Understanding the Components of a Buy-Sell Agreement

You want to protect your company against disruptive, harmful, and nonproductive owners, which may include divorced spouses, competitors, and disgruntled former employees. And you’re also thinking that your estate needs protection. You decide to enter into a buy-sell agreement while the interests of the parties—your partners and yourself—are aligned or at least not sufficiently misaligned that it would be impossible to discuss the business and valuation aspects of these agreements.

You know that when a trigger event occurs, the interests of the parties—buyers and sellers—may diverge and agreement over pricing and terms can become difficult or impossible to achieve. The following list includes features you should examine when devising your own agreement:

  1. Agree before trigger events and other dissension occurs. You need to agree on possible future occurrences so that the agreement can be written, signed, and dated in advance of these events.
  2. Identify which future events need to be considered. Many things can happen that may trigger the usefulness of a buy-sell agreement: owners may quit, be fired, retire, pass away, become divorced, or go bankrupt. Decide which future potential triggers you want to include in the buy-sell agreement. It’s important that all owners think seriously about these issues. If the buy-sell agreement operates satisfactorily, it will kick in when an applicable event occurs.
  3. Define the trigger events. Firings can be with or without cause, so agreements need to specify what happens in each circumstance. You and your partners should try to anticipate what could happen and document the occurrence in the agreement.
  4. Determine the price at which the identified triggers will occur. This is one of the hardest parts of establishing an effective buy-sell agreement. It’s also why many appraisers and other advisers recommend appraisal with a predetermined appraiser as a generally preferred pricing mechanism. These buy-sell agreements have fixed prices and they are ticking time bombs because they’re seldom updated.
  5. Determine the terms under which the price will be paid. In this regard, important factors to consider include down payment, payment schedule, interest-rate schedule, and fixed or floating interest rate.

Buy-sell agreements are based on different business situations and are formed by unique parties—you and your partners. For more on the components of buy-sell agreements and how they can work for your firm, give us a call today.

Wondering if You’re Eligible for R&D Credits

If you’re a business owner who wants to eliminate the uncertainty in developing a new product or improving an existing one, you’re probably engaging in research and development. Unfortunately for them, many business owners don’t realize that in some cases, R&D expenditures are tax-deductible. Or perhaps they think that some expenses are deductible when they’re not.

The IRS notes that “R&D expenditures generally include all expenditures incident to the development or improvement of a product.” The term “product” has a wide range in this context and can include:

  • Formula
  • Invention
  • Patent
  • Pilot Model
  • Process
  • Technique
  • Similar Property

Other examples of IRS-sanctioned R&D expenses include:

  • Obtaining a patent.
  • Attorney’s fees that help perfect a patent application.

R&D expenses you cannot deduct include:

  • Quality control testing.
  • Advertising or promotions.
  • Consumer surveys.
  • Efficiency surveys.
  • Management studies.
  • Research in connection with literary or historical or similar projects.
  • The acquisition of another’s patent, model, production or process.

You can deduct R&D expenses in one of three ways:

  • Current year deduction.
  • Amortization of deduction over a period of not less than 60 months.
  • If you choose to amortize, you can opt for the Optional Write-Off Method by deducting R&D expenses ratably over a 10-year period beginning with the tax year in which those expenses were incurred.

The IRS explains that you must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize. You are allowed to claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. It also notes that the R&D credit is a nonrefundable tax credit.

Of course, rules are changing all the time, and there’s a lot of fine print. Give us a call or email a WFY advisor at info@cpa-wfy.com and we’ll help you make sure you get everything coming to you, without falling afoul of IRS regulations.

 

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