Signs suggest the economy may have hit rock-bottom, but smart businesses and individuals will go into 2010 with their guard up and their belts tightened, according to partners at Marks Paneth & Shron, a New York City-based accounting firm that serves large businesses, including privately owned companies, as well as high-net-worth individuals.
The firm advises clients that, in the near term, savvy businesses and individuals must:
- Maintain post-Madoff skepticism
- Plan for government's increased hunger for tax revenue and business accountability
- Take advantage of low valuations (and interest rates) now before they rise; and
- Work to negotiate with banks before they really need to
"Those who have made it through the last 18 months have probably gotten leaner and meaner. That's a good stance for a more successful 2010. But the challenge, and it's a significant one, is not to be sloppy when growth starts. It's true that you can hire better people and get equipment for less. You can get a leg up. However, given the slow improvement of the economy, and the fragile state of many businesses, decisions require more analysis and thought than they ever have", said Steven Eliach, JD, LLM, principal-in-charge of the tax group at Marks Paneth & Shron.
Added Steven L. Henning, CPA, Ph.D., partner-in-charge of the litigation and corporate financial advisory services group at Marks Paneth & Shron",In some ways, there's a perfect storm of uncertain times, skepticism and increased enforcement. Whether you sit on a corporate board, are thinking ahead about taxes, need to evaluate a balance sheet, are contemplating bankruptcy, have offshore funds, or are deciding where to domicile a company, the theme for 2010 should be extra vigilance."
Following are ideas, approaches, and scenarios that Marks Paneth & Shron partners believe are worth considering in preparation for 2010.
- Clouds on the tax horizon. While federal income taxes are unlikely to go up significantly during 2010, they probably will in 2011. Accordingly, the generally accepted approach of deferring income and accelerating expenses as a tax-mitigation strategy may need to be rethought. Some companies and individuals might be better off doing the opposite. "This, more than ever, is a case-by-case call", said Eliach.
- When it comes to offshore money, don't be an ostrich: Come clean now, and get some help doing it. Even though the October 15, 2009 deadline for the IRS Voluntary Disclosure Program has passed, the government's ongoing revenue drive, plus an apparent willingness on the part of overseas banks to reveal the names of U.S. account holders, mean proactive disclosure is, in almost every case, the smart approach. Those with offshore money should seek experienced legal and accounting help to steer clear of fraud, penalties, even criminal charges, and to maintain legitimate tax minimization strategies.
- Mark-to-market probably applies: Check the balance sheet. Most people think of mark-to-market accounting as an abstract concept associated with the financial crisis and banks. But it's actually a real-world practice that affects and can cause serious issues for just about any business, of any size, with assets on its books. This is especially true in times of economic volatility. The reason: Certain assets may be carried at too-rosy valuations. Mark-to-market rules say that assets need to be valued at what they can be sold for today (not their ultimate value). Therefore, companies and executives should take a hard, skeptical look at their balance sheet before they enter 2010.
- Increased risks for executives and board members = more blame for you . "The government and its agencies are now dealing with fallout from governance and accountability failures that have happened for a number of years, so pressure is increasing sharply", said Michael L. McNee, CPA, partner-in-charge of the nonprofit and government services group at Marks Paneth & Shron. Individuals, board members and executives will increasingly be held accountable for failure to have appropriate systems in place to prevent conflicts and other abuses. "Multiple agencies (IRS, state attorney generals, government funders, etc.) won't just fine the organization, but will also hold individuals responsible. Behavior changes will occur quickly if there is the threat of personal liability, fines and even possibly criminal charges", he said. "So, be especially careful when serving on or joining a corporate board, and spend now to put proper compliance in place. 'I didn't know' is not an answer that will get you very far."
- Make better business decisions by maintaining post-Madoff skepticism. Individuals and businesses are now making more informed business decisions. They're seeking service reports which means doing their own due diligence on a range of service providers, including professional service firms and investment advisors. "Keep doing this if you're taking on new providers, and be aware of the new scrutiny if you're a service provider", said Harry Moehringer, CPA, partner-in-charge of the real estate group at Marks Paneth & Shron.
- Deal strategically with the banks. Credit may be easing a bit, so act early to refinance debt before interest rates go up. Also, companies and organizations that believe they'll have trouble meeting loan covenants should seek to restructure before they hit a wall, not after it happens. "Try to act before trouble strikes so that you can negotiate from strength", addedMoehringer.
- Low valuations: a rare opportunity to pass along assets. Accelerating succession and estate planning moves could save taxes, as businesses and other assets are worth less than they might be in a year or two. So taxes could be lower if assets get transferred now rather than later on in the future.
- Government: more, and less, opportunity. Doing business with government agencies could be great for organizations – for-profit and non-profit – that can take advantage of untapped stimulus money and various entitlements, such as inner-city empowerment programs. But the government shouldn't be seen as an eternal source of funds. Stimulus money will run out, and many state and local governments are in dire straits and will cut budgets.
- The new question for new international businesses: where to incorporate? Among the many key questions for new businesses is",where should the entity be located?" Now more than ever, the question can make a big difference in terms of tax liability for companies that will have overseas operations. In fact, U.S. entrepreneurs may want to consider forming their new corporations offshore at the outset in order to minimize tightened deferral and transfer penalties.
- Those considering a fresh start through bankruptcy should investigate "fresh-start" reporting . While bankruptcy is a challenge in the life of any business, it represents an opportunity to take a structured path toward improved financial health. This is particularly true for companies that qualify for fresh-start reporting**. It allows a company that meets certain criteria to effectively clear its books and establish itself as a new entity with a clean balance sheet.
** Fresh Start Reporting - the reporting requirements for qualifying emerging entities as promulgated by the American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7 (SOP 90-7)",Financial Reporting for Entities in Reorganization Under the Bankruptcy Code."