This year our fall CPE conference took on a slightly different shape. We of course had technical-focused educational sessions on topics geared toward private companies, but we also had the opportunity to join our investment industry colleagues and clients for extended networking and some fantastic keynote speakers.
While the format took on a new twist, the content gave our private company clients what they have come to expect: a plethora of ideas and strategies to help their businesses. Throughout all of our presentations, awareness emerged as the running theme, reminding those in attendance to plan ahead and plan early. Below is an overview of some of the insights and information shared throughout the day.
What’s Trending in Transaction Tax
Samantha Smudz offered valuable insight into tax minimization strategies for business owners looking to sell. If you’re an S corporation or partnership and your state offers a pass-through entity tax (PTET) election, this could be very impactful during the year of your transaction to help minimize taxation on the additional gain. Planning ahead and structuring your sale particularly as an asset sale could allow you to take advantage of the PTET. As with any election, timing and planning ahead is critical. She also highlighted the use of a pre-transaction F reorganization for sellers of an S corporation. An F reorganization is a tax-free reorganization where a corporation changes its identity, form or place of organization. Doing so can set you up for success in selling assets for tax purposes and selling equity for legal purposes.
Another great reminder came in the form of updates on the Tax Cuts and Jobs Act, including details on the ongoing phase out of bonus depreciation; Section 199A deduction, which ends in 2026; the capitalization and amortization of R&D expenses; and Section 163(j) limitation on interest deductions for federal tax purposes.
The most important takeaway of the session was to simply be aware there are many items to plan around from a tax perspective before a sale, not just during or after. Work with your tax advisers early.
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What Businesses Should Know About Private Credit Deals
Private credit deals are hot right now as private lending sources try to fill the gap left from tightened credit markets. Private credit, essentially any type of loan that does not involved a bank or public markets, includes anything from mezzanine lending to borrowing money from a private fund to borrowing money from your relatives. The private credit market is $1.4 trillion currently and projected to grow to $2.3 trillion in the next couple of years, translating to increased opportunity for companies looking to infuse cash into their operations through non-bank sources. With the currently enhanced activity/investor interest in this area, Robert Velotta helped the closely held owners and finance team members in the room learn more about the new doors opening for businesses.
While a borrower in these deals won’t have significantly different tax consequences if using private credit versus a bank loan, investors are left with tax-related decisions to make. As such, Rob gave us an understanding of the tax issues from the investor side as a way to better understand the private credit lending process in its entirety. If merely buying loans, the lender is likely taxed as an investor; if a lender is making loans, they may be taxed as in a trade or business of lending, like a bank. There are different tax implications for each. From the borrower’s perspective, any type of debt modification, such as the cancellation of debt or a restructure to owe less money, could produce a taxable income event you will have to address appropriately.
Rob’s message was to be aware of the lending opportunities available and the tax and business consequences of each.
Considerations Before Transitioning Your Business
Scott Swain and Jim Lisy set out to help owners and their financial teams plan ahead for an eventual sale of the company, from a business and personal perspective.
Scott walked us through how to help owners prepare for a business transition well in advance, positioning them to receive the highest price for their company. He stressed the importance of understanding a sale is a process, not an event, and should be an integral part of strategic business planning. Taking us through key points of business succession planning, ownership succession, buy-sell agreements and stock sales versus asset sales, he also focused on personal readiness. What does an owner want to do after the sale? How much money does she need to live in the way she’s accustomed to? How can they be financially and fiscally ready for this next chapter? This process includes not only income tax planning but also gift tax planning, especially given the potentially significant changes to the gift tax regime with the sunset of currently favorable provisions at the end of 2025.
Jim Lisy took us through some steps surrounding the sale process and execution to maximize your sale price and options, reminding us that a well-planned deal process two to four years in advance complements company value. You must have the right internal and external teams together early so you can all work in tandem. Remember curb appeal matters in an M&A transaction. Have your accounting in order, conduct a pre-emptive Quality of Earnings (QoE) report and recognize that one’s capabilities and personality might be great for building a business — but not for selling it. Jim also commented on the M&A market as a whole, noting that it is down, mostly because companies are not going to market the same as they were last year. This could be a result of higher interest rates, company performance or the fact that people are expecting a more vibrant 2024. Interestingly, valuations haven’t gone down significantly. PE groups have raised a lot of money, putting pressure on them to get deals in the next few years.
Plan ahead for transitioning your business and your sale — there are many opportunities to make it a success.
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Sales & Use Tax Opportunities & Updates
Hannah Prengler and Nick Longo presented on the sales and use tax landscape. But before jumping into technical details, Hannah noted a few key business updates. One important area included the new beneficial ownership information reporting requirements under the Corporate Transparency Act, their impact on many companies and potential state ramifications. She cautioned everyone to take some time to read up on the new requirements and become familiar.
From a state tax perspective, the report was that while numerous states are experiencing robust sales tax collections due to Wayfair, overall state revenue growth is lower than expected. This has states bracing for softness in collections and volatility that could eventually impact taxpayers. States also continue to be more aggressive around nexus, seeking vendors and salespeople that work with companies to identify all collection opportunities.
In addition, there have been numerous impactful sales tax court cases that are changing the landscape. Many states continue to expand their taxation of services, including “non-traditional” services such as software as a service, website design and hosting, pre-written computer software access services, etc. Taxing digital advertising is also on the dockets, with a Maryland court case and other federal court cases leading the charge. The success of these cases could impact other states’ ability to follow suit and begin taxing digital advertising.
Maintaining awareness of the sales and use tax landscape and related legislation, both positive and negative, can keep taxpayers compliant and open to alternative minimization strategies.
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Digital Assets 101 for Private Companies
Jamie Gasiorowski and Mike Dellavalle from our Digital Assets Group gave our private company clients an overview of digital assets and the state of the industry. Digital assets (and the underlying technology, blockchain) are already being used for payments and receipts, the tokenization of real world assets, decentralized finance and smart contracts. But while there are many uses for digital assets and blockchain, there are many challenges, including relatively little guidance from regulators, an overall negative reputation in the public and a constantly evolving environment in a volatile market. Lack of regulatory clarity and framework within the U.S. has pushed digital asset companies and industry participants offshore to countries with more advanced legislation and clarity.
In addition to where the industry stands, Jamie and Mike also covered some of the foundational building blocks, such as types of custody, risks and solutions to self-custody options, hot regulatory topics and general best practices. The presenters certainly brought much needed clarity on the topic to everyone in attendance.
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In addition to all the great technical content, we were also fortunate to hear from two memorable keynote speakers focused on proactivity, awareness and gratitude. Dr. Jim Johnson — William R. Kenan Jr. Distinguished Professor of Strategy and Entrepreneurship, and Director of the Urban Investment Strategies Center at The University of North Carolina at Chapel Hill — took us through the demographics making up our labor force today and how addressing these trends in our company cultures can make a difference. Jim Tressel, President Emeritus at Youngstown State University and former Head Football Coach at The Ohio State University, shared stories of living with an attitude of gratitude and how focusing on the positive, caring for others and ourselves, and gaining perspective through dialogue can lead to success.
We are more than aware of and grateful for all of the hard work and effort that went into this year’s event, and for all of the clients who continue to support us and motivate us every day!
Contact Marie Brilmyer at email@example.com or a member of your service team to discuss this topic further.
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.