M&D Lenders Symposium

M&D Lenders SymposiumHosted by Grassi & Co.’s M&D Practice

Welcome and Introduction Presented by Robert E. Grote, CPA 2013 M&D Market Outlook Survey Results Summary Presented by Michael A. Violano

Private Company Accounting Presented by Stephen J. Mannhaupt, CPA Tax Savings Strategies

Presented by Jeffrey G. Cohen, CPA

Q&A

Agenda

M&D Market Outlook Survey Results SummaryPresented by Michael A. Violano – Manager

M&D Market Outlook Survey Results

M&D Market Outlook Survey Advisory BoardIn order to ensure that the 2013 M&D Market Outlook Survey addressed the most pertinent issues facing the M&D Industry and its executives, we enlisted the assistance of the following Advisory Board for their insights and recommendations.

Anthony Aronica Vince GalloOwner/Chief Financial Officer President & CEOGraphic Paper, Inc. LIF Industries, Inc.

Andy Goodman John HarkinPresident & CEO Vice PresidentSherwood Lumber Busby Metals

Brian Li Vince PalazzoloPresident Chief Financial OfficerA&Z Pharmaceuticals CPI Aero

Grassi & Co. would like to express a special thanks to all the participants on the Advisory Board for the help and advice they provided during the development of the survey.

Building Materials / Construction Supply

Chain13%

Pharmaceuticals7%

Technology9%

Food & Bev-erage20%

Aerospace & Defense10%

Consumer Goods/Retail Products

14%

Transportation3%

Other 24%

Breakdown of Participating Companies by M&D Industry Sub-Segment

M&D Market Outlook Survey Participating Companies

< 25 26 - 50 51 - 75 76 - 100 101 - 150 151 - 200 > 2000%

5%

10%

15%

20%

25%

30%

Total Company Headcount

M&D Market Outlook Survey Participating Company Size

1 - 25% 26 - 50% 51 - 75% 76 - 100%0%5%

10%15%20%25%30%

Manufacturing Raw Materials into Finished Goods

% of Business

% o

f Sur

vey

Resp

onde

nts

1 - 25% 26 - 50% 51 - 75% 76 - 100%0%5%

10%15%20%25%30%

Outsourcing Partial Manufacturing

% of Business% o

f Sur

vey

Resp

onde

nts

M&D Market Outlook Survey Manufacturing Operations

1 - 25% 26 - 50% 51 - 75% 76 - 100%

64%

17%

5%2%

International Sales as % of Total Sales

M&D Market Outlook Survey International Sales

Capital Infusion/Private-Public Offerings3%

Bank Borrowing18%

Accounts Receivable Man-agement

18%Cash Flow Management

26%

Inventory Management25%

Implementation of Lean Manufacturing Principles

7%

Other 2%

Initiatives to Improve Working Capital

M&D Market Outlook Survey Working Capital

New product development

New vertical market identifi-

cation

Implementation of new processes

Implementation of new business

model/strategy

Other

68%

39%

32%

44%

12%

Primary Growth Strategies

M&D Market Outlook Survey Primary Growth Strategies

0% 1 - 25% 26 - 50% 51 - 75% 76 - 100%

5%

13% 13%

18%

40%

8%

27%

17%

7%

20%

Sourced InventoryIn the Unites States Internationally

M&D Market Outlook Survey Sourced Inventory

Very important Moderately important Not important at all

45%47%

8%

Importance of Technology

M&D Market Outlook Survey Importance of Technology

Higher D

educti

ble Plan

s

Health

Reimburse

ment A

rrangem

ents

(HRAs)

Health

Saving

s Acc

ounts

(HSAs)

Wellnes

s Pro

grams

Self-

Insura

nce

Higher Em

ployee

Contri

butions

None o

f the

abov

e

46%

14%

24%

14%11%

36%

24%

Health and Benefit Programs

M&D Market Outlook Survey Health & Benefit Programs

Better than 2012 and 2013 Worse than 2012 and 2013 Same as 2012 and 2013

61%

2%

37%

2014 M&D Market Outlook

M&D Market Outlook Survey 2014 Market Outlook

Reven

ue will

incre

ase f

rom pre

vious y

ear

Reve

nue will

decre

ase f

rom pre

vious

year

Reven

ue w

ill re

main th

e sam

e fro

m previo

us ye

ar

83%

4%13%

Revenue Expectations

M&D Market Outlook Survey 2014 Revenue Expectations

Private Company AccountingPresented by Stephen J. Mannhaupt, CPA – Partner

Private Company ReportingTwo Initiatives: AICPA Financial Reporting Framework for Small

to Medium Sized Entities (FRF for SME)

FASB – Private Company Council

Private Company ReportingFRF for SME: Non-authoritative

− Additional non-GAAP financial reporting option

Concise set of principle − Cash, tax and other OCBOA methods are too vague and available for

manipulation

Accrual based concepts that include some tax based methods Simplified principles and focuses on the most relevant information

needs of businesses and their financial statement users Principles based

− Not rules based

Stakeholders demonstrated the need for such an accounting framework

Private Company ReportingFRF for SME:Framework is intended for – Owner managed companies

− Greater interest in cash flow, liquidity and financial position

Companies with limited accounting resources Not for highly specialized industries Users of the statements want to determine

− Can the Company perform under a contract − Will the Company be able repay a loan − Have access to entity’s management

Private Company ReportingFRF for SME:Principles include - Subsidiaries – accounting is based on control

– Elect either consolidation or equity method– Parent only financial statement are permitted– Variable Interest Entities – concept does not exist

Employee benefit – DB Plans– Record based on contribution attributable to current period - disclose relative

info– Option for recognition based on actuary calculation

Goodwill– Amortized over same period for tax purposes – 10 years if not amortized for

tax Income taxes – allows for an accounting policy choice

– Taxes payable method would reflect only current taxes payable– Deferred method could be elected – same as GAAP– No requirement specific to uncertain tax positions

Private Company ReportingFASB – Private Company Council: GAAP Exceptions for Private Companies

– These are still GAAP Basis financial statement – Can still obtain unmodified opinion

“Private Company” defined Private Companies would be able to elect the exclusion

– Not required to elect all

Different from discussion on FRF SME – these are GAAP statements

Private Company Reporting

FASB – Private Company Council: Two Accounting Standards Update (ASU)

– ASU 2014-02 – Accounting for Goodwill, a consensus of the Private Company Council

– ASU 2014-03 – Accounting for Certain Interest Rate Swaps – Simplified Hedge Accounting Approach, a consensus of the Private Company Council

Currently in exposure daft:– Accounting for Identifiable Intangibles Assets in a Business

Combination– Accounting for VIE in Common Control Leasing Arrangements

Private Company ReportingFASB – Private Company Council:ASU 2014-02 – Accounting for Goodwill Amortize goodwill on a straight-line basis over 10 years Choose to test goodwill for impairment at either the entity level or

the reporting unit level Test goodwill for impairment only when there is a triggering event

instead of having to test it every year Feeling is value of goodwill within a company is depleted over the

years due to changes in the company and the market Reduces the cost associated with valuation

Private Company ReportingFASB – Private Company Council:ASU 2014-03 – Accounting for Certain Interest Rate Swaps – Simplified Hedge Accounting Approach Allows private companies to apply a simplified hedge accounting

– Prior accounting standards for achieving hedge accounting were complicated

No hedge effectiveness is assumed in the hedging relationship

Swap can be recorded at the settlement value not fair value

Hedge accounting is better at avoiding income statement volatility

Private Company ReportingFASB – Private Company Council:Exposure Draft - Accounting for identifiable Intangibles assets in a Business Combination Modifies the requirement for private companies to separately

recognize fewer intangible assets in a business combination

Intangibles would be based on the existence of a contract – i.e. covenant not to compete

Private Company ReportingFASB – Private Company Council:Exposure Draft - Exposure Draft - Accounting for VIE in Common Control Leasing Arrangements Eliminates the consolidation of Variable Interest Entities (VIE) in

relationships with related parties under common control

VIE entity is an organization in which consolidation is not based on a majority of voting rights

Traditional operating and rental company with common ownership– Was not the intent under current accounting standards

Private Company ReportingFASB – Private Company Council:Grassi responded in favor of each of these exposure drafts.Future Agenda Item: Disclosures related to Defined Benefit Pension Plans

Fair value Disclosures for Level III investments

Other Comprehensive Income

Tax Savings Strategies for the M&D IndustryPresented Jeffrey G. Cohen, CPA – Partner

Cost Segregation Studies Research and Development IC-DISC Domestic Production Case Studies Other Tax Incentives ESOP Extenders that Expired on 12/31/13 New Tax Rate

Agenda

Cost Segregation Studies Research and Development Studies IC-DISC Empire Zone Credits/Excelsior Program Domestic Production Deduction Captive Insurance and ESOP

Tax Incentives and Estate Planning

A CSS− identifies the non-structural components of an

owner’s building;− assigns costs to components;− increases owners depreciation by lowering the

component’s tax life; and− allows the grantor trust to be the owner of real

estate from day one.

By decreasing your current income you defer income taxes to a later tax period

Cost Segregation Studies (CSS)

Companies who have invested in the development of a new or improved business component qualify for this credit

Government sponsored programs backed by the IRS

Immediate source of significant cash and permanent tax savings

Not a deduction, dollar-for-dollar credit Scientific in nature 6.5% credit

Research & DevelopmentStudies

Export sales tax incentive for LLC’s, Partnerships, S-Corporations, and closely held C-Corporations

Pay capital gain rate of 23.8% instead of ordinary tax rate of 39.6% and payroll tax on export sales

Creates a deductible dividend to shareholders Eliminate double tax for C Corporations Make Grantor Trust the owner

IC-DISC

The following can result in a 9% deduction:− Qualifying production activities for manufacturers

in the US− Distributors of items manufactured in the US or

“mostly assembled”− Construction services in the US− Software development in the US

Domestic ProductionDeduction

Cost segregation study resulted in a $200,000 savings

R&D Study resulted in a $150,000 savings

Prior CPA had erroneously filed in NYC resulting in a $50,000 savings

Established phantom stock plan, built management team to transition company for growth and eventual sale

Assisted client to focus on EBITDA to improve current profits and eventual sale price

Case Studies$200M Food Manufacturer

Captive Insurance Company: − 831B small insurance co with premiums under

1.2M Use of Risk Pool− Deductible insurance premiums and tax free

premium income in separate C. Corp Captive− Captive ownership in Trusts

Other Tax Incentives

Sale of Company to Employees ESOP is a qualified retirement plan The company establishes an ESOP plan and trust

and appoints an ESOP trustee The ESOP trustee negotiates with a selling

shareholder to establish the terms of the sale of stock to the ESOP

ESOP

The company borrows a part or all of the funds necessary for the ESOP to purchase the stock from the selling shareholder from a third-party lender (outside loan).

The lender evaluates the ESOP company in the same way other potential borrowers are evaluated

Loans are based on the company's ability to collateralize and repay the loans

ESOP

The company loans the funds to the ESOP (inside loan)

The terms of the loan are based on the credit markets

The ESOP uses the funds borrowed from the company to purchase the stock from the selling shareholder

To the extent of available funds, the selling shareholder would receive cash and take back a note for the balance (subordinated note).

ESOP

The company makes annual tax-deductible cash contributions to the ESOP

The ESOP uses the cash contributions received from the company to repay the inside loan

The company uses the payment received from the ESOP to make payments on the outside loans

ESOP

Good ESOP candidates generally have − solid operating performances;− stable or predictable cash flows;− a good senior management team, and − payroll sufficient to support the contributions

necessary to fund the repayment of the ESOP loan.

As mentioned previously, only corporations can adopt an ESOP

ESOP Candidates

IRC 1042: proceeds invested in QRP (Qualified Replacement Property)

QRP includes stocks, bonds, or other securities of operating companies incorporated in the U.S.

QRP does not include government bonds, mutual funds, real estate investment trusts (REITs), or ownership through means other than a security, such as interests in a partnership or limited liability company

ESOP Gain Deferral

Common ESOP issues are− Cant Sell QRP before death of holder− Must die holding QRP to obtain Step Up on QRP

assets− Must margin QRP assets to get money out of the

ESOP for personal use. If Value of QRP assets drop or Bonds Called, could be gain recognition

The question to ask is…“Is an ESOP right for you?”

ESOP Issues

R and D credit Work Opportunity Credit: $2,400 per employee

(40% of first 6K) for employees who work more than 400 hours

War Vets injured is 12K credit and 14K unemployed for 6 months

Section 179 expensing: 500K with 2M investment limit going down to 25K with 200K investment in 2014

Extenders that Expired on12/31/13

Section 179 of 250K for 15 year qualified leasehold improvements, qualified restaurant property and retail property

In 2014 all leasehold is 39 year property and no 179

50% bonus depreciation: ability to write off 50% of all non real property plus qualified leasehold improvements

Extenders that Expired on12/31/13

Estate tax: Federal Rate at 40% Basic Exclusion $5,340,000 plus portability of spouse to total $10,680,000.

NYS: 16% over 1M in taxable estate however, NYS tax commission may use 5.34M federal exemption and lower 10% tax rate in 2014 and future years losing everyone to Florida

New Tax Rates

Federal Tax Rate: 39.6% Federal over 400K and 450K married is same for 2014

Capital Gains Rates: 20% (same for 2014) plus 3.8% Obama tax

0.9% Additional Medicare Tax: 250K threshold married and 200K single

125K married filing separate

New Tax Rates

3.8% Net Investment Income Tax: Married 250K threshold and 200K single

Not just typical portfolio income and capital gains, but also includes Passive Income

2013 tax returns must make grouping elections for activities or IRS will re-class certain pass-through entities as passive for 3.8% Net Investment income

New Tax Rates

Q&A

For more information…Grassi & Co.

50 Jericho QuadrangleJericho, NY 11530

Michael A. ViolanoAudit Manager(516) 336-2409mviolano@grassicpas.com

488 Madison AvenueNew York, NY 10022

Jeffrey G. Cohen, CPATax Partner(516) 336-2475jcohen@grassicpas.com

Robert E. Grote, CPAAudit PartnerM&D Practice Leader(516) 336-2468rgrote@grassicpas.com Stephen J. Mannhaupt, CPAAudit Partner(516) 336-2479smannhaupt@grassicpas.com