Tax, Management & Succession Planning
Thoughts for Architectural Firms
David Goldner, CPA, CVA, CFP
David Goldner – background
• CPA (1980)
• Master’s in taxation (1983)
• CFP (Certified Financial Planner 1989)
• CVA (Cert...
Taxes – §179D deduction
• Energy Policy Act of 2005 –
179D introduced
– Section 179 allows the
expensing of property
• EPA...
Taxes – §179D deduction
• When you reduce total energy and power costs by 50% or
more compared to a reference building – q...
Taxes – §179D deduction
• Generally the property owner gets the deduction
• Special rule for public property
– If the buil...
Taxes – §179D deduction
• Eligible properties – projects completed in the
last three years
– New construction
– Remodels /...
Taxes – §179 deduction
• Eligible properties
– Municipal or government-owned
• Courthouses
• HUD housing (4 stories or mor...
Taxes – §179D deduction
• Case study – high school
– Qualifying area: 485,830 SF
– Qualifying system: lighting,
HVAC, enve...
Taxes – §179D deduction
• Case study – museum
– Qualifying area: 80,377 SF
– Qualifying system: interim
lighting
– Deducti...
IRS requirements
• Third-party certification report
– Unrelated PE or contractor
– Relevant reduction
requirements stateme...
IRS requirements
• Obtain signed allocation letter from
government owner; it must include:
• Designer
• Owner of building
...
Taxes – §179D deduction
• IRS requirements – third-party certification report
– Performed by unrelated PE or contractor
– ...
Taxes – §179D deduction
• Tax wise – accounting procedures and tax filings
– Taken as “other deduction”
– Firm structure d...
Taxes – §179D deduction
How the deduction works
Taxes – §179D deduction
§179D process overview
Tax Armageddon – the issues
• Ordinary tax rates are rising
• Capital gains and dividend tax rates increasing
• Estate tax...
Tax Armageddon – planning
• 50% bonus depreciation is in its last year
• Credits still available for many types of new hir...
Management
Accountability is King
implement accountability to
improve performance
Management – accountability
• Starts at the top – partner accountability
– Do you have a formal system in place?
– Remove ...
Management – accountability
• Successful partner accountability plans:
– Have SMART goals – specific, measureable,
attaina...
Management – accountability goals
• New business won – specific reward of a
percent of new business as collected
• Success...
Management – accountability goals
• Leader in technological innovation – what gets
implemented
• Individual working goals ...
Succession planning – valuation
• Valuing an architectural firm
– Net asset value (no goodwill)
• Cash A/R WIP equipment l...
Succession planning – valuation
• Cash basis financial statements
• Receivables and work in progress
• Restrictive agreeme...
Succession planning
• Personal goodwill
– Business carries name of individual
– Name recognition of individual
– Referrals...
Succession planning
• Institutional goodwill
– Overall practice reputation
– Effective workforce in place
– Practice-wide ...
Succession planning
• Architectural practices tend to sell in the range of
1.75 to 3 times discretionary earnings,
convert...
Questions?
David Goldner, CPA, CFP, CVA
dgoldner@gma-cpa.com
410.685.5512
www.gma-cpa.com
Click the image to
download our free
overhead rate
calculator for FAR
audits
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Taxes, Management and Succession Thoughts for Architecture Firms

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This seminar was presented for the American Institute of Architects' Potomac Valley Chapter. It covers tax planning strategies, management accountability issues, and succession planning for architectural firms.

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Taxes, Management and Succession Thoughts for Architecture Firms

  1. 1. Tax, Management & Succession Planning Thoughts for Architectural Firms David Goldner, CPA, CVA, CFP
  2. 2. David Goldner – background • CPA (1980) • Master’s in taxation (1983) • CFP (Certified Financial Planner 1989) • CVA (Certified Valuation Analyst 1994) • Managing partner (90 person CPA firm)
  3. 3. Taxes – §179D deduction • Energy Policy Act of 2005 – 179D introduced – Section 179 allows the expensing of property • EPAct 2008 update – enhanced usability of deduction for architects and engineers
  4. 4. Taxes – §179D deduction • When you reduce total energy and power costs by 50% or more compared to a reference building – qualifies for a tax deduction of up to $1.80/SF • Modeling is required to compute the deduction under ASHRAE 90.1-2001 baseline = $1.80 Lighting HVAC Building envelope
  5. 5. Taxes – §179D deduction • Generally the property owner gets the deduction • Special rule for public property – If the building is owned by a municipality or government organization, they can assign the tax deduction to you, the architect or engineer (boo)
  6. 6. Taxes – §179D deduction • Eligible properties – projects completed in the last three years – New construction – Remodels / retrofits – Additions – Property placed in service between 2006-2013 – 30,000 SF or more
  7. 7. Taxes – §179 deduction • Eligible properties – Municipal or government-owned • Courthouses • HUD housing (4 stories or more) • Airports, museums, libraries • Transportation centers • County-owned hospitals • Convention centers – Schools • K-12 and higher education
  8. 8. Taxes – §179D deduction • Case study – high school – Qualifying area: 485,830 SF – Qualifying system: lighting, HVAC, envelope – Deduction / SF: $1.80 – Total 179D deduction: $874,494
  9. 9. Taxes – §179D deduction • Case study – museum – Qualifying area: 80,377 SF – Qualifying system: interim lighting – Deduction / SF: $0.43 – Total 179D deduction: $34,562
  10. 10. IRS requirements • Third-party certification report – Unrelated PE or contractor – Relevant reduction requirements statement – Field inspections statement – DOE-approved software – Perjury statement
  11. 11. IRS requirements • Obtain signed allocation letter from government owner; it must include: • Designer • Owner of building • Cost of property • Date placed in service • Amount of the deduction allocated to designer • Penalties of perjury declaration (see sample allocation letter)
  12. 12. Taxes – §179D deduction • IRS requirements – third-party certification report – Performed by unrelated PE or contractor – Relevant reduction requirements statement – Field inspections must be performed after property placed in service – DOE-approved software – Perjury statement
  13. 13. Taxes – §179D deduction • Tax wise – accounting procedures and tax filings – Taken as “other deduction” – Firm structure dictates how deduction is used (S-corp, C-corp, etc.) – Reduced benefit, carry forward or back options available – Tax planning opportunity with your CPA – Amend past three years’ tax returns – Allocation letter and certification report should be kept on file and a copy sent to your CPA; this does not need to be submitted with amended return
  14. 14. Taxes – §179D deduction How the deduction works
  15. 15. Taxes – §179D deduction §179D process overview
  16. 16. Tax Armageddon – the issues • Ordinary tax rates are rising • Capital gains and dividend tax rates increasing • Estate taxes • Alternative Minimum Tax hits BIG • Two percent payroll cut will end • Tax credits will be slashed • New high earner “excise tax” on passive income
  17. 17. Tax Armageddon – planning • 50% bonus depreciation is in its last year • Credits still available for many types of new hires • Estate tax planning – once in a lifetime planning opportunity for very wealthy • Plan to recognize capital gains in 2012 • Maximize your ordinary income in 2012
  18. 18. Management Accountability is King implement accountability to improve performance
  19. 19. Management – accountability • Starts at the top – partner accountability – Do you have a formal system in place? – Remove artificial harmony in your group! – Develop a non-negotiable firm commitment statement – Establish a partner goal setting process – Tie partner goals to compensation
  20. 20. Management – accountability • Successful partner accountability plans: – Have SMART goals – specific, measureable, attainable, realistic and timely goals – Are simple and understood by all partners – Reward results, not efforts – Incent partners to work in areas of strength – Require clear communication and understanding of results by each partner – Align partner goals to the firm’s strategic initiatives
  21. 21. Management – accountability goals • New business won – specific reward of a percent of new business as collected • Success growing a niche area – reputation of the firm, speaking engagements, awards won • Development and management of staff – increased efficiency
  22. 22. Management – accountability goals • Leader in technological innovation – what gets implemented • Individual working goals – hours worked, business managed and realization goals achieved • 60-70% of comp fixed – 30-40% reward based
  23. 23. Succession planning – valuation • Valuing an architectural firm – Net asset value (no goodwill) • Cash A/R WIP equipment less debt – Earnings based methods • Weighted average earnings • Excess earnings • Discounted future earnings (Can this be estimated? ) – Market value • Discretionary earnings • EBITDA
  24. 24. Succession planning – valuation • Cash basis financial statements • Receivables and work in progress • Restrictive agreements among partners employees grievance actions • Depth or leadership • Can you survive to the next generation?
  25. 25. Succession planning • Personal goodwill – Business carries name of individual – Name recognition of individual – Referrals to individual – Closeness of contact – Importance of personal service
  26. 26. Succession planning • Institutional goodwill – Overall practice reputation – Effective workforce in place – Practice-wide marketing – Referrals to practice rather than individual – Repeating as opposed to one-time revenue stream – Practice owns intellectual property
  27. 27. Succession planning • Architectural practices tend to sell in the range of 1.75 to 3 times discretionary earnings, converting to an estimate of 50% of gross revenue (per David DeJong) • BV market data reports – 13 sales (median) – Revenue – 1,240,000 – 55% of revenue – 1.8 x discretionary earnings
  28. 28. Questions? David Goldner, CPA, CFP, CVA dgoldner@gma-cpa.com 410.685.5512 www.gma-cpa.com
  29. 29. Click the image to download our free overhead rate calculator for FAR audits

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