Some Solid Tax Advice As 2017 Winds Down

Martin Romjue
Posted on December 20, 2017
Tax expert Daniel Selby (L) and Delta Airlines strategic sourcing manager Randel Holmes offered advice to operators on how to gain more contracts through sound finances and operations during the MLOA meeting Oct. 24, 2017 in Orlando, Fla. (MLOA photo)

Tax expert Daniel Selby (L) and Delta Airlines strategic sourcing manager Randel Holmes offered advice to operators on how to gain more contracts through sound finances and operations during the MLOA meeting Oct. 24, 2017 in Orlando, Fla. (MLOA photo)

ORLANDO, Fla. — A wave of mergers and acquisitions in the luxury ground transportation industry, among other small business sectors, presents new opportunities for operators planning for the long term.

M&A options are closely connected to a company’s  structure and overall tax health, which can also determine its eligibility for large scale contracts, said Daniel Selby, a Richmond, Va.-based certified public accountant and tax adviser. Selby spoke Oct. 24 to members of the Minority Limousine Operators of America during the Chauffeur Driven Show near Orlando.

Selby started his early morning presentation reviewing the basics of ownership structures, and then pointed out the one best suited to small business finances and taxes.

How You Own
Speaking to a room of mostly LLC or S Corp. business owners, Selby conceded S. Corps get good tax breaks, but run a higher risk of being audited. He underscored the virtues of the C Corp.: Offers the most deductible tax-free fringe benefits; provides the best access to capital and outside funding; retains the most time to file taxes; enables you to build distinct business credit; and commands the lowest tax rates.

“You want the best protection, and you want the lowest tax rates?” Selby asked during a give-and-take with the audience. “Then a C corporation would probably be your best shot. And to decrease the likelihood of being audited. So keep that in mind.”

Financial FYI
The four basic financial statements are the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings.

M&A Wave
Pursuing such tax and financial advantages helps in the current M&A environment,  Selby said. Boomers are strongly influencing the small business economy because of retirements that lead to more mergers and acquisitions, he said. Many are aging out of successful businesses they own.

“We're actually experiencing record high growth in those areas,” Selby said. “So there's a tremendous opportunity for businesses like yours to pursue temporary relationships with other companies to scale up your business. That way you can land those bigger fish.”

Selby relayed an anecdote from a recent presentation where a senior executive from Bank of America mentioned the company prefers not to do business with limousine companies because they don't want to put them out of business. “So think about that for a minute. How could you give business to a company and then still put them out of business? You would think the opposite of that: By giving them business you're actually helping them stay in business.” But the executive found that some limousine companies aren’t scaled to handle the volume from a large contractor like Bank of America, and then it loses out to its competitor, Selby answered.

Growth Opps
Operators who would like to stay in the game and become more competitive have opportunities to buy companies on the market.
“So how can business owners like yourselves benefit from M&A activity? Basically, you identify opportunities where you could partner with other companies and [grow] your business. You can still remain separate but make their [or your] business appear to be a bigger one so you don't have to worry about a [contractor] telling you, “We can't give you our business.”

Among ways companies could pursue such arrangements:

  • Combine assets with those of another company, creating a merger.
  • Acquire the other company by buying its assets and absorbing them.
  • Buy equity in the other company so you become a full or partial owner.

If a business owner is thinking about forming a business venture, a relationship, or a partnership with any other company, the owner should get a second opinion from a professional. “Make sure you do have somebody look under the hood and kick the tires. Make sure that they can give you an outside perspective on where that business is going, and so you don't associate your brand with a company that may not even be in business another year,” Selby warned.

On paper, acquiring assets increases their value, so when you get out of the business or sell those assets, you raise the basis for calculating capital gains taxes, which results in a lower tax, he said.

Operators also may be able to recover some of the payroll taxes that an acquired business has already paid its employees, resulting in tax credits.

AMT Triggers
One major tax pitfall for small businesses is the alternative minimum tax (AMT), which Congress created in 1969 intended for only 150 rich filers. It was put in place to ensure super wealthy individuals paid. Now, many businesspeople get caught up in it, filing two sets of returns and paying the AMT if results in higher taxes. All business entities — S Corp., C Corp, LLC, and partnerships — are subject to it, although the C Corp. can offer the most protection from it.

“You don't really know what your alternative minimum tax is until you actually file your return,” Selby said. Certain triggers can result in an AMT wallop:

  • Pulling some retirement money out before the age minimum of 59 and ½
  • Excessive depreciation recorded on some of your assets
  • Death benefit payments from insurance contracts
  • Dividends from preferred stock or business development
  • Large families
  • Stock options, capital gains
  • Charitable contributions

“If you make charitable donations you have to be very mindful to monitor how charitable you are,” Selby said. “Because if you're extremely charitable you can drive up your itemized deductions and then the IRS would actually minimize or limit some of those charitable deductions.”

Take A Bite Out Of Taxes
To minimize a business tax bite, business owners should:

  • Work with your tax professional throughout the year to make sure you're making good decisions
  • Have a budget in place and actually use it
  • Establish sound internal controls
  • Evaluate your internal prices
  • Hire a person who's working with you to help you set targets, goals, and metrics that you can monitor all year long to maximize profitability. “Don't wait until after Dec. 31 to have that relationship with your tax professional,” Selby said.

Having an “A game” with taxes helps companies qualify to do business with large contractors, he said. Business owners should have: Sound financials in place by a credentialed professional; be paid up on taxes; and if you owe taxes, know how much with a payment plan. “You’ve got to have your act together if you want to do a merger or acquisition and form those business relationships.”

Related LCT article: How To Get More Airline Shuttle Contracts

Related Topics: business deals, business growth, finance, mergers & acquisitions, minority-owned businesses, operation growth, revenue growth, small business, small-fleet operators, taxes

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