Pub. 1 2019 Issue 4

J U L Y / A U G U S T 2 0 1 9 24 nebraska cpas Joe and Pete have been CPA partners for 25 years. Their CPA firm has been successful over the years. They have been bringing on young CPAs and have seen a nice grassroots growth pattern. But Joe and Pete want to expand the firm and need a plan for their succession. The young CPAs have too many financial obligations and little extra cash to buy any stock from Joe or Pete. They’ve thought about selling to a bigger CPA firm or merging with a national firm, but they’re worried about those two options. They could probably get a good price for the business, but they’re worried about the buyer moving their CPA firm out of the community where it is, and they’re really worried about what a sale or merger will do to their firm culture. They’ve worked hard to create positive energy within the firm by building a culture of team spirit, a willingness to help each other, and an eagerness to pitch in when extra work is needed on a project. They’ve seen the merger of other companies fail. Joe and Pete feel like they do not have a good solution for transitioning the ownership of their CPA firm. Historical Ownership of CPA Firms Under the Nebraska Public Accountancy Act, historically, a CPA or public accounting firm could only be owned by natural persons, a partnership or limited liability company, or a corporation. In addition, persons who are non-licensed CPAs could be owners of a CPA firm as long as all non-licensed CPA owners did not total more than 49 percent of the total number of owners, did not own more than 49 percent of the stock or voting rights, or receive more than 49 percent of the profits or losses of the firm. The Public Accountancy Act differed from the Nebraska Professional Corporation Act in that a professional corporation may only issue shares of its capital stock to persons who are duly licensed in Nebraska to render the same professional service as that provided in the articles of incorporation of the professional corporation. So, historically, CPA firms in Nebraska could be owned up to 49 percent by a non-licensed employee but not by an Employee Stock Ownership Plan (ESOP). ESOP Advantages ESOPs are a type of tax-qualified retirement plan governed by the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and are designed to invest primarily in company stock of the sponsoring employer. An ESOP provides a retirement benefit for participating employees and creates a ready buyer for the owner’s business. The ESOP is a business succession tool for the shareholders and the company. A business owner can sell 100 percent of his stock to an ESOP for fair market value in a cash or fully financed transaction. Alternately, a business owner can gradually transition ownership to an ESOP by selling his stock to the ESOP in installments over a number of years to spread out the recognition of the gain on such a sale. If the owner desires to do so, the selling owner can remain actively employed in the business throughout the transition and afterwards. An ESOP is the only tax-qualified retirement plan that may borrow money to buy company stock. An ESOP loan is paid using pre-tax contributions by the company. Both the principal and interest on an ESOP loan is tax-deductible. The ESOP provides a tax-advantaged solution for ownership succession issues. Selling to an ESOP means you don’t have to sell to a competitor or to a private equity company, which will turn around and sell your company in the next five years. It also means you don’t have to merge with another larger firm and hope that the cultures of each firm will mesh. When you sell to an ESOP, your company becomes sustainable, NEW NEBRASKA LAW ALLOWS ESOP OWNERSHIP OF CPA FIRMS BY JOAN M. CANNON, MCGRATH NORTH