Doug Root and Jake Johnson on Taxes
February 28, 2010
Doug Root of Alexander, Offenberger & Root, Inc. (In partnership with Johnson Consulting Group to offer Tax Services to Johnson Consulting Group clients)
We recently asked Doug to share his thoughts about the current and future tax laws in the area of Capital Gains. Here is what he said: “…The current maximum capital gains rate of 15% is set to go back to 20% in 2011 but we had previously heard that even higher rate proposals were possible…However, We’ve heard no mention of the capital gains rate for months….Our guess is the current maximum rate of 15% will sunset back to the old rate of 20% in 2011”
Example: What this means for Funeral Business Owners interested in selling is that they will experience a 5% increase in tax rates on the gains they receive when they sell their business. [This is a 33% increase from the current capital gains tax level] Consequently, if all other things were equal, a business sale in 2010 would yield more cash to the seller than a business sale in 2011. We do not propose this as fact, but it is an eye opening scenario if this does in fact come true. It goes without saying that if you are considering selling and this tax increase is of concern, you should consider planning now. (Be sure to confer with your tax professional to be certain this applies to you) You may also want to check out our business valuation services at http://www.johnsonconsulting.com/valuation-services
Along the lines of Estate Taxes and it’s affects on the funeral business, the NFDA conducted the following study on September 9, 2008. I have pasted some of the comments in that study that I found interesting to estate taxes and the funeral business:
National Estate Tax Study, September 9, 2008, Deana Gillespie, Research Manager
Purpose
The purpose of this study was to measure how the national Estate Tax is affecting funeral directors’ businesses and financial plans.
Executive Summary
- Under the current Federal Estate Tax laws, one-third (36%) of members would have to sell all or part of their business if the current owner died and 33% said that they would have to borrow money to pay the Federal Estate Tax.
- If the owner of their firm died, most members (62%) stated that they would be forced to eliminate between one to four jobs under the current Estate Tax laws.
- If they did not have to set aside money to account for the Federal Estate Tax, most funeral homes (over 60%) would be able to create between one and four additional new jobs.
- Most respondents (58%) felt that the best solution to the current Federal Estate Tax law would be to increase the current exclusion from $3 million to $5 million and to reduce the current rate above the exclusion from current levels to the capital gains rate of 15%.
- Half of the members surveyed work for a Subchapter S Corporation.
Key Findings
- Over one-third (36%) of respondents stated that all or part of their business would have to be sold if the current owner died and 33% said that they would have to borrow money to pay the Federal Estate Tax if the owner died.
| What Would Happen if the Owner of Your Firm Died? | Percent |
| Expansion of the business would be delayed | 13% |
| Expansion of the business would be substantially curtailed | 11% |
| Expansion of the business would be abandoned all together | 7% |
| Money would have to be borrowed to pay the Federal Estate Tax | 33% |
| All or part of the business would have to be sold | 36% |
- Half of the respondents (50.0%) worked for firms that were Subchapter S Corporations and 42.6% worked for C Corporations.
Additional Verbatim Comments
- We have purchased Life insurance to pay the taxes.
- As of right now there would not be any federal estate tax.
- The tax is blatantly double taxation since the accumulated net worth has already been taxed.
Brooks Cowles-Succession Planning Article
February 28, 2010
Brooks Cowles (JCG Field Representative)
Succession planning for your business really is like a puzzle in many ways. For one, there are many pieces that have to fit together. Depending on your view, it can look impossibly confusing or deceptively simple. The fact is, just the basic elements present in every plan, including valuation, structure and documentation, present many challenges. Succession planning for funeral home owners has changed a lot over the last several years. Most established businesses still have excellent prospects to provide the owner and their family with a secure future. And there are many capable purchasers out there. Most of their last names are not “Inc.” or “Group” or “International” anymore. But overly-high values are a thing of the past, and financing is almost always an issue. Legal skills and local market knowledge have become more important than ever. Too many owners decide they are ready to transfer and then get a painful and expensive education in reality. Here are a few tips:
–Understand what your firm is worth and why. Have realistic expectations, but don’t accept less than you expect without good reason.
–Screen potential purchasers. Want to sell for all or even part cash? You need a buyer with investable cash equal to not less than 15% of the total purchase price, at a minimum.
–Understand the role of real estate. Real estate value is critical today in structuring and financing a deal. Consider a lease.
–Ask your attorney or accountant whether industry specific expertise would be helpful. Many professionals welcome a team member with experience and expertise in funeral home transfers.
–Give yourself adequate time to make good decisions. Generally, if you are older than 50, you need to at least have an outline of your thoughts and options. If you are older than 60, you need specific identification of possible successors, which should be communicated to family and advisors. After that, getting started is up to you.
–EVERY OWNER SHOULD HAVE A VALUATION CONDUCTED AT LEAST EVERY 5 YEARS.
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