COMBINED Dec 8 2010 Wine Seminar Presentations

Helping
p g You Grow
Your Business
Vintage by Vintage
A conference
f ffor winery
i & vineyard
i d owners,
CFOs, controllers and general managers
December 8
8, 2010
B i
Business E
Essentials
ti l
Kenny Martin & Michelle Gall
MOSS ADAMS LLP | 2

IMPORTANT TASTING NOTES
This brand has a clean balance sheet,

sheet a lively marketing plan
with tasteful notes of originality, and a strong fiscal-year
finish.
MOSS ADAMS LLP | 3

ECONOMY MULTIPLE CHOICE TEST
I believe:
a) The recession is over
b) Th
There is
i a “new
“ normal”
l”
c) Wine tastes good in any economic condition
d) Some combination of the above
MOSS ADAMS LLP | 4

HOW THE WINE INDUSTRY PLANS TO
RESPOND TO ECONOMIC TRENDS
Source: 2009 Wine Industry Financial Benchmarking Report
MOSS ADAMS LLP | 5
GOALS OF SESSION
• Winery accounting basics

g and interpreting
• Calculating p g key
y financial
metrics
• Tools and techniques for budgeting and
forecasting
• Managing cash flow
• Accounting standards update

MOSS ADAMS LLP | 6

WINERY ACCOUNTING BASICS
• Reliable software
• p
Comprehensive chart of accounts
• Proper set-up
• Consistent procedures
p
• Cost allocations
• Management reports
• Periodic financial statements

MOSS ADAMS LLP | 7
WINERY ACCOUNTING BASICS (CONTINUED)
• Cost allocations - What’s the true cost to

produce?
MOSS ADAMS LLP | 8

• Cost buckets
o Direct costs
o Indirect costs
o Other operating costs
• Included in or excluded from inventory?

MOSS ADAMS LLP | 9

• Direct costs of inventory

o Cost of Grapes
 Vineyard costs or purchase of grapes
o Crush Costs
 Labor,
Labor depreciation,
depreciation repairs and maintenance
o Bottling Costs
 Labor, supplies
o Cellar Costs
 Labor, barrel depreciation

MOSS ADAMS LLP | 10
• Indirect costs allocated to inventory

o Insurance
o Taxes
o Manager Compensation
o F ilit C
Facility Costs/Utilities
t /Utiliti
o Depreciation

MOSS ADAMS LLP | 11

• Other operating costs NOT allocated to

inventory
o Marketing/Selling expenses
o Tasting Room
o T
Travell
o General and Administrative expenses
o Other non
non-production
production costs

MOSS ADAMS LLP | 12

• Components of sales price

Direct costs + indirect

costs
t + gross profit
fit =
sales price
MOSS ADAMS LLP | 13

KNOW WHERE THERE IS ROOM IN THE
PIE?
MOSS ADAMS LLP | 14

BENCHMARKING
• Benchmarking is an effective tool but it really

starts with knowing your own operation,
setting appropriate targets, and monitoring
your results.

MOSS ADAMS LLP | 15

KEY METRICS
• Current ratio
• Quick ratio
• Accounts receivable turnover
• Inventoryy turnover
• Gross profit margin
• Return on total assets

MOSS ADAMS LLP | 16

CURRENT RATIO
• Measures the ability to cover short-term

obligations
Current Ratio = Current Assets

Current Liabilities
Target – Very strong companies are at 2:1, bank

covenants vary, but 1.2 to1.5:1 is common

MOSS ADAMS LLP | 17
QUICK RATIO
• Measures the ability to meet immediate cash

needs.
Quick Ratio = Current Assets – Inventory

Current Liabilities
Target – The higher the QR, the better cash position

of the company. Inventory levels influence
significantly.
i ifi l
MOSS ADAMS LLP | 18
ACCOUNTS RECEIVABLE TURNOVER
• Measures effectiveness of extending credit

and collecting debt.
A/R Turnover = Net Credit Sales

Average Accounts Receivable
Target – At least 6, but preferably higher.

MOSS ADAMS LLP | 19
INVENTORY TURNOVER – CASE GOODS
• Measures how many times inventory is sold

and replaced over a period.
Inventory Turnover = Cost of Sales

Inventory
Target – Most wineries strive to turnover their case

inventory annually.

MOSS ADAMS LLP | 20
GROSS PROFIT MARGIN
• Measures the ability to cover operating

expenses through sales.
Gross Profit Margin = Sales – COGS

Sales
Target – Varies based on business model, channel

strategy and other factors.

MOSS ADAMS LLP | 21
RETURN ON TOTAL ASSETS
• Measures net earnings against total assets
ROTA = Net Income

g Total Assets
Average
Target – 8-10%, in reality somewhat lower

MOSS ADAMS LLP | 22
OTHER RATIOS
• Gross profit dollars per case

• Costs of g
goods sold p per case
• Average cost per ton
• g crush cost p
Average per g
gallon
• Average cellar cost per gallon
• Average bottling cost per case

MOSS ADAMS LLP | 23

BUDGETING AND FORECASTING
• Historical results/trends
j
• Projected results
• Benchmarking
o Industry
o Internal

MOSS ADAMS LLP | 24

• Best Practices
o Monthly forecast for 18-24 months with 3 to 5 year
as ultimate goal
o Balance sheet, income statement, cash flow
statement
o Involve all relevant people (finance, operations,
sales, etc)
o Update regularly

MOSS ADAMS LLP | 25

• Best practices (cont)

o Cash flow timing
o Know the drivers (units x rate)
o Track and report actual results to compare to
forecast

MOSS ADAMS LLP | 26

CASH FLOW MANAGEMENT
• Cash-flow vs. net income - understanding the

difference
• Inventory management
• Accounts receivable
• Options during a cash-flow crisis

MOSS ADAMS LLP | 27

OPTIONS DURING A CASH-FLOW CRISIS
• Discount inventory to move more quickly

• Short-term borrowingg
• Receivables turnover
• Extend payables
p y
• Control costs

MOSS ADAMS LLP | 28

ACCOUNTING STANDARDS UPDATE
• Lease accounting
p g standards
• International financial reporting
(IFRS)
• Small GAAP vs. Large GAAP

MOSS ADAMS LLP | 29

QUESTIONS?
MOSS ADAMS LLP | 30

THANK YOU!
Kenny Martin
kenny.martin@mossadams.com

Michelle Gall
michelle.gall@mossadams.com
MOSS ADAMS LLP | 31

The material appearing in this presentation is for informational purposes
pp g p p p
only and is not legal or accounting advice. Communication of this
information is not intended to create, and receipt does not constitute, a
legal relationship including but not limited to an accountant client
legal relationship, including, but not limited to, an accountant‐client
relationship. Although these materials may have been prepared by
professionals, they should not be used as a substitute for professional
services. If legal, accounting, or other professional advice is required, the
services of a professional should be sought.
MOSS ADAMS LLP | 32

Tax Strategies
g for
Effective
Management
and other stuff we could
come up with
with…
Natalya Griffith
Griffith, CPA
Ben Dubrasich, CPA
Who doesn’t
doesn t love a
good disclaimer?
Any tax advice contained in this communication, unless expressly
stated otherwise, was not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding tax-related
penalties that may be imposed on the taxpayer under the Internal
Revenue Code or applicable state or local tax law or (ii)
promoting, marketing or recommending to another party any tax-
related matter(s) addressed herein.
The material appearing in this presentation is for informational purposes
only
l andd iis nott llegall or accounting
ti advice.
d i Communication
C i ti off thi
this
information is not intended to create, and receipt does not constitute, a
legal relationship, including, but not limited to, an accountant-client
relationship. Although these materials may have been prepared by
professionals,, theyy should not be used as a substitute for p
p professional
services. If legal, accounting, or other professional advice is required,
the services of a professional should be sought.
TODAY’S
TODAY S OBJECTIVES
• HIRE Act ((Payroll
y Incentives))
• 2010 Small Business Jobs Act
– Small Business Incentives
– Capital Expenditure Incentives
• Previous Legislation Reminders & Laws Expiring
• Trends and Planning
• Pending Legislation
• IRS – behind enemyy lines…
HIRE Act Highlights
• Payroll Tax Exemption
• Worker Retention Credit

HIRE - Payroll Tax Exemption
• Exempts employer from their portion of SS (Medicare not exempt)
tax on qualified
f employees
• Qualified employees:
– Hired after 2/3/10 and before 1/1/11
– Has not been employed for more than 40 hours during the 60
days prior to employment with such employer
– Cannot be related to employer
p y
– Cannot replace another employee unless they quit or were
terminated for cause
• If elected
elected, cannot also claim Work Opportunity Tax Credit (WOTC)
on related wages (can choose either option)
• Wineries and Vineyards are qualified employers
• Signed affidavit required to substantiate exemption
HIRE - Worker Retention Tax
C di
Credit
• Tax credit allowed for qqualified employees
p y
• Qualified employees:
– Qualified for PR tax exemption
– Kept employed for at least 52 consecutive weeks
– Wages paid during last 26 weeks must be at least
80% of first 26 weeks
• Credit is the lesser of $1,000 or 6.2% of wages
• Applies to tax years ending after March 18
18, 2010 –
claimed on 2011 federal income tax return
• Can take credit combined with WOTC
2010 Small Business Jobs Act
Hi hli h
Highlights
• Enhanced small business incentives
• Temporary incentives for all business
• Section §179 and Bonus depreciation are

the big ones
Enhanced Small Business Incentives
• General business credits five-year

five year carryback
(instead of one year)
• General business credits now offset AMT
• 100% exclusion on qualified small business

stock (will cover detail in planning section)
General Business Credits
• Energy
– Renewable Energy Production
– Investment Tax Credit
• Work Opportunity Tax Credit (WOTC)
• R&D Credit
• Agricultural Chemical Security Credit
• S ll E
Small Employer
l H
Health
lth IInsurance C
Credit
dit
Energy Credits and Incentives
• Rural Energy for America Program
• Production & Energy Tax Credits and Cash
Grants on qualified energy property
• BETC
• Biomass
Bi C
Credit
dit
• Property tax exemptions (state specific)
• Local Incentives
Capital Expenditure Incentives
• Expansion of Section§179 expensing
– For tax years beginning in 2010 and 2011
– Up to $500,000 of qualifying property can be
expensed
– Can include $250,000 of qualifying real property
– Real
R l propertyt tto include
i l d qualified
lifi d leasehold
l h ld
improvements
– Phase-out
Phase out begins at $2 million
Capital Expenditure Incentives
• Expansion of “bonus” depreciation
– Write-off 50% of cost of qualifying property
– Asset must be new
– Extended for assets placed in service during
2010
– Not
N t eligible
li ibl if mustt use ADS ((expensing
i
preproductive costs in the vineyard…)
– Will not cause AMT adjustment
Depreciation Example
ASSET COST $
$1,100,000
IRC Section §179 expensing 500,000
Remaining basis
Remaining basis 600 000
600,000
50% bonus depreciation 300,000
Remaining depreciable basis 300,000
MACRS: first year of 5‐yr property = 20% 60,000
TOTAL 2010 EXPENSE $860,000
Other Temporary Incentives
• Health insurance costs for owners now deductible
against self-employment income (2010 only)
• Increase in deduction of start-up expenses to $10,000;

reduced if over $60,000 (2010 only)
• $8,000 increase in luxury automobile depreciation limits
• S-Corp built-in gain period reduced to 5 years – for

dispositions in any tax year beginning in 2011 if the fifth
year off the
th recognition
iti period
i d occurs prior
i tot such h year
Overview - §199 Deduction
• Deduction is equal
q to a fixed p
percentage
g of the
lesser of:
– Qualified Production Activity Income (“QPAI”); or
– Taxable Income/AMTI/AGI
• Fixed percentage is phased-in:
– 2005 – 2006 3% = 1% rate reduction
– 2007 – 2009 6% = 2% rate reduction
– 2010 and after 9% = 3% rate reduction
• Wage limitation
Overview - §199 Deduction
• Qualifying activities:
– Winery Operations
– Production and Sale of grapes to unrelated wineries
• Permanent deduction
• Not applicable if reporting a loss

Laws Expiring as of 1/1/10
• Propane Credit for forklifts – likely gone
forever
• Research and Development credit – most
likely to be extended
• 15 year cost recovery on certain property
• 5 year cost recovery on farming equipment
• Indian
I di Reservation
R ti propertyt recovery lives
li
• Renewal Community Tax Incentives
Whatt d
Wh does th
the ffuture
t
have in store for us?
2011
Tax Rates
• Federal Income Tax rates sunset after 2010
(assuming no new legislation):
2010 2011
Ordinary Income 35% 39.6%

Capital Gains 15% 20%
Qualified Dividends 15% 39.6%
Pending Legislation
• Possible extension of all or a p portion of Bush tax
cuts for two years
• American Jobs and Closing Tax Loopholes Act of
2010 (f
(formerly
l TTax E
Extenders
t d actt off 2009)
– Investment in American Jobs and Infrastructure
– Extension of expiring provisions
provisions, ii.e.,
e R&D credit
credit,
favorable depreciation lives for qualified leasehold
improvements, farm machinery and Indian reservation
property,
t certain
t i deductions
d d ti ffor iindividuals,
di id l etc.t
• Probable repeal of Form 1099 reporting provision of
HC Reform
Trends & Planning
Trends & Planning – What are we seeing
andd hearing
h i
• Income acceleration or deferral:

– Crop income – farming
– Depreciation – 179 & Bonus
– Expected future federal income tax rates?
– What do you do?
• C corporations – are they making a comeback?
• Qualified Small Business Stock and capital gain
exclusion – a lot of hype, is it worth it?
Trends & Planning – Qualified Small
B i
Business Stock
St k (QSBS) Gain
G i Exclusion
E l i
• Exclusion from capital gains on qualifying sales (federal and AMT)
• Domestic “C” corporation stock issued on or before December 31, 2010
(issued after 9/27/10)
• Held for five years
• Original issue from corporation in exchange for money, property or
compensation/services
• Assets of corporation cannot exceed $50 million (tax basis)
• S ti 1202 requirements
Section i t
• Generally available to individuals, LLC/partnerships, S corporations,
trusts/estates (non-corporate shareholders) – certain rules on pass-thru’s
• Exclusion is limited to > of 1) $10 million or 2) ten times the income tax
basis in the QSBS
• Farming, banking, oil/gas, personal service are ineligible
Trends & Planning – Qualified Small
B i
Business Stock
St k (QSBS) Gain
G i Exclusion
E l i
• Considerations:
– Benefits outweigh “pass-through” income tax benefits?
– Discount applicable on sale when buyer acquiring stock v. assets
– Future individual v. corporate tax rates
– Wh t ttype off assets
What t makek sense? ?
– Unknown of future tax law
– Downsides associated with use of “C” corporations in small business
– Buyer available in future?
– Cash flow complexities
– Exit planning?
• Would it make sense to contribute the intangible
g assets of a
winery/vineyard (trademark, trade-name, intellectual property,
processes/procedures, customer lists, etc.) to a newly formed “C”
corporation by 12/31/10?
Trends & Planning – What are we seeing
andd hearing
h i
• Heightened
g focus on p planningg related to:
– business structure (legal liability protection, transfer
planning, self-employment taxes, succession planning)
– Inventory management and costing methods
• Internal accounting and finance expertise v. outsourcing
p
• Capital/debt structure analysis
y
• Cost segregation to accelerate deductions
• IC DISC
• Incentive
I ti compensation ti packages
k and
dddeferred
f d compensation
ti
• Management succession planning – talent is in short supply
IRS Activity
IRS Activity
• Payroll Tax Audits (National Research Program or NRP)
• NRP audits of S corporations – focused on reasonable
compensation, independent contractors and dividends
• Heightened
g focus on small business – additional 22,000
, corporate
p
audits for 2011 (<$50 million in assets)
• Increased focus on high net worth individuals ($10 million of assets
or income threshold))
• International transactions and reporting scrutiny
• Replacing mailed booklets with postcards
• Encouraging e e-filing
filing
• Related party transactions (Ocmulgee Fields, 11th Circuit) – tax
avoidance and lack of business purpose on failed 1031 exchange
IRS Activity
• Audit rates released ((courtesyy of The Tax Advisor):
)
– C corporations greater than $10 million in assets 14.5%
– Small C corporations .9%
– S corporations and partnerships .4%
4%
– Individuals <1%
– Farms (Schedule F) .3%
– Schedule C’s < $25,000 gross receipts 1.1%
– Larger Schedules C’s escalate to 3.2%
– Lesson: Pass-through’s
g rule!
• IRS providing QuickBooks accounting software training

t auditors
to dit (time
(ti to
t switch
it h to
t Peachtree?)
P ht ?)
Recent Rulings
• Chief Counsel Advice on LIFO - CCA 201043029 (LIFO
it
item considerations)
id ti )
– Type of wine
– Source of grapes
– Process, recipe, formula
– Length of time in production/storage
– Same old story…
story
• Chief Counsel Advice on §197 intangibles

– Vineyard’s purchase price allocated to AVA designation
(amortizable intangible asset)
– Supportable documentation of AVA value required.
Helpful Websites
• www.mossadams.com/publications
(Webinars, MA Now, MA Alerts)
• http://www.irs.gov/pub/irs-pdf/p225.pdf
(IRS PPublication
bli ti 225
225, Farmers
F Tax
T Guide)
G id )
• http://coststudies.ucdavis.edu/files/grapewinenapa2009.pdf
(UC Davis Vineyard Cost Study)
• http://www rurdev usda gov/rbs/farmbill
http://www.rurdev.usda.gov/rbs/farmbill
(USDA Rural Energy for America Program)
• http://www.dsireusa.org/
(Database of State Incentives for Renewables & Efficiency)
QUESTIONS?
THANK YOU
COST SEGREGATION
MOSS ADAMS LLP | 64

CAPITALIZATION ISSUES AND
OPPORTUNITIES FOR WINERIES
• Deductible Repairs
• Cost Segregation Studies
Cost Segregation Studies
• Small Business Jobs Act
MOSS ADAMS LLP | 65

CAPITALIZATION OPPORTUNITY #1 –
DEDUCTIBLE REPAIRS
Questions
1. “I replaced the roof on the winery building, we can
expense that right?”
expense that , right?
2. “We replaced the lighting in the fermentation hall,
but the old lighting was still good, so we can
expense that, right?”
3. “Half the foundation went into the sinkhole; cost
$2M to rebuild Can I get away with expensing
$2M to rebuild. Can I get away with expensing
that?”
Answer – It Depends…
MOSS ADAMS LLP | 66

EXISTING TAX LAW
• Capitalized under §263(a) if:
• Capitalized under §263(a) if:
o Materially increases value of unit of property
o Prolongs useful life of asset
o Adapts property to new use
• Deductible under §162 if:
Simply keeps the asset in ordinary and efficient operating
o Simply keeps the asset in ordinary and efficient operating
o
condition
• Contentious Issue ‐ 1926 BTA decision ‐ Illinois
Merchants through 2003 FedEx Case (6th Circuit)
h h h d ( h )
• Underlying issue:
o Identifying unit of property on which comparisons are made
o Identifying unit of property on which comparisons are made
MOSS ADAMS LLP | 67

NEW AND PROPOSED TAX LAW
•Proposed regulations under §263(a)
•Proposed regulations under §263(a)
o Proposed in 2006, withdrawn, re‐proposed 2008
o Current Form
o Current Form
Essentially follows existing case law theory
Bright line tests added for value and physical size of
repair
repair
Unit of property determination is key to applying tests
o Action expected by the end of the year
Likely to be (at least) partially issued in final form
Currently taxpayer friendly
Final form unknown
Final form unknown
MOSS ADAMS LLP | 68
NEW AND PROPOSED TAX LAW (CONT.)
•Rev. Proc. 2009‐39
o Provides automatic consent for method change
o 3rdd copy of Form 3115 filed with IRS field office
o Method changed is unit of property determination, which the
IRS will not rule on as part of the method change request
•Repairs are currently a Tier 1 issue
o Not something to take a position on without documentation
and careful analysis
and careful analysis

MOSS ADAMS LLP | 69

KEY CONCEPTS IN REPAIRS
• Definition of the Unit of Property (UoP)
D fi iti f th U it f P t (U P)
o Lowest set of functionally interdependent components
p
•Keep vs. Put
o “Keeping” in an ordinary efficient operating condition versus “putting”
in to operating condition.
• Extension of useful life (FOR UoP ONLY)
Extension of useful life (FOR UoP ONLY)
o Because of the improvement, the UoP overall will last longer.
MOSS ADAMS LLP | 70

KEY CONCEPTS IN REPAIRS (CONT.)
• Plan of Rehabilitation / Betterment / Adaptation
Pl f R h bilit ti / B tt t / Ad t ti
o Is the work part of an overall plan of rehabilitation that would
trigger capitalization?
o Is the asset in better condition after the improvement?
o Is the asset being adapted to a different use?
• Physical size test
• Physical size test
o Does the improvement constitute a significant physical portion of
the UoP?
MOSS ADAMS LLP | 71

CAPITALIZATION OPPORTUNITY #2 –
COST SEGREGATION
Define Cost Segregation
Define Cost Segregation
 Classification Criteria

Identify Candidates for Cost Segregation
 Types of transactions/clients that can benefit
f
from cost segregation
t ti

Review Case Study
 Explanation and examples of the benefits

Review New Cases / Current IRS Positions

Review New Cases / Current IRS Positions
MOSS ADAMS LLP | 72
COST SEGREGATION
A tax deferral strategy that frontloads depreciation deductions by segregating the
cost components of a building into the proper asset classifications and recovery
periods thereby significantly reducing depreciable lives
periods, thereby significantly reducing depreciable lives.
Classification Criteria
• Components lack of necessity to the operation and maintenance of
the building.
h b ld
 Example – Decorative Lighting
• Components accessorial nature to the occupant’s business.
 Example – Electrical power to specific machinery
• Components “inherent lack of permanence” – Whiteco 6 point test
(Manner of Attachment).
(Manner of Attachment).
 Example – Certain floor coverings
• Components “sole justification”
 Example –
l Computer Room Air Conditioning Unit
d
MOSS ADAMS LLP | 73

CANDIDATES
Types of Cost Segregation Projects
 Newly Constructed
Newly Constructed
 Ground‐up Winery
 Significant Remodel
 Property Acquisitions
Property Acquisitions
 Allocation
 Like‐Kind Exchanges (Sec. 1031)

Prior Year Transactions
 You can “look‐back” to prior tax years outside of the 3‐yr statute of
limitations
limitations
 Depreciation is a method of accounting – Form 3115 is filed
 Prior returns are not amended
 Depreciation
Depreciation “catch‐up”
catch up adjustment is deducted in the current year
adjustment is deducted in the current year

MOSS ADAMS LLP | 74
PHOTOGRAPHS
MOSS ADAMS LLP | 75

EXAMPLE 1 –
TYPICAL NEW CONST. OR PURCHASE
MOSS ADAMS LLP | 76

EXAMPLE 1 –
TYPICAL NEW CONST. OR PURCHASE
With Study
Without Study
MOSS ADAMS LLP | 77

EXAMPLE 2 – LOOK BACK IN YEAR 3
MOSS ADAMS LLP | 78

EXAMPLE 2 – LOOK BACK IN YEAR 3
With Study
Without Study
MOSS ADAMS LLP | 79

CONTACTS

Jeffrey L. Shilling – Senior Manager
Cost Segregation Group Chair
Direct 503.4781283
j ff
jeffrey.shilling@mossadams.com
hilli @ d

Moss Adams LLP
805 SW Broadway Suite #1200
Portland, OR 97205
Phone 503.242.1447
Fax 503.274.2789
MOSS ADAMS LLP | 80

Responding to
Health Care Reform
Chris Rivard, CPA, Partner & Health
Care Industry Chair
MOSS ADAMS LLP | 81

WHAT WE’LL COVER
• The basics
• The realities of insurance reform
• Some Reform specifics
• gp
Big picture considerations
• The politics of reform
MOSS ADAMS LLP | 82

A FEW HISTORICAL FACTOIDS
• Every other developed country in the world
guarantees medical care to those who are sick
• “Socialized medicine” is a term popularized by a
public relations firm working for the AMA in 1947
to disparage President Truman’ss proposal for a
to disparage President Truman proposal for a
national health care system
• It was meant to suggest that anybody advocating
gg y y g
universal access must be a communist
• Most national health care systems are not
“socialized” The Healing of America, T.R. Reid
MOSS ADAMS LLP | 83

ONE YEAR AGO…
• The Scott Brown Affair
• Only 39% of the public believed their ability to get
coverage with a pre‐existing medical condition
would improve if the bill became law
• From 2007 to 2009, the four largest U.S. for‐profit
F 2007 t 2009 th f l tUS f fit
health insurers on average denied policies to 1 of 7
pp
applicants
• Only a third of the public believed the legislation
would make it easier for them to obtain health
insurance if they changed jobs or lost their job
MOSS ADAMS LLP | 84
THE ACT
• Patient Protection and Affordable Care Act
• A shell of a bill
• “The Secretary shall…”
• , p g , p g , p g
1,000 pages …. 3,000 pages …. 40,000 pages??
• Truly the most sweeping change in health care
since Medicare was enacted
• But a long way to go

MOSS ADAMS LLP | 85
EXPANSION OF COVERAGE
MOSS ADAMS LLP | 86

PAYING FOR REFORM
(2012) (2010)
(2013)
(2011)
(2013) (2014)
(2018) (2010)
(2010)
MOSS ADAMS LLP | 87

THE NEED FOR CARE -
COVERING THE UNINSURED
34.5 M
50.7 M
Great! But doesn’t kick in until 2014.
MOSS ADAMS LLP | 88

OMITTED FROM THE ACT
• Indirectly addresses “sick” care through
Accountable Care Organizations and Bundled
Care concepts
• Impact on insurers is very significant
• Didn’t include a physician payment fix
• Doesn’t address physician shortage
• Doesn’t deal with tort reform

MOSS ADAMS LLP | 89

REFORM TIMELINE
Year Coverage Expansion Financing Delivery System Reform
2010 A. New insurance reforms that ban rescissions E. Cuts to annual market basket updates H. Modifies payment for OP imaging services for
and lifetime caps; limits annual caps; begin for Medicare inpatient, outpatient, non-hospital entities; new disclosure
mandates appeals process; allows children to IRF, psych and LTCH payments requirements for physician-owned imaging
stay on their parent’s insurance plan until age F Tanning salon tax takes effect
F. I
I. Bans self
self-referral
referral to new physician
physician-owned
owned
26 G. Hospitals are required to implement a hospitals, and places limits on grandfathered
B. Prohibition on denying coverage for children financial assistance policy and make it hospitals
with pre-existing conditions available to the public. They must limit J. New requirements for tax-exempt hospitals
C. Small business employers (less than 26 the amount of emergency care for K. Hospitals must publish a list of standard charges
employees and average annual wages of less patients who are eligible for assistance. L. Additional enforcement tools and increased
than $50,000) will receive a tax credit of up to They must also determine eligibility for penalties for violations of anti-kickback statutes
35% to subsidize employee health coverage assistance before engaging in and other fraud laws
(increasing to 50% in 2014.) extraordinary billing and collection
D. New high-risk pools for patients with pre- processes. Failure to comply results in
existing conditions an excise tax of $50,000.
2011 M. Five-year opt-in long-term care program begins P. Begin “productivity adjustments” to ASC S. CMS to launch new “Physician Compare” website
N. Requires insurers to report medical loss ratios payments T. CMS to launch “Center for Medicare and
and requires premium rebates if MLRs exceed Q. “Productivity adjustments” for Medicare Medicaid Innovation”
certain thresholds inpatient, outpatient, IRF, psych and U. Ends federal Medicaid payments for hospital
O. Cuts to Medicare Advantage plans LTCH payments begin acquired conditions
R. Employers must include the total cost of V. Small businesses allowed to establish simple
employer-sponsored health coverage on cafeteria plans
their employees’ Form W-2 (postponed
to 2012)
2012 W Form 1099 reporting will include all

W. X
X. CMS to launch new “Physician
Physician Feedback”
Feedback
payments made to all corporations other program to provide physicians with reports
than tax-exempt comparing their resource use to peer physicians
Y. CMS to launch “value-based purchasing”
program for hospitals and ambulatory surgery
centers
Z. Medicare payment penalties for hospitals with
excessive readmissions begin
AA. Deadline for CMS to launch “shared savings”
program for accountable care organizations
MOSS ADAMS LLP | 90

REFORM TIMELINE
Year Coverage Expansion Financing Delivery System Reform
2013 BB. Large employers must prepare an information CC. Medicaid must pay primary care and HH. CMS to launch national pilot program on
return that contains certification of offer to pediatric physicians at least 100% of bundling for acute, post-acute and physician
employees of option to enroll in minimum Medicare for 2013
2013-2014
2014 payments
essential coverage, the number of full-time DD. New Medicare tax takes effect
employees by month, and information identifying EE. Passive income tax takes effect
each employee
FF. New excise tax on medical device sales
GG. Medicaid and Medicare DSH cuts begin as
number of uninsured declines
2014 II. State-based “exchanges” for individual and small OO. CMS to implement “value-based modifier” for
group insurance markets open Medicare physician payments
JJ. New insurance reforms – ends pre-existing PP. Quality reporting begins for IRFs and LTCHs
condition exclusions and annual caps; prohibits QQ. Medicare payment penalty for hospitals in
premium variation based on gender and health top quartile for hospital acquired conditions
status; allows limited premium variation based
on age, geography, family size and smoking
KK. Businesses with >49 employees that don’t
provide minimum coverage will pay penalty of
$2,000 per employee per year
LL. Individuals must maintain minimum coverage or
pay a penalty ($95 in 2014; $325 in 2015; $695
in 2016 and thereafter) or a % of household
income
MM.Office of Personnel Management certifies new
multi-state, non-profit plans for sale in the state
insurance exchanges
NN. Medicaid eligibility for all non-elderly people up
to 133% of federal poverty level begins
2018 RR. Excise tax on “Cadillac” health plans
MOSS ADAMS LLP | 91

THE IMPACT OF REFORM ON INSURANCE
Cadillac tax
$8 b annual fee assessment on net premiums
Prohibition on premium variation
2014 Ban on annual caps
2013 Compliance with admin simplification
2012 $2 fee per policy X lives
2011
2011 Medical loss ratio > 85%
Ban on lifetime caps
No cancellation of coverage except for fraud
No OOP for preventive services 1.5%
No OOP for preventive services
Extend dependent coverage to age 26
2%
No pre‐ex conditions for children
Essential benefits package
p g 20‐40%
20 40%
High risk pools (4:1 limit)
2010 MOSS ADAMS LLP | 92

WHAT IS A DEPENDENT?
• Not a tax definition
• Plan is prohibited from conditioning coverage on
whether:
whether:
o Child is a tax dependent
o A student
o Resides with parent
Resides with parent
o Receives financial support from parent
o Is married
• Plan
Plan is not required to cover spouses of married
is not required to cover spouses of married
dependents nor children of dependent children
• Plans cannot vary rates or benefits for children
b d
based on age
MOSS ADAMS LLP | 93
ESSENTIAL HEALTH BENEFITS PACKAGE
Includes:
• Applies to any new
pp y • Ambulatory patient services
health plan • Emergency services
beginning on or • Hospitalization
• Maternity and newborn care
after September 23, • Mental health and substance abuse
2010 • Prescription drugs
• Rehabilitative and habitative
• Applies to all
A li ll services and devices
existing plans • Lab services
• Preventive and wellness services
renewing on or after
renewing on or after ( co-pays or shared
(no h d cost)
t)
September 23, 2010 • Chronic disease management
• Pediatric services including oral
and vision care
MOSS ADAMS LLP | 94

GRANDFATHERED PLANS
• “If
“If you like your current plan, you can keep it” ‐
lik l k i”
Maybe
• Definition –
D fi iti any group plan or individual
l i di id l
coverage that was in effect on March 23, 2010
• June 14th 120 pages of regulations issued
June 14th 120 pages of regulations issued
• New enrollees, family status, or TPA changes do
not impact status
not impact status
• Not clear whether changes to provider network
or drug formularies cause loss of status
or drug formularies cause loss of status
MOSS ADAMS LLP | 95
GRANDFATHERED PLANS
• May not eliminate any benefits
• May not increase co‐pays or deductibles beyond
inflation plus 15%
• Not required to provide preventive care at no cost
• Able to discriminate in favor of highly compensated
(insured plans only – not self‐insured plans)
• Plans predicted
Plans predicted 2011 2012

2011 2012 2013
2013
to lose status Small 30% 51% 66%
Large 18% 33% 45%
(per HHS)
(p ) All 22% 38% 51%

MOSS ADAMS LLP | 96

AVERAGE ANNUAL WORKER AND EMPLOYER CONTRIBUTIONS
TO PREMIUMS AND TOTAL PREMIUMS FOR FAMILY
COVERAGE, 1999-2010
$5,791
$6,438*
$ ,
$7,061* * Estimate is statistically different from

estimate for the previous year shown (p<.05)
$8,003* Source: Kaiser/HRET Survey of Employer-

Sponsored Health Benefits, 1999-2010
$9 068*
$9,068*
$9,950*
$10,880*
$11,480*
$12,106*
$12 680*
$12,680*
$13,375*
$13,770*
MOSS ADAMS LLP | 97

AVERAGE ANNUAL WORKER PREMIUM CONTRIBUTIONS
PAID BY COVERED WORKERS FOR SINGLE AND FAMILY
COVERAGE, 1999-2010
* Estimate is statistically different from estimate for the previous year shown (p<.05)
MOSS ADAMS LLP | 98
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010
HIGHER DEDUCTIBLES/ OOP COST
• Some employers are looking at new options for
healthcare coverage‐ how to get employees
compliant with preventive care with buy‐down
compliant with preventive care with buy down of
of
deductibles for compliance.
• Change of pace from no copay, reward the
compliant employees with lowering cost while non
compliant employees bear the burden of higher
costs.
o Annual Exams, mammograms, colonoscopy
o Weight and Exercise Maintenance
o Smoking
Smoking
MOSS ADAMS LLP | 99
THE ECONOMICS OF HEALTH
INSURANCE
Claims
Admin
costs
MOSS ADAMS LLP | 100

INSURANCE
Claims
Admin
costs

INSURANCE
Claims
Admin
costs

INSURANCE
Claims
Admin
costs

INSURANCE
Claims
Admin
costs

INSURANCE
Claims
Admin
costs

2010

2010
INSURANCE REFORM –
PROTECTION FOR HIGH RISK
• Effective September 23, 2010 or on next renewal
• Ban on rescissions (except fraud or misrepresentation)
• Ban on lifetime caps (annual caps banned in 2014)
Ban on lifetime caps (annual caps banned in 2014)
• Cost sharing for preventive services is prohibited (unless
grandfathered)
o Does not apply to out‐of‐network providers
Does not apply to out of network providers
o Does not apply if preventive services were not primary
reason for visit
• Mandated appeals process
M d d l
• Prohibition on denying coverage for children (under 19)
with pre‐existing conditions
• Children allowed to stay on parent’s plan until age 26
SOME ACCOUNTING HUMOR
What is the definition of a tax

accountant?
Someone who solves a problem

p
you did not know you had
in a way that you don’t understand

2010
SMALL-BUSINESS TAX CREDITS
• Good initiative, poor judgment – too complex in the
details…
• Overview today, too much detail to cover
Overview today, too much detail to cover
everything
• Small business employers:
o < 25 FTE employees
< 25 FTE employees
o < $50,000 average annual wages
o ≥ 50% of premiums contributed by employer
• Credit for employer provided health insurance:
C dit f l id d h lth i
o 2010 – 2013 = maximum 35% credit of employer
contribution
o 2014 = maximum 50% credit of employer contribution
2014 i 50% dit f l t ib ti
2010
HEALTH CARE TAX CREDIT – THE PROCESS
• Determine potential for eligibility (prior slide)
• Determine FTEs (full time equivalents) – Step 1
o Who to count
o Hours to count (and how)
o Calculate FTEs
Calculate FTEs
• Determine average annual wages – Step 2
• Determine eligible premiums to count – Step 3
Determine eligible premiums to count Step 3
• Calculate the gross credit – Step 4
• Reduce credit for phase‐outs –
p Step 5
p
2010
STEP 1 - FTES
WHICH EMPLOYEES TO INCLUDE?
• Employees who perform services for employer
during the year (everyone who gets a W‐2)
• Exclude from calculations:
Exclude from calculations
o sole proprietors
o partners in partnership
o more than 2% shareholders
o owners > 5% of other
o family members or other members of household of above
family members or other members of household of above
o seasonal workers (unless > 120 days during taxable year)
• Employees of controlled groups, common control,
affiliated service groups included
ffili d i i l d d
2010
FTES - DETERMINING HOURS
• Include:
o Each hour employee is paid for performance of duties
o Each hour paid for vacation/holiday/illness/etc.
• Don’t include:
o unpaid leave of absences
• Three methods (to determine hours of service):
( )
o Actual hours of service from records and hours for
vacation/holiday/etc.
o Days‐worked method – 8 hours credited for each day worked
and for each day on vacation/holiday/etc
and for each day on vacation/holiday/etc.
o Weeks‐worked method – 40 hours credited for each week
worked and for each week on vacation/holiday/etc.
• Examples…

2010
FTE HOURS WORKED EXAMPLES
Example 1
• Sam works 49 weeks and took 2 weeks of vacation
with pay and 1 week of leave without pay
with pay and 1 week of leave without pay.
• Under the weeks‐worked method 49 + 2 = 51
p ,
weeks * 40 hours per week = 2,040 hours of service
Example 2
• Pam worked 2,000 hours and received 80 hours
vacation & holiday pay.
i & h lid
• Under the actual hours method 2,080 hours of
service
service
2010
DETERMINING NUMBER OF
EMPLOYER’S FTE
• Total hours of service/2,080
• Total hours of service not to exceed 2,080 for
any employee
• Example…

2010
FTE EXAMPLE
• Employer pays the following:
o 5 employees for 2,080 hours each
o 3
3 employees for 1,040 hours each
e p oyees o ,0 0 ou s eac
o 1 employee for 2,300 hours
• Total hours of service (not exceeding 2,080 per
employee):
o 5 employees * 2,080 = 10,400
o 3 employees * 1,040 = 3,120
o 1 employee * 2 080 = 2 080
1 employee * 2,080 = 2,080
o Total hours = 15,600
o 15,600 / 2,080 = 7.5
o Round to the next lowest whole number 7 FTE
Round to the next lowest whole number = 7 FTE

2010
STEP 2 - DETERMINING AMOUNT OF
AVERAGE ANNUAL WAGES
• Total wages paid by employer/FTE for the year
(only counting includable EE’s)
• Round down to the nearest $1,000
Example
• Employer paid $224,000 in wages and has 10
FTEs
• $224,000 / 10 = $22,400
• Round down to $22,000

2010
STEP 3 - PREMIUM PAYMENTS BY
THE EMPLOYER
• Include premiums paid by employer for health
insurance coverage (medical, dental, vision, long‐
g )
term care, nursing home care, etc.)
• Must be paid under a “qualifying arrangement”
o Employer pays ≥ 50% of premium cost of coverage
• Separate
Separate plans must each meet the qualifying
plans must each meet the qualifying
arrangement requirements (med, vision, dental…)
• Limited to the average premium for small group
market (WA employee only $4 543 family
market (WA employee only = $4,543, family =
$10,725) multiplied by the % of insurance paid by
ER
• Can include premiums paid on seasonal Employees
C i l d i id lE l
2010
STEP 4 - CALCULATING THE CREDIT
• Calculate the maximum credit (health
insurance premiums paid by employer
multiplied by the applicable percentage )
o For profits:
 35% Before 2014
35% B f 2014
 50% 2014
o Not for profits
p
 25% Before 2014
 35% 2014

2010
STEP 5 - PHASE OUT CALCULATION
• FTE > 10
o Reduction = credit * percentage in excess of 10 (FTE
in excess of 10 divided by 15)
in excess of 10 divided by 15)
• Average annual wages > $25,000
o Reduction
Reduction = credit
credit * percentage in excess of $25,000
percentage in excess of $25,000
(average annual wages in excess of $25,000 divided
by $25,000)
• 10FTEs
10FTEs with average wages < $25,000 = no
with average wages < $25 000 no
phase out
• Examples…
2010
CREDIT CALCULATION
Example 1
• During 2010 ABC Corp. (an eligible small
employer) has 9 FTE with average annual
l ) h 9 FTE i h l
wages of $23,000 per FTE.
• ABC Corp. pays $40,000 in health insurance
ABC Corp pays $40 000 in health insurance
premiums (which does not exceed the average
premium for small group market)
Step 4 – Maximum credit = $40,000 * 35% = $14,000
Step 5 – No phase out (less than 10 FTE, less than
$25 000 average annual wages)
$25,000 average annual wages)
2010
CREDIT CALCULATION
Example 2
• During 2010 DEF Corp. (an eligible small employer) has 12
FTE with average annual wages of $30 000 per FTE
FTE with average annual wages of $30,000 per FTE.
• The company pays $50,000 in health insurance premiums
(which does not exceed the average premium for small
group market).
k t)
Step 1 – Maximum credit = $50,000 * 35% = $17,500
Step 2 –Credit reduction for FTE > 10: ($17,500 * 2/15) = $2,333
Credit reduction for average annual wages > $25,000:
($17,500 * $5,000/$25,000) = $3,500
Total credit reduction = $2,333 + $3,500 = $5,833
Total 2010 credit = $11,667 ($17,500 – $5,833)
2010
SBHC TAX CREDIT – FINAL COMMENTS
• Carryforward – 20 years if unused in year claimed
• Carryback – not allowed for 2010, one year
carryback allowed in 2011 and beyond
carryback allowed in 2011 and beyond
• Must reduce tax deductions for credit claimed (no
double dipping)
• Maximum of five years of eligibility (ending 2014)
M i f fi f li ibilit ( di 2014)
• Resources:
o IRS website FAQ’s
o Revenue Ruling 2010‐13
o IRS Notice 2010‐44
• Special rules, exceptions and transitional guidance
Special rules, exceptions and transitional guidance
MORE ACCOUNTING HUMOR
There are just three types of

accountants:
Those who can count,

And those who can’t!


2010
IT’LL COST YA!
Tanning salon tax
p
• 10% tax passed on
to the consumer


2011

2011
2011 COVERAGE EXPANSION
• Five‐year opt‐in long‐term care program begins
(CLASS)
• Requires insurers to report medical loss ratios
and requires premium rebates if MLRs exceed
certain thresholds (generally 85%)
i h h ld ( ll 85%)
• Cuts to Medicare Advantage plans ($136B)


2011
SIMPLE CAFETERIA PLANS FOR
SMALL BUSINESSES
• Applies to small businesses (≤ 100 employees)
• Provides “safe harbor” from nondiscrimination
requirements
• Minimum eligibility, participation, and
contribution requirements


2011
REIMBURSEMENT LIMITATIONS FOR
OVER-THE-COUNTER MEDICINES
• Over‐the‐counter medicines (except for insulin
and doctor prescribed) cannot be reimbursed
through the following:
o Health Reimbursement Account
o H l hS i
Health Savings Account (HSA)
A (HSA)
o Archer Medical Savings Account (MSA)
o Flexible Spending Account (FSA)
Flexible Spending Account (FSA)

2011
TAX ON HSA AND ARCHER MSA
NON-QUALIFIED DISTRIBUTIONS
• Premature withdrawals (prior to age 65) from
HSAs and Archer MSAs will be taxed at
increased rates when used for purposes other
than qualified medical expenses
o HSAs – from 10% to 20%
HSA f 10% t 20%
o Archer MSAs – from 15% to 20%

2012

2012
REPORTING OF HEALTH CARE BENEFITS
• Originally effective for 2011 but extended
p y p
• Must include total cost of employer‐sponsored
health coverage on Form W‐2
• Included medical, dental, and vision
• Means to verify medical coverage mandates
• NOT taxable income

2012
EXPANSION OF FORM 1099 REPORTING
• Expanded to include payments made to
Corporations
• Expanded to include gross proceeds for
E d d i l d d f
property and services (merchandise,
equipment, inventory, and raw materials)
equipment, inventory, and raw materials)
• Payers must obtain TINs, perform backup
withholding
• Possible exemption of payments by debit/credit
card
• Push to have this rescinded due to burden
h h h d dd b d
2012
2012 DELIVERY SYSTEM REFORM
• CMS to launch new “Physician Feedback” program
to provide physicians with reports comparing their
resource use to peer physicians
t h i i
• CMS to launch “value‐based purchasing” program
for hospitals and ambulatory surgery centers
for hospitals and ambulatory surgery centers
• Medicare payment penalties for hospitals with
g
excessive readmissions begin
• Deadline for CMS to launch “shared savings”
programs for accountable care organizations

2012
EXPANDING THE DRG

2012
FROM PILOT TO POLICY?

2012
ESTABLISHING THE MEDICAL PERIMETER

EVEN MORE ACCOUNTING HUMOR
You Might be an Accountant if:
You refer
Y f tot your child
hild
As Deduction #152

2013

2013
OTHER EMPLOYER REPORTING
REQUIREMENTS
• Information return requirements for large
employers reporting:
o Certification that employees offered option to enroll
in minimum essential coverage
o # of full time employees by month
# of full time employees by month
o Information identifying each employee
o Large employers
Large employers = 200 or more full time employees
200 or more full time employees
• Reported to the “Treasury”


2013
MEDICARE PAYROLL TAX INCREASE
• 0.9% increase in Medicare Hospital Insurance (HI)
payroll tax on wages and self‐employment income in
ll t d lf l ti i
excess of $250,000 for MFJ and $200,000 for
Individuals
Individuals
• No change in employer’s portion of HI payroll tax
• Employers must withhold 0.9% of an employee
Employers must withhold 0 9% of an employee’ss
wages exceeding $200,000
• Effective: Tax years beginning after December 31,
Effective: Tax years beginning after December 31
2012
p y
Employee’s wages
g mayy be < $200,000, but collectively
y with
spouse may be > $250,000. In this case the employer
would not withhold wages, but the employee would still be MOSS ADAMS LLP | 140
responsible for paying the tax.

2013
MEDICARE TAX ON UNEARNED INCOME

• 3.8% Medicare contribution tax will be assessed to
individuals, trusts, and estates on lesser of net
investment income or excess MAGI over $250,000
(MFJ), $125,000 (MFS) or $200,000 (all others)
$ $
• Tax is non‐deductible by the taxpayer
• Effective: Tax years beginning after December 31,
2012
• Covering individuals today
Investment income will become the highest taxed component of
individual income, unearned income Medicare contribution tax
could climb as high as 43.4% for 2013
2013
NET INVESTMENT INCOME
• Net investment income is the sum of interest,
dividends, annuities, royalties, capital gains, gains
from the disposal of non‐business
from the disposal of non business property and
property and
passive income earned from a business.
• Sale
Sale of stock/partnership by active participant
of stock/partnership by active participant –
although lacking clarity, current guidance indicates
the gains from the sale of an active trade or
business would not be considered investment
business would not be considered investment
income. However it appears gains on non‐business
assets may be taxed.

2013
NET INVESTMENT INCOME
• Includes earnings on investment of working capital
• Investment expenses reduce net investment
income
• Doesn’t include:
o Active trade or business income
d b
o Distributions from qualified retirement plans
o Tax‐exempt income (interest)
Tax exempt income (interest)
• Appears to include rent and interest received from
y
active business by owner
2013
WHAT’S IT MEAN?
• Higher taxes… obviously
• Can be hit with both Medicare and HI tax increases
• Reasonable compensation studies will become
Reasonable compensation studies will become
prevalent – less wages/SE income…
• More documentation requirements of “lesser involved”
owners to document active participation in enterprise
• No taxpayer deductions for either tax increase
• Sweet spot
Sweet spot – active participant with reasonable wages.
active participant with reasonable wages
• No indexing for inflation on either taxes
• Example…

2013
EXAMPLE
Facts: Single taxpayer with net investment income of
$100,000, wages of $300,000 and MAGI of $375,000.
• HI tax – $900 ($300,000 ‐ $200,000 = $100,000 * .9% =
$900)
• Medicare tax
Medicare tax – $3,800 (Lesser of $375,000 less $200,000
$3 800 (Lesser of $375 000 less $200 000 =
$175,000 or $100,000. Thus, $100,000 * 3.8% =$3,800)

Questions?

2013
ITEMIZED DEDUCTION CHANGES
• Threshold increases to 10% (from 7.5%)
p y (
• Taxpayer 65+ remains 7.5% (2013 – 2016))


2013
LIMIT ON HEALTH FSAS
• Employee salary reductions for coverage under
a cafeteria plan Health FSA are limited to
$2,500 per taxable year


2014

2014
ADMINISTRATIVE SIMPLIFICATION
• Insurers and employers who self‐insure must report health
insurance coverage information to the covered individual and to
the IRS, including:
o Taxpayer identification number
o Dates of coverage
o Whether coverage is offered through Exchange
o Tax credit or cost sharing reduction received
g
• Health plans must document compliance with administrative
simplification standards
o Single
Single set of operating rules for eligibility verification; claims status;
set of operating rules for eligibility verification; claims status;
electronic funds transfers, health care payment and remittance, health
claims or equivalent encounter information; enrollment and
p ; p p p y
disenrollment in a health plan; health plan premium payments; and ;
referral certification
2014
LEVERAGING EXCHANGES
2014

2014
INSURANCE EXCHANGES
• The Exchanges will be state‐based and serve as an aggregator of
individual policies sold by private insurers and underwritten using
the new federal underwriting and rating rules spelled out by the
Acts
• Small Business Health Options Programs (SHOPs)
• Self‐employed independent contractors can choose to purchase
coverage that best meets their needs in either the Exchange or in
coverage that best meets their needs in either the Exchange or in
SHOP
• The SHOP will be open to the self‐employed individual and the
employees of firms with 100 or fewer employees. The bill grants
l f fi i h 100 f l Th bill
the Administrator (or states) the authority to allow larger firms to
participate in the Exchange or SHOP in the future and/or to merge
the Exchange and SHOP into one larger pool.
h h d l l
2014
INSURANCE COOPERATIVES AND
COMPACTS
• The Acts authorize the creation of private health insurance
p
co‐operatives. A health insurance co‐operative is a non‐
profit, non‐government, consumer‐driven health plan that
p
would serve as an alternative to the private health insurance
programs
• Owned and controlled by the people and small businesses
that purchase health coverage from the cooperative
that purchase health coverage from the cooperative
• Subject to all exchange rules and state laws that apply to
other insurance products, i.e. licensure, solvency,
capitalization, and consumer protections
i li i d i
• The Acts authorize the creation of state compacts that would
allow insurers to offer plans across state lines. In addition,
the Act allows non‐profit insurers to contract with the
exchanges to offer multi‐state plans MOSS ADAMS LLP | 152
2014
MORE INSURANCE REFORMS
• Ban on annual caps
• Prohibits premium variation based on gender and
health status
health status
• Allows limited premium variation based on age,
geography, family size and smoking
• Employers with more than 200 employees must
automatically enroll new employees
p y p q p
• Employer must provide adequate notice and opt‐out
provisions
• Opt out only allowed with proof of coverage from other
source
source
‘PAY
PAY OR
PLAY
PLAY’
PENALTY

2014
EMPLOYERS SUBJECT TO THE
‘PAY OR PLAY’ PENALTY
• Employers who employed an average of 50 full
time employees or more on business days
during the preceding calendar year.
• Exception
o The employer’s workforce exceeded 50 full time
employees for 120 days or less, AND
o The employees in excess of the 50 were seasonal
The employees in excess of the 50 were seasonal
employees.

2014
DEFINITION – FULL TIME EMPLOYEE
• Full time employee – employed an average of at
least 30 hours per week
• To determine full time employees, you must also
To determine full time employees you must also
include the hours of part time employees.
o Example: You have 3 part time employees who each work
10 hours per week. Those 3 part time employees are
combined and considered 1 full time employee.
• Related party entities are combined to determine if
p y
they have more than 50 full time employees in
total. If so, each entity is subject to the Pay or Play
excise tax
excise tax.
2014
EXCISE TAX - NO PLAN OFFERED
• If Employer
a) does not offer minimum essential coverage under
an eligible employer sponsored plan to its full time
employees, AND
b) at least one employee receives health coverage
at least one employee receives health coverage
assistance (premium tax credit or cost sharing
reduction) after enrolling in another plan then…
o Penalty amount is ‐ $2,000 for every full time
employee (less 30 employee reduction)

2014
EXCISE TAX - PLAN IS OFFERED
• If employer does offer minimum essential coverage but
an employee enrolls in a different qualified health plan
and gets health coverage assistance then
and gets health coverage assistance, then….
o Penalty amount is $3,000 for each employee who receives
assistance.
o Penalty is limited to $2,000/employee (less the 30 employee
l l d $ / l (l h l
reduction).
o The penalty won’t be assessed if the employer gives a “free
choice voucher” to the employee
h h ” h l
o Free choice voucher – payment to employee for what the
employer would have paid for the employees coverage if
employee didn’t go to an alternative plan.
l did ’ l i l
2014
HEALTH COVERAGE ASSISTANCE
• Treasury Department will pay an “assistance
credit” or refundable tax credit directly to the state
health insurance plan for certain individuals OR
health insurance plan for certain individuals OR
will share in costs of deductibles, copayments or
similar charges.
• Qualifying individuals are those with household
incomes between 138 and 400% of federal poverty
( p , y )
levels (up to $88,000 for family of four).
• Credit is determined so that individual pays
between 2% – 9.5% of income for health insurance
(sliding scale depending on income)
(sliding scale depending on income).
2014
PAY OR PLAY PENALTY
• If you offer coverage, you shouldn’t have to pay penalty unless the
p
policy is unaffordable or the plan’s share of the total allowed cost of
y p
the benefits is less than 60%.
• Unaffordable – Portion of premium the employee must pay is >9.5%
of the employees household income
of the employees household income.
• When the employee goes to the state exchange, the state collects the
info needed to determine if the premium is > 9.5% of income.
• Employer will be notified if an employee qualifies for assistance and
employer can then appeal the first determination.
• If an employee opts out of the employers coverage but gets covered
If an employee opts out of the employers coverage but gets covered
by Medicaid (instead of an exchange), no penalties apply.
• Penalty is not deductible

2014
PAY OR PLAY PENALTY
Example 1
p y
• In 2014, Employer A fails to offer minimum
essential coverage:
o 100 FT employees
o 10 receive health coverage assistance
• Total annual penalty
o $140,000
o (100‐30) 70 employees * $2,000
• Penalty calculated on a monthly basis
P lt l l t d thl b i
2014
PAY OR PLAY PENALTY
• Example 2
• In 2014, Employer A offers minimum essential
coverage:
o 100 FT employees
o 20 receive health coverage assistance
20 receive health coverage assistance
• Total annual penalty
o Lessor of:
 $60,000 ($3,000*20)
 $140,000 (100‐30) 70 employees * $2,000
• Penalty calculated on a monthly basis
Penalty calculated on a monthly basis
2014
EMPLOYER PAY OR PLAY
• Additional considerations
o Direct costs of providing medical/pharmacy benefits
to employees
o Indirect costs
 Stop loss
Stop loss
 Reinsurance
 Third‐party administrator fees
 Pharmacy benefits management fees
 Internal human resource costs
 Consulting/brokerage costs

INDIVIDUAL
PENALTIES

2014
INDIVIDUAL HEALTH COVERAGE MANDATES
• All individuals must have “minimum essential
coverage” for themselves and their dependents.
• Only exceptions are for individuals who:
Only exceptions are for individuals who
o Qualify for one of the religious exemptions
o Are not U.S. Citizens
o Are aliens lawfully present in the U.S.
o Are incarcerated
• Religious Exemptions:
Religious Exemptions:
o Member of a religious sect that is opposed to accepting
the benefits of any public or private insurance
o Member of a “health care sharing ministry”
M b f “h l h h i i i ”
2014
DEFINITION - MINIMUM ESSENTIAL
COVERAGE
• Includes:
o Government sponsored programs such as Medicare/Medicaid, and
Veteran’s health care programs
o Employer sponsored plans
o Health plan offered in the individual market
o Coverage under a grandfathered plan
o State health benefits risk pools
• Does not include:
o Accident or disability insurance
o Workers Compensation
o Automobile medical payment insurance
o Coverage for a specific disease
o M di
Medicare supplemental health insurance
l lh l hi

2014
SHARED RESPONSIBILITY PENALTY
• If an individual does not have minimum essential coverage, there will be a
shared responsibility penalty equal to the greater of:
h d ibili l l h f
o A flat dollar amount or
o A percentage of income
• Flat Dollar Amount ( per family member)
l ll ( f l b )
o 2014 ‐ $95/year
o 2015 ‐ $325/year
o 2016 d l
2016 and later ‐ $695/year (adjusted each year for inflation)
$695/ ( dj d h f i fl i )
o If a dependent is under 18, the flat dollar amount is ½ of the above amounts.
o Total per family is equal to 3 times the flat dollar amount.
• P
Percentage of Income
t fI
o 2014 – 1%
o 2015 ‐ 2%
o 2016 and later – 2.5%
2016 and later 2 5%

2014
• If you don’t have minimum essential coverage, you pay a
y g y p y
penalty equal to the greater of the:
o Flat Dollar Amount or
o Percentage of Income
P fI
But – penalty amount is limited to 60% of the national average
premium for qualified health plans for the applicable family size.
• Penalty is paid on income tax return, but if penalty is not
paid
o No interest will be assessed
o You are not subject to criminal prosecution or penalty
o The IRS cannot file a notice of lien and cannot levy any property
The IRS cannot file a notice of lien and cannot levy any property
2014
EXEMPTIONS FROM
• Cannot Afford Coverage – If your health care would
cost more than 8% of your household income.
• Not enough income to File Return – For married
couples this amount is currently $ 18,700
• Member of an Indian Tribe
M b f I di T ib
• Months during short coverage gaps – No penalty if
there is a gap in coverage of less than 3 months
there is a gap in coverage of less than 3 months.
• Hardships – An Exchange can certify that someone
is exempt from the penalty if there isn’t any
p p y y
affordable coverage through the Exchange.
2015 AND
BEYOND

2018
HIGH COST EMPLOYER PLAN EXCISE TAX
HIGH-COST
• “Cadillac Plan Tax”
• 40% excise tax (on insurer) on high cost health
plans
• High cost plans:
o $10,200 individual
$10 200 i di id l
o $27,500 family
• Excise
Excise tax on excess over the floor
tax on excess over the floor
• Employer must communicate excise tax to insurer
• Effective 2018
Effective 2018
THE BIG
PICTURE

ESTIMATED ANNUAL GROWTH IN
NATIONAL HEALTH EXPENDITURES
Andrea M. Sisko, Christopher J. Truffer, Sean P. Keehan, John A. Poisal, M. Kent Clemens, and Andrew J. Madison,
National Health Spending Projections: The Estimated Impact Of Reform Through 2019,
Health Affairs, Vol 0, Issue 2010, hlthaff.2010.0788v2-101377201 Copyright ©2010 by Project HOPE, all rights reserved.

DOC IN A BIG BOX

THE NEED FOR CARE –
COVERING THE UNINSURED
34.5 M
50.7 M
Great! But way

y behind the Medicare cuts!

THE NEED FOR CARE – THE ELDERLY
The number of older

people (age 65 and
over) will double over
the next 30 years, from
40 million to 80 million
million,
and the percentage of
older people in the
population will increase
from 13%
to 20%.
By 2032, there will be
more people 65 or older
than children under 15
Stanford Center on Longevity 2010

AN OLDER, SICKER POPULATION

A POPULATION MORE PREDISPOSED TO
COMORBIDITY
Obesity‐related medical costs total $168.4 billion annually, or 16.5% of all medical spending in
the U.S., according to the National Bureau of Economic Research October 2010

CAN WE MEET THE NEED?
• The nation will have a

projected shortfall of 62,900
physicians in 2015
• Due to an expected rise in
patient
ti t demand
d d because
b off
reform
• Also predicting a shortage of
33,100
, physicians
p y in areas of
cardiology, oncology and
emergency medicine in 2015,
adding that many previously
uninsured patients will enter
the health care system with
formerly untreated conditions
that require specialized care
Association of American Medical Colleges 2010

THE
POLITICS

EIGHT MONTH CHECKUP –
WHERE DO WE STAND?
Kaiser Family Foundation Health Tracking Poll
• Confusion
o 53% of Americans are confused about Reform
53% f A i f d b R f
• Misperception
o 3 in 10 seniors believe government panels will make
3 0 se o s be e e go e e t pa e s a e
decisions about end‐of‐life care for Medicare recipients
• Anger
o Of the 32% of respondents who are angry
Of the 32% of respondents who are angry
 20% are angry about health care reform
 The rest are angry about the state of affairs
in Washington and reform is a symbol
in Washington and reform is a symbol

WILL REFORM BE REFORMED?
• Republican “Pledge to America”
• Repeal and Replace
• It is possible to gain Republican majority
• But unlikely to have super‐majority
• Repeal would force a presidential veto
• Piecemeal plan would target individual mandate and
employer mandate among other things
• Adverse selection becomes reality

THE POLITICS OF HEALTH CARE
The government has made substantial progress already in
implementing reform this year including many measures
implementing reform this year, including many measures
popular with the public…
• No pre‐existing condition exclusions for children (72% favorable)
p g ( )
• Extend dependent coverage to age 26 (53% favorable)
• No out‐of‐pocket costs for preventative services (70% favorable)
• N
No cancellation of coverage except for fraud
ll ti f t f f d (68% favorable)
(68% f bl )
• High risk pool for people with pre‐existing conditions (61%
favorable)
• Small business health insurance tax credits (71% favorable)
• Drug rebates for Medicare beneficiaries (64% favorable)
Source: Kaiser Family Foundation
THE POLITICS OF HEALTH CARE
...but major elements of the law that will affect many more
people don’tt kick in until 2014.
people don kick in until 2014
• Guaranteed access to insurance regardless of your health
(69% favorable)
• Insurance exchanges to make it easier to buy coverage
(87% favorable)
• Tax credits to make insurance more affordable for low and middle
Tax credits to make insurance more affordable for low and middle
income people (76% favorable)
• Expanded Medicaid coverage for low income people
(71% f
(71% favorable)
bl )
• A requirement that people have insurance (70% UNfavorable)
• Penalties for employers that don't offer coverage to workers (51%
favorable, 47% unfavorable)11 Source: Kaiser Family Foundation
QUESTIONS?
Please contact:
chris.rivard@mossadams.com

Thank you!


Jim Bernau, Founder/Winegrower
Moss Adams Wine Industry
Moss-Adams
Financial Seminar
Kurt Wittman
Relationship Manager/Vice President
203
NW Farm Credit Services
• Ag.
g Finance Co-op;p; 43 Branches in NW
• $8 Billion in loans; ~20,000 Ag. Operations
• $450 Million in loans to approx. 150
NW winery & vineyard operations (~5% of
p
portolio).
)
• Expecting ~$150 Million Profit in 2010.
• 10
10-Year
Year Avg. Patronage: ~ 55 basis pts.
204
Topics for Discussion
• Key
y Topics:
p
– Peer Data for 13 Oregon Wineries (2006-09)
– “Straw Poll”– 2010 YTD Sales Thru 3rd Qtr.
– Vineyard Value Trends in Willamette Valley
• Additional Talking Points If Time Allows:
– Wine Inventories / Grape Supply Outlook
– Interest Rate Trends / Outlook
205
Benchmark Analysis of Oregon Wineries-
Major Assumptions:
• 13 Wineries in the Analysis
• Sample ~ 5% of Oregon wineries by number
• Sample ~ 27% based on total cases sold
• Used CPA Prepared GAAP-basis financials
• Financials are confined to the winery business
(outside investor wealth/income is excluded)
• Winery, vineyard, & real estate assets were
adjusted to market value
• Winery inventory stated at cost basis (for the
most part)
• 2009 Data is still in draft stage.
206
Balance Sheet Benchmarks
2006 - 2009
207
Balance Sheet Benchmarks
2009 - Large vs. Small
208
Income Statement Benchmarks
2006 - 2009
209
Income Statement Benchmarks
2009 - Large vs. Small
210
Revenue Straw Poll 2008 vs
vs. 2009
211
Revenue Straw Poll 2009 vs.
vs 2010
212
Vineyard Value Trends
213
Vineyard Sales - “Willamette Valley”
2004-2006
214
Vineyard Sales – “Yamhill
Yamhill County”
County
2004-2009
215
Pinot Noir Production/Inventory Outlook
Group Discussion - what will it take to
keep inventories in balance?
216
217
Thank You.
Questions?
218
Legal,
L l Regulatory
R l t andd
Legislative Hot Topics
Wine Industry Financial Seminar

December 88, 2010 – Salem,
Salem Oregon
Some Context …
 Economy & Government
 Consumers
 Distribution Tier
 Processors
 Farm Sector
…Impacts on development and implementation of

business strategies and practices.
Hot Topics
(simmering at least) …
(simmering,
1 Grape Supply Relationships
1.
2. Distribution Channel Relationships
3 Financial Relationships
3.
4. Land Use Policy – Incidental Activities
5 OLCC/TTB Rulemaking
5.
6. Big Stakes in Alcohol Politics
Grape Supply Relationships
 Per Ton Farming Costs

 Pricing
 Future Supply Commitments
 Focus on Getting Paid
 Bulk Wine Market
Statutory Grower Liens (OR)
Agricultural
g Produce Lien ((ORS 87.700))
 Inventory and proceeds
 File APL-1
APL 1 within 45 days after final due date
http://filinginoregon.com/forms/pdf/ucc/430.pdf
 Priority IF other secured creditors are notified
within 20 days.
 Expires in 225 days
Perishable Agricultural
Commodities Act (PACA)
 Produce
Prod ce B
Buyer
er and Seller Licensing
(optional for grower-only sellers)
 Fair
F i Trading
T di Regulations
R l ti
 Prompt Payment Presumption
(10 days; longer must in writing)
 Statutory Trust for Payment
 http://www.ams.usda.gov (“PACA”)
PACA’s
PACA s Statutory Trust
 Agreed
g p
payment
y terms not >30 days
y
 Preserve rights by notice within 30 days or by
invoice language (only if PACA licensed
seller)
 Trust beneficiaries have priority in trust
assets: grapes, wine, and A/R
Distribution Channel
Relationships
 Channel Emphasis
p
 Choice of Channel Partners (brokers and
distributors)
 Getting it Right (contracts, transitions)
 Focus on Getting g Paid
 Direct Sales Strategies
 Self Distribution
Troubled Distribution and Sales
Relationships?
 Revenue problems
p
 Credit problems
 Dispute about performance
 Misunderstanding about payment terms
 Unfavorable contract or no contract
 Franchise
F hi di distribution
t ib ti llaws
 Insufficient leverage
 A/P aging priority
Distribution and
Brokerage Agreements
 Scope of Rights (territory/brands/delegation)
 Payment Terms
 Penalties/Interest
 Attorney’s
Att ’ Fees
F
 Franchise State Issues
 Standards (sales/reporting/handling/service)
 “Good Cause” to Terminate
 Termination Penalties/Tail Commissions
Invoicing Best Practices
 Delivery
y detail
 Dates, price, quantity
 Payment terms
 Interest/Attorney’s Fees “fine print”
 Regular reminder statements
Financial Relationships
Co-Owners/Investors in business
 Individuals (friends/family, third parties)
 Institutional/Strategic (allies, funds)
Lenders
 Non-Commercial
Non Commercial (friends/family
(friends/family, third parties)
 Commercial (banks)
Life Cycle of the
Financial Partnership
1. Initial Questions: Finding
g the right
g partner.
2. Preparation: Entering the partnership.
3. Ongoing Relationship: Managing the
partnership (expectations and terms).
4. Exit: Exiting/ending the partnership.
Challenge for
O
Owner/Operators
/O t
 Changing
Ch i winei iindustry
d t conditions
diti
 More difficult wine market
 Cash and capital is tight
 Financial partners’ circumstances
1. Wealth/Loan portfolio
p
2. Cash flow requirements
3. Risk tolerance (and banking regulation)
4. Covenants & Valuation
Land Use: Incidental Activity at
EFU Permitted Use Wineries
 Range
g of industry
y expectations
 Varying treatment across counties
 Changing practices within counties
 Threats of enforcement activity
 Uncertainty for new and existing business
SB 1055 (2010)
“Items (and services) directly related to sale and promotion of
wine produced in conjunction with the winery
winery, the sale of
which is incidental to retail sale of wine on-site…”
 “gross
“ i
income f
from the
th sale
l off iincidental
id t l ititems and
d services
i
may not exceed 25% of the gross income from the retail
sale on-site of wine produced in conjunction with the
winery
winery”
 Incidental includes: packaged food/beverages; other wines;

gifts; private events hosted by winery or its patrons
Next Steps in Land Use
(EFU Wineries)
 SB 1055 will sunset January 1, 2013.
 Other Legislative Topics:
 Gallonage Limits
 Tasting
g Room Functions ((and farm stands))
 CUP Standards
 Marketing Events
 Weddings/Concerts,
Weddings/Concerts etc.
etc (AOC special events concept)
 Commercial Kitchens
 Destination Wineries
OLCC/TTB Rules in Play
 Privilege
g Tax Administration
 Drinking on Duty
 Portland AIA
 Winery Licensing for Custom Crush Customers
 TTB Bonded Wine Producer: all privileges
 TTB Wholesale: own brands only
 TTB Label Terms
Big Stakes in Alcohol Politics
Public forums, charged
g debates driving
g outcomes:
 Granholm case (new direct shipping states)

 Costco case (trade practice reform)
 Washington’s I-1100 & I-1105 (similar proposals)
 Alcohol Energy Drinks (quick triggers)
Questions or Comments?
Jesse D. Lyon
(503)778-5268
j
jesselyon@dwt.com
y @
MOSS ADAMS CONSULTING
Increasing the Odds of Beating the Odds
Increasing the Odds of Beating the Odds
Successful Ownership Transition
Successful Ownership Transition

Jay Silverstein, JD, LLM
Jay Silverstein, JD, LLM
Northern California Consulting Group
Northern California Consulting Group


A LITTLE ABOUT ME
• Three things that I never thought I would see
o SF Giants win the World Series
o Oregon Ducks ranked #1 in football
o I would qualify for the Boston Marathon

WELL………………..
• In October, Giants won the World Series
• In December of 2009 I ran a 3:30 marathon and
will run the 2011 Boston Marathon and ….
• The Ducks ranked #1

ANYTHING IS POSSIBLE
• ……. including a successful ownership
transition, all you need is
o Patience
o A Plan
o D di i
Dedication and Hard Work
dH dW k
o A little luck


OWNERSHIP TRANSITION IN THE WINE
INDUSTRY
• Unique Issues in the Wine Industry
U i I i h Wi I d
o N. California: family succession disasters
o Romance of the Industry
Romance of the Industry
 Not like the widget business
o Capital Intensive/Lack of Cash Flow
p /
 Assets outside of the winery difficult
 Other Industries property produces cash flow
 Pressure on non‐employed siblings/cousins
Pressure on non employed siblings/cousins
• There is no silver bullet
o Trying to have a better chance of success
Trying to have a better chance of success
OUR PROCESS
SUCCESSION PLANNING PROCESS
• Step One: Who? When?
• Step Two: Prioritization of Goals and Objectives
• Step Three: Diagnostic (Assessment) Where am I?
Step Three: Diagnostic (Assessment) – Where am I?
o BOSS EvaluatorTM
o Focused Meetings
• Step Four : Design – How do I get there?
• Step Five: Reviewing the Plan
• Step Six: Implementation –
p p Getting There?
g
• Step Seven: Annual Review/Update – Course

WHAT HAPPENS TO MY WEALTH?
• Consumption
• pp / p
Appreciation/depreciation in value
• Income and Estate Taxes
• Intended Beneficiaries

THE PLAYERS
• Goals and objectives– legacy/continuation
• Cash flow goals and objectives post
t
transaction/transition –
ti /t iti personal financial plan
l fi i l l
• Goals and objectives ‐ disposition of your estate
• The IRS – income and estate tax issues
The IRS – income and estate tax issues
• Time

IT STARTS WITH THE PERSONAL
FINANCIAL
C PLAN
• Define and prioritize your personal goals and objectives
o How long do I want to work?
o How much cash flow would I like to have in
h h fl ld l k h
retirement?
o Do I want to leave the business to next generation?
g
o Can I afford to gift the business to the next generation?
o Will the sale generate enough cash to fund my
retirement goals?
o Does my successor have the skills to maintain the cash
flow needed for my retirement ?
y
IT STARTS WITH THE PERSONAL
FINANCIAL PLAN
• Determine tolerance to produce the cash flow
you will need
• Then determine your “Excess Capacity”

EVALUATING STRATEGIC ALTERNATIVES
Strategic buyer
Total
Financial buyer
Sale
Competitor
Partial Minority investor purchases stock

Sale Spin-off of division
IPO
Objective: Gradual
Transition Sale to insiders, family, or management
Liquidity
Leveraged Borrow to buy back stock

Recapitalization ESOP
Grow andd
G Be the buyer,
buyer not the seller
Expand Grow bigger, then sell
Status Wait and see

Quo Ignore change, procrastinate, denial
EXTERNAL TRANSITION
• Am I maximizing value?
o Business Financial Planning
o Management
• Am I maximizing after tax value?
o Income Tax Issues – how am I structured –
(winery/vineyard, S corp, C corp, LLC)
o Estate and Gift Tax Issues –
Estate and Gift Tax Issues have I quantified –
have I quantified what
what
am I doing

INTERNAL TRANSITION
• Personal Financial Planning
o How much do I need, or want?
• Estate Planning
l
o Most effective estate and gift tax efficient methods
o Will ownership deter from management
Will ownership deter from management’ss ability to
ability to
run a profitable business?
• Management Succession
o Are my children or key employee capable of managing
the business? (a) provide cash flow and (b) preserve
and grow the value of the business
g

YOUR ESTATE PLAN
• Who will get my assets?
o Children, Grandchildren, Charities
• When will they get them?
h ll h h
o Lifetime Gifting, Outright or in Trust
• How much estate tax will I owe?
How much estate tax will I owe?
o Now and projected in the future
• How can I reduce my estate taxes?
o Estate planning tools
• How will I pay for my estate taxes?
o Liquidity issues, Installments
THE SHARE OF THE PIE!
NO Strategy
St t or Planning
Pl i
Taxes
40%
Heirs
58%
Advisors
2%

THE SHARE OF THE PIE!
With Pl
Planning
i and Time
d Ti
Taxes
20%
Advisors
5%
Heirs
75%

THE TOOLS AND TIME
• The Tools
o Gifts
Gift
o Family Limited Partnerships
o Sale to Defective Grantor Trusts
Sale to Defective Grantor Trusts
o GRATs
o Life Insurance Trusts and Charitable Trusts
• Time
o If prior to a sale, can take advantage of discounts
p g
o Allows time for annual gifting and sales transactions to
work

THE OTHER TAX MAN – INCOME TAXES
ON SALE OF BUSINESS
• The same pie chart applies to the proceeds from the sale
o Your proceeds
o Advisor Fees
d
o Taxes
• Time can also be an issue for income tax planning
Time can also be an issue for income tax planning
• Buyers want to buy assets, may cause additional tax
o Two levels of tax
o Ordinary income tax versus capital gains

INCOME TAX STRATEGY IDEAS
• Is your entity structure tax effective?
o Switch from C to S corporation?
o Time
Time ‐ 10 years for S election.
10 years for S election.
• Understand the allocation of the purchase price
o Are there allocations that may reduce taxes
 Personal Goodwill
Personal Goodwill
 Employment Agreements
 Covenants Not to Compete

CONCLUSION
• You created a valuable asset, it would make sense
to preserve as much of that value for your intended
use
• How to do that
o Personal Financial Plan
P l Fi i l Pl
o Estate Plan
o Income Tax Planning
Income Tax Planning

Business Owner Succession Services
Succession Candidate Identification
Succession Candidate Identification

• Owner Over Age 50
• Family Members in Business
• Non Family Partners – No / Old Buy/Sell Agreement
• Small size/non‐working partners
• No / Old Estate Plan
• Own Real Estate Upon which Business located
• No Financial Plan
• Key People Critical – or aging
• There is illness in the family that is unlikely to be favorably
resolved
• There is squabbling among generations that is interfering
with operations
• There is significant wealth ‐ distributed in different
Whether your business is in its infancy or your company forms/different owners
/
ownership is in the beginning stages, it’s never too early to begin • There is heavy reliance upon the business value to support
planning your succession. It’s all part of thinking big, envisioning retirement plans
• The business is struggling and new management is needed
success, and eliminating surprises that could derail growth and
• Next generation?
prosperity. To that end, we work with you early to define your • Professional management?
strategic priorities and develop a comprehensive action plan
strategic priorities and develop a comprehensive action plan
that includes when you’ll want a successor, who that ideal
person might be, and how you can ensure your business
continues to fulfill your vision even after you have moved on.
The Moss Adams Wealth Services Group of Northern California brings over 100 years of solid experience in
h d lh f h lf b f ld
navigating issues like those that your company – and your family – are currently facing.
CONTACTS:
Jay Silverstein
((707)) 535-4115
John Whiting
(707) 535-4167

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Helping

MOSS ADAMS LLP | 2

This brand has a clean balance sheet,

MOSS ADAMS LLP | 3

MOSS ADAMS LLP | 4

• Winery accounting basics

MOSS ADAMS LLP | 6

• Cost allocations - What’s the true cost to

MOSS ADAMS LLP | 8

• Included in or excluded from inventory?

MOSS ADAMS LLP | 9

• Direct costs of inventory

• Indirect costs allocated to inventory

MOSS ADAMS LLP | 11

• Other operating costs NOT allocated to

MOSS ADAMS LLP | 12

• Components of sales price

Direct costs + indirect

MOSS ADAMS LLP | 13

MOSS ADAMS LLP | 14

• Benchmarking is an effective tool but it really

MOSS ADAMS LLP | 15

MOSS ADAMS LLP | 16

• Measures the ability to cover short-term

Current Ratio = Current Assets

Target – Very strong companies are at 2:1, bank

• Measures the ability to meet immediate cash

Quick Ratio = Current Assets – Inventory

Target – The higher the QR, the better cash position

• Measures effectiveness of extending credit

A/R Turnover = Net Credit Sales

Target – At least 6, but preferably higher.

• Measures how many times inventory is sold

Inventory Turnover = Cost of Sales

Target – Most wineries strive to turnover their case

• Measures the ability to cover operating

Gross Profit Margin = Sales – COGS

Target – Varies based on business model, channel

• Measures net earnings against total assets

ROTA = Net Income

Target – 8-10%, in reality somewhat lower

• Gross profit dollars per case

MOSS ADAMS LLP | 23

MOSS ADAMS LLP | 24

MOSS ADAMS LLP | 25

• Best practices (cont)

MOSS ADAMS LLP | 26

• Cash-flow vs. net income - understanding the

MOSS ADAMS LLP | 27

• Discount inventory to move more quickly

MOSS ADAMS LLP | 28

MOSS ADAMS LLP | 29

MOSS ADAMS LLP | 30

MOSS ADAMS LLP | 31

MOSS ADAMS LLP | 32

• Payroll Tax Exemption

• Worker Retention Credit

• Enhanced small business incentives

• Temporary incentives for all business

• Section §179 and Bonus depreciation are

• General business credits five-year

• General business credits now offset AMT

• 100% exclusion on qualified small business