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If you own an interest in a closely held business, a buy-sell agreement should be a critical component of your estate and succession plans. These agreements provide for the orderly disposition of each owner’s interest after a “triggering event,” such as death, disability, divorce or withdrawal from the business. This is accomplished by permitting or requiring the company or the remaining owners to purchase the departing owner’s interest. Often, life insurance is used to fund the buyout.

Buy-sell agreements provide several important benefits, including keeping ownership and control within a family or other close-knit group, creating a market for otherwise unmarketable interests, and providing liquidity to pay estate taxes and other expenses. In some cases, a buy-sell agreement can even establish the value of an ownership interest for estate tax purposes.

However, because circumstances change, it’s important to review your buy-sell agreement periodically to ensure that it continues to meet your needs. The start of a new year is a good time to do that.

Focus on the valuation provision

It’s particularly critical to revisit the agreement’s valuation provision — the mechanism for setting the purchase price for an owner’s interest — to be sure that it reflects the current value of the business.

As you review your agreement, pay close attention to the valuation provision. Generally, a valuation provision follows one of these approaches when a triggering event occurs:

Formulas, such as book value or a multiple of earnings or revenues as of a specified date,
Negotiated price, or
Independent appraisal by one or more business valuation experts.

Independent appraisals almost always produce the most accurate valuations. Formulas tend to become less reliable over time as circumstances change and may lead to over- or underpayments if earnings have fluctuated substantially since the valuation date.

A negotiated price can be a good approach in theory, but expecting owners to reach an agreement under stressful, potentially adversarial conditions is asking a lot. One potential solution is to use a negotiated price while providing for an independent appraisal in the event that the parties fail to agree on a price within a specified period.

Establish estate tax value

Business valuation is both an art and a science. Because the process is, to a certain extent, subjective, there can be some uncertainty over the value of a business for estate tax purposes.

If the IRS later determines that your business was undervalued on the estate tax return, your heirs may face unexpected — and unpleasant — tax liabilities. A carefully designed buy-sell agreement can, in some cases, establish the value of the business for estate tax purposes — even if it’s below fair market value in the eyes of the IRS — helping to avoid these surprises.

Generally, to establish business value, a buy-sell agreement must:

Be a bona fide business arrangement,
Not be a “testamentary device” designed to transfer the business to family members or other heirs at a discounted value,
Have terms that are comparable to similar, arm’s-length agreements,
Set a price that’s fixed by or determinable from the agreement and is reasonable at the time the agreement is executed, and
Be binding during the owner’s life as well as at death, and binding on the owner’s estate or heirs after death.

Under IRS regulations, a buy-sell agreement is deemed to meet all of these requirements if at least 50% of the business’s value is owned by nonfamily members.

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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Most not-for-profits can’t afford to turn down offers of financial support. At the same time, you shouldn’t blindly accept government or foundation grants simply because they’re offered. Some grants may come with excessive administrative burdens, cost inefficiencies and lost opportunities. Here’s how to evaluate them.

Administrative and other burdens

Smaller or newer nonprofits are at particular risk of unexpected consequences when they accept grants. But larger and growing organizations also need to be careful. As organizations expand, they usually enjoy more opportunities to widen the scope of their programming. This can open the door to more grants, including some that are outside the organization’s expertise and experience.

Even small grants can bring sizable administrative burdens — for example, potential reporting requirements. You might not have staff with the requisite experience, or you may lack the processes and controls to collect the necessary data.

Grants that go outside your organization’s original mission can pose problems, too. For example, they might cause you to face IRS scrutiny regarding your exempt status.

Costs vs. benefits

As for costs, your nonprofit might incur expenses to complete a program that may not be allowable or reimbursable under the grant. As part of your initial grant research, be sure to calculate all possible costs against the original grant amount to determine its ultimate benefit to your organization.

Then, if you decide to go ahead with the grant, analyze any lost opportunity considerations. For unreimbursed costs associated with new grants, consider how else your organization could spend that money. Also think about how the grant affects staffing. Do you have staff resources in place or will you need to hire additional staff? Could you get more mission-related bang for your buck if you spent funds on an existing program as opposed to a new program?

Quantifying the benefit of a new grant or program can be equally (or more) challenging than identifying its costs. Assess each program to determine its impact on your organization’s mission. This will allow you to answer critical questions when evaluating a potential grant.

The long-run

If your organization has lost grants during the COVID-19 pandemic, you’re probably tempted to welcome any new funds with open arms. But in the long-run, it pays to scrutinize grants before you accept them. Contact us if your nonprofit is trying to grow revenue and needs fresh ideas.

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Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not mandatory.

Is now the time for your small business to do so? As you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly. And the good news is that the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.

Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:

1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously, only 50% of costs were allowed. This limit still applies to employers with 51 to 100 employees.

2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than 3 years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.

3. Enhancement of employer contributions. Perhaps the biggest change brought by SECURE 2.0 is that certain employer contributions for a plan’s first 5 years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:

100% in the plan’s first and second tax years,
75% in the third year,
50% in the fourth year, and
25% in the fifth year.

For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.

In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.

To be clear, though the name of the tax break is the ‘small employer pension plan start-up cost credit,’ it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine if now is the right time for your small business to launch a retirement plan and, if so, which one.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between holders and developers, and why it makes a difference.

Watch the video:

An identity crisis in the real estate industry can make for costly tax obligations. The real estate industry is diverse and there are many roles to play – investor, agent, broker, developer. Each has its own tax ramifications. Before embarking on the purchase of a property, a buyer needs to ask himself some important questions in order to understand what role he is assuming. What is his business? Is he purchasing a property to hold and profit from as an asset? Is he purchasing a property to develop for sale?

Let’s start with some definitions. A real estate developer is someone who buys land and builds a real estate property on it or buys and improves an existing property. His intent in purchasing is to sell the property for a profit. A developer profits by creating real estate.

A holder or investor purchases a property with a long term intent. He intends to hold the property, rent it out and accrue revenues from it. A holder profits by possessing real estate.

Whether a purchaser defines himself as a holder or a developer is critical because the tax treatment of real estate holders provides certain benefits that are unavailable to developers.

A real estate holder may purchase a property, rent it out, collect income, and when he sells the property, his profit is taxed as a capital gain, as long as he’s held it for more than a year. That means that instead of being subject to the ordinary tax rate he had been paying on his rental income, his income from the sale will be subject to a lower, long term capital gains rate of 15%-20%. Holders are allowed to take advantage of a Section 1031 like-kind exchange to defer the recognition of their gains or losses that would otherwise be recognized at the time of a sale.

Because a holder may be challenged to prove that his intentions were to hold and utilize a property for the long term, it is advisable that he keep good records to support his status. Lease and rental agreements, advertising and listing information, and research efforts should be documented and saved in case his position is challenged by tax authorities after the sale of the property.

For a real estate developer, it’s a whole different picture. A developer is taxed like someone who is running a business that buys and sells real estate inventory. A real estate dealer, or developer, is defined as “an individual who is engaged in the business of selling real estate to customers for gain and profit.” Under this definition, a developer’s income, earned by the sale of his property, would be taxed as an ordinary gain, and taxed at the higher ordinary income rate of up to 37%. He may also be subject to self-employment taxes up to 15.3% (subject to OASDI limitations) as well as city taxes. Developers also cannot depreciate property held as inventory or use a Section 1031 like-kind exchange to defer income recognition. However, they may take advantage of their real estate selling expenses by taking them as ordinary business expenses and deducting unlimited ordinary losses.

Under the IRS Code, each individual property purchased is assessed independently, so one’s status as ‘holder’ or ‘developer’ is not absolute. A real estate entrepreneur may own a portfolio of rental properties which makes him a holder, and may simultaneously purchase and sell other properties, making him a developer as well. His tax status will depend on his intent for that individual property at the time of purchase.

Before purchasing, the savvy investor must be cognizant of his goals and make sure to structure his purchase properly at inception in order to avoid any tax surprises. Consult with your financial advisor regarding newly acquired or potential real estate assets.

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One of the few pieces of legislation that is being pursued during this Congressional lame duck session is an update to the Secure Act, which was originally passed in December of 2019. Dubbed the ‘Secure Act 2.0,’ this legislation carries a whole array of changes to the world of retirement accounts.

The act’s acronym stands for, “Setting Every Community Up for Retirement Enhancement,” but after a review of the first round of this legislation, it looks like “Setting Every Community Up for Robbery of Estates” would be a better fit. The legislation has eliminated what was known as the ‘stretch IRA’ – which allowed IRA beneficiaries to ‘stretch’ their IRA’s tax benefits over their lifetime.

Obviously, there were a few bones thrown in to support the legislation’s claim to ‘enhance retirements.’ The smoke screen created by titling this act in a positive way isn’t as egregious as it was for the Inflation Reduction Act, but it’s not far from it.

In the new version of the act, currently being deliberated by the offices of Congresspeople and various lobbying groups, there are north of thirty changes. However, though few of these changes will impact the act substantially, there are some minor provisions that are notable.

One of the changes being proposed is a positive one. It will allow employers to contribute – either through a match or a non-elective deferral – as a Roth contribution.

Currently, 401(k) plans can allow participants (i.e., employees) to contribute as a Roth contribution, but the company match and non-elective deferrals need to go into the plan as a pre-tax contribution. Also included in the proposed legislation is a provision allowing Roth accounts in SEP-IRAs.

So why is this exciting? Simple. ROTHs allow you to buy out the IRS for future taxation.

Picture this: You have a partner in a business who, without your consent, is entitled to decide at any time what his share of the business consists of. Wouldn’t you want to rid yourself of him and buy him out? With a pre-tax 401(k) or IRA, the IRS remains a silent partner that can walk in one day asking for its share of your money. If it decides that tax rates are 50%, then you have no choice but to comply.

When deciding to utilize a pre-tax or a Roth account, many people try to calculate what their current tax rates are as opposed to their future expected tax rates in retirement. The problem with this reasoning is that nobody really knows what tax rates will apply in the future.

Based on where our national debt is and the trillions in untapped resources for IRS retirement accounts, we don’t think it’s a bad idea to buy out this bossy partner. So, although we need to live with some of the negative clauses in this legislation, make sure to also glean some of the benefits as well.

Are you setting yourself up for retirement success? If you’re not sure, reach out to us at info@equinum.com for professional guidance.

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Have you ever been in a meeting and felt the ideas you were trying to communicate were not getting through? You could have the greatest idea in the world, but if you can’t persuade anyone else to follow your vision, or if no one can understand it, then even the brightest idea will go to waste.

Long considered a “soft skill,” effective communication is now regarded as one of the most important skills a business leader can have. Leaders who reach the top of their field study the art of communication in all its forms — writing, speaking, presenting — and are constantly striving to improve on those skills. The ability to explain the direction and strategy of your business to others so they can do what needs to be done is critical for any business leader and is often the difference between success and failure.

In his new book, The Bezos Blueprint, best-selling author and Harvard University Instructor Carmine Gallo describes three common tactics that top leaders use when communicating with their employees:

Using short words to talk about hard things

Long, complicated sentences make ideas hard to understand. “If you care about being thought credible and intelligent, do not use complex language where simpler language will do,” writes Nobel prize-winning economist Daniel Kahneman. Instead of muddling your ideas with complex and technical language, find the simplest and clearest way to communicate what you want to say.

There are simple ways to improve the clarity of your communication. Software tools can review your writing and create a numerical readability score that corresponds to an education grade level. For example, a document written for someone with at least an eighth-grade education level is considered “very easy to read.” It does not imply that your writing sounds like an eighth-grader wrote it; it means that the ideas are easy to grasp. And ideas that are easy to understand are more persuasive. (For context, Grammarly assessed this article at a 9th-grade education level.)

Choosing metaphors to reinforce key concepts

The beauty of metaphors is that they can provide simple, concrete and memorable comparisons to explain the complex or abstract.

In business, metaphors communicate complex information in short, catchy phrases. Warren Buffet is an expert communicator who has long used metaphorical references to explain complex financial topics. Buffett’s metaphors grab the reader’s attention and reduce complexity to a short sentence. For example, Buffett is frequently asked why 90% of his investments are made in the U.S. His answer: “America’s economic soil remains fertile.” Heavy textbooks have been written on foreign vs. domestic investment, but in five simple words, a metaphor allows Buffet to communicate a complex concept simply.

Visualizing or humanizing data to create value

In the information age, data is being collected in greater and greater quantities every day, but throwing up a graph or a pie chart on a presentation is often met with eyes glazing over. A trick to making any data point interesting is to humanize it by placing the number in perspective. Any time you introduce numbers, take the extra step to make them engaging and memorable.

An example from Gallo’s book is, “By 2025, scientists expect humans to produce 175 zettabytes (one trillion gigabytes) of data annually. It’s simply too big a number for most people to wrap their minds around. But what if I said that if you could store 175 zettabytes on DVDs, the disks would circle the earth 222 times?” The number is still the same, but the description is more engaging because it paints a powerful image.

The human brain does not do well with complexity or abstractions. Consider the previous strategies to improve your communication style and make sure your messages and ideas have the desired effect. Former PepsiCo CEO Indra Nooyi may have said it best: “If you cannot simplify a message and communicate it compellingly, believe me, you cannot get the masses to follow you.”

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Most businesses have some intangible assets, and the tax treatment of these assets can be complex.

What makes intangibles so complicated?

IRS regulations require the capitalization of costs to:

Acquire or create an intangible asset,
Create or enhance a separate, distinct intangible asset,
Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
“Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
Amounts paid to modify certain contract rights (such as a lease agreement);
Amounts paid to defend or perfect title to intangible property (such as a patent); and
Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

Outside counsel to draft and negotiate a lease agreement;
Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder;
Outside consultants to investigate competitors in preparing a contract bid; and
Outside counsel for preparation and filing of trademark, copyright and license applications.

Are there any exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need help or have questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules.

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The effects of inflation are all around. You’re probably paying more for gas, food, healthcare and other expenses than you were last year. Are you wondering how high inflation will affect your federal income tax bill for 2023? The IRS recently announced next year’s inflation-adjusted tax amounts for several provisions.

Some Highlights

Standard Deduction

What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2023, the standard deduction will increase to $13,850 for single taxpayers, $27,700 for married couples filing jointly and $20,800 for heads of household. This is up from the 2022 amounts of $12,950 for single taxpayers, $25,900 for married couples filing jointly and $19,400 for heads of household.

The Highest Tax Rate

For 2023, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $578,125 ($693,750 for married taxpayers filing jointly). This is up from 2022 when the 37% rate affects single taxpayers and heads of households with income exceeding $539,900 ($647,850 for married couples filing jointly).

Retirement Plans

Many retirement plan limits will increase for 2023. That means you’ll have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2023, individuals will be able to contribute up to $22,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $20,500 in 2022. The catch-up contribution limit for employees age 50 and over who participate in these plans will also rise in 2023 to $7,500. This is up from $6,500 in 2022.

For those with IRA accounts, the limit on annual contributions will rise for 2023 to $6,500 (from $6,000). The IRA catch-up contribution for those age 50 and up remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs)

These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored health Flexible Spending Account (FSA), you can contribute more in 2023. The annual contribution amount will rise to $3,050 (up from $2,850 in 2022). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2023, the amount that can be carried over to the following year will rise to $610 (up from $570 for 2022).

Taxable Gifts

Each year, you can make annual gifts up to the federal gift tax exclusion amount. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2023, the first $17,000 of gifts to as many recipients as you would like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $16,000 in 2022.)

Thinking Ahead

While it will be quite a while before you have to file your 2023 tax return, it won’t be long until the IRS begins accepting tax returns for 2022. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you are entitled.

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If your company uses supplier finance programs to buy goods or services, and if you’re required to adhere to U.S. Generally Accepted Accounting Principles (GAAP), there will be changes starting next year. At that time, you must disclose the full terms of supplier finance programs, including assets pledged to secure the transaction. Here are the details of this new requirement under GAAP.

Gap in GAAP

Supplier finance programs — sometimes called “structured payables” and “reverse factoring” — are popular because they offer a flexible structure for paying for goods and services. In a traditional supplier arrangement, the buyer agrees to pay the supplier directly within, say, 30 to 45 days.

Conversely, with a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile, the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. However, many organizations haven’t been transparent in disclosing in their financial statements the effects those programs have on working capital, liquidity and cash flows.

That’s the reason the Financial Accounting Standards Board recently issued Accounting Standard Update (ASU) No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. It will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

More details

Supplier finance programs are a relatively new form of arrangement that continues to evolve and grow in popularity. Even after this ASU becomes effective, GAAP doesn’t provide any specific guidance on where to present the amounts owed by the buyers to finance companies. It’s up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt.

However, the updated guidance does require that in each annual reporting period, a buyer must disclose:

The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary, and
For the obligations that the buyer has confirmed as valid to the finance provider or intermediary 1) the amount outstanding that remains unpaid by the buyer as of the end of the annual period, 2) a description of where those obligations are presented in the balance sheet, and 3) a roll-forward of those obligations during the annual period, including the amounts of obligations confirmed and obligations subsequently paid.

In each interim reporting period, the buyer must disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the period.

Ready, set, go

The new rules take effect for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information. That provision is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Contact us for more information or help implementing the changes.

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If you’ve been an investor in 2022, you don’t need us to tell you how tough things are. In order to tamp down inflation, the Federal Reserve is deliberately trying to make stock prices go down, crash the housing market, and slow down the overall economy.

For the most part, it’s worked. The stock market is officially in a bear market. The housing market has dried up, and it is almost certain that we are either in, or entering, a recession.

Here are the returns for the stated indices through September 30^th:

Index	Return
S&P 500	-25.25%
AGG Bond Index	-13.79%
60/40 Portfolio	-20.67%

As you can see, it isn’t only the stock market that has taken it on the chin. The “conservative” bond investments have also been taken to the woodshed.

By the Fed raising the Fed-Funds rate under their control, the other interest rates on government and corporate bonds have followed their rise, pushing down prices of existing bond holders. This has caused an extremely unusual reaction in the bond market – a double-digit percent correction. If the year would be over today, it would be the third worst calendar year for the observed 60/40 portfolio.

Charted below is a list of the worst years for a 60/40 portfolio. (Constituting 60% S&P 500 and 40% 10-year treasuries):

Year	Portfolio Return
1931	-27.3%
1937	-20.7%
1974	-14.7%
2008	-13.9%
1930	-13.3%
1941	-8.5%
2002	-7.1%
1973	-7.1%
1969	-6.9%
2001	-4.9%

These returns may surprise you. How are we down so much more now than we were in 2008, during a real financial crisis? Or in 2001 when the dot-com bust cut the S&P 500 in half?

The answer is the diversification aspect that we expected from bonds, or the lack thereof. For example, in 2008, equities were down -36.6%, quite a chunk lower than what equities are down now. Conversely, bonds were up 20.10%. Since 1928, there have been only four points in time where stocks and bonds have been down in the same year. And when that did happen, most were in the low single digits.

So, where is the good news?

The good news is that, if history is any guide, things will be looking quite positive from here on in.

First, on the fixed income side of things: A year ago, the yield we were getting from a ten-year bond was .74%. A two-year bond was yielding .49%. With that backdrop we were at a starting point of almost no yield, making it very hard to diversify portfolios. Now, these same bonds are yielding in the 4% range. So, the bond portion of the account will earn a yield, providing investors with a fixed income and a benefit from diversification.

As for equities, there is also a historical precedent for a comeback. Look below at what happens when the S&P 500 falls by 25% or more:

Source: A Wealth Of Common Sense

This isn’t to say the low for the year is in, or that there won’t be any gut-wrenching volatility until year end. But for those courageous enough to hold on, history proves that they will be paid back nicely.

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Earlier this year, I wrote about the term ”The Great Resignation” describing the record number of employees who have left their jobs since the start of the pandemic. Although the number of employees who are quitting remain at record levels, economists have begun using a different term to describe the recent employment phenomenon – ”The Great Renegotiation.”

”The Great Resignation” seems to imply that employees are simply resigning and finding new jobs or leaving the workforce altogether. The truth is much more complicated. There is a growing belief that the worker-employer relationship has changed both fundamentally and permanently. According to a report by McKinsey, 65% of workers who took a new job in the last 2 years did so in a different industry than the one in which they were previously employed. The pandemic has made employees adjust their priorities and rethink their work expectations.

Put a little differently, employee expectations have gone up, so organizations need to examine how they recruit talent. According to McKinsey, employees have different priorities and want more than just higher compensation, and it is up to employers to adjust. ”The Great Renegotiation” has begun, and companies who are committed to making the necessary work and cultural changes can leverage this workforce reshuffling into a powerful opportunity.

Traditional tools such as compensation, titles, and promotion are still important, but shouldn’t be the only levers that companies can use to attract employees. Katy George, a senior partner at McKinsey & Company, wrote a paper highlighting five changes that companies should consider making if they want to succeed in the emerging talent market:

From Pedigree to Potential

Job descriptions typically list specific education and experience requirements, but this can discourage candidates from applying who may be able to do the job despite lacking a certain credential. To broaden an employment search, companies can shift the focus from degrees to skills – simply changing the entry barriers, not lowering them.

From Preset Career Paths to Self-Authorship

In years gone by, employees would follow a pre-determined career track up a corporate ladder. Given the rapidly changing nature of today’s work and how quickly skills can become obsolete, employees are now taking charge of their own professional development. Companies should provide more professional development, apprenticeship, and personal growth opportunities. Self-directed learning can support both individual ambitions and company priorities.

From One-Way to Two-Way Apprenticeship

Traditional apprenticeship was about a younger person learning directly from an older one. Today, learning and teaching should flow both ways. For example, an apprenticeship that brings together a senior finance manager and a lower-ranking IT engineer would be an excellent way to share knowledge. A two-way learning dynamic gives employees opportunity for continual growth and can lead to greater loyalty and productivity.

From Time Served to Impact Delivered

An employee staying with a singular company for their whole career is pretty much unheard of nowadays. The stigma in leaving a job has never been weaker and the relationship between tenure and performance is nonexistent. Employees are looking for meaningful work where they feel they are making an impact. Employees expect their jobs to bring a significant sense of purpose to their lives and employers need to help meet this need. A paycheck is great, but a paycheck coupled with the feeling that you’ve positively contributed to society is even better.

From Culture Fit to Inclusive Culture

Capturing the full benefits of diversity is not about hiring people who can fit into the existing corporate culture. It’s about creating a company culture that is supportive and adaptable enough to embrace all kinds of talent. If a company does not work to embrace diverse talent, they will miss out on adding creativity and innovation to their team. Whether it is encouraging empathetic managers, or conducting fair performance reviews, there are many different ways to improve a company’s culture to be more inclusive.

Given the stress in many labor markets and the increasingly global hunt for talent, “The Great Renegotiation” is expected to intensify – but it is a process, not an end result. Adopting the changes above will be no small undertaking, but they are important steps to meeting both the present and the future needs of the labor market.

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There’s a strong sense of relief when outside experts announce that their audit of your not-for-profit is complete. But even if auditors have left your premises and returned the documents they’ve reviewed, the work isn’t really over. Not only do your executive director and board need to review the audit report, but it may be necessary to address auditor concerns by making changes to your organization.

Review the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your audit committee and management also need to meet with the auditors before the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”) highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Assess internal controls

The final audit report will state whether your nonprofit’s financial statements present its financial position in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. If the auditors have found your internal controls to be weak, promptly shore them up.

Gather feedback

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with the auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

Fiscal responsibility

Your donors, grantmakers and other supporters expect your organization to do everything in its power to ensure funds are used appropriately and responsibly. If you fail to act on issues identified in an audit, it could lead to asset misappropriation and seriously damage your nonprofit’s reputation and viability. Contact us if you have questions, require an audit or need help improving internal controls.

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If you’re interested in investing in tax-free municipal bonds, you may wonder if they’re really free of taxes. While the investment generally provides tax-free interest on the federal (and possibly state) level, there may be tax consequences. Here’s how the rules work:

Purchasing a bond

If you buy a tax-exempt bond for its face amount, either on the initial offering or in the market, there are no immediate tax consequences. If you buy such a bond between interest payment dates, you’ll have to pay the seller any interest accrued since the last interest payment date. This amount is treated as a capital investment and is deducted from the next interest payment as a return of capital.

Interest excluded from income

In general, interest received on a tax-free municipal bond isn’t included in gross income although it may be includible for alternative minimum tax (AMT) purposes. While tax-free interest is attractive, keep in mind that a municipal bond may pay a lower interest rate than an otherwise equivalent taxable investment. The after-tax yield is what counts.

In the case of a tax-free bond, the after-tax yield is generally equal to the pre-tax yield. With a taxable bond, the after-tax yield is based on the amount of interest you have after taking into account the increase in your tax liability on account of annual interest payments. This depends on your effective tax bracket. In general, tax-free bonds are likely to be appealing to taxpayers in higher brackets since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, the tax benefit from excluding interest from income may not be enough to make up for a lower interest rate.

Even though municipal bond interest isn’t taxable, it’s shown on a tax return. This is because tax-exempt interest is taken into account when determining the amount of Social Security benefits that are taxable as well as other tax breaks.

Another tax advantage

Tax-exempt bond interest is also exempt from the 3.8% net investment income tax (NIIT). The NIIT is imposed on the investment income of individuals whose adjusted gross income exceeds $250,000 for joint filers, $125,000 for married filing separate filers, and $200,000 for other taxpayers.

Tax-deferred retirement accounts

It generally doesn’t make sense to hold municipal bonds in your traditional IRA or 401(k) account. The income in these accounts isn’t taxed currently. But once you start taking distributions, the entire amount withdrawn is likely to be taxed. Thus, if you want to invest retirement funds in fixed income obligations, it’s generally advisable to invest in higher-yielding taxable securities.

We can help

These are only some of the tax consequences of investing in municipal bonds. As mentioned, there may be AMT implications. And if you receive Social Security benefits, investing in municipal bonds could increase the amount of tax you must pay with respect to the benefits. Contact us if you need assistance applying the tax rules to your situation or if you have any questions.

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Whether you’re considering selling your business or acquiring another one, due diligence is a must. In many mergers and acquisitions (M&A), prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers get their own QOE reports to spot potential problems that might derail a transaction and identify ways to preserve or even increase the company’s value. Here’s what you should know about this critical document:

Different from an audit

QOE reports are not the same as audits. An audit yields an opinion on whether the financial statements of a business fairly present its financial position in accordance with Generally Accepted Accounting Principles (GAAP). It’s based on historical results as of the company’s fiscal year end.

In contrast, a QOE report determines whether a business’s earnings are accurate and sustainable, and whether its forecasts of future performance are achievable. It typically evaluates performance over the most recent interim 12-month period.

EBITDA effects

Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Many buyers and sellers believe this metric provides a better indicator of a business’s ability to generate cash flow than net income does. In addition, EBITDA helps filter out the effects of capital structure, tax status, accounting policies and other strategic decisions that may vary depending on who’s managing the company.

The next step is to “normalize” EBITDA by:

Eliminating certain nonrecurring revenues and expenses,
Adjusting owners’ compensation to market rates, and
Adding back other discretionary expenses.

Additional adjustments are sometimes needed to reflect industry-based accounting conventions. Examples include valuing inventory using the first-in, first-out (FIFO) method rather than the last-in, first-out (LIFO) method, or recognizing revenue based on the percentage-of-completion method rather than the completed-contract method.

Continued viability

A QOE report identifies factors that bear on the business’s continued viability as a going concern, such as operating cash flow, working capital adequacy, related-party transactions, customer concentrations, management quality and supply chain stability. It’s also critical to scrutinize trends to determine whether they reflect improvements in earnings quality or potential red flags.

For example, an upward trend in EBITDA could be caused by a positive indicator of future growth, such as increasing sales, or a sign of fiscally responsible management, such as effective cost-cutting. Alternatively, higher earnings could be the result of deferred spending on plant and equipment, a sign that the company isn’t reinvesting in its future capacity. In some cases, changes in accounting methods can give the appearance of higher earnings when no real financial improvements were made.

A powerful tool

If an M&A transaction is on your agenda, a QOE report can be a powerful tool no matter which side of the table you’re on. When done right, it goes beyond financials to provide insights into the factors that really drive value. Let us help you explore the feasibility of a deal.

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Investing has been tough this year. We have seesawed up and down, with the downs swinging much more heavily. Long-lasting inflation pressures have caught the Federal Reserve flat-footed and are now forcing them to take drastic measures to try to dampen inflation. These measures have caused a lot of turmoil in the economy and have created a lot of volatility in the investing sphere. Equity markets, bonds and REITs have all been struggling.

One core question our clients challenge us with is why we don’t try to sell out before, or at the beginning of, market corrections, and then reinvest once calmer times have returned. This is much easier said than done. In the long run, investing on a constant basis and riding the ups and downs is the winning method. However, when you try to trade around market conditions, you need to be right twice: on the way out and on the way back in. What happens if you exit and the market creeps up another 10%? Will you get back in at the higher levels or wait on the side lines for safety for weeks, months or even years?

Having said that, there may be certain changes around the edges that can be appropriate based on economic conditions. But the slicing and dicing of trading in and out of the market can be a huge drag on long-term performance.

In Morgan Housel’s book, The Psychology of Money, Housel provides a great analogy for bearing the psychological pain to achieve higher returns:

Say you want a new car that costs $30,000. You have a few options:

Pay $30,000 for a new car.
Opt for a cheaper, used car instead.
Steal one.

Generally, 99% of people would avoid the third option because the consequence of stealing a car outweighs the upside. This is obvious, but say you want to earn a 10% annual return on your investments. Just like the shiny new car, there’s going to be a price to pay. In this case, the usual price is volatility and uncertainty. And just like in the car scenario, here too you have a few options:

You can pay it, and accept the volatility while you hold on tight to your investments.
You can find a more predictable asset and accept a lower return, such as government treasuries or CDs (the equivalent of the used car option).
You can ‘steal’ it – a.k.a. trying to simultaneously earn the return while avoiding the price that comes with it (volatility). People try anything to attempt this: trading, rotations, hedges, arbitrages, leverage – you name it.

Unlike the vehicle, with investments, many people attempt the third option. And while a few may get away with it, like car thieves – most get caught.

Running off with investment returns without paying for them – like driving off with someone else’s car – looks enticing (especially if you know that one guy who claims to have done it successfully). But don’t be fooled. The risk is great.

This warning may not be one you want to hear (especially with all the other warnings about economic storms coming our way) but your future self will be thankful. Investments made during bear markets yield amazing benefits down the line. Just make sure you have a sound financial plan in place, and abide by that plan through thick and thin.

(And if you aren’t sure if your financial plan is sound, you know where to find us.)

info@equinum.com

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Warren Buffett once said that “trust is like the air we breathe — when it’s present, nobody really notices. When it’s absent, everyone notices.” As anyone in the business world will tell you, trustworthiness is one of the most important assets for a business and one of the most essential forms of capital a leader has. No matter what kind of work your business does, it is critical that your customers trust you with their money and personal information, and that your employees trust you with their reputation and their careers.

Trust is the natural result of thousands of tiny actions, words, thoughts and intentions. It does not happen all at once – gaining trust takes time and work. It can take years for a manager or leader to develop the trust of their employees or customers, but it can only take a moment to lose that trust. Without trust, transactions cannot occur, leaders can lose teams, salespeople can lose sales…the list goes on. Trust and relationship, much more than money, are the currency of business.

Jack Zenger and Joseph Folkman, executives at a leadership development consultancy, analyzed over 80,000 employee assessments and found three elements that predict whether a leader would be trusted by his direct reports, peers and other colleagues:

Good Judgement/Expertise. One factor that influences whether people trust a leader is the extent to which a leader is well-informed and knowledgeable. A leader must understand the technical aspects of the work and be competent in their area of expertise. They must use good judgement when making decisions and exhibit a high degree of confidence in their ideas and opinions.

Consistency. Another major element of trust is the extent to which leaders do what they say they will do. This may seem obvious, but people rate a leader high in trust if they honor their commitments and keep their promises. Even something as simple as quickly returning emails and phones calls can go a long way in building trust.

Positive Relationships. According to Zenger and Folkman’s research, the most important element of trust is based on the extent in which a leader is able to create positive relationships with other people and groups. To instill trust, a leader must balance results with concern for others. Last month, we spoke about how to communicate with empathy – a critical element in building positive relationships. Leaders must also be able to generate cooperation between others and resolve conflicts in a helpful way.

Trust is a measure of the quality of any relationship — something worth investing a whole lot in.

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Fall is here, and many not-for-profits are starting to think about their 2023 budgets. If your budget process is on autopilot, think about changing things up this year — particularly if you’ve experienced recent shortfalls or found your budget to be less resilient than you’d like. Here are some ways for you to rethink your budgeting:

A holistic approach

Your nonprofit may not always approach its budget efficiently and productively. For example, budgeting may be done in silos, with little or no consultation among departments. Goals are set by executives, individual departments come up with their own budgets, and accounting or finance is charged with crunching the numbers.

You’d be better off approaching the process holistically. This requires collaboration and communication. Rather than forecasting on their own, accounting and finance should gather information from all departments.

Under-budgeting tendencies

Another habit to break? Underbudgeting. You can improve accuracy with techniques such as forecasting. This process projects financial performance based on:

Historical data (for example, giving patterns),
Economic and other trends, and
Assumptions about circumstances expected to affect you during the budget period (for example, a major capital campaign).

Forecasting generally takes a longer-term view than budgeting — say, five years versus the typical one-year budget. It also provides valuable information to guide budget allocations and strategic planning.

You also might want to do some budget modeling where you game out different scenarios. Consider your options if, for example, you lost a major grant or were (again) unable to hold big, in-person fundraising events.

If the COVID-19 pandemic has proven anything for nonprofits, it’s the necessity of rainy-day funds. If you don’t already have a reserve fund, establish one. If you do have a reserve fund, avoid the temptation to skip a budget period or two of funding for it.

More ideas

Another idea is to switch from your annual budget to a more flexible, rolling budget. You would still budget for four quarters but set certain intervals during which you’d adjust the numbers as circumstances dictate. Typically favored by organizations that experience volatile financial and service environments, rolling budgets can empower nonprofits to respond better to both crises and opportunities in a timely manner. Reach out for more ideas on crafting an accurate and effective budget.

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Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.

Tax implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protecting assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. 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.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. Part one of our mini-series on real estate investment through syndication focused on the use of a clause called a ‘waterfall provision.’ We’ll continue with part 2 of our series, which discusses syndication and carried interest.

Watch the video:

A real estate syndicate is an organization, or combination of investors, who pool together capital to invest in real estate. The syndicate shares in the investment’s profits, even though it does not invest any of its own capital. When it realizes a profit, that profit is called a ‘carried interest’ or a ‘promote.’ The carried interest serves as compensation to the syndicator for the risk it assumes during the development of the project and the efforts made prior to its sale.

If a property has been held for more than a year before it’s sold, the carried interest has traditionally been treated as a long term capital gain. This is important because Uncle Sam recognizes a carried interest as a return on investment. So, it’s taxed at a lower capital gains rate than is ordinary income.

However, the IRS later extended that holding period from more than one year to more than three years. Does this paralyze a syndicator for three years, disallowing favorable tax benefits on an earlier sale? Apparently not. On January 13, 2021, the IRS posted final Treasury Regulations for Section 1061 of the Internal Revenue Code. Section 1061 extended the 1-year holding period required for long-term capital gains treatment to a 3-year period for entities termed, “applicable partnership interests” (APIs).

Section 1061(c)(1) defines the term “applicable partnership interest” as “any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business.”

There’s an interesting – and potentially profitable – caveat built into the IRS’ definition. Section 1061 rules inadvertently include a favorable exception for real estate investors. After careful review of the updated code, practitioners realized that this new restriction omitted interests resulting from certain services. These services include investing and disposing of real estate held for rental or investment. In our scenario, the syndicate provides these real estate investment services for the investors. This means that a syndicator’s profits at the time a property is sold are the result of an allowable service that, if held for one year, can be treated as a long term capital gain. It is free of the three year holding period requirement and subject to advantageous capital gains tax rates.

Here’s the bottom line: A syndicators’ profits at the time a property is sold will be treated as long term capital gain, free of the three year holding period requirement, and subject to advantageous capital gains tax rates.

Speak to your professional advisor about investing through syndication to build wealth.

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Academics, business consultants and employees agree that empathy is one of the most important skills in a successful business leader. Empathy has always been a critical skill, but over the last two years, business leaders may feel they have become something akin to the “Counselor in Chief” or “Chief Empathy Officer.” During challenging times, empathic communications are even more necessary, but empathy is not a trait that comes naturally to everyone. The good news is that even leaders who are not naturally empathic can still communicate messages of empathy in a way that inspires people, builds loyalty and strengthens bonds within their company.

What exactly is empathy? According to the Center for Creative Leadership, empathy is the ability to experience and relate to the thoughts, emotions, or experience of others. In other words, empathy is the ability to understand someone from their perspective. It is the ability to share in how another person feels as they encounter different circumstances, situations and life experiences. Empathy welcomes people to shift from their own experiences and instead think about the experiences of those they interact with.

Why does it matter? According to the statistics, there are many benefits surrounding the importance of empathy in work cultures. Incorporating empathy into a business culture leads to increased employee retention, higher engagement levels, better chances at recruiting top talent, greater employee satisfaction, and better business results. Microsoft CEO Satya Nadella says, “Empathy makes you a better innovator. If I look at the most successful products

we have created, it comes with that ability to meet the unmet, unarticulated needs of customers.”

Just as each of us has varying levels of empathy, not every leader is equally empathic. Regardless of how empathic you are or think you are, here are four simple ways to improve empathy in your communications:

Listening – When communicating, listening is just as important as speaking (maybe more so). Listening with empathy means listening with the purpose of understanding another person’s situation or perspective, by suspending your own thinking, opinions and judgments. Sometimes just an attentive presence is enough to alleviate concerns. Remember that listening only works when the mouth is closed and the ears are open!

Acknowledgement – Leaders are generally good at getting stuff done. But often, when it comes to challenging situations, that’s not what people need. Many times people just need your ear and your caring presence. Many problems just need to be heard and acknowledged, showing the person that you are now aware of the situation and recognize how it can be stressful.

Care – Express authentic feelings of care about how a challenge affects your team. Expressions of care indicate that you are moved by a situation. Remember to not be the predominant speaker during communication exchanges, and don’t talk at length about difficult decisions you’ve had to make. Referencing yourself this way may feel soothing to you, but it is your job to support your team, not the other way around.

Action -Finally, expressions of action are among the best ways to display empathy. By first acknowledging and then acting to address the challenges an employee may be facing, leaders build and strengthen the trust in that relationship. Consider asking simply, ”What do you need?” By giving the person an opportunity to reflect on what they may need, you are initiating a solution to the issue while allowing the person feel heard and seen.

There is no question that the ability to step into another person’s shoes and understand their situation is a powerful trait that builds trust and faith. While empathy may not come easily to all leaders, that shouldn’t stop them from communicating with empathy. At its most basic level, empathy is about building stronger relationships.

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While contemplating our own mortality is usually not our activity of choice, ignoring the need for an estate plan or procrastinating to create one is asking for trouble. For your estate plan to achieve your goals, avoid these four pitfalls:

Pitfall #1: Failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.

Pitfall #2: Not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.

Pitfall #3: Mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, you should review these designations periodically, just as you should your beneficiary designations. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Pitfall #4: Not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.

To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can provide you with the peace of mind that you’ve covered all the estate planning bases.

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Bigger isn’t always better. Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.

1. QBI deduction

For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts and estates. But it’s not available to C corporations or their shareholders.

The QBI deduction can be up to 20% of:

QBI earned from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
QBI passed through from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or S corporation.

Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.

2. Eligibility for cash-method accounting

Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.

Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.

Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.

3. Section 179 deduction

The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It’s available for both new and used property.

For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:

Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.

Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.

The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.

Bonus depreciation

While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.

Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.

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If you’ve been in business for a while, you’ve probably considered many different employee benefits. One option that might have crossed your desk is an employee stock ownership plan (ESOP).

Strictly defined, an ESOP is considered a retirement plan for employees, but it can also play a role in succession planning by facilitating the transfer of a business to the owner’s children or employees over a period of years in a tax-advantaged way.

Not a buyout

Although an ESOP is a retirement plan, it invests mainly in your own company’s stock. ESOPs are considered qualified plans and, thus, subject to the same IRS and U.S. Department of Labor (DOL) rules as 401(k)s and the like. This includes minimum coverage requirements and contribution limits.

Generally, ESOP distributions to eligible employees are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put” options or an “option to sell” — at fair market value during certain time windows.

While an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control gradually. During the transfer period, owners’ shares are held in an ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.

Mandatory valuations

One big difference between ESOPs and other qualified retirement plans is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.

The fair market value of the sponsoring company’s stock is important, because the DOL specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP essentially provides a limited market for its shares.

Costs and entity choice

Although ESOPs can be an important part of a succession plan, they have their drawbacks. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Plus, there are costs associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.

Another disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to the corporate form to establish one of these plans. This raises a variety of financial and tax issues.

It’s also important to consider the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.

A popular choice

There are about 6,500 ESOPs and equivalent plans in the United States today, with roughly 14 million participants, according to the National Center for Employee Ownership. So, if you decide to launch one, you won’t be alone. However, careful planning and expert advice is critical.

Back to industry updates

Often at Equinum, we hear people saying they don’t need professional financial advice because “you can find all the information you need on the Internet!”

And they’re right. The age we live in is pretty remarkable. All the information you could ever need – from the most basic of facts to the most complex and debated topics – is housed online.

But raw information isn’t everything. While Google can spit back all the differences between term and permanent life insurance, it can’t advise you in your personal situation. “What is a Roth conversion?” – Google can tell you. “Does a Roth conversion make sense for me?” – now, even Google has it’s limits.

The Internet does try and advise us, but sometimes, that advise can be poor, and other times, cringeworthy. Here are 2 of the many pieces of advice we’ve seen tossed around by influences, bloggers, and clickbait fishers:

“Don’t try to make more money – you’ll be pushed into the next bracket and pay more in taxes.”

Sure, making more money means paying more in taxes, but of course it’s still worthwhile. The U.S. tax code works at a marginal tax rate, where even the richest Americans have their first dollars taxed at 10%. So you’d only be paying a higher tax rate on the ‘extra’ income.

“Invest in the riskiest things, since the higher the risk, the higher the reward.”

What these promoters are missing is that higher risk doesn’t guarantee higher returns – just potential for higher returns!

Can we agree that advice is best through a dynamic conversation with a qualified human being?

Especially if 1 of these 3 people sounds like you:

You’re not the DIY type. You prefer to focus on what you want to focus on – say, family and career – and delegate the rest to people you trust.
You have a complex financial situation, and the cost of an advisor is chump change compared to the cost of making a mistake in investment losses, taxes or legal fees.
You’re financially lonely. You’re not comfortable talking money with your friends or family, so you don’t have anyone to verify that you’re doing what’s financially best for you. The stress of trying to figure it all out on your own is taking quite a toll.

If you could use a second financial opinion (or a first for that matter), reach out to info@equinum.com. Oh, what a pair of professional eyes could do for you…

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Discussing an employee’s performance with them can be very stressful. It’s tough for managers to give feedback, and even harder for employees to receive it. While employee performance reviews are an incredibly powerful tool for driving employee success, their effectiveness depends on how they are conducted. Performance reviews have the ability to empower your employees to reach new heights – or – they can waste time, frustrate and even drive employees away from your company.

An employee performance review, also known as a performance evaluation, is a formal assessment of an employee’s work in a given time period. In an employee performance review, managers evaluate the individual’s overall performance, identify their strengths and weaknesses, offer feedback and help them set goals.

Although employee performance reviews can be extremely useful, they can also be one of the most uncomfortable parts of being a manager – and being an employee. Dissatisfaction with performance reviews is pervasive and has received a lot of criticism in recent years. A recent Gallup poll found that just 1 in 5 employees felt that their company’s performance practices motivated them.

Organizations such as Netflix, Microsoft and General Electric have recently begun to re-think their performance management systems. Many organizations and employees see performance reviews as time-consuming, demotivating, inaccurate, biased and unfair.

The problem is that these attitudes become self-fulfilling. Busy managers do cursory reviews without providing insightful feedback. Employees feel the review is unfair and approach the next review with that attitude. Managers then try to avoid the unpleasantness and will do an even more cursory, drive-by review, and the downward spiral continues.

Despite these concerns, there is immense value in developing an open, honest avenue for managers to discuss an employee’s performance and opportunities for growth. Employee reviews are also an important key to effective leadership. The higher you rise in any organization, the more dependent you are on your subordinates’ performance. How organizations handle these conversations plays a huge role in your employees’ engagement and growth. Here are some useful and effective tips for conducting performance reviews:

Set Expectations and Goals – At the beginning of the year, have a meeting with your employees to share your goals and expectations for the team. Then, take the time to meet with employees individually to set their own performance goals. This ensures that everyone is clear about expectations, and gives employees a defined outline to follow each time you discuss performance going forward.

Start Positive – Start with a compliment or a positive piece of feedback. Don’t put the employee on the defensive by highlighting problems at the start of the review. Consider first asking the employee how they think they’re doing, rather than starting the review off with your assessment.

Two-Way Conversation – Even if you know that performance reviews should be a two-way conversation, it can be easy to end up talking for most of the review. Effective performance management can only be reached if you’re open to listening and obtaining feedback from the employee. The goal of a good performance review should be to help people gain insight into how they can get even better. Consider asking your employees how they might be able to improve. By being ready to listen and having an open conversation, the review process will give great insights into both sides of the table.

Specific Examples/Data – When you’re giving feedback, don’t be vague. Vague or generic criticism given during a performance review is only going to frustrate and disenchant an employee. Don’t say things like “you need to be more proactive.” Give specific examples of behaviors you want your employee to stop, start or continue. The more concrete examples you can give to back up your constructive criticism, the better.

Multiple Source – Use data and feedback from multiple sources. Solicit feedback from colleagues who have worked closely with the employee to give a more well-rounded and balanced review. Be sure to gather both quantitative measures of employee performance, like sales reports and project deadlines, as well as qualitative measures, such as feedback from clients, customers or other employees.

Evaluate Results, Not Traits – One of the most common mistakes is trying to evaluate personality traits such as leadership, motivation, attitude and so on. The problem is that traits are subjective and are therefore impossible to evaluate fairly. Instead, focus on results that are observable, such as meeting sales quotas or completing projects on time.

Consider Conducting Reviews More Often – Want to make each performance review less of an ordeal? Conduct them more often. Of course, that’s easier said than done. Obviously, employees, supervisors and managers are all busy. It’s not easy to find the time to spend writing up fair, engaged and humanizing evaluations for every employee. But an entire year can be a long time for things to build up, and notable areas of performance can be forgotten or overlooked if they have to wait until the annual performance review.

A performance conversation is the perfect opportunity to make or break trust. Open, honest, regular dialogue builds trust among employees, managers and the organization as a whole. From an employee’s standpoint, performance reviews provide an opportunity for self-evaluation to discuss what’s been going right, and analyze areas for improvement. From a management standpoint, a well-crafted performance review allows business leaders to provide constructive feedback and coaching, while also building rapport and trust.

We want what’s best for you and your employees, and we are committed to helping your company grow together.

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Many people wonder how they can save on taxes by transferring assets into their children’s names. This tax strategy, known as ‘income shifting,’ seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

The child hasn’t reached age 18 before the close of the tax year, or
The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates.

Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible saving vehicles

The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

Securities and mutual funds oriented toward capital growth;
Vacant land expected to appreciate in value;
Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends;
Tax-exempt municipal bonds and bond funds;
U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

Traditional and Roth IRAs, which can be established or contributed to if the child has earned income;
Qualified tuition programs (also known as “529 plans”); and
Coverdell education savings accounts.

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

Two reporting options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child.

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Accounts payable is a critical area of concern for every business, but as a back-office function, it doesn’t always get the attention it deserves. Once in place, accounts payable processes tend to get taken for granted. Following are some tips and best practices for improving your company’s approach.

Be strategic

Too often, businesses take a reactive approach to payables, simply delaying payments as long as possible to improve short-term cash flow. But this approach can backfire if it puts you on bad terms with vendors.

Poor vendor relationships can affect delivery times, service quality and payment terms. A proactive, strategic approach to payables can help you strike a balance between optimizing short-term cash flow and getting along well with vendors.

It’s also critical to explore the potential benefits of early payment discounts, volume discounts or other incentives that can eventually improve cash flow. That doesn’t mean you should accept every available discount. Obviously, the decision hinges on whether the long-term benefits of the discount outweigh the immediate cost of, for example, paying early or buying in bulk.

Strengthen selection and review

Implement policies, procedures and systems to ensure that you properly vet vendors and negotiate the best possible prices and payment terms. Create preferred vendor lists so staff members follow established procedures and don’t engage in “maverick” buying — that is, purchasing from unauthorized vendors.

Review vendor contracts regularly, too. Create and maintain a database of key contractual terms that’s readily accessible to everyone. With an understanding of payment terms and other important contractual provisions, employees can use it to double-check vendor compliance and avoid errors that can result in overpayments or duplicate payments.

Leverage technology

Automating accounts payable with the right software offers many benefits. For one thing, an automated, paperless system can increase efficiency, reduce costs and speed up invoice processing. And of course, the ability to pay invoices electronically makes it easier to take advantage of available discounts.

Automation can also provide greater visibility of payables and better control over payments. For instance, cloud-based systems provide immediate access to account information, allowing you to review and approve invoices from anywhere at any time. The best automated systems also contain security controls that help prevent and detect fraud and errors.

Naturally, there’s an upfront cost to buying good accounts payable software and training your staff to use it. You’ll need to find a solution that suits your company’s size, needs and technological sophistication. You’ll also incur ongoing costs to maintain the system and keep it updated.

Pay attention to payables

Don’t underestimate the impact of accounts payable on the financial performance of your business. Taking a “continuous improvement” approach can enhance cash flow and boost profitability. Let us help you devise strategies for the optimal tracking and handling of outgoing payments.

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Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new?

In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided that:

The deceased was a U.S. citizen or resident,
The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and
The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (within two years of the date of death) had expired. According to the IRS, these requests placed a significant burden on the agency’s resources.

The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in lieu of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline

If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death.

Back to real estate right now

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, this series covers the latest real estate trends and opportunities and how you can make the most of them. Part one of our mini-series on syndication focuses on the use of a clause called a ‘waterfall provision.’

Watch our short video:

A real estate syndicate is formed when an individual, partnership or organization pools together outside capital and invests in real estate. The syndicator will do all the groundwork on behalf of the investors, or “partners”, and will research, locate, purchase and eventually manage the investment property. Although the syndicator puts in sweat equity, it doesn’t invest any of its own capital.

There are several ways that a syndicator can share in the investment’s profits, and the role that each player assumes in the real estate transaction will determine its share. Those roles are explained in the “waterfall provision” found in their partnership agreement.

A ‘waterfall,’ also known as a waterfall ‘model’ or ‘structure,’ is a legal term that appears in a partnership’s operating agreement that describes how and to whom distributions are made. The property’s profits from operations, or from a “capital event” (i.e. refinance or sale), are allocated to the investors based on the terms of the waterfall provision. In the example in our video, the investors agree to contribute $2 million towards the property’s purchase. They make it a 70%/30% split and decide on an 8% “preferred return” on their $2 million capital investment.

Here’s how it will play out: The syndicator keeps an accounting of the property’s cash flow over the course of their ownership and will wait until the investors have been satisfied as specified in the waterfall agreement. In our example, the agreement ensures that the investors earn 8% of their capital investment – that would be $160,000, or 8% in preferred returns – and recoup their original $2 million investment. The syndicator will benefit from the profits of the operation, or its sale or refinance, only after the investors have recouped $2,160,000, (the amount of their capital investment and preferred returns). When the terms are satisfied, the syndicator will earn its 30% share of any residual profits, and the remaining 70% will be shared among the investors. It’s a win-win.

When distributions are made based on the profits of a property’s operations, it results in steady payments over the life of the property. However, it’s very common, and often very profitable, for an ‘event’ to accelerate the waterfall process. If the property is sold or refinanced, profits are actualized quickly and monies are released for distribution quickly. In either case, real estate investment by syndication offers an investment model that can benefit investors at many levels and presents profitable opportunities for syndicators and non-real estate professionals alike.

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The pandemic has made many companies rethink what flexibility looks like in the workplace. Hybrid work schedules are becoming increasingly common, as are flexible work hours. Employees are more concerned than ever about their work-life balance and the culture of their workplace. All these factors have brought the perennial idea of the four-day work week back into the public discussion.

The concept is simple – employees would work four days a week while being paid the same and earning the same benefits, but also while maintaining the same workload. The thinking is that by reducing their work week, organizations could operate with fewer meetings and more independent work. Governments across Europe have started experimenting with the four-day work week. Last year, Kickstarter became the latest in a string of organizations to announce they were experimenting with a four-day workweek.

Research suggests that reducing work hours can decrease employee stress, and improve well-being without impacting productivity, but only when implemented correctly. To illustrate, in a recent study about New Zealand’s move to the four-day workweek, researchers Helen Delaney and Catherine Casey found that not only was work intensified following the change, but so were managerial pressures around performance measurement, monitoring, and productivity. It is simply not sustainable or reasonable to expect already frazzled employees to keep working with existing workloads for fewer hours or less days.

While reducing employee hours or workdays is certainly not for every business, there may be companies out there whose employees will benefit from a shift to less hours or days. A recent Harvard Business Review article outlines a six-step guide to help leaders plan and implement a four-day workweek.

Shifting your mindset – For a four-day workweek to be successful, leaders must shift their mindsets to value actual productivity, not just hours worked. While hours worked is an easily quantifiable metric, it often doesn’t correspond to the actual value added to an organization.

Employees and leaders define goals and metrics together – Both employees and leaders should be actively involved in the planning process and should jointly answer important questions on implementation. Whether there is a joint work group or just regularly scheduled meetings between leadership and employees, here are some questions that should be considered: How will the organization measure productivity? Which days or hours should we take off? How can we keep the change from negatively impacting our clients, customers, and other stakeholders? What steps can we take to increase our productivity?

Communicate internally and externally – Internally, the biggest questions will likely be about how the change will affect people’s jobs. Be clear about your reasons for trying out the four-day workweek and assure your employees that it will not negatively affect their pay or benefits. Externally, many companies worry about what their clients will think if they reduce hours. Those worries can often be addressed by simple communication. Identify which customers or stakeholders might be affected and ensure the scheduling change is communicated clearly. You may be surprised about how receptive they‘ll be to the change.

Run a Pilot – Now it’s time to act! Remember that in the pilot stage, the goal isn’t to get everything right from day one; it is about creating the tools and processes your organization needs to make reduced work hours possible. During this time, problems will arise. Try your best to address them as they happen and create an environment where people feel safe sharing their thoughts and concerns.

Assess the Pilot – Once the pilot is complete, analyze the results using different metrics. Group interviews can provide insight into employees’ experiences, and job satisfaction surveys can help identify trends in stress levels, work-life balance, and quality of life. As far as productivity, relevant metrics will depend on your industry, such as number of sales or average completion time of projects.

Implementation – Leaders will need to work across the organization to embed the new practices into the workplace culture. Be sure to remain focused on productivity — not hours worked — as the metric of success. Track metrics over the long term and adapt your processes according to what they show. Every organization will uncover its own challenges when moving to a reduced work hours policy, but with constant communication and staying flexible, most issues can be addressed quickly.

Workplace norms have shifted over the last two years. Today we find ourselves in a transitional period in the American workplace and we have the chance to remake our concept of work before things go back to the way they were. It’s an opportunity leaders must not squander. While no change comes easily, leaders willing to embrace the changes have a chance to push their businesses ahead of the competition by having more engaged employees who better service their clients.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. 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.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Back to industry updates

Business owners and investors are understandably concerned about skyrocketing inflation. Over the last year, consumer prices have increased 8.3%, according to the latest data from the U.S. Bureau of Labor Statistics. The Consumer Price Index (CPI) covers the prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. This was a slightly smaller increase than the 8.5% figure for the period ending in March, which was the highest 12-month increase since December 1981.

Meanwhile, the producer price index (PPI) is up 11% over last year. This was a smaller increase than the 11.2% figure for the period ending in March, which was the largest increase on record for wholesale inflation. PPI gauges inflation before it hits consumers.

Key impacts

For your business, inflation may increase direct costs and lower customer demand for discretionary goods and services. This leads to lower profits — unless you’re able to pass cost increases on to customers. However, the possible effects aren’t limited to your gross margin. Here are seven other aspects of your financial statements that might be impacted by today’s high rate of inflation.

1. Inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is measured at the lower of 1) cost and 2) market value or net realizable value. Methods that companies use to determine inventory cost include average cost, first-in, first-out (FIFO), and last-in, first-out (LIFO). The method you choose affects profits and the company’s ending inventory valuation. There also might be trickle-down effects on a company’s tax obligations.

2. Goodwill. When estimating the fair value of acquired goodwill, companies that use GAAP are supposed to apply consistent valuation techniques from period to period. However, the assumptions underlying fair value estimates may need to be revised as inflation increases. For instance, market participants typically use higher discount rates during inflationary periods and might expect revised cash flows due to rising expenditures, changes in customer behaviors and modified product pricing.

3. Investments. Inflation can lead to volatility in the public markets. Changes in the market values of a company’s investments can result in realized or unrealized gains or losses, which ultimately impact deferred tax assets and liabilities under GAAP. Concerns about inflation may also cause a company to revise its investment strategy, which may require new methods of accounting or special disclosures in the financial statement footnotes.

4. Foreign currency. Inflation can affect foreign exchange rates. As exchange rates fluctuate, companies that accept, hold and convert foreign currencies need to ensure they’re capturing the correct rate at the appropriate point in time.

5. Debts. If your company has variable-rate loans, interest costs may increase as the Federal Reserve raises interest rates to counter inflation. The Fed already raised its target federal funds rate by 0.5% in May and is expected to increase rates further over the course of 2022. Some businesses might decide to convert variable-rate loans into fixed-rate loans or apply for additional credit now to lock in fixed-rate loans before the next rate hike. Others may restructure their debt. Depending on the nature of a restructuring, it may be reported as a troubled debt restructuring, a modification or an extinguishment of the debt under GAAP.

6. Overhead expenses. Long-term lease agreements may contain escalation clauses tied to CPI or other inflationary measures that will lead to increased lease payments. Likewise, vendors and professional service providers may increase their prices during times of inflation to preserve their own profits.

7. Going concern disclosures. Each reporting period, management must evaluate whether there’s substantial doubt about the company’s ability to continue as a going concern. Substantial doubt exists if it’s probable that the entity will be unable to meet obligations as they become due within 12 months of the financial statement issuance date. Soaring rates of inflation can be the downfall of companies that are unprepared to counter the effects, causing doubt about their long-term viability.

We can help

Inflation can have far-reaching effects on a company’s financial statements. Contact us for help anticipating how inflation is likely to affect your company’s financials and brainstorming ways to manage inflationary risks.

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How often does your company generate a full set of financial statements? It’s common for smaller businesses to issue only year-end financials, but interim reporting can be helpful, particularly in times of uncertainty. Given today’s geopolitical risks, mounting inflation and rising costs, it’s wise to perform a midyear check-in to monitor your year-to-date performance. Based on the results, you can then pivot to take advantage of emerging opportunities and minimize unexpected threats.

Appreciate the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that have been struggling during the pandemic.

For example, you might compare year-to-date revenue for 2022 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. It’s also important to track costs during an inflationary market. If your business is starting to lose money, you might need to consider 1) raising prices or 2) cutting discretionary spending. For instance, you might need to temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. A low stock of key inventory items might foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Recognize potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might result from informal accounting practices that are common midyear (but are corrected by you or your CPA before year-end statements are issued).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, tend to paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked finance managers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact us to help with your interim reporting needs. We can fix any shortcomings by performing additional procedures on interim financials prepared in-house — or by preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

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Let’s not try to sugar-coat this; 2022 has been brutal from a financial standpoint. The stock market has officially entered into a bear market, inflation has been producing nasty headlines and interest rates have gone haywire.

Let’s explore what has been happening under the surface.

Emerging out of the Covid recession many aspects of the economy were out of whack. For starters, many were out of work, so the government footed the bill by paying enhanced unemployment programs on top of other stimulus and business borrowing programs.

Giving the people extra money and not being able to spend it on vacations and restaurants as they were all closed, meant that American families’ balance sheets improved. So, although there was this once-in-a-lifetime pandemic and financial disruption, savings rates actually went up.

Once we emerged from the pandemic, people were desperate to spend. Demand was extremely high. But broken-down supply chains meant that demand outpaced supply which in economic terms creates inflation.

All this extra cash in hands of the American public, along with very easy monetary conditions from the Federal Reserve, also created an asset-buying frenzy. The stock market, real estate market, cryptocurrencies along with other assets caught a huge bid. The S&P 500 rose 113% off the pandemic lows, houses all over the U.S. were selling for 20%+ above the asking price, and speculative assets like non-profitable growth companies and cryptocurrencies were up hundreds of percentage points in just a few months creating a bubble environment.

The inflation pressures, which started in earnest in the middle of 2021, has put the Federal Reserve on its heels. At the start, they kept on saying that the inflation spike is “transitory”. But as it turns out, it is way stickier than they anticipated.

This experiment of money printing is something we wrote about in May of 2021, and I guess the debate should be settled.

Being that the Federal Reserve’s dual mandate is maximum employment and stable prices, they needed to jump into overdrive and slow inflation. The core way they do it is by raising interest rates.

Slowing the economy by reducing the circulation of money in the economy is the chief outcome of raised rates. When this slowdown spreads through the nooks and crannies of the economy, spending slows, so demands drop. The hope is that prices should come down.

This plan can come along with collateral damage. The R-word. Okay, I’ll say it, a recession.

By slowing the economy, spending goes down, so income goes down, so rents fall, so foreclosures go up… You get the picture. The Fed may try to accomplish one thing by slowing the economy, but there may be a price to pay.

Fed Chair Powell was asked during a recent press conference if he believes that we will have a “soft landing”, he responded “softish”. That is admitting to a lot in Fed Speak.

There is a case to be made that this is not the worst thing. The stock market is already paying the piper as it is, why not complete the process? If we manage to avoid a near-term recession, we’d only be temporarily preventing the inevitable: Recessions are a normal and natural part of the economic cycle and the longer we go without one, the worse the imbalances will be when we get there.

50% of Nasdaq stocks are off 50% from their highs. Once we got to this point, why go back up to new highs only for a recession in 2024?

So, if the recession comes, how can you prepare for this?

For starters, keep your leverage low. Purchasing real estate and other assets on leverage works great when the economy is humming. But when rents fall, vacancies are up and business profits fall, being left holding the bag with all the debt can prove costly. As Warren Buffet famously said, “only when the tide goes out do you discover who’s been swimming naked.” It may be time to de-leverage and sell some higher-risk assets.

Diversification is as important as ever.

From a stock market perspective, it’s very difficult to try to time it right. Markets tend to bottom out before the actual recession is wreaking havoc on the economy. Take the covid drawdown for example; the market bottomed out way before daily deaths spiked. The wealth destruction happened mostly before the virus was spreading in the United States.

The same would be with other economic events. The market is a forward-looking mechanism. The selling for an anticipated recession could be long over once we are actually in one. Trying to time the in and out right is almost impossible.

From an employment perspective, be nimble and ready to do additional tasks to keep salaries up to current levels. Layoffs are a nasty part of a recession and those who bring massive value to a company are the last to be tampered with.

As gloomy as this sounds, it is also a huge opportunity. As Sir John Templeton said, “for those properly prepared, the bear market is not only a calamity but an opportunity”.

So, keep your emotions in check, try not to do anything drastic, it’s not the time to score style points, and don’t try to overthink things. And don’t hesitate to ask for help.

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Are you a partner in a business? You may have come across a situation that’s puzzling. 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 does this happen? It’s due to the way partnerships and partners are taxed. Unlike C 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 or her share of a partnership’s loss to offset other income.)

Pass through your share

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.

An information return must be filed by a partnership. 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 or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her 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.

Illustrative example

Two people 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 or her partnership interest from $50,000 to $10,000.

More rules and limits

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. Contact us if you’d like to discuss how a partner is taxed.

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Pay equity is both required by law and a sound business practice. However, providing equitable compensation to employees who perform the same or similar jobs, while accounting for differences in experience and tenure, isn’t easy. That’s why every company should at least consider undertaking a pay equity audit to assess its compensation philosophy and approach.

Legal background

The federal Equal Pay Act requires employers to provide men and women with equal pay for equal work in the same establishment. The jobs don’t need to be identical, but they should be “substantially equal.” Moreover, it’s not job titles, but job content — including skill, effort and responsibility — that determines whether jobs are substantially equal.

Many states have enacted their own equal pay laws, some of which are more stringent than the federal legislation. California, for example, requires employers to pay employees the same wage rates for “substantially similar work,” a larger umbrella than “same or similar jobs.”

Some other countries have also introduced laws around pay equity. The United Kingdom, for instance, requires some public companies to annually disclose the ratio of their chief executive officers’ pay to the lower, median and upper quartile of their employees’ pay.

In addition to helping to prevent legal woes, pay equity can offer bottom-line benefits. A company’s commitment to equitable pay can enhance its employer brand, boost employee morale and performance, and reduce the risk of negative publicity.

An involved process

The purpose of a pay equity audit is to:

Uncover disparities in compensation,
Identify the drivers behind them, and
Develop ways to address the inequities.

Although the process can be quite involved, it’s typically worth the effort.

First, assemble participants from multiple departments — including HR, legal, and finance or accounting — to collect data on employee compensation, job classifications and demographics. This cross section of participants also will help ensure buy-in across the business.

The next step is determining how to group employees. That is, which ones will be considered to have substantially similar roles and, thus, should fall within the same pay range?

Some number crunching will come into play. For smaller employee groups, an analysis of, for example, differences in median pay between groups of employees might be enough to identify any unwarranted disparities. With larger groups, you may have to conduct more rigorous statistical analyses. For example, regression analysis can help control for variables, such as employees’ experience levels, when examining disparities.

Critical component

Over the past year, many workers have made it abundantly clear that they’ll leave a job if any of several employment components isn’t to their liking. Compensation is certainly one of these. Our firm can help support your efforts to conduct a pay equity audit.

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Disclosure of contingent liabilities — such as those associated with pending litigation or government investigations — is a gray area in financial reporting. It’s important to keep investors and lenders informed of risks that may affect a company’s future performance. But companies also want to avoid alarming stakeholders with losses that are unlikely to occur or disclosing their litigation strategies.

Understanding the GAAP requirements

Under Accounting Standards Codification (ASC) Topic 450, Contingencies, a company is required to classify contingent losses under the following categories:

Remote. If a contingent loss is remote, the chances that a loss will occur are slight. No disclosure or accrual is usually required for remote contingencies.

Probable. If a contingent loss is probable, it’s likely to occur and the company must record an accrual on the balance sheet and a loss on the income statement if the amount (or a range of amounts) can be reasonably estimated. Otherwise, the company should disclose the nature of the contingency and explain why the amount can’t be estimated. In general, there should be enough disclosure about a probable contingency so the disclosure’s reader can understand its magnitude.

Reasonably possible. If a contingent loss is reasonably possible, it falls somewhere between remote and probable. Here, the company must disclose it but doesn’t need to record an accrual. The disclosure should include an estimate of the amount (or the range of amounts) of the contingent loss or an explanation of why it can’t be estimated.

Making judgment calls

Determining the appropriate classification for a contingent loss requires judgment. It’s important to consider all scenarios and document your analysis of the classification.

In today’s volatile marketplace, conditions can unexpectedly change. You should re-evaluate contingencies each reporting period to determine whether your previous classification remains appropriate. For example, a remote contingent loss may become probable during the reporting period — or you might have additional information about a reasonably possible or probable contingent loss to be able to report an accrual (or update a previous estimate).

Outside expertise

Ultimately, management decides how to classify contingent liabilities. But external auditors will assess the company’s existing classifications and accruals to determine whether they seem appropriate. They’ll also look out for new contingencies that aren’t yet recorded. During fieldwork, your auditors may ask for supporting documentation and recommend adjustments to estimates and disclosures, if necessary, based on current market conditions. Contact us for more information.

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As a business leader, you have likely run countless meetings. Your meetings might have ranged from a large group of people to a one-on-one. Meetings can be an invaluable way at producing better business decisions or gaining valuable input, but have you ever left a meeting and couldn’t remember anyone besides yourself sharing or contributing ideas?

Some leaders need to be trained to speak up, but many leaders have the opposite problem — they talk too much and monopolize meeting discussions. While it is certainly important to share your point of view in meetings, it is also important to not overshare and suffocate discussion. Monopolizing the conversation can lead to your team members becoming frustrated because they want to share their own ideas. At the same time, your ideas get ignored because stakeholders lose patience and tune you out because they are tired of you dominating meetings.

If you think you may be monopolizing the conversation in meetings, here are some helpful tactics for sharing the floor and helping get your message across.

Measure. After a meeting, take time to reflect on how much you contributed compared to others and try to estimate how much you spoke at the meeting. Did you speak for half the meeting or a quarter? Also, try to remember how often you interrupted or spoke over someone who was trying to contribute? If you have a pattern of talking over others, make a mental note before the meeting to prioritize listening over talking.

Create a Speaking Rule. For routine meetings, creating a rule for yourself can be an effective way at letting others have the floor. For example, wait until at least two other people have shared their input before sharing yours, or limiting yourself to only two minutes every time you speak up. While limiting your speaking time doesn’t have to last forever, trying to follow a speaking rule can help you build the habit of letting others share.

Compress your thoughts. If you have a habit of rambling when verbalizing your ideas, you could come across as scattered and ill-prepared. When speaking, make sure that what you’re saying is necessary and impactful. It is easier said than done but try limiting your thoughts to only a few sentences and make sure your message is cut down to the essential points. Extra words make for a more muddled message, which reduces the impact of your ideas.

Build in pauses. Are you giving your colleagues enough time to digest your comments and to then ask questions? If not, commit to giving deliberate and extended pauses. This straightforward tactic can be one of the most effective ways to encourage input from others. By slowing down and taking deliberate pauses, you’ll be able to regulate your impulse to overshare, while encouraging others to speak up.

Ask for help. Taking an honest and hard look at oneself can be very difficult and many leaders may not even realize that they are oversharing or interrupting others. Consider asking a trusted

colleague or friend to provide insights into how you’re meeting your goal of talking less and listening more. Makes sure to ask someone you trust and who will give you honest feedback, as opposed to someone who will just tell you what you want to hear.

As a business leader your point of view is important, but remember it is not the only point of view out there. By soliciting input from others, you can make better business decisions for you and your business. Try some or all of these tactics to make sure everyone’s input is being heard. We want to make sure you are developing into the best business leader you can be and we are here to help you in any way we can.

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Spring is the time of year that calendar-year-end businesses issue financial statements and prepare tax returns. This year, take your financial data beyond compliance. Here’s how financial statements can be used to be proactive, not reactive, to changes in the marketplace.

Perform a benchmarking study

Financial statements can be used to evaluate the company’s current performance vs. past performance or against industry norms. A comprehensive benchmarking study includes the following elements:

Size. This is usually in terms of annual revenue, total assets or market share.

Growth. How much the company’s size has changed from previous periods.

Profitability. This section evaluates whether the business is making money from operations — before considering changes in working capital accounts, investments in capital expenditures and financing activities.

Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities.

Asset management. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how well the company manages its assets.

Leverage. This identifies how the company finances its operations — through debt or equity. There are pros and cons of both.

No universal benchmarks apply to all types of businesses. It’s important to seek data sorted by industry, size and geographic location, if possible.

Forecast the future

Financial statements also may be used to plan for the future. Historical results are often the starting point for forecasted balance sheets, income statements and statements of cash flows.

For example, variable expenses and working capital accounts are often assumed to grow in tandem with revenue. Other items, such as rent and management salaries, are fixed over the short run. These items may need to increase in steps over the long run. For instance, your company may eventually need to expand its factory or purchase equipment to grow if it’s currently at (or near) full capacity.

By tracking sources and uses of cash on the forecasted statement of cash flows, you can identify when cash shortfalls are likely to happen and plan how to make up the difference. For example, you might need to draw on the company’s line of credit, request additional capital contributions, lay off workers, reduce inventory levels or improve collections. In turn, these changes will flow through to the company’s forecasted balance sheet.

We can help

When your year-end financial statements are delivered, consider asking for guidance on how to put them to work for you. A Financial Advisor can help you benchmark your results over time or against industry norms and plan for the future.

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Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.

Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.

To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:

Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.

Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.

Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.

Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.

Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?

Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.

Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.

Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.

Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.

Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.

Ask for help. As you undertake the steps above — and before you meet with investors — contact a Financial Advisor. They can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.

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If you’re an investor in mutual funds or you’re interested in putting some money into them, you’re not alone. According to the Investment Company Institute, a survey found 58.7 million households owned mutual funds in mid-2020. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

What are the basic tax rules?

Let’s say you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15%.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One challenge is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

When does a sale occur?

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. Although it may not seem like it, each time you write a check on your fund account, you’re making a sale of shares.

How do you determine the basis of shares?

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then, add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis:

First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on April 1, 2018.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact a Tax Advisor if you have questions. They can explain in greater detail how the rules apply to you.

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I have written a lot about leadership. How to lead, what traits make a good leader, and tips to becoming a better leader. But what really is leadership? It is often described as a lofty ideal or strategic concept that is hard to quantify. Academics and social scientists have debated the idea of leadership for years, but what does leadership look like on a day‐to‐day basis?

President Dwight D. Eisenhower once said that “the job of getting people really wanting to do something is the essence of leadership.” If you talk with a lot of managers, they often distill the concept of leadership into the simple idea of getting employees to do things they would rather not do. Maybe it’s returning to the office two days a week after working remotely for the last two years. Maybe it’s launching a new company platform that will change how your business and employees operate. Maybe it’s something as simple as asking an irritable clerk to greet customers with a smile. If the work of leadership is the

work of change, then overcoming the natural tendency to resist change has to be at the top of every leader’s agenda.

So how do business leaders persuade employees to do things they would rather not do? Social scientists have developed two popular techniques that leaders can consider. Each can work in the right situation, although neither technique translates perfectly from the ivory‐tower world of research into the realities of corporate life. Both techniques are worth considering when leaders seek to commit to the hard work of making a big change.

The “Foot‐in‐the‐Door” Technique

First coined in 1966 by Stanford professors Jonathan Freedman and Scott Fraser, the “Foot‐in‐the‐Door” technique refers to a strategy for encouraging a person to agree to a large change by first asking them to change something small. The idea is that when a person agrees and completes a small request, they are much more likely to agree to a larger request, which they would have otherwise rejected. The theory is that people often develop a sense of commitment and confidence when completing a small request that makes them more enthusiastic about agreeing to the next, more significant request. In other words, the path to big change is paved with lots of small steps.

As an example, charities sometimes use the Foot‐in‐the‐Door technique in fundraising efforts. An organization may ask a person to donate a small amount to a cause. Later, the organization will come back and ask the donor if they would be willing to donate again, but increase their amount this time, or donate on a regular basis.

The “Door‐in‐the‐Face” Technique

The second persuasion technique was coined in 1975 by Arizona State University professor Robert Cialdini who found that when confronted with an extreme first request, which will definitely be rejected, a person is then much more likely to agree to a second, more reasonable request. The aim behind the “Door‐in‐the‐Face” technique is that you would ask someone to do something much bigger than what you actually have in mind, and after they refuse your initial request, your real objective seems tame by comparison.

It is important to realize that the Door‐in‐the‐Face approach should be seen as more of a concept than a routinely viable leadership tactic. Most managers will probably agree that regularly trying to bluff your employees with phony goals as a way to hit the targets you really have in mind, is not good leadership. Instead, try thinking of it as a manager setting aspirational goals, especially in organizations that suffer from inertia, to encourage people to consider innovations they would not have tried otherwise.

The next time you are faced with trying to convince reluctant employees to embrace a significant change, consider the lessons of the Door‐in‐the‐Face technique and the Foot‐in‐the‐Door technique. Determining which one will work for you depends on your leadership style, the situation you face, and your organization’s culture. Interestingly, a 2005 analysis found that there were no significant differences in effectiveness between these two techniques. Remember, there is no “right” way to implement change, but having the right tools and techniques can help.

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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, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses how the tax-deferred benefits resulting from a 1031 exchange can help investors build a more valuable real estate investment portfolio.

Watch our short video:

What is a 1031 exchange?

In 1921, Section 1031 was entered in the US Internal Revenue Code and the ‘1031 exchange’ was born. Under specific criteria, a 1031 exchange allows an investor to sell his property, reinvest in a similar property of equal or greater value, and defer payment of capital gains taxes until that second property is ultimately sold.

Eligibility for a 1031 exchange is reserved for real property that is “held for productive use in a trade or business or for investment”. This kind of property could include an apartment building, a vacant lot, a commercial building, or even a single-family residence. Properties held primarily for personal use do not qualify for tax-deferral under Section 1031. There are specific types of property that don’t qualify for a 1031 exchange, including business inventory, stocks and bonds, securities and partnership interests.

Your reinvested property must be “like kind,” or of the same nature, as the property being replaced. The definition of “like kind” is fairly loose, and IRS considers real estate property to be like-kind regardless of if or how that property has been improved.

Benefits

The obvious benefit of a 1031 exchange is that you get to hold onto your money for longer and have more funds available to take advantage of other investment opportunities. A 1031 exchange could also yield tax-shielding benefits, such as depreciation and expense deductions and capital returns at a refinance. A 1031 exchange is also useful for estate tax planning. Tax liabilities end with death, so if you die without selling a property that was invested through a 1031 exchange, your capital gains tax debt disappears. Not only that, but your heirs will inherit the property at a stepped-up market-rate value.

Details and Dangers

A 1031 Exchange has a very strict timeline. The replacement property, which must be of equal or greater value, and must be identified within 45 days. The replacement property must be purchased within 180 days. One potential pitfall investors face when deciding to implement a 1031 Exchange is that, because of the time pressure, they may rush to commit to an investment choice that is less than worthwhile. For that reason, potential investors are advised to plan ahead when considering a 1031 exchange. In order to get the best deal on a replacement property, don’t wait until the original property has been sold before starting to research replacement options.

45-Day Rule

When an investor sells his property and chooses to do a 1031 Exchange, the proceeds of the sale go directly to a qualified intermediary (QI). The QI holds the funds from the sold property and uses them to purchase the replacement property. As per IRS 1031 rules, the property holder never actually handles the funds. Also within the “45 day rule”, the property holder must designate the replacement property in writing to the intermediary. The IRS allows the designation of three potential properties, as long as one of them is eventually purchased.

180-Day Rule

The second timing rule in a 1031 is that the seller must close on the new property within 180 days of the sale of the original property. The two time periods run concurrently, so for example, if you designate a replacement property exactly 45 days after your sale, you’ll have only 135 days left to close on it. To determine the 180-day time frame, the IRS counts each individual day, including weekends and holidays.

1031 Exchange Tax Implications

What happens when the purchase price of your replacement property is less than the proceeds of the sale of your original property? That cash – known as the “cash boot” – will be returned to you after the closing on the replacement property, but it will be considered as sales proceeds and taxed as a capital gain.

Another important factor to remember is that if you have a mortgage, loan or other debt associated with the exchange, and your liability goes down, that sum will also be treated as income. For example, if you had a mortgage of $1 million on your original property, but your mortgage on the replacement property is only $900,000, you will enjoy a $100,000 gain. That $100,000 is the “mortgage boot”, and it will be taxed.

The 1031 Exchange is a tax-deferred strategy that any United States taxpayer can use. It allows equity from one real estate investment to roll into another and defers capital gains taxes. It’s like having an interest free loan, compliments of the IRS. Savvy investors can put that extra capital to work and acquire a more valuable investment property, painlessly building wealth over time. Over the long term, consistent and proper use of a 1031 Exchange strategy can provide substantial advantages for both small and large investors.

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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With the baseball lockout finally at an end, we can actually feel Spring in the air. Aside from being the great American pastime, baseball allows advisors to abuse sports clichés to the fullest. From “make sure all your bases are covered”, to the great, “Singles and doubles as opposed to homers”, and finally, the ultimate, “we’re in the seventh inning of the bull market”, baseball clichés make for useful tools. Using these clichés may help clients stay on track and make sure nothing comes out of left field. They also provide a great lesson, shared by Warren Buffet via Red Sox great Ted Williams.

In his book ‘Science of Hitting’, baseball legend Ted Williams breaks down the strike zone to seventy-seven squares. He explains how his batting average is seriously impacted depending on where the pitch lies within that zone. The position of the pitch inside those seventy-seven squares can range from one that is his sweet spot – where he can hit .400, to a spot far outside his comfort zone, where a bad pitch could drop his batting average down as low as .230.

Standing at bat, Ted didn’t really have a choice about his swing. If he avoided the pitches that would most likely result in a lowered batting average, he would be called out on strikes. Although he would have preferred a “fat pitch”, he didn’t have the luxury of waiting for it.

With his remarkable story-telling ability, Mr. Buffet describes how as investors, we have a decisive advantage over baseball players. When it comes to investing, there are no called strikes. The only way to strike out is by making a bad investment. By ‘avoiding the pitch’ you may miss out on a great investment – but you won’t lose money. And of course, we have the luxury of waiting things out and staying on the lookout for that “fat pitch” of an investment.

Nevertheless, though Buffet’s baseball analogy is cleverly and accurately drawn from the Ted Williams theorem, the reality is that the economy really did throw us a real curveball. Inflation remained very low for many years in the face of various market and the Federal reserve changes. Sitting on one’s cash while waiting for the fat pitch wasn’t the worst choice an investor could make. But now, with inflation rates rising like an Aaron Judge moonshot homer, cash has become trash.

This certainly doesn’t mean that, as investors, we should just go out and swing at balls in the dirt. Rather, the savvy investor needs a proper plan in place so that his money acts as the devoted worker it is meant to be. If an investor wants to make it to the big leagues, he must make sure to craft an investment plan that is resilient and secured against any unexpected changes in the economy.

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Business owners are regularly urged to “see the big picture.” In many cases, this imperative applies to a pricing adjustment or some other strategic planning idea. However, seeing the big picture also matters when it comes to managing the performance of your staff.

Perhaps the best way to get a fully rounded perspective on how all your employees are performing is through a 360-degree feedback program. Under such an initiative, feedback is gathered from not only supervisors rating employees, but also from employees rating supervisors and employees rating each other. Sometimes even customers or vendors are asked to contribute.

Designing a survey

As you might have guessed, a critical element of a 360-degree feedback program is the written survey that you distribute to participants when gathering feedback. You can inadvertently sabotage the entire effort early on if this survey is poorly written or difficult to complete.

For starters, keep it as brief as possible. Generally, a participant should be able to fill out the survey in about 15 to 20 minutes. Ask concise questions that have a clear point. Be sure the language is unbiased; avoid words such as “excellent” or “always.” Ensure the questions and performance criteria are job-related and not personal in nature.

If using a rating scale, offer seven to 10 points that ask to what extent the person being rated exhibits a given behavior, rather than how often. It’s a good idea to use a dual-rating scale that includes both quantitative and qualitative performance questions.

Another good question is: To what extent should the person exhibit the behavior described, given his or her job role? By comparing the answers, you basically perform a gap analysis that helps interpret the results and reduces a rater’s bias to score consistently high or low.

Encouraging buy-in

To optimize the statistical validity of 360-degree feedback results, you need the largest sample size possible. Tell feedback providers how you’ll analyze their input, assuring them that their time will be well spent.

Also, emphasize the importance of being objective and avoiding invalid observations that might arise from their own prejudices. Ask providers to comment only on aspects of the subject employee’s performance that they’ve been able to observe.

Even with anonymous feedback, you should require some accountability. Incorporate a mechanism that would enable someone other than the subject of the evaluation — for instance, a senior HR manager — to address any abuse of the program. And, of course, ensure that subjects of the feedback process can work with their supervisors to act on the input they receive.

Taking it slowly

If a 360-degree feedback program sounds like something that could genuinely help your business, don’t rush into it. Discuss the idea with your leadership team and take the time to design a program with strong odds of success. Finally, bear in mind that you’ll likely have to fine-tune the program in years ahead to get the most useful data.

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For 2022, the federal gift and estate tax exemption has reached its highest level ever. In fact, you can transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes. This is a limited time offer, however, as the exemption amount is scheduled to drop to $5 million (adjusted for inflation) in 2026. (However, Congress could pass legislation to reduce it even sooner or to extend it longer.)

Many are considering making substantial gifts to the younger generation to take advantage of the current exemption while it lasts. Often, these gifts consist of hard-to-value assets — such as interests in a closely held business or family limited partnership (FLP) — which can be risky. A defined-value gift may help you avoid unexpected tax liabilities.

Hedging your bets

Simply put, a defined-value gift is a gift of assets that are valued at a specific dollar amount rather than a certain number of stock shares or FLP units or a specified percentage of a business entity.

Structured properly, a defined-value gift ensures that the gift won’t trigger an assessment of gift taxes down the road. The key to this strategy is that the defined-value language in the transfer document is drafted as a “formula” clause rather than an invalid “savings” clause.

A formula clause transfers a fixed dollar amount, subject to adjustment in the number of shares or units necessary to equal that dollar amount (based on a final determination of the value of those shares or units for federal gift and estate tax purposes). A savings clause, in contrast, provides for a portion of the gift to be returned to the donor if that portion is ultimately determined to be taxable.

Language matters

For a defined-value gift to be effective, it’s critical to use precise language in the transfer documents. In one recent case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s assessment of gift taxes based on percentage interests. The documents called for the transfer of FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift, because fair market value was determined by a qualified appraiser. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Seek professional advice

If you plan to make substantial gifts of interests in a closely held business, FLP or other hard-to-value asset, a defined-value gift can help you avoid unwanted gift tax consequences. Turn to a financial advisor before taking action because to be effective, the transfer documents must contain specific language that provides for adjustment of the number of shares or units to convey the desired value.

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Business transactions with related parties — such as friends, relatives, parent companies, subsidiaries and affiliated entities — may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company’s financial statements, because undisclosed related-party transactions may skew the company’s true financial results.

The hunt for related parties

Given the potential for double-dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:

A list of the company’s current related parties and associated transactions,
Minutes from board of directors’ meetings, particularly when the board discusses significant business transactions,
Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,
Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and
Press releases announcing significant business transactions with related parties.

Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s-length transactions between unrelated third parties.

For example, a spinoff business might lease office space from its parent company at below-market rates. A manufacturer might buy goods at artificially high prices from its subsidiary in a low-tax country to reduce its taxable income in the United States. Or an auto dealership might pay the owner’s daughter an above-market salary and various perks that aren’t available to unrelated employees.

Audit procedures

Audit procedures designed to target related-party transactions include:

Testing how related-party transactions are identified and coded in the company’s enterprise resource planning (ERP) system,
Interviewing accounting personnel responsible for reporting related-party transactions in the company’s financial statements, and
Analyzing presentation of related-party transactions in financial statements.

Accurate, complete reporting of these transactions requires robust internal controls. A company’s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction.

Let’s talk about it

With related-party transactions, communication is key. Always tell your auditors about known related-party transactions and ask for help disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles.

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Today’s workforce may be the first ever to include five generations (Silent Generation, Baby Boomers, Gen X, Millennials, and Gen Z) working side by side. For many business leaders, managing multiple generations in the workplace presents unique challenges, but it also creates unique opportunities.

A generation is an age cohort whose members are born during the same period in history. Each generation grows up in a different context and experiences significant events at similar life stages. As a result, different generations may have different work expectations. If not addressed correctly, sometimes these generational differences can cause tensions in the workplace, and can hurt your organization’s productivity by limiting employee collaboration, creating emotional conflict, and lowering performance.

Sadly, many businesses do not take any steps to address intergenerational issues. Even when organizations do try and address them, the strategy has often been to encourage employees of different generations to focus on their similarities or deny the existence of any differences. But this is a huge, missed opportunity. Age-diverse teams can be incredibly valuable because they bring together employees with different but complementary skills, abilities, and networks. Age- diverse teams are known to be more productive and offer better decision-making, if managed effectively.

So how do business leaders embrace the challenges and benefits of a multigenerational workplace? The following steps may help bridge generational gaps and help create an intergenerational workforce that uses its age diversity to build something that no single generation could build on its own.

1. Identify and Acknowledge Differences.

The assumptions we make about generational groups (or any groups for that matter) can hold us back from understanding our coworkers’ true character, as well as the skills, strengths, and connections they have to offer. Having the awareness to recognize we are making these assumptions is the first step to combating them.

As an example, imagine you oversee a social media campaign. Which employees or coworkers would you choose to work on this campaign? Most of us would probably say our younger colleagues. Consciously, you likely believe you are choosing the most qualified and the most interested workers. Unconsciously, you may be giving in to deeply held assumptions that older people dislike technology or are uninterested in learning anything new.

2. Adjust your Assumptions.

Recognizing assumptions is important, but the next step is actively addressing them. Stereotypes often cause us to incorrectly attribute differences to a group, which causes tension for no real reason. Consider whether your assumptions align with the reality of the situation at hand, or whether you’ve been judging someone’s actions and attitudes based only on a stereotype. Try to understand why colleagues from different generations might approach a situation differently than you do.

A well-known example is an older coworker may get frustrated with their younger colleague, when, in the middle of a conversation about a difficult work project, the younger coworker starts using their cell phone. Of course, checking a phone mid-conversation might offend a lot of people, but, if the older employee can adjust their assumptions, they may realize that their younger coworker was just checking their phone to try and get information to help with the difficult work project.

3. Encourage Mutual Learning.

The key to truly getting the most out of intergenerational teams is that each employee must believe that they have something to learn from colleagues in all different age cohorts. The ultimate goal is to have mutual learning among every employee, with coworkers of all ages teaching and learning from one another in an ongoing loop. Mutual learning happens best when coworkers of different generations have good relationships with each other, and everyone is looking for opportunities to grow.

Businesses and organizations need to acknowledge that skill sets, motivations and values differ among different generations. Leaders need to view this diversity as a strength and encourage a culture where generations can work in harmony and learn from each other. Every generation has something to teach and something to learn.

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If you’ve worked a lifetime to build a large estate, you undoubtedly would like to leave a lasting legacy to your children and future generations. Educating your children about saving, investing and other money management skills can help keep your legacy alive.

Teaching techniques

There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.

If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores. This helps teach them the value of work. And, after they spend the money all in one place a few times and don’t have anything left for something they really want, they (hopefully) will learn the value of saving. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.

For families that are charitably inclined, a private foundation can be a vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family. For this strategy to be effective, children should have some input into the foundation’s activities.

Timing and amounts of distributions

Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.

Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.

Introduce incentives, but remain flexible

An incentive trust is one that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.

Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called principle trust, for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.

Communication is key

To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reasons for your decisions. Contact your estate planning advisor for more information.

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If you’re married, you may wonder whether you should file joint or separate tax returns. The answer depends on your individual tax situation.

In general, it depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means that the IRS can come after either of you to collect the full amount.

Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,499 on their 2021 taxes, when they file this year.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Circumstances matter

The decision you make on filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately.

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Footnotes appear at the end of a company’s audited financial statements. These disclosures provide insight into account balances, accounting practices and potential risk factors — knowledge that’s vital to making well-informed lending and investing decisions. Here are examples of key risk factors that you might unearth by reading between the lines in a company’s footnotes.

Contingent (or unreported) liabilities

A company’s balance sheet might not reflect all future obligations. Auditors may find out the details about potential obligations by examining original source documents, such as bank statements, sales contracts and warranty documents. They also send letters to the company’s attorney(s), requesting information about pending lawsuits and other contingent claims.

Detailed footnotes may reveal, for example, an IRS inquiry, a wrongful termination lawsuit or an environmental claim. Footnotes may also spell out the details of loan terms, warranties, contingent liabilities and leases. Liabilities may be downplayed to avoid violating loan agreements or admitting financial problems to stakeholders.

Related-party transactions

Companies may give preferential treatment to, or receive it from, related parties. It’s important that footnotes disclose all related parties with whom the company — and its management team — conducts business.

For example, say a retailer rents space from its owner’s grandparents at below-market rents, saving roughly $240,000 each year. If you’re unaware that this favorable related-party deal exists, you might believe that the business is more profitable than it really is. When the owner’s grandparents unexpectedly die and the rent increases, the company’s stakeholders could be blindsided by the undisclosed related-party risk.

Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as that change’s effect on the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

Significant events

Footnotes may even forewarn of a recent event — including something that’s happened after the end of the reporting period but before the financial statements were issued — that could materially impact future earnings or impair business value. Examples might include the loss of a major customer, a natural disaster or the death of a key manager.

Critical piece of the financial reporting puzzle

Footnotes offer the clues to financial stability that the numbers alone might not. But drafting footnote disclosures requires a delicate balance. While most companies want to be transparent when reporting their results, indiscriminate disclosures and the use of boilerplate language may detract from the information that’s most meaningful to your company’s stakeholders. Contact us to discuss what’s right for your situation.

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For most business leaders, managing employee frustration and resentment is a normal and common part of the job. The reality is that when a company brings together many different employees with different personalities, at some point they are bound to clash with each other or with the company’s culture.

Anger and frustration in the workplace is nothing new, and has been around since people started working together. The pandemic has certainly added new frustrations to the workplace, but Gallup’s State of the Global Workplace Report highlights that the daily rates of anger, stress, worry and sadness among American workers have been rising over the past decade.

Of course, the past couple of years have brought unique frustrations for employees and leaders, but the strategies that great managers use to navigate these challenges haven’t changed and will be used long into the future. As a business leader, it isn’t your responsibility to keep everyone happy all the time, but you are responsible for building a culture of trust and respect so that your employees can be as productive as possible. Here are some recommendations from a recent Harvard Business Review article on how to handle employee frustration:

Balance Your Emotions Before Reacting

The most important step is to be sure that before reacting to your employees’ frustration, you stabilize your own mood. Business leaders are not robots and feel the same frustrations and uncertainty as their employees. It is only natural for people to react defensively when confronted by anger or resentment, but it is important for leaders to not act impulsively.

Perceive your employees’ frustration as data, not danger. Accepting feedback that your team is frustrated without judging them – or yourself – can help you address concerns with an open and clear mind.

One of the best tricks as manager is to give yourself time before responding. For example, if you receive a frustrating email, don’t respond impulsively. Write a response, but wait to send it. Give yourself time to stabilize your own mood – an hour, a day – whatever you need. Then go back and read your response to see if you still want to send it. Most of the time, you’ll end up deleting your draft and sending something completely different.

Learn What’s Causing Their Frustration

After making sure you are in the right frame of mind to respond, ask for more information about your team’s frustration. This demonstrates that you care enough to acknowledge and empathize with them.

Offer your employees a safe space to vent to you without shame or fear of retribution. Then thank them for coming forward and sharing their concerns. Encourage them to partner with you to explore new solutions that benefit everyone.

Redesign Goals Together

After de-escalating emotions and learning about the source of your employees’ frustration, you can now try to channel their anger towards a more constructive outcome. Work with your employees to create shared goals that will address their frustration. By jointly creating goals, you can help turn frustration from a negative emotion to a positive and productive one. According to a study in the Academy of Management Review, employees can become more proactive and increase motivation when redirecting frustration towards a battle that benefits others. Helping your team regulate and pivot their emotions not only helps everyone feel better, but can spark more creativity to address and begin making changes.

Anger and resentment from your employees can make an already stressful leadership job feel even worse. But the way in which you respond to your employees’ frustrations can make you a better leader, your employees happier, and your company more productive. By following these recommendations, you can turn an angry employee into an engaged employee, and improve your company’s operation at the same time.

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It’s been almost two years since “patient zero” was officially diagnosed in the United States, and times have been trying, to put it mildly.

While the virus was wandering in China, even before it hit our shores, the market and the economy jittered around. A combination of the quickest 30% drop in stock market history, government-imposed closures of world commerce, and governments setting their money-printing presses on overdrive, has created a volatile backdrop for the financial system.

What will the stock market do next? Will high inflation endure? Will the unemployment level ever come back to pre-Covid levels?

These are some of the many questions we’ve fielded on a regular basis. Our clients, friends and other concerned investors turn to us as licensed advisors and we’ve responded by sharing potent and valuable communications to address these concerns.

We have always tried to remain even-keeled and level-headed, not getting overly bearish on the bad days or overly excited on the good ones. It wasn’t always easy. For about a year, good advice simply wasn’t working. People who were new to investing were quitting their jobs and making lots of money trading. Margin balances in accounts were up and the put-all-my-eggs-in-one-basket method was working out. Throughout those difficult times, we tried to keep our cool and advise others to stick with the models that have been working for many decades.

These days, though we aren’t ready to do a victory lap just yet, we will allow ourselves the proverbial pat on the back. While many rowdy traders got blown out of the water, our traditionalist, long-term approach has held up and worked to our clients’ advantage. The YOLO trade which had people betting it all on one stock or option, eventually came to a crashing halt, leaving many of those high-flyers down more than 80%. To get an idea about how our judicious approach played out over the course of the last few tumultuous years, here are some excerpts from our past articles:

“Investing in the market is for the long-term, not on each day’s news. If you are a net-buyer, cheer! You have an opportunity to buy these investments at a much better price.” (03-09-2020)

“As we write this, the Dow is -29% off its highs. Odds of better returns should follow. That doesn’t mean we won’t go down another 20% or need to endure nasty volatility. But that is a feature of the market, not a bug. In order to take part in the market returns, you need to sign up for the volatility.” (04-03-2020)

“Panic buying is a recipe for regret. Mean reversion is a powerful force. So, what is the proper strategy? You’ve got to have a plan and stick to it. That means having an emergency fund, investment plan and retirement plan in place.” (06-11-2020)

“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.” (10-13-2020)

“We’re not saying that investors shouldn’t trade the market at all. We’re just saying that you need to understand what the market risks are. While you may have a friend who’s really good at the game now, if history serves as any guide, we can assume that the nature of today’s game is temporary. Leaving a steady income to get involved in speculation is a risky (read: bad) idea. If you want to take a small portion of your invested assets and speculate, it may well be worthwhile. But the bulk of your assets should be properly invested with a long-term approach in a well-diversified portfolio.” (03-22-2021)

“We all know that substantial investment risks will always be present in a portfolio. Some risks just can’t be removed. And if you follow markets, you understand that there is always a reason to sell, because the market is either at or near an all‐time high, or in a drawdown. Many will maintain that, when we’re at all-time highs, the market is extended and it’s time to opt out. And when we are in a drawdown, there is usually a reason for it. Which means that many are calling for markets to unravel.

What we to do for our clients may not always look exciting, but it helps them reach their goals. Discussing asset allocation, inflation hedges, insurance levels or estate planning will not excite most people. But when we focus on our clients’ total picture and keep them calm, we are creating legacies.” (07-30-2021)

It wasn’t easy begging people not to panic-sell during the drop, or to convince people not to panic-buy during the crazy rise. Advising on inflation hedges, well before it was covered on the nightly news, was no picnic – like when we advised clients to purchase a house (Brooklynites and Lakewooders out there). Throughout this turbulent time, we stood firm in our approach, despite the fact that the markets were going against our advice. Ultimately, remaining calm and positive, and sticking with the core principles of investing, usually works out for the best.

Back to industry updates

Ever since the Affordable Care Act was signed into law, business owners have had to keep a close eye on how many employees they’ve had on the payroll. This is because a company with 50 or more full-time employees or full-time equivalents on average during the previous year is considered an applicable large employer (ALE) for the current calendar year. And being an ALE carries added responsibilities under the law.

What must be done

First and foremost, ALEs are subject to Internal Revenue Code Section 4980H — more commonly known as “employer shared responsibility.” That is, if an ALE doesn’t offer minimum essential health care coverage that’s affordable and provides at least “minimum value” to its full-time employees and their dependents, the employer may be subject to a penalty.

However, the penalty is triggered only when at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

ALEs must do something else as well. They need to report:

Whether they offered full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan,
Whether the offered coverage was affordable and provided at least minimum value, and
Certain other information the IRS uses to administer employer shared responsibility.

The IRS has designated Forms 1094-C and 1095-C to satisfy these reporting requirements. Each full-time employee, and each enrolled part-time employee, must receive a Form 1095-C. These forms also need to be filed with the IRS. Form 1094-C is used as a transmittal for the purpose of filing Forms 1095-C with the IRS.

3 key deadlines

If your business was indeed an ALE for calendar year 2021, put the following three key deadlines on your calendar:

February 28, 2022. This is the deadline for filing the Form 1094-C transmittal, as well as copies of related Forms 1095-C, with the IRS if the filing is made on paper.

March 2, 2022. This is the deadline for furnishing the written statement, Form 1095-C, to full-time employees and to enrolled part-time employees. Although the statutory deadline is January 31, the IRS has issued proposed regulations with a blanket 30-day extension. ALEs can rely on the proposed regulations for the 2021 tax year (in other words, forms due in 2022).

In previous years, the IRS adopted a similar extension year-by-year. The extension in the proposed regulations will be permanent if the regulations are finalized. No other extensions are available for this deadline.

March 31, 2022. This is the deadline for filing the Form 1094-C transmittal and copies of related Forms 1095-C with the IRS if the filing is made electronically. Electronic filing is mandatory for ALEs filing 250 or more Forms 1095-C for the 2021 calendar year. Otherwise, electronic filing is encouraged but not required.

Whether you’re a paper or electronic filer, you can apply for an automatic 30-day extension of the deadlines to file with the IRS. However, the extension is available only if you file Form 8809, “Application for Extension of Time to File Information Returns,” before the applicable due date.

Alternative method

If your company offers a self-insured health care plan, you may be interested in an alternative method of furnishing Form 1095-C to enrolled employees who weren’t full-time for any month in 2021.

Rather than automatically furnishing the written statement to those employees, you can make the statement available to them by posting a conspicuous plain-English notice on your website that’s reasonably accessible to everyone. The notice must state that they may receive a copy of their statement upon request. It needs to also include:

An email address for requests,
A physical address to which a request for a statement may be sent, and
A contact telephone number for questions.

In addition, the notice must be written in a font size large enough, including any visual clues or graphical figures, to highlight that the information pertains to tax statements reporting that individuals had health care coverage. You need to retain the notice in the same location on your website through October 17, 2022. If someone requests a statement, you must fulfill the request within 30 days of receiving it.

Identify your obligations

Although the term “applicable large employer” might seem to apply only to big companies, even a relatively small business with far fewer than 100 employees could be subject to the employer shared responsibility and information reporting rules. We can help you identify your obligations under the Affordable Care Act and assess the costs associated with the health care coverage that you offer.

Back to real estate right now

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, this series covers the latest real estate trends and opportunities and how you can make the most of them. This last episode in our valuation metrics mini-series discusses one final metric: Discounted Cash Flow.

Watch our short video:

DCF, or Discounted Cash Flow, is used to determine the total monetary value of an asset in today’s dollars and is a powerful tool for valuing businesses, real estate investments or other investments that project to generate profits and cash flow.

DCF studies a potential investment’s projected future income and then discounts that cash flow to arrive at a present, or current, value. It adds up the property’s future cash flow from the time of purchase until the time of its sale and all the activity that happens in between. It takes into account the property’s initial cost, annual cost, estimated income, operating costs, renovations, changes in occupancy and its future selling price, among other factors. At the end of the assumed investment period, an exit price is determined using the building’s metrics in the year of disposition. The entire cash flow stream, including the forecasted profit from the investment’s sale, is then discounted back to the current period using a discount rate.

The discount rate represents the rate of return that is required of the investment based on its risk. The higher the risk, the higher the return required by the investor, and the more we have to discount the investment’s value. A higher discount rate implies greater uncertainty, and that means a lower present value of our future cash flow. On the flip side, the lower the perceived risk in an investment, the lower the discount rate.

The DCF metric is an influential tool, but it has its drawbacks. The upside of the DCF model is that it is very customizable and able to be tailored to the facts and circumstances, such as projected renovation costs or market changes. The downside is that the model is very sensitive to changes in its variables. For example, a change in the discount rate of less than 1% can have a 10% effect on the value of the investment. There is a lot of assumption and estimation involved, and small changes can have a big impact on the end-result.

Whereas it may not always be accurate or applicable for every situation, the DCF calculation remains a formidable tool in the investors’ arsenal and, combined with other important metrics, allows the investor to assess the present value, risk and potential profitability of a real estate investment.

Back to industry updates

The 2022 new year started with three consecutive weeks of downhill stock prices followed by a brief lapse into correction territory – as defined by a drop of 10% or more. This comes after the S&P notched 70 all-time highs last year – a record only second to 1995. Over the past two years, growth stocks have had all the fun, with large-cap and mid-cap growth stocks close to doubling the performance of their value stock counterparts.

Taking advantage of interest rates at near zero percent, growth companies were perfectly placed to borrow funds at historically low costs, using the funds to continue to expand and grow their market share.

The picture for 2022 includes growth stocks that have taken the brunt of the market dip. Why? Analysts are touting inflation as this year’s primary concern. Jerome Powell, Chair of the Federal Reserve Board, spent last year arguing that the surge in inflation during the pandemic was due to “transitory forces”. But by November of 2021, even he threw in the towel and told Congress that it’s “probably a good time to retire that word.” There are factors that contributed to inflation that do not seem to be transitory at all.

You may be wondering, “What does inflation have to do with the stock market? Prices are going up substantially , but shouldn’t that help companies make more money?” In fact, inflation negatively affects the stock market in multiple ways. Factors ranging from higher borrowing costs to lower margins. Historically, high inflation periods offer investors a much better return on their lower-risk fixed-income investments. This, in tum, prompts investors to lower their allocations to higher-risk stocks/equities.

Smaller companies, and companies focused on future growth, are especially affected by higher inflation. For companies to continue making a profit they need to be able to pass along their Inflated costs to their customers. Larger companies, with strong, loyal customer bases, have a much easier time passing costs along. But smaller companies or high-growth businesses often struggle with heavy competition and are only beginning to establish a loyal customer base.

Inflation plays an important role when analysts try to calculate a present valuation based on a company’s future cash flows. In order to estimate a current company valuation, analysts calculate the value using a discount rate. The calculation requires a multitude of estimations on revenue growth and margins, and then it discounts the risk associated with each company. Once all those calculations are made, inflation must be added to the discount rate. The value of $100 dollars today does not hold the same value of $100 dollars in five years’ time. The higher inflation expectations are, the less that $100 dollars will be worth in five years. So, when calculating a current value on a future cash flow, in addition to risk contributing to the discount rate, inflation also plays an integral role. With all this in mind companies that are primarily expecting to make profits in the future – as opposed to companies that are generating current cash flow – are greatly impacted by inflation.

All investments have a risk-reward ratio; there is no reward without risk. Generally, the higher the reward, the more risk you will need to bear. Good short-term performance is not hard to accomplish, but replicating that performance is the hard part. An investor would need to have a perfect understanding of the how’s and why’s of his short-term outperformance before attempting to replicate his model – an almost impossible task.

At the beginning of 2021, a friend of mine asked me why he should invest with a professionally diversified portfolio when, “My account is up 110% since Covid. I’ve invested in a handful of growth companies .” His assessment was followed by a substantial drop in small caps and growth stocks, leaving his healthy account bruised and diminished.

Managing your investments on your own can work well in the short term but keeping performance riding high in the long run is where things get tough. At Equinum, we’re here to help you with that. Contact us at info@equinum.com.

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The IRS began accepting 2021 individual tax returns on January 24. If you haven’t prepared yet for tax season, here are three quick tips to help speed processing and avoid hassles.

Tip 1. Contact you accountant soon for an appointment to prepare your tax return.

Tip 2. Gather all documents needed to prepare an accurate return. This includes W-2 and 1099 forms. In addition, you may have received statements or letters in connection with Economic Impact Payments (EIPs) or advance Child Tax Credit (CTC) payments.

Letter 6419, 2021 Total Advance Child Tax Credit Payments, tells taxpayers who received CTC payments how much they received. Since the advance payments represented about one-half of the total credit, taxpayers who received CTC payments need to file a return to collect the rest of the credit. Letter 6475, Your Third Economic Impact Payment, tells taxpayers who received an EIP in 2021 the amount of that payment. Taxpayers need to know the amount to determine if they can claim an additional amount on their tax returns.

Taxpayers who received an EIP or CTC payments must include that information on their returns. Failure to include this information, according to the IRS, means a return is incomplete and will require additional processing, which may delay any refund owed to the taxpayer.

Tip 3. Check certain information on your prepared return. Each Social Security number on your tax return should appear exactly as printed on the Social Security card(s). Likewise, make sure that names aren’t misspelled. If you’re receiving your refund by direct deposit, check the bank account number.

Failure to file or pay on time

What if you don’t file on time or can’t pay your tax bill? Separate penalties apply for failing to pay and failing to file. The penalties imposed are a percentage of the taxes you didn’t pay or didn’t pay on time. If you obtain an extension for the filing due date (until October 17), you aren’t filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment. If you obtain an extension, you’re required to pay an estimate of any owed taxes by the regular deadline to avoid possible penalties.

The penalties for failing to file and failing to pay can be quite severe. (They may be excused by the IRS if your lateness is due to “reasonable cause,” such as illness or a death in the family.) Contact us for questions or concerns about how to proceed in your situation.

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Now that 2022 is up and running, business owners can expect to face a few challenges and tough choices as the year rolls along. No matter how busy things get, don’t forget about an easily accessible and highly informative resource that’s probably just a few clicks away: your financial statements.

Assuming you follow U.S. Generally Accepted Accounting Principles (GAAP) or similar reporting standards, your financial statements will comprise three major components: an income statement, a balance sheet and a statement of cash flows. Each one contains different, but equally important, information about your company’s financial performance. Together, they can help you and your leadership team make optimal business decisions.

Revenue and expenses

The first component of your financial statements is the income statement. It shows revenue and expenses over a given accounting period. A commonly used term when discussing income statements is “net income.” This is the income remaining after you’ve paid all expenses, including taxes.

It’s also important to check out “gross profit.” This is the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of direct labor and materials, as well as any manufacturing overhead costs required to make a product.

The income statement also lists sales, general and administrative (SG&A) expenses. They reflect functions, such as marketing and payroll, that support a company’s production of products or services. Often, SG&A costs are relatively fixed, no matter how well your business is doing. Calculate the ratio of SG&A costs to revenue: If the percentage increases over time, business may be slowing down.

Assets, liabilities and net worth

The second component is the balance sheet. It tallies your assets, liabilities and net worth to create a snapshot of the company’s financial health on the financial statement date. Assets are customarily listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year. Long-term assets (such as plant and equipment) will be used to generate revenue beyond the next 12 months.

Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year. Long-term liabilities are payment obligations that extend beyond the current year.

True to its name, the balance sheet must balance — that is, assets must equal liabilities plus net worth. So, net worth is the extent to which assets exceed liabilities. It may signal financial distress if your net worth is negative.

Other red flags include current assets that grow faster than sales and a deteriorating ratio of current assets to current liabilities. These trends could indicate that management is managing working capital less efficiently than in previous periods.

Inflows and outflows of cash

The statement of cash flows shows all the cash flowing in and out of your business during the accounting period.

Cash inflows typically come from selling products or services, borrowing and selling stock. Outflows generally result from paying expenses, investing in capital equipment and repaying debt. The statement of cash flows is organized into three sections, cash flows from activities related to:

Operating,
Financing, and
Investing.

Ideally, a company will generate enough cash from operations to cover its expenses. If not, it might need to borrow money or sell stock to survive.

The good and the bad

Sometimes business owners get into the habit of thinking of their financial statements as a regularly occurring formality performed to satisfy outside parties such as investors and lenders. On the contrary, your financial statements contain a wealth of data that can allow you to calculate ratios and identify trends — both good and bad — affecting the business. For help generating accurate financial statements, as well as analyzing the information therein, please contact us.

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The term “The Great Resignation” has become very fashionable over the last several months as a way to describe the rising trend of employees quitting their jobs. Across many different industries, companies of all sizes are struggling to maintain and staff their workforce during ‘The Great Resignation.’ According to the Wall Street Journal, in the first 10 months of 2021, America’s workers handed in nearly 39 million resignations – the highest number since tracking began in 2000. Data just released by the U.S. Labor Department for November added another 4.5 million workers who quit their jobs – a new record high for resignations in a single month. That means that 3% of all American workers voluntarily left their positions in November alone.

The truth is, the ‘Great Resignation’ is more than people simply quitting and walking away. What we are seeing is huge numbers of employees moving around within the job market, rather than just leaving it altogether. These workers are looking for a better work-life balance and making deliberate choices as to where their careers are heading next. “People are finding jobs that give them the right pay, benefits and work arrangements in the longer term,” says Anthony Klotz, the Texas A&M University organizational psychologist who coined the term ‘Great Resignation.’

While burnout – long an issue for American workers – is seen as the primary cause of ‘The Great Resignation,’ it is not the only factor. The pandemic has made employees change their priorities and rethink their work expectations. These “pandemic epiphanies,” as Klotz calls them, have helped many people change what they want to get, and eventually, what they actually do get, out of work.

Businesses need to react, as this trend does not appear to be slowing down. Employers know that it takes significantly longer to recruit and train someone than it does for that person to give their two-week notice and depart. The obvious solution is that most businesses need to consider bolstering their retention efforts of current employees. A recent Harvard Business Review article highlights six measures that can have a consequential impact on retaining employees:

1. Incentivize Loyalty

Re-evaluate your employee compensation packages and ensure it compares to industry standards. If an employee feels like they are not being paid well for the work that they do, the current employment climate makes it is easier than ever to seek higher-paid opportunity elsewhere. Most employees believe in loyalty, but they want their business leaders to believe in it too.

2. Provide Opportunities to Grow

Forward-thinking organizations have been doing retention interviews over the past months — asking each employee what it would take for them to stay. Show current employees that you value them even more than potential new hires by providing them with new opportunities to grow and advance.

3. Give Employees a Sense of Purpose

Purpose is the reason your organization exists, and it’s the reason people choose to join and stay. Recent research from McKinsey confirms that the top two reasons employees cited for leaving were that they didn’t feel their work was valued by their organization (54%), and that they lacked a sense of belonging at work (51%). Employees want to feel that what they do matters, and that begins by shifting your culture to one where people believe in the work they are doing.

4. Prioritize Connections

Make time to connect and build relationships with your people. Social connections have a significant impact on productivity and employees routinely place a higher priority on having a good relationship with coworkers than on many other job attributes.

5. Take Care of your Employees and their Families

Provide mental health resources, subsidize day care, and give more paid time off. Providing these benefits will easily outweigh the cost of hiring and training new employees.

6. Embrace Flexibility

The future of work is going to be flexible work environments in terms of location, hours and job description. If you can, now is the time to embrace it. It may even be helpful to have employees form teams to provide input on what their future work should look like. When people help build their dream home, they want to live in it.

‘The Great Resignation’ is a cultural phenomenon created by the pandemic and it is impacting businesses across the country. The benefits of the measures listed above will not only help you retain good employees, it will make your business more attractive to new hires as well. Don’t resign yourself to the continuing tide of resignations and the constant struggles of recruitment. Decisive action is what’s needed, and we’re here to help.

Back to real estate right now

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, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses more critical valuation metrics used to calculate the potential of an investment property.

Watch our short video:

In our last video we talked about three useful tools to help calculate the potential of an investment property: GRM (Gross Rent Multiplier), PPU (Price Per Unit) and Cap Rate (Capitalization Rate). Moving forward, here are additional metrics that can help an investor dig even deeper.

IRR

The Internal Rate of Return (IRR) is a metric used in financial analysis to estimate the profitability of a potential investment. It represents the annual rate of return on your investment, over the life of that investment. The higher the IRR, the healthier the return.

The IRR is calculated by computing the net present value of the investment. The Net Present Value (NPV) is the amount that the investment is worth in today’s money. To successfully analyze the data, future values must be considered against today’s values. Why? Because today’s money is more valuable than the value of the same money later on. This is also known as the time value of money.

When we calculate the IRR, we solve for “a rate”, so that the Net Present Value of the cash outflows and inflows is zero. That “rate” is the IRR. We achieve this by plugging in different interest rates into our IRR formula until we figure out which interest rate delivers an NPV closest to zero. Computing the Internal Rate of Return may require estimating the NPV for several different interest rates. The formulas are complex, but Microsoft Excel offers powerful functions for computing internal return of return, as do many financial calculators.

Simplified, here is how it works:

If you invest $10,000 in year one and receive an $800 return annually through Year 5, then exit the investment for $15,000, you would calculate the IRR as follows:

This scenario yields an IRR of 18%.

Here’s a similar scenario that yields a different result:

This scenario yields an IRR of 15%

Which scenario provides a better return? Looking at the bottom line is deceptive. By calculating the IRR for both investments, you would see that the IRR on the second investment, 15%, is a nice return. However, the first investment, with an 18% IRR, would be a better use of your money.

CoC Return

The Cash-on-Cash Return tells the investor how much cash the investment will yield relative to the cash invested. It measures the annual return the investor made on a property after satisfying all debt service and operating costs. This is a helpful analytic for many real estate investors who commonly leverage investments by taking out mortgages to reduce their cash outlay. The metric is the most helpful when liquidity during the investment period is important to the investor. One of the most important reasons to invest in rental properties is cash flow, and Cash-on-Cash return measures just that. Put simply, Cash-on-Cash return measures the annual return the investor made on the property after satisfying all debt service and operating costs.

Here is a simple CoC Return example:

Let’s say you buy a multifamily property for $200,000, putting down a $40,000 deposit, and assuming a $160,000 mortgage. Your gross rents are $30,000 monthly, with $20,000 of operating expenses. Additionally, you have $9,000 monthly debt service payment comprised of $7,000 interest and $2,000 principal. Because principal payments are not an expense, Net income is $3,000 annually.

However, when calculating Cash-on-Cash, you consider the debt service as well, bringing your return to $1,000 monthly, or $12,000 annually.

Comparing your investment’s yearly net income of $12,000 to the $40,000 down payment, you have a Cash-on-Cash annual return of 30%. While there is no specific rule of thumb for what constitutes a good return rate, the general consensus amongst investors is that a projected Cash-on-Cash return between 8% to 12% implies a worthwhile investment.

Financial metrics are important and useful tools that can help an investor make smart, informed decisions. Whereas any one metric may have limitations, by considering a combination of metrics commonly used for comparing, in addition to tracking performance or value, an investor can target a strategy and analyze risk in a potential investment opportunity.

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Management needs timely, accurate feedback to guide operating decisions, anticipate problems and take advantage of emerging opportunities. Unfortunately, comprehensive financial statements take a long time to generate. Reporting key performance indicators (KPIs) on a monthly or weekly basis is a simplified alternative to gauge performance in real time.

Popular financial metrics

KPIs measure an organization’s progress toward its objectives. However, with so many metrics to choose from, data overload can easily happen. That’s why your KPI report should be customized and streamlined to cover the metrics that are the most critical to your success.

KPIs differ from one company to the next based on the industry and the company’s objectives. Common examples include:

Operating cash flow. This helps management evaluate how much cash is available for immediate spending needs. Poor cash flow, not slow sales or lagging profits, is one of the leading causes of business bankruptcy.

Return on assets. This metric equals net income divided by total assets. It measures how effectively your company is managing its assets to generate earnings.

Inventory turnover. The number of times inventory is converted into sales is usually computed by dividing cost of goods sold by the average inventory balance. This tells you how efficiently you’re “selling through” inventory. Many companies waste valuable cash by allowing slow-moving inventory to sit idle on their shelves for too long.

KPIs can also be industry specific. To illustrate, auto dealers might compare new vehicle sales to used vehicle sales; contractors might focus on the bid-hit ratio; and hospitals might want to know the average wait time in the emergency room or the bed occupancy rate in the intensive care unit.

Beyond the numbers

Many companies also include nonfinancial metrics in the areas of customer service, sales, marketing and manufacturing. However, nonfinancial KPIs must be both specific and measurable.

For instance, just saying that your company wants to “provide better customer service” doesn’t produce a sound KPI. Instead, if your goal is to improve response time to customer complaints, a relevant KPI might be to provide an initial response to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.

Benchmarking results

A basis of comparison is important when reviewing KPIs. Benchmarks will provide a standard against which you can compare to see how your KPIs stack up. You can benchmark your current KPIs against historical results or averages published in trade publications.

This will help you spot trends and identify potential problems, allowing you to deal with them before they worsen. For example, if your accounts receivable days are lengthening, it might indicate that your collections are lagging and a cash flow crunch is looming.

Unlocking the keys to success

During the pandemic and the ensuing economic turmoil, tracking relevant performance metrics is more important than ever. Threats and opportunities abound — and new ones seem to arise quickly. We can help you tailor your KPI report to meet your business needs, as well as find meaningful benchmarks based on current market conditions.

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On Monday, December 20th, Roth&Co and Korsinsky & Klein hosted a webinar detailing important employment laws, including discrimination laws, leave laws and social media policies. It was presented by Avi Lew, Esq., partner at Korsinsky & Klein, and moderated by Chaya Salamon, Director of Human Resources at Roth&Co. Below is a detailed recap of the webinar. You can also watch the full video recap here.

Federal, State and City Employment Discrimination Laws

Avi’s comprehensive overview of diverse federal, state and city employment laws illustrated how complex and illusive they are and how they impact every employer. Whether yours is a small or large business, as an employer, you need to be educated, knowledgeable, and have access to competent legal support when it comes to employee related laws.

The primary federal employment discrimination laws which were discussed include: Title VII of the Civil Rights Act; the Americans with Disabilities Act; the Age Discrimination in Employment Act; the Equal Pay Act; the Fair Labor Standards Act; the Family and Medical Leave Act; and the Older Workers Benefit Protection Act.

These laws prohibit employers from discriminating against employees on the basis of – among other factors – color, race, religion, gender, age, national origin, marital status and disability. The list is long and constantly expanding, as is the definition of ‘employee.’ Title VII of the Civil Rights Act of 1964 has expanded to include discrimination by gender identity and now defines even independent contractors as ’employees.’

Employee Handbooks

Providing an employee handbook to your employees is no longer optional – it is required by law. An employee handbook is a vital resource in an employee claim of discrimination or harassment. An employee handbook protects the employer from liability and educates employees about the business’ policies and procedures.

An employee handbook is not a document you want to write yourself; using the wrong language can inadvertently violate a law or create a contract with the employee. Don’t include policies that your business doesn’t actually adhere to, and consider including provisions that address restrictive covenants, alternative dispute resolution terms and cyber-security obligations.

It is vital to document that your employees actually read and received your business’ employee handbook, which will be helpful to you in the event of future employee claims against you. Reviewing and updating your company’s employee handbook annually is necessary to ensure that you have policies and procedures in place before an issue arises.

Social Media Policies

Do you use social media sites to screen applicants? Have you ever rejected a potential employee because of something you found online? The National Labor Relations Act protects the rights of employees when it comes to certain work-related conversations conducted on social media, such as Facebook and Twitter.

This is a very grey area of the law and employers are advised to protect themselves by developing a clear policy that serves the company’s legitimate business interests without compromising the rights of its employees. It is important for the company to regularly review handbooks for potential violations and encourage management training.

Reasonable Accommodation

This is an important term that effects both employers and employees. It is usually unlawful to refuse to provide reasonable accommodation to someone with disabilities or to someone who claims hardship due to his religious belief. In order to avoid a charge of discrimination, an employer must be able prove that making accommodations to such an employee would fundamentally alter the nature of the business or cause it an undue burden. An undue burden is defined as a significant difficulty or expense.

Discrimination laws aren’t limited to federal law. For example, the NYC Human Rights law is one of the most powerful anti-discrimination laws in the country – even stronger than federal law. If you employ four or more employees (which includes independent contractors), this law applies to you.

The threshold for making a claim of discrimination under this law is very low and makes it easy for an employee to sue. Under the NYC Human Rights law, litigation is easily triggered and often becomes prolonged and expensive.

Small and Large Companies

Employment laws apply to small and large companies and it is the employer’s responsibility to be aware of its business’ obligations. Here are a few examples:

• Title VII discrimination laws apply to employers with 15 or more employees.

• The federal Fair Labor Standards Act sets standards for wages and overtime pay. It applies to all employers, regardless of how many employees they have.

• The ADA (American with Disabilities Act) and the Pregnancy Discrimination Act guards against discrimination for the disabled and for pregnant employees. It applies to businesses with 15 or more employees.

• The Age Discrimination and Employment Act (ADEA) protects seniors and applies to employers with over 20 employees.

• The Family and Medical Leave Act of 1993 (FMLA) is a federal law requiring covered employers to provide employees with job-protected, unpaid leave for qualified medical and family reasons. Both the FMLA and the Affordable Care Act apply to employers with over 50 employees.

• The NYC Paid Safe and Sick Leave Law provides employees with mandated sick leave time and requires that New York City employers provide up to 40 hours of paid leave each calendar year (or up to 56 hours if the company has 100 employees or more).

• The Stop Sexual Harassment in NYC Act requires all employers located in New York City with 15 or more employees to conduct an annual anti-sexual harassment training for all employees, supervisors and managers.

Employers have a responsibility to safeguard and protect both their businesses and their employees. When a business delays addressing an employment issue, it will most likely intensify, resulting in prolonged and expensive litigation that will damage the business and erode its work environment. Conversely, when an employment issue is addressed promptly and at its source, it can be remediated much more easily, avoiding costly violations, penalties and litigation. Employers must be vigilant in creating and documenting clear policies, abide by those policies and educate management to report issues promptly. Lastly, employers must be mindful of the constant changes in employment law that can impact their business, their employees and their bottom line.

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If you’re starting to worry about your 2021 tax bill, there’s good news — you may still have time to reduce your liability. Here are three quick strategies that may help you trim your taxes before year-end.

1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2022 payment in December, you can deduct the interest portion on your 2021 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2022.

You shouldn’t pursue this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Maximize your retirement contributions. What could be better than paying yourself? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2021, you generally can contribute as much as $19,500 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $58,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

There’s still time

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2021.

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The IRS recently announced next year’s cost-of-living adjustment amounts. For 2022, the federal gift and estate tax exemption has cracked the $12 million mark: $12.06 million to be exact. Arguably more notable, the annual gift tax exemption has increased by $1,000 to $16,000 per recipient ($32,000 for married couples). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

With the federal gift and estate tax exemption so high, making lifetime gifts to your loved ones may seem less critical than it was in the past. But even if your wealth is well within the exemption amount, a lifetime gifting program offers significant estate planning and personal benefits.

Tax-free gifts

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include those within the annual gift tax exclusion — for 2021 the exclusion amount is $15,000 per recipient ($30,000 for married couples) — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Even though estate tax may not seem that important now because it’s not applicable to a vast majority of families, there are no guarantees that a future Congress won’t reduce the exemption amount. Indeed, the gift and estate tax exemption is scheduled to be reduced to an inflation-adjusted $5 million on January 1, 2026. And a provision in an earlier version of the Build Back Better Act currently being discussed by Congress also slashed the exemption amount. However, as of this writing, that provision is no longer included in the bill.

The good news is that lifetime gifts remove assets from your estate, including all future appreciation in value, providing some “insurance” against changes in the law down the road.

Taxable gifts

Taxable gifts — that is, gifts over the annual exclusion amount — may also provide advantages. Although these gifts are subject to tax (or applied against your exemption amount), they can reduce your tax liability by removing future appreciation from your estate.

When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell appreciated assets without triggering capital gains taxes.

Assets transferred during life, on the other hand, retain your tax basis, so the recipients could end up with a large tax bill should they sell them.

Beyond taxes

Even if gift-giving offered no tax advantages, there are many nontax benefits to making lifetime gifts. For example, it allows you to help loved ones or transfer business interests to the next generation.

Get with the program

Regardless of your level of wealth and whether you’re likely to be subject to estate tax, making gifts continues to offer substantial tax and nontax benefits. We’d be pleased to help you take advantage of these benefits.

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An external audit is less stressful and less intrusive if you anticipate your auditor’s document requests. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.

What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest.

Anticipate questions

Accounting personnel can also prepare for audit inquiries by comparing last year’s financial statements to the current ones. Auditors generally ask about any line items that have changed materially. A “materiality” rule of thumb for small businesses might be an inquiry about items that change by more than, say, 10% or $10,000.

For example, if advertising fees (or sales commissions) increased by 20% in 2021, it may raise a red flag, especially if it didn’t correlate with an increase in revenue. Be ready to explain why the cost went up and provide invoices (or payroll records) for auditors to review.

In addition, auditors may start asking unexpected questions when a new accounting rule is scheduled to go into effect. For example, private companies and nonprofits must implement new rules for reporting long-term lease contracts starting in 2022. So companies that provide comparative financial statements should start gathering additional information about their leases in 2021 to meet the disclosure requirements for next year.

Minimize audit adjustments

Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP).

For example, auditors may need to prompt clients to write off bad debts, evaluate repair and supply accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.

You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.

Plan ahead

An external audit doesn’t have to be time-consuming or disruptive. The key is to prepare, so that audit fieldwork will run smoothly. Contact us to discuss any concerns as you prepare your preliminary year-end statements.

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Are you thinking about merging with or acquiring a business? CPA-prepared financial statements can provide valuable insight into historical financial results. But an independent quality of earnings (QOE) report can be another valuable tool in the due diligence process. It looks beyond the quantitative information provided by the seller’s financial statements.

These reports can help buyers who want more detailed information — and help justify a discounted offer price for acquisition targets that face excessive threats and risks. Conversely, when these reports are included in the offer package, it can add credibility to the seller’s historical and prospective financial statements. They may also help justify a premium asking price for businesses that are positioned to leverage emerging opportunities and key strengths.

Deep dive

QOE analyses can be performed on financial statements that have been prepared in-house, as well as those that have been compiled, reviewed or audited by a CPA firm. Rather than focus on historical results and compliance with U.S. Generally Accepted Accounting Principles (GAAP), QOE reports focus on how much cash flow the company is likely to generate for investors in the future.

Examples of issues that a QOE report might uncover:

Deficient accounting policies and procedures,
Excessive concentration of revenue with one customer,
Transactions with undisclosed related parties,
Inaccurate period-end adjustments,
Unusual revenue or expense items,
Insufficient loss reserves, and
Overly optimistic prospective financial statements.
A QOE report typically analyzes the individual components of earnings (that is, revenue and expenses) on a month-to-month basis. This helps determine whether earnings are sustainable. It also can identify potential risks and opportunities, both internal and external, that could affect the company’s ability to operate as a going concern.

EBITDA vs. QOE

It’s common in M&A due diligence for buyers to focus on earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing 12 months. Though EBITDA is often a good starting point for assessing earnings quality, it may need to be adjusted for such items as nonrecurring items, above- or below-market owners’ compensation, discretionary expenses, and differences in accounting methods used by the company compared to industry peers.

In addition, QOE reports usually entail detailed ratio and trend analysis to identify unusual activity. Additional procedures can help determine whether changes are positive or negative.

For example, an increase in accounts receivable could result from revenue growth (a positive indicator) or a buildup of uncollectible accounts (a negative indicator). If it’s the former, the gross margin on incremental revenue should be analyzed to determine if the new business is profitable — or if the revenue growth results from aggressive price cuts or a temporary change in market conditions.

Flexible tool

Fortunately, the scope and format of QOE reports can be customized, because they’re not bound by prescriptive guidance from the American Institute of Certified Public Accountants. Contact us for more information about how you can use an independent QOE report in the M&A process.

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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, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses critical valuation metrics used to calculate the potential of an investment property.

Watch our short video:

Investing in real estate can be profitable, rewarding and successful. At the same time, the real estate investment industry is also demanding, competitive and very often, risky. Success requires a combination of knowledge, organization and determination, and while this article may not be able to supply some of those requirements, it will help increase your knowledge about how to initially assess a real estate investment. Here are three useful tools to help calculate the potential of an investment property:

o Gross Rent Multiplier (GRM)
o Price Per Unit (PPU)
o Capitalization Rate (Cap Rate)

Gross Rent Multiplier (GRM)
When an investor considers buying a commercial or rental property, he’ll need to know how long it will take to earn back his investment. The GRM is a simple calculation that tells us how many years of rent it will take to pay off the cost of an investment purchase. The GRM formula compares a property’s fair market value (the price of the property) to its gross rental income.

Gross Rent Multiplier = Purchase Price / Gross Annual Rental Income

The result of the calculation represents how many years it will take for the investor to recoup the money he spent on the purchase of the property. The lower the gross rent multiplier, the sooner the investor can expect to get his money back.

Calculating an investment property’s GRM is not complex and will result in a useful metric, but in practicality, it does not consider operating costs such as the debt service coverage, the property’s maintenance expenses, taxes, local property values and other important factors that strongly impact the profitability of an investment
Experienced investors use the GRM metric to make quick assessments of their opportunities, and to quickly weed through their options. A high GRM may serve as a red flag, directing the investor to look elsewhere and spend more time analyzing more optimal options.

Price Per Unit (PPU)
Another tool in the investment arsenal is the PPU, or Price Per Unit. This calculates just that – the price per door on your investment property. The calculation is simple:

Price Per Unit = Purchase Price / Number of Units

In other words, the PPU is the amount the seller is asking per unit in the building. The PPU can provide a broad view of the market and can give you a good idea of how one property compares to another. The downside of the calculation is that it does not determine the ROI or Return on Investment. PPU does not take any other features of the property into consideration, so its usefulness is limited.

Capitalization Rate (Cap Rate)
The Cap Rate is a realistic tool that considers an investment’s operating expenses and income, and then calculates its potential rate of return (as opposed to the GRM, which looks only at gross income). The higher the Cap Rate, the better it is for the investor. Why is it realistic? Because the Cap Rate estimates how profitable an income property will be, relative to its purchase price, including its operational expenses in the computation.

Capitalization Rate = Net Operating Income / Purchase Price

Like any other calculation, the Cap Rate will only be as accurate as the numbers applied. If a potential investor under- or overestimates the property’s operational costs or other factors, the calculated Cap Rate won’t be accurate.

There is no one-size-fits-all calculation that will direct an investor to real estate heaven. However, utilizing basic tools like the GRM, PPU and Cap Rate will give an investor a broad view of the investment’s potential. Using these tools to jumpstart the due diligence process can help the investor determine whether further research into the investment is warranted and what a property’s potential for profit may be.

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Auditing standards require external auditors to consider potential fraud risks by watching out for conditions that provide the opportunity to commit fraud. Unfortunately, conditions during the COVID-19 pandemic may have increased your company’s fraud risks. For example, more employees may be working remotely than ever before. And some workers may be experiencing personal financial distress — due to reduced hours, decreased buying power or the loss of a spouse’s income — that could cause them to engage in dishonest behaviors.

Financial statement auditors must maintain professional skepticism regarding the possibility that a material misstatement due to fraud may be present throughout the audit process. Specifically, Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to consider potential fraud risks before and during the information-gathering process. Business owners and managers may find it helpful to understand how this process works — even if their financial statements aren’t audited.

Doubling down on fraud risks

During planning procedures, auditors must conduct brainstorming sessions about fraud risks. In a financial reporting context, auditors are primarily concerned with two types of fraud:

1. Asset misappropriation. Employees may steal tangible assets, such as cash or inventory, for personal use. The risk of theft may be heightened if internal controls have been relaxed during the pandemic. For example, some companies have waived the requirement for two signatures on checks, and others have reduced oversight during physical inventory counts.

2. Financial misstatement. Intentional misstatements, including omissions of amounts or disclosures in financial statements, may be used to deceive people who rely on your company’s financial statements. For example, managers who are unable to meet their financial goals may be tempted to book fictitious revenue to preserve their year-end bonuses. Or a CFO may alter fair value estimates to avoid reporting impairment of goodwill and other intangibles and triggering a loan covenant violation.

Identifying risk factors

Auditors must obtain an understanding of the entity and its environment, including internal controls, in order to identify the risks of material misstatement due to fraud. They must presume that, if given the opportunity, companies will improperly recognize revenue and management will attempt to override internal controls.

Examples of fraud risk factors that auditors consider include:

Large amounts of cash or other valuable inventory items on hand, without adequate security measures in place,
Employees with conflicts of interest, such as relationships with other employees and financial interests in vendors or customers,
Unrealistic goals and performance-based compensation that tempt workers to artificially boost revenue and profits, and
Weak internal controls.

Auditors also watch for questionable journal entries that dishonest employees could use to hide their impropriety. These entries might, for example, be made to intracompany accounts, on the last day of the accounting period or with limited descriptions. Once fraud risks have been assessed, audit procedures must be planned and performed to obtain reasonable assurance that the financial statements are free from misstatement.

Following up

Auditors generally aren’t required to investigate fraud. But they are required to communicate fraud risk findings to the appropriate level of management, who can then take actions to prevent fraud in their organizations. If conditions exist that make it impractical to plan an audit in a way that will adequately address fraud risks, an auditor may even decide to withdraw from the engagement.

Contact us to discuss your concerns about heightened fraud risks during the pandemic and ways we can adapt our audit procedures for emerging or increased fraud risk factors.

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Graphs, performance dashboards and other visual aids can help managers, investors and lenders digest complex financial information. Likewise, auditors also use visual aids during a financial statement audit to quickly identify trends and anomalies that warrant attention.

Powerful tool

Your auditor uses many tools and techniques to validate the accuracy and integrity of your company’s financial records. Data visualization — using a picture to show a relationship between two accounts or how a metric has changed over time — can help improve the efficiency and effectiveness of your audit.

Microsoft Excel and other dedicated data visualization software solutions can be used to generate various graphs and charts that facilitate audit planning. These tools can also help managers and executives understand the nature of the auditor’s testing and inquiry procedures — and provide insight into potential threats and opportunities.

4 Examples

Here are four examples of how auditors might use visualization to leverage your company’s data:

1. Employee activity in the accounting department. Line graphs and pie charts can help auditors analyze the number, timing and value of journal entries completed by each employee in your accounting department. Such analysis may uncover an unfair allocation of work in the department — or employee involvement in adjusting entries outside of their assigned area of responsibility. Managers can then use these tools to reassign work in the accounting department, pursue a fraud investigation or improve internal controls.

2. Activity in accounts prone to fraud and abuse. Auditors closely monitor certain high-risk accounts for fraud and errors. For example, data visualization can shine a spotlight on the timing and magnitude of refunds and discounts, highlight employees involved in each transaction and potentially uncover anomalies for additional scrutiny.

3. Journal entries prior to the end of the accounting period. Auditors analyze and confirm the timing and magnitude of your journal entries leading up to a month-end or year-end close. Timeline charts and other data visualization tools can help auditors understand trends in your company’s activity during a month, quarter or year.

4. Forecast vs. actual. Line graphs and bar charts can show how your company’s actual performance compares to budgets and forecasts. This can help confirm that you’re on track to meet your goals for the period. Conversely, these tools can also uncover significant deviations that require further analysis to determine whether the cause is internal (for instance, fraud or inefficiency) or external (for instance, cost increases or deteriorating market conditions). In some cases, management will need to revise budgets based on the findings of this analysis — and potentially take corrective measures.

Show and tell

Data visualization allows your data to talk. Auditors use these tools to better understand your operations and guide their risk assessment, inquiries and testing procedures. They also use visual aids to explain complex matters and highlight trends and anomalies to management during the audit process. Some graphs and charts can even be added to financial statement disclosures to communicate more effectively with stakeholders. Contact us for more information about using data visualization in your audit and beyond.

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When choosing health care benefits, many businesses opt for a self-insured (self-funded) plan rather than a fully insured one. Why? Among various reasons, self-insured plans tend to offer greater flexibility and potentially lower fixed costs.

When implementing a self-insured plan, stop-loss insurance is typically recommended. Although buying such a policy isn’t required, many small to midsize companies find it a beneficial risk-management tool.

Purpose of coverage

Specifically, stop-loss insurance protects the business against the risk that health care plan claims greatly exceed the amount budgeted to cover costs. Plan administration costs generally are fixed in advance, and an actuary can estimate claims costs. This information allows a company to budget for the estimated overall plan cost. However, exceptionally large — that is, catastrophic — claims can bust the budget.

To be clear, stop-loss insurance doesn’t pay participants’ health care benefits. Rather, it reimburses the business for certain claims properly paid by the plan above a stated amount. A less common approach for single-employer plans is to buy a stop-loss policy as a plan asset, in which case the coverage reimburses the plan, rather than the employer.

The threshold for stop-loss insurance is referred to as the “stop-loss attachment point.” A policy may have a specific attachment point (which applies to claims for individual participants or beneficiaries), an aggregate attachment point (which applies to total covered claims for participants and beneficiaries) or both.

Aligning plan and coverage terms

If you choose to buy stop-loss insurance, it’s critical to line up the terms of the coverage with the terms of your health care plan. Otherwise, some claims paid by the plan that you might expect to be reimbursed by the insurance might not be — and would instead remain your responsibility.

Properly lining up coverage terms isn’t always straightforward, so consider having legal counsel familiar with the terms of your health care plan review any proposed or existing stop-loss policy. In particular, watch out for discrepancies between the eligibility provisions, definitions, limits and exclusions of your plan and those same elements of the stop-loss policy.

Because stop-loss insurance isn’t health care coverage, insurers may impose limits and exclusions that are impermissible for group health plans. For example, a stop-loss policy can exclude coverage of specified individuals or services. Or it can impose an annual or lifetime dollar limit per individual.

You’ll also need to look carefully at the stop-loss policy’s coverage period. This is the period during which claims must be incurred by individuals or paid by the health care plan to be covered by the insurance. Specifically, determine whether it lines up with your plan year.

Cost-effective coverage

After buying stop-loss insurance, be extra sure to administer your health care plan in accordance with its written plan document. Any departures from the plan document could render the stop-loss coverage inapplicable. We can help you determine whether stop-loss insurance is right for your business or whether your current coverage is cost-effective.

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Events of the last decade have taught us that tax law is anything but certain. So how can young, affluent people plan their estates when the tax landscape may look dramatically different 20, 30 or 40 years from now — or even a few months from now? The answer is by taking a flexible approach that allows you to hedge your bets.

Conflicting strategies

Many traditional estate planning techniques evolved during a time when the gift and estate tax exemption was relatively low and the top estate tax rate was substantially higher than the top income tax rate. Under those circumstances, it usually made sense to remove assets from the estate early to shield future asset appreciation from estate taxes.

Today, the exemption has climbed to $10 million, indexed annually for inflation ($11.7 million for 2021) and the top gift and estate tax rate (40%) is roughly the same as the top income tax rate (37%). If the gift and estate tax regime remains the same and your estate’s worth is within the exemption amount, estate tax isn’t a concern and there’s no gift and estate tax benefit to making lifetime gifts.

But there may be a big income tax advantage to keeping assets in your estate: Under current law, the basis of assets transferred at death is stepped up to their current fair market value, so beneficiaries can turn around and sell them without generating capital gains tax liability.

Unpredictable future

For young and affluent people, designing an estate plan is a challenge because it’s difficult to predict what the estate and income tax laws will look like — and what their own net worth will be — decades from now. If you believe that the value of your estate will remain lower than the exemption amount, then it may make sense to hold on to your assets and transfer them at death so your children can potentially enjoy the income tax benefits of a stepped-up basis.

But what if your wealth grows beyond the exemption amount so that estate taxes become a concern again? Or what if the exemption goes down? Indeed, Congress is currently considering legislation that would halve the gift and estate tax exemption to $5 million, indexed annually for inflation (which likely would be somewhere around $6 million for 2022). If that happens, you may have to remove assets from your estate to ease estate tax liability.

Or what if the step-up in basis rules change, reducing or eliminating the income tax benefits of holding assets until death? Major changes to the rules had been proposed earlier this year. These changes aren’t included in the latest version of the legislation, but they could be proposed again in the future.

Building flexibility into your plan

A carefully designed trust can make it possible to remove assets from your estate now, while giving the trustee the authority to force the assets back into your estate if that turns out to be the better strategy. This allows you to shield decades of appreciation from estate tax while retaining the option to include the assets in your estate should income tax savings become a priority.

For the technique to work, the trust must be irrevocable, the grantor (you) must retain no control over the trust assets (including the ability to remove and replace the trustee), and the trustee should have absolute discretion over distributions.

This trust type offers welcome flexibility, but it’s not risk-free. Contact us for more information.

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Have you heard of the “nanny tax?” Even if you don’t employ a nanny, it may apply to you. Hiring a house cleaner, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

2021 and 2022 thresholds

In 2021, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,300 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount would increase to $2,400 in 2022. If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Paperwork and payments

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for the business. And you use your sole proprietorship EIN to report the taxes.

Recordkeeping is important

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

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When creating or updating your strategic plan, you might be tempted to focus on innovative products or services, new geographic locations, or technological upgrades. But, what about your customers? Particularly if you’re a small to midsize business, focusing your strategic planning efforts on them may be the most direct route to a better bottom line.

Do your ABCs

To get started, pick a period — perhaps one, three or five years — and calculate the profitability contribution level of each major customer or customer unit based on sales numbers and both direct and indirect costs. (We can help you choose the ideal metrics and run the numbers.)

Once you’ve determined the profitability contribution level of each customer or customer unit, divide them into three groups: 1) an A group consisting of highly profitable customers whose business you’d like to expand, 2) a B group comprising customers who aren’t extremely profitable, but still positively contribute to your bottom line, and 3) a C group that includes customers who are dragging down your profitability, perhaps because of constant late payments or unreasonably high-maintenance relationships. These are the ones you can’t afford to keep.

Devise strategies

Your objective with A customers should be to strengthen your rapport with them. Identify what motivates them to buy, so you can continue to meet their needs. Is it something specific about your products or services? Is it your customer service? Developing a good understanding of this group will help you not only build your relationships with these critical customers, but also target sales and marketing efforts to attract other, similar ones.

As mentioned, Category B customers have some profit value. However, just by virtue of sitting in the middle, they can slide either way. There’s a good chance that, with the right mix of sales, marketing and customer service efforts, some of them can be turned into A customers. Determine which ones have the most in common with your best customers, then focus your efforts on them and track the results.

Finally, take a hard look at the C group. You could spend a nominal amount of time determining whether any of them might move up the ladder. It’s likely, though, that most of your C customers simply aren’t a good fit for your company. Fortunately, firing your least desirable customers won’t require much effort. Simply curtail your sales and marketing efforts, or stop them entirely, and most will wander off on their own.

Brighten your future

As the calendar year winds down, examine how your customer base has changed over the past months. Ask questions such as: Have the evolving economic changes triggered (at least in part) by the pandemic affected who buys from us and how much? Then tailor your strategic plan for 2022 accordingly.

Please contact our firm for help reviewing the pertinent data and developing a customer-focused strategic plan that brightens your company’s future.

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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 discusses real estate professionals.

Watch our quick 1-minute video:

REAL ESTATE PROFESSIONALS IN DETAIL:

Qualifying as a real estate professional potentially allows a taxpayer to deduct 100% of all real estate losses against ordinary income. It also helps the taxpayer avoid the 3.8% Section 1411 net investment income tax on qualifying rental property income.

For many real estate businesspeople, especially those who own several rental properties, acquiring Real Estate Professional status can create thousands of dollars in tax deductions resulting in a zero tax liability at the end of the year.

How does one qualify as a Real Estate Professional?

Under the IRS’s Section 469(c)(7)(B), one can qualify as a real estate professional if two conditions are met:

The taxpayer must prove that he or she spends more time “materially participating” in real estate activities than in non-real estate activities.
The taxpayer must spend at least 750 hours per year “materially participating” in real estate activities

Material Participation

The IRS wants to know that the taxpayer is active in real estate activity and is not a passive investor. A taxpayer can try to establish material participation by satisfying any one of the seven tests provided in IRS Publication 925. The taxpayer may elect to aggregate all of his or her interests in rental real estate to establish material participation.

Passive or Non-Passive Income?

According to the IRS, non-passive income is money that you actually work for. It’s generally reported as W-2 or 1099 wages. Passive income is the money you earn without any particular labor, like interest, dividends…and rental income.

IRS Code Section 469 defines all rental activities, regardless of the taxpayer’s level of participation, as passive activity; and the taxpayer may only offset losses from a passive activity against income from a passive activity.

However, Section 469(c)(7) was later added to the law to avoid unfair treatment to those actually participating in the business of renting, selling or developing real estate. This provision provides an exception for ‘qualifying real estate professionals’ and allows them to treat rental activities as non-passive.

So, the rental activity of a taxpayer who qualifies as a real estate professional under Section 469(c)(7) is not presumed to be passive and will be treated as non-passive if the taxpayer materially participates in the activity.

Bottom line? As a qualified real estate professional, one can deduct of rental losses against his or her non-passive income.

Qualifying as a real estate professional can also be advantageous to taxpayers with rental income. A net investment income tax imposed in Section 1411 levies an additional 3.8% surtax on, among other matters of investment income, all passive income of a taxpayer. A taxpayer who qualifies as a real estate professional with rental income may choose to represent that rental income as non-passive and may be able to avoid this 3.8% surtax.

Does your business activity define you as a Qualified Real Estate Professional? Contact us for advice on how to take advantage of this significant status and how to minimize your real estate tax burden.

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As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Gift-splitting by married taxpayers

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.

Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

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For many small to midsize businesses, spending money on marketing calls for a leap of faith that the benefits will outweigh the costs. Much of the planning process tends to focus on the initial expenses incurred rather than how to measure return on investment.

Here are five questions to ask yourself and your leadership team to put a finer point on whether your marketing efforts are likely to pay off:

1. What do we hope to accomplish? Determine as specifically as possible what marketing success looks like. If the goal is to increase sales, what metric(s) are you using to calculate whether you’ve achieved adequate sales growth? Put differently, how will you know that your money was well spent?

2. Where and how often do we plan to spend money? Decide how much of your marketing will be based on recurring activity versus “one off” or ad-hoc initiatives.

For example, do you plan to buy six months of advertising on certain websites, social media platforms, or in a magazine or newspaper? Have you decided to set up a booth at an annual trade show?

Fine tune your efforts going forward by comparing inflows to outflows from various types of marketing spends. Will you be able to create a revenue inflow from sales that at least matches, if not exceeds, the outflow of marketing dollars?

3. Can we track sources of new business, as well as leads and customers? It’s critical to ask new customers how they heard about your company. This one simple question can provide invaluable information about which aspects of your marketing plan are generating the most leads.

Further, once you have discovered a lead or new customer, ensure that you maintain contact with the person or business. Letting leads and customers fall through the cracks will undermine your marketing efforts. If you haven’t already, explore customer relationship management software to help you track and analyze key data points.

4. Are we able to gauge brand awareness? In addition to generating leads, marketing can help improve brand awareness. Although an increase in brand awareness may not immediately translate to increased sales, it tends to do so over time. Identify ways to measure the impact of marketing efforts on brand awareness. Possibilities include customer surveys, website traffic data and social media interaction metrics.

5. Are we prepared for an increase in demand? It may sound like a nice problem to have, but sometimes a company’s marketing efforts are so successful that a sudden upswing in orders occurs. If the business is ill-prepared, cash flow can be strained and customers left disappointed and frustrated.

Make sure you have the staff, technology and inventory in place to meet an increase in demand that effective marketing often produces. We can help you assess the efficacy of your marketing efforts, including calculating informative metrics, and suggest ideas for improvement.

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For many Americans, saving for retirement means participating in the 401(k) or 403(b) retirement plans offered by their companies. This leaves the self-employed and small business owners out in the cold when it comes to saving for retirement. Luckily for them, there are several options they can utilize.

Every American not covered by a company plan, can contribute to an IRA to save for retirement. The $6,000 contribution limit for these plans however, just won’t cut it for many. SEP IRAs were established as a way to help small-business owners establish retirement accounts for their businesses without the headaches that come with ERISA-sponsored plans. Later legislation introduced the solo 401(k), which also offers a simplified way for business owners to save for retirement and enjoy some of the benefits of a 401(k) plan that are not available with SEPs.

Here are the highlights of these two plans, and their key differences:

SEP IRA

A Simplified Employee Pension (SEP) IRA is a plan that can be established by employers, including the self-employed. SEP plans benefit both employers and their employees. Employers may make tax-deductible contributions on behalf of eligible employees to their SEP IRAs. SEPs are advantageous because they have low administrative costs, are easy to set up and allow an employer to determine how much to contribute each year, without annual requirements. The contribution limit for 2021 is the lesser of $58,000 per person and 25% of adjusted net earnings. (For self-employed income, the percentage is a little lower.)

One major benefit of a SEP IRA from the employee’s perspective is that an employer’s contributions are vested immediately. No loans are permitted from a SEP IRA. The deadline for SEP IRAs is the filing date, including extensions, which make it a good option if any discussion arises after year’s end. A drawback from the employer’s perspective is that the employer must contribute on behalf of all employees who earn a total annual compensation of more than $600 if they reach the age of eligibility, even if they are only part-time workers.

Solo 401(k)

Solo 401(k) plans are for sole proprietors, small business owners without employees (though spouses can contribute if they work for the business), independent contractors and freelancers.

With these plans, both the employer and the employee can make contributions. Like a regular 401(k), there is a Roth option to have after-tax funds contributed to these accounts. The contribution limit for 401(k)s for 2021, as an employee, is $19,500. If you are 50 or older, you can make an additional catch-up contribution of $6,500.

Wearing the employer hat, you can contribute up to 25% of your compensation. The total contribution limit (employee and employer contributions) for a solo 401(k) is $58,000 for 2021. This does not include the employee’s $6,500 catch-up amount for those over the age of 50. The calculation usually breaks down to the sum of $19,500 as an employee and $38,500 as an employer.

So, which one is a better option – a SEP IRA or a Solo 401(k)? The answer depends on your situation.

If you’re unsure which plan may work for you, please reach out to us at info@equinum.com. We’ll help you review your options and come to a decision tailor-made for your needs.

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For most of us, having a job, a boss and a workplace where we have a genuine sense of purpose is very important. Steve Jobs famously said, “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”

As a business leader, motivating your employees and ensuring that they are engaged in their work is one of the most important things you do for your company. Research has shown time and again, that employee engagement is vital to a business’s success and profitability. According to the analytics and advisory company Gallup, engaged employees display higher levels of enthusiasm, energy and motivation, which translates into higher levels of job performance, creativity and productivity. This correlates to greater revenues and profits for your organization, as well as higher levels of well-being for employees and less turnover.

Despite the importance of employee engagement, just 35 percent of employees in the United States are considered “engaged” in their jobs. So, what is employee engagement and how do you improve it at your company?

Gallup, an industry leader in employee engagement, defines ‘engaged’ employees as those who are involved in, enthusiastic about and committed to their work and workplace. For engaged employees, it is about more than just a paycheck – they work harder and are more dedicated towards their employers, which is then reflected in their individual productivity. Disengaged employees are more likely to only do the bare minimum or even actively damage your company’s work output and reputation.

As a business leader, what can you do to improve the engagement of your employees? Well, it turns out that leaders and managers have a significant amount of input on employee engagement. According to Gallup, 70% of the variance in team engagement is determined solely by the manager. A study by the American Psychological Association found that 75% of Americans say their “boss is the most stressful part of their workday.” So here are a few ways that business leaders can increase employee engagement:

Include Me: Assuring your employees that their work and opinions are important is a simple yet important step to increase engagement. According to cloud-based software company Salesforce, professionals who believe their voice is heard are over four times more likely to feel empowered to do their best work. When you are considering solutions to business problems, encourage your employees to participate in the decision-making process, and give equal consideration to each employee’s suggestions, so they feel valued. Following the success of an important project or initiative, offer praise and emphasize how much you appreciate your employee’s contributions.

Inspire Me: Trust and autonomy are core ingredients that inspire engagement amongst employees. Be sure to delegate important tasks and projects to your team because it demonstrates trust and empowers your employees. To delegate effectively, ensure you are assigning tasks to employees who are equipped with the knowledge, skills and resources to handle them. Take time to clearly define the expectations and the required results, but leave your employees to accomplish the assigned task and don’t micromanage.

Grow Me: Many business leaders and managers are so focused on their own careers or success that they often forget about the careers of their employees. It is important for leaders to recognize that most employees are looking to be a part of an organization that offers a visible path for career progression. People want to feel that they have partners in developing their careers – and that goes beyond timely promotions. They want personal and professional development, such as the opportunity to cultivate new skills and experiences or by pursuing valuable certifications or degrees. As your employees’ careers develop and grow, your organization will be poised to reap the rewards.

Now more than ever, good pay and benefits are not enough to fully engage employees. You need to give your employees challenging work, truly value their contributions and show that you care about them and their careers. If you follow these steps, you will find that you have happier employees who are willing to work harder for you and your business.

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The New York State Tax Department has just issued a technical memorandum TSB-M-21(1)C, (1)I, and has put up an accompanying webpage that provides information on the new, optional Pass-Through Entity Tax (PTET).

The PTET, under new Tax Law Article 24-A1, is an optional tax that partnerships or New York S corporations can choose to pay. The tax allows eligible pass-through entities to pay state income taxes at the entity level, and it is deductible for federal tax purposes. A partner or shareholder of a pass-through entity that elects to pay PTET is entitled to a credit against his New York personal income tax equal to his “direct share” of the PTET tax. This allows the taxpayer to bypass the $10,000 limitation on deduction of state and local taxes imposed in 2017 by The Tax Cuts and Jobs Act.

The option applies to tax years beginning on or after January 1, 2021, and the election must be made annually. For 2021, the deadline to make the election is October 15, 2021. For future tax years, the annual election may be made on or after January 1, but no later than March 15.

For 2021, an electing entity is not required to make any estimated tax payments for PTET. Starting 2022, quarterly estimates will need to be made in March, June, September and December.

The PTET Annual Election application can be accessed online, and if you are an authorized person representing your business, you can opt in to PTET through its Online Services account.

To learn more about the PTET and the election process, visit Pass-through entity tax (PTET) periodically, or subscribe here to receive email updates about the pass-through entity tax.

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What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.

Business vs. nonbusiness

If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.

In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.

Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.

If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.

In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:

You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
The guaranty agreement was entered into before the debt becomes worthless; and
You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.

Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.

These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.

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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.

Back to real estate right now

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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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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It’s always fun to arrive at the office early in the morning and see that a client has already emailed with questions about the market. One day last week, the email went like this:

“I’m worried today about the stock futures…and the selloff that’s happening now around the world… I know you’ve prepared us for volatility, but this morning worldly selloff is huge. PERHAPS IT IS TIME TO SELL?!”

I quickly clicked to CNBC to see what the client was referring to. The first headline declared, “Dow futures drop 500 points amid global economic recovery concerns, bond yields slide.” We jumped on a call with the client, reviewing the news and talking about how his portfolio is set up with a long‐term plan in mind and which can maneuver through market volatility. We also suggested that he stay away from financial media until mid‐day, when everyone’s coffee will have already taken effect.

These episodes are reminders that fear sells. As Max Rosner, founder of Our World in Data, wrote, “Newspapers could have had the headline ‘Number of people in extreme poverty fell by 137,000 since yesterday’ every day in the last 25 years.” The reason they don’t, is because positive headlines don’t sell.

A case in point would be Robert Kiyosaki, who published the famed book, ‘Rich Dad, Poor Dad.’ On June 28, he Tweeted: ‘The best time to prepare for a crash is before the crash. The biggest crash in world history is coming. The good news is the best time to get rich is during a crash. Bad news is the next crash will be a long one. Get more gold, silver, and Bitcoin while you can. Take care.’

If you weren’t intimately familiar with Kiyosaki‘s name you would come away quite scared. A quick Google search shows that he is a serial entrepreneur who sold more than 32 million copies of his flagship book. But if you dig a bit deeper you would see that he has been predicting “the largest crash” in history for many years now. For example, check out this 2015 Seeking Alpha article titled, “Robert Kiyosaki: Biggest Stock Market Crash In History Coming In 2016.”

Kiyosaki doesn’t limit himself to interviews and blogposts. He wrote a whole book on his doomsday approach! Titled, ‘Rich Dad’s Prophecy,’ the book makes a case for the biggest crash in history. Originally published in 2002, it was republished many times with title changes detailing why the ‘biggest stock market crash in history’ is still coming. Here is a review on Amazon:

I am sure he and his followers would still claim that the crash is coming, and that we are just a bit early. But one thing is for sure: Being that he reprints every couple of years, whenever a crash comes, he will have predicted it right before.

Few things are easier than fearmongering and scaring people into buying a newsletter or book about how the world is going to end. All writers know that if you promote yourself with click‐bait fear tactics, you will get people to click and sign up easily. By the time three years have passed, with the major crash predictions keeping followers out of three years of market gains, another thousand signups will have accumulated. When CNBC, Yahoo Finance or The Wall Street Journal post scary headlines, they know that they will keep you reading, clicking and engaged. The fact that it works for their bottom line does not mean that it’s best for yours. Remember, they aren’t really your friend.

We all know that substantial investment risks will always be present in a portfolio. Some risks just can’t be removed. And if you follow markets, you understand that there is always a reason to sell, because the market is either at or near an all‐time high, or in a drawdown. Many will maintain that, when we’re at all-time highs, the market is extended and it’s time to opt out. And when we are in a drawdown, there is usually a reason for it. Which means that many are calling for markets to unravel.

What we to do for our clients may not always look exciting, but it helps them reach their goals. Discussing asset allocation, inflation hedges, insurance levels or estate planning will not excite most people. But when we focus on our client’s total picture and keep them calm, we are creating legacies.

These days, with all we have endured, the market is hovering at all‐time highs. So, if you had the ability to mute out the noise and remain invested, hats off to you! This is not to say that we won’t have a correction or a crash. We will. And they may even be big ones. But to consistently make money in the market, we need to believe in a brighter tomorrow.

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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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As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.

Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Here are some of the rules that come into play.

Transportation and meals

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. The law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Combining business and pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions.

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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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