Below are just a few of the many services that we can offer:
An outstanding opportunity may exist for private company manufacturers who are looking to sell all or part of their company, while keeping it within the extended family of existing owners, management and/or employees. It involves using a leveraged Employee Stock Option Plan (ESOP) and applies specifically to private C corporations, or S corporations that can be converted to C corporations.
A leveraged ESOP is a specialized form of tax qualified retirement plan that may invest up to 100% of its assets in securities of a company and acquire the shares with funds borrowed from, or on the credit of, the company. In a typical leveraged ESOP transaction, the ESOP borrows funds from a bank or other third party lender and uses the proceeds to purchase shares of company stock from existing shareholders or the company. If the ESOP acquires at least 30% of the outstanding shares (by vote or value), and the selling shareholder(s) reinvests the proceeds within one year in "qualifying replacement property" (e.g., securities of a domestic operating company) there is no current recognition of capital gain on the sale.
Subsequent to the share acquisition, the company makes annual contributions to the ESOP in an amount sufficient to service the ESOP loan. Because such contributions are fully deductible (within certain limits), the transaction has the effect of allowing the company to deduct the entire principal and interest on the loan repayment. Dividends paid on the ESOP shares may also be tax deductible. As the loan is paid down, shares are allocated to participants accounts within the ESOP. Eventually, as employees retire or leave the company, the shares are repurchased at fair market value, thereby funding the employees' retirement benefit. Employees may be able to treat a substantial portion of their distributions as long-term capital gain rather than ordinary income.
The leveraged ESOP may yield a number of benefits for private company manufacturers:
- Gain liquidity and diversification
- Buy out minority shareholders
- Sell a portion of the company to a friendly buyer
- Secure tax efficient financing
- Establish a valuable stock-based incentive and retirement benefit for employees
- Defer or eliminate recognition of capital gain on the sale of shares to the ESOP
- Receive significant tax benefits unavailable with other forms of corporate financing
To find out more on how a leveraged ESOP may play a role in your corporate financing strategy, contact
Lou Joseph,
Alan Lee or
Joe Gattone.
Controlling property taxes, one of the largest expenses for any manufacturer, is critical to the bottomline. Unlike income taxes, property taxes must be paid even if a company is unprofitable.
Perhaps the greatest reason manufacturers routinely pay more than their fair share of property taxes is the sheer complexity of effectively managing their assets for tax purposes. Data verification, asset classification, asset valuation, obsolescence analyses, taxability analyses, monitoring and procuring available abatements or exemptions and construction cost segregation analyses are complex and time consuming processes—further complicated with every merger, acquisition, capital investment or divestiture that a manufacturing business may decide to make.
We provide an integrated approach for manufacturers called CLARITY (
Classification,
Lifing,
Asset
Review
Integrating
TechnologY). CLARITY seeks to provide personal property tax savings, both current and future. It brings all property tax management tasks under a single umbrella and provides a roadmap for the future, thereby simplifying the property tax function.
CLARITY utilizes a two-phase approach to help identify over-assessments of personal property taxes. In Phase I, PricewaterhouseCoopers obtains relevant information and samples data to identify potential opportunities. In Phase II, we obtain additional information to help the client quantify, substantiate and implement identified savings opportunities. In addition, we transfer this knowledge for future reporting requirements, thereby potentially mitigating future overpayments.
CLARITY is designed to help you find significant personal property tax savings and improve cash flow. For more information, contact
Kris Miller (National Property Tax Partner, TX-based),
Robert Butterbaugh (Partner, Midwest Region) or
Gary Hunter (Senior Manager, Western Region).
In the past year, many product prices have increased dramatically and economists are forecasting average inflation of 3-4% over the next few years. Not surprisingly, the most significant inflation increases are found in petroleum, metals, lumber and livestock products.
Any company with an inventory based on these items should look at the potential benefit of adopting Inventory Price Index Computation ("IPIC") LIFO in the current year. Such a switch may allow the company to reduce taxable income by deducting inflation included in its inventory. For some, this tax savings could be significant.
For those who might consider adopting the IPIC LIFO method, PricewaterhouseCoopers has a LIFO calculator that can be used to estimate the potential first-year tax savings. Keep in mind that in order to use LIFO for tax purposes, it must be used for external financial statements as well. Therefore, the decision to adopt LIFO for calendar year 2004 must be made prior to the issuance of the company's 2004 financial statements.
Without good debt and receivables management, many cash problems can develop. A manufacturing company can quickly find itself unable to pay employees, suppliers, lenders, and other vendors.
For many manufacturers, managing receivables requires a bit of juggling. You want to convert receivables into cash as quickly as possible but, at the same time, you don't want to alienate your customers. Extending credit costs money, but overly aggressive collection policies can drive customers away.
Debt management is equally challenging. In an ever-changing marketplace of loan, credit and debt equity alternatives, manufacturers have a wide range of options to choose from. Not only do they need to know which ones are appropriate for their business, but they also should be aware of which are tax advantageous.
We help manufacturers effectively balance their debt, credit and collections. Our professionals analyze our manufacturing clients' borrowing/payment practices, credit/collection policies and asset utilization and then offer tools and techniques designed to help reduce their debt, shorten their collection cycle and improve their cash flow. We also share "best practices", based on our work with many other manufacturers.
To remain competitive, you need to effectively manage cash flow. Not only do we provide the audit and advisory services designed to help identify opportunities to improve cash flow, but we also seek to identify appropriate tax savings opportunities. Following are examples of circumstances we see that may present opportunities to improve cash flow.
- One of the most significant issues facing manufacturers is accounting for inventory. Newly formed companies (e.g., as a result of a spin-off, 338 election, asset acquisition) or those that acquire another company may be able to choose a more effective method of tax accounting. Other events, such as inflation, price increases on materials and a profitable year after a history of losses may also support switching to more favorable accounting methods that result in less current taxable income.
- Inventory costs, such as purchasing, storage and warehousing that are required to be capitalized for tax purposes, may be overstated by manufacturers. We perform an analysis designed to identify opportunities to reduce these costs. The analysis may result in an immediate tax deduction, as well as a reduction in administrative expenses.
- Manufacturers often have significant inventory shrinkage issues. In these cases, a change in accounting method may help elect a safe harbor of estimating inventory shrinkage. It may reduce administrative costs in supporting inventory counts and more closely align audit with tax strategy.
- An increase in obsolete inventory may suggest that it's time to evaluate reserves for obsolete or excess inventory. Manufacturers can partially deduct obsolete inventory by writing it down below "market" and filing a change in accounting method to limit the IRS adjustments for improper reserves. This effort could accelerate inventory obsolescence deductions and help eliminate interest and penalty exposure.
Employee benefit costs have escalated to become one of the highest expenses for manufacturing businesses, after payroll. What does this mean for your organization? For many, it means introducing more efficiency into the buying power of benefits.
One strategy is to reduce inefficiencies associated with your benefit dollars. By reviewing vendor contracts, renegotiating the benefits and conducting vendor performance reviews, manufacturers may reduce costs associated with their employee benefit programs. Costs may also be reduced by reviewing and addressing the specific cost drivers (e.g., health risks) impacting a specific business. Costs may be trimmed through coaching and lifestyle change programs. Efforts in these areas may yield higher quality benefits for employees and greater cost savings for all.
In this increasingly competitive landscape, you have to continually find new business concepts, products, channels and innovative solutions to grow your business. You may consider an acquisition of one of your competitors or suppliers to improve your market share and raise economies of scale. Or you may be interested in selling a product line or the company as a part of a well-thought out exit plan.
Our Transaction Services practice, comprised of a select team of senior deal professionals, assists manufacturers in identifying, evaluating and executing various strategic alternatives. Our professionals have deep experience on both the buy-side and the sell-side of various types of transactions, including divestitures, mergers, strategic/corporate acquisitions, joint ventures, corporate restructurings and leveraged buyouts. As appropriate, they facilitate and help prepare clients for introductions to leading private investment firms. This tailored function may be used to provide informational feedback well in advance of a capital need, as well as facilitate formal introductions germane to a proposed investment request.
As manufacturers expand into new markets, the corresponding customs duties, taxes, and the costs of regulatory compliance also expand — leading to additional product cost, risk, and logistical "drag." The commercial objectives of the company can also be materially compromised.
Traditionally, many manufacturers view these costs as fixed or unmanageable. However, there might be opportunities for planning designed to manage the costs and potentially reduce them.
Our Worldtrade Management Services team recommends and helps implement strategies designed to help manufacturers plan and control the commercial movement of goods/products across borders. Through business process studies, system redesigns, duty reduction/refund programs, risk management, and compliance studies, we analyze the customs and associated costs of compliance and help clients develop efficient and cost-effective processes. This, in turn, may lead to improved margins, speed and accuracy.
Our international tax network spans more than 139 countries, with a particularly strong presence in the Far East. Through this global infrastructure, we keep up with emerging international tax developments and provide integrated tax research, planning, and compliance services for multi-national manufacturing businesses — both US and non-US based. Some of our international tax services include:
- Foreign desk program – local resources with international experience;
- Outbound international tax planning;
- World trade indirect taxes – customs, duties, VAT, etc.;
- Global profit alignment (GPA);
- Intangibles migration;
- Transfer pricing;
- Cash repatriation planning;
- Local country tax advice; and
- Global expansion assistance (Pathfinder ServiceTM).
Our local international desk acts as a global coordinator of our international tax network. Through this desk, we provide an introduction to the specific professionals placed in locations to help our clients.
Outsourcing occurs when a manufacturer subcontracts a business function(s) to an outside supplier. It allows the manufacturer to focus on core competencies, reduce costs, improve asset utilization and reduce time to market by relying on the supplier's purchasing power, inventory, facilities, technologies and efficiencies.
However, at the same time, outsourcing can also have negative impact on a manufacturer's public relations, employee morale, labor disputes, product quality, delivery and more. These problems can quickly compound if the business function(s) are outsourced to unfamiliar sites overseas.
For these reasons and others, it is critical to carefully weigh the risks when considering outsourcing. Our professionals are highly knowledgeable in the benefits/costs of outsourcing and how they can impact the bottom-line. With our large network of offices both locally and abroad, we help our clients get specific information to help decide if outsourcing is the right choice.
A recent accounting rule, FIN 46, mandated that many multi-location manufacturers will have to consolidate their financial statements with the financial statements of any related enterprises holding real estate used in the business — whether separately owned or controlled by the shareholders. Another ruling, the Financial Accounting Standards Board (FASB) Standards #150, mandated that manufacturers may have to reclassify certain financial instruments as liabilities, rather than equity, even though they have the characteristics of both.
Manufacturers have a relatively short timeframe to review these new developments and determine whether they have viable alternatives to these new financial statement requirements. Our audit and accounting professionals are available to assist you in evaluating the implications and determining which alternatives may benefit your company.
As an owner or senior executive of a privately-held manufacturing company, there are many demands on your time. As a result, you may not always have the time to devote to the effective planning and administration of your personal financial and business affairs. Moreover, is your net worth diverse enough should anything happen to your business?
Our Personal Financial Services team works with business owners to effectively enhance and preserve wealth. We help our clients manage risk, build value and improve performance through a customized approach that reflects who they are and where they want to go.
Many small and medium-sized manufacturing businesses fail to make it through the second generation. In order to manage succession effectively, a strategy should be developed early on that combines the objectives of management, ownership and other stakeholders in the business.
We help our manufacturing clients plan business progression and transfer of ownership interests. We work one-on-one with owners in creating an integrated plan for transferring wealth to heirs, in providing advice to improve the tax efficiency of the plan, in identifying retirement needs and in developing strategies to meet their retirement goals. By using this approach, we help our clients more effectively meet personal objectives, while transferring ownership interests to the next generation.
