it was really regarding an audit aspect. And I always assumed — every auditor always gets the last couple of years’ tax returns. I haven’t cited it, but the regulation says “No, you only really need [returns] that are germane to this audit. So, when the auditor asks — I just read this, so I’m validated two days ago — but when the auditor asks, “Well, give me last year’s tax return,” even though they requested it in a letter, I say, “I don’t think it relates to this year,” and it usually stops there, unless there’s something like carry-forward issues and they want to see where you got this NOL or whatever. I didn’t know that three days ago; now I know it. By the time I’m in assisted living, I think I’ll get it.

Katz: I’m glad you mentioned that, Marty. We are in the middle of an audit right now. This involves a net operating cost from over a decade ago. We have provided the IRS with all of the tax returns to trace the origin of that audit that came from closely held S corporations. And the auditor is pushing back, and wants documentation that the owners put the money into the corporation in the form of either equity or debt, and wants records to prove what we accountants call shareholder S basis. And although the IRS generally is barred from making an assessment within three years after that tax return is filed, if you have losses from — net operating losses or, as Kevin mentioned with the technology companies, you might have a lot of R&D credits being carried forward — the rule here is, those companies have to maintain those records. Their losses can be carried forward up to 20 years, and if you don’t have those records, you’re in trouble. Maybe Michael can fill us in. Do banks retain those records for more than a few years? How far back can a taxpayer get records from a bank?

MacFarland: Great question, Stuart. We do retain those records, at least back a certain period of time. But I think this is a key topic. Hopefully to the earlier point, that there is no impact to the financial position of the company as a result of going through the audit, because the work had been done accurately through the years. If there potentially is an impact, I think one of the key points as the banker is to make sure there is good communication with your bank prior to a year-end financial statement being issued to a bank that perhaps notes some impact to the company’s P&L or their balance sheet. Bankers hate surprises. We love good communication — whether it is good or bad, it is important. And potentially if there is an impact to a financial covenant or something on the company’s financial position, it’s great to understand that earlier, sooner than later, so that we can address those issues. And we do have access, of course, to the information and can assist in that fashion.

Urian: We are seeing more and more state audits as opposed to IRS audits, and the one thing that the state auditors are looking at are the company websites. So often the website description of the activities, where the activities are, they are written by a marketing person. They [aren’t] necessarily … current with what the company is doing, and that’s really hard to refute when the state is looking for money, and they are looking for more and more apportionment due to nexus issues in that state. And if you have a website that is really from a marketing perspective embellishing on that, that’s difficult to refute. So, I would just encourage that website be looked at again.

Compensation and benefits

What common mistakes have you seen small or mid-market companies making in regards to comp and benefit plans?

Katz: First of all, I want to bring your attention, or the CEOs’ attention, to a new form that is required at the beginning of January 2017. CEOs should advise their HR departments whenever they do a new hire to ask the employee to prepare a form I9. That’s with the Immigration and Naturalization Service. They have to provide two forms of identity such as a driver’s license, a passport. That form has been revamped and employers are supposed to use the new version of that. And failure to comply can result in penalties, so make sure that the HR people are aware of that new I9 requirement.

In terms of errors or mistakes that we see quite often, the employer doesn’t necessarily treat some of the fringe benefits correctly. For instance, companies may want to provide disability payments, disability income payments to employees. It’s best to do that on an after-tax basis, rather than a pre-tax, so that if, God forbid, the employee becomes disabled and wants to collect on that policy, the proceeds of that policy would remain tax free. There are also rules with regards to, again, our closely held clients that provide health insurance to 2 percent or more shareholders. That health insurance is required to be provided and included in the owner’s W-2s.

Here in Philadelphia, we have a very good opportunity, and I see employers make this mistake. Stock options in Philadelphia are not subject to city wage tax for a Philadelphia resident. We have seen CFOs and HR payroll departments improperly withhold on those stock options, yet we can go into the city and file a petition and recover that money, but that’s something these companies should be aware of. If they are compensating employees with stock options, they should be taking a look at that.

Kuchler: What additional steps should companies take around comp and benefits to make sure that they are not falling off the wagon and staying online with addressing these types of issues?

Pugliese: To further Stuart’s comment, with S corps, it can be a mistake, or it is a mistake, if let’s say it’s a one-owner S corp, to let all of the profit fall to the bottom line of the S corp. Because doing that versus running off some officer comp through payroll, it avoids payroll taxes. That’s something we communicate to our clients each year to make sure, especially to these one-owner S corps. You have … to pay a reasonable officer comp. You can’t just let it fall to the bottom line to avoid self-employment (SE) taxes.

Troped: I was thinking about an issue that we have seen in our practice more than we would have thought. Employer-sponsored retirement plans, …which may require an audit. The determination of whether an audit is required in a retirement plan is based on the number of eligible participants, and I think that there is some mis-knowledge out there about the definition of an eligible participant, because included in that population are former employees who may still have account balances in the plan, as well as any individuals who work for the company who decline to participate, but are eligible to participate. So, for example, a company with only 60 employees but maybe 70 more former employees who still maintain account balances, that company and its retirement plan may be subject to having their 5500 that’s filed for their retirement plan audited by a CPA firm. It’s really kind of a tricky issue. A lot of our clients are not necessarily sophisticated to the point that they’ve got significant human resource departments or human resource professionals, so it’s sort of important to have that mindset of what am I missing? That’s really important as well.

Kuchler: And your accountant can be your first line of defense.

Troped: Your accountant can always be the first line of defense. Even if we do not necessarily possess the expertise in the area, we are certainly a great place to go to get a referral to someone else.

Abo: I was just going to bridge a little bit of a gap in what you mentioned there or alluded to. I think there’s so many traps for the unwary in the retirement arena. … In that arena, the Department of Labor has really geared up — not in the benefits arena, but they have really geared up for audits. There’s so much of the transparency that goes on in the financial services industry. You just brought up a really good point, Mike. It’s not just who you thought were part-time employees, but everyone trying to play around with independent contractors. … That has a whole world of itself. But when it comes to ERISA, it’s different definitions. I never have the answer, I just bring up the question. You better have somebody seasoned, maybe some of the brain power around this table, not me, can really check all of these people that you thought were independent contractors, and you’ve covered the base on that arena. You may have been really screwing up on their retirement plan, and the stakes there are huge. The owner of the business is going to be really at risk. Not only will he lose his employees, but find out all of the assets in the plan are taxable, just because you thought you treated some truck driver as an independent contractor. I wasn’t even thinking of the audit requirements, but just the concept of getting the team of advisors together, including your accountant.

Pugliese: One further comment to Marty and Mike’s points. The three issues that we sometimes see with these retirement plans are [about] the timing that the employee enters the plan. So make sure they know there’s a plan and that they are brought into it at the right time. And the timing of the contributions to the plan, so if there is a withholding from the employer, that needs to be moved into the plan rather hastily. And then third is the classification of income which employees are paid. So you have to just follow the plan document. So if the plan document calls for this type or that type of income to qualify, then you have to follow the plan.

Preventing fraud

What best practices can CEOs and their teams implement to protect their assets from fraud, both internal and external?

Conner: I think the biggest thing in the fraud arena is having the internal controls in place to understand that there needs to be a segregation of duties between the business owner, the accountant, the controller or CFO, if they are large enough to have a CFO, and then the accounting staff. And having [that] segregation of duties and having all of those lines of communication open. … For example, probably the most basic thing is to have the owner of the business reconcile, or at least review, the bank account every month to at least understand where the cash receipts are coming from and where the cash disbursements are going. And in the arena that we work in, a lot of times it’s publicly traded companies where the companies have a board of directors, and they have formal internal control policies. But that can also be in a small to medium-sized business where they can take what is in, what Sarbanes-Oxley has promulgated through the process of being a publicly traded company. Those policies and procedures can be taken into a small to medium-sized business.

Troped: Kevin’s point is very well taken. It all comes down to internal control. I think that business owners — my practice is really closely-held businesses, not large multinational companies — so these are people with manufacturing companies. There’s a differentiation between preventive and detective controls. … Kevin touched on opening a bank statement, having a bank statement mailed to a separate address, or having an owner access that information, whether or not the owner is actually doing anything with it. Having that sort of preventative measure in place so that the person who is potentially making the company susceptible to a misappropriation at least knows that there is some level of review going on. Often times, [for] our clients, there are two people who work in the accounting area, so the segregation of duties becomes very, very difficult. So it is incumbent on the owner of the company to really step up their game with respect to oversight and just having as much information as possible. We’ve had access to situations with clients over the years, and the nicest, longest-lasting employees were the ones who perpetrated something terrible.

Kuchler: So, that’s the internal approach. Mike, do you have additional best practices or tips that companies can use in this arena from the banking perspective?

MacFarland: This is a critical topic for banks. Banks have lost more dollars through fraud than through making bad loans in recent years. In fact, in speaking regarding TD, I know one of the comments that was made is that there are over 10,000 attacks per day against the TD Bank system, and I’m sure that’s larger for some of our larger peers. Banks are susceptible to this type of fraud. [For] companies and CEOs, often times, fraud prevention becomes a reactive measure, because they have gone through a terrible fraud situation. Now it becomes a hot topic on their to-do list.

To Mike’s point and Kevin’s point, putting in that proactive process so that there are checks and balances, there are dual signatures on certain amounts of dollars that are authorized. TD offers, and banks offer, certain technologies to be able to only clear certain checks that are authorized by that bank. So, you would submit a list of the checks that have been cut to your bank, and if there are any checks presented to your bank that aren’t on that list, they would be rejected. So, much easier to avoid the fraud on the front end than it is to spend months digging out of trying to recover.

We just had two situations in the last two weeks regarding clients impacted by fraud. One was related to a very trusted employee who, over a period of more than 10 years, had been accessing funds from the employer. Another was just from a cost standpoint, a case settled that was related to fraud that cost the company over $300,000 in legal fees to recover a portion of the impact of that fraud. So this is a real hot issue. I’m sure all of the CEOs are focused on it. But there are some key proactive technologies and processes put in place that will help you avoid having to go through this.

Protecting credit cards

What about in the credit card arena? I’m continuing to hear about people having to get new credit cards and redo everything that’s online because their credit cards have been jeopardized.

Troped: So, the GLB Act, the Gramm-Leach-Bliley Act, directly impacts this, and [so do] new Federal Trade Commission (FTC) regulations. This is sort of a throwback to what’s new in 2017. If you’re taking credit cards in your business, you best ensure that your credit card provider is compliant with the FTC regulations, which went into place 11 days ago. These are a throwback to the sort of SAS 70 compliance or SSAE 16 kind of compliance requirements. But there are regulations. Accounting firms are subject to new IRS regulations with respect to what we do with our data. The credit card usage, and obviously it flows down into the consumer end. Everyone is getting chips in their cards. This is all part of an effort to curb a very real problem. But there are regulations in place that if you are taking credit cards from your customers, and are not sure if your credit card provider is compliant, it’s a good question to ask.

Abo: I always dread talking about credit cards, but that’s usually with my wife. I think when you talk about the fraud arena — and it’s going on again — [for] any of these CEOs, it just depends where you put the decimal point. On a closely held business, it does become harder, and the stakes are just as relevant to them as possible. One thing we’ve tried over the years to be proactive rather than reactive — especially with some of the things that Kevin and Mike were touching upon [about] when you don’t have segregation of duties — is getting the free three … credit reports. And we do that routinely. I see so many mistakes. … I’ll walk it through [with] the business owner or CEO; he’ll see things, not only [will he] forget about the college loan or the car loan that he signed for his son or daughter, he’ll see usage of accounts, credit card accounts that will show a timeline. “Wait a minute, we haven’t used that account for years.” So you get it for free. You get it. It’s like a negative assurance, those of you in the audit field. It’s not necessarily what I don’t see. It’s sometimes what I don’t see there in the activity, and then you can start to see that we’ve got this corporate credit card, or it was a personal thing that the company has been using and he doesn’t see the activity.

And just to add to Mike’s thing, I love that we tell the client, “You know Sam, that’s all you got. Just have the TD Bank statement mailed to your home. Isn’t that great?” I come home the next month and I see the TD Bank statement he brought in unopened. I say, “No, no. You’ve got to at least give the perception that you’re looking at it.”

Exit planning

There are a number of businesses in the Philadelphia area, tens of thousands I think at last count, that are in the process over the next four to five years of [an exit]. So let’s spend a little bit of time talking about the tax considerations that they need to take into account.

Abo: That’s the M&A world, the Marty Abo world. Again, the tax issues are one line. Bill brought it up. It can be a huge line. It can be the deal killer, but it’s one line. And conveying to them what the bottom line is after all the smoke clears, and what you get after you pay the high-priced attorneys and then the high-priced accountants and doing all that investment banking — it’s a big number to deal with. The structuring, whether or not you want to take the risk of taking back paper. By that I mean, a note because I want to defer the taxation. Sometimes it’s better to take the money and run. I’ve seen so many people in the roll-ups of the heyday, and then we are back into that again. I guess Kevin can allude to that. They took back stock. There’s so many ramifications on it.

The only thing that I really despise … and it’s dealing with a lot of the brainpower around this table: M&A people, merger and acquisition investment bankers, and attorneys. I have a real problem with the term exit planning. It’s planning. It’s like succession planning. I don’t get a life insurance policy today because I think I’m going to die tomorrow. So, everything that Kevin was talking about governors and the tax planning, it’s like three legs on the stool: tax planning, business planning, estate planning. You want to do it before it’s a fait accompli. Bottom line is, I tell the clients, forget about selling the company. I mean, God forbid if you really have to, assume it’s going to happen tomorrow. What if the kids don’t want a business? You’ve got this convoluted structure with LLCs all over the place. Nobody knows what stock. You’ve got no buy-sell in place. You’ve got no management, you know. So I guess I really talk about it as planning, but God forbid something happens, or God forbid they really are planning for a five-year strategy. Better to go to the bank before you need the money then when you need the money.

I haven’t really addressed — I’ll let Bill answer it — the tax issues of it. It’s a big number and you can structure it really well, but I’m more concerned about preparing for the divorce before it comes — getting all the things lined up and doing on it. So it’s not exit planning, it’s succession planning. And I like bringing down from what the big companies [are doing]. Kevin was alluding to the public companies, to lopping off the decimal point. But, it’s the same thing. Getting your buy-sell in place. … Interestingly enough, everybody wants to give, if you have a restaurant, the chef a piece of the action, or key employees and management. And I do a lot of litigation work and valuation, and I say before you want to give away that 10 percent, I’ll usually speak to that employee and think, what the heck are you going to do with a 10 percent you can pass in? So, we are dealing a lot with attorneys on a closely held business with a phantom-stock type of situation. Informally or formally it says “I don’t want you in bed with me and knowing all my books, but we are going to get the agreement, we are going to get these accountants to come up with the formula on valuation … as if you own 10 percent.” That’s the creativity we are seeing somewhat. It doesn’t answer necessarily who is going to take over the company … or whatever, but it works.

Briggs: Marty hit it right on the head. When you say exit planning, there are so many different hallways in that house. The first question is “I’m only going to do this for five more years. OK, do I have kids in the business, and are they prone, or are they set up, or are they going to be set up to take over the business from me?” If that’s the answer, then that takes you down a whole separate string as far as the planning is concerned and the tax considerations. “Am I large enough, and are my key employees strong enough, that if I decided I wanted to step away, could they run the business and possibly buy the business from me?”

One avenue that I’ve done a fair amount of work in, and this is something we do with the banks all the time, is if that is the answer, we explore whether the employees could set up a retirement plan, an employee stock ownership plan (ESOP), to actually buy the business from me. And there are a lot of very beneficial tax considerations in the tax law for not only the employees, but also for the employer who is selling his business to an ESOP, as well as the tax benefits for the business in the future. And it’s not always the right answer for each business. Sometimes I’ve had clients who read an article about an ESOP, and they say, “Oh this is the greatest thing ever, let’s do it.” And I say wait. Just wait and then let’s just see if it really does make sense or it doesn’t. So, that’s another avenue.

And then the third avenue is if I don’t have the employees that are going to be able to buy it, I don’t have the kids that are looking to buy it, then we get into what Kevin had said. OK, now we get into the merger and acquisition treatment. And as I said before, what happens is the benefits to the owner selling may be different than the buyers. So you have to look at all the different avenues as to how you are going to transition this business. Are you going to take stock back or an ownership piece of the buyer? All of these things have to be taken into consideration. As I said before, … it’s very important that the accountant is part of this process. A lot of times they’ll think this is just something for the lawyers and I’ll tell the accountant about it when it’s done. A lot of times in that case it is too late.

Urian: The two things that we see, number one is the correct valuation. A lot of owners think the company is worth more than it is. So to get an understanding of the true value, I don’t think five years out is too soon to start that. And also, what are they selling? Are they selling the assets of the company or are they selling the stock of the company? The buyer is going to want the assets of the company. The seller is going to want to sell the stock in the company. And there are certain elections that can be made to be the best of both worlds for both the buyer and seller. What they call a 338 election. So, I would bring those two up. That’s what we see a lot with our clients.

Katz: Here in Philadelphia as well as the suburbs, we have been blessed with a pretty robust real estate economy … since the recession — certainly a building boom in Center City Philadelphia, a lot of developers. And we represent a lot of those developers that buy. Some buy in whole, but some buy with the intent of flipping those properties and selling those properties in a few years. So in addition to the traditional things, like whether they are going to sell the assets, in the world of real estate it can be particularly advantageous to sell the partnership interest as opposed to the actual physical asset. Again, in Philadelphia and Pennsylvania, there’s a pretty hefty real estate transfer tax, and the CEO should discuss that with their attorneys, because there are certain loopholes here in Philadelphia that are actually due to expire this July 1 when it involves the sale of a real estate company.

Kuchler: So if you’re in real estate, something else to talk with your accountant and your advisors about. Great. Thank you very much. I want to thank you all very much for lending your expertise and sharing your best practices and tips with our CEO audience. Appreciate the time very much. This concludes our roundtable discussion, and on behalf of SmartCEO and TD Bank, thank you very much for your time and your insights.


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