Author: Ketel Thorstenson, LLP

OK, you’ve built your company from scratch, toughed it out through the hard times, persevered, prospered and ended up with a successful business that could provide a good, stable investment to somebody who wants to get into business.

Welcome to the first in a series of articles aimed at aiding you in using Business Valuation as a strategic planning tool.

A buyer may use up to three approaches to determine the value of your business.  One is to look at comparable businesses that have recently sold.  Depending on the industry type, this information may or may not be easily obtained.  Some industry groups form peer groups to measure performance.  For example, some franchised restaurants share performance metrics with others in the peer group.  The metrics are oftentimes based on cash flows, revenues or book value.  In the Valuation profession, we refer to this as the Market Approach.

Another approach is to examine cash flows.  Sufficient cash flows are what can make or break a company.  Therefore, the buyer will ask, “Can I pay myself a reasonable wage and still make a bank payment?  How many years will I need to finance the purchase with current cash flows?”  Without sufficient cash flows, a buyer could face challenges in purchasing new equipment, researching a new product line, expanding service footprint or managing working capital, for example replacing worn out fixtures.  In the Valuation profession, we refer to this as the Income Approach.

Finally, a buyer may simply look at the fair market value of inventory and equipment.  He/she may not be willing to pay a premium for a business that could be started from scratch.  For example, a company that does not have strong cash flows may only be worth the value of its fixed assets (fixtures, furniture, equipment, and working capital which is accounts receivable plus inventory less accounts payable).  This is referred to as the Net Asset Approach.

Because value derived by both the Market and Income Approaches are based on cash flows, it important for business owners to omit any personal expenses from the business.  Only expenses that are related to the business operations should be included in company financial statements.  Moreover, any assets that are not related to operations (snowmobile, boats, airplanes, etc.) should be removed from the Company’s balance sheet.

If your exit strategy involves selling your company, you need to plan ahead.  Having clean, profitable and strong financial statements for the last five years could raise fewer questions and lend to a smooth transition.

Please contact me with any questions when valuing a company that you are buying or selling.

Be sure to watch for the rest of the Business Valuation Strategic Planning articles in upcoming KT Addition Newsletters.

For those of us living in the Bakken, these are words we hear regularly.  However, they are not specific to the region and many taxpayers routinely receive these types of payments.  Our North Dakota office decided to give a brief description of these payments and the taxability of each.  We will be a little more specific to pertain to Oil and Gas payments for this discussion.

The first (and easiest) are royalty payments.  A “royalty interest” commonly consists of an interest in the underlying oil and gas reserves retained when the owner of land grants to another, the right to oil and gas that exists and to develop the property.  A royalty bears no portion of the cost of exploration, development and production.

In return for assuming the risks involved in developing the property, the lessee is granted the right to the production, while a fraction of the production is set aside for royalties to the owner.  The royalties are reported on IRS Schedule E and are allowed a depletion deduction of 15% of the gross royalties.

A common form of lease in the oil and gas industry is a “lease bonus”.  A lease bonus is the term applied to the consideration received upon execution of an oil and gas lease.  The bonus pays for the rights to enter upon the leased premises and explore for oil and gas for a set period of time.  The Supreme Court has held that a bonus is not a sale of property, but payment in advance for oil and gas extracted and therefore would be reported on IRS Schedule E as rental income.

The final topic of damages is a little more difficult as a taxpayer must determine the nature of the damages.  If the damage payment is for lost production (crops, hay etc.) those damages are to be reported as regular business income.  This would be IRS Schedule F for farmers.  If proof can be shown that a payment is made to the landowner specifically for damage done to the land during exploration, this payment is treated separately.  The taxpayer can treat this damage payment as a nontaxable return of capital to the extent of his applicable basis in the land.  To the extent that such payments exceed basis, the excess would be taxed as a gain.  The taxpayer and tax preparer must be aware that often times long-time farmers’/ranchers’ basis in their land is very low.  This often times creates a situation where most if not all of the damages are taxable income.

The above discussion is a general in nature and can quickly become complex.  The professionals at Ketel Thorstenson are always available to help with your individual tax situation.

Employers across the Black Hills are likely spending a good part of their January completing W-2 forms for all employees who worked for the company in 2014. This year, the deadline is Feb. 2 to mail the employee copies.

Although there were more than 50 changes in the recent passage of the extenders legislation (the Tax Increase Prevention Act of 2014), the IRS announced that it still plans to open the 2015 filing season as scheduled in January. According to its recent news release, the IRS will begin accepting tax returns filed electronically on 1/20/15. Paper tax returns will begin processing at the same time.

The last-minute shuffle in Congress to renew more than 50 tax provisions collectively dubbed the “tax extenders” is keeping everybody on their toes — especially CPAs such as Kevin Sickels of Ketel Thorstenson’s Rapid City office.

If you have deductible expenses that you want to claim for 2014, but you don’t want to pay them just yet, here’s a bit of advice from the Ketel Thorstenson accounting team that you might not have considered — pay the expenses with a credit card.

Before mailing out Forms W-2 at year end and filing your fourth quarter Form 941 you will want to do a reconciliation to ensure its accuracy.

The following information will help you balance your Forms 941 & W-2 at year end:

• Annual amounts from payroll records should match the total amounts reported on all Forms 941 for the year.
• Total amounts reported on all Forms 941 for the year should match sum of same data fields shown in W-2/W-3 totals.

* Total the values for the listed line number for all four 941 reports in the year.

Troubleshooting hints if Forms W-2 and 941 do not balance:

If the wages are higher on Form 941:
1. Are you missing one or more Forms W-2?
2. Did you manually change any payroll items for one or more employees on your payroll
software?  If so, the payroll software may not have properly computed final wages.

If the wages are higher on Forms W-2:
1. Did you manually change any payroll items for one or more employees on your payroll
software?  If so, the payroll software may not have properly computed final wages.
2. Did one or more employees’ wages not get reported on the Form 941 for any particular
payday during the year?

If the wages match but the taxes don’t, check each employee’s Form W-2 for the following:
1. Social security tax (box 4) is 6.2% of the social security wages (box 3).
2. Medicare tax (box 6) is 1.45% of the Medicare wages (box 5).
3. Federal income tax has obvious errors such as more tax than wages or zero withholdings
when you believe federal income tax was withheld.

If you still cannot find the error

1. Go through the payroll records of the employees who had one of the following:
a. The highest probability of errors
b. The highest wages
c. Payroll changes or manipulations during the year
d. If necessary, go through all payroll records, quarter by quarter, until you find the
error on the Forms W-2, Forms 941 or both.

Forms W-2/W-3 Due Dates

February 2, 2015 – Due date to mail employee copies of Forms W-2.

March 2, 2015 – Due date to send paper format of W-2 Federal (SSA) filing

Or

March 31, 2015 – Due date to send e-file format of W-2 Federal (SSA) filing

*Remember, you must e-file if you file 250 or more Forms W-2 or W-2C.

Intuit provides the following checklist to assist with year-end accounting tasks. It can be accessed from within QuickBooks. Just go to: [Help] and then select [Year End Guide].

Tasks to prepare for filing season

1. Reconcile all bank and credit card accounts
2. Verify petty cash entries for the tax year
3. Make year-end accrual adjustments and corrections
4. Close your books
5. Adjust Retained Earnings
6. Review details of all new equipment purchased during the year
7. Make all asset depreciation entries and adjustments
8. Review fringe benefits that need to be reported on Form W-2
9. Take a physical inventory and reconcile with book inventory
10. Print financial reports
11. Print income tax reports to verify tax tracking
12. Import you tax-related date to TurboTax or ProSeries
13. Archive and back up your data
14. Order supplies and tax forms

Tasks to do if you use subcontractors

1. Ensure that 1099 info is correct
2. Print and mail 1099’s

Tasks to do if you have employees

1. Confirm you have current payroll tax tables (QuickBooks Payroll only)
2. Clear YTD payroll amounts – QuickBooks does this for you
3. Pay payroll liabilities
4. Review W-2 forms
5. Print and distribute W-2’s
6. Print Form W-3
7. Process Form 940
8. Process Form 941
9. Verify W-4 informationAttention Quick