Looking to Attract Investors? Would a Huge Tax Break Help Them Decide?

Attract Investment with QSBS Tax Benefits

How a company is formed has a significant impact on its options later. In some cases it can limit from whom a company can receive investment. There are also cases where certain tax benefits are provided that aren’t available in other types of investments.

One example is Qualified Small Business Stock (QSBS). Investors can leverage QSBS to significantly reduce their taxes by taking advantage of benefits provided under Section 1202 of the IRS Code. To take advantage of these benefits, there are quite a few requirements.

First, the acquisition must be for a business that is 1) a C corporation with 2) gross assets of $50 million or less obtained 3) when the stock was issued that is 4) actively engaged in a qualified trade or business. The businesses that are eligible include:

• IT Technology such as software or hardware development or other technology-related fields

• Biotechnology and Healthcare including pharmaceuticals or medical devices

• Clean Energy and Environmental Technology

• Agricultural Technology

• Educational Technology

• Consumer Goods and Services

• Manufacturing

• E-commerce and other Platforms

There are also many businesses that are specifically excluded. Among these include:

• Personal Services Businesses where the principal asset is the reputation or skill of one or more employees (e.g., accounting, law, consulting, engineering, or financial services)

• Farming

• Natural Resource Extraction (such as mining or drilling)

• Hotels and Restaurants

• Retail Businesses

Obtaining the stock directly can include exchange for money or property, but can also include compensation for services as is the case for many founders of companies.

These are the first steps to be eligible. Before these benefits can be realized, though, 1) the stock must be held for more than five years and 2) at least 80% of the corporation's assets must be used to actively conduct the qualified trade or business mentioned above. This basically means QSBS is a long term investment that creates a viable business and will ultimately reward investors for the risk they took in investing. So what are the rewards?

If all conditions are met, investors can potentially exclude up to 100% of the gain from federal income taxes upon the sale of QSBS. The exclusion amount is subject to a cap, typically $10 million or 10 times the stock’s basis, whichever is greater. This gain can then be excluded from taxable income to  reduce your overall tax liability. If an investor chooses to reinvest the proceeds from the sale of QSBS into another QSBS, they might be able to defer some or all of the gain. There are concerns in regards to Alternative Minimum Tax (AMT); however, changes to the tax code have mostly eliminated this concern.

Because QSBS has the potential to be a massive benefit, it’s critical to keep detailed records of any investment, including how and when the stock was acquired, the cost basis, and the holding period. As with any tax benefit, it’s also worth working with a tax professional who understands these benefits. QSBS rules can be complex and tax laws tend to change or be challenged in the courts. And while there are a great deal of barriers to QSBS, it could have tremendous benefits that would attract investors to companies that meet these required criteria.

If you’re considering starting a company that will raise funds from investors, wouldn’t it be useful to work with professionals who can help you understand your options and assist in making critical decisions that will affect the company moving forward? Reach out to Brightleaf Consulting Group and let us help your vision become a reality.

- John Thrush

Finding the Perfect Fit: Why Client-Accountant Matching Matters at Brightleaf

Finding the Right Fit Improves Your Accounting Experience

At Brightleaf Accounting and Consulting, we believe that the right fit between a business and its financial team is crucial for success. As a firm specializing in accounting, consulting, and payroll services, we've seen firsthand how a well-matched partnership can drive business growth. Let's explore why finding the right fit is so important and how we at Brightleaf ensure we pair each client with the perfect team members.

Understanding Your Business Needs Every business has unique financial requirements. Some need basic bookkeeping, while others require complex financial planning or specialized services like payroll management. At Brightleaf, our first step is always to thoroughly assess your specific needs. This allows us to match you with the team members best equipped to add value to your business.

Experience and Expertise

While all our team members possess strong general accounting skills, we also pride ourselves on our diverse range of specialized knowledge and certifications. Many of our professionals are certified in popular accounting software like Xero and QuickBooks Online (QBO). Our payroll specialist is also certified, providing expert guidance in this critical area.

At Brightleaf, we often pair clients with multiple team members to leverage different skills and specialties. For instance, you might work with our payroll specialist for payroll needs, an accountant for general reconciliation, and a senior accountant for insights into financial data and reports such as balance sheets and profit and loss statements. This approach ensures you benefit from the full spectrum of our team's expertise.

Communication Style and Availability

Clear, timely communication is at the heart of our client relationships. When we onboard a new client, we establish clear rules of engagement between you and your Brightleaf team members. We discuss your preferred contact methods, frequency of updates, and availability expectations. Whether you prefer regular check-ins or as-needed consultations, we tailor our communication style to suit your needs.

Technology and Tools

In today's digital landscape, we understand the importance of technological compatibility. Our team's certifications in Xero and QBO demonstrate our commitment to mastering the tools our clients use. We're always ready to adapt to our clients' preferred systems and stay ahead of the curve, introducing new financial technologies that can streamline your operations and provide deeper insights.

Cultural Fit and Values Alignment

At Brightleaf, we believe that shared values and business philosophy contribute significantly to a successful partnership. We strive to understand your company culture and vision, ensuring we pair you with team members who align with your approach. This cultural fit leads to a more intuitive, productive relationship that goes beyond basic number management.

Cost vs. Value

While we're sensitive to budget constraints, we encourage our clients to view our services as an investment rather than an expense. Our certified team is committed to providing value that exceeds our cost, from ensuring compliance to identifying growth opportunities and potential savings.

At Brightleaf, we're dedicated to creating the best possible fit for each of our clients. When you partner with us, we don't just assign you to a single accountant. Instead, we carefully consider all these factors to pair you with the Brightleaf team members best suited to your unique needs and business style, ensuring you have access to the right expertise for every aspect of your financial management.

We believe this commitment to finding the right fit sets us apart from other small accounting firms. It's not just about providing accounting services; it's about building lasting, productive relationships that contribute to your business success. If you're looking for a financial partner that truly understands the importance of a good match and brings certified expertise across multiple specialties to the table, reach out to Brightleaf today. Let's explore how we can be the perfect fit for your business needs.

- Sharon Mangrum

"Aren't You Done Yet?!?!"

“Why is it taking so long to get the books done?!?!”

Why Accounting Isn't As Easy As It May Seem...

Many accountants are often asked why it takes so long. This is because many people are under the impression that accounting isn't that complicated. These people assume accounting is just adding and subtracting with a little division from time to time. That may be true in some circumstances; but, that's like saying auto repair is just turning a wrench. Like most occupations, there is far more to it.

When a business is small, accounting is generally fairly simple. As the business grows and sales increase, everything becomes more complex. Hiring people and doing payroll means understanding when a person can be a contractor or must be an employee, what taxes must be paid, what insurance coverage is required, and what withholding is necessary. Selling products will require collecting sales tax and setting prices to be profitable. Manufacturing products will require determing costs of good sold and how to classify inventory at different stages of production. When you buy assets like real estate or equipment, depreciation and amortization need to be calculated and adjusted over time. And if you have multiple owners, raise money, have investors, or take on bank loans or other debt, there is a great deal of complexity involved in determining who owns and who is owed what throughout the year.

Another consideration with accounting is knowing the legal requirements and regulations. This can get overwhelming very quickly as some things that seem simple are more complicated than they seem, especially when federal and state governments have different rules at different times. These rules also tend to change periodically, which means needing to stay current with the new regulations. All of these factor into taxes as well as making sure the company is in compliance so it can avoid fines, but there is far more value to accounting that that.

If an accountant is doing their job right, they're doing more than just paying taxes. The deeper understanding there is of what the company does and how the company operates, the more value the numbers have in not only understanding the impact of past decisions, but also in determining the opportunities and best options available for the business to make going forward. Does it make sense to change business structure? Will decisions increase or decrease the value of the company? Does it make sense to start a new copmany?

All of this, however, depends on the owners of the business understanding that accounting is a valuable tool to help them understand their business. It requires communicating with the accountants, answering their questions, and providing not only the numbers but the reasons for those numbers. When accountants have that, they can help the managers and owners understand what's really happening with their business and to make more informed and better decisions faster.

Accounting is more complex than you think, which means your accountant is helping to make it look easy. But is your accountant helping you understand what the numbers mean? Are they helping you make better decisions? If not, give Brightleaf a call and let's talk about how we can help your business.

- John Thrush

Two Businesses (or More) for the Price of One!

Using DBAs to Expand Your Company's Potential

The Same Company Can Do Business Under Multiple Names

As small businesses mature and grow, they often find that differences start appearing in the clients and customers they serve. This often results in having to market different product and services to different segments in different ways. This can get complicated, particularly if a company has developed their brand in a way that is very successful for a specific segment that may not necessarily translate to other segments.

A way that a company can handle this divide is to use a different trade name. This is commonly referred to as a DBA, or "Doing Business As”. A DBA allows businesses to operate under a name that resonates more clearly with or clarifies a type of service aimed at a target audience. A strong, recognizable name can be a powerful marketing tool that makes it far easier to attract clients seeking specific services.

For instance, The Gap, Inc. started out selling as Gap, but also owns several other brands targeting different segments. These brands include Banana Republic, Old Navy, and Athleta. All are part of the same company, but "do business as" different names with different levels of product quality at different price points.

This is not restricted to large corporations. Brightleaf Consulting Group started out as a strategy consulting company; however, we started providing accounting services shortly after starting out because we found that many small businesses had issues with their books and weren't using them as a management tool. Because people don't necessarily associate accounting with consulting, we registered a DBA as Brightleaf Accounting to more clearly communicate these services. This not only helps in building a distinct brand identity but also aids potential clients in quickly identifying our expertise in accounting.

Operating under a DBA provides legal and financial flexibility. It enables a company to expand its service offerings without the need for establishing a separate legal entity, allowing the company to adapt and expand services while avoiding some duplicative expenses such as a different set of books, a separate tax return, a different office, different IT or telecommunications services, etc.

Because a DBA often targets a different market segment, it often means that marketing efforts will be somewhat different in order to make your services more relatable and accessible to clients. This allows the company to craft tailored marketing messages and branding strategies that align closely with the needs of target clients and to increase client engagement.

From a financial management perspective, a DBA simplifies banking and transactions by using the same bank accounts to process financial transactions under multiple names. This streamlines financial operations and presents a professional front to clients and vendors.

This varies from state to state. For example, filing for a DBA in New York is done at the state level. In California, this is done through the County Clerk's office of the County where the business is located (or in Sacramento County if the business is located out of state). This can often be done online, but some states still require that a paper form is filled out and mailed in.

If you're interested in knowing more or need assistance setting up a DBA, Brightleaf Consulting Group would be pleased to help!

- John Thrush