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Someone might have once told you that human beings use only 10% of our brains. The implication is that we have vast, untapped stores of cerebral power waiting to be discovered. In truth, this is a myth widely debunked by neurologists.

What you may be underusing, as a business owner, is your accounting software. Much like the operating systems on our smartphones and computers, today’s accounting solutions contain a multitude of functions that are easy to overlook once someone gets used to doing things a certain way.

By taking a closer look at your accounting software, or perhaps upgrading to a new solution, you may be able to improve the efficiency of your accounting function and discover ways to better manage your company’s finances.

Revisit training

The seeds of accounting software underuse are often planted during the training process, assuming there’s any training at all. Sometimes, particularly in a small business, the owner buys accounting software, hands it over to the bookkeeper or office manager, and assumes the problem will take care of itself.

Consider engaging a consultant to review your accounting software’s basic functions with staff and teach them time-saving tricks and advanced features. This is even more important to do if you’re making major upgrades or implementing a new solution.

When accounting personnel are up to speed on the software, they can more easily and readily generate useful reports and provide accurate financial information to you and your management team at any time — not just monthly or quarterly.

Commit to continuous improvement

Accounting solutions that aren’t monitored can gradually become vulnerable to inefficiency and even manipulation. Encourage employees to be on the lookout for labor-intensive steps that could be automated and steps that don’t add value or are redundant. Ask your users to also note any unusual transactions or procedures; you never know how or when you might uncover fraud.

At the same time, ensure managers responsible for your company’s financial oversight are reviewing critical documents for inefficiencies, anomalies and errors. These include monthly bank statements, financial statements and accounting schedules.

The ultimate goal should be continuous improvement to not only your accounting software use, but also your financial reporting.

Don’t wait until it’s too late

Many business owners don’t realize they have accounting issues until they lose a big customer over errant billing or suddenly run into a cash flow crisis. Pay your software the attention it deserves, and it will likely repay you many times over in useful, actionable data. We can help you assess the efficacy of your accounting software use and suggest ideas for improvement.

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Roth&Co’s latest video series: Real Estate Right Now. Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, will cover the latest real estate trends and opportunities and how you can make the most of them. This episode covers Cost Segregation.

Watch our quick 1.5 minute video:

COST SEGREGATION IN DETAIL:

What is cost segregation?

From a tax perspective, there are two types of property that depreciate differently:

Real Property: Actual buildings or structures that can be depreciated over 27.5 or 39 years.

Personal property: Furniture and fixtures, equipment and machinery, carpeting, electrical wiring and window treatments that can be depreciated over 5, 7, or 15 years.

As assets depreciate, their value decreases, reducing federal and state income taxes on their rental income.

Cost-segregation is an IRS-approved federal tax planning tool that allows companies and individuals who have purchased, constructed, expanded or renovated any kind of real estate to accelerate depreciation by reclassifying specific assets from real property to personal property reducing the federal and state income taxes owed.

How does it work?

A cost segregation study is required to breakdown commercial buildings into assets that could be reclassified as personal property. The cost segregation study provides real estate owners with information required to calculate the accelerated depreciation deductions for income tax purposes. The cost segregation study will also serve as the supporting documentation during any IRS audit.

On average, 20% to 40% of components fall into the personal property categories that can be written off much quicker than the building structure.

How much does a cost segregation study cost?

Cost segregation studies generally run between $5,000 – $20,000.

What properties are eligible?

Any commercial property placed into service after 1986, including any new acquisition, real estate construction, building, or improvements may qualify for a cost segregation study. Examples of eligible buildings include retail centers, office and industrial buildings, car dealerships, medical offices, multi-family unit buildings, restaurants, manufacturing facilities, and hotels.

When is the best time to conduct a cost segregation study?

Cost segregation studies may be conducted after a building has been purchased, built, or remodeled. However, the ideal time to perform a study is generally within the first year after the building is placed into service to maximize depreciation deductions as soon as possible.

Can I utilize cost segregation if my property is already in use?

Yes! A cost segregation study performed on a property in use and a tax return has been filed, is known as a look-back study.

You can then apply a “catch-up” deduction, which is equal to the difference between what was depreciated and what could have been depreciated if a cost segregation study was performed on day one.

The IRS allows taxpayers to use a cost segregation study to adjust depreciation on properties placed in service as far back as January 1, 1987.

Properties already in service are often overlooked when it comes to cost segregation, however the benefits of a look-back study can be quite significant.

What changed?

The Tax Cuts & Jobs Act passed in 2017 introduced the “100% additional first year depreciation deduction” otherwise known as “bonus depreciation” that allows businesses to write off the cost of most personal property in the year they are placed in service by the business. The bonus deduction is eligible until 2023.

What are other factors do I need to consider before claiming a depreciation deduction or bonus depreciation?

Active vs Passive Partners: Active partners can use the deduction to offset ordinary income. Passive partners can only use the deduction to offset passive income.

State Tax: The bonus depreciation deduction may only apply to federal income tax. Check with your state to see if they apply to state taxes as well.

President Joe Biden promised the end of many tax cuts. Could this be one of them?

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This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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A complete set of financial statements for your business contains three reports. Each serves a different purpose, but ultimately helps stakeholders — including managers, employees, investors and lenders — evaluate a company’s performance. Here’s an overview of each report and a critical question it answers.

1. Income statement: Is the company growing and profitable?

The income statement (also known as the profit and loss statement) shows revenue, expenses and earnings over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

It’s important to note that growth and profitability aren’t the only metrics that matter. For example, high-growth companies that report healthy top and bottom lines may not have enough cash on hand to pay their bills. Though it may be tempting to just review revenue and profit trends, thorough due diligence looks beyond the income statement.

2. Balance sheet: What does the company own (and owe)?

This report provides a snapshot of the company’s financial health. It tallies assets, liabilities and “net worth.”

Under U.S. Generally Accepted Accounting Principles (GAAP), assets are reported at the lower of cost or market value. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Intangible assets (such as patents, customer lists and goodwill) can provide significant value to a business. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are only reported when they’ve been acquired externally.

Net worth (or owners’ equity) is the extent to which the value of assets exceeds liabilities. If the book value of liabilities exceeds the book value of the assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies may provide the details of owners’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement: Where is cash coming from and going to?

This statement shows all the cash flowing in and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. Watch your statement of cash flows closely. To remain in business, companies must continually generate cash to pay creditors, vendors and employees.

Read the fine print

Disclosures at the end of a company’s financial statements provide additional details. Together with the three quantitative reports, these qualitative descriptions can help financial statement users make well-informed business decisions. Contact us for assistance conducting due diligence and benchmarking financial performance.

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When not-for-profits first start up, fundraising can be an ad hoc process, with intense campaigns followed by fallow periods. As organizations grow and acquire staff and support, they generally decide that fundraising needs to be ongoing. But it can be hard to maintain focus and momentum without a strategic fundraising plan. Here’s how to create one.

Building on past experience

The first step to a solid fundraising plan is to form a fundraising committee. This should consist of board members, your executive director and other key staffers. You may also want to include major donors and active community members.

Committee members need to start by reviewing past sources of funding and past fundraising approaches and weighing the advantages and disadvantages of each. Even if your overall fundraising efforts have been less than successful, some sources and approaches may still be worth keeping. Next, brainstorm new donation sources and methods and select those with the greatest fundraising potential.

As part of your plan, outline the roles you expect board members to play in fundraising efforts. For example, in addition to making their own donations, they can be crucial links to corporate and individual supporters.

Developing an action plan

Once the committee has developed a plan for where to seek funds and how to ask for them, it’s time to create a fundraising budget that includes operating expenses, staff costs and volunteer projections. After the plan and budget have board approval, develop an action plan for achieving each objective and assign tasks to specific individuals.

Most important, once you’ve set your plan in motion, don’t let it sit on the shelf. Regularly evaluate the plan and be ready to adapt it to organizational changes and unexpected situations. Although you want to give new fundraising initiatives time to succeed, don’t be afraid to cut your losses if it’s obvious an approach isn’t working.

Maintaining strong cash flow

Don’t wait until your nonprofit’s coffers are nearly dry before firing up a fundraising campaign. Fundraising should be ongoing and constantly evolving. Contact us for advice on maintaining strong cash flow.

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Most business owners would likely agree that strategic planning is important. Yet many companies rarely engage in active measures to gather and discuss strategy. Sometimes strategic planning is tacked on to a meeting about something else; other times it occurs only at the annual company retreat when employees may feel out of their element and perhaps not be fully focused.

Businesses should take strategic planning seriously. One way to do so is to hold meetings exclusively focused on discussing your company’s direction, establishing goals and identifying the resources you’ll need to achieve them. To get the most from strategy sessions, follow some of the best practices you’d use for any formal business meeting.

Set an agenda

Every strategy session should have an agenda that’s relevant to strategic planning — and only strategic planning. Allocate an appropriate amount of time for each agenda item so that the meeting is neither too long nor too short.

Before the meeting, distribute a document showing who’ll be presenting on each agenda topic. The idea is to create a “no surprises” atmosphere in which attendees know what to expect and can thereby think about the topics in advance and bring their best ideas and feedback.

Lay down rules (if necessary)

Depending on your workplace culture, you may want to state some upfront rules. Address the importance of timely attendance and professional decorum — either in writing or by announcement as the meeting begins.

Every business may not need to do this, but meetings that become hostile or chaotic with personal conflicts or “side chatter” can undermine the purpose of strategic planning. Consider whether to identify conflict resolution methods that participants must agree to follow.

Choose a facilitator

A facilitator should oversee the meeting. He or she is responsible for:

Starting and ending on time,
Transitioning from one agenda item to the next,
Enforcing the rules as necessary,
Motivating participation from everyone, and
Encouraging a positive, productive atmosphere.

If no one at your company feels up to the task, you could engage an outside consultant. Although you’ll need to vet the person carefully and weigh the financial cost, a skilled professional facilitator can make a big difference.

Keep minutes

Recording the minutes of a strategic planning meeting is essential. An official record will document what took place and which decisions (if any) were made. It will also serve as a log of potentially valuable ideas or future agenda items.

In addition, accurate meeting minutes will curtail miscommunications and limit memory lapses of what was said and by whom. If no record is kept, people’s memories may differ about the conclusions reached and disagreements could later arise about where the business is striving to head.

Gather ’round

By gathering your best and brightest to discuss strategic planning, you’ll put your company in a stronger competitive position. Contact our firm for help laying out some of the tax, accounting and financial considerations you’ll need to talk about.

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The COVID-19 pandemic has dramatically affected the way people interact and do business. Even before the crisis, there was a trend toward more digital interactions in sales. Many experts predicted that companies’ experiences during the pandemic would accelerate this trend, and that seems to be coming to pass.

As this transformation continues, your business should review its remote selling processes and regularly consider adjustments to adapt to the “new normal” and stay ahead of the competition.

3 tips to consider

How can you maximize the tough lessons of 2020 and beyond? Here are three tips for keeping your remote sales operations sharp:

1. Stay focused on targeted sales. Remote sales can seemingly make it possible to sell to anyone, anywhere, anytime. Yet trying to do so can be overwhelming and lead you astray. Choose your sales targets carefully. For example, it’s typically far easier to sell to existing customers with whom you have an established relationship or to prospects that you’ve thoroughly researched.

Indeed, in the current environment, it’s even more critical to really know your customers and prospects. Determine whether and how their buying capacity and needs have changed because of the pandemic and resulting economic changes — and adjust your sales strategies accordingly.

2. Leverage technology. For remote selling to be effective, it needs to work seamlessly and intuitively for you and your customers or prospects. You also must recognize technology’s limitations.

Even with the latest solutions, salespeople may be unable to pick up on body language and other visual cues that are more readily apparent in a face-to-face meeting. That’s why you shouldn’t forego in-person sales calls if safe and feasible — particularly when it comes to closing a big deal.

In addition to video, other types of technology can enhance or support the sales process. For instance, software platforms that enable you to create customized, interactive, visually appealing presentations can help your sales staff meet some of the challenges of remote interactions. In addition, salespeople can use brandable “microsites” to:

Share documents and other information with customers and prospects,
Monitor interactions and respond quickly to questions, and
Appropriately tailor their follow-ups.

Also, because different customers have different preferences, it’s a good idea to offer a variety of communication platforms — such as email, messaging apps, videoconferencing and live chat.

3. Create an outstanding digital experience. Customers increasingly prefer the convenience and comfort of self-service and digital interactions. So, businesses need to ensure that customers’ experiences during these interactions are positive. This requires maintaining an attractive, easily navigable website and perhaps even offering a convenient, intuitive mobile app.

An important role

The lasting impact of the pandemic isn’t yet clear, but remote sales will likely continue to play an important role in the revenue-building efforts of many companies. We can help you assess the costs of your technology and determine whether you’re getting a solid return on investment.

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Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.

Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes

If you’re starting or planning to launch a new business, keep these three rules in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Eligible expenses

In general, start-up expenses are those you make to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Plan now

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

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Businesses rely on internal controls to help ensure the accuracy and integrity of their financial statements, as well as prevent fraud, waste and abuse. Given their importance, internal controls are a key area of focus for internal and external auditors.

Many auditors use detailed internal control questionnaires to help evaluate the internal control environment — and ensure a comprehensive assessment. Although some audit teams still use paper-based questionnaires, many now prefer an electronic format. Here’s an overview of the types of questions that may be included and how the questionnaire may be used during an audit.

The basics

The contents of internal control questionnaires vary from one audit firm to the next. They also may be customized for a particular industry or business. Most include general questions pertaining to the company’s mission, control environment and compliance situation. There also may be sections dedicated to mission-critical or fraud-prone elements of the company’s operations, such as:

Accounts receivable,
Inventory,
Property, plant and equipment,
Intellectual property (such as patents, copyrights and customer lists),
Trade payables,
Related party transactions, and
Payroll.

Questionnaires usually don’t take long to complete, because most questions are closed-ended, requiring only yes-or-no answers. For example, a question might ask: Is a physical inventory count conducted annually? However, there also may be space for open-ended responses. For instance, a question might ask for a list of controls that limit physical access to the company’s inventory.

3 approaches

Internal control questionnaires are generally administered using one the following three approaches:

1. Completion by company personnel. Here, management completes the questionnaire independently. The audit team might request the company’s organization chart to ensure that the appropriate individuals are selected to participate. Auditors also might conduct preliminary interviews to confirm their selections before assigning the questionnaire.

2. Completion by the auditor based on inquiry. Under this approach, the auditor meets with company personnel to discuss a particular element of the internal control environment. Then the auditor completes the relevant section of the questionnaire and asks the people who were interviewed to review and validate the responses.

3. Completion by the auditor after testing. Here, the auditor completes the questionnaire after observing and testing the internal control environment. Once auditors complete the questionnaire, they typically ask management to review and validate the responses.

Enhanced understanding

The purpose of the internal control questionnaire is to help the audit team assess your company’s internal control system. Coupled with the audit team’s training, expertise and analysis, the questionnaire can help produce accurate, insightful audit reports. The insight gained from the questionnaire also can add value to your business by revealing holes in the control system that may need to be patched to prevent fraud, waste and abuse. Contact us for more information.

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Last month I discussed emotional intelligence, a research-proven and incredibly reliable indicator of an individual’s overall business success. Popularized by Dr. Daniel Goleman, emotional intelligence (EI) is defined as the ability to understand and manage your own emotions, as well as recognize and influence the emotions of those around you.

In his research, focusing on nearly 200 large companies, Goleman found that the most effective leaders were those with a high degree of emotional intelligence. He also found that at the highest levels of these companies, where differences in technical skills are of negligible importance, EI played an even greater role in determining the success and productivity of leaders and their teams.

As emotional intelligence has grown into a must-have skill for businesses, two major issues have arisen with its application. First, many people who learn about EI, often simplify the concept into merely being “nice.” Secondly, business leaders often believe that by learning about EI at a seminar or online workshop (or by reading a couple of articles), they have done enough to become emotionally intelligent.

As outlined in last month’s article, the components of emotional intelligence are self-awareness, self-management, social awareness and relationship management. Clearly, none of these components are the same as “niceness.” While being nicer to others and more empathetic can be a result of developing EI, believing that EI is synonymous with “niceness” will obscure and minimize many important traits of emotional intelligence.

In the competitive business world, “niceness” can sometimes be described as someone who tries to avoid conflict. For leaders who might be conflict-averse, it can be difficult to clearly explain to employees what is expected of them. These leaders can often be easily manipulated and taken advantage of by employees who do not want to work hard or who want to accomplish goals that are different from their employer’s objectives.

Being proficient in each of the four components of emotional intelligence can allow leaders to develop the skills to be confrontational when necessary, but to do so more strategically and productively. It encourages leaders to have powerful, productive conversations that build up their ability to influence and lead.

Recognizing that emotional intelligence is more than just “being nice” is important, but so is understanding that the skills, attitudes, and behaviors which compose EI must be continuously worked on and practiced. Remember that genuine leaders are not just born. It takes many years of hard work and the ability to learn from difficulties and disappointments to become an effective leader. In the rush to get ahead, many would-be leaders skip important personal developmental steps. Some of these people get to the top of companies through sheer determination and aggressiveness or by their brilliant technical skills. However, when they finally reach the leader’s chair, they are very ineffective because they never worked on their personal development.

Developing emotional intelligence is about more than just training and learning the vocabulary. It takes commitment and practice. Everyone can, theoretically, change, but few people are seriously willing to try. Good coaching and training are helpful and valuable tools. Accurate assessments are also an important part of the equation. In the end though, business leaders must commit to changing and practicing that commitment every day. Developing EI is not about being perfect, but about being more emotionally intelligent more of the time.

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There’s a harsh tax penalty that you could be at risk for paying personally if you own or manage a business with employees. It’s called the “Trust Fund Recovery Penalty” and it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is aggressive in enforcing the penalty.

Wide-ranging penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely avoid it.

What actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under some circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.

According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken entirely on his or her own after the penalty is paid. It isn’t part of the IRS collection process.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

Never borrow from taxes

Under no circumstances should you fail to withhold taxes or “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions about making tax payments.

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Do you have significant investment-related expenses, including the cost of subscriptions to financial services, home office expenses and clerical costs? Under current tax law, these expenses aren’t deductible through 2025 if they’re considered investment expenses for the production of income. But they’re deductible if they’re considered trade or business expenses.

For years before 2018, production-of-income expenses were deductible, but they were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor. (These rules are scheduled to return after 2025.) If you do a significant amount of trading, you should know which category your investment expenses fall into, because qualifying for trade or business expense treatment is more advantageous now.

In order to deduct your investment-related expenses as business expenses, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments — regardless of the amount or the extent of the work required.

A trader vs. an investor

However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader, who is engaged in a trade or business, rather than an investor, who isn’t. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home office deductions since the investment activities aren’t a trade or business.

Since the Supreme Court decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this test, a taxpayer’s investment activities are considered a trade or business only where both of the following are true:

The taxpayer’s trading is substantial (in other words, sporadic trading isn’t considered a trade or business), and
The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

Profit in the short term

So, the fact that a taxpayer’s investment activities are regular, extensive and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, a taxpayer who made more than 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor rather than a trader because the holding periods for stocks sold averaged about one year.

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No matter the size or shape of a business, one really can’t overstate the importance of sound accounts receivable policies and procedures. Without a strong and steady inflow of cash, even the most wildly successful company will likely stumble and could even collapse.

If your collections aren’t as efficient as you’d like, consider these five ways to improve them:

1. Redesign your invoices. It may seem superficial, but the design of invoices really does matter. Customers prefer bills that are aesthetically pleasing and easy to understand. Sloppy or confusing invoices will likely slow down the payment process as customers contact you for clarification rather than simply remit payment. Of course, accuracy is also critical to reducing questions and speeding up payment.

2. Appoint a collections champion. At some companies, there may be several people handling accounts receivable but no one primarily focusing on collections. Giving one employee the ultimate responsibility for resolving past due invoices ensures the “collection buck” stops with someone. If budget allows, you could even hire an accounts receivable specialist to fill this role.

3. Expand your payment options. The more ways customers can pay, the easier it is for them to pay promptly. Although some customers still like traditional payment options such as mailing a check or submitting a credit card number, more and more people now prefer the convenience of mobile payments via a dedicated app or using third-party services such as PayPal, Venmo or Square.

4. Get acquainted (or reacquainted) with your customers. If your business largely engages in B2B transactions, many of your customers may have specific procedures that you must follow to properly format and submit invoices. Review these procedures and be sure your staff is following them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due — especially for large payments — to verify that everything is on track.

5. Generate accounts receivable aging reports. Often, the culprit behind slow collections is a lack of timely, accurate data. Accounts receivable aging reports provide an at-a-glance view of each customer’s current payment status, including their respective outstanding balances. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days and 91+ days past due.

With easy access to this data, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they get any further behind.

Need help setting up aging reports or improving the ones you’re currently running? Please let us know — we’d be happy to help with this or any aspect of improving your accounts receivable processes.

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Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction.

It’s available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships and S corporations. It may also be claimed by trusts and estates.
The deduction is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
It’s taken “below the line.” That means it reduces your taxable income but not your adjusted gross income. But it’s available regardless of whether you itemize deductions or take the standard deduction.
The deduction has two components: 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate; and 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
QBI is the net amount of a taxpayer’s qualified items of income, gain, deduction and loss relating to any qualified trade or business. Items of income, gain, deduction and loss are qualified to the extent they’re effectively connected with the conduct of a trade or business in the U.S. and included in computing taxable income.
QBI doesn’t necessarily equal the net profit or loss from a business, even if it’s a qualified trade or business. In addition to the profit or loss from Schedule C, QBI must be adjusted by certain other gain or deduction items related to the business.
A qualified trade or business is any trade or business other than a specified service trade or business (SSTB). But an SSTB is treated as a qualified trade or business for taxpayers whose taxable income is under a threshold amount.
SSTBs include health, law, accounting, actuarial science, certain performing arts, consulting, athletics, financial services, brokerage services, investment, trading, dealing securities and any trade or business where the principal asset is the reputation or skill of its employees or owners.
There are limits based on W-2 wages. Inflation-adjusted threshold amounts also apply for purposes of applying the SSTB rules. For tax years beginning in 2021, the threshold amounts are $164,900 for singles and heads of household; $164,925 for married filing separately; and $329,800 for married filing jointly. The limits phase in over a $50,000 range ($100,000 for a joint return). This means that the deduction reduces ratably, so that by the time you reach the top of the range ($214,900 for singles and heads of household; $214,925 for married filing separately; and $429,800 for married filing jointly) the deduction is zero for income from an SSTB.
For businesses conducted as a partnership or S corporation, the pass-through deduction is calculated at the partner or shareholder level.

As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation.

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The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.

Background

Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.

The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.

Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC.

Modifications

Beginning in the third quarter of 2021, the following modifications apply to the ERTC:

Applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate. For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate.
Recovery startup businesses are qualified employers. These are generally defined as businesses that began operating after February 15, 2020, and that meet certain gross receipts requirements. These recovery startup businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
A “severely financially distressed” employer that has suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 can treat wages (up to $10,000) paid during those quarters as qualified wages. This allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not employees actually provide services.
The statute of limitations for assessments relating to the ERTC won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed).

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“Diversification is the only free lunch in investing,” said Nobel Prize laureate Harry Markowitz. Why that is, and what it means to the average investor, needs some demystifying.

Proper diversification refers to having assets that move in opposite directions at the same time. In investing and statistics jargon, this is called ‘correlation.’ If one asset zigs, the other zags. For example, during the Covid drawdown in the first quarter of 2020, the S&P 500 fell 33.69% from February 13th till March 23rd. In that period, 20‐year treasuries (as measured by the iShares 20+ Year Treasury ETF) rose by 15.51%.

It’s analogous to the hitter in baseball that has a batting average of .315 but can go 4 for 5 in any one game. Nevertheless, over an entire season, he will always remain close to his average. Similarly, if you have many investments, you will earn their average over longer periods of time.

Many investors think that owning a few, or even many, stocks means you’ve assembled a diversified portfolio. The problem with this premise is that many stocks have a very high correlation (read: move in tandem). You would expect that stocks in the same sectors have a high correlation, but in today’s environment, the entire stock market moves in the same direction. For example, Target (ticker: TGT) has a correlation of .91 with Facebook (ticker: FB), which means they move in the same direction at a very high rate. What does a national retail chain have in common with the social media juggernaut? Only the fact that the market started moving in tandem.

In order to diversify, you need to incorporate many asset classes into your portfolio, such as equities, fixed income, real estate, precious metals and commodities. It’s also vital to have diversification in regions. Even within any one region, different asset classes can move in the same direction.

There is one type of false diversification that some investors think is helpful, and that is using more than one advisor. One of the biggest reasons one hires an advisor is to relieve them from managing the duties of their assets. But when you have more than one advisor, you’ll need to spend time and energy managing them as opposed to the assets.

Additionally, when it comes to actual management, multiple advisors’ work may be redundant. This does not add any diversification, plus, things can get hairy if they contradict each other. For example, to lock in a loss to offset gains, an investor can sell a position that is at a loss. This is known as tax‐loss harvesting. This only works if they don’t buy it back within 30 days. But if there are two advisors, the second one may purchase it in that 30-day time frame, causing a wash sale. This results in a tax bill, plus a headache. Having one quarterback managing and overlooking the entire diversified portfolio is probably the best way to invest for most.

Are you properly diversified? Reach out to us at info@equinum.com for a knowledgeable and professional opinion.

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Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it may be too late.

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Clarifying the terminology

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

Living will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do-not-resuscitate order (DNR), which instructs medical personnel to not perform CPR in the event of cardiac arrest.

HCPA

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Document storage and upkeep

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where to find them.

Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. Contact us for additional information.

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Timing counts in financial reporting. Under the accrual method of accounting, the end of the accounting period serves as a strict “cutoff” for recognizing revenue and expenses.

However, during the COVID-19 pandemic, managers may be tempted to show earnings or reduce losses. As a result, they may extend revenue cutoffs beyond the end of the period or delay reporting expenses until the next period. Here’s an overview of the rules that apply to revenue and expense recognition under U.S. Generally Accepted Accounting Principles (GAAP).

General principle

Companies that follow GAAP recognize revenue when the earnings process is complete, and the rights of ownership have passed from seller to buyer. Rights of ownership include possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.

In addition, under accrual-based accounting methods, revenue and expenses are matched in the reporting periods that they’re earned and incurred. The exchange of cash doesn’t necessarily drive the recognition of revenue and expenses under GAAP. The rules may be less clear for certain services and contract sales, tempting some companies to play timing games to artificially boost financial results.

Rules for long-term contracts

The rules regarding cutoffs recently changed for companies that enter into long-term contracts. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

The guidance requires management to make judgment calls about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises and estimating variable consideration. These judgments could be susceptible to management bias or manipulation.

In turn, the risk of misstatement and the need for expanded disclosures will bring increased attention to revenue recognition practices. So, if your business is affected by the updated guidance, expect your auditors to ask more questions about cutoff policies and to perform additional audit procedures to test compliance with GAAP. For instance, they’ll likely review a larger sample of customer contracts and invoices than in previous periods to ensure you’re accurately applying the cutoff rules.

For more information

Contact us if you need help understanding the rules on when to record revenue and expenses. We can help you comply with the current guidance and minimize audit adjustments.

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Among all the positive traits effective leaders possess, research points to one attribute that is more reliable in predicting overall business success than intelligence, toughness, determination and vision – qualities traditionally associated with leadership: emotional intelligence.

Emotional intelligence (EI) is defined as the ability to understand and manage your own emotions, as well as recognize and influence the emotions of those around you. The term was first coined in a 1990 research paper by psychology professors John Mayer and Peter Salovey. It was later popularized in the New York Times bestselling book, Emotional Intelligence: Why It Can Matter More Than IQ, by psychologist Daniel Goleman.

Dr. Goleman highlighted the importance of emotional intelligence in leadership, telling the Harvard Business Review, “The most effective leaders are all alike in one crucial way: They all have a high degree of what has come to be known as emotional intelligence. It’s not that IQ and technical skills are irrelevant. They do matter, but…they are the entry-level requirements for executive positions.” In his research of nearly 200 large companies, Goleman found that the most effective leaders were those with a high degree of emotional intelligence. A person can have the best training, a brilliant mind and an endless supply of great ideas, but without developing his EI capabilities, he will still struggle to be a great leader.

Over the years, emotional intelligence has grown into a must-have skill for businesses. According to a survey by CareerBuilder.com, 71% of employers surveyed said they value EI over IQ, and report that employees with high emotional intelligence are more likely to stay calm under pressure, resolve conflict effectively and respond to co-workers with empathy.

The good news is that emotional intelligence can be learned and improved. In fact, the four components of emotional intelligence are not necessarily earned through life experience, but proactively learned and developed. These components can be studied and practiced with self-paced online learning tools or at off-site workshops.

Self-Awareness: Self-awareness is the ability to recognize and understand your own emotions, strengths, weaknesses, needs and drives. Self-awareness is a critical part of emotional intelligence, and it goes beyond just recognizing these traits. It’s also about being aware of how your actions, moods and emotions can have an effect on other people. Self-aware people are honest with themselves and others. They are comfortable talking about their limitations and they often demonstrate a thirst for constructive criticism. It requires a great deal of introspection and the ability to thoughtfully consider feedback from others.

Self-Management: Those with strong self-management skills have the ability to manage their emotions, particularly in stressful situations, and maintain a positive outlook despite life’s setbacks. Leaders who lack self- management often react poorly to difficult situations and have a harder time keeping their impulses and emotions under control. A person with a high degree of self-management will find ways to control his emotional impulses and channel them in useful ways. People with strong self-management skills also tend to be flexible and adapt well to change.

Social Awareness: Social awareness in the workplace refers to the ability to recognize the feelings and emotions of others, while understanding the dynamics at play within one’s organization. Leaders who excel in social awareness usually have a great deal of empathy. They strive to understand the feelings and perspectives of others, which enables them to communicate and collaborate more effectively. Being empathetic – or having the ability to understand how others are feeling – is critical to emotional intelligence. Today, empathy is more important than ever due to the increasing use of teams in the workplace, as well as the growing need to retain talent.

Relationship Management: Relationship management skills include the ability to influence and mentor others, as well as resolve conflict effectively. Managing one’s social relationships at work often builds on the previous components of EI. People tend to be more effective at managing relationships when they can understand and control their own emotions while empathizing with the feelings of others. Relationship management is about building bonds with people, but it is also about addressing and managing conflict. It is important to properly address issues as they arise, because keeping your employees happy often means having to navigate tough and honest conversations.

The truth is that no one is born a leader. To develop into the leaders we want to become, we need to consciously work to improve ourselves. While a business leader might excel at their job on a technical level, if he or she cannot communicate or work with others effectively, those technical skills will get overlooked. By mastering emotional intelligence, you can continue to advance your organization and your career. Relationships with employees, vendors, customers and others will undoubtedly improve when led by a leader with highly developed emotional intelligence.

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Working capital equals the difference between current assets and current liabilities. Organizations need a certain amount of working capital to run their operations smoothly. The optimal (or “target”) amount of working capital depends on the nature of operations and the industry. Inefficient working capital management can hinder growth and performance.

Benchmarks

The term “liquidity” refers to how quickly an item can be converted to cash. In general, receivables are considered more liquid than inventory. Working capital is often evaluated using the following liquidity metrics:

Current ratio. This is computed by dividing current assets by current liabilities. A current ratio of at least 1.0 means that the company has enough current assets on hand to cover liabilities that are due within 12 months.

Quick (or acid-test) ratio. This is a more conservative liquidity benchmark. It typically excludes prepaid assets and inventory from the calculation.

An alternative perspective on working capital is to compare it to total assets and annual revenues. From this angle, working capital becomes a measure of operating efficiency. Excessive amounts of cash tied up in working capital detract from other spending options, such as expanding to new markets, buying equipment and paying down debt.

Best practices

High liquidity generally equates with low financial risk. However, you can have too much of a good thing. If working capital is trending upward from year to year — or it’s significantly higher than your competitors — it may be time to take proactive measures to speed up cash inflows and delay cash outflows.

Lean operations require taking a closer look at each component of working capital and implementing these best practices:

1. Put cash to good use. Excessive cash balances encourage management to become complacent about working capital. If your organization has plenty of money in its checkbook, you might be less hungry to collect receivables and less disciplined when ordering inventory.

2. Expedite collections. Organizations that sell on credit effectively finance their customers’ operations. Stale receivables — typically any balance over 45 or 60 days outstanding, depending on the industry — are a red flag of inefficient working capital management.

Getting a handle on receivables starts by evaluating which items should be written off as bad debts. Then viable balances need to be “talked in the door” as soon as possible. Enhanced collections efforts might include early bird discounts, electronic invoices and collections-based sales compensation programs.

3. Carry less inventory. Inventory represents a huge investment for manufacturers, distributors, retailers and contractors. It’s also difficult to track and value. Enhanced forecasting and data sharing with suppliers can reduce the need for safety stock and result in smarter ordering practices. Computerized technology — such as barcodes, radio frequency identification and enterprise resource planning tools — also improve inventory tracking and ordering practices.

4. Postpone payments. Credit terms should be extended as long as possible — without losing out on early bird discounts. If you can stretch your organization’s average days in payables from, say, 45 to 60 days, it trains vendors and suppliers to accept the new terms, particularly if you’re a predictable, reliable payor.

Prioritize working capital

Some organizations are so focused on the income statement, including revenue and profits, that they lose sight of the strategic significance of the balance sheet — especially working capital accounts. We can benchmark your organization’s liquidity and asset efficiency over time and against competitors. If necessary, we also can help implement strategies to improve your performance, without exposing you to unnecessary risk.

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Your employee opens an email attachment or clicks on a link. It sounds inconsequential, but the next thing you know, you and your employees are locked out of your company’s computers and network. You may receive an intimidating message demanding a ransom and threatening that if you do not pay up in a day or two, all your data will be deleted or your company’s sensitive data will be published online. This type of cyberattack is known as ‘ransomware’ and is one of the most significant cyber risks that can jeopardize you and your business.

Earlier this month, a malicious ransomware attack forced the largest pipeline operator on the East Coast to temporarily shut down all operations. The attack led to price spikes and gasoline shortages across a large expanse of the United States. The pipeline operator ended up paying the hackers $4.4 million to regain control of their system. Such a high-profile case has publicized the problem of cybersecurity and ransomware to the public. Worse still is that large companies are not the only targets of cyberattacks.

Across the country, we have seen a dramatic increase in cyberattacks as organizations have shifted to remote work during the pandemic. According to Homeland Security Secretary Alejandro Mayorkas, the rate of ransomware attacks increased by 300% in 2020, and about three-quarters of victims were small businesses, who paid a total of over $350 million in ransoms during the year. Sadly, the attacks are becoming more brazen and costly as the pandemic drags into 2021.

So, what exactly is ransomware?

Ransomware is a computer program that is a form of malware. There are many variants, but ransomware is typically activated when someone clicks a link in a phishing email, or hackers find a weakness in your company’s computer system. Once the hacker is in, they encrypt and lock your business’s files, then demand a ransom for the key to decrypt and unlock them. More recently, hackers have begun downloading a business’s sensitive data, threatening to publish it online if a ransom is not paid.

Small businesses are frequent targets because they often lack the security or training to prevent a cyberattack. With the threat of ransomware and other cyberattacks becoming more common, what actions can you take to protect yourself and your business? Here are some steps that all organizations should consider as the frequency and sophistication of cyberattacks become more alarming:

Cyberattack Response Plan: Make sure your company has a cyberattack response plan so that in the event of an attack, you know what you need to do and who you need to contact. Cyberattacks always happen when you least expect them. When they happen, you will need to make decisions very quickly. The complexity of the plan will depend on the size of your company, but remember, hackers do not care how big or small you are. They give the same timeframes to a sole proprietor as they do a Fortune 500 company, and your response will have to be immediate.

Train Employees: Human error is the main cause of a business’s data being compromised. Train your employees to identify phishing emails and regularly educate them on the dangers of clicking unknown links. More than merely training, consider conducting drills to help employees identify and prevent a phishing attack. This can include sending fake phishing emails to your own employees to familiarize them with identifying dubious links or suspicious attachments.

Good Cyber Hygiene: Along with employee training, be sure to practice other good cyber hygiene habits. Regularly backing-up your data will leave your company less vulnerable. Making sure your systems and software are up-to-date is another simple yet effective tool to help prevent a cyberattack. The Federal Trade Commission has a useful website where you can learn more strategies for protecting your business from cyberattacks: https://www.ftc.gov/tips-advice/business-center/small-businesses/cybersecurity

Cyber Insurance: Determine if your company has a cyber insurance policy and be sure to review it. If your business does not have one, you may consider getting one, but be sure that ransom is covered and that the level of coverage reflects the current reality.

Remember that the cost of ransomware goes beyond just the ransom. Downtime during the attack means a loss of revenue and sales. Moreover, even if a ransom is paid, there is no guarantee you will get your computer or data back. Protecting your business from ransomware and other cyberattacks requires a multi-faceted approach. With good preparation and cybersecurity hygiene, your company can reduce risk in an increasingly dangerous digital world.

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After trekking steadily upwards, the equity markets in the U.S. and around the world have hit some turbulence. While the larger indices like the S&P 500 and the Dow are only a couple of percentage points off their highs, some notable high-flyers have been taken out to the woodshed. Other “stay-at-home” darlings like Zoom, Peloton, Teladoc and others have been cut in half. The uber-famous Ark Invest Innovation ETF (ticker: ARKK), managed by its new star fund-manager, Kathy Wood, was up 358% off the lows back in March of 2020, and has now dropped about 35% off its highs. This pales in comparison to the complete mania experienced by crypto currencies. Doge Coin, which is up thousands of percentage points for the year, has experienced 30-40% swings on a daily basis.

So why have many investors, or shall we call them speculators, embraced these wild investing themes? The answer is simple. People want to get rich quick. There are plenty of newly minted crypto millionaires out there making Tik Tok videos, and they make Warren Buffet’s recent investments look lame.

But will they hold onto their millions? That remains to be seen. Historically, most who chase quick riches tend to crash and burn. Getting rich slowly, while perhaps less exciting, is definitely a smarter goal. There are a couple of ways to get there. One standard method lies in real estate, an asset class that consistently produced millionaires. But investing in real estate requires time, the ability to research and more importantly, the skill to manage your assets.

There is yet another way – perhaps an even more subdued method – to make those millions: By establishing yourself as a 401k millionaire. According to Fidelity Investments, their account roster currently includes 233,000 people holding 401k’s with an account balance of $1 million or more. Fidelity also has an additional 208,000 IRA accounts assessed at the same value. Although this is only 1.6% of the $27.2 million retirement accounts they manage, it’s way up from the 21,000 retirement plans, valued in the millions, that were managed in 2009.

So, what will it take for you to become a 401k millionaire?

For 2021, the contribution limit for employees is $19,500. Imagine being able to max out on this amount each year (the contribution limit tends to go up over time, but let’s stick to this sum for illustrative purposes). Assuming you want to retire at age 65, here is the investment return you will need to earn in order to reach your goal:

Starting Age	Required Returns
25	1.08%
35	3.15%
45	8.14%
55	28.31%

You don’t need to be a rocket scientist to see that the earlier you start, the better your chances are of reaching the million dollar mark. As the famous investing adage goes, “It’s not timing the market, rather time in the market.”

To drive this compounding point home, let’s work the other way: If you max out your 401k’s $19,500 and earn an average 8% return, here is the amount you would have at age 65, at various starting ages.

Starting Age	Ending balance
25	$5,475,230.28
35	$2,405,244.43
45	$983,246.97
55	$324,587.01

Though it may be hard to save and invest such a large sum each year, hitching your wagon to the newest crypto fad or meme stock and praying for it to go up as you keep on refreshing your browser window may not help you make it to the finish line. A balanced and fixed investment plan will do more to help you achieve the wealth and security you want.

Reach out to info@equinum.com to ensure that your investment accounts are aligned with your financial goals and risk tolerance.

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One benefit of the current federal gift and estate tax exemption amount ($11.7 million in 2021) is that it allows most people to focus their estate planning efforts on asset protection and other wealth preservation strategies, rather than tax minimization. (Although, be aware that President Biden has indicated that he’d like to roll back the exemption to $3.5 million for estate taxes. He proposes to exempt $1 million for the gift tax and impose a top estate tax rate of 45%. Of course, any proposals would have to be passed in Congress.)

If you’re currently more concerned about personal liability, you might consider an asset protection trust to shield your hard-earned wealth against frivolous creditors’ claims and lawsuits. Foreign asset protection trusts offer the greatest protection, although they can be complex and expensive. Another option is to establish a domestic asset protection trust (DAPT).

DAPT vs. hybrid DAPT

The benefit of a standard DAPT is that it offers creditor protection even if you’re a beneficiary of the trust. But there’s also some risk involved: Although many experts believe they’ll hold up in court, DAPTs haven’t been the subject of a great deal of litigation, so there’s some uncertainty over their ability to repel creditors’ claims.

A “hybrid” DAPT offers the best of both worlds. Initially, you’re not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds in the future, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children or other family members, either outright or in a trust, without retaining any control. If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).

If, however, you want to retain access to the assets later in life, without relying on your spouse or children, a DAPT may be the answer.

Setting up a hybrid DAPT

A hybrid DAPT is initially created as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.

If you have additional questions regarding a DAPT, a hybrid DAPT or other asset protection strategies, please don’t hesitate to contact us.

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Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

Are you wondering when you will receive your refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

If you overlooked claiming a tax break, can you still collect a refund for it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Year-round tax help

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long.

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Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error.

It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.

On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).

What are the factors the IRS considers?

Who is an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.

Note: Section 530 doesn’t apply to certain types of workers.

Should you ask the IRS to decide?

Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

These are the basic tax rules. In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would make it easier for businesses to classify workers as independent contractors. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.

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“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking.

Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay any taxes owed by your regular deadline to help avoid possible penalties. In other words, your 2020 tax payments are still due by May 17.

Victims of certain disasters

If you were a victim of the February winter storms in Texas, Oklahoma and Louisiana, you have until June 15, 2021, to file your 2020 return and pay any tax due without submitting Form 4868. Victims of severe storms, flooding, landslides and mudslides in parts of Alabama and Kentucky have also recently been granted extensions. For eligible Kentucky victims, the new deadline is June 30, 2021, and eligible Alabama victims have until August 2, 2021.

That’s because the IRS automatically provides filing and penalty relief to taxpayers with addresses in federally declared disaster areas. Disaster relief also includes more time for making 2020 contributions to IRAs and certain other retirement plans and making 2021 estimated tax payments. Relief is also generally available if you live outside a federally declared disaster area, but you have a business or tax records located in the disaster area. Similarly, relief may be available if you’re a relief worker assisting in a covered disaster area.

Located in a combat zone

Military service members and eligible support personnel who are serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes taxpayers serving in Iraq, Afghanistan and other combat zones.

These extensions also give affected taxpayers in a combat zone more time for a variety of other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of time available to taxpayers.

Outside the United States

If you’re a U.S. citizen or resident alien who lives or works outside the U.S. (or Puerto Rico), you have until June 15, 2021, to file your 2020 tax return and pay any tax due.

The special June 15 deadline also applies to members of the military on duty outside the U.S. and Puerto Rico who don’t qualify for the longer combat zone extension described above.

While taxpayers who are abroad get more time to pay, interest applies to any payment received after this year’s May 17 deadline. It’s currently charged at the rate of 3% per year, compounded daily.

We can help

If you need an appointment to get your tax return prepared, contact us. We can also answer any questions you may have about filing an extension.

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‘Opportunity Zones’ are part of an economic development initiative rolled out in 2017 as part of the 2018 Tax Cuts and Jobs Act, and were supposed to be a win-win proposition from the Federal Government. The goal was to encourage investment in the development of low-income neighborhoods and to spur economic growth and job creation in low-income communities. In exchange for their investment in these low-income zones, investors were offered significant capital gain tax deferrals and discounts.

New York designated 514 “low-income community” census tracts as Opportunity Zones. The three major benefits of investing in these sites include:

1) Tax deferrals on original capital gains through 2026

2) Eligibility for partial exclusions of 10% or 15% if the investment was held for longer than five or seven years, respectively

3) No tax on the appreciation of investments held for over 10 years (known as “the ten-year benefit”)

But taxes are always subject to change, and the New York State fiscal year 2022 budget did just that. New legislation “decouples” New York from the federal income tax deferral available for investments in Opportunity Zones beginning in January of 2021. Because of the new legislation, a New York investor with a gain in 2021 will lose the Opportunity Zones tax benefits they would have accrued for New York tax purposes.

This change means that any eligible gain earned in 2021 that is deferred for federal purposes will be added back in when calculating a taxpayer’s taxable income for New York purposes. In 2026, when the gain becomes subject to federal income, it will be excluded from the New York taxable income, so New York will only tax the gain once. This provision is effective for taxable years beginning on or after January 1, 2021.

Important Considerations:

> 2020 capital gains that are still eligible to be deferred for federal purposes will also be eligible in New York, if the 180-day condition is maintained. The original initiative requires that the taxpayer invest the realized capital gain dollars into a qualified Opportunity Zone with 180 days from the date of the sale or exchange of appreciated property.

> New Yorkers with gains disbursed through a K-1, or a flow-through entity, like a partnership or trust, still have a few months to reinvest 2020 gains in 2021 and receive both the federal and New York tax benefits.

> There is the possibility that when tax on the deferred gain is due in 2026, the taxpayer will have tax due in their state of residence, but no offsetting credit for the taxes paid to New York in 2021. This looks a lot like double taxation.

> President Biden has indicated that he intends to increase the tax rate on capital gains. This may mean higher capital gains’ tax rates in 2026.

> Finally (and on a positive note) the wording of the legislation does not indicate that New York has decoupled from the 10-year benefit. Gains from the sale of an Opportunity Zone investment may still be eligible for exclusion from income for both federal and New York purposes, assuming the requisite 10-year holding period is met.

In light of these changes, Roth&Co recommends those considering or participating in an Opportunity Zone fund to speak to their financial advisor to see how the new bill affects their investment.

Roth&Co is committed to keeping you informed of all provisions that may benefit you, your business or your organization. We will provide more information as it becomes available.

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When the pandemic ends, many companies will find that their business model has been changed in fundamental ways. The reality is that these changes will not just be in what consumers expect, but also in how employees operate, as well as the overall business culture.

Some business leaders are yearning to have everyone back in the office, but it is important that they understand how their employees’ needs and desires have changed. Retaining the best talent will likely require greater flexibility in the work environment. That is why leading tech companies such as Twitter, Facebook, Oracle, Google and Salesforce have announced flexible working arrangements for their employees.

A Harvard business school survey found that 27% of employees hope to work remotely full-time, 61% would like to work 2-3 days a week from home, and only 18% want to go back to the office full-time. A Pew Research Center survey found similar results with more than half of Americans currently working remotely due to the pandemic, wanting to continue working from home most or all of the time.

Michael Watkins, professor at IMD Business School, defined ‘organizational culture’ as consistent, observable patterns of behavior in organizations. Obviously, the pandemic has fundamentally changed those patterns, and therefore changed the culture of just about every business and organization. In the post-COVID world, leaders need to seriously consider the new business culture that was created by the pandemic and avoid trying to recreate their pre-COVID cultures. Here are steps that leaders can consider as they prepare their organizations and employees to emerge stronger in the post-pandemic world.

Integrate Slowly. Emerging from any profoundly disruptive experience takes time, and this pandemic is no different. Some employees may be ready and hoping to return to “normal,” believing that it will bring renewed focus. Other employees have changed their lives around to make remote work possible, and are now finally comfortable with the current arrangement. Some may even be exhausted and confused, needing time to process what they have experienced. Employees will need the chance to integrate and reflect as they begin to adjust once again to their work practices post-pandemic. Your business culture undoubtably changed and it will need to be rebuilt collectively.

Identify What Worked. To keep up during the pandemic, businesses were forced to act quickly. Decisions and plans that often took weeks or months, were being decided in days. According to the Harvard Business Review, a leading retailer was exploring how to launch a curbside-delivery business and the plan stretched over 18 months. When the COVID lockdown hit, it went live in two days. During the pandemic, clear goals, rapid decision making and focused teams replaced corporate bureaucracy. As we move into the post-COVID era, leaders must acknowledge and commit to not going backwards. Rethinking their organization and culture will go a long way in developing a long-term competitive advantage.

Identify What to Discard. It will be important to retain some long-established cultural practices and beliefs, institutionalize others that developed during the crisis and discard those that are no longer useful. You need to identify which is which. Are your employees happier and more effective working remotely, or is face-to-face interaction an important component of your business and industry?

Embrace the Future of Work. The future of remote work was always coming, but COVID has hastened the pace. Employees across all industries have learned how to complete tasks remotely, using digital communication and collaboration tools. Continuing this shift will call for substantial investment in workforce training, specifically in new skills using digital tools. It will also require employers to seriously consider hybrid working models for their employees.

Business leaders need to have a sound understanding of the evolution of their industry to determine how their business will succeed in the future. Your business’s culture has been influenced by the pandemic, but those changes can have a positive impact, if managed correctly.

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We would like to share two important updates relevant to nonprofit organizations that will enhance facilities, serve employees and save money.

Security Grants Recipients – Bridge Loan Program

The Hebrew Free Loan Society (HFLS) has created a bridge loan fund offering capital to federal and state grant recipients to use for immediate security upgrades. This loan is for organizations that have received security grants but cannot afford to pay for those security enhancements upfront while awaiting reimbursement from the government. The program provides interest-free loans of up to $150,000 to organizations in any of New York City’s five boroughs, Westchester, Long Island and Northern New Jersey. Click here for more information, or contact Fred Cohen at fcohen@hfls.org.

Paid Time Off For Employees To Get COVID-19 Vaccinations

The IRS has issued new guidance aimed at helping employees get Covid-19 vaccinations. Day schools, shuls and other organizations with fewer than 500 employees may now be eligible to receive federal financial support for the paid time off they provide to employees to get and recover from COVID-19 vaccinations. This support comes in the form of a tax credit which is funded by the most recent COVID-19 relief package, the American Rescue Plan (ARP).

The ARP tax credits are available to eligible employers that pay sick and family leave for leave taken from April 1, 2021, through September 30, 2021. Eligible employers can claim the paid leave tax credit to offset the cost of providing sick leave for up to 80 hours (or 10 workdays), and up to a dollar value of $511 per day.

For more information on paid leave for employees receiving COVID-19 vaccines, please see the guidance outlined by the IRS, here.

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The May 17 deadline for filing your 2020 individual tax return is coming up soon. It’s important to file and pay your tax return on time to avoid penalties imposed by the IRS. Here are the basic rules.

Failure to pay

Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 1/2% for each month (or partial month) the payment is late. For example, if payment is due May 17 and is made June 22, the penalty is 1% (1/2% times 2 months (or partial months)). The maximum penalty is 25%.

The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount.

For example, if your payment is two months late and your return shows that you owe $5,000, the penalty is 1%, which equals $50. If you’re audited and your tax bill increases by another $1,000, the failure-to-pay penalty isn’t increased because it’s based on the amount shown on the return as due.

Failure to file

The failure-to-file penalty runs at a more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension to file (until October 15), you’re not filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment.

If the 1/2% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the total combined penalty is 5%. The maximum combined penalty for the first five months is 25%. After that, the failure-to-pay penalty can continue at 1/2% per month for 45 more months (an additional 22.5%). Thus, the combined penalties could reach 47.5% over time.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments. So if no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual tax liability is later determined to be an additional $1,000, the failure to file penalty (4.5% × 3 = 13.5%) would also apply for an additional $135 in penalties.

A minimum failure to file penalty will also apply if you file your return more than 60 days late. This minimum penalty is the lesser of $210 or the tax amount required to be shown on the return.

Reasonable cause

Both penalties may be excused by IRS if lateness is due to “reasonable cause.” Typical qualifying excuses include death or serious illness in the immediate family and postal irregularities.

As you can see, filing and paying late can get expensive. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can reach 15% per month, with a 75% maximum. Contact us if you have questions or need an appointment to prepare your return.

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Owners of incorporated businesses know that there are tax advantages to withdrawing money from a C corporation as compensation, rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of a corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts.
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

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With so many employees working remotely these days, gathering competitive intelligence has never been easier. The Internet as a whole, and social media specifically, have created a data-rich environment where a business owner can uncover a wide variety of information about what competitors are up to. All you or an employee need to do is open a browser tab and start looking.

But should you? Well, competitive intelligence — formally defined as the gathering and analysis of publicly available information about one or more competitors for strategic planning purposes — has been around for decades. One could say that a business owner would be imprudent not to keep tabs on his or her fiercest competition.

The key is to engage in competitive intelligence legally and ethically. Here are some best practices to keep in mind:

Know the rules and legal risks. Naturally, the very first rule of competitive intelligence is to avoid inadvertently breaking the law or otherwise exposing yourself or your company to a legal challenge. The technicalities of intellectual property law are complex; it can be easy to run afoul of the rules unintentionally.

When accessing or studying another company’s products or services, proceed carefully and consult your attorney if you fear you’re on unsteady ground and particularly before putting any lessons learned into practice.

Vet your sources carefully. While gathering information, you or your employees may establish sources within the industry or even with a specific competitor. Be sure you don’t encourage these sources, even accidentally, to violate any standing confidentiality or noncompete agreements.

Don’t hide behind secret identities. As easy as it might be to create a “puppet account” on social media to follow and even comment on a competitor’s posts, the negative fallout of such an account being exposed can be devastating. Also, if you sign up to receive marketing e-mails from a competitor, use an official company address and, if asked, state “product or service evaluation” as the reason you’re subscribing.

Train employees and keep an eye on consultants. Some business owners might assume their employees would never engage in unethical or even illegal activities when gathering information about a competitor. Yet it happens. One glaring example occurred in 2015, when the Federal Bureau of Investigations and U.S. Department of Justice investigated a Major League Baseball team because one of its employees allegedly hacked into a competing team’s computer systems. The investigation concluded in 2017 with a lengthy prison term for the perpetrator and industry fines and other penalties for his employer.

Discourage employees from doing competitive intelligence on their own. Establish a formal policy, reviewed by an attorney, that includes ethics training and strict management oversight. If you engage consultants or independent contractors, be sure they know and abide by the policy as well. Our firm can help you identify the costs and measure the financial benefits of competitive intelligence.

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Now that the federal gift and estate tax exemption has reached an inflation-adjusted $11.7 million for 2021, fewer estates are subject to the federal tax. And even though President Biden has proposed reducing the exemption to $3.5 million, it’s uncertain whether that proposal will pass Congress. If nothing happens, the exemption is scheduled to revert to an inflation-adjusted $5 million on January 1, 2026. Nonetheless, estate planning will continue to be essential for most families. That’s because tax planning is only a small component of estate planning — and usually not even the most important one.

The primary goal of estate planning is to protect your family, and saving taxes is just one of many strategies you can use to provide for your family’s financial security. Another equally important strategy is asset protection. And a spendthrift trust can be an invaluable tool for preserving wealth for your heirs.

“Spendthrift” is a misnomer

Despite its name, the purpose of a spendthrift trust isn’t just to protect profligate heirs from themselves. Although that’s one use for this trust type, even the most financially responsible heirs can be exposed to frivolous lawsuits, dishonest business partners or unscrupulous creditors.

A properly designed spendthrift trust can protect your family’s assets against such attacks. It can also protect your loved ones in the event of relationship changes. If one of your children divorces, your child’s spouse generally can’t claim a share of the spendthrift trust property in the divorce settlement.

Also, if your child predeceases his or her spouse, the spouse generally is entitled by law to a significant portion of your child’s estate. In some cases, that may be a desirable outcome. But in others, such as second marriages when there are children from a prior marriage, a spendthrift trust can prevent your child’s inheritance from ending up in the hands of his or her spouse rather than in those of your grandchildren.

Safeguarding your wealth

A variety of trusts can be spendthrift trusts. It’s just a matter of including a spendthrift clause, which restricts a beneficiary’s ability to assign or transfer his or her interest in the trust and restricts the rights of creditors to reach the trust assets.

It’s important to recognize that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, it may be possible for government agencies to reach the trust assets — to satisfy a tax obligation, for example.

Generally, the more discretion you give the trustee over distributions from the trust, the greater the protection against creditors’ claims. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, it’s preferable to give the trustee full discretion over whether and when to make distributions.

If you have further questions regarding spendthrift trusts, please contact us. We’d be happy to help you determine if one is right for your estate plan.

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Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.

Uncomplicated paperwork

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.

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If you were to ask your IT staff about how tech support for remote employees is going, they might say something along the lines of, “Fantastic! Never better!” However, if you asked remote workers the same question, their response could be far less enthusiastic.

This was among the findings of a report by IT solutions provider 1E entitled “2021: Assessing IT’s readiness for the year of flexible working,” which surveyed 150 IT workers and 150 IT managers in large U.S. organizations. The report strikingly found that, while 100% of IT managers said they believed their internal clients were satisfied with tech support, only 44% of remote employees agreed.

Bottom line impact

By now, over a year into the COVID-19 pandemic, remote work has become common practice. Some businesses may begin reopening their offices and facilities as employees get vaccinated and, one hopes, virus metrics fall to manageable levels. However, that doesn’t mean everyone will be heading back to a communal working environment.

Flexible work arrangements, which include the option to telecommute, are expected to remain a valued employment feature. Remote work is also generally less expensive for employers, so many will likely continue offering or mandating it after the pandemic fades.

For business owners, this means that providing optimal IT support to remote employees will remain a mission-critical task. Failing to do so will likely hinder productivity, lower morale, and may lead to reduced employee retention and longer times to hire — all costly detriments to the bottom line.

Commonsense tips

So, how can you ensure your remote employees are well-supported? Here are some commonsense tips:

Ask them about their experiences. In many cases, business owners are simply unaware of the troubles and frustrations of remote workers when it comes to technology. Develop a relatively short, concisely worded survey and gather their input.

Invest in ongoing training for support staff. If you have IT staffers who, for years, provided mostly in-person desktop support to on-site employees, they might not serve remote workers as effectively. Having them take one or more training courses may trigger some “ah ha!” moments that improve their interactions and response times.

Review and, if necessary, upgrade systems and software. Your IT support may be falling short because it’s not fully equipped to deal with so many remote employees — a common problem during the pandemic. Assess whether:

Your VPN system and licensing suit your needs,
Additional or better cloud solutions could help, and
Your remote access software is helping or hampering support.

Ensure employees know how to work safely. Naturally, the remote workers themselves play a role in the stability and security of their devices and network connections. Require employees to undergo basic IT training and demonstrate understanding and compliance with your security and usage policies.

Your technological future

The pandemic has been not only a tragic crisis, but also a marked accelerator of the business trend toward remote work. We can help you evaluate your technology costs, measure productivity and determine whether upgrades are likely to be cost-effective.

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When you file your tax return, you must check one of the following filing statuses: Single, married filing jointly, married filing separately, head of household or qualifying widow(er). Who qualifies to file a return as a head of household, which is more favorable than single?

To qualify, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent (unless you only qualify due to the multiple support rules).

A qualifying child?

A child is considered qualifying if he or she:

Lives in your home for more than half the year,
Is your child, stepchild, adopted child, foster child, sibling stepsibling (or a descendant of any of these),
Is under age 19 (or a student under 24), and
Doesn’t provide over half of his or her own support for the year.

If a child’s parents are divorced, the child will qualify if he meets these tests for the custodial parent — even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.

A person isn’t a “qualifying child” if he or she is married and can’t be claimed by you as a dependent because he or she filed jointly or isn’t a U.S. citizen or resident. Special “tie-breaking” rules apply if the individual can be a qualifying child of (and is claimed as such by) more than one taxpayer.

Maintaining a household

You’re considered to “maintain a household” if you live in the home for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home. Don’t include items such as medical care, clothing, education, life insurance or transportation.

Special rule for parents

Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify under this rule, you must be able to claim the parent as your dependent.

Marital status

You must be unmarried to claim head of household status. If you’re unmarried because you’re widowed, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household. The joint rates are more favorable than the head of household rates.

If you’re married, you must file either as married filing jointly or separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household, you’re treated as unmarried. If this is the case, you can qualify as head of household.

We can answer questions if you’d like to discuss a particular situation or would like additional information about whether someone qualifies as your dependent.

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As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations.

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

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The new American Rescue Plan Act (ARPA) provides eligible families with an enhanced child and dependent care credit for 2021. This is the credit available for expenses a taxpayer pays for the care of qualifying children under the age of 13 so that the taxpayer can be gainfully employed.

Note that a credit reduces your tax bill dollar for dollar.

Who qualifies?

For care to qualify for the credit, the expenses must be “employment-related.” In other words, they must enable you and your spouse to work. In addition, they must be for the care of your child, stepchild, foster child, brother, sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expenses can also be for the care of your spouse or dependent who’s handicapped and lives with you for over half the year.

The typical expenses that qualify for the credit are payments to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades doesn’t qualify because it’s an education expense. However, the cost of before and after school programs may qualify.

To claim the credit, married couples must file a joint return. You must also provide the caregiver’s name, address and Social Security number (or tax ID number for a day care center or nursery school). You also must include on the return the Social Security number(s) of the children receiving the care.

The 2021 credit is refundable as long as either you or your spouse has a principal residence in the U.S. for more than half of the tax year.

What are the limits?

When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you aren’t entitled to any credit. However, in some cases, if one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).

For 2021, the first $8,000 of care expenses generally qualifies for the credit if you have one qualifying individual, or $16,000 if you have two or more. (These amounts have increased significantly from $3,000 and $6,000, respectively.) However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.

How much is the credit worth?

If your AGI is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out under a complicated formula. For taxpayers with an AGI greater than $440,000, it’s phased out completely.

These are the essential elements of the enhanced child and dependent care credit in 2021 under the new law. Contact us if you have questions.

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Data security is a critical part of the audit risk assessment. If your financial statements are audited, your audit team will tailor their procedures to answer critical questions about cyber risks and the effectiveness of your internal controls. While conducting fieldwork, they’ll assess how your practices measure up and whether your company has weaknesses that may require additional inquiry, testing and disclosure.

Is cybersecurity a priority?

Most companies today view cybersecurity as a business problem, not just as an information technology (IT) issue. During the audit process, it’s important to identify the “crown jewels” of your company’s data assets, and then consider how your management team evaluates, manages and responds to cyber risks and cybersecurity incidents.

People are often the weakest link in cybersecurity. So, auditors will evaluate your company’s training, awareness and accountability policies to ensure that sensitive data is kept safe. Those policies may need to be regularly updated as 1) hackers get more sophisticated and find new ways of breaking into systems, and 2) your business environment changes.

For example, remote working arrangements during the COVID-19 pandemic have resulted in new risks as employees access data from less-secure home networks. So companies may need to modify their practices to maintain effective data security.

Auditors also consider the tone at the top of your organization. Cybersecurity should be integrated into an organization’s values and goals. Responsibility shouldn’t fall solely in the hands of your company’s IT department. After all, if your company can’t keep its intellectual property and customers safe, its ability to operate will ultimately be diminished over the long run.

What’s important to investors and lenders?

To date, the Public Company Accounting Oversight Board (PCAOB) hasn’t found any material misstatements on a public company’s financial statements as a result of a cybersecurity breach. So, stakeholders generally have confidence in the ability of auditors to evaluate and identify cyber risks.

However, audit committees and other external stakeholders recognize that there’s a risk that future cyberattacks may affect financial reporting. And they expect auditors to actively communicate about cybersecurity measures and the costs associated with breaches. The full cost of a data breach — including response and reputational damage — may not always be apparent. Financial statement disclosures should be as accurate, timely and comprehensive as possible.

An agile approach

Many traditional audit risks — such as supply chain and related party risks — tend to be fairly constant and predictable over time. But cyber risks are constantly evolving. We have experience evaluating and disclosing data security practices. Each accounting period, our audit team will take a fresh look your company’s cyber risks in today’s marketplace and modify our audit procedures as necessary. We can also help get your policies and procedures back on track, if they haven’t kept up with the times.

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Now that the vaccines are rolling out to more people and government health restrictions are beginning to ease, every business leader should be asking themself what their company is going to do when the pandemic is over. Certain industries such as grocery stores and cleaning product suppliers have experienced a boost in sales, but will that growth be sustainable? Hotels and movie theaters have experienced an unprecedented drop in demand, but will their customers come back?

The U.S. economy is driven by consumer purchases, and those purchases have not gone away. Even though the pandemic is temporary, it has lasted long enough to turn temporary behaviors into structural shifts. At the end of the crisis, some things will return to the way they were, some things will look different, and some things will simply not come back at all. The real question is, which trends are temporary and which trends are here to stay? Unfortunately, predicting the future habits of consumers can be challenging during normal times. Predicting habits during and after a global pandemic requires even greater planning and evaluation.

As you begin developing a business plan for the post-covid world, it is important to consider how your customers’ habits and behaviors are going to change. This is a difficult question for businesses to consider and the answers will be different for every sector and industry. In a recent Harvard Business Review article, Dev Patnaik, Michelle Loret de Mola and Brady Bates identified key factors to help business leaders evaluate how the behaviors of stakeholders might change.

Habits

How has the pandemic affected people’s habits? When a behavior becomes part of a routine, the likelihood of that behavior continuing, increases. Importantly, studies of habit formation suggest that the number of times you perform a behavior determines the likelihood that the behavior will stick. Food delivery businesses such as DoorDash and Uber Eats have thrived during the pandemic. After looking at their data, they discovered that it took four deliveries to a single customer to turn that customer into a ‘lifelong customer.’ Three orders wasn’t enough, and five orders provided no additional gain. The belief is that these companies will fare well in the post-covid landscape, since customers have developed a habit of using apps to place food orders.

Motivators

Does continuing the behavior provide significant psychological or financial benefit? The tourism industry has been understandably hit hard by the pandemic. While the industry has struggled, it is very unlikely the current trends will continue post-pandemic. The psychological benefits of vacations and travel have long been documented and the tourism industry will likely rebound strongly. While many museums and tourist destinations have tried to develop virtual tours and online experiences, most travelers do not believe these are substitutes for real-life activities.

Better Alternatives

People will change their behavior if they discover a better way to do something, but shifting to a new behavior needs to be relatively easy and the alternative must already exist. Zoom wasn’t invented during the pandemic, but the pandemic created the perfect environment for it to thrive. The question is, has Zoom transformed people’s behavior or will they revert back to their old behavior? Going forward, we are likely to see a mix of both. Unfortunately for kids and teachers, snow days may become a thing of the past as schools can simply have their students participate in virtual learning instead of canceling school.

As we try and look over the horizon at a post-covid world, businesses will need to examine which trends are here to stay, which are not, and which will be reshaped. We’ve discovered over the past year that predicting the future is extremely difficult. It is important that business leaders focus on their customers’ needs, both in the present and in the future. Predicting expected trends is not easy, but these tools may help.

Looking forward to being a part of your business’s success.

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Nobel prize winning economist Richard Thaler tells of a meeting he had with a CEO and the department managers of a large company in which they discussed risk and decision-making. Thaler asked each of the 25 managers to consider a risky investment opportunity for their department. The risky option had a 50% chance of losing half the capital under their control or conversely, a chance to double the amount of capital they controlled by 50%. Not one of the executives were willing to take the gamble. Thaler then turned to the CEO for feedback. Without hesitation, the CEO stated that he wished his executives would all have opted to try for the investment opportunities.

For the CEO this made perfect sense. He had a broad view of all the possibilities and risks. From that prospective, he realized that considering all the investments pooled together, the risk profile was much more attractive, and it was likely that the company would make a significant profit on the combination of transactions. While the CEO’s decision may seem obvious when we view it from his perspective, this simple example shows how organizations and their employees can become risk-averse. When businesses become too risk-averse in their decision-making, they can squander real opportunities for growth.

What we know about risk aversion can be attributed to a combination of two well-documented behavioral biases. The first is ‘loss aversion,’ a phenomenon where decision makers fear losses more than they enjoy equivalent gains. Some studies have shown that experiencing losses can even be twice as psychologically impactful as gains (as illustrated by the example above). The second bias is ‘narrow framing,’ where people tend to see a single investment or outcome —like flipping a coin only once— without viewing them in the context of the overall set of outcomes – like flipping 25 coins. Both of these biases are sourced from another Nobel laureate, Daniel Kahneman.

These biases are more than just academic theory. Recent studies from a Harvard Business Review article present a picture of business executives that are not “the risk-takers we hear so much of in industrial folklore. They portray decision-makers quite unwilling to take what, for the company, would seem to be rather attractive risks.” Business leaders often struggle to see individual investments or opportunities as just one of many opportunities they will have over the course of a month, a year or a career. That is why managers and executives have a tendency to favor projects that require smaller investments over those that require larger investments but have a more profitable outcome. So, how does a business reduce unnecessary risk aversion?

Push to develop proposals for high-risk-high-reward projects and explore innovative ideas beyond your comfort level. Compare your high-risk projects alongside proposals for safer projects with lower returns. Be sure to remember how loss aversion and narrow framing biases can influence you and your employees’ decision-making.

Evaluate performance based on portfolios of outcomes, not on single projects. No investment is perfect and even the best opportunities do not always pan out. When evaluating projects or your employees, base the grade on overall performance, rather than on individual project outcomes. By making risk less personal, you and your employees can evaluate future decisions with less bias.

Companies should understand whether a particular success or failure was controllable. Eliminate the role of luck – good or bad – in rewarding employees for a project. Remember that even well-executed projects will fail due to factors outside of your control. Outcomes can be influenced by competitors, regulators, natural disasters, commodity price spikes and the economic cycle. There is a strong element of chance in any investment and that needs to be taken into consideration.

Unless a failed investment would trigger financial distress or bankruptcy, sometimes the riskier but more profitable opportunity might be the right choice. Remember Thaler’s story and do not let profitable opportunities pass you by because of loss aversion. Don’t be afraid to see each investment as part of your business’s larger picture. It is almost never clear which investment is best, but by acknowledging our biases, business leaders can be more confident that they are not missing potentially valuable opportunities.

Looking forward to being a part of your success.

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People sometimes keep assets hidden, not revealing their location, or even their existence, to family members. Similarly, they may own life insurance policies that no one is aware of. Here’s why we recommend full disclosure of your assets to your family and loved ones.

George was a successful entrepreneur. He accumulated significant wealth during his lifetime, including several real estate parcels, a wide array of securities, retirement plan accounts and IRAs, and various collectibles, in addition to the home he owned jointly with his wife, Theresa. He also took out several life insurance policies on his life.

In his will, George designated Theresa as the beneficiary of most of the assets but divided up some of the other property between his two children. George named his wife and children as equal beneficiaries on the life insurance policies. Sadly, George died late last year.

The problem: George had hidden some of his assets without disclosing their location to anyone in his family. His loved ones had no information about account numbers or passwords. And neither Theresa nor the children even knew of the existence of one of the life insurance policies and two of the IRAs.

What happens now? It will take considerable time and effort for George’s family to track down all the assets and it’s not certain that they’ll be completely successful. And the family will likely never collect on the life insurance policy or find the IRAs they were never made aware of. By being secretive, George made things more difficult for his loved ones and actually cost them money.

Don’t make the same mistake. Have an open discussion with all relevant parties about your possessions. List all the assets you own and provide locations, account numbers and passwords. Arrange for this information to be stored in a secure place. In the event you become incapacitated or suddenly pass away, your family won’t have the added stress of not having access to your assets. Contact us for help in compiling your list of assets and all other relevant information.

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The events of the past year have taught business owners many important lessons. One of them is that, when a crisis hits, customers turn on their computers and look to their phones. According to one analysis of U.S. Department of Commerce data, consumers spent $347.26 billion online with U.S. retailers in the first half of 2020 — that’s a 30.1% increase from the same period in 2019.

Although online spending moderated a bit as the year went on, the fact remains that people’s expectations of most companies’ websites have soared. In fact, a June 2020 report by software giant Adobe indicated that the pandemic has markedly accelerated the growth of e-commerce — quite possibly by years, not just months.

Whether you sell directly to the buying public or engage primarily in B2B transactions, building customers’ trust in your website is more important than ever.

Identify yourself

Among the simplest ways to establish trust with customers and prospects is to convey to them that you’re a bona fide business staffed by actual human beings.

Include an “About Us” page with the names, photos and short bios of the owner(s), executives and key staff members. Doing so will help make the site friendlier and more relatable. You don’t want to look anonymous — it makes customers suspicious and less likely to buy.

Beyond that, be sure to clearly provide contact info. This includes a phone number and email address, hours of operation (including time zone), and your mailing address. If you’re a small business, use a street address if possible. Some companies won’t deliver to a P.O. box, and some customers won’t buy if you use one.

Keep contact links easy to find. No one wants to search all over a site looking for a way to get in touch with someone at the business. Include at least one contact link on every page.

Add trust elements

Another increasingly critical feature of business websites is “trust elements.” Examples include:

Icons of widely used payment security providers such as PayPal, Verisign and Visa,
A variety of payment alternatives, as well as free shipping or lower shipping costs for certain orders, and
Professionally coded, aesthetically pleasing and up-to-date layout and graphics.

Check and double-check the spelling and grammar used on your site. Remember, one of the hallmarks of many Internet scams is sloppy or nonsensical use of language.

Also, regularly check all links. Nothing sends a customer off to a competitor more quickly than the frustration of encountering nonfunctioning links. Such problems may also lead visitors to think they’ve been hacked.

Abide by the fundamentals

Of course, the cybersecurity of any business website begins (and some would say ends) with fundamental elements such as a responsible provider, firewalls, encryption software and proper password use. Nonetheless, how you design, maintain and update your site will likely have a substantial effect on your company’s profitability. Contact us for help measuring and assessing the impact of e-commerce on your business.

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To gift or not to gift? It’s a deceptively complex question. The temporary doubling of the federal gift and estate tax exemption — to an inflation-adjusted $11.7 million in 2021 — is viewed by some people as a “use it or lose it” proposition. In other words, you should make gifts now to take advantage of the exemption before it sunsets at the end of 2025 (or sooner if lawmakers decide to reduce it earlier).

But giving away wealth now isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate. Here are some of the factors to consider.

Lifetime gifts vs. bequests at death

The primary advantage of making lifetime gifts is that, by removing assets from your estate, you shield future appreciation from estate taxes. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.

An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.

Also, be aware that President Biden proposed eliminating the stepped-up basis benefit during his campaign.

Hedging your bets

Determining the right time to transfer wealth can be difficult, because so much depends on what happens to the gift and estate tax regime in the future. It may be possible to reduce the impact of this uncertainty with carefully designed trusts.

Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, so they’ll be subject to capital gains taxes when they sell them.

Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries enjoy a stepped-up basis and the higher exemption shields all or most of the asset’s appreciation from estate taxes.

Work with us to monitor legislative developments and adjust your estate plan accordingly.

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Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

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Over the past year, we’ve all come to understand the importance of leadership at every level of a business. When crisis hits, it creates a ‘stress test’ not only for business owners and executives, but also for department supervisors and work groups. Can your company’s supervisors communicate well enough to keep employees reassured, focused and motivated during good times and bad? One factor in their ability to do so is the age of the employees with whom they’re interacting.

Encourage a flexible management style

Right now, there may be four different generations in your workplace: 1) Baby Boomers, born following World War II through the mid-1960s, 2) Generation X, born from the mid-1960s through the late 1970s, 3) Millennials, born from the late 1970s through the mid-1990s, and 4) Generation Z, born in the mid-1990s and beyond. (Birth dates for each generation may vary depending on the source.)

Supervisors need to develop a flexible style when dealing with multiple generations. Millennial and Generation Z employees tend to have different needs and expectations than Baby Boomers and those in Generation X.

For example, Millennials and Gen Z employees generally like to receive more regular feedback about their performances, as well as more frequent public recognition when they’ve done well. Baby Boomers and Gen Xers also enjoy positive performance feedback, but they may expect praise less often and derive personal satisfaction from a job well done without needing to share it with co-workers quite as often.

Employees from different generations also tend to have differing views on company loyalty. Many younger employees harbor greater allegiance to their principles and co-workers than their employers, while many older employees feel a greater sense of fidelity to the business itself. Train your supervisors to keep these and other differences in mind when managing employees across generations.

Recognize the impact of benefits

While financial security is highly valued by every generation, younger employees (Millennials and Gen Z) may prioritize salary less than older workers. What’s often more important to recent generations is a robust, well-rounded benefits package.

Of particular importance is mental health care. Whereas older generations may have historically approached mental health issues with hesitancy, and some still do, younger generations generally prioritize psychological well-being quite openly. Business owners should keep this in mind when designing and adjusting their benefits plans, and supervisors (and HR departments) need to encourage and guide employees to optimally use their benefits.

Promote workplace harmony

To be clear, a person’s generation doesn’t necessarily define him or her, nor is it a perfect predictor of how someone thinks or behaves. Nevertheless, supervisors who are aware of generational differences can develop more flexible, dynamic management styles. Doing so can lead to a more harmonious, productive workplace — and a more profitable business. We can assist you in developing cost-effective strategies for upskilling supervisors and maximizing productivity.

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Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.

The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.

Here are some additional points about the plug-in electric vehicle tax credit:

It’s allowed in the year you place the vehicle in service.
The vehicle must be new.
An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Electric motorcycles

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.

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Many business owners generate financial statements, at least in part, because lenders and other stakeholders demand it. You’re likely also aware of how insightful properly prepared financial statements can be — especially when they follow Generally Accepted Accounting Principles.

But how can you best extract these useful insights? One way is to view your financial statements through a wide variety of “lenses” provided by key performance indicators (KPIs). These are calculations or formulas into which you can plug numbers from your financial statements and get results that enable you to make better business decisions.

Learn about liquidity

If you’ve been in business for any amount of time, you know how important it is to be “liquid.” Companies must have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.

Working capital — the difference between current assets and current liabilities — is a quick and relatively simple KPI for measuring liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities). A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.

Accentuate asset awareness

Businesses are more than just cash; your assets matter too. Turnover ratios, a form of KPI, show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.

Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.

Promote profitability

Liquidity and asset management are critical, but the bottom line is the bottom line. When it comes to measuring profitability, public companies tend to focus on earnings per share. But private businesses typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).

For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).

Focus in

As your business grows, your financial statements may contain so much information that it’s hard to know what to focus on. Well-chosen and accurately calculated KPIs can reveal important trends and developments. Contact us with any questions you might have about generating sound financial statements and getting the most out of them.

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There’s a new IRS form for business taxpayers that pay or receive certain types of nonemployee compensation and it must be furnished to most recipients by February 1, 2021. After sending the forms to recipients, taxpayers must file the forms with the IRS by March 1 (March 31 if filing electronically).

The requirement begins with forms for tax year 2020. Payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report any payment of $600 or more to a recipient. February 1 is also the deadline for furnishing Form 1099-MISC, “Miscellaneous Income,” to report certain other payments to recipients.

If your business is using Form 1099-MISC to report amounts in box 8, “substitute payments in lieu of dividends or interest,” or box 10, “gross proceeds paid to an attorney,” there’s an exception to the regular due date. Those forms are due to recipients by February 16, 2021.

1099-MISC changes

Before the 2020 tax year, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee (in other words, an independent contractor). These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was introduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that reported NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.

Payers of nonemployee compensation now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. But for 2020 tax returns, the due date is February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

When to file 1099-NEC

If the following four conditions are met, you must generally report payments as nonemployee compensation:

You made a payment to someone who isn’t your employee,
You made a payment for services in the course of your trade or business,
You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
You made payments to a recipient of at least $600 during the year.

We can help

If you have questions about filing Form 1099-NEC, Form 1099-MISC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How is a person’s tax identity stolen?

In a tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

When will you receive your W-2s and 1099s?

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

How else can you benefit by filing early?

In addition to protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

Do you need help?

If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

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Auditing standards require a year-end risk assessment. One potential source of risk may be a small business’s reliance on the owner and other critical members of its management team. If a so-called “key person” unexpectedly becomes incapacitated or dies, it could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves.

Common among small businesses

No one is indispensable. But filling the shoes of a founder, visionary or rainmaker who unexpectedly leaves a business is sometimes challenging. These risks are usually associated with small businesses, but they can also impact large multinationals.

Consider the stock price fluctuations that Apple experienced following the death of innovator Steve Jobs. Fortunately for Apple and its investors, it possessed a well-trained, innovative workforce, a backlog of groundbreaking technology and significant capital to continue to prosper. But other businesses aren’t so lucky. Some small firms take years to fully recover from the sudden loss of a key person.

Factors to consider

Does your business rely heavily on key people, or is its management team sufficiently decentralized? The answer requires an evaluation of your management team. Key people typically:

Handle broad duties,
Possess specialized training,
Have extensive experience, or
Make significant contributions to annual sales.

Other factors to consider include whether an individual has signed personal guarantees in relation to the business and the depth and qualification of other management team members. Generally, companies that sell products are better able to withstand the loss of a key person than are service businesses. On the other hand, a product-based company that relies heavily on technology may be at risk if a key person possesses specialized technical knowledge.

Personal relationships are also a critical factor. If customers and suppliers deal primarily with one key person and that person leaves the company, they may decide to do business with another company. It’s easier for a business to retain customer relationships when they’re spread among several people within the company.

Ways to lower your risk

Your auditor’s risk assessment can help determine accounts and issues that may require special attention during audit fieldwork. The assessment can also be used to help you shore up potential vulnerabilities.

Training and mentoring programs can help empower others to take over a key person’s responsibilities and relationships in case of death or a departure from the business. Likewise, a solid succession plan can help smooth the transition.

Also consider external replacement options. This exercise can help you understand how much it would cost to hire someone with the same knowledge, skills and business acumen as the key person. In addition, a key person life insurance policy can help the company fund a search for a replacement or weather a business interruption following the loss of a key person.

We can help

Key person risks are a real — and potentially significant — possibility, especially for small businesses with limited operating history and charismatic, innovative leaders. Contact us to help identify key people and brainstorm ways to lower the risks associated with them.

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During the first few weeks of the COVID-19 pandemic, many business leaders and senior executives reported a sudden rush of energy and a profound sense of teamwork, which carried them through those opening days. Freed from their normal daily routines and energized by adrenaline, many business leaders found this to be an incredibly productive time where priorities became clear, decisions were made faster, and most employees stepped up to work in hectic, but harmonious, ways.

Managing through a crisis can feel very meaningful and energizing. But now, many months later, we are experiencing the second wave of COVID-19, and gone are those adrenaline-filled days of the early pandemic. Instead, that intensity has been replaced by “pandemic fatigue.” According to Merete Wedell-Wedellsborg in an article in the Harvard Business Review, many leaders and managers have reported experiencing a loss of agency, determination and energy. Stress incidents are on the rise and people’s emotional reactions are becoming more polarized. And this is even before we consider the recent events in our nation’s capital.

Pandemic fatigue is a natural response to this long, drawn-out crisis. What was originally a sprint has turned into a marathon, and as any runner will tell you, they require two very different skill sets. Dealing with stressful circumstances over a long period of time requires different coping strategies than the short-term fight or flight response we experienced in March and April. Just as a marathon runner needs to build up their endurance and stamina, business leaders need to develop the psychological stamina necessary to lead through the last mile.

Even as the vaccine appears as light at the end of the tunnel, how can you navigate your organization through the home stretch and come out successfully on the other side? There are a few key steps you can consider as you look to answer this question.

First, consider bounded optimism. While it is important that leaders display optimism and hope, it is just as important that it be grounded in reality. As the vaccine is currently being administered, this concept is more important than ever. Bounded optimism cautions against thinking a vaccine will return life to normal in only a short period of time. It will take months for enough people to be vaccinated and even then, we will still need time to process what has happened to our lives during the pandemic. One of a leader’s critical roles is to not only inspire hope, but also to temper that hope with a realistic expectation that resonates with his/her employees. This approach helps maintain a leader’s integrity, while encouraging positivity in the workplace.

Secondly, it is important to remember compassion. Your employees likely need more warmth and comfort than they might have prior to the pandemic. Leaders need to be serious about the mental health of their employees and commit to intervening when necessary. Organizations should consider a more holistic and inclusive form of listening than they are typically accustomed to. One way to create a space for employees to share how they are really doing, is for leaders to voice their own feelings of discomfort, which can send the powerful message that, “it’s OK to not be OK.”

Finally, although the moment calls for compassion, it also calls for a little more edge and collective defiance against the cruelty of the virus. You want your employees to think that “enough is enough!” and rise to fight the fatigue. Employees are tired of hearing that “we will get through this.” It’s time to think about raising the bar and challenging your employees. By adding a little edge, you can help restore some of your organization’s energy. Another way to get the energy flowing is by never accepting that meetings and interactions should become stale or boring. For example, according to Merete Wedell-Wedellsborg, the LEGO Group has a goal to “Energize Everyone, Every Day” as a central leadership principle of their organization. Energy is not a given; it must be generated internally. Always look for ways to shake things up so that meetings and daily work do not become tiring and repetitive.

Cultivating the necessary resilience to propel your team through the end of the pandemic requires a different kind of leadership and unique appeal to your employees. Compassion is more critical than ever, but a little edge and energy can go a long way. Remember that you are not alone, and that the resiliency needed to help you and your organization fight through pandemic fatigue, is within you.

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COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit:

- Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
- Was subject to an overall wage cap of $10,000 per eligible employee, and
- Was available to eligible large and small employers.

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.

What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity.

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The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the Federal Government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which includes other laws within it.

Business meal deduction increased

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

The food and beverages can’t be lavish or extravagant under the circumstances, and
You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.

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Some might say the end of one calendar year and the beginning of another is a formality. The linear nature of time doesn’t change, merely the numbers we use to mark it.

Others, however, would say that a fresh 12 months — particularly after the arduous, anxiety-inducing nature of 2020 — creates the perfect opportunity for business owners to gather their strength and push ahead with greater vigor. One way to do so is to ring in the new year with a systematic approach to renewing everyone’s focus on profitability.

Create an idea-generating system

Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize the bottom line. What you want to do is act in ways that inspire and allow you to gather profit-generating concepts. Then you can pick out the most actionable ones and turn them into bottom-line-boosting results. Here are some ways to create such a system:

Share responsibility for profitability with your management team. All too often, managers become trapped in their own information silos and areas of focus. Consider asking everyone in a leadership position to submit ideas for growing the bottom line.

Instruct supervisors to challenge their employees to come up with profit-building ideas. Leaving your employees out of the conversation is a mistake. Ask workers on the front lines how they think your business could make more money.

Target the proposed ideas that will most likely increase sales, cut costs or expand profit margins. As suggestions come in, use robust discussions and careful calculations to determine which ones are truly worth pursuing.

Tie each chosen idea to measurable financial goals. When you’ve picked one or more concepts to pursue in real life, identify which metrics will accurately inform you that you’re on the right track. Track these metrics regularly from start to finish.

Name those accountable for executing each idea. Every business needs its champions! Be sure each profit-building initiative has a defined leader and team members.

Follow a clear, patient and well-monitored implementation process. Ideas that ultimately do build the bottom line in a meaningful way generally take time to identify, implement and execute. Don’t look for quick-fix measures; seek out business transformations that will lead to long-term success.

Many benefits

A carefully constructed and strong-performing profitability idea system can not only grow the bottom line, but also upskill employees and improve morale as strategies come to fruition. Our firm can help you identify profit-building opportunities, choose the right metrics to evaluate and measure them, and track the pertinent data over time.

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When it comes to taxes, December 31 is more than just New Year’s Eve. That date will affect the filing status box that will be checked on your 2020 tax return. When filing a return, you do so with one of five tax filing statuses. In part, they depend on whether you’re married or unmarried on December 31.

More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status could change during the year.

Here are the filing statuses and who can claim them:

Single. This is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. Special requirements are described below.
Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.

How to qualify as “head of household”

In general, head of household status is more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.

A “qualifying child” is defined as one who:

Lives in your home for more than half the year,
Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
Is under 19 years old or under age 24 if enrolled as a student, and
Doesn’t provide over half of his or her own support for the year.

If a child’s parents are divorced, different rules may apply. Also, a child isn’t eligible to be a “qualifying child” if he or she is married and files a joint tax return or isn’t a U.S. citizen or resident.

There are other head of household requirements. You’re considered to maintain a household if you live in it for the tax year and pay more than half the cost. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.

Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with him or her. To qualify, you must claim the parent as your dependent.

Determining marital status

You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately — not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year, a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may qualify as head of household.

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In the early 1990s, the Balanced Scorecard approach to strategic planning was developed to enable business owners to better organize and visualize their objectives. With 2021 shaping up to be a year of both daunting challenges and potentially remarkable recovery, your company should have a strategic plan that’s both comprehensive and flexible. Giving this methodology a try may prove beneficial.

Areas of focus

The Balanced Scorecard approach segments strategic planning into four critical areas:

1. Customers. Every business owner knows the importance of customer satisfaction but, to truly know and fulfill customers’ needs, you must identify the right metrics that measure it. Also identify the types of customers you want and, more important, can best serve.

Key question to ask: To fulfill our strategic objectives, how can we attract and retain the customers that build our bottom line?

2. Finance. Companies generally know how to measure their financial performance. However, they too often rely on finances as the only barometer of overall operational stability and success. Financial details are often lagging indicators because they reveal past events — not future performance. So, along with continuing to properly generate financial statements, also track data such as employee productivity and sales growth.

Key question to ask: To achieve our vision, how will our leadership and employees drive our company’s financial success?

3. Internal processes. To operate more productively and efficiently, identify problems and change the related processes. Simply paying closer attention to a shortcoming isn’t an adequate solution. For example, measuring productivity won’t automatically increase it. Your business must analyze the internal components of production — from design to delivery to billing and receipt of revenue — and implement process improvements.

Key question to ask: To meet our goals, in which business processes do we need to excel?

4. Learning and professional growth. Continuing education often calls for more time and effort than businesses are willing or able to devote. Learning must go beyond simply training new hires to include, for instance, mentoring and knowledge sharing through performance management programs. Many companies’ success depends largely on the development and preservation of intellectual capital.

Key question to ask: To accomplish our strategic plan, how can we better preserve and pass along knowledge, as well as encourage learning?

A multipronged effort

Compiling data under the Balanced Scorecard approach requires a multipronged effort. You might use a survey to gather customer info. Your financial statements and industry benchmarks should provide insights into finances. Employee surveys and open forums can illuminate internal operations. And a performance management consultant could help you target learning opportunities and methods.

We can assist you in identifying pertinent financial metrics and incorporating accurate analysis into your strategic plan to help you achieve your profitability goals in the coming year.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

Pay the final installment of 2020 estimated tax.
Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.

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As President-elect Joe Biden moves forward with the transition and prepares for the inauguration next month, you may be wondering how the federal estate tax may be affected.

During the campaign, Biden pledged to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on high-income individuals and businesses.

Bear in mind that his odds of translating his proposals into legislation in the next couple of years largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. These elections are scheduled for January 5, 2021.

Proposals for gift and estate taxes

The TCJA temporarily doubled the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively. These TCJA amounts are scheduled to expire after 2025 to $5 million for individuals and $10 million for married couples, adjusted annually for inflation.

Biden has proposed reducing the exemption to $3.5 million for estate taxes and exempting $1 million for the gift tax. He also favors imposing a top estate tax rate of 45%, from the current rate of 40%.

In addition, Biden would like to end the “step-up” in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. If a beneficiary sells an inherited asset now, the capital gains generated is the difference between the asset’s fair market value at the time of sale less the stepped-up basis (the fair market value of the asset at the date of the deceased’s death), rather than the basis at the date of the original purchase. Without the step-up in basis, the capital gains generated on sale would be a larger amount.

Review your estate plan

As mentioned above, the ability of Biden to implement his proposals rests largely on the outcome of the Georgia runoff elections for Senate early next month. In the meantime, it would be worth your while to review your estate plan and make any necessary revisions. Potential tax law changes are a reason to trigger a review, as well as life changes, such as a marriage, the birth of a child or a divorce. Please turn to us for help reviewing your plan and making changes based on your specific circumstances.

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As the COVID-19 pandemic continues to disrupt work environments across the globe, business leaders should be aware of how they can motivate employees and improve morale. Increased stress, frustration and loneliness have lowered morale at many firms. Low employee morale can result in poorer work quality and employees who are more disengaged.

Business leaders and academics have studied what motivates people at work for years and different leaders have proposed different theories. In the Harvard Business Review, authors Lindsay McGregor and Neel Doshi identify six motivators – three positive and three negative – that influence work performance and motivation.

Play is when an employee is motivated by the work itself because they enjoy the activities of the work.
Purpose is when an employee values the work’s impact.
Potential is when the work enhances an employee’s future employment potential, i.e. promotion or advancement.
Emotional pressure such as fear, peer pressure, and shame.
Economic pressure is when an employee works to gain a reward or avoid a punishment.
Inertia is when an employee continues working because they worked yesterday and the day before, however they can’t explain why they are actually working.

The work of many researchers has found that the first three motives tend to increase performance, while the latter three hurt it. Companies with successful business cultures — from Southwest Airlines to Trader Joe’s — tend to maximize the good motives, while minimizing the bad ones.

As a result of the COVID pandemic, emotional pressure and economic pressure have increased for almost all employees as people worry about losing their jobs, paying their rent and protecting their health. Likewise, many employees are seeing their positive motivators threatened as they are finding it more difficult to connect with colleagues and clients. For example, employees may miss problem-solving with colleagues or face-to-face interaction with clients. The nature of communication and teamwork is changing in most work environments, whether employees are working remotely or not, and your employees may be questioning how much they enjoy these new changes.

So, what can you do to build and maintain a high-performing culture that continues to motivate your employees in this ever-changing world?

Effective Communication. It seems simple, but the more information you can share and the better you can communicate, the more your employees will feel valued. Remember that communication is a two-way street and in an evolving business climate, getting feedback from employees can help you determine what works and what does not. Soliciting ideas from employees reinforces your commitment to them.
Routine Meetings. With so much uncertainty in the world, developing a few routines can be reassuring. Holding a short reflection meeting with your team once a week, either in-person or through an online video platform, helps employees feel less isolated. It can also be an excellent way to encourage collaboration between employees and gives you an opportunity to recognize exceptional staff and their contributions.
Give Employees Freedom, Trust and Flexibility. Our world is in flux and many employees may need flexibility balancing their work lives with their personal lives. Be flexible and loosen some work restrictions where you can. That flexibility should also extend to employees’ roles. Think about where employees could be free to experiment and make that clear. Trust your employees to fulfill their potential and you will see your employees’ motivation renewed.

It is important for businesses to remember that a crisis, such as COVID, tests a company’s leadership and culture. Many new values can be formed under the strain, and it is a unique opportunity for employees to gain new perspectives on their organization and its leadership. The actions you take can help reinforce your employees’ trust in the organization and improve their performance at a difficult time. It can also help create a better culture that will carry on when the crisis is over.

How you react in the face of crisis and uncertainty can strengthen your business for years to come, so seize the opportunity.

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If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction:

Is available to owners of sole proprietorships, single-member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers and $329,800 for married couples filing jointly.

Year-end planning tip

Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year-end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps.

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As your company plans for the coming year, management should assess your strengths, weaknesses, opportunities and threats. A SWOT analysis identifies what you’re doing right (and wrong) and what outside forces could impact performance in a positive (or negative) manner. A current assessment may be particularly insightful, because market conditions have changed significantly during the year — and some changes may be permanent.

Inventorying strengths and weaknesses

Start your analysis by identifying internal strengths and weaknesses keeping in mind the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies and competitive advantages. Examples might include a strong brand or an exceptional sales team.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider purchasing life insurance policies on key people, initiating noncompete agreements and implementing a formal succession plan.

Alternatively, weaknesses represent potential risks and should be minimized or eliminated. They might include low employee morale, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Anticipating opportunities and threats

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. They might come from the economy, technological changes, competition and government regulations, including COVID-19-related operating restrictions. The idea is to watch for and minimize existing and potential threats.

Think like an auditor

During a financial statement audit, your accountant conducts a risk assessment. That assessment can provide a meaningful starting point for your SWOT analysis. Contact us for more information.

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Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

Fixed or variable interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Interest generally accrues until redemption

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.

If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.

Reaching final maturity

One of the main reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1990 reached final maturity after 30 years, in January 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2020.

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable. Contact us if you have any questions about savings bond taxation, including Series HH and Series I bonds.

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Owners of closely held corporations are often interested in easily withdrawing money from their businesses at the lowest possible tax cost. The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” And it’s not deductible by the corporation.

Other strategies

Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five strategies to consider:

Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution.
Loans. You can withdraw cash tax free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest and principal. Also, consider what the corporation’s receipt of interest income will mean.
Fringe benefits. You may want to obtain the equivalent of a cash withdrawal in fringe benefits, which aren’t taxable to you and are deductible by the corporation. Examples include life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other corporation employees. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the most out of your corporation at the lowest tax cost.

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From natural disasters and government shutdowns to cyberattacks and fraud, risks abound in today’s volatile, uncertain marketplace. While some level of risk is inevitable when operating a business, proactive owners and executives apply an enterprise risk management (ERM) framework to manage it more effectively.

Evolving framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985 to combat fraudulent financial reporting. The panel is a joint initiative of the American Institute of Certified Public Accountants, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO first published its Enterprise Risk Management — Integrated Framework in 2004. Companies aren’t generally required by law or regulations to apply an ERM framework. But they often choose to use COSO’s ERM framework to enhance their ability to manage uncertainty, consider how much risk to accept and improve understanding of opportunities as they strive to increase and preserve stakeholder value.

Through periodic updates, COSO aims to capture today’s best practices and help management attain better value from their ERM programs. The ERM framework was revamped in 2017 to address questions about how risk management should be incorporated with an organization’s management of its strategy. That update included five components: 1) governance and culture, 2) strategy and objective setting, 3) performance, 4) review and revision, and 5) information, communication and reporting.

The framework was modified again in 2018 to address sustainability issues. Specifically, COSO’s Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks highlights ESG risks, as well as opportunities to enhance resiliency as organizations confront new and developing risks, such as extreme weather events or product safety recalls.

In December 2019, COSO published Managing Cyber Risk in a Digital Age. This guidance addresses how companies can apply COSO’s framework to protect against cyberattacks. These attacks have been on the rise in 2020, in part, because people are increasingly reliant on the Internet for working, learning and interacting during the COVID-19 pandemic. And home networks tend to be more vulnerable to cyberattacks than in-office networks.

Broad scope

Many people are unclear what the term “ERM” means. ERM encompasses more than taking an inventory of risks — it’s an enterprise-wide process. Internal control is just one small part of ERM — it also may include, for example, strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply at all business levels, across all functions and to organizations of any size.

The ERM framework is designed to help management anticipate risk so they can get ahead of it, with an understanding that change creates opportunities, not simply the potential for crises. In short, ERM helps increase positive outcomes and reduce negative surprises that come from risk-taking activities.

ERM in the new normal

Market conditions in 2020 have been unprecedented, and more uncertainty lies ahead. Our accounting professionals can help you identify and optimize risks. Contact us to discuss cost-effective ERM practices to make your business more resilient and responsive in the future.

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Many businesses and organizations are currently maintaining some hybrid model of remote/in-person work, with even more flexibility anticipated in the future. For most workforces, navigating processes, interactions and activities which are usually completed in-person, takes more than some new technology. Problems requiring unplanned, emergent coordination that could be addressed through impromptu interaction if everyone were in the same office, now require coordinated virtual communication.

The National Bureau of Economic Research utilized information from lockdowns in 16 metropolitan areas to compare the changes it caused to business communication patterns. Compared to pre- pandemic levels, they found increases in the number of meetings per person and the number of attendees per meeting, with decreases in the average length of meetings. They also found significant and durable increases in length of the average workday and email activity.

Employees are apprehensive about the challenges they are facing. Employers are too. Leaders of a remote workforce are facing a new organizational challenge. In addition to managing affairs, managers need to adopt new ways of leading their teams. The way you connect, enable and lead your remote team now, will set the trajectory for your next success.

Motivate and Inspire

Recognize that the dynamics of the office space must in some ways be recreated for a virtual workforce, but you can also re-envision and recreate your business for the better. A good virtual leader will start by clearly defining and then honing the virtual processes that will lead to success. Keep it simple. Move away from micro-management and delegate clear roles and benchmark goals with a heightened sense of trust. Prepare them and empower them.

Communication, Communication, Communication

Remote work-life integration and remote teamwork can be difficult and isolating. Communication is more critical than ever. Regular feedback and open communication boosts employees’ confidence in their work, improves mutual trust and ensures that managers are aware of issues as they arise. To create a culture of communication and enhance morale, give positive feedback generously and publicly when possible. This paves the way for effective feedback that is clearly understood and taken well by your employees. Remember, people won’t care how much you know until they know how much you care.

Tackle Problems Early

When businesses are operating in an environment of volatility, uncertainty, complexity and ambiguity, leaders must be sensitive to the barometer of the workforce where information is the freshest and most salient. Lead by example. Strengthen every available channel of virtual communication and be responsive and trustworthy. Conduct regular team meetings to check in, identify issues and tackle them together immediately.

Lead your virtual team with empathy and empower them to succeed.

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It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

Staff members and their families,
Customers,
Suppliers,
Banks and other financial stakeholders, and
Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

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A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise your company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.

What is a conflict of interest?

According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:

Hiring an external auditor,
Upgrading the level of assurance from a compilation or review to an audit, and
Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.

For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.

Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.

How can auditors prevent potential conflicts?

AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:

Seek guidance from legal counsel or a professional body on the best path forward,
Disclose the conflict and secure consent from all parties to proceed,
Segregate responsibilities within the firm to avoid the potential for conflict, and/or
Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.

For more information

Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it.

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Are you wondering if the passive activity loss rules affect business ventures you’re engaged in — or might engage in?

If the ventures are passive activities, the passive activity loss rules prevent you from deducting expenses that are generated by them in excess of their income. You can’t deduct the excess expenses (losses) against earned income or against other nonpassive income. Nonpassive income for this purpose includes interest, dividends, annuities, royalties, gains and losses from most property dispositions, and income from certain oil and gas property interests. So you can’t deduct passive losses against those income items either.

Any losses that you can’t use aren’t lost. Instead, they’re carried forward, indefinitely, to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity aren’t used up in this way, you’ll be allowed to use them in the tax year in which you dispose of your interest in the activity in a fully taxable transaction, or in the tax year you die.

Passive vs. material

Passive activities are trades, businesses or income-producing activities in which you don’t “materially participate.” The passive activity loss rules also apply to any items passed through to you by partnerships in which you’re a partner, or by S corporations in which you’re a shareholder. This means that any losses passed through to you by partnerships or S corporations will be treated as passive, unless the activities aren’t passive for you.

For example, let’s say that in addition to your regular professional job, you’re a limited partner in a partnership that cleans offices. Or perhaps you’re a shareholder in an S corp that operates a manufacturing business (but you don’t participate in the operations).

If you don’t materially participate in the partnership or S corporation, those activities are passive. On the other hand, if you “materially participate,” the activities aren’t passive (except for rental activities, discussed below), and the passive activity rules won’t apply to the losses. To materially participate, you must be involved in the operations on a regular, continuous and substantial basis.

The IRS uses several tests to establish material participation. Under the most frequently used test, you’re treated as materially participating in an activity if you participate in it for more than 500 hours in the tax year. While other tests require fewer hours, all the tests require you to establish how you participated and the amount of time spent. You can establish this by any reasonable means such as contemporaneous appointment books, calendars, time reports or logs.

Rental activities

Rental activities are automatically treated as passive, regardless of your participation. This means that, even if you materially participate in them, you can’t deduct the losses against your earned income, interest, dividends, etc. There are two important exceptions:

You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
If you qualify as a “real estate professional” (which requires performing substantial services in real property trades or businesses), your rental real estate activities aren’t automatically treated as passive. So losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate.

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On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

Fixed assets, such as land, buildings and equipment,
The use of fixed assets or utilities,
Materials and supplies, such as food, clothing or pharmaceuticals,
Intangible assets, and
Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
A description of any associated donor restrictions,
A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

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Remote audit procedures can help streamline the audit process and protect the parties from health risks during the COVID-19 crisis. However, seeing people can be essential when it comes to identifying and assessing fraud risks during a financial statement audit. Virtual face-to-face meetings can be the solution.

Asking questions

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Specific areas of inquiry under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit include:

Whether management has knowledge of any actual, suspected or alleged fraud,
Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
Any specific fraud risks that management has identified or that have been brought to its attention, and
The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist.

In addition, auditors will inquire about management’s communications, if any, to those charged with governance about the management team’s process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Seeing is believing

Traditionally, auditors require in-person meetings with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal cues of dishonesty. In a face-to-face interview, the auditor can, for example, observe signs of stress on the part of the interviewee in responding to the question.

However, during the COVID-19 pandemic, in-person meetings may give rise to safety concerns, especially if either party is an older adult or has underlying medical conditions that increase the risk for severe illness from COVID-19 (or lives with a person who’s at high risk). In-person meetings with face masks also aren’t ideal from an audit perspective, because they can muffle speech and limit the interviewer’s ability to observe facial expressions.

A videoconference can help address both of these issues. Though some people may prefer the simplicity of telephone or audioconferences, the use of up-to-date videoconferencing technology can help retain the visual benefits of in-person interviews. For example, high-definition videoconferencing equipment can allow auditors to detect slight physical changes, such as smirks, eyerolls, wrinkled brows and even beads of sweat. These nonverbal cues may be critical to assessing an interviewee’s honesty and reliability.

Risky business

Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and ensuring your managers and accounting personnel are all familiar with how videoconferencing technology works. Contact us for more information.

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If you’re still around at this point of 2020, you’re probably expecting something crazy to happen. Will there be a release of a new and improved COVID-20? Will there be a civil war when half the country doesn’t like the election outcome? Are we in for a zombie apocalypse, perhaps?

While we do know that crazy stuff can happen, we can never predict it.

Financial media on the other hand, lives on predictors and prognosticators.

Every day, talking heads come onto CNBC and Bloomberg to gab about and predict the future of the economy, the stock markets and more. (In all honesty, they know nothing. But hey, something’s gotta fill their programming.)

We don’t like predictions because we know they don’t actually represent the truth. And even if they did, that information might not be as helpful as you’d think. Just imagine having a time machine where you could see future news, but not its financial outcome. All you’d need to do to know how the economy and stock market would look, is interpret the news.

So, it’s January of 2020, and you check into your magical machine. Alas, you see that a pandemic will be unleashed into the world, where air-travel would come to a halt, live sports would take a total sabbatical and the entire globe would be on an obligatory home confinement for months. You see that the virus will leave forty million Americans jobless, millions of people infected, and hundreds of thousands – dead.

Okay, now what would you do with your portfolio? Probably go to all-cash. Maybe you would buy some gold?

With the benefit of hindsight, cash was probably the worst asset class to be in. Gold did perform very well, but regarding the bulk of your decision, you would have been dead wrong. You would have never predicted that although thousands would die each day from the virus, the stock market would make a new all-time high just a couple of months afterwards.

Just think: If we can’t even predict the financial future knowing the news in advance, we definitely don’t stand a chance without that advantage.

Our take at Equinum is: stop predicting what the future holds. Instead, prepare and be ready for many diverse outcomes, including the crazy stuff.

If you watch financial media, your head should be spinning from all the current predictions coming from all the pundits sitting in their living rooms. (Although their bookshelves of borrowed books do make them look intelligent.)

Will we have hyper-inflation due to all the helicopter money being dropped in the form of stimulus and unemployment benefits, or deflation due to the millions of people out of work?

Will the market retest the March lows, or will the amazing ascent we are currently on, continue?

Will New York real estate have a Humpty Dumpty fall, or is this a once-in-a-life-time opportunity where the king’s horses and men come through?

Again, we don’t predict. But we do need to prepare.

And how do we do that?

Well first and foremost, we want to have an all-weather portfolio. That is, a properly diversified portfolio where you have a mix of asset classes and proper asset allocation.

At Equinum, we have made some changes to our clients’ accounts. We have swapped some of the government bonds in our portfolios to TIPS, which are inflation protected. So, if inflation gets out of control, clients won’t lose purchasing power.

We added some real assets to portfolios, like precious metals and real estate. These tend to do well in cases of inflation.

Income producing companies can also be a good hedge as well.

One more thing to the renters out there: It might be a prudent idea to consider purchasing a home. If we do have a pickup in real inflation, your rent can double over the next decade or so. But if you lock in a mortgage, your price is locked. To sweeten the deal, mortgage rates are the lowest ever recorded by Freddie Mac in a series that goes back to 1971.

If you have personal questions or concerns, please reach out to us at info@equinum.com to set up a call.

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In some cases, investors have significant related expenses, such as the cost of subscriptions to financial periodicals and clerical expenses. Are they tax deductible? Under the Tax Cut and Jobs Act, these expenses aren’t deductible through 2025 if they’re considered expenses for the production of income. But they are deductible if they’re considered trade or business expenses. (For tax years before 2018, production-of-income expenses were deductible, but were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor.)

In order to deduct investment-related expenses as business expenses, you must figure out if you’re an investor or a trader — and be aware that it’s more advantageous (and difficult) to qualify for trader status.

To qualify, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments, regardless of the amount of the investments or the extent of the work required.

However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader engaged in a trade or business, rather than an investor. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home-office deductions since the investment activities aren’t a trade or business.

Since the Supreme Court’s decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer’s investment activities are considered a trade or business only if both of the following are true:

The taxpayer’s trading is substantial (in other words, sporadic trading isn’t a trade or business), and
The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

So, the fact that a taxpayer’s investment activities are regular, extensive and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, even a taxpayer who made more than 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.

Contact us if you have questions about whether your investment-related expenses are deductible. We can also help explain how to help keep capital gains taxes low when you sell investments.

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Today, many banks are working with struggling borrowers on loan modifications. Recent guidance from the Financial Accounting Standards Board (FASB) confirms that short-term modifications due to the COVID-19 pandemic won’t be subject to the complex accounting rules for troubled debt restructurings (TDRs). Here are the details.

Accounting for TDRs

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if:

The borrower is troubled, and
The creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider.

Banks generally must account for TDRs as impaired loans. Impairment is typically measured using the discounted cash flow method. Under this method, the bank calculates impairment as the decline in the present value of future cash flows resulting from the modification, discounted at the original loan’s contractual interest rate. This calculation may be further complicated if the contractual rate is variable.

Under U.S. Generally Accepted Accounting Principles (GAAP), examples of loan modifications that may be classified as a TDR include:

A reduction of the stated interest rate for the remaining original life of the debt,
An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and
A reduction of accrued interest.

The concession to a troubled borrower may include a restructuring of the loan terms to alleviate the burden of the borrower’s near-term cash requirements, such as a modification of terms to reduce or defer cash payments to help the borrower attempt to improve its financial condition.

Recent guidance

Earlier this year, the FASB confirmed that short-term modifications made in good faith to borrowers experiencing short-term operational or financial problems as a result of COVID-19 won’t automatically be considered TDRs if the borrower was current on making payments before the relief. Borrowers are considered current if they’re less than 30 days past due on their contractual payments at the time a modification program is implemented.

The relief applies to short-term modifications from:

Payment deferrals,
Extensions of repayment terms,
Fee waivers, and
Other payment delays that are insignificant compared to the amount due from the borrower or to the original maturity/duration of the debt.

In addition, loan modifications or deferral programs mandated by a federal or state government in response to COVID-19, such as financial institutions being required to suspend mortgage payments for a period of time, won’t be within the scope of ASC Topic 310-40.

For more information

The COVID-19 pandemic is an unprecedented situation that continues to present challenges to creditors and borrowers alike. Contact your CPA for help accounting for loan modifications and measuring impairment, if necessary.

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COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

1. Working from home.

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules.

2. Collecting unemployment

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (Don’t send it to the IRS.)

We can help

We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Thursday, October 15

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

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Do you own a business with one or more individuals? Undoubtedly, your interest in the business represents a substantial part of your net worth and is likely your “pride and joy.” So it’s normal if your fondest wish is for the business to continue long after you’re gone or for you to keep it running if a co-owner or partner dies.

However, if adequate provisions aren’t made, the business may flounder if a leadership void isn’t filled. Or bitter family disputes may tear the organization apart. In the end, a “distress sale” may leave your heirs with substantially less than the company’s current value.

Fortunately, disastrous results may be avoided if you have a buy-sell agreement drafted during your lifetime. The agreement can dictate how the business is sold, to whom and for how much. Life insurance policies are often used to fund the transaction.

Buy-sell agreements in a nutshell

A buy-sell agreement may be used for virtually every type of business entity, including C corporations, S corporations, partnerships and limited liability companies. Typically, it applies to the shares of stock and any business real estate held by respective owners.

Although variations exist, the agreement essentially provides for the sale of a business interest to other owners or partners, the business entity itself, or a hybrid. Alternatively, the agreement may cover a sale to one or more long-time employees.

The agreement, which is typically signed by all affected parties, imposes restrictions on the future sale of the business or property. For instance, if you intend to leave a business interest to your children, you may provide for each child to sell or transfer his or her interest to another party or parties named in the agreement, such as grandchildren or other relatives.

Significantly, a buy-sell agreement often establishes a formula for determining the sale price of the business and its components. The formula may be based on financial statement figures, such as book value, adjusted book value, or the weighted average of historical earnings, or a combination of variables.

Understanding the benefits

Having a valid buy-sell agreement in writing removes much of the uncertainty that can happen when a business owner passes away. It provides a “ready, willing and able” buyer who’s arranged to purchase shares under the formula or at a fixed price. There’s no argument about what the business is worth among co-owners, partners or family members.

The buy-sell agreement addresses a host of problems about co-ownership of assets. For instance, if you have one partner who dies first, the partnership shares might pass to a family member who has a different vision for the future than you do.

Work with us to design a buy-sell agreement that helps preserve the value of your business for your family.

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You’d be hard-pressed to find a business that doesn’t value its customers, but tough times put many things into perspective. As companies have adjusted to operating during the COVID-19 pandemic and the resulting economic fallout, prioritizing customer service has become more important than ever.

Without a strong base of loyal buyers, and a concerted effort to win over more market share, your business could very well see diminished profit margins and an escalated risk of being surpassed by competitors. Here are some foundational ways to strengthen customer service during these difficult and uncertain times.

Get management involved

As is the case for many things in business, success starts at the top. Encourage your management team and fellow owners (if any) to regularly interact with customers. Doing so cements customer relationships and communicates to employees that cultivating these contacts is part of your company culture and a foundation of its profitability.

Moving down the organizational chart, cultivate customer-service heroes. Post articles about the latest customer service achievements on your internal website or distribute companywide emails celebrating successes. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just be sure to empower employees to make timely decisions. Don’t just talk about catering to customers unless your staff can really take the initiative to act accordingly.

Systemize your responsiveness

Like everyone in today’s data-driven world, customers want immediate information. So, strive to provide instant or at least timely feedback to customers with a highly visible, technologically advanced response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The specifics of this system will depend on the size, shape and specialty of the business itself. It should encompass the right combination of instant, electronic responses to customer inquiries along with phone calls and, where appropriate, face-to-face (or direct virtual) interactions that reinforce how much you value their business.

Continue to adjust

By now, you’ve likely implemented a few adjustments to serving your customers during the COVID-19 pandemic. Many businesses have done so, with common measures including:

Explaining what you’re doing to cope with the crisis,
Being more flexible with payment plans and deadlines, and
Exercising greater patience and empathy.

As the months go on, don’t rest on your laurels. Continually reassess your approach to customer service and make adjustments that suit the changing circumstances of not only the pandemic, but also your industry and local economy. Seize opportunities to help customers and watch out for mistakes that could hurt your company’s reputation and revenue.

Don’t give up

This year has put everyone under unforeseen amounts of stress and, in turn, providing world-class customer services has become even more difficult. Keep at it — your extra efforts now could lay the groundwork for a much stronger customer base in the future. Our firm can help you assess your customer service and calculate its impact on revenue and profitability.

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Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations — and some changes are expected to be permanent. In certain cases, these pivot strategies may need to be reported under the complex discontinued operations rules under U.S. Generally Accepted Accounting Principles.

What are discontinued operations?

The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.

A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group.

Examples of a qualifying strategic shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

On the income statement, the results of discontinued operations are reported separately (net of income tax) from continuing operations in both the current and comparative periods. Allocating costs between discontinued and continuing operations is often challenging because only direct costs may be associated with a discontinued operation.

What disclosures are required?

Under GAAP, companies also must provide detailed disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements — allowing them to better understand continuing operations.

The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

The major classes of line items constituting the pretax profit or loss of the discontinued operation,
Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation, and
If the discontinued operation includes a noncontrolling interest, the pretax profit or loss attributable to the parent.

Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation or if a disposal doesn’t qualify for discontinued operations reporting.

Unfamiliar territory

Today’s conditions — including shifts to work-from-home arrangements, domestic supply chains and online distribution methods — have disrupted traditional business models in many sectors of the economy. These kinds of strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re in compliance.

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Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless:

The taxpayer previously used the property and
The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:

Land improvements other than buildings, for example fencing and parking lots, and
“Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

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The COVID-19 crisis is causing private companies to re-evaluate the type of financial statements they should generate for 2020. Some are considering downgrading to a lower level of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize the additional risks that work-from-home and COVID-19-related financial distress are causing, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of your organization. Some companies also worry that major changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

3 levels

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer three types of assurance services:

1. Compilations. These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). Instead, the CPA puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional and often omitted.

2. Reviews. Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with GAAP. Here, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. She or he inquires about these anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

3. Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that your financial statements are free from material misstatement and conform with GAAP.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Time for a change?

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present your company’s performance.

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Increasing diversity is a key initiative at many companies in 2020. This movement goes beyond social responsibility — it can lead to better-informed decision-making, improved productivity and enhanced value. Congress has also jumped on the diversity-and-inclusion bandwagon: Legislation is in the works that would require public companies to expand their disclosures about diversity.

Good for business

Even though it’s not reported on the balance sheet, an assembled workforce is one of your most valuable business assets. From the boardroom to the production line, people are essential to converting hard assets into revenue. However, the tone of any organization starts at the top, where key decisions are made.

Academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable for poor financial performance. This concept also extends to private companies: Management teams with people from diverse backgrounds and functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Bills to expand disclosures

The Securities and Exchange Commission (SEC) currently requires limited disclosures on boardroom diversity. Under current SEC rules, a public company must disclose whether and how it considers diversity in identifying board of director nominees. However, the rules don’t provide a definition of diversity.

In recent years, the SEC rules have been criticized for failing to provide useful information to investors. Critics want broader rules that provide more information about corporate board diversity.

In response, Congress is currently considering legislation to expand the SEC disclosure requirements. In November 2019, the House passed the Improving Corporate Governance Through Diversity Act. It would require public companies’ proxy materials to disclose additional diversity information on directors and board nominees.

The Senate introduced a similar bill in March 2020. In addition to expanding proxy statement disclosures, the Senate’s Diversity in Corporate Leadership Act would set up a diversity advisory group within the SEC to recommend ways to increase “gender, racial and ethnic diversity” on public company boards. The group would be tasked with studying strategies to improve diversity on boards of directors and would be required within nine months of its creation to report its findings and recommendations to the SEC, the Senate Banking Committee and the House Financial Services Committee.

In late July, a coalition of industry groups that included the American Bankers Association and U.S. Chamber of Commerce urged the Senate Banking Committee to pass the bill. “Our associations and members support efforts to increase gender, racial, and ethnic diversity on corporate boards of directors, as diversity has become increasingly important to institutional investors, pension funds, and other stakeholders,” the groups said.

Be a leader, not a follower

For now, Congressional legislation on diversity matters appears to have taken a backseat to more pressing matters related to the COVID-19 pandemic. In the meantime, many companies are planning to voluntarily expand their disclosures for 2020. We can help assess your level of boardroom or management team diversity — and provide cutting-edge disclosures that showcase your commitment to race, gender and ethnic diversity in the workplace.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

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If you’re getting close to retirement, you may wonder: Are my Social Security benefits going to be taxed? And if so, how much will you have to pay?

It depends on your other income. If you’re taxed, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes. It merely that you’d include 85% of them in your income subject to your regular tax rates.)

Crunch the numbers

To determine how much of your benefits are taxed, first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file joint tax returns. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits isn’t above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but isn’t more than $44,000, you will be taxed on one half of the excess over $32,000, or one half of the benefits, whichever is lower.

Here’s an example

For example, let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +1/2 of $21,000). You must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)

Important: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax on the additional income, you’ll have to pay tax on (or on more of ) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket.

For example, this situation might arise if you receive a large distribution from an IRA during the year or you have large capital gains. Careful planning might be able to avoid this negative tax result. You might be able to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock with gain that can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments. Contact us for assistance or more information.

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Not-for-profits increasingly are adopting a corporate world tool: financial dashboards. A dashboard is a summary of an organization’s progress toward a specific goal over time — or a snapshot of its current situation. Dashboards are designed to help boards and other constituents visualize important metrics, or key performance indicators (KPIs). But to facilitate informed, timely decisions, it’s critical to select the right KPIs.

Choosing the right KPIs

A nonprofit’s financial KPIs will depend largely on factors such as its revenue streams, key expense factors, budget and strategic goals. To include the most useful metrics, identify your organization’s “business” drivers and solicit input from your audience.

Additionally, determine which factors affect the reliability of your revenue streams — and which influence expense levels. Then create KPIs that monitor those factors. Think, too, about the level at which you want to track your KPIs. You could monitor them by individual program or function, or at the organizational level.

Looking at an example

Say that a performing arts organization’s board is concerned about financial stability and liquidity. The nonprofit’s primary business drivers are proper pricing and maximum attendance. Its dashboard might include KPIs such as an increase or decrease in operating results, the level of liquid unrestricted net assets, current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). The organization also would want to monitor the number of tickets sold and average revenue per performance.

Over time, this nonprofit likely would need to adjust its KPIs as its strategies, priorities or programs change. As many organizations have learned recently, what was “key” last year isn’t necessarily key in today’s challenging environment.

Considering popular KPIs

Certain KPIs are popular among nonprofits. These include:

Current ratio. This reflects your organization’s ability to satisfy debts coming due within the year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.

Projected year-end cash. Based on the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.

Year-to-date revenue and expense. This KPI measures actual results against a budget and lets you know separately if revenues and expenses are in line with expectations or within a reasonable range.

Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs vs. administrative or other expenses. Calculate it by dividing a program’s expenses by its overall expenses.

Meaningful metrics

By providing a target such as budgeted amounts, chronological trends or external benchmarks, you’ll make the metrics more meaningful for your audiences. Contact us for help creating a dashboard with appropriate KPIs.

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On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and
Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.

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While you probably don’t have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) can’t pay taxes on time? Here’s a look at the options.

Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.

Common penalties

The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest.

Undue hardship extensions

Keep in mind that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you’ll be charged interest. If you qualify, you’ll be given an extra six months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.

Borrowing money

If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee.

Installment agreement

Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions).

The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete or the IRS believes the tax collection is in jeopardy. The IRS may also modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it’s due.

Avoid serious consequences

Tax liabilities don’t go away if left unaddressed. It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process may also include seizure and sale of your property. In many cases, these nightmares can be avoided by taking advantage of options offered by the IRS.

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If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

Payroll costs;
Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
Payments for covered rent obligations (for leases that began before February 15, 2020); and
Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

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During the COVID-19 crisis, you can’t afford to lose sight of other ongoing risk factors, such as cyberthreats, fraud, emerging competition and natural disasters. A so-called “stress test” can help reveal blind spots that threaten to disrupt your business. A comprehensive stress test requires the following three steps.

1. Identify the risks your business faces

Here are the main types of risks to consider:

Operational risks (based on the inner workings of the company),
Financial risks (involving how the company manages its finances, including the threat of fraud and the effectiveness of internal control procedures),
Compliance risks (related to issues that might attract the attention of government regulators, such as environmental agencies and the IRS), and
Strategic risks (regarding the company’s market focus and its ability to respond to changes in customer preferences).

If you’ve conducted a risk analysis in prior years, beware: Current risk factors may be different due to changes in market conditions, business operations and technology. For example, if your business pivoted to more online orders or remote working arrangements during the pandemic, it may now be more exposed to cyberattacks than it previously was.

2. Establish a risk management strategy

Meet with managers from all functional lines of business — including sales and marketing, human resources, operations, procurement, IT, and finance and accounting — to discuss the risks that have been identified. The goal is to improve your team’s understanding of business threats and to brainstorm ways to manage those risks.

For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. Review copies of the disaster recovery plan and ask when it was last updated.

In addition to asking for feedback about identified risks, encourage managers to share any additional risk factors and projections regarding the potential financial impact. Their frontline experience can be eye-opening, especially during these unprecedented times.

3. Review and update your strategy

Managing risk is a continuous process. After creating your initial risk mitigation strategy, your management team should meet periodically to review whether it’s working. If it isn’t, brainstorm ways to fortify it.

For example, if your company’s disaster recovery plan has been activated recently, ask your management team to assess its effectiveness. Then consider making changes based on that assessment.

Need help?

While risk is part of operating a business, some organizations are more prepared to handle the unexpected than others. To ensure your company falls into the “more prepared” category, implement a stress test. We can help you assess current risks and develop a plan that’s right for you.

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On Tuesday, August 11^th, Roth&Co hosted a webinar titled, “State of The Industry: Nursing Homes & Assisted Living Facilities in a Post-COVID-19 World.” The roundtable featured Mr. Mark Parkinson, CEO and President of the American Health Care Association (AHCA) and former Governor of Kansas, and Steve Zicherman, Managing Partner at LTC Finance, a premier healthcare firm providing centralized back office and financial advisory services. The discussion was moderated by Roth&Co Partner Moshe Schupper. You can view a full video of the webinar here.

Please note that while we are sharing what we currently know, the details are still changing by the minute. We will continue to keep you updated as additional information becomes available. This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice.

Here are some key takeaways:

State of the Industry

This has been the toughest year in the history of our industry. Long-term care has endured over 50,000 deaths, taking an enormous emotional toll on our front-line heroes. From the business side, we have seen an average occupancy decrease of 10%, though that number varies by location and provider type, with facilities in the Northeast reporting census loss of up to 25%.

Today, we are doing better on both fronts: Clinically, the number of new cases and deaths has dropped significantly. From a business perspective, we received enormous resources from the Federal Government which provided much-needed relief. We are beginning to see the light at the end of the tunnel.

Through the CARES Act and other programs, we have been able to secure about $20 Billion for recovery for the sector, with providers receiving an average of $800,000. For about 80% of providers, this has allowed them to keep their heads above water, and hopefully, make it through to the end of the year. About 20% of the sector, mostly in the North East, will need a lot more assistance to stay afloat. We are optimistic that we will be able to get those buildings help as well.

HHS Distribution of an Additional $5 Billion

The U.S. Department of Health & Human Services has announced that they will distribute $5 billion to homes through four different programs:

$2.5 billion will be automatically distributed to every building in the country to be used for PPE, testing and staffing. Each home can decide how to allocate these funds. The amount that each home receives will be based on whether or not it has point of site antigen machines and how many beds there are in the facility. An average size facility (with about 104 beds) which has an antigen machine will receive $90,000. Homes without machines will receive $170,000, with the additional funding intended to cover the cost of testing. CMS is very likely to require buildings in a state with an infection rate of above 5% to test their staff weekly.
$2 billion will be spent on a value-based purchasing program that will incentivize keeping buildings COVID-19 free. Every month from September 2020 through December 2020, $500 million will be distributed to homes with an equal or better case count than their community average. It is expected to be about $70,000 a month per building. Each month will be considered individually, so a building may be eligible even if it was not previously. COVID-19-only wings and buildings will not be included in the total case count.
$250 million will be used to reimburse facilities with COVID-19-only wings or buildings. As of now, it only includes reimbursement of future expenses. We are advocating for reimbursement for past expenses as well.
$250 million will be designated to fund collaboration with outside groups to keep COVID-19 case count down. Currently, the details of this fund remains undefined.

Targeted Funds for New York & New Jersey Homes

We are actively advocating for COVID-19 hotspot payments in the next stimulus plan. While nothing specific has been proposed, the President’s comments have been supportive, so we are hopeful.

This is a lesson on the importance of relationships with local government. In some states, our ability to influence governors and legislatures is greater than in others. We need to do better politically in New York and New Jersey to receive the support we need, when we need it. This starts with being a united association.

Liability Protection

Majority Leader Mitch McConnell has included helpful language that protects skilled nursing and assisted living facilities by shielding them from any liability unless it is intentional or gross neglect. The legislation would limit the amount of recovery, ensuring that it does not exceed the amount in actual damages. It also moves litigation to federal court, which is very helpful since the most punitive damages have occurred in state courts. Normally, this would be difficult to get adopted, but Senator McConnell has declared it as his number one priority and will not let the bill pass without it.

Change of Ownership

New owners who have trouble accessing HHS funds that were distributed to former owners can sign up to receive the funds through a new portal, expected to open by Friday, August 14th.

If you are an AHCA member seeking assistance, you can email AHCA directly at CHOW@AHCA.org. In your email, please include building details as well the funds you would like to receive.

Deal-Making

While we saw a complete halt in all activity in April and May, the market bounced back as government support became clear. Activity right now is the same as it was before COVID-19 hit. There is interest in buying, equity is available, and banks consider the sector as a secure space to put their money. There is a little more diligence, but overall, players are ready to engage.

Returning to Pre-COVID-19 Levels:

Most facilities have seen a weekly occupancy decline of about 1%, beginning mid-March and continuing through June 1^st. Increasing our numbers relies on two factors:

Hospitals will need to start accepting patients for elective surgeries to create our post-acute business.
The public will need to regain the confidence needed to send family members back to our buildings.

Unfortunately, these two processes will take time. We expect the occupancy rates to remain stagnant through most of 2020.

The Long-Lasting Effects of COVID-19

We are expecting the release of a vaccine in January 2021, as well as proven therapeutic treatments for COVID-19. We are also hoping that by March 2021, the pandemic will be behind us, and that we will slowly grow both business and confidence levels.

The Election Ramifications

Polls currently predict that the upcoming election will deliver both the House and the Senate to Democratic control. This usually means greater access to funding, but with more oversight. Conversely, Republican control means less funding and less regulation. A bipartisan government is best for our sector as it moderates both funding and regulation.

Regardless of who wins this election, we expect a large amount of government oversight. There will be hearing after hearing on what went wrong and how it can be fixed. Our job is to ensure that the solutions that are helpful, get adopted. We are hoping for government support for proven infection control measures, like re-configuring our facilities to enable more private rooms and more collaborative survey systems that provide better data.

Last Words to Skilled Nursing & Assisted Living Facility Operators

These are the roughest five months of the sector. Congratulations on making it through and not giving up. You did a tremendous job. Our story is not over yet; we are expecting a rough 5 – 7 upcoming months. However, know that you are not alone. Every operator is experiencing the same thing. The AHCA is backing us up and the Government is behind us. We will get through this tougher.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.

For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.

2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.

There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.

5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.

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There’s a bright side to today’s unprecedented market conditions: Agile people may discover opportunities to start new business ventures. Start-ups need a comprehensive business plan, including detailed financial forecasts, to drum up capital from investors and lenders. Entrepreneurs may also use forecasts as yardsticks for evaluating and improving performance over time.

However, forecasting can be challenging for a business with no track record, especially during today’s unprecedented conditions. Here’s an objective approach to developing forecasts based on realistic, market-based assumptions.

Starting point

Revenue is a critical line item in the forecast, because it drives many other accounts, such as direct costs, accounts receivable and inventory. To create a credible estimate of your start-up’s revenue-generating potential, consider the following questions:

What’s the size of the potential market?
How many competitors are vying for market share? What positioning strategies will the start-up use to compete?
How will the start-up price its products and services? Will its prices fall below, match or surpass those of competitors?
How will the start-up distribute products or services?
How many customers can the start-up support with its existing infrastructure? How will the start-up scale its operations to meet forecasted increases in demand?

It’s generally a good idea to develop multiple revenue scenarios — best, worst and most likely case. Then weight each scenario based on how likely it is to happen.

Costs and investments

Next, the costs directly attributable to producing revenue, such as materials, utilities and labor, need to be identified and quantified. These variable costs are typically stated as a percentage of forecasted revenue.

Some expenses — such as rent, insurance and administrative salaries — are fixed. That is, they remain constant over the short run, though they often have limited capacity. For example, you might need to add office space and headcount once a start-up grows beyond a certain level.

Besides expenses that are recorded on the income statement, start-ups may need working capital to ramp up operations. They may also need to invest in fixed assets, such as equipment, furniture and software. These expenditures are typically capitalized (reported) on the balance sheet and gradually depreciated their useful lives.

Finally, it’s time to focus on the missing puzzle piece: financing. You may need an initial round of capital to acquire (or produce) inventory, purchase essential assets and generate buzz about your new offering. Plus, start-ups often need ongoing access to capital — such as a revolving line of credit — to help fund the cash conversion cycle as the business grows.

Don’t let a competitor beat you to the punch!

Time is of the essence if you want to capitalize on emerging opportunities. So that you can focus on starting the business, we can help create an objective, defensible financial forecast for your start-up and benchmark your forecasted results against other successful businesses. This diligence will help impress prospective investors and lenders — and build value over the long run.

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Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

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Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

“Phantom income”

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

Check your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Consider some options

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

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Although many businesses have had to reduce their workforces because of the COVID-19 pandemic, others are hiring or may start adding employees in the weeks or months ahead. A thoughtful onboarding program has become more important than ever in today’s anxious environment of safety concerns and compliance challenges.

Crucial opportunity

Onboarding refers to “[a formal] process of helping new hires adjust to social and performance aspects of their new jobs quickly and smoothly,” according to the Society for Human Resource Management.

Traditionally, a comprehensive onboarding program’s objective is to deliver multiple benefits to the company. These include stronger employee performance and productivity, higher job satisfaction and a deeper commitment to the business. New hires who are properly onboarded should also experience reduced stress and an enhanced sense of career direction.

What’s more, an onboarding program allows you to be crystal clear about compliance procedures, HR policies, compensation and benefits offerings. In other words, this is a crucial opportunity for you to explain to a new hire many issues, including all the measures you’re using to cope with the COVID-19 crisis.

3 parts to a program

What does a comprehensive onboarding program look like? Specifics will depend on the size, industry and nature of your company. Generally, however, an onboarding program can be segmented into three parts:

1. Preparing for the job. The onboarding process should begin before a new hire starts work. This involves steps such as discussing his or her specific acclimation needs, choosing and preparing a workspace (or introducing the platform and procedures for working remotely), and designating a coach or mentor.

2. Optimizing day one. As the saying goes, “You never get a second chance to make a good first impression.” An onboarding program might involve an itemized start-date schedule that lays out everything from who will greet the new employee at the door — or who will conduct a first-day video call — to what paperwork must be completed to a detailed itinerary of meetings (virtual or otherwise) throughout the day.

3. Following up regularly. Even a great first day can mean nothing if a new hire feels ignored thereafter. An onboarding program could establish continuing check-in meetings with the employee’s direct supervisor and coach/mentor for the first 30 or 60 days of employment. From then on, interactions with the coach/mentor could be arranged at longer intervals until the employee feels comfortable.

When the time is right

Onboarding in the year 2020 and beyond involves so much more than giving new employees their marching orders. It entails helping a new hire feel safe, supported and fully informed. We can help you calculate when the time is right to expand your workforce and accurately measure the productivity of workers added to your payroll.

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Starting in 2019, auditors’ reports for certain public companies must contain a new element: critical audit matters (CAMs). The requirement was in effect for audits of large accelerated filers (with market values of $700 million or more) in fiscal years ending on or after June 30, 2019. It goes into effect for smaller public companies in fiscal years ending on or after December 15, 2020.

Regardless of where you are in the implementation process, anticipating the CAMs that will appear in your auditor’s report may be especially challenging given the uncertainty caused by the COVID-19 crisis.

The basics

The auditor’s report offers an opinion as to whether the financial statements fairly present the company’s financial position, results of operations and cash flows in conformity with U.S. Generally Accepted Accounting Principles or another applicable financial reporting framework. In 2017, the Public Company Accounting Oversight Board (PCAOB) expanded the pass-fail format of the auditor’s report.

The PCAOB rule requires auditors to describe CAMs, which are matters that, from the auditor’s point of view, require especially challenging, subjective or complex judgment. CAMs aren’t necessarily meant to reflect negatively on the company or indicate that the auditor found a misstatement or internal control deficiencies. But they can raise a red flag to stakeholders.

Close-up on CAMs

When identifying CAMs, the auditor must:

Describe the principal considerations that led the auditor to determine that the matter is a CAM,
Describe how the CAM was addressed in the audit, and
Refer to the relevant financial statement accounts or disclosures that relate to the CAM.

In May, research firm Audit Analytics reported that the four most common CAMs in auditors’ reports issued for large accelerated filers through April 30, 2020, were: 1) goodwill and intangible assets, 2) revenue recognition, 3) structure events (valuation of acquiring assets), and 4) income taxes. Together, these topics accounted for more than half of all CAMs. These matters are expected to continue to present auditing challenges during the COVID-19 crisis.

Moving target

CAMs may change from year to year, based on audit complexity, changing risk environments and new accounting standards. Each year, auditors determine and communicate CAMs in connection with the audit of the company’s financial statements for the current period.

A significant event — such as a cybersecurity breach, a hurricane or the COVID-19 pandemic — may cause the auditor to report new CAMs. Though such an event itself may not be a CAM, it may be a principal consideration in the auditor’s determination of whether a CAM exists. And such events may affect how CAMs were addressed in the audit.

No surprises

Management and the audit committee should know what to expect when the financial statements are delivered. A dry run before year end can help you anticipate the CAMs that will appear on your auditor’s report for fiscal year 2020, so you can provide clear, consistent messaging to stakeholders. Contact us for more information.

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Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.

Why you need a dashboard report

Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.

To maximize the effectiveness of dashboard reports, make them accessible to managers across your organization via the company’s internal website or weekly email blasts. Widespread, easy access will allow your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share these reports with their lenders as a condition of their continued support.

Metrics that matter

When deciding which information to target, look at your company’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, most dashboard reports include the following ratios:

Gross margin [(revenue – cost of sales) / revenue],
Current ratio (current assets / current liabilities), and
Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of company- or industry-specific performance metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel that’s struggling to reopen might provide a schedule of net operating income, average room rates and vacancy rates compared to the previous week or month. A law firm might report each partner’s realization rate.

A diagnostic test

Comprehensive financial statements are the best source of information about your company’s long-term stability and profitability — especially for external stakeholders. But dashboard reporting is critical for internal purposes, too. These reports can help assess a sudden change in market conditions, interim performance or potential downward trend in your financial performance. Contact us to help you compile a meaningful dashboard reporting process for your organization.

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When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

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If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters.

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You may think of trusts as estate planning tools — vehicles for reducing taxes after your death. While trusts can certainly fill that role, they’re also useful for protecting assets, both now and later. After all, the better protected your assets are, the more you’ll have to pass on to loved ones.

Creditors, former business partners, ex-spouses, “spendthrift” children and tax agencies can all pose risks. Here’s how trusts defend against asset protection challenges.

Tell creditors “hands off”

To protect assets, your trust must own them and be irrevocable. This means that you, as the grantor, generally can’t modify or terminate the trust after it has been established. (A “revocable trust,” on the other hand, allows the grantor to make modifications.) Once you transfer assets into an irrevocable trust, you’ve effectively removed your rights of ownership to the assets. Because the property is no longer yours, it’s unavailable to satisfy claims against you.

It’s important to note that placing assets in a trust won’t allow you to sidestep responsibility for debts or claims that are outstanding at the time you fund the trust. There may also be a substantial “look-back” period that could eliminate the protection your trust would otherwise provide, as well as other restrictions.

Build a fence

If you’re concerned about what will happen to your assets after they pass to the next generation, you may want to consider the defensive features of a “spendthrift” trust. Despite the name, a spendthrift trust does more than protect your heirs from themselves. It can protect your family’s assets against dishonest business partners and unscrupulous creditors. It also can protect loved ones in the event of relationship changes. For example, if your son divorces, his spouse generally won’t be able to claim a share of the trust property in the divorce settlement.

Several trust types can be designated a spendthrift trust — you just need to add a spendthrift clause to the trust document. Such a clause restricts a beneficiary’s ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets, as allowed by law.

Trustees play a role in keeping your trust safe. If a trustee is required to make distributions for a beneficiary’s support, a court may rule that a creditor can reach trust assets to satisfy support-related debts. So, for increased protection, consider giving your trustee full discretion over whether and when to make distributions. You’ll need to balance the potentially competing objectives of having the access you want and preventing creditors and others from having access.

Make asset protection a priority

If securing your assets is a priority — and it should be — talk to us about whether a trust can provide the protection you need. There may also be other ways to help shelter wealth — for example, maximizing your use of qualified retirement plans.

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If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

Fair market value rules

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Step up, step down or carryover

It’s crucial for you to understand the fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides to make a gift of the stock during his lifetime (rather than passing it on when he dies), the “step-up” in basis (from $500 to $5 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it (just $500), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance.

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