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July 27, 2020

Tax Planning for Professional Services Firms

When you have a professional services firm, you need to think ahead when it comes to taxes. With some planning, you can be strategic in spending, reducing tax liability and payments and hitting your financial goals. 

You’ll learn what to think about when it comes to: 

  • Federal tax deductions
  • Local and state planning
  • Pass-through deductions, 199A and R&D credits
  • Retirement Planning

Below is a transcript of the webinar.

Amanda: I'd like to welcome everyone to today's webinar, Tax Planning For Professional Services Firms. Just a little bit of housekeeping as we get started.

Today we have Ted Byer. Ted is a licensed certified public accountant in New Jersey with over 30 years of experience in public accounting and taxes, and he was also recently recognized as the top CPA of the decade by the International Association of Top Professionals.

We also have with us Henry Rinder, who's going to be moderating today's panel. Henry is a licensed certified public accountant in New Jersey and New York with more than 30 years of experience, and as our guest panelist today, we have Jim DiNardo. Jim is a wealth management advisor with Northwestern Mutual Wealth Management Company and a member of [inaudible 00:01:00] Financial. With that, I will hand things over to Henry to get everything started.

Henry Rinder: Thank you, Amanda. Once again, we have an excellent panel. We've done some webinars with Jim and with Ted, and to everybody's benefit, both of them bring a lot of value to the table. And these topics that we're going to discuss today surely affect a lot of firms, professional firms, law firms, medical practices, dental practices, architectural engineering firms. We represent a lot of them.

Between us, it's smaller than Jim's company, and we come across these issues constantly, and even more so now with the COVID-19. I guess there's a lot of discussions among folks about retirement and planning. They might have more time to address it, so we figure we're going to do it as a webinar, and surely if anybody's going to have questions afterwards. Please text them to Amanda and maybe we'll be able to field them right during the webinar. If not, we'll get back to you directly.

So we'll talk about entity choices, accounting methods, we'll talk about state and local issues/considerations, we will touch upon 199 cap A and R&D credits and some other benefits that are uniquely available to professional firms. We'll talk about retirement planning and section 409A, which addresses deferred compensation, and finally, we'll close with just the short discussion about how to plan for succession and exit strategy.

Having said that, Ted, why don't you tee off, and between you and Jim, you can go through the initial slides. Ted?

Ted Byer: Sure. Thanks, Henry. As far as entity choices go, what I tell people is the first time they get out of bed and think about, "Maybe I'll start my own business or start my own practice," that's when the discussion should start about entity choice because it's really a very, very important discussion and it's important that you lay your groundwork properly because if you're a couple years into it and you decide, "Oh, I made the wrong entity choice," it could be costly and time consuming to make the change.

So there's basically five standard ones. We're not going to talk about owning the business or a trust. That's just not practical for this limited time frame. But sole proprietor, sole practitioner, that's the simplest ... You just basically open up your shop and you go. Problem is unlimited liability. There's no corporate vale protection, and you have some issues there.

Limited liability company I like. They're very flexible. You can be a sole proprietor in a limited liability company. It's called a disregarded entity. You could become a partnership. You could even make a check-the-box election, become a C corp, and then make an S election and become an S corp. So a limited liability company gives you a lot of flexibility. It does give you limited liability, as the name says, somewhat of a corporate veil. You do need, usually, an attorney to set one of these up. You should have what's called a membership agreement if there's more than one member. So we like those.

Partnerships as opposed to being taxed to the partnership in a limited liability company, if Henry and I decide we're going to go into business together, we form a general partnership. We're liable for each other's actions. Usually, there's unlimited liability. They're flexible as far as taxation and allocation of profits, allocation of distributions, but they do have some limitations on the liability side.

Corporations, there's really two types at a C corp, which is the fault type corporation, or an S corp, which you have to elect by filing a form 2553. C corp is a tax paying entity. Pays a flat tax rate of 22%. The problem with the C corp is you have the concept of double taxation. C corporation pays the tax, the shareholder wants to take money out as a dividend, they pay tax again at the individual level.

An S corp is a pass-through, similar to a partnership. However, it is a corporation. You do have corporate protection. You can still take payroll, where a partnership you only take distributions. And the nice think about an S corp, if you take a reasonable salary, any distributions that you take out of the S corp are not subject to social security or Medicare tax or the debt investigative companies.

But on the downside, S corps, when you take distributions, they must be pro-routed. So if Henry and I are shareholders of an S corp and we decide to take a distribution, and assuming we're 50/50 shareholders, we would have to take 50/50 distributions, but we may not have earned them in that ratio. So there is some limitations there as well.

Well beyond the five minutes I have for this slide, we could spend two or three hours on entity choices. But if you're thinking of opening a business or a practice, do this early. That's all I have on entities, Henry.

For accounting methods, again, it's something that we normally set up when you start the business, start the practice. But this can be changed midstream, if we have to. For professional service organizations, cash is usually the most common. You pay tax when you receive the money, you get an expense when you pay the expenses. Cash in, cash out. Whatever's left, that's what you pay tax on. That's the most common in professional organizations.

There's the accrual method where you recognize income when the income is earned, not when it's paid. So your accounts receivable is income, and your accounts payable, like incur expense, I decided to buy the chair I'm sitting in for 200 dollars and I don't pay for it for six weeks, but at terms I can recognize the expense when it's placed in service, not when I pay for it. That's more common in a manufacturing environment, something along those lines. Not normally a professional service environment because with work in process and receivables, we don't want to pay tax on that. We want to pay tax on cash that we receive.

GAAP is generally accepted accounting principles. Not usually something that professional service organizations care about much. I wanted to mention it. That is if you're going to have a certified audit, sometimes look for GAAP financial statements, but again, not for professional service organizations.

OCBOA stands for other comprehensive basis of accounting. That's really a wide open area. The most common of that is a hybrid company. So we have a cash basis tax payer who has inventory, the mom and pop candy store, if you want to use that as an example. They're cash basis, but they do have inventory. So we have the inventory on the balance sheet, where under a true cash basis, we would bolt the inventory and we would expense it. But in this case, when we buy the inventory, it goes in as an asset, and we expense it as we sell it. Again, not real common in professional service organizations. Cash is key.

Next. Local and state considerations. This used to be pretty straightforward. There used to be a concept, and there still is. Its' called physical nexus. If you're office was in New Jersey, you pay New Jersey. You also visit New York to pay New York tax. If you had offices in New York and New Jersey, you pay New York and New Jersey tax, and those three-factor formula for determining the allocation, the fact of resales, payroll, and property.

And then a few years ago, along came a case called Wayfair versus South Dakota. It went to the Supreme Court, and a concept of economic nexus came into being. So what economics nexus basically says is, if I'm a New Jersey based entity and I do work for somebody in Colorado, the economic nexus was in Colorado. So, potentially, I may be subject to Colorado taxes. But there are thresholds. Each state's threshold is different. The way that thresholds work is there are two factors. One is the number of transactions, and the other is the total aggregate dollar amount of transactions.

So if I do a one-off in Colorado, I'm not filing a Colorado tax return if I did a tax return for a couple thousand dollars. But if I did 200 tax returns in Colorado or generated a couple hundred thousand dollars in revenue, I may. And economic nexus plays into account for not only income tax, but also for sales taxes as well. And again, we could do a summit on economic nexus for half a day and not cover it all. So five minutes isn't enough.

Remote employees is getting to be a big deal these days, especially in the age of COVID and people working from home. I'll give you an example of one of my clients who lives in Tennessee, works in their house in Tennessee for a New York employer. New York audited this client, this particular taxpayer and determined that even though they're in Tennessee and never stepped foot into the state or city of New York, because it's for a New York employer, and it's for the employee's convenience, that income is subject to New York tax.

Certain states have talked about in the age of COVID that they're not going to enforce those types of rules because people are only working at home, not for their convenience, but because of lockdown orders. No state has, to my knowledge, at least none in the Tri-State Area has actually formulated any of the rules concerning this. But this is going to be a very hot area when we file 2020 tax returns. So please make sure you speak with your tax advisor concerning this.

Henry Rinder: Ted, I just wanted to add one comment on this because there was a case in New York State, which basically gave the foundation for this whole concept of telecommuting income being attributable to the source rather than where the services were actually performed, and to your point, convenience of the employer versus convenience of the employee is what was the specific factor that was considered in that case, and I know for a fact New York follows this rule right now.

I don't know if they're going to enforce it or not, but this case was from New York originally, and to my knowledge, four other states followed that case. In terms of rules, I don't have a list of those states, but obviously people that are telecommuting right now because of COVID from different states with an employer who is in New York, for certain, should be cognizant that this could be an issue.

Ted Byer: Yeah. We actually had recently picked up a client who got caught in that trap. They were audited from New York even though they've never been in New York other than the initial interview, all that income was subject to New York tax. Okay. Next slide. You're up, Henry.

Henry Rinder: All right. Thank you, Ted. Here, we wanted to discuss a couple benefits that many people don't consider. And I'm going to jump to R&D credits first, and there's other credits, but we're going to talk about R&D credits specifically in today's presentation, but surely there are other credits, and a lot of people, a lot of businesses, a lot of small firms do not know about this and do not consider it. But basically, a professional firm that develops or designs new products, processes, that enhances existing processes or products, develops formulations, secret source, improves software, develops software, all of these different activities provide a foundation for significant savings that comes from R&D credits.

And the R&D credits, actually, do not just apply to income tax, but could also be used against payroll taxes for certain companies, usually startups and emerging businesses can actually use the credit to upset the Federal Insurance Contribution Act tax, FICA, when they don't have taxes generated ... They generate losses or whatever. They can actually take advantage of that.

And for sure it isn't just for high-tech companies. So for example, we represent several microbreweries, and obviously microbreweries would be developing different formulations, and that process is eligible for R&D credits. The wineries, by the same token, are also eligible for R&D credits, and one other thing about R&D credits is that normally R&D credits would be limited to income and income taxes generated by the business. But in most recent years, that's no longer the case, especially on the carryover of R&D credits, which I haven't mentioned they can be carried back and carried over, and when you do that, you can actually apply the credits against other sources of income.

So it's a huge benefit that should be considered in small, professional firm or otherwise. There is opportunities to take it and to consider it once you should look at it. And the way to consider it is actually to hire a professional R&D consultant, which we would be happy to recommend who would, at no cost to the company, assess whether you are eligible for R&D credits. And once they determine that, they calculate "How much would a study cost, and what would be the estimated tax benefit resulting from a study and then subsequent tax filings and so on?" So it's a benefit worth considering.

Now I'm going to jump back to 199 cap A, which was a huge benefit that came through when the federal tax law changed to give C corporations a lower tax rate of 21%. In order to equalize, to level the playing field, the legislators decided to give a benefit to pastoral entities as well, and this benefit approximates 20% of what the law defines as qualified business income, and this area is quite complex. There's multiple steps in determining a business's qualification for this particular adoption.

Some of it is based on wages. Some of it is based on capital expenditures, but specifically for professional service firms, the consideration is quite different because, first of all, there are significant limitations. So an attorney, an accountant is limited based on a taxable income that they show individually, whether or not they would qualify for it. But once they qualify for it, this is a very nice deduction that people can take to reduce the overall tax rates on a federal level.

And there are some special provisions for actually professional firms involving construction, like engineering firms. They don't have the same limitations that accountants and doctors and lawyers have. So they surely get better outcome of this particular provision, but not to be forgotten and it must be considered when you do your tax planning and tax filings. This particular provision is supposed to sunset in 2025, but obviously, there is no guarantee whether it's going to last that long or there is no guarantee whether or not it's going to be renewed. It all depends on what happens in the elections and so on and who's going to be able to change the future tax law in this area. Next slide.

Jim DiNardo: Hey. Jim DiNardo here. Yep, yep. Jim DiNardo here. Thanks, guys. Thanks, everybody. So one of the other things for professional service firms to consider is we're calling this by retirement plan considerations, but it's really all employee/employer benefits. Let's focus today on the retirement plans for professional services.

The first thing that we would recommend is to really figure out what life stage the professional service firm currently is in, and we'll typically think of a life stage as a startup firm, a group that its just starting their professional service firm, the ever growing professional service firm, and then the mature professional service firm and identifying the life stage, specifically when factoring in and considering the retirement plan is critical because in the startup phase, you're going to be putting more and more dollars back, reinvesting into the business, into the people into the business, into the marketing to get the professional service firm up and running.

So saving money for retirement, regardless of how tax efficient such savings may or may not be is really second mind, second thoughts as opposed to just having the firm get up and running. Then we get into the growing side of the firm, and that's really when we start hearing from professional service firms, "All right, let's put some money away. Can we put money away on a pre-tax basis? We've got to consider life after work," and that's when we can get into a little bit more complicated, sophisticated retirement specific plans.

Then, finally, the mature side of the firm, one of my partners calls is, this is the cash king or cash cow type of firm, where costs are somewhat fixed, and now the owner's tax bills tend to be increasing, and as a result of that tax bill being increasing, one of the favorite things to really look at are custom-designed, and we're going to get into this in another bullet, but custom-designed retirement plans where you could put 100 to 150,000 dollars, potentially, away pre-tax.

The second bullet point, and I believe this is where advisors, professional service folks, Ted, Henry, myself can add a tremendous amount of value is really designing the retirement plan, and I look at this when we're talking with clients, I look at this as a continuum. There's a continuum of, "Do we want to maximize the retirement contributions for the owners on one side?" And no right or wrong, by the way, with this continuum. "Or do we want to treat all owners and all employees the same? Does everybody get the same dollar amount or the same percentage of their compensation put away in the retirement account?"

My guess, if I had to poll, because I don't have any firm stats on this, about 75% of our clients will say, "Let's maximize the owner contributions," and that is all designed, that is all figured out through proper plan design. I firmly believe advisors in our space can add the most value in really helping figure out which life stage a firm is in, startup growing mature, and then based on that and their goals, putting money away for retirement, how do we then design the plan to match the life stage of the firm?

Just to wrap up this slide, Defined contribution plans versus defined benefit plans. Defined contribution plans, you are defining the amount or the contribution that you can put in, and that amount caps out at about 60,000 dollars. So you can put about 60,000 dollars away on a pre-tax basis. Defined benefit plans, and these have a little bit of a black eye from the earlier years, defined benefit plans, AKA pensions, have been around forever.

And with smaller, nimble, growing, mature professional service firms, we've had a lot of success when they come to us and say, "We've just got beat up in taxes, and we'd like to put more than the 60,000 dollars that you're able to put in the defined contribution plan away," and typically, these folks tend to be over the age of 40 to 45 because a defined benefit plan defines the end benefit, and if you're starting to fund such plans, say, at 45 or 50, then you're able to put in much larger amounts, sometimes as much as 200 thousand dollars away on a pre-tax basis.

There's no free lunch. You've got to take care of employees. You're not allowed to just put money away for the owners, but there are ways to design it where it would be owner-skewed, the contributions would be owner skewed.

The last two bullet points on this, investment options. There's a term we throw around, "open architecture." Make sure that the investment platform or our recommendation is "Make sure the investment platform in the defined contribution plan or the defined benefit plan is a pure, open architecture platform, meaning you can get just about any investment that you wish in there, and then please make sure the advisor is acting as a fiduciary with a big F on that word.

And then last, but not least, we would recommend that you connect business retirement plan to the personal financial planning of the owners and the key employees. A decent amount of our clients, 25 to 50% of their savings is tied up in the retirement plan, and then lo and behold, sometimes 25 to 50% of the remaining net worth is tied up in the business. So if you're not connecting the business retirement plan to the personal financial planning of the owners, we feel that would be a big miss. Next slide.

Henry Rinder: So, once again, this slide is something I'll cover, but I wanted to go back to you, Jim, because on your list you had qualified plans, and that's basically profit sharing plans for one case, pensions, and maybe some even smaller, like your SAPs and some Roth IRAs and so on. But we see quite a bit of use of plans that are not qualified in retirement planning, any succession planning, and many times we actually see the use of life insurance products in combination with some sort of retirement plan and a succession plan. Can you speak to that a bit?

Jim DiNardo: Sure.

Henry Rinder: Would you mind?

Jim DiNardo: Sure. Sure. Henry is alluding to non-qualified deferred compensation plans, and non-qualified are really anything that don't fall into your traditional 59-and-a-half-year-old retirement plan. Non-qualified deferred compensation plans are intended for key executives, owners, people that are instrumental to the business that you want to ... There's a term "golden handcuffs," that you want to keep at the firm with some additional dollars.

And yes, Henry, a lot of those plans, JP Morgan, I just happen to know JP Morgan's non-qualified deferred compensation plan for their executives, about 80% of it is funded through life insurance, and the rationale there is, so one, you ...

Let me back up. One, you have, again, going back to plan design, and on the plan design in a non-qualified deferred compensation plan, we can target one, two, 10, key, key people and we can customize how that plan looks. You have way more customization. With non-qualified deferred compensation plans, a lot of times they're called SERPs supplemental executive retirement plans. Supplemental executive retirement plans.

So one is the design, and then to Henry's point, the second component of it is, then how is it funded? And there are two or three main ways that you can fund it. The first way is a way that I would not recommend, but the first way is you don't fund it. You fund it with an IOU. The business owns this executive money at this date, assuming certain things get triggered.

Being a saver, I don't like any liability that is not matched with some sort of savings vehicle, but you are allowed to have an unfunded non-qualified deferred compensation plan. Instead of that, and this is what we would recommend to clients when we do this, is that you actually fund it, and you can fund it through traditional investments using ETS, mutual funds, individual stocks, individual bonds.

A lot of times the reason why these plans will be funded with life insurance is because of the tax benefit of the internal buildup of the life insurance. The tax growth of that asset does not get hit with corporate or income tax as the money is growing. So that's a major reason why life insurance is used, and then, finally, the life insurance is also used if the person should pass away, the cash value is sent to their family, but most of the time the death benefit is greater than the cash value, so the business can retain the excess.

So let's say somebody is owed a half a million dollars, and there's a million five of a life insurance contract and the person dies, a half a million dollars is paid to the key executive or key employee's family, and then the million dollars is then retained by the business, which is critical because now the business has a million dollars to go to replace that key executive. So Henry, I don't know if I did a good job or not.

Henry Rinder: You did, Jim. And so that, in fact, provides for cost, also, recovery if the business had been paying for the premium over the years, and now there's an opportunity to get that money back, and presumably, depending on the structure of the entity, it may be coming into the entity tax-free as well.

Jim DiNardo: Yeah, correct. And Henry, one last thing, it goes back to early stages growth or mature. The non-qualified deferred compensation that we just talked about, we tend to see at the growth/mature phase of the business, and most of those businesses have life cycles that are longer than the people actually working in the business. So you're going to see gen two, gen three, gen four type of employees in those businesses.

Henry Rinder: Which brings us back to my slide and this concept of basically deploying a succession plan, and how do you go about it? Frankly, I've got to say this keeps me busy a lot, and it's planning for law firms, medical practices, accounting firms on how to basically move the leadership group to the next generation. You mentioned gen one, gen two, gen three. A lot of times these firms that were founded 40 years ago are still running by gen one, and they do have partners who are gen two, maybe gen three, but yet, there was no transition of power. There was no transition of control.

Maybe the governance model is not quite structured properly. And it takes a little tweaking to get everybody on the same page, and it's not always possible, frankly. We see this in different businesses. In many businesses, we are able to execute on the transfer of leadership and ownership. In some cases, you cannot. And things just deteriorate and fall apart. But a basic plan for succession and exit strategy, basically is the idea of failing to plan is planning to fail.

So if you sit down and you start working on this, the chances are you're creating the foundation for a plan that can be executed. And setting up timelines and processes, getting consultants involved helping you with the process, helping you identifying who should be a lead successor and who should be the leadership team of the firm going forward.

I also listed something called business process improvement. When you run a business for many, many years, you become accustomed to the way things are. Often enough, we don't sit back, look at that business, and law firm is a business, medical practice is a business, accounting firm is a business, engineering firm is a business. We are not all professionals that work in the business, but sometimes some of us need to work on the business, and this idea of business processing improvement is the idea of sitting back and making the business better with its better billing policies, better collection policies, improving production. How can you get more efficient, how can you be more productive? Utilizing technology to gain that.

And again, there are consultants in different professions that can assist with this process. They can discuss what are the best practices. They can discuss what you should be looking at from the perspective of key performance indicators. How do you measure improvement? How do you measure progress? And then, eventually, when you have a plan of that sort in place, the hardest thing is to actually execute on it.

Some people are driven and committed and get it done. And some people just develop a plan and it collects dust and things do not change and things do not move forward. But, obviously, having consultants, whether it's us or specific consultants to the profession who are out there, helps move things along. So we always recommend to get that coaching in place.

I'll talk about selling the business as well and the basic M&A processes that we see, whether it's a large law firm, engineering firm, architectural firm, there's always opportunities to merge upstream, and there's plenty of people in that space that can assist it with a process. Similarly, medical practices can be absorbed into more corporate structures. There's plenty of corporate medical management firms that are interested in purchasing practices. And again, investment bankers in a normal sense would have a lot of skillsets and knowledge about the market and what value can be derived from the practice. So they actually are a good resource for that purpose.

Also, in terms of deal valuation and deal structure, they can suggest what is commonly used in the practice. They can help with what's called a teaser and the book. A teaser is basically a one-page presentation or two-page presentation on a business, and the book is a collection of all the documents that would have to be considered by the purchaser or somebody that you would merge with.

As far as the due diligence process is concerned, that's, again, taking that book and validating that the representations and documents are what they're supposed to be. Many times, the buyer's, purchasers, the merger candidates employ law firms and accounting firms that specialize in due diligence, legal due diligence and financial due diligence. So it's something that you would have to be prepared to entertain when you go through this process.

Needless to say, there's contract negotiations, and each one of the practice areas, whether it's law, whether it's accounting, medical, engineering, architectural, has a unique set of circumstances, and they need to be specifically addressed, and many times professional associations have 10 plated contracts on selling the practice that may be something to look at because there may be some specific provisions that need to be considered and employed in the process.

Obviously, when I'm in this space, part of it is also planning of the best tax outcome. So prior to this webinar, Ted Byer and I talked about this case, Martin Ice Cream, which provides a foundation for the possibility of selling at personal goodwill. So, for example, when attorneys do not have the ability to have restricted covenants on other attorneys who work for the firm, that actually creates a pretty significant opportunity.

Now, it's not the easiest thing to execute on, but we have several transactions ongoing and transactions that have closed already involving this idea of identifying the personal goodwill of the key players in the practice separate from the value of the law firm or the accounting firm or architectural firm. You separate it, and when the people get bought out and they get paid for it, they get paid for it for your capital asset, which is then subject to a capital gain recognition rather than ordinary income tax recognition. Huge benefit.

The buyer who's purchasing these relationships and the continuing support and the retention of these clients and customers is able to amortize the payment for the goodwill over 15 years and deduct it. So it's an ordinary deduction for the buyer and a capital gain recognition for the seller. It's a huge win-win when one can be negotiated and obtained.

Now, finally, when I talk about the selling process, there is this whole piece of actual closing, and post-closing activities often involving lawyers and accountants because you want to make sure that the assets that's supposed to transfer get transferred, that the liabilities that's supposed to be assumed get assumed, you're supposed to make sure that if there is any post-closing adjustments that need to be done because not everything can be firmed up on the day of closing, then there's a subsequent accounting for those assets and liabilities or whatever that may be that you need to account for, and specific adjustments need to be made at that point.

Surely, in a transaction of that type, when you do have a post-closing requirement, often enough we see in transactions that there is an escrow, money set aside that is kept in trust by an attorney, usually, and it's for the purpose of satisfying that post-closing adjustment. So this way the buyers do not have to chase the sellers and so on.

Next slide, please. So I guess we are open for questions right now. We have a few minutes. We allotted a little more times for this webinar. So among that, what do you see in terms of questions?

Amanda: Yeah. So I think you guys covered a lot of everything really, really well. We did have a couple questions, though. Someone was asking about whether or not a qualified plan can push the eligibility for a 199A from not eligible to eligible, based on a partial or full deduction.

Henry Rinder: Well, that's a good question. Ted, what are your thoughts on that? If you increase the contribution to a qualified plan, would that in any way affect the 199A limitations ?

Ted Byer: Certainly, if you do it in an S corp it may because in S corp, it's not a specifically allocated deductions of the business owner, it's a corporate deduction. So if we're in a professional service environment and the qualified plan deduction brings the owner under the income threshold, sure. I'm not sure of the answer on a pass-through entity. I just don't know the answer to that for a pass-through entity.


Henry Rinder: It's a good question because the deduction may be flowing separately, and increasing the taxable income for sure. Perhaps we can get back to the person that asked that question. Maybe Ted and I will look into it further and elaborate on it more.

Jim DiNardo: We have seen people use defined benefit plans to start to qualify for some of the QBI on that sliding scale. So I'm going off of memory now. I'm almost positive they were a pass-through. So just food for thought.

Henry Rinder: Okay. Amanda?

Amanda: Sure. So another question was how far in advance should succession planning being to maximize the tax benefits and to figure out the processes and all of that?

Henry Rinder: So perhaps I'll tee off and Jim and Ted, please pitch in if you feel it should be supplemented. There is no magic formula for this in terms of tax benefits because, surely, tax laws are subject to change, and we have seen significant changes over the past several years. So whatever it is that we plan ahead, it's always sort of subject to change. There's a certain level of uncertainty.

Although, usually, congressional measures are generally done in such a way that if you already have something in place, there's a likelihood that you're going to get grandfathered in. So if there is a specific provision that you like and you take advantage of it now and the law changes, there is a good chance that you're going to be grandfathered in.

A good example of that would be a deferred compensation on the 409A, which came to being at some point, and as it evolved, it provided more and more restrictions and penalties, but right in the original provision, there was basically a carve-out for existing plans that allowed them to stay in place under the original terms. Ted, what are your thoughts on that?

Ted Byer: I think Jim may have said it earlier. If not, I'll say it. Failing to plan is planning to fail. I think succession planning should start same time as deciding what entity you're going to be. If you're going into business with someone else, you need to look at the alternatives that are available to you if someone is going to buy, get disabled and retire. And those things need to be discussed before you get into business together. It can be modified along the way. There's nothing to say that an agreement we make today can't change tomorrow if our relationship changes, if tax law changes, anything else like that. The sooner, the better.

Jim DiNardo: Yeah. The other thing I'll say to that is it sounded like the question was around transition and succession planning and letting taxes drive the conversation. Instead, flip it the other way and let's make sure that we found the next owner, gen two, that can buy the original owner out, and still run the company and still make a living. So finding that match, or as we call it, our firm is currently looking for gen two right now. Having somebody that can do all of those things is a little bit of a unicorn, and then once we've found the person, then we'll figure out how to do it from a tax efficient standpoint.


Henry Rinder: But I think to Ted's point, Jim, I've got to say those are words of wisdom. You cannot plan for death and disability. Those things provide uncertainty, and when you go into business, you should plan for a circumstance in which one or two of the partners either die or become disabled, and obviously, thinking ahead will provide you with the best tools because when you start early, perhaps folks are younger, so the life insurance product is cheaper, the disability coverage is cheaper. Jim, you can speak to that better than I can, but it's like putting the tools in a tool chest even though you don't need to fix anything yet, but at some point, some things could break and you may need those tools.

Jim DiNardo: Yeah, and those tools are relatively easy to set up. So if I told you how many times we've seen partnership agreements, but again, unfunded partnership agreements and then, as a result of an issue, premature death or premature disability, Ted and I are partners right now, and all of a sudden Ted and Jim's wife are partners now, so to the extent that we can avoid those, you want to make sure that these partnership agreements and succession plannings on the early demise are funded, and yes, Henry, the life insurance and the disability funding mechanisms are just so easy, so inexpensive if you do it the right way.

Henry Rinder: Amanda, any more questions?

Amanda: Yeah. So one more question from someone is that in consideration of actually forming a partnership that you guys were just talking about, would it make sense, many people consult their attorney, but to bring in a financial planner during that phase as well?

Henry Rinder: We're now open for Jim, but I would say that Jim, you had in your slide incorporating the whole financial planning with the business planning.

Jim DiNardo: Right.

Henry Rinder: I think not to do that is shortsighted, but Jim, go ahead and tee off and address that. Actually, we recommend having somebody like you in the play all the time because otherwise, how would you even consider some of these tools that we just spoke about in terms of life insurance products and disability products.

Jim DiNardo: Yeah, Henry, I'll go one step further. I think if you're starting a business and/or starting a partnership. So you may have a business and then you're merging with another business, I think having a strong accounting ... We tend to refer the small and professionals as tax consultants, not tax preparers. But I think as you're starting that, you really ought to have a strong accounting team at the table. You should have a strong legal team at the table, and I know I'm biased for saying this, but you should have a strong advisory team, financial advisory team, and all of them should be working together.

It's one of my favorite reasons for working as much as I work with Smolin, is that it's all coordinated, and it's not coordinated to start only. It's ongoing. It's coordinated at the start, it's coordinated while things are running well, it's coordinated while things are running poorly, it's coordinated when things are back to running well, and then you've got the succession plan and then we all get to work with gen two. So I would have those three professionals at least at the table.

Henry Rinder: Agreed. Amanda, any more questions?

Amanda: No, that about covers it. We did have a couple questions about the R&D recommendations. I don't know whether or not you guys want to cover that now or we could send them out by email separately after the webinar.

Henry Rinder: I think what I would suggest to the audience is that if you are looking for R&D consultants, send us an email describing your business, the nature of your business, so this way we can actually match consultants that are most fitting for your business and we'll recommend you some names.

I think since we have no more questions, I wanted to thank everybody for joining us today. I wanted to thank Amanda for hosting it. You always do such a wonderful job for us, and Ted and Jim, you guys did a great job. Thank you so much for joining us and presenting today.


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