Engineering Inc. - July/August 2006 - 26

B U S I N ESS INSIGhTS fRom ACEC'S INSTITUTE foR BUSINESS mANAGEmENT acec's
new a/e 9% tax deduction; advantages of esoPs; aruP's global foresight
getting the Most from the a/e tax deduction cipal shareholder can
indefinitely defer capital gains taxes on the ACEC's 9 percent tax
deduction, which the Council gained in sale of shares to an ESOP.
Moreover, in an S-type corporation, a legislation in 2004, has the
potential for sizable benefits for A/E shareholder pays no current income
taxes on its attributed share firms, says Ernst & Young tax consultant
Lawrence Pociask. of corporate taxable income. The deduction, Section 199
of the American Jobs Creation Act But there are drawbacks, too. of 2004,
is designed to reward certain qualified activities, includ- ESOPs don't
concentrate ownership in the hands of key suc- ing domestic engineering,
architectural and construction services. cessors as effectively as a
direct sale, Steiker says. And they usu- Pociask explained that Section
199 allows the deduction for qual- ally involve borrowed money. But these
disadvantages often can ified production activities income QPAI , defined
as domestic be mitigated with proper planning. production gross receipts
minus the cost of goods sold associated Preparing for the future
Marketplace with those receipts and other general expenses. The deduction
is three percent for tax years 2005 and 2006; six One thing that's certain
about change is that there's always going percent for tax years 2007, 2008
and 2009; and nine percent for to be more. But by putting change in a
context, firms will be bet- tax years 2010 and beyond. ter able to
navigate future business trends, says Chris Luebkeman, To be eligible, a
firm must be regularly engaged in the engi- director of Arup's Global
Foresight and Innovation initiative. neering or architectural business.
And the firm must have gross Arup has developed a five-point system to
help understand the receipts derived from services performed in the United
States, drivers of change that will impact engineering in the future. The
including activities such as consulting, investigation, valuation, five
points fit neatly into the acronym STEEP: social, technologi- planning,
design and supervision. cal, economic, environmental and political. To
make the most of Section 199, Pociask advises that firms Social change
refers to demographics. In some parts of the begin claiming deductions
this filing season, consider the state and world, such as the U.S., the
population is aging. In other areas, local tax implications and consult a
tax adviser. For more informa- the opposite is true. The impacts can be
profound, ranging from tion on ACEC's 9 percent tax deduction, go to
www.acec.org. developing new ways of dealing with aging Baby Boomers to
cop- ing with a dearth of skilled laborers. the esoP alternative
Technological borders are becoming increasingly blurred. Engineering firms
always have faced liquidity and succession The greatest future challenge
for firms will be finding ways to challenges. Principals often look to the
next generation of key incorporate new technologies into the marketplace
safely and managers as the natural buyers of the firm. The obstacle, how-
efficiently, he says. ever, is that very few firms compensate non-owner
executives well Luebkeman says that there's a direct relationship between
enough that they can someday make a cash offer for the firm. access to
energy and a viable economy. Energy conservation, Many firms address this
challenge by using profits to pay large therefore, will become a major
challenge to sustaining robust bonuses to key executives with the
expectation that they will use economies. the after-tax proceeds to
purchase stock in the firm. While this Developing a compelling political
vision that recognizes global provides some liquidity for principals, it
is slow and extraordi- diversity as well as global inclusivity will be
crucial, he adds. narily tax-inefficient, says Jim Steiker, president and
founder of Engineers and engineering firms must be constantly mindful SES
Advisors as well as Steiker, Fischer, Edwards & Greenapple about the
shifting political landscapes around the globe. n in Philadelphia.
Employee Stock Ownership Plans are becoming a more attrac- tive method of
creating a pool of internal buyers for an engi- neering firm. ESOPs are
qualified retirement plans designed to The ACEC Institute for Business
Management provides com- invest primarily in employer stock. Typically, a
company borrows prehensive and accessible business management education
money to fund an ESOP purchase of a significant block of stock for
engineering company principals and their staffs. Visit from principals.
ACEC's online educational events calendar at www.acec.org/ This approach
has several key advantages, according to Steiker. events/index.cfm or
bookstore at www.acec.org/publications, A company can fund a liquidity
event for principals using tax- or call 202-347-7474 for further
information. deductible dollars. In a properly structured transaction, a
prin- 26 ENGINEERING INC. JULY / AUGUST 2006
http://www.acec.org http://www.acec.org/events/index.cfm http://www.acec.org/publications, http://www.acec.org/events/index.cfm
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