Transworld Business article on using Stock Options to compensate employees. Written by ASPN founder Michael Orlando. Click here: Using Stock Options and Other Equity Incentives to Retain and Attract Talent
You try to protect your business against as many risks as possible. But when it comes to key
employees who are critical to your company’s success, there might be more risk than you think.
The death or disability of a key employee can reduce the earning power of any business in the
short run. For smaller businesses, it can have a more dramatic effect, and even threaten the
company’s stability if it happens at the wrong time. This can also be true for other key
contributors such as co-owners or board members.
Addressing these risks with insurance is simple in theory, but determining the right kind of
coverage for each key person requires careful analysis, best undertaken with the assistance of a
trusted financial professional with specific training in this area.
Having the foresight to protect your business against the loss of a key employee – perhaps a
company’s most valuable asset – can mean the difference between business as usual and
closing up shop. Some important questions need to be faced in order to ensure the business can
continue and thrive if the unexpected should occur:
• What value does the key person bring – creative genius, sales acumen leadership qualities?
– and what are those characteristics worth to the business?
• How much revenue could be lost before a replacement can take over the role?
• How much will it cost to recruit and train a replacement?
• Will clients lose confidence in the company?
With the help of a trained professional, you can estimate the financial impact on the business of
these and other factors, and put in place effective life and disability insurance policies, as well as
appropriate legal agreements and/or trusts as needed, to help ensure those costs are covered.
No one wants to imagine the worst. But making a plan for your business to survive is always a
© 2011 Massachusetts Mutual Life Insurance Company.
Insurance products issued by Massachusetts Mutual Life Insurance Company, Springfield MA
01111-0001. These polices have exclusions and limitations. For costs and complete details of
coverage, please call me at (858) 538-9858.
The information provided is not written or intended as specific tax or legal advice and may not be
relied on for the purpose of avoiding any Federal tax penalties. MassMutual, its employees and
representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek
advice from their own tax or legal counsel.
Provided by Josh Farmer, a financial representative, who represents MassMutual and other companies; courtesy of Massachusetts Mutual Life Insurance Company (MassMutual) (California insurance license number: 0D86987)
I recently had the opportunity to help one of my clients navigate through a sales and use tax audit. It was actually a good experience from my perspective since I was involved from the receipt of the first notification letter from the state Board of Equalization (“BOE”), through the signing of a waiver letter, to the final letter of no further procedures needed. Don’t get me wrong, it was by no means an easy process and was quite stressful for my client’s staff. The good part for me was that I gained valuable experience of the current BOE audit process and can better consult my clients on recordkeeping and information maintenance to avoid potential costly problems should they have the “good fortune” to find themselves the focal point of a BOE sales tax auditor’s attention for a week. Mind you that this is just the Cliff’s Notes© version for a relatively standard wholesale company audit and that I would highly recommend that you consult your accountant or tax professional prior to any correspondence from your end with the BOE as each situation is unique and has its own set of circumstances.
Let’s start with the love note that the BOE sends to inform you that you and them have a date in the near future. The information request list covers a three year period, which happens to be the standard sales tax audit period in California. The list is as follows:
- Sales and use tax returns, including any related worksheets.
- General ledger and related journals.
- Sales invoices and cash register tapes, if applicable.
- Purchase invoices (paid bills) for consumable supplies and fixed assets (furniture, fixtures, equipment, computers, etc.)
- Documentation supporting claimed exempt sales (resale certificates, freight bills, etc.)
- Federal income tax returns, including depreciation schedules (in detail)
- Property tax returns, including worksheets and corresponding statements.
- Sales invoices for fixed assets sold during the audit period.
P.S. – The BOE also states that they may request information for additional filing periods or other records not previously requested after the Auditors review the information that was previously requested. This basically means that the Auditors can request anything that they want to if they find something that is not to their liking.
The BOE will generally give you at least two weeks to prepare for the audit. If you request additional time that would jeopardize any of the audit period by way of expiration of the statute of limitations (which is three years from the end of the period of any of the sales tax returns), the Auditor will request that you sign a waiver to extend the statute of limitations for the audit periods. Don’t try and play hardball here. If you don’t sign the waiver, the BOE assess tax on all of the company’s sales immediately and request payment.
I cannot underestimate the importance of keeping excellent and complete records for items 1 through 8 listed above. The worst case scenario is that you cannot provide any of information (which would seem to be the best case scenario for the state conducting the audit) and all of your companies reported sales as shown on your federal income tax return are taxable in the state. So fully taxable is your starting point, and you work backwards from there into your actual tax position which should reconcile exactly to your sales tax returns, which by the way are required at least once a year for all operations that have gross sales from all sources (whether taxable or not) of $100,000 or more. They should be completed for all businesses that have sales that are subject to sales and use tax regardless of the level of sales volume. For most of my clients that are strictly wholesalers sales tax is limited to the following transactions:
- Sales made during sample sales and warehouse sales,
- Sales to sales reps (inside and outside),
- Sales to employees,
- Promo items (yes everything that you give away is subject to sales tax since you became the end user when you gave it away and if you are a wholesaler you didn’t pay sales tax when you bought it.)
- Gift items from inventory stock (think employee allowances and presents).
Even if you are a wholesale operation you will definitely need the following (for the whole audit period):
- Resale certificates for all retailers that you sell to in California to evidence your exemption from collecting tax on the sales. You should have them complete a resale card with all of the pertinent information on it then sign it and provide a copy of their valid resale certificate.
- For retailers that are not in California you should also have them complete a resale card and sign it and should get a copy of their resale certificate (not all states have them, so do a little research on the state before you harass the customer for it) or other proof that the shipment was sent to an interstate retailer.
- Note that a customer’s billing address (like on an invoice) is not considered evidence that they are out of state as many retailers have headquarters in a state and retail stores in many states. If they have any shipping locations inside the state of the sales tax audit you will need a resale certificate. I would recommend getting anything that you can from out of state customers to evidence that they are a retailer and maintain all shipping documents.
What the auditor will do is reconcile all of the sales tax returns to the federal income tax return to the company’s general ledger. In theory these should all agree or have reconciliations of how they agree to each other. The next step will be to select a series of sales transactions (the amount will vary by company size and auditor) from the general ledger and request all of the backup to support the transaction as to whether it was taxable or not.
The next part of the audit surrounds use tax and is primarily focused on the purchase of fixed assets and supplies. The auditor will request copies of your annual property tax statements and detailed returns filed, your general ledger detail (for all fixed asset, supplies, and repairs & maintenance accounts), and the federal income tax return detailed depreciation schedules. The auditor will once again reconcile these three source documents and in theory they should all agree to each other. During this audit the auditor focused on office equipment (laptops, printers, copiers, office furniture, etc.) and supplies (printer paper, toner, ink, general supplies). What the auditor is looking for are purchases from out of state vendors (Amazon, eBay, etc.) where no sales tax was paid so that they can assess use tax. Any time a purchase is made from an out of state vendor the amount should be claimed on the sales and use tax return so that you can pay use tax on the purchases. The auditor is generally not going to look at any vehicles that are licensed within the state under audit as the taxes and licenses are paid separately on those items. The audit process was standard selection of purchases from the various accounts over the various years under audit. Make sure you have all of the documentation supporting the purchase of major fixed assets.
The last part of the audit focused on disposals of fixed assets. The auditor will want to ensure that for any disposals of assets that were by sale that sales tax was collected and paid on the sale. This is generally not a large portion of wholesale operations so exposure might be lower here than other areas but make sure that you have supporting documentation nonetheless.
With most states hurting for tax revenue due to lower income taxes being collected the Auditors are looking to other sources. One of those sources is ensuring that businesses are collecting and remitting the proper amount of sales and use tax. Remember, this was a very straight forward wholesale operation with one location. Sales and use tax can get extremely complex extremely quickly in cases where there are operations in multiple districts within a state and or within multiple states with each state having their own set of sales and use tax nexus requirements and regulations. You would be well served to review the state BOE in each of the jurisdictions that your company operates to determine if you have a requirement to file there. Not filing or filing an incorrect sales and use tax return can cause a ton of problems if you are facing an audit situation, I highly recommend contacting a tax professional should you have any situations that are out of your comfort zone.
Orion Barca, CPA
Barca Company, Inc.
Circular 230 Disclaimer
Any tax advice contained in this communication, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing or recommending to any other party any tax-related matter(s) addressed herein.
Raising children is a laborious task coated with love, sprinkled with support and dusted generously with encouragement. Unfortunately, parents do not have the luxury of being able to follow a simple recipe and 18 years later, “DING”, your child is ready! If it were only that simple.
If raising children is so daunting and complex then why, during the process of settling a case for a minor, do we default to such simplistic recommendations? Designing a settlement plan for minor children is always a challenge. Settlement Consultants should make recommendations based on these important goals:
- Protecting the child’s assets from
,family, friends, inflation and themselves.
- Preserving Public Benefits
- Leveraging settlement dollars
- Protecting Financial Aid Qualifications
- Growing Settlement Dollars
- Tax Efficiency
As a settlement consultant, one of my biggest pet peeves is getting a request from an attorney asking….. that I present a Structured Settlement quote for a minor, using the same payout ages of 18, 21, 25 and 30. These ages are so commonly requested by so many referring attorneys. Who picked these ages and why?
Age 18 is “The” age. The, “I can vote and die for my country!” age. The age of majority. Adulthood. I can understand why we would want some money to be given to our children at this age. They are, after all, considered adults at that age. Try to think back to when you were age 18 or just talk to a recent High School graduate. Are eighteen-year-olds mature enough to handle their own financial future in a society where it seems that the majority of adults struggle with money themselves?
If we address this issue from a different perspective, we may come up with some different ages and ideas. Financial Advisors have used “Needs Based Planning” techniques for many years. It is considered by many to be the most effective way to determine what is best for a client. Financial Advisors also analyze current information and use statistics to back up the reasoning for their recommendations. Drafting a solid settlement plan for a Minor is difficult to do because making decisions based on what “may” happen is like shooting at a moving target. The only thing that is consistent in life is change. Having said that, we need to make sure we do our best to make recommendations for our children based on realistic, if not absolute, facts.
After some research, I have found that ages 18, 23, 27 and 31 may be better years to target. Here are some recommendations for, and the reasoning behind, the dates of payments.
Age 18 – Transportation
Going off to college is a huge life changing event. I remember driving my 1972 Datsun 510 to college and when the motor started to die, I panicked. Alleviating worries of old used cars breaking down offer comfort to parents and students. Providing money to be paid out to them at age 18 will allow the children to purchase a safe car for work and school. Also consider a small monthly income stream to subsidize the increase in cost of auto insurance premiums through the college years.
Age 23 – College Debt Repayment
Instead of lump sum payments for college, it makes better sense to defer money until after college is completed. That way we are leveraging the minor’s money to assist in paying off student loans rather than taking the chance that the child chooses NOT to attend college because he/she was given a large lump sum of money too soon. Have the minor apply for college loans and write for grants, that they actually will have a better chance of qualifying for, without the additional settlement benefits having been paid out in their name prior to the completion of their studies. Financial Advisors refer to this as, using “O.P.M.” (Other People’s Money).
Why age 23? The U.S. Department of Education’s National Center for Education Statistics (NCES) tracked the progress of first-time students seeking a bachelor’s degree or its equivalent and attending a four-year institution full time in the 2000-2001 school years. It found that only 36 percent of students graduate from college within four years. Furthermore, the graduation class of 2008 carried an average debt of $23,200. [i]
Age 25 – 27 – Family Starter Funds
This is one of those “Moving Targets” that can be most challenging for settlement planners. Currently the average age of Americans starting a family is 26.8 years for men, and 25.1 years for women. Studies have shown that births by women between ages 25 to 29 has risen nearly one-third since 2007, which was already up 25% from the previous five years.[ii] Who knows when our children will start a family? When we are making these kinds of financial decisions for our children, we have to keep in mind that we don’t have a crystal ball to look into. We can not know for sure any outcome for our children. What we can take comfort in is that we are making these important decisions based on good information with the goal of enhancing the quality of their lives.
Age 30 – 35 – Down Payment for Home
Data from the most recent (2005) America Housing Survey (AHS), among the key findings is that first-time buyers were, on average, about 33 years old. So, if there are sufficient assets to allocate on behalf of the minor, why not take advantage of leveraging the settlement dollars to help with buying their first home? One of the most revealing questions I like to ask parents of an injured child is, “Given the same scenario, if you were in your child’s shoes, what opportunities would you want created for you?”
To summarize, raising children is hard work. Planning for their future is near impossible. Parents will never stop trying to help their children plan for a better life. Quite often the courts step in with their own method of protecting the rights of injured children in regards to how the settlement dollars are being invested and at what ages those settlement dollars will be disbursed.
If the case is large in value and trying to make these decisions for our children’s futures becomes daunting, consider establishing trusts that are much better at hitting those moving targets based on their flexible payout capabilities.
In the seven plus years I have been creating settlement plans for minors, the ages stated in the previous paragraphs were not only the most accepted ages by parents, but also the most frequently approved settlement plans by Judges during the Minor’s Compromise hearing.
My recommendations are that attorneys, the courts, and of course the parents of children involved in civil litigation settlements, reconsider the key ages in order to create an optimum settlement plan for minors. You get one chance to make this right! Take advantage of this unfortunate situation and seek the guidance of a Settlement Consultant to assist you making these crucial decisions.
i These figures appear in the latest study by the Project on Student Debt, an initiative of the Institute for College Access and Success, a nonprofit organization.
All art displayed will be raffled off. $20 Raffle tickets can be purchased at the event.
ALL PROCEEDS BENEFIT THE WILLY SANTOS FOUNDATION, a non-profit group dedicated to helping build and maintain public skateboarding venues.
7pm to 10pm
Market Street Village, 2nd Floor Clubhouse
699 14th Street, San Digo CA 92101
Doug Works, lifelong skateboarder and First Vice President at CB Richard Ellis, a global commercial real estate firm – gives us his perspective about the commercial real estate landscape in the U.S. and how it can work in many brands’ favor.
What have been the greatest changes you’ve seen in the national commercial real estate market since the recession began and how can companies leverage this to their advantage?
The biggest change in the overall commercial real estate market is that most markets around the U.S. have experienced a shift from landlord or property owner dominance in many markets to an environment defined by favorable terms and concessions on purchases and leases given the appropriate leverage. Keep in mind that different regions of the United States have been affected differently since the “Great Recession” began in 2007. Simply put, commercial real estate is affected by supply, which has gone up significantly in many areas, and demand, which in some areas has diminished significantly due to a variety of factors. The more facility choices and commercial real estate local market intelligence a business has, the better terms it can achieve on a lease renewal, new lease or building acquisition. That is where I and my global counterparts at CBRE come in, of course. The fact that there are now larger quantities of attractive purchase and lease opportunities throughout the U.S. as a whole than there have been for over a decade has enabled companies to reconsider their former outsourcing strategies in relation to distribution aka Third Party Logistics as well as manufacturing in some cases.
In addition, to the more favorable leasing and purchase concessions that property owners are generally willing to accommodate, there is another critical factor that should be considered when determining where to operate and what functions to outsource. That factor is economic incentives.
Can you explain these economic incentives further?
States across the United States compete to attract, recruit and retain companies that will expand business and investment within their boundaries. Economic incentives can greatly enhance a company’s return on investment and continue to play a significant role in the location and investment decisions. Economic incentives typically fall into two categories: statutory and discretionary. State and federal statutory incentives are “on the books” and available to any business that meets stated criteria. Discretionary incentives are customized and provided by certain cities and only for specific projects on a case-by-case basis. In almost every case, discretionary incentives come into play when a community is trying to attract a large business operation that brings significant investment into that community and will have a substantial impact on jobs created.
How does one identify and capitalize on these state and federal incentives?
Financial incentive availability depends on a variety of factors including the state or community’s needs and the project’s economic impact. In general, incentives are likely to be minimal in prosperous areas unless the project is viewed as highly desirable by local authorities. On the other hand, areas in dire need of new jobs and tax revenue are more likely to offer larger packages. Until all parties meet to discuss the potential size and economic impact of the project, it is difficult to offer a preliminary estimate of incentives to be offered. CBRE actually has a consulting arm called Economic Incentives Group (EIG) that is comprised of professionals that negotiate directly with federal, state and municipal economic development officials throughout the United States. Their services and knowledge of economic development help evaluate, develop and secure meaningful economic incentive programs for the clients they serve. EIG professionals work in conjunction with me and my team of local market experts in each area of consideration.
What advice would you give to companies that are reassessing their current real estate needs?
Rarely will either statutory or discretionary incentives turn a poor location into an acceptable one. Therefore, they should be considered only after a number of locations have been identified that satisfy a company’s key operation requirements. But among roughly equal alternatives, incentives can represent a decisive factor. Incentives should be combined with other factors as part of a “big picture” comparison of contending site locations.
The other advice that I convey to almost all of my clients is to begin with the end in mind. This maxim adopted from Stephen Covey’s Seven Habits of Highly Effective People is especially applicable when making commercial real estate related decisions. Since the commercial real estate market is fluid and ever-changing, it is crucial to lock in terms and negotiate expansion options that are aligned with the client’s growth strategy. For example, if based on conservative projections, a company expects that they will not outgrow a specific building for 7 or more years, it may be appropriate to purchase that building or another of similar size and function pending other terms. It also may be appropriate to consider a shorter term lease on smaller space or a staged take-down of larger space if the business anticipates outgrowing a specific size in just a few years. Since every situation is different and every market is different, we only provide that type of specific advice after completely listening to and understanding the short and long term financial restraints and operational needs of the client.
Statutory and discretionary incentives take numerous forms, including:
• Cash Grants
• Corporate Tax Credits
• Sales Tax Refunds
• Job Fairs
• Recruiting & Screening Services
• Research & Development Tax Credits
• Foreign Trade Zone
• Military Reuse Zone Discretionary Incentives
• Real & Personal Property Tax Abatement
• Cash Grants
• Corporate Tax Credits
• Sales Tax Refunds
• Training Grants
• Building Review and Permit Waiver
• Infrastructure Grants
• Forgivable Loans & Low Interest Loans
• Donated Land
• Free or Subsidized Parking Facilities
• Equipment Grants
• Low Interest Equipment Loans
• Utility Cost Reduction
• Low Interest Bond Offering
• Public Financing
The article below was originally run in Transworld Business. For the actual article, go to:
For the perspectives of all who were asked to weigh in on this, go to:
Age is our friend. Contrary to our obsession with youth, its profitability and our reflective youthful behavior, the other end of the spectrum is looking more and more interesting as each year passes. For those of us who are also obsessed with staring at the horizon looking for opportunities, there continues to be a huge opportunity across the boards to expand sales, extend loyalty and develop the aging segment of the market.
Again, obsessed as we are with youth we’ve been looking at the US Census Bureau numbers and birth rates for years now to determine market growth. We’ve portended the future and we’ve seen the opportunities even in the face of not-so-good news. We reported the dip in the 10 to 14 year-old age segment a few years back and sure enough even before the economy went south skate shoe sales went in that direction. There weren’t enough 12 year-old feet to fill all those shoes that were filling retailers’ shelves.
But strap in because about ten years ago couples leaned more toward amorous behavior, which resulted in lots of little feet and prospective skateboarders. Indications from our quarterly retail reports are that sales as well as margins are picking up and as money starts to flow more freely sales will continue to rise. Money is again being spent on little feet.
Meanwhile there’s an aging phenomenon happening. Boomers have been the engine driving the economy for more than four decades now and will continue to hold up their end. While many of the heritage brands and brands like Old Guys Rule have already identified the aging surf market, there may be even more opportunities on the horizon.
Recently we were asked by a client to determine retention among surfers and we saw a number that might be approaching 70%. It comes down to 60% of surfers in the U.S. are over the age of 25. Starting age for surfers has gone from between 10 and 13 years old to 16 years old. And, the older age segments are growing each year since we’ve been counting.
It’s not just surfers who are aging. Our last Skateboard survey shows that 17% of the 9 million+ skateboarders in the U.S. are over the age of 25: 8% are between the ages of 25 and 34; 6.9% are 35 to 44 and almost 2% are over 45!
Snowboarders look the same. The thinning of available dollars may have resulted in advancing the ages of snowboarders and precluding families that snowboard, but again, there are opportunities in the older market as well. According to our last snowboard survey, 60% are over the age of 25 and almost 34% are over the age of 32.
Opportunities abound among these aging surfers, skateboarders and snowboarders. Think feet. Think shorts and T-shirts. Think shirts. And, don’t forget about the youth obsessed chicks over 35 who surf, snowboard, frequent the beach and practice the lifestyle. The “older” age segments – even in this economy – have more money to spend than their teenaged counter parts. Think margins!
A friend sent me a birthday card that said something about being like a fine wine … life just gets better with age. And, so do the opportunities.
Transworld Business recently published this interesting article on their website:
Check out this recent article written by Killeen Gonzalez, Yahoo contributor
According to figures previously released by Board Trac, 17% of the over nine million skateboarders in the United States are 25 years old or older. Of that 17%, 8.9% are 35 years of age of older. This change in the sport’s demographics has understandably made things a bit more complicated for those on the business side of things, especially since the sport was once considered solely for the young. Let’s take a closer look at some of the older skateboarders behind the trend. http://sports.yahoo.com/top/news?slug=ycn-8488773