The CPA Desk

A Thought Leader Production by PKFTexas

Implications of a C Corporation’s Buy-Sell Agreement

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand.

Buy-sell basics

A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used.

Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.

Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares.

Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.

C corp. tax consequences

A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger the corporate alternative minimum tax.

Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.

Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.

Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so.

For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.

Crystal & Company Looks to a Bright Future Through Client Care and Relationship Building

Russ:  This is PKF Texas Entrepreneur’s Playbook, I’m Russ Capper, this week’s guest host and I’m here at the Gulf Coast Regional Family Forum and my guest is Jonathan Crystal with Crystal & Company; Jonathan, welcome to the Playbook.

Jonathan:  Thank you, Russ, for having me, I appreciate it.

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Expand Your Not-for-Profit’s Reach with Social Listening

Many not-for-profits are adopting a marketing tactic called “social listening” that for-profit companies have used successfully in the past. Social listening costs relatively little and can give you valuable insight into issues that resonate with your supporters. This allows you to better tailor your communications.

Identify and engage

Social listening starts with monitoring social media sites such as Facebook, Twitter, LinkedIn and Instagram for mentions of your organization and related keywords. But to take full advantage of this strategy, you also must identify and engage with topics that interest your supporters and interact with “influencers,” who can extend your message by sharing it with their audiences.

Influencers don’t have to be celebrities with millions of followers. Connecting with a group of influencers who each have only several hundred followers can expand your reach exponentially. For example, a conservation organization might follow and interact with a popular rock climber or other outdoor enthusiasts to reach that person’s followers.

Listen in

To use social listening, develop a list of key terms related to your organization and its mission, programs, and campaigns. You’ll want to treat this as a “living document,” updating it as you launch new initiatives. Then “listen” for these terms on social media. Several free online tools are available to perform this monitoring, including Google Alerts, Twazzup, and Social Mention.

When your supporters or influencers use the terms, you can send them a targeted email with a call to action, such as a petition, donation solicitation or event announcement. Your call to action could be as simple as asking them to share your content.

You can also use trending hashtags (a keyword or phrase that’s currently popular on social media, such as #BostonMarathon or #TaxDay) to keep your communications relevant and leverage current events on a real-time basis. You might be able to find creative ways to join the conversation while promoting your organization or campaign.

Be savvy

Savvy nonprofits know they need to embrace and make the most of their social media profiles. You can cost-effectively improve your engagement efforts with social listening. Contact us for more information on growing your supporter base.

Tax Deadlines to be Aware of for the Remainder of 2017

April 15 (April 18 this year) has passed, but that doesn’t mean you should put your taxes to the back of your mind until 2018. To help make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments, and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and contact us if you have any questions about the deadlines or would like assistance in meeting them.

June 15

  • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
  • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15

  • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2

  • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest, and penalties due, if an automatic five-and-a-half month extension was filed.

October 16

  • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest, and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
  • Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
  • File a 2016 gift tax return (Form 709) and pay any tax, interest, and penalties due, if an automatic six-month extension was filed.

December 31

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.

Three Tax Tips to Follow When Buying a Business

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m here with Martin Euson, one of our Tax Directors on our Transaction Advisory Services team.  Welcome to the Playbook, Martin.

Martin: Thank you very much, Jen. It’s a pleasure to be here.

Jen: So, when we talk transaction advisory services I know there are some considerations, tax considerations to make when you’re advising, you know, a business owner on potentially buying another business. What types of things do you tell them?

Martin: Jen, I would say first and foremost it is critically important for any buyer to really understand the form of the transaction, the substance of the transaction, and the structure of the transaction that they are proposing to undertake.  As you might imagine, when you’re thinking about that, you have the legal form and then you also have how the transaction is going to be treated for tax purposes, and they are not always the same. So, it’s really important for buyers to understand where those two roads diverge because all of the future decisions after that really are going to be driven by that distinction.

Jen: And so, what else do you tend to tell people when you’re advising them on things to know about the buy side?

Martin: I would say another important factor is for buyers to really be able to manage and limit their exposure, manage their risk and limit their exposure when we’re talking about the historical tax liabilities of the business that they’re proposing to buy.

Jen: So, what does that mean?

Martin: What that really means is that there is a concept that’s referred to a successor liability, and when a buyer buys another business, depending on how they buy it, they may be assuming any historical tax liabilities that that business may or may not have. If there’s unpaid taxes, in other words, the buyer may step into the shoes of that former owner and then become liable for those taxes.

Jen: Ok, so that’s when they would call us so that we can take a look at the contracts, take a look and give them the proper advice?

Martin: Exactly. That is really going to unfold through a process of tax due diligence. You’re going to have a purchase and sale agreement, you’re going to want to make sure that you have the maximum protection that you can have in that agreement, yes.

Jen: Perfect. Well, it sounds like we need to get you back to talk a little bit more to talk about what buyers need to know.  Can we get you back?

Martin: Absolutely.

Jen: Perfect. To learn more about how we can assist you with potential transactions, visit And this has been another Thought Leader Production brought to you by the PKF Texas Entrepreneur’s Playbook.

Five Accounting Mistakes Not-for-Profits Should Avoid

To err is human, but your not-for-profit’s supporters, not to mention the IRS, may be less than forgiving if errors affect your financial books. Fortunately, if you attend to details, you can avoid these common accounting mistakes: 

1. Failing to follow accounting procedures. Even the smallest nonprofit should set formal, documented and detailed procedures for managing financial and bookkeeping chores. Your process should include all aspects of managing your organization’s money — how to accept, document and deposit donations, pay bills, and handle every step in between. Put these procedures in writing and make sure you follow each step, every time.

2. Making data entry errors. It’s easy to wreak havoc on your accounts by entering a $500 payment as $50 or transposing numbers. So check and double-check every entry every time. Reconcile accounts against bank statements immediately, and don’t overlook even the smallest discrepancy.

3. Working without a budget. You can’t control overspending or invest a surplus if you don’t know they exist. Budgets don’t have to be intricate to be useful; just look at a few months’ worth of bills and deposits to create a starting point. Then refine your plan as you go along. Include a “miscellaneous” category, but don’t allow it to account for the majority of your expenses.

4. Playing loose with petty cash. Small expenditures like picking up a few office supplies or buying a pizza for volunteers is much easier to do with a petty cash fund. Handle the cash with care, though. Lock it up, authorize only a few people to make disbursements and require receipts for all expenditures.

5. Neglecting to properly categorize. All money coming in and going out of your organization must be assigned to the appropriate category. This is particularly important if you accept donations earmarked for certain programs. To be successful at this, you need to properly set up the initial chart of accounts and define how items should be assigned.

Contact our not-for-profit team with any nonprofit financial questions or if you need help devising organization-wide policies.

Avoid Late-Filing Penalties on Your Tax Return with These Tips

Because of a weekend and a Washington, D.C., holiday, the 2016 tax return filing deadline for individual taxpayers is Tuesday, April 18. The IRS considers a paper return that’s due April 18 to be timely filed if it’s postmarked by midnight. But dropping your return in a mailbox on the 18th may not be sufficient.

An example

Let’s say you mail your return with a payment on April 18, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared.

You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

Avoiding penalty risk

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

  • DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope,
  • FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
  • UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.

Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See for a complete list of authorized services.

Another option

If you’re concerned about meeting the April 18 deadline, another option is to file for an extension. You’ll still need to pay taxes you owe by April 18 to avoid the risk of late-payment penalties as well as interest.

If you’re owed a refund, however, it isn’t necessary to file for an extension: You won’t be charged a failure-to-file penalty if you file late but don’t owe tax.

We can help you determine if filing for an extension makes sense for you — and help estimate whether you owe tax and how much you should pay by April 18.

Help Your Not-for-Profit Run Smoothly with Internal Controls

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host and I’m here with Nicole Riley, one of our Audit Senior Managers on our Not-for-Profit team. Welcome to the Playbook Nicole.

Nicole: Hi, how’s it going?

Jen: Good. Now I’ve heard you giving advice to various non-profits and I’ve heard you emphasize internal controls and how important they are. Can you share a little bit about that?

Nicole: Well, internal controls really are all about fraud. It’s about having the right controls in place in the first place to prevent fraud from ever happening, or if you do have fraud, when you have good controls you detect it right away, so you don’t have that issue where you hear about frauds that go on for seven, eight years and steal millions. It also helps to deter fraud. So, when someone feels like you’re looking over their shoulder, they tend not to commit fraud and steal from the organization.

Jen: Now does that happen a lot with non-profits? Do you see that? Are there some common things that you see that happen more frequently than others?

Nicole: Not that we see a lot of fraud, but we do see a lot of issues with internal controls, segregation of duties being the biggest where they just don’t have the staff size to be able to split duties between different people. So, you have one person that can write checks and records the invoices and then reconciles the bank statements so they have control over all aspects.

Jen: So, then they bring in someone like us to help them put processes into place, or how would that work?

Nicole: Well, usually during an audit we always get an understanding of controls, but if they wanted to bring us in for consulting, we could really look at their controls; what’s in place, and what their weaknesses are. We have some, even just some key things where you have an executive director look at the payroll reports after they come back to make sure that everybody on the payroll report is an employee. Or, having the executive director open the bank statement and look at it every month so they can look and make sure the checks that actually went out the door and the things that got paid,

Jen: Are what’s supposed to be paid.

Nicole: Right.

Jen: Perfect. Well, that sounds great and I’m going to get you back to talk a little bit more about that next time. Does that sound good?

Nicole: That sounds great.

Jen:  Awesome.  To learn more about how we can help your not-for-profit, visit This has been another Thought Leader production brought to you by PKF Texas’ Entrepreneur’s Playbook.

Accounting Update on Employee Benefit Plans

In February 2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-06. The new standard clarifies the presentation requirement for master trust and requires more detailed disclosures of the Plan’s interest in the master trust. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted and is adopted retrospectively to each period the financial statements are presented.

The new standard includes the following amendments:

  1. Requires a plan’s interest and changes in that interest are shown on the face of the financial statements. The interest should be shown as a single line item for each interest in a master trust that the plan holds.
  2. Removes the requirement to disclose the percentage interest in the master trust for plans with divided interests. The standard instead requires that all plans disclose the dollar amount of their interest in each of the general types of investments.
  3. Requires plans to disclose the master trust’s other assets and liabilities and the dollar amount of the plan’s interest in those items.
  4. Removes the investment disclosures that were required for 401(h) account assets provided in the health and welfare benefit plan’s financial statements. These plans should disclose the name of the defined benefit plan in which the investment disclosures are provided.

The guidance improves financial reporting and clarifies the required disclosures for master trust. Contact us if you have any questions regarding this or anything else related to Employee Benefit Plans.

Benefit Your Employees and Your Not-for-Profit by Cross-Training

What would happen if one of your not-for-profit’s key people suddenly quit or had to go on long-term disability? Would you be able to conduct business as usual? To prevent a critical function from possibly coming to a standstill, consider cross-training staff.

Organization benefits

Cross-training personnel means that you teach them how to do each other’s jobs. That way, if one staffer is unavailable, another can jump in and do the job. Cross-training also can increase your organization’s productivity. If the workload temporarily becomes heavy in one area, you’ll be able to shift employees where they’re needed.

There’s also value in a fresh pair of eyes. An employee who is filling in for someone else can bring new perspectives to the day-to-day operations. They may also be able to come up with process improvements.

What’s more, cross-training staff is central to strong internal controls. Prevent fraud by making sure that one accounting employee’s job is periodically performed by another employee. Potential thieves are put on notice that their activities may come under review at any time.

Employees also gain

Employees can benefit, too. If the task a cross-trained staffer learns is vertical — it requires more responsibility or skill than that employee’s normal duties do — the employee may feel (and be) more valuable to the organization. If the task is lateral — with the same level of responsibility as the employee’s routine duties — the staffer still gains a greater understanding of the department or organization. Plus, the shared experience fosters mutual support.

Note, however, that not every employee is a candidate for cross-training. Choose people who show an interest in particular areas of your operation and are open to change. For example, your program coordinator might want to learn more about fundraising and could be an appropriate person to back up your development team.

Be sure to build the idea of cross-training into your hiring process. Select job candidates who show flexibility and curiosity, and let them know that, if hired, they may need to learn how to perform the duties of other employees.

Get started

Determine which positions to cross-trained and create an implementation plan to begin. Contact us for tips on cross-training employees.