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CPA | Principal

An avid reader of fantasy novels who completes 1,000-piece puzzles in her spare time, it’s no wonder Kelly’s favorite part of her day includes playing make believe with two of her favorite people—her amazing kids.

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Robert A. Wheeler
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This is the first article in an ongoing series that will explore the role of leadership from a diverse array of perspectives. Each article will be written by a Clark Nuber leader who will share their ideas on the unique challenges and opportunities they have experienced, and the lessons they’ve learned along the way.

I have been thinking about leadership a lot lately. Challenging times will do that. As a member of a family, a community, an organization, and a society, we are all looking for guidance and some assurance that everything is going to be okay, despite the turbulence of the moment.

As a leader, you aspire to provide that assurance, as well as a sense of optimism and hope, that will encourage families and teams to support one another as they face uncertainty together.

Lessons from Great Leaders

I have studied leadership for many years, and I especially enjoy biographies of inspirational leaders such as Abraham Lincoln, Winston Churchill, Colin Powell, Madeleine Albright, and many others who led during troubled times. I find their stories to be both instructive and inspirational

All these great leaders, past and present, had their own style, strengths, and (often) personal quirks. As human beings, they were also imperfect and subject to the same personal fears, biases, and uncertainties that affect us all. However, I believe there are five characteristics shared by all that are required to be a truly inspirational leader: Character, Judgment, Courage, Humility, and Empathy.

Character

Some would argue that “good” character is in the eye of the beholder, and there is some truth to that. However, I believe that character has more to do with one’s motives than their point of view. The famous friendship between Ruth Bader Ginsburg and Antonin Scalia is a good example from recent history that shows two people can have completely different opinions and still be admired for their character.

In my view, the key to understanding someone’s character lies in understanding the objectives that motivate them. If the people you lead believe your decisions are prompted by kindness and a sincere concern for their well-being, they will trust you even if they are uncertain of your decision or don’t agree with your point of view. On the other hand, if people believe that a leader’s motives are heavily influenced by personal gain or winning at all costs, the leader’s character and decisions will be viewed with suspicion.

Judgment

Great leaders have good judgment. This doesn’t mean they are right all the time or they never make mistakes. Rather, great leaders recognize that they don’t know everything, and so they seek out information and advice from others who may have differing opinions before making any important decision. After winning the presidency, Lincoln famously filled his cabinet with a “Team of Rivals,” a group of men who had vastly different political perspectives, with the specific goal of soliciting a variety of viewpoints.

Once the data and advice has been weighed, leaders must be able to make a decision and move forward with confidence and courage. And they must also be willing to adjust course if necessary. A strong leader is less concerned with “being right,” and more concerned with “getting it right.”

Courage

With respect to leadership, courage means making decisions that you believe to be in the best interest of the people or organization that you lead. It does not mean simply telling people what they want to hear. Sometimes your decisions will be unpopular, or the message will be difficult to deliver, but a strong leader must be willing to share the good with the bad.

I also believe that courage is contagious. A leader who demonstrates courage and a sense of optimism will instill those same characteristics in the people they lead. For example, many historians credit Churchill for sustaining the citizens of Great Britain during The Blitz with his example of extraordinary courage in the face of a seemingly overwhelming threat. Sadly, the opposite is likely true as well, and a fearful or pessimistic leader will impart those same destructive traits to their teams.

Humility

Most great leaders are self-aware and recognize both their personal strengths and their weaknesses. While they are confident in their ability to lead, they also recognize they cannot do it alone.

I think a good leader appreciates that they are in a position of leadership as a result of the support of others, and perhaps a bit of luck, and they don’t take that for granted. The concept of “servant leadership” is about recognizing that leadership is an opportunity to serve others for the greater good.

Empathy

A familiar phrase these days is that “we are all in this together.” However, I recently heard someone say this differently in a way I think is more accurate: “We are in the same storm but different boats.” A great leader understands that we all experience events from a different perspective, and they endeavor to understand how others feel.

Some people do this naturally, but anyone can learn to be a more empathetic listener if they simply pause long enough to ask, “How would I feel if I were in your shoes?”

Becoming an Inspiring Leader

Most of us are leaders in some aspect of our lives and supporting team members in others. For instance, you might lead a project team, community group, or task force. If you are a parent, you are a leader in your family. I believe that anyone who sincerely endeavors to exercise these five leadership traits can become a more inspiring leader no matter the role or circumstances.

© Clark Nuber PS and Leadership Perspectives, 2020. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Leadership Perspectives with appropriate and specific direction to the original content.

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Debrief of the AICPA Global Manufacturing Conference

On Nov. 18, 2020, the AICPA held its annual Global Manufacturing Conference, a yearly gathering of CPAs and global manufacturing companies where industry trends are discussed. Like many conferences and meetings in 2020, things went virtual. While the schedule was reduced for remote delivery, the convenience and access to high value speakers made it one of best conferences in recent years. I learned three takeaways from the conference concerning the economy, trade, and increased risks to the sector. I’ve summarized the key takeaways below.

Manufacturers Expect to Return to Pre-COVID Levels by the End of 2021

Dr. Chad Moutray, Chief Economist for the National Association of Manufacturers (NAM), kicked things off with an economic update. As part of his presentation, Dr. Moutray reviewed NAM’s third quarter 2020 manufacturers outlook survey. According to the report, 17% of manufacturers were already back to pre-COVID level revenues, while 47% expect to be by the end of 2021. It comes as no surprise that a weaker economy and sales were the primary business challenges reported. However, it’s significant to note that attracting and retaining talent, which has historically been the number one business challenge in the last several years, was still the second largest concern. The stress over hiring remains even amongst the highest unemployment rate we have seen in more than a decade.

New Trade Deals May Significantly Impact Supply Chains

Lou Longo, an international consulting leaser from Plante Moran, discussed all things trade. Specifically, Mr. Longo discussed the significance of the Regional Comprehensive Economic Partnership (RCEP) trade deal that was signed over the weekend. RCEP is the largest trade agreement in the world, representing one-third of the world’s countries and one-third of the world’s GDP. The agreement, which includes China and 14 other countries, provides China with significant influence and will no doubt have impacts on the global supply chain. Even though the United States is not part of the RCEP, Mr. Longo recommended manufacturers understand the impacts it could have. Much of the trade focus this year has been on the United States-Mexico-Canada Agreement (USMCA), commonly referred to as NAFTA 2.0. Mr. Longo cautioned that many manufacturers are not aware of the new penalties under this deal, and that the USMCA has some of the most comprehensive enforcement provisions of any trade agreement. Finally, Mr. Longo speculated that a Biden administration could lead to a higher likelihood of a ‘No Deal’ Brexit, which will no doubt impact U.S. companies operating in the U.K.

Hackers are Increasingly Targeting Manufacturing Companies

Joe Lazzarotti of Jackson Lewis provided a sobering update on the state of cyber-related attacks on the industry. He noted that costs associated with cyber-attacks have doubled in the last year, with one of the largest increases coming from the manufacturing sector. While manufacturers make up 18% of the total ransomware attacks, they represent 62% of the ransom payments made (according to a Kivu 2019 study). Criminals have now recognized the value in targeting manufacturers. Sadly, most of the successful attacks have been made on companies with fewer than 25 employees. Many of these companies had not developed a business continuity plan to mitigate cyberattacks and were caught off guard without a premeditated response in place.

In Conclusion

Despite the hurdles set up by the COVID-19 pandemic, this year’s AICPA Global Manufacturing Conference was a successful event, with valuable information for those able to attend. While the world is set for some major shake-ups in the aftermath of the tumultuous 2020, manufacturers who take the lessons of the conference to heart will be well established to succeed in the coming decade. If you have any questions regarding the conference, or the outlook for the manufacturing industry, please send me an email. © Clark Nuber PS, 2020. All Rights Reserved

Turning a Failed Investment into a Tax Benefit

Unfortunately, not all startup companies become the next Snowflake and turn into one of the largest IPOs in the history of the U.S. stock exchanges. In fact, many are not successful. If one of your emerging company investments has failed, you may be surprised to learn that the investment could still yield immediate favorable tax benefits.

Using IRC Section 1244

Section 1244 of the Internal Revenue Code (IRC) allows an annual ordinary loss deduction for “worthless stock” up to $100,000 for a married couple filing jointly, and $50,000 for an individual filing single. For example, if $100,000 was invested by a married couple filing jointly with a 37% marginal rate, and that corporation’s stock became entirely worthless in early 2020, that may translate into a $37,000 tax reduction/potential refund of their 2020 tax liability. This has the effect of turning a completely worthless investment into a $37,000 recovery. Investments not qualifying for this special write off rule may only yield a capital loss that could take years to produce any tax benefit (due to the limits on capital loss deductions). At a high level, IRC Section 1244 was originally enacted into the tax law to provide income tax incentives for individuals to make new investments into small businesses. The theory goes something like this: the larger the number of early stage companies, the higher the probability of another successful company and, of course, very successful employees. At some point, these successful employees may spin off and form their own successful Section 1244 qualified businesses, thus perpetuating the U.S. entrepreneurial economic life cycle.

Does Your Failed Investment Qualify?

IRC Section 1244 includes a myriad of rules. Here is a summary of five general rules to help you gain a quick glimpse into whether your stock may qualify:
  • The stock must have been issued by a qualifying U.S. domestic corporation, including an S Corporation.
  • At the time the stock is issued, the corporation must have shareholder’s equity of less than or equal to $1 million (caveat being that special rules apply in the year the equity exceeds $1 million).
  • The stock must have been issued in exchange for cash or property (but not stock).
  • At least half of the corporation’s earnings from the past five years or the life of the company (whichever is less) before the stock became worthless must have been derived from active business operations and not from passive activities.
  • The individual claiming the loss must have received the stock in a direct issue from the corporation. (Stock received by way of a gift or inheritance doesn’t qualify).
For many companies and investors, the qualifications may be easily met. For other situations, additional investigation and documentation may be required. In summary, a failed investment in a small company may generate a significant tax benefit if it falls within the IRC Section 1244 rules. If you are wondering if you hold an investment that is eligible for Section 1244 treatment, contact your Clark Nuber tax advisor before year end to discuss qualification and potential tax benefits. © Clark Nuber PS, 2020. All Rights Reserved

Paycheck Protection Program Loans and Changes in Ownership

On Friday, October 2, 2020, the Small Business Administration (SBA) issued a notice providing information on the required procedures for when a change in ownership occurs for entities holding a Paycheck Protection Program (PPP) loan. This guidance will help PPP borrowers who are contemplating or currently executing a transfer of ownership.

What is Considered a Change in Ownership?

A change in ownership occurs when:
  • At least 20% of the common stock or other ownership of the PPP borrower (including a public entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity. All sales or transfers occurring since the date of the approval of the PPP loan must be aggregate; or
  • The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair value) in one or more transactions; or
  • the PPP borrower is merged with or into another entity.

Borrower’s Responsibilities

Regardless of a change in ownership, the borrower remains responsible for:
  • Performance of obligations under the PPP loan; and
  • The certifications made in connection with the PPP loan application, including the certificate of economic necessity and compliance with all other applicable PPP requirements. This means obtaining, preparing, and retaining all PPP forms and supporting documents. The paperwork must then be provided to the PPP lender or lender serving the PPP loan or to the SBA upon request.
Prior to the closing of any change in ownership, the PPP borrower must notify the PPP lender in writing of the completed transaction and provide the PPP lender with a copy of the proposed agreement or other documents that would affect the proposed transactions. PPP lenders are required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

SBA Consent and Approval

If the PPP borrower satisfies one of the following criteria, SBA consent is not required: 1.  The PPP loan is fully satisfied prior to the closing of the sale or transaction of ownership.
  • The PPP loan is paid in full; or
  • The loan forgiveness process has been contemplated; i.e., the SBA has remitted funds to the PPP lender and any unforgiven amounts are to be paid in full.
2. If the PPP loan has not been fully satisfied, and there has been a sale of stock or a merger, then SBA consent is still not required if:
  • There is a sale or transfer of less than 50% of the PPP borrowers’ stock or ownership; or
  • The PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP lender, and it funds an interest-bearing escrow account controlled by the lender. The funds should equal the outstanding balance of the PPP loan. After the forgiveness process is completed, the escrow funds must be distributed first to repay any remaining PPP loan balance plus interest.
3. If there is a sale of 50% or more of the PPP borrower assets (measured by fair value):
  • The PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP lender, and it funds an interest-bearing escrow account controlled by the lender. The funds should equal the outstanding balance of the PPP loan. After the forgiveness process is completed, the escrow funds must be distributed first to repay any remaining loan balance plus interest.
In other changes of ownership, prior SBA approval may be required. This review and determination will be completed within 60 days of the receipt of complete request.

For More Information

The notice also discusses the successor’s obligations under the PPP loan and requirements of both parties who have PPP loans. This includes separating and documenting PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements. If you have questions regarding the transfer of ownership and PPP loans, contact a Clark Nuber professional. See our PPP Loan Forgiveness series for more information on loan forgiveness. © Clark Nuber PS, 2020. All Rights Reserved

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