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Don't Get Overtaxed

John Kielich, CPA - Managing Director for Kolb+Co. M&A Advisers   email | bio 
LeAnne Foster, CPA - Senior Associatefor Kolb+Co. M&A Advisers   email
April 2011

It's the thick of tax season and April 15th is quickly approaching. There is no better time to be thinking about your business, evaluating your tax strategy and preparing for the future. Neil Keller, Kolb+Co. tax department chair, is one of the knowledgeable professionals that Kolb+Co. M&A Advisers can turn to when tax advice is needed. Neil was gracious enough to take time during "busy season" to pass along tax insights to benefit business owners. Here are the questions we posed along with Neil's answers.

What are the first five things that come to mind that small and midsize business owners should know?

1. Know what your goals are.  If you don't know where you are going, it is hard to help you get there.  What is your plan for your business?  The road map for passing your business on to the next generation looks very different from selling your business to a strategic buyer.  
2. There are lots of tax benefits to be had...know what is available.  A short list of benefits include increased depreciation benefits, the research and development credit (especially for manufacturing companys), cost segregation studies, electing LIFO for inventory (can help combat inflation), and IC-DISC (Interest Charge-Domestic International Sales Corporations which gives United States exporters the ability to realize a tax break on commissions paid to the IC-DISC).  
3. Don't let the "tax tail" wag the dog.  Tax planning and tax strategy is a supplement to a good business plan.   Although good tax planning is very important, the desire to lower taxes should not replace making solid business decisions.  For example, don't spend more than what is in your business plan on new equipment just because there is a great tax write-off available.  
4. States are being aggressive for tax dollars.  Make sure you discuss where and how you are doing business in other states with your tax adviser.  With states regularly changing their rules, there are a lot of unpleasant surprises lurking for the unwary.  
5. All tax accountants are not created equal.  You need a tax adviser not just a tax preparer.  A tax preparer helps you document history while a tax adviser helps you make history!

What are benefits specific to Wisconsin that those looking to start a business should know? What about existing Wisconsin business owners?

For a new corporation forming in Wisconsin that meets certain criteria (see footnote) there is potential for utilizing the Small Business Stock Exclusion. Under Wisconsin law, net capital gains from the disposition of qualified small business stock are exempt from Wisconsin tax. The small business stock must be held for at least five years and can't be acquired by gift or in a stock for stock exchange. The individual who is reporting the gain must also have certification from the corporation that the corporation met certain requirements.

There is also a provision which excludes long-term capital gain on the disposition of business assets to a related party assuming certain criteria are met, but does not have the five-year holding period requirement of the Small Business Stock Exclusion. Credits/deductions are also available related to new employment both for existing companies and companies that are relocating to Wisconsin. The Wisconsin R&D credit is available for C-corporations.

If I am thinking of selling my company in two or three years, is there an advantage to changing the structure of it from a C-Corporation to an S-Corporation, or vice-versa?

From a tax perspective, changing to an S-Corporation can be desirable to avoid a potential double layer of taxation upon disposition, but it needs to be done more than two or three years before selling to lessen or avoid any built-in gains tax implications. Companies that have converted from a C-Corporation to an S-Corporation and held their S-Corporation status for at least five years are not subject (under current federal tax laws) to the built-in-gains tax. It is important to remember that for Wisconsin purposes the period is still ten years, so although you may avoid federal built-in gains, you still might have Wisconsin tax implications. The best way to determine if it is advantageous for you to convert from a C-Corporation to an S-Corporation is to start with a conversation with your tax adviser. Discuss with your tax adviser your goals so that they can perform the necessary analysis. Likely next steps would include reviewing your effective income tax rates, determining the value of assets inside the corporation and the value of the company as a whole, calculating built-in gains potential and calculating the tax ramifications of a future disposition. Although the election to make the change is relatively straightforward, the process to make the determination can be complicated but crucial.

*Footnote: More information about the Wisconsin exclusion on small business stock can be found in the instructions for WI Schedule WD, it is briefly discussed in WI Publication 103 and ultimately relates back to Wisconsin Statute 71.05(6)(b)6 and 71.01(10)