Posted on Jul 25, 2018

The 2018 Cornwell Jackson Executive Pulse Survey reveals a highly optimistic group of business owners and executives who are confident in their business strategies while being concerned about internal culture and leadership transitions. Across six major industry segments, leaders believe the U.S. economy is better than 12 months ago while the Texas and Dallas Fort Worth economies are holding steady. To improve business opportunities, respondents cite available skilled labor, technology incentives and next generation business leaders at the top of their wish lists.

To attract and retain talent, companies and organizations are providing traditional benefits like health insurance, retirement funding and additional compensation, but also a wide array of incentives that include flexible schedules, referral compensation, revised dress codes and allowances for religion, as well as cafeteria plans and child care programs. More than 32 percent of leaders noted that millennials within their workforce have influenced acceleration in technology investments. More than 43 percent of leaders agreed that millennials are influencing “rethinking of leadership tracks” at their organizations. For almost 60 percent of respondents, their organizational culture is shifting through the influence of millennials.

With the anticipation of current and future labor shortages, leaders are investing in technology solutions to augment positions that are hard to fill. They are also maintaining close relationships with universities and trade schools to cultivate talent. Once in the door, employees continue to receive education and cross training at more than 32 percent of the companies and organizations surveyed.

At the time of this survey in early 2018, leaders were still taking a wait-and-see approach on the impact of the Tax Cuts and Jobs Act of 2017. While most believe it will have some impact on their businesses, the specifics regarding the tax code and planning were unclear. Although the survey revealed some concern over the Trump administration’s economic policies here and abroad, leaders appear most concerned with domestic issues that range from compensation and reputation management to the need for continuous innovation in their businesses.

According to more than 50 percent of leaders, one of the biggest threats to their business planning is the change in consumer demand tied to an increasing variety of procurement channels for goods and services (e.g. online purchases). As options increase for purchasing, leaders are closely monitoring consumer confidence and service standards. Top traditional concerns include an uncertain tax structure and staffing levels.

Competition will impact the operating metrics of more than 43% of survey respondents.

When it comes to financing, leaders in the survey noted strong cash reserves and little need for new capital. However, they emphasized the importance of strong relationships with their lenders and adequate existing lines of credit — regardless of whether they are using the lines or not. They note that banking flexibility is improving with regard to extension of credit to more companies and organizations.

For the coming year, the biggest operational focus of leaders in this survey vary, but some themes that came through include a focus on internal efficiency followed by growth of their customer base and the management of leadership transitions within the company.

Overall, the priorities for leaders in the Dallas Fort Worth area across industries include how to manage change with a dynamic workforce and the influence of increasing consumer choice and technological innovation.

Participant Statistics

The 2018 Executive Pulse Survey attracted more than 80 participants across five major industry sectors. The breakdown of executive and professional types is as follows:

About 85% of participants had businesses based directly in the Dallas Fort Worth metropolitan area, with outlying cities that included Plano, Carollton, Wylie, Irving, Addison and Farmers Branch. The average tenure of participants in their current position averaged about 12 years. Professional certifications varied, but the most common involved a J.D. or CPA licensure.

The average employment of businesses surveyed was about 150 employees. Actual 2017 revenue of participants averaged $21 million. Projected revenue for 2018 was slightly higher at $23 million.

About the Executive Pulse Survey Report

We’re very pleased to publish our first ever Executive Pulse Survey and Report. The survey, which was conducted exclusively in the Dallas Fort Worth area, targets executives in the Construction, Energy, Manufacturing and Distribution, Professional Services, and Real Estate industries.

The Pulse Survey is designed to explore the opinions of DFW-based executives on a wide range of topics and trends that impact how businesses and organizations operate. It is also intended to provide information regarding their peers’ thinking across a variety of industries and topics.

The Survey was developed by our firm in collaboration with our sponsors: Richard P. Slaughter Associates, Comerica Bank, Scheef & Stone, and Insperity. The survey would not have be possible to produce without our sponsor and participant support.

We hope you find the report useful and insightful.

Download the full report here: Download the Executive Pulse Survey Report

Posted on Aug 14, 2017

For years, people have questioned the viability of the Social Security system going forward. In July, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds.

The report projects that the combined asset reserves of the Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds will become depleted in 2034, unless Congress takes action to reverse the situation.

In general, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are common concerns regarding the Social Security system.

What’s My FRA?

Your full retirement age (FRA) depends on the year in which you were born.

Year of Birth

Full Retirement Age

1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943–1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

If you were born on January 1 of any year, refer to the previous year. If you were born on the first of the month, the SSA figures your benefit (and your FRA) as if your birthday were in the previous month.

Collecting Retirement Benefits

According to the 2017 report by the Social Security Board of Trustees, roughly 61 million beneficiaries were collecting money from the SSA at the end of 2016, including:

  • 44 million retired workers and dependents of retired workers,
  • 6 million survivors of deceased workers, and
  • 11 million disabled workers and dependents of disabled workers.

In 2016, the SSA’s total income ($957 billion, including interest income) exceeded its total expenditures ($922 billion). So, its asset reserves grew by $35 billion last year.

The reserves of the OASDI Trust Funds together with projected income should be sufficient to cover the SSA’s costs over the next 10 years. However, starting in 2022, the SSA’s total expenditures are expected to start outpacing its total income.

Is it time for you to start collecting retirement benefits? You may apply for benefits as early as age 62. Starting early will reduce your monthly benefits by as much as 30%, but, of course, you’ll receive benefits for more years.

If you want to receive full retirement benefits from the SSA, you must wait until you reach the so-called full retirement age (FRA). See “What’s My FRA?” at right. Your tax advisor can help you determine if you would likely be better off waiting until your FRA to start taking benefits.

Applying for Benefits

Apply for retirement benefits three months before you want your payments to start. The SSA may request certain documents in order to pay benefits, including:

  • Your original birth certificate or other proof of birth,
  • Proof of U.S. citizenship or lawful alien status if you weren’t born in the United States,
  • A copy of your U.S. military service paper(s) if you performed military service before 1968, and
  • A copy of your W-2 Form(s) and/or self-employment tax return for the prior year.

For most retirees, the easiest way to apply for benefits is by using the online application.

Receiving Benefits While You’re Working

If you’re under FRA and earn more than the annual limit (subject to inflation indexing), your benefits will be reduced, as follows:

  • If you’re under FRA for the entire year, you forfeit $1 in benefits for every $2 earned above the annual limit. For 2017, the limit is $16,920.
  • In the year in which you reach FRA, you forfeit $1 in benefits for every $3 earned above a separate limit, but only for earnings before the month you reach FRA. The limit in 2017 is $44,880. But the SSA only counts earnings before the month you reach your FRA.

Beginning with the month in which you reach FRA, you can receive your benefits without regard to your earnings.

Retiring after Your FRA

You can receive increased monthly benefits by applying for Social Security after reaching FRA. The benefits may increase by as much as 32% if you wait until age 70, but of course you’ll receive benefits for fewer years. After age 70, there is no further increase. Your tax advisor can help calculate the payout for waiting to collect your retirement benefits and help you determine if you likely will be better off waiting beyond your FRA to start taking benefits.

Managing Benefits for an Incapacitated Person

If a Social Security recipient needs help managing his or her retirement benefits — perhaps an elderly parent — contact your local Social Security office. You must apply to become that person’s representative payee in order to assume responsibility for using the funds for the recipient’s benefit.

Qualifying for Social Security Survivors Benefits

A spouse and children of a deceased person may be eligible for benefits based on the deceased’s earnings record as follows:

A widow or widower can receive benefits:

  • At age 60 or older,
  • At age 50 or older if disabled, or
  • At any age if she or he takes care of a child of the deceased who is younger than age 16 or disabled.

A surviving ex-spouse might also be eligible for benefits under certain circumstances. In addition, unmarried children can receive benefits if they’re:

  • Younger than age 18 (or up to age 19 if they are attending elementary or secondary school full-time), or
  • Any age and were disabled before age 22 and remain disabled.

Under certain circumstances, benefits also can be paid to stepchildren, grandchildren, stepgrandchildren or adopted children. In addition, dependent parents age 62 or older who get at least one-half of their support from the deceased may be eligible to receive benefits.

A one-time payment of $255 may be made only to a spouse or child if he or she meets certain requirements. Survivors must apply for this payment within two years of the date of death.

Paying Income Taxes on Benefits

You’ll be taxed on Social Security benefits if your provisional income (PI) exceeds the thresholds within a two-tier system.

PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers). Recipients in this range are taxed on the lesser of 1) one-half of their benefits or 2) 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers).

PI above $44,000 ($34,000 for single filers). Recipients above this threshold are taxed on 85% of the amount by which PI exceeds $44,000 ($34,000 for single filers) plus the lesser of 1) the amount determined under the first tier or 2) $6,000 ($4,500 for single filers).

PI equals the sum of 1) your adjusted gross income, 2) your tax-exempt interest income, and 3) one-half of the Social Security benefits received.

Need Assistance?

The long-term insolvency of the SSA program underscores the importance of saving for retirement while you’re working. Social Security benefits should be viewed only as a supplement to your other assets.

If you have additional questions about receiving Social Security retirement benefits, contact your Cornwell Jackson advisor. He or she can help you navigate the application process and understand tax issues related to receiving retirement benefits.

Posted on Dec 6, 2016

With Donald Trump as the president elect and Republicans holding a majority in the U.S. House and Senate, GOP tax reform appears likely in 2017. While campaigning, Mr. Trump promised big tax changes. Here’s a digest of his proposals, according to his website.

Individual Tax Rates and Capital Gains Taxes

For individuals, President-elect Trump proposes fewer tax brackets and lower top rates: 12%, 25% and 33% — versus the current rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%.

Proposed Rate Brackets for Married-Joint Filing Couples

Taxable Income Rate Bracket
Less than $75,000 12%
More than $75,000 but less than $225,000 25%
More than $225,000 33%


Proposed Rate Brackets for Unmarried Individuals

  Taxable Income
Rate Bracket
$0 to $37,500 12%
More than $37,500 but less than $112,500 25%
More than $112,500 33%

The proposed plan would eliminate the head of household filing status, which could prove to be a controversial idea.

President-elect Trump would abolish the alternative minimum tax (AMT) on individual taxpayers.

Itemized/ Standard Deductions and Personal/ Dependent Exemptions

The president-elect’s plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried individuals.

The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried individuals, the standard deduction would be increased to $15,000 (up from $6,350).

The personal and dependent exemption deductions would be eliminated.

Child and Dependent Care

Proposed new deduction: The Trump plan would create a new “above-the-line” deduction (meaning you don’t have to itemize to benefit) for expenses on up to four children under age 13. In addition, it would cover eldercare expenses for dependents. The deduction wouldn’t be allowed to a married couple with total income above $500,000 or a single taxpayer with income above $250,000. The childcare deduction would be available to paid caregivers and families who use stay-at-home parents or grandparents to provide care. The deduction for eldercare would be capped at $5,000 annually, with inflation adjustments.

Rebates for child care expenses: The proposed Trump Plan would offer new rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit. The rebate would equal 7.65% of eligible childcare expenses, subject to a cap equal to half of the federal employment taxes withheld from a taxpayer’s paychecks. The rebate would be available to married joint filers earning $62,400 or less and singles earning $31,200 or less. These ceilings would be adjusted for inflation annually.

Dependent care savings accounts: Under the proposed plan, taxpayers could establish new Dependent Care Savings Accounts for the benefit of specific individuals, including unborn children. Annual contributions to one of these accounts would be limited to $2,000. When established for a child, funds remaining in the account when the child reaches age 18 could be used for education expenses, but additional contributions couldn’t be made. To encourage lower-income families to establish these accounts for their children, the government would provide a 50% match for parental contributions of up to $1,000 per year. Dependent Care Savings Account earnings would be exempt from federal income tax.

Affordable Care Act Taxes

President-elect Trump wants to repeal the Affordable Care Act and the tax increases and employer penalties that it imposes — including the 3.8% Medicare surtax on net investment income and the 0.9% Medicare surtax on wages and self-employment income.

Estate Tax

His plan would also abolish the federal estate tax. But it would hit accrued capital gains that are outstanding at death with a capital gains tax, subject to a $10 million exemption.

Business Tax Changes

The president-elect proposes major changes to the taxes paid by businesses. Trump would cut the corporate tax rate from the current 35% to 15%, but eliminate tax deferral on overseas profits.

Under the proposed plan, a one-time 10% tax rate would be allowed for repatriated corporate cash that has been held overseas where it’s not subject to U.S. income tax under current rules.

The plan would also allow the same 15% tax rate for business income from sole proprietorships and business income passed through to individuals from S corporations, LLCs, and partnerships, which could cause a significant decrease in tax revenues.

Without getting very specific, the proposed plan proposes the elimination of “most” corporate tax breaks other than the Research and Development (R&D) credit. At-risk tax breaks could include unlimited deductions for interest expense and a bevy of other write-offs and credits.

On the other hand, the proposed Trump plan would allow manufacturing firms to immediately write off their capital investments in lieu of deducting interest expense.

What about Congress?

In addition to President-elect Trump’s proposed plan, House Republicans released the “Better Way Tax Reform Blueprint” earlier this year and Republicans in the Senate proposed their own tax plans. These proposals — which in some cases, differ from Trump’s — would make numerous changes to cut taxes and simplify filing. Despite some differences, members of Congress have expressed support for Trump’s plans and have vowed to act quickly.

When Might Changes Happen?

Democrats in Washington are likely to oppose any meaningful tax cuts, and they can attempt to stall things in the Senate where the Republicans won’t have a filibuster-proof majority. However, the Republicans can use the same procedural tactics that the Democrats used in 2010 to enact the Affordable Care Act. It’s possible that Trump’s tax plan (or parts of it) may pass in the first 100 days of his new presidency. If that happens, we could see major tax changes taking effect as early as next year.

Stay tuned.

Posted on Sep 13, 2016

Fall is a good time to pause and review your financial planning strategy. A lot can happen in a year. If your personal life, market conditions or tax laws have changed, you may need to revise your long-term financial plans. Here are some retirement and estate planning considerations that may be worthwhile.

IRS Proposal Threatens Discounts on Transfers of Family-Owned Business

For years, proactive taxpayers have used family limited partnerships (FLPs) and other family-owned business entities in estate planning. If properly structured and administered, these estate-planning tools allow high net worth individuals to transfer their wealth to family members and charities at a substantial discount from the value of entities’ underlying assets. Examples of assets that may be contributed to an FLP include marketable securities, real estate and private business interests.

Important Note. The FLP must be set up for a legitimate purpose (such as protecting assets from creditors and professional-grade asset management) to preserve valuation discounts.

Valuation discounts on FLPs relate to the lack of control and marketability associated with owning a limited partner interest. These interests are typically subject to various restrictions under the partnership agreement and state law.

The IRS has targeted FLPs and other family-owned businesses in various Tax Court cases. To strengthen its position in court, the IRS issued a proposal in August that could significantly reduce (or possibly eliminate) valuation discounts for certain family-owned business entities. Among other changes, the proposal would add a new category of restrictions that would be disregarded in valuing transfers of family-owned business interests.

If finalized, the proposed changes won’t go into effect until 2017 (at the earliest). So there still may be time to use these estate-planning tools and be grandfathered in under the existing tax rules. If you’ve been considering setting up an FLP or transferring additional interests in an existing one, it may be prudent to act before year end.

Contact your estate planning advisor for more details on this proposal — or to utilize this strategy before any new restrictions go into effect.

Roth IRAs

Do you understand the key differences between traditional and Roth IRAs? Roth IRAs can be an effective retirement-saving tool for people who expect to be in a higher income tax bracket when they retire. Here’s how it typically works.

You open up a Roth IRA and make after-tax contributions. The tax savings come during retirement: You don’t owe income taxes on qualified Roth withdrawals.

As an added bonus, unlike with traditional IRAs, there’s no requirement to start taking annual required minimum distributions (RMDs) from a Roth account after reaching age 70 1/2. So you’re free to leave as much money in your Roth account as you wish for as long as you wish. This important privilege allows you to maximize tax-free Roth IRA earnings, and it makes the Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth IRA money to help finance your own retirement).

The maximum amount you can contribute for any tax year to any IRA, including a Roth account, is the lesser of:

  1. Your earned income for that year, or
  2. The annual IRA contribution limit for that year. For 2016, the annual IRA contribution limit is $5,500, or $6,500 if you’ll be age 50 or older as of year end.

If you’re married, both you and your spouse can make annual contributions to separate IRAs as long as you have sufficient earned income. For this purpose, you can add your earned income and your spouse’s earned income together, assuming you file jointly. As long as your combined earned income equals or exceeds your combined IRA contributions, you’re both good to go.

Unfortunately, your ability to make annual Roth contributions may be reduced or eliminated by a phaseout rule that affects high-income individuals. But you may be able to circumvent this rule by making an annual nondeductible contribution to a traditional IRA and then converting the account into a Roth IRA. In this indirect fashion, high net worth individuals can make Roth contributions of up to $5,500 if they’re under age 50 or up to $6,500 if they’re at least 50 and younger than 70 1/2 as of the end of the year. (Once you hit 70 1/2, you become ineligible to make traditional IRA contributions, and that shuts down this strategy.)

If you’re married, you can double the fun by together contributing up to $11,000 or up to $13,000 if you’re both at least 50 (but under age 70 1/2). There are various rules and restrictions to using this strategy, and it may be less advantageous if you have one or more existing traditional IRAs. So, consult with your tax advisor before attempting it.

Self-Directed IRAs

Self-directed IRAs expand the menu of investment options available in a typical IRA. For instance, with a self-directed IRA you may be able to include such alternatives as hedge funds, real estate and even equity interests in private companies. These types of investments often offer higher returns than traditional IRA investment options.

But self-directed IRAs aren’t a free-for-all. The tax law prohibits self-dealing between an IRA and “disqualified” individuals. For example, you can’t lend money to your IRA or invest in a business that you, your family or an IRA beneficiary controls. The consequences for self-dealing can be severe, so consult with your financial advisor before making the switch.

Deductible Losses on Underperforming Stocks

Do you own stocks and other marketable securities (outside of your retirement accounts) that have lost money? If so, consider selling losing investments held in taxable brokerage firm accounts to lower your 2016 tax bill. This strategy allows you to deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss.

You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment income, alimony and interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2017 and beyond.

Gifts of Appreciated Assets

Suppose you are lucky enough to have the reverse situation: You own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. Taxpayers in the 10% or 15% income tax brackets can sell the appreciated shares and take advantage of the 0% federal income tax bracket available on long-term capital gains. Keep in mind, however, that depending on how much gain you have, you might use up the 0% bracket and be subject to tax at a higher rate of up to 20%, or 23.8% when considering the Medicare surcharge that may apply.

While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the lower tax brackets. If so, consider gifting them assets to sell.

Important Note. Gains will be considered long-term if your ownership period plus the gift recipient’s ownership period equals at least a year and a day.

Giving qualified-dividend-paying stocks to family members eligible for the 0% rate is another tax-smart idea. But before making a gift, consider the gift tax consequences.

The annual gift tax exclusion is $14,000 in 2016 (the same as 2015). If you give assets valued at more than $14,000 (or $28,000 for married couples) to an individual during 2016, it will reduce your $5.45 million gift and estate tax exemption — or be subject to gift tax if you’ve already used up your lifetime exemption. Also keep in mind that if your gift recipient is under age 24, the “kiddie tax” rules could potentially cause some of his or her capital gains and dividends to be taxed at the parents’ higher rates.

Charitable Donations

Charitable donations can be one of the most powerful tax-savings tools because you’re in complete control of when and how much you give. No floor applies, and annual deduction limits are high (20%, 30% or 50% of your adjusted gross income, depending on what you’re giving and whether a public charity or a private foundation is the recipient).

If you have appreciated stock or mutual fund shares that you’ve owned for more than a year, consider donating them instead of cash. You can generally claim a charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

If you own stocks that are worth less than you paid for them, don’t donate them to a charity. Instead, sell the stock and give the cash proceeds to a charity. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Life Changes

Have there been any major changes in your personal life, such as a recent marriage or divorce, the birth or adoption of a new child, or a death in the family? If so, you may need to revise the beneficiaries on your retirement accounts and life insurance policies. You also may need to update your will and power of attorney documents.

Life changes can be stressful, and it’s very common for these administrative chores to be overlooked. But failure to update financial plans and legal documents can lead to unintended consequences later on, either when you die or if you become legally incapacitated and need someone else to make certain decisions on your behalf.

Got Questions?

These are just a handful of financial issues to consider at year end. Your financial and legal advisors can run through a more comprehensive checklist of planning options based on your personal circumstances. Call Cornwell Jackson to schedule a meeting as soon as possible, before the hustle and bustle of the holiday season starts.

Posted on Jul 30, 2016

When I work with small business owners, particularly family-owned businesses in manufacturing and distribution, succession planning is stalled because of a lack of communication. Owners don’t want to face the sometimes tough conversations around who will take over the business and what that will mean for family members, employees or customer relationships. Before beginning the final phase of building your succession plan, consider the following questions:

  • How will you communicate the plan to leaders, clients, employees, family?
  • What can reinforce buy-in and cooperation?
  • What contracts and documents must be in place?
  • What is the exact timetable and launch?

Usually, I try an objective process of elimination. If there are family members in the business, I ask if any are interested — and able — to operate the company. Based on the owner’s responses, we take a look at other scenarios such as a leveraged buy-out or ESOP arrangement. And finally, we look at the potential for selling to an outside buyer (e.g. private equity, competitor, affiliated vendor).

Based on the owner’s selection of a Plan A and Plan B succession scenario, we have to plan communication with family and management. The depth and detail of communication is directly related to how significant each family member’s or management leader’s role will be in Plan A or Plan B. The smaller the role, the less detailed you will be in communication. Key topics of discussion may or may not include:

  • How your buyout or retirement will be handled and impact on the business operationally and financially going forward
  • How the plan will affect each stakeholder in particular – who will be offered stock or ownership
  • How you are dealing with family members not involved in the business — helping them understand that the business is like any other stock in their portfolio
  • Your planned date of exit
  • Getting feedback on their concerns

There may be some hard conversations. This is where you can seek help from your advisory team to guide the conversation. For example, I’ve seen situations in which a child thinks the parent will bring him into the business, but the child doesn’t have any experience or education. You may also have one child already working in the business and another who isn’t. The parents want to be fair to both children, but it’s not necessarily the best decision to hand the reins of the company to both.

The same conversations must be discussed with management. Depending on the details of Plan A and Plan B, you want to avoid a mass exodus of skilled management. Therefore, discussions of transition should also include compensation of key employees to support retention and timely — rather than sudden — exits.

Set up the Timetable and Deliverables

The final timetable is of utmost importance so that you can address issues and gaps in your plan, properly structure your exit and leave the company in good hands.

Let’s say, for example, you have seven years to exit. In year three, you may arrange to step out of the CEO role and take on a support role of transitioning relationships and training management. Making such transitions over time is usually best to preserve customer relationships and value of the business.

Owners must also set up a timetable for addressing and solving issues and gaps in the plan. Perhaps you need to restructure entities for a better tax position upon sale. You may have outstanding debt and collections that need cleaning up. You will need to schedule a valuation to determine the true value (or estimation of value) of all company assets. You will also need to revisit your organizational chart to determine hiring of key management and/or transition of management.

The last 30 days of your succession planning involve reviewing your written Plan A and Plan B, establishing a timetable to address gaps and issues, and ensuring that many documents are updated and in place. Some of the key documents in a succession plan can include the following:

  • A one page executive summary succession Plan A and Plan B in writing
  • A management emergency plan
  • Shareholder agreements – buy /sell
  • Review of wills and estate plan documents
  • Purchase price formula or method with discounts and terms
  • Final proforma balance sheet, income statement and cash flow

Remember, you are not alone in this planning. Rely on your designated succession planning quarterback, such as your CPA, to keep everyone on your advisory team informed and involved. You will be amazed at the sense of relief after handling a critical piece in business ownership — that is, how to leave your business in good hands.

For more information on guiding your small business through succession planning, download the whitepaper: Do You Need a Succession Planning Starter Kit?

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

Posted on Jul 21, 2016

If your dealership’s new car sales are putting a smile on your face and your used car and service departments are merrily humming along, you might think now’s the time to give yourself a hefty — and perhaps overdue — pay increase.

But before you compensate yourself for the amount you believe you deserve, take stock: The IRS is in the business of scrutinizing top executives’ salaries, bonuses and distributions or dividends. Various stakeholders also may be examining your self-compensation decisions. Here are some factors to consider before setting your new pay.

What’s the Right Balance?

Let’s start with the basics. Your compensation is obviously affected by the amount of cash in your dealership’s bank account. But just because your financial statements report a profit, it doesn’t necessarily mean you’ll have cash available to pay owner-employees a higher salary or large bonus or make annual distributions. Net income and cash flows aren’t synonymous.

Other business objectives — such as buying new equipment, repaying debt and sprucing up your showroom — vie for your kitty. So, it’s a balancing act between owner-employees’ compensation on the one hand and capital expenditures, expansion plans and financing goals on the other.

What if Your Dealership Is a C-Corporation?

If you operate as a C corporation, your dealership’s income is taxed twice. First, it’s taxed at the corporate level. Then, it’s taxed again at the personal level as you draw dividends — an obvious disadvantage to those owning this corporation type.

C corporation owner-employees might be tempted to classify all the money they take out as salaries and bonuses, which the company can deduct, to avoid the double tax on dividends. But the IRS is wise to this strategy. It is on the lookout for excessive compensation to owner-employees and may reclassify above-market compensation as dividends, potentially resulting in additional income tax as well as interest and penalties.

The IRS also may monitor a C corporation’s accumulated earnings. Generally similar to retained earnings on your balance sheet, accumulated earnings measure the buildup of undistributed earnings. If these earnings get too high and can’t be justified for such things as a planned expansion, the IRS may assess a tax on them.

What about S-Corporations?

S corporations, limited liability companies and partnerships are examples of flow-through entities, which aren’t taxed at the entity level. Instead, income flows through to the owners’ personal tax returns, where it’s taxed at the individual level.

Dividends (typically called “distributions” for flow-through entities) are tax-free to the extent that an owner has tax basis in the business. Simply put, basis is a function of capital contributions, net income and owners’ distributions. Distributions in excess of basis are subject to ordinary income tax, but they’re not subject to payroll taxes.

So, the IRS has the opposite concern with flow-through entities: Agents are watchful of owner-employees who underpay themselves to minimize payroll taxes. If the IRS thinks you’re downplaying salary in favor of payroll-tax-free distributions, it may reclassify some of your distributions as salary. In turn, while your income taxes won’t change, you’ll owe more in payroll taxes — plus any interest and penalties due.

Do You Reflect the Market?

Above- or below-market compensation raises a red flag to the IRS, and that’s definitely undesirable. Not only will the agency evaluate your compensation expense — possibly imposing extra taxes, penalties and interest — but a zealous IRS auditor might turn up other challenges to your records.

What’s more, it might cause a domino effect, drawing attention in the states where you do business. Many state and local governments face budget shortages and are hot on the trail of the owner-employee compensation issue.

Who Else Might be Concerned?

Other parties may have a vested interest in how much you’re getting paid, too. Lenders, franchisors and minority shareholders might think you’re impairing future growth by paying yourself too much.

If a silent owner, factory representative or lender, for instance, decides your showroom looks shabby and sees flat sales, your salary expense and dividends might become the subject of debate.

Here Comes the Judge

If you or your dealership is involved in a lawsuit, the courts might impute reasonable (or replacement) compensation expense. This is common in divorces and minority shareholder disputes. The amount a court prescribes for compensation affects business value, which, in turn, affects damages awards and asset distributions. In divorce, reasonable compensation also affects child support and alimony awards.

When a court imputes reasonable compensation, it typically considers compensation studies and other factors that include salary history, responsibilities, experience, geographic location and the dealership’s performance.

Are You Being Prudent?

One of the major advantages of being a dealership owner is having a big say in all manner of decisions. But when it comes to your compensation, make sure you’re being prudent. Otherwise, you may find yourself in hot water with the IRS and others who have an interest in your business.


Posted on Jul 20, 2016

Warning. The execution phase of succession planning requires singleness of purpose. Within the first 90 days of succession planning, you will likely find issues and gaps with your plan or personal retirement plan — items that need tending. Don’t let these issues become a distraction to your ultimate goal of developing a clear and actionable succession plan! To stay focused during this phase, use the following questions to keep your plan on track.

  • Who will help you execute and monitor the plan?
  • What are the gaps and issues?
  • How can you prioritize fixing the gaps and issues?
  • What if all doesn’t go as planned?

Maintaining Deadlines

Succession planning for small businesses can be accomplished within 210 days if you don’t let these issues become a hindrance. But often, business owners feel that they have to have every detail figured out before they can execute. Not so. For example, you may have:

  • Wills that need updating based upon new tax laws
  • Missing non-compete agreements with some of your key management
  • A woefully inadequate disability policy based on the level of income needed
  • Your personal investment portfolio performing below average (e.g. 1 percent rate of return when it needs to be at least 5 percent)
  • Legal entity structure changes needed to pay less tax upon sale
  • Unaddressed estate tax problems

Rather than diving into one rabbit hole after another to tackle each of these somewhat complex issues, document each one and prepare a to-do list. In the check-in meeting with your advisors, share the list and prioritize it. This process will help you move along the path of creating a well-written succession plan while scheduling the action items that will support smart execution of your plan down the road.

Now it’s time to meet with your advisors, which can include your lawyer, CPA, financial advisor, board and/or board of advisors and leadership team. Give them an outline of your progress over the past 90 days, your discoveries and expected next steps. It is important to discuss the following in this meeting:

  • Plan A and Plan B – Plan A is your preferred scenario for transitioning out of the business. However, things can change in year one, three or five…requiring a back-up plan. Discuss your preferences and potential changes that could require shifting from Plan A to Plan B. This will keep you on the same page with your advisors and help you prepare logically and emotionally for that shift if necessary.
  • Your list of gaps, issues and problems for Plan A — let your advisors weigh in on these and other issues they foresee.
  • Your list of gaps, issues and problems for Plan B — again, gather advisor feedback and any additional foreseeable issues that may be different than in Plan A.

Do not let the blind spots or additional issues brought up in this meeting distract you from the ultimate goal of creating a plan. Obstacles can be overcome in most scenarios by taking them one step at a time. Right now, you are simply gathering feedback and advice. Don’t give up even if the issues seem insurmountable. Stay in control of the process.

Name a Quarterback

When I say that business owners should stay in control of execution, I mean that owners are the ultimate decision makers in the transition of their businesses. However, that doesn’t mean trying to handle every detail. You are still trying to run a business! Instead, place a chief advisor in charge of facilitating discussion and outlining next steps. This advisor can be accountable for research, scheduling the next check-in meeting and coordinating feedback from other advisors.

Some business owners prefer their CPA in this role (like a succession planning quarterback) while others choose their attorney or financial advisor. Just make sure it’s a trusted relationship that you believe will keep things moving forward in a timely way and bring about the best results. By choosing a quarterback, you can avoid your own blind spots in the planning process as well as soften the emotional impact of certain decisions.

For example, many small business owners avoid setting up an emergency management plan. This plan provides a designated leader or leaders to operate the business in the event of an owner’s incapacitation. Because buy/sell agreements are only engaged if the owner dies, an emergency management plan fills that gap if the authorized person is in a coma or otherwise disabled. Designated leaders are given limited legal power to make financial or other important business decisions and operate the business on behalf of stakeholders such as family members. You can even include incentives for key people to stay and see the business through a set time period until transition or succession decisions can be made.

Now that you have organized your advisory team (including your quarterback), determined your Plan A and Plan B and received feedback on gaps and issues, it’s time to assemble all the documents and create a timetable and strategy around communication with family and key employees/managers.

Continue reading for the last phase in Succession Planning: Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

Posted on Jul 11, 2016

Phase I – Assessment

Because your business is probably your largest asset — and because it also is probably your largest single source of income — your decision-shaping and calendar of events for your plan are going to be built around assessing alternatives to preserve the asset, nurture the asset, monetize the asset or liquidate the asset for optimum results for you, your family and the business. Some of the questions you should ask as you begin the journey of planning your succession are:

  • What is your business really worth?
  • What do you really need in retirement?
  • How does ownership translate into retirement assets?
  • Who will step into the ownership role(s)?
  • What’s your Plan A and Plan B scenario?
  • What will you do next?
  • What is your timetable for fully transitioning out?

So, what is your business really worth? If you’ve never had a formal or even informal valuation of your business, now is the time to schedule it. You will need a reasonable estimated value of your business — and an honest assessment of after-tax available cash to you in the event of a sale. You need a valuation regardless of whether you desire to sell to a third party or to your management team, or create an ESOP, family gifting or charitable gifting options.

There are formal valuations and there are informal valuations. For the purposes of succession planning, most small business owners simply need a valuation professional to determine an estimation of value within $100,000. Don’t try to calculate the value online with a low-end, do-it-yourself tool. All of your decisions going forward derive from this number, so it pays to consult a professional.

Once you have a clear estimation of value, you will want to visit with your investment advisor or financial planner to assess your personal finances, current and post retirement cash flow, retirement goals and sources of cash flow up to your official retirement date. In my experience with succession planning, this process will take at least three separate meetings in order to:

  • Determine what you want to do in retirement
  • Assess the lifestyle you want to maintain
  • Incorporate the vision of the next successful chapter of your life into the succession plan

During this discussion, you may want to decide how much, if any, you want to continue working in the business. Independent of any valuation or legacy issues you carry, what would be a fair amount for you to be compensated in a less than full-time position at the company? What are the primary areas where you could add value to the business on a continuing basis?

Establish Plan A and Plan B

This decision, of course, hinges on the most likely acquirer of your business. You will need to rank on a 10-point scale the likelihood and viability of a sale or transfer to:

  • Your own family members
  • Your current management team or business partners
  • Your employees taking ownership stake through an ESOP
  • A strategic buyer
  • A private equity firm

Whichever option gets the highest ranking, call that “Plan A.” But call the second highest option “Plan B.” We’ll talk more about why having two options for potential owners are important in the execution phase of succession planning.

In addition to ranking a potential successor or outside buyer, you will need to obtain and review all of the following agreements and legal documents. You may find during this process that there are documents you don’t have and will need to create.

  • Will and estate documents
  • Emergency management plan – who gets the keys if you are temporarily out of commission
  • Shareholder agreements, often called buy/sell agreements
  • Bylaws or operating agreement of the business itself – voting, officers, classes of stock, etc.

The final piece of your Phase I Assessment is to target a specific year that will be the year of your exit — no matter what form that takes.

As you assess your current situation, including decisions around successors and timelines, your CPA should support you with a clear picture of cash flow, debt and proper entity structures. Your CPA can also help you assess certain buy-out scenarios that may involve selling to internal stakeholders, courting an external buyer or creating an ESOP. Rely on your CPA to weigh the pros and cons of your Plan A and Plan B to ensure that they are viable choices.

Once your first 90 days of planning are completed, you should begin to understand where the gaps lie in order to set the timeline for succession planning execution. Review each step that has been accomplished so far with your advisory team. Most of all, congratulate yourself for moving toward a viable plan for your business transition.

To continue reading about succession planning, read: Phase II – Sharing and Executing the Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

Posted on Jul 6, 2016

Non-compete agreements have long been a staple of executive employment contracts. Today, however, they’re becoming increasingly common even in lower-level jobs. According to the Wall Street Journal, a steady rise in litigation over non-competes “largely reflects the increased usage of non-compete arrangements among lower-level staffers, along with employees’ greater mobility and access to sensitive information.”

It might seem like overkill to require a non-compete agreement with employees below the executive level. However, an individual’s ability to damage your business by going to work for a competitor will grow over time — assuming the employee gains responsibility and knowledge that could help a competitor. If you don’t secure a non-compete agreement at the beginning of an employment relationship, you’ll probably need to jump through an extra hoop to make it legally enforceable later on.

State Law Rules

State law governs non-compete agreements, and some of the rules vary from one state to the next. In an extreme case, California generally doesn’t recognize the validity of these agreements at all.

Federal courts may also sometimes get involved. One federal court recently weighed in on a case and upheld a common principle — the need for an employee to receive “consideration” (some form of compensation) in exchange for accepting a non-compete agreement.

Ordinarily, being offered a job is deemed to be adequate consideration in itself. However, if an employee has already been working for a while, simply being allowed to keep the job might not be deemed adequate consideration. That’s how the U.S. District Court in Hawaii came down on the issue in the case of The Standard Register Co. v. Keala (No. 14-00291 JMS-RLP).

“Numerous courts have held that where an employee has already been hired, continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement,” the court held, and denied the employer’s request for a temporary restraining order against former employees.

Is the Agreement Enforceable?

One possibility for “consideration” in that situation might have been a bonus or a promotion. However, courts aren’t always predictable in what they’ll uphold. Here are other key facets of a non-compete agreement that courts examine:

  • Does it protect a legitimate business interest? For example, let’s say you claim that an employee possesses sensitive information which could harm you if it fell into a competitor’s hands. Unless there’s evidence that you made a real effort to protect the secrecy of that information, a court may decide your stated business interest isn’t legitimate.
  • What is the duration of the agreement? Courts are sympathetic to the idea that people need to earn a living. Therefore, they often frown on agreements that restrict former employees for periods longer than, for example, six months. But “reasonable” limits vary by circumstances and courts.
  • What are the geographic parameters? A court will try to determine reasonableness here based on the size of your market. If you don’t have many competitors beyond a certain distance, such as a 10-mile radius, you wouldn’t be able to justify an agreement based on a 50-mile radius. Again, there’s considerable variability in this parameter.
  • What activity is prohibited? The broader the scope of the prohibition, the less likely the agreement is to be enforceable. The most “reasonable” restriction in the eyes of the majority of courts is against soliciting your customers.

Red Pencil, Blue Pencil

If a court reviews a non-compete agreement and finds fault with it, there are three possible outcomes — depending on the state. The most restrictive standard is known as the “red pencil” rule. It requires the invalidation of an entire agreement even if only one provision is flawed. Nebraska takes the position, and South Carolina, Virginia and Wisconsin generally do as well.

Under the less draconian “blue pencil” standard, courts are allowed to invalidate specific provisions of an agreement, while leaving other ones standing. Arizona, Connecticut, Indiana, Maryland, Montana and North Carolina generally take that approach.

The best scenario is “reformation,” which is permitted in approximately 30 states. This is where the court can actually rewrite the agreement to allow it to be as faithful as possible to the employer’s original intent, but only to the extent permissible by law. That way, you might win a partial victory if you’re still allowed to restrict the former employee’s activities, even if not as thoroughly as you’d hoped.

Not all states fall into such tidy categories, and their positions evolve. Wherever you’re located, you will need to consult with a qualified attorney to draft a non-compete agreement that will hold up to local scrutiny.

Also, many job applicants will take a dim view of a requirement to sign this type of contract. With that in mind, you’ll need to balance your eagerness to hire a particular applicant with the consideration you’re willing to offer to make the agreement more palatable. Otherwise, the non-compete agreement could be a deal breaker.

Consult your Cornwell Jackson adviser for more information.

Posted on Jul 2, 2016

Scenic high way

You Can “Manufacture” a Succession Plan in Months,
Enjoy it for Years.

As a longtime CPA in the Dallas area, I have worked with a lot of family-owned and closely held small business owners, particularly in manufacturing and distribution companies. If you are among the small and medium-sized business owners who are age 50 or older, that gives most of you a window of 10 years or less to fully execute a business transition or succession plan. Fortunately, creating the actual succession plan can take less than one year. This whitepaper can be your accounting starter kit or template for a fruitful business transition. Use it to support a healthier business and a more secure retirement. Your future begins…now.

As a business owner, you have always forged your own path, but at the height of your leadership lies the big question: What’s next?

Succession planning is like a nagging incompletion in the back of your mind. You have plenty of reminders from your attorney, your CPA, your spouse and maybe even your children. You know you need to face it, but inertia sets in. It all feels so complex, so overwhelming, and so FINAL.

WP Download - Succession PlanningOne day, you overhear a conversation on the golf course (or at your favorite restaurant). “Poor Fred. After 40 years, the only thing he can do is liquidate when he finally decides to call it quits. It’s too bad…”

If you don’t have a plan, someone or something will create the plan for you. Due to the unfortunate lack of business succession planning, only about 30 percent of successful family businesses survive into the second generation, according to The Family Firm Institute. A survey of advisors through the Financial Planners Association also found that only 30 percent of their clients had a written succession plan — even though 78 percent of clients planned to fund their retirements through a business sale.

Really? A Succession Plan in Seven Months?

In our experience, about 80 percent of business succession planning can be developed in seven months. Some plans take more time, some less, but the average timetable is about 210 days.

Step one: declare your commitment to create a plan. Share this commitment with your three closest advisors. This team usually includes your attorney, your CPA and your investment advisor, but it could also include your banker, your CFO and/or members of your leadership team. This team will keep you accountable for the planning process by organizing meetings and asking important questions. Planning is divided into three phases:

PHASE I – 90 days of Assessment – facing the unknowns

  • What is your business really worth?
  • What do you really need in retirement?
  • How does ownership translate into retirement assets?
  • Who will step into the ownership role(s)?
  • What’s your Plan A and Plan B scenario?
  • What will you do next?
  • What is your timetable for fully transitioning out?

PHASE II – 90 days of Execution – sharing the plan and getting feedback

  • Who will help you execute and monitor the plan?
  • What are the gaps and issues?
  • How can you prioritize fixing the gaps and issues?
  • What if all doesn’t go as planned?

PHASE III – 30 days of Communication – establishing timing and deliverables

  • How will you communicate the plan to leaders, clients, employees, family?
  • What can reinforce buy-in and cooperation?
  • What contracts and documents must be in place?
  • What is the exact timetable and launch?

To dive deeper into each phase of planning a succession plan for your business, click on the links below to read more on each phase.

Phase I – Assessment: Facing the Unknowns of Succession Planning
Phase II – Execution: Sharing Your Succession Plan
Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan


For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas.