Month: February 2017

People: The First Decision Every Growth Company Must Get Right

Posted by Maria T. Rollins on February 17, 2017

“A mediocre strategy with A-players executing with discipline will blow away your competition.” – Mike Goldman

The February KRS Insights Breakfast featured guest speaker Mike Goldman, President of Performance Breakthrough, who works with leadership teams to ensure they have the right people, strategies and execution habits for growth.

For those who missed the breakfast, we wanted to share some of Mike’s insights and best practices.

Mike started off by sharing the four decisions CEOs face to drive scale and growth: People, Execution, Strategy and Cash. Of these, decisions about people are by far the most important. Quoting Jim Collins, author of Good to Great, Mike pointed out, “First take care of the who, then the what. If you don’t have the right people, you’re going to be miserable.”

Key insight: A great strategy with the wrong people and/or undisciplined execution will fail every time. It is vitally important to put practices in place so that your company has A-players who can execute effectively.

Who is an A-player?

You may believe you have great players because you’ve worked with them for years. But you probably don’t have as many A-players as you think. For instance, your employee Joe might be a great guy who shows up for work on time, but he’s become complacent in his job and his skills outdated – not what you need in an A-player.

Ask yourself this question: Would you enthusiastically rehire everyone on your team? The answer to this question can mean huge changes within your organization.

Kip Tindell, founder and former CEO of The Container Store, believes one A-player’s productivity equals that of three average employees’ productivity.

Being an A-player, however, is not just about productivity. You must take into account your organization’s core values. “If someone on your team is highly productive, but not living the core values, they are a cancer in your organization,” said Mike. “So a salesperson who beats his or her quota every month but is abrasive to customers is hurting, not helping your organization.”

Determining your organization’s core values

Knowing your organization’s core values – what is best and most noble about your organization – will help you find, retain and leverage A-players. Mike shared three quick tests to help you decide whether something is truly a core value:

Are you committed to firing someone who blatantly, and continually, violates the core value?
Are you willing to take a financial hit to uphold the core value?
Is the core value alive within your organization today? Can you tell recent stories describing how an individual lived the core value?

Answers to these questions can help you establish your organization’s core values. Then use core values to hire – and to fire. “Live your core values – award your team on them,” said Mike.

Finding A-players

Sourcing, recruiting and hiring A-players needs to be your organization’s most important process. Mike shared these best practices for getting started:

Create a virtual bench. Don’t wait until you have an open position to scramble to find someone to fill it. You’ll likely wind up with someone who is not an A-player, just to have a body to fill the position. Always be recruiting.

Best practice: Hold everyone on your leadership team responsible for calling ten people they know and trust to ask them, “We’re growing and always looking for A-players. Who do you know that I should talk to?” The idea is not to hire them right away; you might not need them now and they might not be looking for a job. The objective is to initiate a relationship so that when a need arises, you’ve got a virtual bench of A-players to call.

Upgrade your employee referral program. Typical employee referral programs pay a bonus to the employee who refers someone who eventually gets hired. These programs don’t work because the dollar amounts – typically between $500 and $2,500 – aren’t enough to change someone’s behavior.

“Dramatically increase the bonus amount and split it in two parts,” Mike recommended. “For example, pay a $10,000 bonus. $5,000 when the employee gets hired and another $5,000 in 12 months if both referrer and new employee are still with the company.”

Create A-player ambassadors. A-players tend to know other A-players and can be your best ambassadors, communicating what is best about working for your company.

Plan for your A-players

When you invest so much time and effort in recruiting and hiring A-players, you must have a plan for retaining them as well. Mike advised asking:

How can you better leverage their talents?
How can you give them more responsibility?
How can you re-recruit them to make sure they stay?

You will also need a plan for your C-players. Usually this plan consists of giving them a short period of time to make performance improvements. If they don’t make it happen, they need to go work for your competition.

We’ve got your back

At KRS CPAs our goal is to make it as easy as possible for you to get the advice and counsel needed, so you can focus on what matters most to you. The KRS Insights Breakfast Series offers timely and relevant information from experts like Mike Goldman, who can help you grow your company successfully.

Visit our Insights page to subscribe to our newsletter and you’ll be notified about upcoming breakfasts plus other KRS news, events and resources.

Mike Goldman, who is also author of the book Performance Breakthrough, offers a free online assessment for business leaders to help them determine if they are focusing on the most important issues for their business. You can also contact Mike at mgoldman@performance-breakthrough.com or 201.301.2841.

Consider Converting to an S Corporation to Avoid Taxes

Posted by Simon Filip on February 14, 2017

Consider Converting to S Corporation to Avoid Taxes

For closely held corporations still taxed as C corporations, the opportunities to avoid future taxes should be considered.

When converting a C corporation to an S corporation there are a number of tax issues that must be addressed.

C corporation vs. S corporation tax rates

A C corporation is taxed on its taxable income at federal rates up to 35%. Distributions of qualified dividends to individual shareholders are taxed again at a federal rate as high as 23.8% (the tax rate on qualified dividends is 15% or 20%, depending on certain adjusted gross income thresholds with an additional 3.8% surtax on net investment income for taxpayers with adjusted gross income over certain thresholds).

If a business elects to be taxed as an S corporation, there is only one level of taxation, at the shareholder level.

Generally, items of income, deduction, gain or loss from a pass-through entity pass through to its owners, while the entity itself is not subject to tax. The S corporation may therefore be favorable as it avoids double taxation.

Not every C corp is eligible

Not every C corporation is eligible to elect to be taxed as an S corporation. The current S corporation eligibility requirements are as follows:

No more than 100 shareholders
Shareholders who are all individuals (there are exceptions for estates, trusts and certain tax exempt organizations)
No nonresident aliens as shareholders
Only one class of stock

Mechanics of election

The S election requires the unanimous consent of the shareholders and is effective for any year if made in the prior year or on or before the fifteenth day of the third month of the year. Some states, such as New York and New Jersey, require a separate election be filed, while some states follow the Federal tax classification.

Built-in gains

The excess of the fair market value of the assets over their adjusted basis at the time of the S election is considered “built-in gain.” If any of this built-in gain is recognized during the 5-year period beginning with the first tax year for which the corporation was an S corporation, such gains remains subject to corporate-level tax. Any appreciation of assets that occurs post-S corporation election, is subject to only one level of taxation.

Here’s an example:

XYZ, Inc., a C corporation, was converted to an S corporation on January 1, 2017. On the date of the conversion, it owned real estate with a fair market value of $3 million and an adjusted basis of $2 million. The corporation’s net unrealized built-in gain would be $1 million. If the corporation had taxable income of $1.5 million and sold the real estate asset in 2019, the corporation would be subject to the built-in gains tax of $350,000 ($1 million x 35%). However, if the built-in gain assets were sold in 2023, the built-in gains tax would be a non-issue (zero built-in gain tax), since the fifth year of the recognition period passed.

For more about real estate and C corps, see my post Do You Hold Real Estate in a C Corporation?

Excess passive investment income

If an S corporation was previously a C corporation, it may have accumulated Earnings & Profits (“E&P) from years when it was a C corporation. A potential problem for an S corporation with E&P is the passive investment income tax.

If gross passive investment income (which includes income from interest, dividends, and certain rents) exceeds 25% of gross receipts, the corporation may be subject to tax on its net passive investment income. This is fairly common when a taxpayer makes an S election for a C corporation that owns rental real estate. In a year where an S corporation has both E&P and excess passive investment income, some of the excess net passive investment income may be subject to the tax at the highest corporate income tax rate. This does not apply to a year in which there is no taxable income.

The S corporation will still have a problem if there is no taxable income and the passive investment income tax does not apply. If the S corporation has both E&P and excess passive investment income for three (3) consecutive tax years, the S corporation status is revoked on the first day of the fourth year.

Tax planning can help minimize your taxes

The double taxation of C corporation income is very tax inefficient. With proper tax planning, the owners of a C corporation can minimize their total taxes by converting the corporation to S corporation status. As always, KRS CPAs is here to help you. Contact me at sfilip@krscpas.com or 201.655.7411 for assistance with C corporations and tax planning.

Key Features of the Proposed Trump Tax Plan

Posted by Maria T. Rollins on February 2, 2017

President Trump has proposed a detailed tax plan that will revise and update both the individual and corporate tax codes.

Here are some of the key plan elements that could affect individuals and small business owners, if enacted into law.

Top tax rates decrease

Currently the 2017 top tax rate on ordinary income is 39.6%. Under the Trump Tax Plan, the top rate on ordinary income will drop to 33%. He has also proposed lower rates throughout all tax brackets.

More taxpayers will pay the 20% tax capital gains. This 20% rate will kick in for all taxpayers in the top bracket ($127,500 if single and $255,000 if married filing jointly). Currently this rate doesn’t kick in until you earn more than $425,400 if single and $487,650, if married filing jointly.

One tax rate for businesses

Trump plans a single 15% tax rate for business income, whether the business is an S-corporation, partnership or Schedule C. Because sole proprietorships qualify, we may see more wage earners become self-employed business owners.

Under the Trump plan we would also see a 100% expensing of all asset acquisitions, with no limitation.

Capped deductions

For individual taxpayers, Trump is planning an overall limit on itemized deductions of $100,000 if single, and $200,000 if married filing jointly. Currently, itemized deductions are reduced by 3% for every dollar the taxpayer’s income exceeds $250,000 if single, and $300,000 if married filing jointly.

Elimination of the estate tax

Trump has proposed eliminating the estate tax. Still up for discussion is the gift tax or whether the estate tax will be eliminated all at once or phased out over time. Also, there would be no step-up in basis. It is unclear if under Trump’s plan the heirs would take the assets at the decedent’s basis or if appreciation on the assets is taxable at death.

Other key plan features for individuals

The Trump Tax Plan also eliminates:

Head of household filing status for single parents
Net investment income tax
Alternative minimum tax (AMT) for individuals

The plan increases the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly. It also taxes carried interest as ordinary income.

Other changes impacting businesses

Businesses will need to pay attention to these proposed changes as well:

Reduction in the corporate income tax rate from 35% to 15%.
Elimination of the corporate AMT.
Elimination of the domestic production activities deduction (Section 199) and all other business credits, except for the research and development credit.
Implementation of a deemed repatriation of currently deferred foreign profits, at a tax rate of 10%.

We’ve got your back

Of course, these were campaign proposals and we don’t know if they will become law. KRS CPAs will keep you updated on important revisions to the tax code via email radar and blog posts. If you aren’t already registered for our email radars and newsletter, sign up here.