Business Record - Iowa Biz

Equity is king

Employees today are more attentive to the benefits that a company provides them. Pay, health benefits, insurance and others are the standard. The exception in the benefits realm is equity.

According to the NCEO, only 13 million workers in the United States have equity in the companies they work for. This amounts to roughly 8% of the workforce. These workers can make the linkage between working overtime, weekends, and extra time outside of the normal business day and equity. The value they create is not directly tied to cash in the hand, but to the long-term success of the company and themselves.

Sharing equity in a company gives employees a greater appreciation and tolerance for downturns, capital investments, tough decisions, and the future of the company. Employees will give that little "extra" which turns ordinary companies into extraordinary companies.

Equity is the motivator for employees to put their sweat, knowledge, and the vast majority of their life into a company. Equity is the driver that increases company and personal success.

-Victor Aspengren

Partnerships - a guaranteed divorce

partnership agreement (Photo credit: o5com)

Many of the clients I advise are in partnerships.  It is a common situation.  Two or more people get together to solve a problem and the next thing you know a partnership is born.  If you listen to the first-time partners, they will tell you their priorities are to get the product into the market and grow the business. If you listen to partners who have been through years of business together, you will hear something different. 

What older, wiser partners will tell you is to plan the divorce.  It is coming.  It is guaranteed.  At some point the partnership must end.   Whether for reasons of death, indifference, disagreement, or a multitude of other reasons, it will happen.  The key these wise people will tell you is to plan the divorce in advance.  Setting the value of the company and how one partner might buy out another partner well in advance sets the rules if things go bad. I sincerely hope that things will not go bad for you in your partnership.  But in case they do, have the ground rules set in advance. 

My good firend Rush Nigut at Brick Gentry has presented on this topic many times in the past.  Check out the video of him on this subject "Rush Nigut on Partnering" for an in-depth analysis of why this is so critical and how you can protect yourself. 

 

You negotiated a debt workout? The IRS may be glad to hear that.

The best-laid business plans can go awry. When that happens, everyone may be better off renegotiating the debt. If you do that, remember that the tax man has a seat at the table.

The default rule under the tax law is that debt forgiveness generates taxable income. Fortunately for distressed debtors, there are some important exceptions. The most important:

-A reduction in purchase-money debt for an asset can be treated as a reduction in your purchase price, rather than debt forgiveness income.

-Debts forgiven under the terms of a bankruptcy decree are tax-exempt.

- Debt forgiveness income is taxable to the extent a taxpayer is insolvent.

A taxpayer is "insolvent" to the extent the value of assets are less than the taxpayer's liabilities. If a taxpayer has a negative net worth of $100,000 and has debt of $110,000 forgiven, the $10,000 difference is taxable income.

There are also debt forgiveness exclusions when home mortgage debt is forgiven, for business real property acquisition debt forgiveness, and for farm indebtedness.

If a taxpayer has debt forgiven that is tax-exempt,, it's not usually a free lunch. If the taxpayer has unused loss carryforwards or tax credits, they may be reduced or eliminated by the debt cancellation income. Alternatively, you may find yourself with a lower basis in some of your property, increasing your gain or reducing your loss on an eventual sale.

Sometimes what seems like debt forgiveness isn't taxed that way. For example, if your debt is settled by foreclosure, you have a taxable sale of the secured property to the extent of its value. Only the debt forgiven in excess of the value of the surrendered collateral is debt forgiveness income that may eligible for an exclusion.  

If property is foreclosed in settlement of non-recourse debt -- debt for which the creditor has no right to pursue the debtor beyond what is recovered in foreclosure -- the entire amount of the debt is considered to be the sale price of the property sold. This can be an expensive problem if the taxpayer has depreciated the property and has a low basis, triggering a big taxable gain on the foreclosure.

Taxation of debt forgiveness can be fiendishly complex. If you are negotiating a workoout, keep your tax advisor involved; after all, the IRS already is.

Image via Wikipedia

-Joe Kristan