At this year’s fall Cohen & Company CPE Day, there was a special feeling in the air as our colleagues, peers and friends came together live and in person to learn from our presenters and each other about a variety of issues for their businesses. Below are some of the highlights from the day.
1. Year-End Tax Opportunities & Updates
With taxes always a hot topic for year-end planning, Kevin Carney, Hannah Prengler, Jenny Tapia and Patrick Walsh covered the gamut. Tax Cuts & Jobs Act (TCJA) provisions with delayed starts are now coming into view, including the change in deductibility of R&D expenses for businesses, unfavorable changes to the calculation of the interest expense limitation (163j), bonus depreciation phase out starting in 2023, and the change in deductibility of business meal expenses. While it is possible we could see an extender package that would change these provisions, for now we plan with what we know.
Other opportunities present themselves for pass-through entities in the form of opt-out options for Schedule K-2 and K-3 reporting and special entity-level taxes in 36 states that alleviate some of the federal tax burden of the state and local tax deduction cap at the owner level. The Inflation Reduction Act also offers a host of energy tax credit opportunities for individuals and businesses. Additionally, the team signaled a hot button for the IRS this year: the Employee Retention Credit (ERC). While qualifying employers can still amend prior returns for all of 2020 and the last three quarters of 2021, the IRS warns to be wary of third party firms trying to “help” businesses claim the ERC, and the Service will focus on fraudulent claims.
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2. What’s Ahead for Accounting & Financial Reporting
Gino Scipione provided an overview of significant standards that are broadly applicable for 2022 and beyond, including the lease standard; stock compensation, giving private entities the green light to use a tax reporting model to determine how to price stock in a company; and government assistance, a disclosure standard for any type of government assistance a company has received, inspired by the influx of government aid throughout the pandemic.
In addition, there are other important matters to keep on your radar as you report for the 2022 fiscal year, including impairments, forecasting, inflation and interest rates, risks and uncertainty disclosures, ESG reporting and considerations, and purchase accounting.
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3. Confronting Cyber Threats: Cybersecurity from the FBI’s Perspective
Fortunate to have Acting Supervisor Special Agent Thomas Corrigan of the Cyber Criminal FBI Cleveland Division at our event, his presentation focused on cybercrimes — which are on the top of the FBI priority list, alongside terrorism and foreign intelligence. One focal point of his presentation that hit home with many attendees is that email is one of the biggest threats for organizations, particularly emails in which someone pretends to be your CEO (often asking for a wire transfer). Agent Corrigan emphasized you can do everything right for your organization’s security, but as soon as one person clicks on a bad link in an email or responds to a fraudulent request for funds, bad actors can get in and establish a foothold.
So, with over $2 billion stolen via hacks throughout 2022, how do you prevent your organization or yourself from falling victim? Agent Corrigan’s advice is to customize internal training, with the highest level of training for those involved in the finance part of the business. Be sure to layer security, keeping the “crown jewels” behind multiple layers of defense within the organization’s security. Personally, use two-factor authentication for everything you do (don’t rely on passwords), have separate email accounts for financial and other matters, and stay current on software updates.
He also recommends creating a partnership with the FBI even before you encounter a threat, so you know who to call and have a baseline understanding of the process. And for companies falling victim to fraudulent wire transfers, his advice is to get to the FBI quickly. Time is of the essence, and they can likely work with your bank to freeze fraudulent wire transfers before the money gets into the hands of the criminals.
4. Is Your Finance Organization Ready for Your Next Business Combination?
Phil Ryan and Jim Hessel focused on what an organization’s finance function must do to prepare not just for a business combination, but for a successful combination. They stressed doing what’s best so your company can tell its story on its own terms. That starts with having your books in order, as buyers will dive deep into your financial records — at least two years’ worth — looking for trends. Closing the books on a monthly basis not only helps your company stay organized but also instills confidence in potential buyers. A third-party valuation and Quality of Earnings report can both be invaluable tools. A data room, before you get far down the road, for all of your diligence documents is also a best practice. Once the sale process starts, keep your decision to a small inner circle to minimize business disruption. Consider what life after the sale looks like and the critical role your finance department will play on the deal team and through the diligence process. And don’t forget about immediately after the sale, when wires will need to get paid, you’ll need to conduct physical count of your inventory and fixed assets, and you’ll start working on sales and cash disbursements post-transaction, among other things. There’s a lot to do but your team will be vital to the deal’s success before, during and after.
5. M&A Lessons Learned
Our panel discussion on M&A consisted of Justin Thomas, Jim Lisy, Dennis Gach, Jeff Detwiler and Rob Heiser II, representing perspectives from all sides of a deal. The theme of the day was to make sure your house in order, planning for a possible transaction often up to five years or more in advance. Whether considering a sale to private equity, which are the funds driving much of the private markets today, strategic buyer or as a portfolio add on, it’s never too early to begin the process of getting organized. If you’re starting to prepare documents and such when the sale process begins, you’re already behind. Be prepared for a heavy diligence process, ready to show solid monthly financial reporting on a trailing 12-24 month period and to answer questions, provide forecasts and more. For owners looking to sell to a strategic buyer, matching up cultures is critical. For those considering a sale to private equity, it’s important to understand the value (in addition to the funding) a PE firm can bring to a deal and a company, and then to communicate that to your entire team when the time is right to get them engaged and on board with the new growth strategy. And don’t forget about mezzanine debt, which is an alternative to equity or bank debt. A mezzanine strategy could be a fit for your organization as well.
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6. Preparing for a Recession
After examining both political and economic landscapes to understand where we’ve been and where we are headed, Leon LaBrecque reminded us that, while we could be on our way to a recession, it can also bring opportunities if you know where to look and how to execute. It’s not the fittest of the organizations that will survive, but those that are the most adaptable that ultimately win. So, what should businesses do now to prepare? He suggests rebalancing your portfolio; harvesting tax losses; considering Roth IRAs and I bonds; and looking into intra family transfers of wealth while the market is down, when you can get a better valuation. Leon also outlined opportunities before and during a recession, such as giving yourself a business “gut check,” reviewing you financial statements, cash flows and insurance coverages; and having your budgets ready for if things stay good (status quo), get bad (revenue drops 10-20%) or get ugly (revenue drops 25-40%). Offload low performing assets, and make sure you have cash on hand to take advantage of bargains that will come during a recession — whether in the form of acquiring a competitor or some of their “A” level talent. And always protect your existing team, checking in to see what they need and identify any weak spots the competition may find that would cause them to leave.
The information we shared at our annual CPE Day for private companies was insightful and spurred many great conversations. Thank you again to all of our amazing presenters and clients who always make this event such a success!
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.