Accounting’s Dynamic and Evolving Landscape

ilseu — Tue, 26 Sep 2023 22:06:08 +0000

Accounting’s Dynamic and Evolving Landscape ilseu Tue, 09/26/2023 - 15:06 More News September 15, 2023

When asked why she was compelled to earn a business education herself, Professor of Accounting Ivy Zhang’s answer is definitive: “I have always been intrigued by the dynamic nature of the business world, where innovation, strategy, and problem-solving intersect.

A business education offered me the opportunity to gain a comprehensive understanding of the various aspects of commerce.”

From the beginning, Zhang was fascinated by how business connects people, organizations, and global markets. She recognized that pursuing a business degree would not only provide her with technical knowledge, but also sharpen her ability to analyze issues from multiple perspectives and solve problems that have real-world impact. This broad foundation gave her the tools to explore where her passions and skills intersected most strongly.

Among the many disciplines within business, accounting stood out. “I was captivated by the ability of accounting to translate complex financial data into meaningful information that helps stakeholders,” she says. “Accounting also offers a dynamic and evolving landscape, with the advent of technology and data analytics revolutionizing the profession.”

This perspective reflects how accounting is no longer limited to recordkeeping. For Zhang, it is a language of business — one that helps companies, investors, and communities understand performance, assess opportunities, and plan for the future. By combining precision with interpretation, accounting has allowed her to bridge the technical side of business with its human impact.

Zhang joined the UCR School of Business in 2018, bringing her expertise and passion to students preparing to enter a wide range of professions. Teaching, for her, is more than sharing knowledge. “One of the primary reasons I chose to be a professor was the opportunity to make a positive impact on the lives of students as a mentor and educator,” she says. “Guiding students through their academic journeys, seeing them overcome challenges, and witnessing their intellectual growth is incredibly gratifying.”

This commitment has shaped her teaching style. She works with both undergraduate and graduate students, adapting her methods to ensure that each classroom becomes a space for curiosity and growth. In her courses, theory is paired with application, and she emphasizes collaboration as much as individual achievement. Group projects, case studies, and simulations give students the chance to test ideas, learn from each other, and build confidence in real-world settings.

“By engaging in practical tasks, students can demonstrate their comprehension and develop essential skills that are transferable beyond the classroom setting,” she says. “My goal is to create a dynamic and inclusive learning environment where students feel comfortable and motivated to explore new and sometimes complex concepts.”

For Zhang, teaching is not just about delivering content but about cultivating resilience and independence in her students. She strives to prepare them for challenges they will face as professionals, ensuring they leave her classroom not only with technical knowledge but also with adaptability, critical thinking skills, and confidence. Her dedication underscores the central mission of the UCR School of Business: empowering students to succeed in an increasingly complex and interconnected business world.

Ivy Zhang’s research focuses on two areas: the CEO labor market and social media. She recently co-authored “Outside Opportunities, Managerial Risk Taking, and CEO Compensation” in The Accounting Review.

Disrupting VC Assumptions About Tax Benefits

ilseu — Wed, 11 Aug 2021 20:25:50 +0000

Disrupting VC Assumptions About Tax Benefits ilseu Wed, 08/11/2021 - 13:25 More News Holly Ober August 11, 2021

Startups backed by venture capital — and their investors — often lose tax savings because they organize as corporations rather than limited liability companies, finds a UC Riverside-led study.

Eric Allen, assistant professor of accounting

The reason? Venture capitalists, or VCs, are more familiar with corporations, or C-corporations, and pay less attention to taxes, even though limited liability companies, or LLCs, have significant tax advantages that outweigh potentially higher initial incorporation costs. Investors in companies included in the study together paid $43.9 billion more in taxes than they would have if those companies had organized as LLCs instead.

“We find VC investors are forgoing significant tax savings mainly due to things like path dependence and ‘hassle’ as opposed to the standard cost-benefit analysis that most people assume,” said corresponding author Eric Allen, an assistant professor of accounting at UC Riverside. “It really shows how a tendency to just stick to the default option that everyone else uses can cause even sophisticated actors to make inefficient decisions.”

It’s all about the losses.

When a firm starts operation it has to choose the organizational form under which to conduct business. For the majority of startup firms, the only forms that provide the desired ownership attributes, such as limited liability and equity-based incentive compensation, are the C-corporation and LLC. The increased tax savings from the LLC are attributable to two dynamics: The tax treatment of the different organizational forms, and the fact that the majority of startup firms generate losses in their early years and cease operation without ever achieving profitability.

Here’s a simple stylized example to illustrate how this might look in practice. Assume we have a startup, LOSSCO, which generates a loss of $1,000 and then ceases operations. If it is organized as a C-corporation, it would be taxed as a separate entity. This means that the loss is retained within the corporation and only provides a tax benefit if the firm eventually becomes profitable. Since the firm fails before generating profits, no tax benefits are recognized at the entity level. The owners of the firm can get a tax deduction as a long-term capital loss against their other capital gains. Because of the special tax rules regarding capital gains, this would provide a benefit at a maximum of 20%, or $200.

Alternatively, if LOSSCO is organized as an LLC there would be no entity level tax. All profits and losses would flow immediately to the owners for immediate taxation. In this case, it means the $1,000 loss from the entity can be immediately deducted from the owners’ other income. If we assume the investor faces a tax rate of 35%, the tax benefit of $350 is substantially higher than if it were organized as a C-corporation.

While most industry participants are aware of the potential tax savings, they generally assume the higher costs or difficulties involved in filing taxes and other regulatory paperwork as an LLC will exceed any benefits. However, until now, the magnitude of the benefits has not been rigorously investigated.

Allen and co-authors Jeffrey Allen of Bentley College, Sharat Raghavan of UC Berkeley, and David H. Solomon of Boston College, examined the initial public offering, or IPO, prospectuses for 1,155 VC-backed public firms listed between 1997 and 2014, 98% of which were C-corporations. Ninety-two percent of the total firms reported a net operating loss just prior to going public. Most either failed or were acquired without being able to take advantage of tax savings on their losses.

The authors found that, had the startups registered as LLCs, investors could have used the losses to completely eliminate taxes from the remaining 8% of profitable firms. The remaining losses would then be passed through to shareholders and could be used to offset other taxable income. VC-funded firms that did not conduct an IPO had even higher potential tax savings.

When they combined the IPO with non-IPO samples, the authors found that switching to the LLC yielded an overall tax savings of $43.9 billion — approximately 4.9% of invested equity or 3% of estimated net payoffs. The potential tax savings were far greater than the few higher costs and difficulties of being an LLC, making the norm to incorporate look even more irrational.

Further investigation revealed venture capitalists often urge startups to reorganize as C-corporations simply because it is the form with which they are most familiar and want to avoid what they perceive as the “hassle” of LLCs. This “path dependence” allows an inefficient form to persist over time because its sheer popularity lowers the perceived implementation cost for each participant.

“The most surprising thing is not that some firms are C-corporations, but that essentially they all are. The people who should be most annoyed are taxable VC investors, since they are the ones that bear most of the costs under the current setup,” Allen said. “But since they don’t seem to push the VC managers to demand better startup structures, the industry just sticks with the ingrained practice.”

The paper, “On the tax efficiency of startup firms,” is forthcoming in the Review of Accounting Studies.

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^{Header photo: Leon Dewiwje on Unsplash}