• State of backlog
  How many projects are in the door? What is their stage of completion? Are these contracts fixed price, time and materials, etc.? Are they profitable? Are their any outliers in the backlog data?
• State of relevant market
  Your appraiser should know whether the surrounding market is in a state of expansion, decline, flattening, and general degrees of uncertainty. What are the effects of trends in interest rates, inflationary forces, and the labor market? As a branch of this consideration, the right expert is wrapping into this topic how subject business itself is experiencing issues such as bidding, financing, sourcing of labor, materials, equipment, and so forth.
• Diversity of work
  The degree to which projects come from a diversity of sources and different types of projects may have a profound impact on the valuation of the firm. For example, a contractor reliant on 5 to 10 projects ever year may experience far more volatility in its financials and day-to-day operation than a company working on 30 projects.
• Union / non-union status
  This will factor into ease of attracting qualified labor. It can also have a geographical impact on where you are likely to be doing business. Further, there are back-end financial concerns (e.g., via retirement /pension issues) and legal issues to consider.
• Bonding capacity and status
  Knowing whether the contractor has adequate bonding capacity, knowledge of limits, and generally that there is no imminent threat to bonding should be considered.
• Borrowing capacity and/or approach to financing
  It is not uncommon to see credit facilities in place. Contracting businesses are constantly putting money out to pay their labor force, costs of materials and other resources, but then suffer relatively slow inbound payment cycles to get money in the door. Having facilities in place or alternative means of financing in this fact pattern is an important area to highlight.
  • Separate issues that could be highlighted with respect to topics such as bonding and borrowing include cash conversion, financial health, organizational structure, and the contractor’s track record.
• Related parties
  Frequent or at least periodic valuation issues for contractors revolving around related parties include real estate holdings (e.g., of the office and yard, garages, etc.), equipment/leasing companies, and legal entity separation of a union arm and non-union arm of the same organization. The impact of related parties on the economics and substance of private businesses is a classic valuation issue that is also commonly encountered in a construction or contracting context.
• Reliance on key individual(s), transition / succession plans
  Believe it or not there are organizations doing tens of millions of dollars in business where the key individual or controlling group of individuals will contend that without them, company valuation is highly questionable. It is important to separate fact from fiction and provide careful analysis in this area.
• Evidence of an M&A market
  This can serve as a nice sanity check at times. Whether checking against a complicated fundamental analysis of value, or countering the common allegation that “nobody will buy this business” when there are in fact businesses being bought and sold that are like it, the analyst should typically be checking for indications of value in the M&A market.

The Wider Evaluation

The issue of private business valuation is complex, requiring far more analysis than the mere issues highlighted in this article. Careful analysis broadly tackles the nature, background, history, operations, customers, suppliers, employees, risks, opportunities, earning capacity, and capitalization metrics for these businesses. This requires significant document review, research, interviews, and competent and thoughtful modeling techniques.

Starting the conversation of what your construction business is worth includes understanding the intended scope of the analysis, purpose, and users of the work. It then quickly moves into a document collection phase. Here, the business owner/manager should expect at a minimum to be asked for the last three to five years of business tax filings and financial statements (e.g., Audit/review, basic management prepared financials, etc.). Next contract schedules including completed and uncompleted projects over the same timeframe will be important, as well as any explicit future budgets or projections (if they exist). Beyond these high-level items, it is somewhat typical to seek breakouts of material balance sheet items and supplemental supporting information for your profit and loss statements (e.g., greater itemization, details of payroll, related parties, fringes/perks, etc.). Going beyond the financial weeds will also include collection of various corporate documents like shareholder agreements, leases, org charts, insurance summaries, past letters of intent/P&S/appraisals, and litigation/contingency details, among other things.

After a desktop review of this private production of information, publicly information, and market research, the appraiser will typically request a forum to interview the relevant owner and/or key managers of the construction firm. This may be in the form of a virtual meeting, teleconference, or even physical in-person meeting.

From laying the scoping, to collecting information, and running a multi-phased diligence process, eventually the appraiser applies methodologies to value your construction or contracting firm. Will we value the firm based on a fundamentally derived income/cash flow capitalization metric, determine appropriate market-derived multipliers, or fall back on an analysis of the net assets of your firm? And upon doing so, one of the final questions is what will be the most appropriate format of any formal documentation of the analysis?

To read the full article, click here.

Jason uses graphs, tables, and his expertise to illustrate a situation in which owners or operators artificially drive down the company’s profits while reaping excessive benefits.

For the full article, click here.

Casey was quoted in the article, “Invisible Touch: Building Relationships in the Digital Age,” written by Stacy L. Dreher, Marketing Director at James Moore & Co. Here’s part of what Casey said:

“It’s been a pivotal time for firms to ensure they have the tools needed to communicate as effectively and efficiently as possible.”

To read the full digital journal, click here.

Roth IRAs are a fantastic retirement tool allowing an individual to set aside up to $6,000 ($7,000 if over age 50) of taxable earned income leading to future tax-free qualified distributions.  There are income phaseout thresholds for direct contributions to a Roth IRA (starting at $124,000 for single taxpayers; $196,000 for married filing joint taxpayers for 2020).  If the taxpayer’s income exceeds those thresholds, they must first do a contribution to a Traditional IRA and then convert it to a Roth IRA.  If there was no existing traditional IRA prior to the contribution for the conversion, the transaction will be tax free.  If there was an existing traditional IRA prior to the contribution, then a portion of the transaction may be deemed taxable.

Opportunity knocks with the current market volatility.  Let us assume as of 12/31/2019 there was $40,000 in a traditional IRA with a basis of $15,000.  Assume in recent months the value of the traditional IRA dropped down to $28,000.  If the full balance of the traditional IRA was converted to a Roth IRA, the taxable portion would be $13,000 ($28,000 converted less basis of $15,000).  This means there is an opportunity to pay less in tax on a Roth IRA conversion simply because the taxable portion, the unrealized growth in the IRA, has decreased.

Suppose in 2020, a small business owner is going to realize a net operating loss.  This would create a situation where a traditional IRA could be converted to a Roth IRA and use up or offset some of the net operating loss for the year.

Suppose another individual lost a good portion of income for 2020, dropping down to a lower tax bracket but has remained financially stable.  If this person has the cash flow to cover the taxes on a Roth IRA conversion, it would be an option to consider while the market is down.

Why bother converting to a Roth IRA?  As noted above, qualified distributions from a Roth IRA are tax-free (under current tax law).  The time value of money in the Roth IRA could be explosive, dependent upon actual returns and the length of time the money can sit there and grow.  Also, we are currently in a period of very low tax rates.  Given the various stimulus packages utilized over the past 12 years and the burgeoning national deficit, it is likely we will see higher tax rates in the future.  Additionally, Roth IRAs do not require minimum distributions when you attain a certain age.  Therefore, the investment continues to grow tax-free for longer and future beneficiaries who inherit the Roth IRA would take distributions tax-free.  Lastly, in times like these, some people find they need access to cash.  Provided the Roth IRA was open for 5 years, the contributions to a Roth can be withdrawn without penalty or tax.  The growth portion, if withdrawn, would be taxable income if the Roth IRA owner was not yet age 59 ½ at the time of withdrawal.

What are the COVID-19 impacts on Required Minimum Distributions? Prior to December 2019, the tax law stipulated once a taxpayer attained age 70 ½, they were required to start taking distributions from their traditional IRA, SEP IRA, or SIMPLE IRAs.  Under the SECURE Act passed in December 2019, for those born after June 30, 1949, RMDs must start at age 72.   Due to COVID-19, there is no mandated RMD for 2020 as taking funds out during a downturn in the market could solidify losses and reduce recovery in a rebound.  It is important to note if the individual was still employed and had a 401(k) with the employer, the RMD would start the year after retiring.  The RMD is determined by looking to the value as of December 31^st and dividing by the distribution period reported un the Uniform Lifetime Table for the taxpayer’s age at the end of the year.

What about pulling funds from IRAs due to COVID-19?  Congress recognized the need for cash by individuals and relaxed the rules on distributions from retirement savings for those individuals impacted by COVID-19.  Impacted means the individual was diagnosed with the virus, lost their job, were furloughed, experienced reduced work hours, or due to COVID-19 could not work or had no childcare.  (This is a pretty wide net.)  Impacted individuals can now pull up to $100,000 from their IRA.  The $100,000 limitation is per individual, not retirement account.  There are three scenarios discussed below: pull funds out of retirement without repayment, borrow funds temporarily, or borrow funds for a longer period.  The downside to these options is obvious: pulling funds out of a retirement plan will set back retirement planning and reduce the potential growth over time as there is less in the bucket.  However, if there is a desperate need, these options warrant consideration.

• If the funds are pulled and not redeposited, normally the individual would be subject to a 10% penalty under age 59 ½ and the distribution would be subject to income tax at both the Federal and state levels. Due to the COVID-19 pandemic, the relief is waiver of the 10% penalty and allowing the Federal tax owed on the distributions to be paid over three years instead of one, if desired.  It is important to recognize states will have their own rules and could still require taxes on the distribution by April 15^th of the following year, potentially impacting estimated tax payments.
• If the funds are redeposited into the retirement account within the three years (instead of the traditional, pre-pandemic 60-days), no tax is owed on the distribution. Since tax filings are due on an annual basis, this option would require filing amended returns to get back the taxes paid on the initial withdrawal.
• Another option is to temporarily use retirement funds as a loan for a longer period. Prior to the COVID-19 pandemic, if an individual borrowed funds from their 401(k), they would be limited to 50% of the vested balance and must repay the loan over five years.  The stimulus package changed the rules allowing up to 100% of the vested to be borrowed and repay over six years.  Typically, a low interest rate applies on the borrowed funds and the interest is paid to the individual’s own 401(k).  However, the interest rate charged does not make up for any lost earnings while the funds were borrowed.

During these times of uncertainty, we’re here for you as we always have been.  We encourage you to connect with us directly so that we can discuss your specific needs around retirement planning and Required Minimum Distributions, as well as other issues pertinent to you.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first significant retirement-related legislation in more than a dozen years. It brings many changes that affect employers of all sizes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some of the changes, however, may increase the burden on employers. Here are some of the most important developments for employers, many of which took effect for plan years beginning after December 31, 2019.

Greater access to multiple employer plans

Multiple employer plans (MEPs) allow small and midsize unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA plan. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan.

Currently, MEPs generally are limited to participating employers that share some commonality — for example, being in the same industry or geographic location or using the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP. These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP.

PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the IRS are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans.

In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation by one employer participant (such as failing to make contributions to the plan on schedule) could jeopardize the MEP’s tax-qualified status. The SECURE Act lays out certain requirements that a PEP can satisfy to protect its status in such a situation.

The SECURE Act also provides an alternative to MEPs for small employers seeking the economies of scale they provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met.

Looser notice and amendment rules on safe harbor plans

As of January 1, 2020, plan sponsors no longer are required to give notice to plan participants before the beginning of the plan year when the sponsor is making qualified nonelective contributions — that is, contributions an employer makes regardless of whether an employee contributes — of at least 3% to all eligible participants. The requirement to provide advance notice when making safe harbor matching contributions continues.

Plan sponsors also can amend 401(k) plans that don’t use a matching contribution safe harbor to include a 3% nonelective contribution safe harbor any time before the 30th day before the end of the plan year. The amendment can be made later than that only if it provides for a qualified nonelective contribution of at least 4% of compensation, rather than 3%, and the amendment is done no later than the close of the following plan year.

Annuity options

Annuities can help reduce the risk that retirees will run out of money before the last years of their lives, when health care expenses can run high. But many employers have been reluctant to offer annuities for fear of facing lawsuits alleging breach of fiduciary duty if the annuity providers they selected run into financial problems down the road. The SECURE Act preempts this hurdle by immunizing employers from liability if they choose a provider that meets certain requirements, starting December 20, 2019.

The SECURE Act, however, also requires employers to include a lifetime income disclosure on a plan participant’s benefit statements at least annually. The disclosure will show the estimated monthly payments the participant would receive if the total account balance were used to purchase an annuity for the participant and his or her surviving spouse. Before employers can implement this requirement, the U.S. Department of Labor must issue applicable guidance.

Participation by part-time employees

Employers generally have been allowed to exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in 2021, the SECURE Act generally expands the rule by requiring employers to allow not just those who work at least 1,000 hours in one year (about 20 hours per week) to participate, but also those who work at least 500 hours in three consecutive years and are at least age 21 at the end of the three-year period.

Employer contributions aren’t a requirement of the new participation rules for part-time employees. And employers can exclude the latter category of part-time employees from testing under the nondiscrimination and coverage rules, as well as from the application of the top-heavy rules.

Expanded tax credits

The SECURE Act establishes a new tax credit of up to $500 per year to offset start-up costs for new 401(k) and SIMPLE IRA plans with an eligible automatic contribution arrangement (EACA), beginning in 2020. This credit is on top of the plan start-up credit already available and is available for three years. It’s also available to employers that convert an existing plan to one with an EACA.

The new law also boosts the amount of the credit available for small employer pension plan start-up costs. (A “small employer” is one with no more than 100 employees.) The new law changes the calculation of the flat dollar amount limit on the credit to the greater of 1) $500 or 2) the lesser of:

• $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
• $5,000.

Like the automatic enrollment tax credit, it’s available beginning in 2020 and applies for up to three years.

Higher automatic enrollment safe harbor cap

Even before the SECURE Act, employers could automatically enroll employees in a 401(k) plan under a safe harbor with a qualified automatic contribution arrangement (QACA). However, elective deferrals for QACAs have been limited to 10% of compensation.

The SECURE Act increases the maximum amount of an employee’s compensation that can be automatically deferred after the employee’s first plan year, from 10% to 15%. (The cap for the first year in the plan is 10%.) The increase is effective for plan years beginning after December 31, 2019.

Adoption deadlines

Previously, many types of retirement plans were required to be set up during the tax year for which they were to take effect. The SECURE Act extends the adoption deadline for a tax year to the due date of the employer’s tax return (including extensions), providing more flexibility to make contributions and reduce tax liabilities.

Costlier penalties

The SECURE Act increases the penalties for failing to file retirement plan tax returns, as follows:

• The penalty for failing to file a Form 5500 is $250 per day, not to exceed $150,000 (up from $25 per day, with a maximum of $15,000).
• The penalty for failing to file a registration statement (IRS Form 8955-SSA) is $10 per participant per day, not to exceed $50,000 (up from $1 per participant per day, with a maximum of $5,000).
• The penalty for failure to provide a notification of change of certain information (for example, the plan name, sponsor or administrator) is $10 per day, not to exceed $10,000 (up from $1 per day, with a maximum of $1,000).
• The penalty for failing to provide a required withholding notice is $100 for each failure, not to exceed $50,000 for all failures during any calendar year (up from $10 for each failure, with a maximum of $5,000).
• The penalty hikes apply for filings, registrations and notifications required after December 31, 2019.

Promising, but complicated

These and other changes in the SECURE Act are intended to make it easier and less expensive for employers to offer retirement plans to their employees. (The law also contains a number of significant changes for individuals.) The applicable laws and regulations can prove tricky to navigate. Please contact us with any questions regarding the SECURE Act.

Edelstein & Company was named a Top 10 Medical Practice Management Consulting/Services Company in Healthcare Tech Outlook’s Medical Practice Management Edition. Healthcare Partner, Jonathan Gorski, was highlighted in their piece, ‘Maximizing Financial and Operational Performance.’ Jonathan was quoted saying, “Our staff performs the dual role of CPAs and healthcare consultants, so we can view a project through the multi-experienced lenses of accounting and healthcare.” The piece shared a recent example of when Edelstein’s healthcare team enabled a client to gain $40,000 in just one quarter. To see the full piece, click here and jump to pages 18 and 19.

Read the entire Healthcare Advisory here.