Holistic Tax Review Maximizes Private Company Tax Strategies

Friday, July 1, 2011 - 00:00

The Editor interviews Michael S. Maglio, Managing Director, and Joseph P. Toce, Jr ., Managing Director, WTAS, LLC.

Editor: Please describe your background and tell us about WTAS.

Toce: WTAS is one of the largest tax firms in the country, with 13 offices and over 500 tax professionals. We do tax work exclusively, and a large part of our practice is oriented toward large private and family companies and tax issues that pertain to wealthy families. Smaller public companies also are a key market for us because the tax issues that they face include shareholder and entity issues.

Our services include performing a holistic review and analysis of a private company's tax profile. We address shareholder issues, such as estate, gift, trust, confidentiality and asset protection planning along with the entity-level issues that pertain to corporations, such as accounting methods, state and local taxes, and international operations.

In my personal practice, I've worked on tax issues with many of the largest family companies in the country and with a number of families that are in the Forbes 400.

Maglio: I've also worked with privately held businesses, focusing generally on individual family members, the underlying family as a whole and the principals of the companies. In the case of private businesses, common issues include tax mitigation, wealth transfer and succession planning as well as broad coordination of other issues, such as compensation and general financial planning between the business and the underlying principals.

Editor: Describe the recent WTAS Tax 360 program for those involved with private companies.

Toce: The origins of WTAS Tax 360 are rooted in the fact that, over a period of years, many successful private companies have made one-off tax decisions, which may have been correct at the time but - because times and tax laws have changed - are no longer are optimal. The Tax 360 program provides a holistic evaluation of the company's tax position: we sometimes refer to it as a Mayo Clinic-type review. Our various specialists take a fresh, in-depth look at all aspects of a company's tax profile and generate a diagnostic review.

Maglio: The objective is to employ a diagnostic approach to determine and implement updated and effective tax strategies, which may range from more beneficial accounting methods to restructuring of the business. Typically, we work with current advisors and in-house tax personnel to address these issues.

Editor: I gather you work sometimes with the lawyer who represents the firm.

Maglio: We recognize the significant relationship to both the company and the underlying family, and we work directly with in-house and outside legal counsel on many issues.

Editor: Why should corporate counsel representing private companies be familiar with their tax issues?

Maglio: Corporate counsel focus on many other areas, which is why it is important for them to have qualified resources to come in and assist them with tax matters. GCs regularly advise the underlying family or principals of private businesses on issues that have tax implications - for example, a future sale of the business, other restructurings or compensation. Clearly, GCs must understand and address the tax implications of these decisions.

Toce: Taxes have become so specialized and complex that many private and family companies use outside accounting and law firms. Many of these companies are not large enough to have an in-house tax counsel as would big public companies. Qualified experts can evaluate existing tax strategies and can validate whether they are best options going forward. As part of the diagnostic review, we also can advise if a company has tax matters that simply need better support or documentation.

Editor: What is WTAS Tax 360? What entities does it cover? Why is the holistic view that it provides important? Does it dislodge current advisors?

Toce: WTAS Tax 360 is a comprehensive, expert analysis of a company's tax profile, providing a fresh and holistic review without dislodging current advisors at all. At one end of the spectrum, this review may validate current strategies and determine that no further action or additional strategies are required. At the other end, there may be significant tax planning opportunities that our experts are able to uncover. In reviewing the whole picture, we can identify outdated or ineffective strategies and then generate ideas from an objective perspective.

WTAS Tax 360 covers all the entities in the chain. Many family companies have brother/sister companies - real estate in one company or an operating business in another - and often, there are trusts involved as shareholders. Many private operating companies are S corporations or LLCs, which, as flow-through entities, pose unique challenges when the shareholders are trusts. For example, the interplay of the passive activity rules can be quite complex, and there are substantial planning opportunities.

Maglio: Unlike public companies, the unique issues for private businesses relate to the fact that the shareholder is specifically affected by decisions made at the entity level. These decisions have a direct tax impact on the underlying principals or owners, and the same is true in reverse; thus, tax decisions are dual purpose and must be made in an interconnected manner. The WTAS Tax 360 diagnostic comprehends and addresses this dynamic.

Editor: How often should you do a survey with the company of its whole tax profile?

Toce: We suggest taking a fresh look every four to five years.

Editor: Does WTAS Tax 360 cover tax issues affecting the entity only, or does it also focus on shareholder tax considerations as well as estate, gift and trust planning?

Toce: Generally, Tax 360 is holistic and encompasses estate, gift, trust and corporate and entity-level planning, but we are flexible in the approach. If a client specifically does not want us to consider some of the shareholder issues, then we can omit them. Conversely, if a client prefers that we focus only on shareholder issues and not on entity issues, we can accommodate.

Editor: Give a few examples of the important tax issues WTAS Tax 360 covers relating to international operations and compensation planning.

Toce: Many companies will be organized as S corporations or other flow-through entities. Engaging in international operations opens a variety of planning opportunities, most of which revolve around foreign tax credit planning and determining the best strategy for paying business taxes to foreign countries. The latter analysis involves determining whether taxes should be managed at the entity level - by forming a foreign corporation - or whether taxes are managed better in a flow-through environment - flowing all the way through to the shareholder's 1040.

It's very complicated planning because the states often don't allow foreign tax credits - only the federal government does - so you have to integrate state and local tax planning with international and federal tax strategies. Increasingly, family companies are going global, so we are helping, many of them with these complex matters.

Maglio: On the compensation front, most private businesses operate without substantial in-house resources. Usually, there are various plans designed to compensate via equity-type ownership, and there are many opinions as to the best approach for managing Section 409(A) valuation issues relating to the issuance of stock options and other types of equity compensation.

Editor: Does WTAS Tax 360 also cover state taxes, tax controversies, valuation, asset protection, privacy and confidentiality planning?

Toce: At the shareholder level, there is increasing concern over privacy and asset protection, and many family companies hold stock through trusts that are designed to protect their assets from creditors. If an individual owns a valuable private company interest and is sued, the company's stock could be subject to his creditors. Thus families are opting to put company stock in trusts.

Many states have asset protection laws that protect trust assets from creditors of the beneficiary, and we can advise clients as to the appropriateness of those structures. Similar structures are used in estate planning to minimize estate and gift taxes. Effective strategies involve a combination of estate tax, gift tax and asset protection.

Editor: Why should a company take advantage of complicated, but important, accounting methods to reduce current tax and improve cash flow?

Toce: Depreciation is one of the most common accounting methods for private companies as it furthers the primary objective of maximizing cash flow. Private companies generally prefer to accelerate depreciation and amortization as much as possible to reduce taxes, even though it also reduces their reported earnings. Because their earnings are reported only to a bank - not to the market - the closely held business owner is generally much more concerned about the impact of taxes on cash flow than she is about so-called book earnings.

As part of the Tax 360 process, we review all company accounting methods, looking for ways to accelerate tax deductions and, therefore, to improve the company's cash flow. Another very important area that is often overlooked is research and development (R&D) credits. There is an expansive definition of what constitutes R&D, and many companies can substantially improve cash flow via R&D credits, which were improved this year under the tax law.

Editor: Describe the role of liquidity event planning. Why is it so important?

Maglio: One of the most important aspects of liquidity event planning is anticipating it, and we advise companies to consider liquidity planning long before it becomes an issue. We find that many private companies don't start planning for these events until the eleventh hour.

Toce: For estate planning and gift purposes, for example, it is far better to plan in advance of a possible liquidity event, such as an IPO or a sale. Private companies are subject to substantial discounts for lack of marketability and control; however, once the liquidity event has happened, those discounts are generally not available. We work with companies to look at sale alternatives whereby the company can either use excess cash on hand or borrow, for example, in order to buy out the interests of older generations. Such redemptions can be part of retirement and estate planning and offer creative alternatives to third-party sales as a way of transferring the business from one generation to the next.

Editor: Do you have additional comments for our readers?

Toce: As one of the largest independent firms in the U.S., WTAS provided a wide range of tax, valuation, financial advisory and related consulting services to individual and corporate clients. WTAS Tax 360 provides holistic consulting for individual and business entity tax compliance.

Maglio: Our clients are at the center of an operating model that is structured to allow us to be entrepreneurial and proactive in our approach. Our goal is to ensure that our clients operate with maximum tax efficiency and in full compliance with the most current tax laws.

Please email the interviewees at michael.s.maglio@wtas.com and joe.toce@wtas.com with questions about this interview.