On March 23, 2015, the San Fernando Valley Business Journal turned to some of the leading accountants in the region regarding the current state of business accounting and the various trends that they have been observing, and in some cases, helping to drive. Below is a series of questions the Business Journal posed to Drew Grey, SRG’s partner – offering a glimpse into the state of business accounting in 2015 – from the perspectives of someone delivering financial advice and leadership to the businesses of San Fernando Valley region today.
Have you been observing any new, positive business trends?
Grey: The most significant change in business over the last decade is technology. Technology eliminates the need for double or triple entry systems; reducing the need to file large amounts of paper work. Now data can be stored virtually and accessed instantly. Technology has enabled smaller companies to compete with larger enterprises by leveraging technology to handle a global customer base. The advent of social media has enabled businesses an easy way to learn about their customers and target them more effectively. Also, businesses have the opportunity to integrate technology into their decision processes resulting in faster and more comprehensive data analysis.
How has the increase in income tax rates changed income tax planning for your clients?
Grey: The increases in income tax rates have caused our clients to place a greater value on tax planning. We are spending more time finding methods to minimize taxes through deferral of income, acceleration of deductions, and identification of refundable credits. An example of some of the techniques our clients have utilized are Research and Development Credit Studies, Cost Segregation Studies for existing or current purchases of properties, using the new repair regulations, formation of Captive Insurance Companies, utilization of Interest Charge Domestic International Sales Corporations, Domestic Sales Corporations, expanded planning for pension utilizing defined benefit plans, and the use of tax deferred exchanges for sales of assets with significant gain. At SRG, we carefully analyze the tax laws to identify responsible reporting positions that minimize our clients’ tax paid to the Internal Revenue Service and the Franchise Tax Board.
What advice do you give your clients when it comes to estate planning?
Grey: We advise all our clients to have updated Wills and Revocable Trusts. The estate tax rate for 2015 is 40% on the value in excess of $5,430,000 per spouse. It is important to preserve the step up in basis upon death to avoid income tax. Clients who have estates that exceed the exemption amount need a plan that meets their living requirements. We advise clients to retain cash, bonds and stocks to utilize the exemption to avoid estate and income taxes. We suggest that clients transfer their principal residence and or vacation homes, establish family entities to transfer minority interests at discounted valuations, transfer assets via other complex trusts and or sales of assets to a grantor trust to freeze the future appreciation. We use charitable trusts and foundations for certain clients. One of the ancillary benefits of an effective estate plan is asset protection.
Have you seen a change in the way your clients monitor cash flow and what are some examples you can share?
Grey: It is essential that our clients monitor their cash flow. We assist clients in developing cash reporting and forecasting models; providing a daily pulse on their business and projections of future cash needs. An example is one of our clients provides a daily cash position, estimates the deposits and checks clearing for the week and updates their weekly, monthly, and quarterly cash projections to determine the future needs of their business. The projections are updated bi-monthly with sales backlog reports and updates of any changes in costs. It is important for clients to plan for the short term and long term. At SRG, we strongly urge our clients to develop effective financial and cash forecasting that are updated daily.
How are your clients balancing the importance of providing strong earnings for banking needs versus reducing the amount of tax paid to the Federal and State governments?
Grey: Clients preparing financial statements for financial institutions are challenged with balancing the reduction of federal and state taxes and reporting strong earnings; which helps maintain or increase their credit facilities. We have developed effective strategies to emancipate the clients’ financial statements from their tax reporting. The financial institutions require an accrual based financial statement; while the tax law provides for significant differences from accrual accounting. This can yield lower taxable income while not impacting the accrual based EDITDA of the company. We evaluate each company to identify areas where the financial statement and tax reporting may be separated by applying different year-ends and methods of accounting. At SRG, we use the GAAP and tax rules to our clients’ advantage while maintaining integrity in all aspects of our reporting.
How should companies evaluate the effectiveness of their accounting firm?
Grey: A client needs to evaluate their goals when hiring a CPA firm. Many clients are seeking a low cost provider who can prepare accurate financials statements and/or tax returns. Many clients are looking for much more. The client needs to perform a cost benefit analysis. The effectiveness of a CPA firm is dependent on the benefits exceeding the costs. At SRG, we serve clients who want more than an accountant. Some of the benefits include tax minimization, financial statement optimization, obtaining debt or capital, and strategic business consulting to assist in maximizing profits.
What is the best formula for creating a successful and valuable relationship between you and you client?
Grey: Providing significant value on a consistent basis is the best formula for creating a successful relationship with clients. It is essential for us to identify the needs of clients and develop a plan to achieve them. Many of our clients desire services, such as tax minimization, financial statement optimization, assistance with finding debt or capital for their businesses, and increasing their credit facilities. For our high net worth individuals, they typically value an effective estate plan that reduces their estate taxes while maintaining control. An ancillary benefit of an effective estate plan is asset protection which some of our clients appreciate. Whether a client needs strategic business consulting or other services, it is imperative for the CPA to recognize these needs and deliver cost effective and quality services.
For more information on Drew Grey and his accounting practices, please call us at 818-995-0090.