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Property for Services Part 2: Succession Planning and Stock Options

February 5, 2021 by Brian Nuttall, CPA, J.D. Leave a Comment

Property for Services Series: Part 2 of 5

When does property become taxable? As we discussed in Property for Services Part 1, when a service provider receives property in exchange for services, for example equity in a company, that receipt of property is taxable to the employee and deductible for the employer. In Part 2, we will examine how Elevate CPA Group can assist you with your succession planning and stock options property taxes.

The most important and common scenario we encounter is succession planning for our RIA clients and advising employees on receipt of stock or options from their employer.

In most scenarios, when an employee receives options whether Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs/NSOs) it is not a taxable event under IRS Section 83. The taxable event occurs when the option is exercised.

Some employees receive equity in a company instead of options. The timing of the taxability of this transaction is dependent on when the securities are transferable or are not subject to a substantial risk of forfeiture.

Transferable is not a practical consideration, but a technical one. A security is deemed transferrable if the employee is not subject to a substantial risk of forfeiture. A security may be subject to a buy/sell agreement, a right of first refusal or limited market, but none of these are transferability issues. The simple question is if the security is transferred, can the buyer (transferee) have the stock taken away due to a substantial risk of forfeiture.

The most common substantial risk of forfeiture is vesting. The general rule on taxation is the value of the property is determined on the date the substantial risk of forfeiture lapses, or as the employee meets the service requirements. For example, if an employee receives 100 shares of employer stock that vests 50% each year, 50 shares are taxable at the one-year anniversary of the grant and 50 shares are taxable on the second anniversary of the grant.

An 83(b) election simply changes the timing of the income recognition. The 83(b) election accelerates the timing of the taxation to the date of grant ignoring the vesting schedule or other substantial risk of forfeiture. I will discuss some of the considerations on whether to make the elections in the next blog. The most important takeaway to understand is an 83(b) election has very strict timing rules as it MUST be made no later than 30 days after the date of grant. The 83(b) election also has strict requirements on information it must include and where it must be sent. The specific rules are outside the scope of this blog, but we encourage you to urge your client to carefully and timely complete the 83(b) election if so required.

If you would like help explaining the tax liabilities to your client, let us know. Elevate CPA Group focuses solely on the RIA community. We pride ourselves on helping RIA clients streamline and increase the value of their business by not only providing a full range of services including fractional CFO, but also having the expertise to help you bring sophisticated tax planning to your best client relationships. If you have questions about property for services taxation, give us a call.

Filed Under: Fractional CFO, Tax Planning

Property for Services Part 1: Common RIA Tax Errors

February 3, 2021 by Brian Nuttall, CPA, J.D. Leave a Comment

Property for Services Series: Part 1 of 5

An important and often misunderstood concept in the US tax system is taxability of property for services, aka IRS Section 83 Primer: Property for Services. This common tax issue affects both our RIA clients with their own succession planning and clients who receive options or restricted stock units (RSUs) from their employer. At Elevate CPA Group, we are here to help you avoid common RIA tax errors.

As a tax professional, our Spidey senses are triggered when our clients become owners in a company. Ownership is an exciting time in your clients’ lives, but without a firm understanding and proactive planning, this exciting event can lead to a painful and unexpected tax consequence in the future.

The general concept of “property for services’” is fairly straight forward when broken down. Employees receiving property directly from the employer should not be treated differently than an employee who uses cash payroll to purchase property. In other words, we can’t avoid taxing assets given directly to the employee.

To help our RIA firm clients and their clients, I have written a series of blogs deciphering IRA Section 83, aka Property transferred in connection with the performance of services.

As we all know, concepts can be simple—but putting the concept into practice can be very difficult. The next blogs will address:

  • When does the property become taxable, i.e. vesting and the 83(b) election;
  • How much is taxable, i.e. valuation and options;
  • Importance of planning for transfer of ownership; and
  • Tax Treatment of Options

At Elevate CPA Group, our sole focus is the RIA community. We pride ourselves on helping RIA clients streamline and increase the value of their business. By not only providing a full range of services including fractional CFO, but also having the expertise to help you bring sophisticated tax planning to your best client relationships. If you have questions about property for services taxation, give us a call.

Filed Under: Fractional CFO, Tax Planning

2021 Market Trends for the Wealth Management Industry

February 1, 2021 by Brittany Leave a Comment

By Joe DeMarco, CPA

Time to Hire a CPA that Knows RIA Firms

In a recent podcast with Truelytics, Elevate CPA Group discussed how leveraging a CPA firm can help grow your RIA business.   Truelytics is a sophisticated management platform that helps wealth managers attract, grow and retain advisory business while also providing powerful key performance indicators for the RIA industry.  Elevate CPA Group leverages the analytics and analysis of Truelytics to target initiatives for our RIA clients to grow their firm.

If interested, here is the link to our podcast:

https://blog.truelytics.com/how-to-leverage-a-cpa-firm-to-grow-your-ria-business

In the podcast, RIA firms learn how surrounding themselves with the best service providers, including a CPA firm that specializes in the RIA industry, allows them time to focus on the profitable growth of their firm. This point was reaffirmed in a recent article about market trend predictions for wealth management in 2021.

Brian Hamburger, President and CEO of MarketCounsel, is a prominent attorney that has specialized in the wealth management industry for over 20 years.  In the article, he said, “Here’s what I hope for in 2021: I hope advisors give their own business the same care and analysis that they give to other equity investments, make the same type of investment in themselves that they make in others, and make principled decisions when the decision rests with them.”

Positioning Your RIA for Growth

Nearly every RIA firm owner wants to grow their firm in a scalable and profitable manner.  More than likely, it’s their largest asset and where they spend the majority of their time.  As Mr. Hamburger stated, RIA firms should give “their own business” the same care as other equity investments.

This statement really resonated with me. In my experience, too often RIA firm owners are not focusing “ON” their business. The daily requirements of handling new and existing clients have become more and more time consuming.  Clients are looking to their wealth manager for advice on all topics – whether it’s a financial plan for retirement, tax implications on their portfolios or stock market fluctuations. This couldn’t be more apparent given the impact of COVID-19 on the market in 2020 and now the increased volatility with the GameStop scenario. Each market wave and crash equate to less time for RIA firm owners to focus on their own business.

All of this takes time away from RIA firm owners focusing on their own business.

Partnering with Your Firm to Drive Value

At Elevate CPA Group, we understand the financial services industry. Our team of nearly 50 professionals are RIA firm specialists that consistently help them create value.

The wealth management industry is changing more every year:

  • Managed fees are compressing
  • Competition for clients is rising
  • Clients are requiring more tax planning and guidance
  • Regulation will continue to increase specifically around the Books and Records rule

Elevate’s outsourced CFO services could be the answer with addressing these issues. As an Enterprise Partner with Truelytics, we can start with a complementary benchmarking assessment of your RIA firm. Contact us to get started.

Filed Under: Fractional CFO Tagged With: Fractional CFO

Top 4 compliance considerations of newly registered RIA firms

January 4, 2021 by Elevate CPA Group Leave a Comment

By Rick Wilkens, CPA, CVA

Managing your RIA compliance program can be a full-time job. Whether you have a chief compliance officer (CCO) on staff or are working with an RIA compliance consultant, it’s important to make sure your firm’s ducks are in a row. Here are four compliance points for newly registered RIA firms to consider.

Create a policies and procedures manual for RIA compliance

Having a solid, policies and procedures manual—and a plan to implement it—protects your newly registered RIA firm when state or federal regulators come knocking on your door. This manual should be specific to your firm; do not use a boilerplate version. Make sure your owners and managers review and understand your firm’s policies and procedures manual, and that your CCO or RIA compliance consultant updates it annually. No one wants to find out their firm’s manual isn’t being followed when regulators come in and ask for it.

Properly maintain and update Form ADV

Form ADV is used to register your RIA firm with both the SEC and state securities authorities. The roughly 20-page, two-part form contains information about your firm and its business operations, as well as to disclosures about disciplinary events involving key personnel and conflicts of interest. It’s a public form, meaning anyone can access it. Your Form ADV must kept up to date to reflect any changes within your firm—you can guarantee regulators will look at it.

Conduct an annual compliance review

Your annual compliance review is the cornerstone of your compliance program. This is where having a compliance consultant can be especially beneficial. Whereas your CCO will complete the review as a staff member, your RIA compliance consultant will approach it as an outside reviewer. Many consultants will come in and conduct a mock audit, so you’re ready when it really happens.

Establish safeguards

Per the Safeguards Rule of Regulation S-P, your RIA firm’s privacy policies and procedures should include administrative, operational, and physical safeguards for the protection of client records and data. These should establish a standard setting for security controls and configurations for network storage. Additionally, your firm should set sufficient supervisory processes in place to ensure compliance with the Safeguards Rule.

Make compliance a non-issue for your RIA firm.

Registered investment adviser compliance issues can be complicated to manage, especially for new registered RIA firms. If you’re struggling to keep up with this area of your business, Elevate can help. We maintain a robust network of RIA compliance consultants and can connect you with the right one for your RIA firm. Contact us today.

 

 

Filed Under: Fractional CFO

How a fractional CFO could benefit your RIA firm

January 4, 2021 by Elevate CPA Group Leave a Comment

By Rick Wilkens, CPA, CVA

What if you could tap into CFO expertise without having to keep this executive position on your firm’s payroll? With a fractional (i.e., outsourced) CFO, you can. Here’s how a fractional CFO could benefit your registered investment advisor firm today.

A high level of talent at a lower cost for your RIA firm

Adding a full-time CFO to your payroll can be a significant expense. With a fractional CFO, you get financial expertise and support that’s tailored to your firm’s needs—without the cost of an employee. Your fractional CFO can take care of everything from reconciliations to key performance indicator (KPI) analysis while also serving as an in-house resource for tax planning and preparation.

While a fractional CFO engagement doesn’t give you a full-time CFO, it does give you full-time access to one. A fractional CFO’s work is done online, which means you always have access to your real-time financial information. Outsourced CFO solutions are typically provided for a set monthly fee, so you won’t experience billing surprises.

Best of all, a fractional CFO gives you talent you can rely on for the long term. You won’t have to worry about your CFO leaving your firm for a better job.

The right KPIs and industry expertise

Paying attention to key performance indicators, or KPIs, can be a powerful way to drive value—if you’re paying attention to the right KPIs, that is. A fractional CFO who knows the financial services industry can quickly identify which KPIs are critical to your RIA firm’s performance. These may include your firm’s direct expenses, cost to acquire new accounts, and growth and retention rates, to name a few. Your fractional CFO will monitor these KPIs, so you can stay focused on growing your business.

A fractional CFO who specializes in the financial services industry can offer insight into what other similar firms are doing, too. You can use a fractional CFO as your sounding board, knowing this professional is familiar with the types of issues you face.

A one-stop shop for tax planning and preparation

As I mentioned earlier, a fractional CFO can help you with tax planning and preparation, too, making tax time more convenient. Think of a fractional CFO as someone who provides full-time accountant outsourced services. And because a fractional CFO is tracking your firm’s numbers on a monthly basis, you won’t have to worry about last-minute adjustments or last minute tax planning crunches.

Accountability for your firm’s financial success

Your fractional CFO will review your firm’s financials after each month-end close and pull out the important things for you. You can count on your fractional CFO to review these custom reports with you, and to make sure you understand the numbers. In other words, your fractional CFO is your in-house financial resource and educator.

Your RIA firm doesn’t have to go it alone.

Managing your firm’s financials can be a substantial undertaking if you’re trying to do it on your own. At Elevate, we provide outsourced CFO solutions solely for registered investment advisor firms. Our team offers fractional CFO support that can be scaled up or down as needed and multiple levels of expertise. If you’d like to begin the new year with fewer financial worries on your plate, we’re here to help. Questions for your RIA firm? Contact us today.

 

Filed Under: Fractional CFO

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Recent Posts

  • 5 Potential Biden Tax Law Changes Impacting RIA Firms
  • Top 6 Tax Considerations for New RIA Firms
  • Property for Services Part 5: Stock Options
  • Property for Services Part 4: Selling Your RIA Firm
  • Property for Services Part 3: How Much is Taxable?

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