Beneficial Ownership Reporting Required Under the Corporate Transparency Act

The Corporate Transparency Act (CTA) became law on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283). Effective January 1, 2024, certain U.S. and foreign entities doing business in the United States will be required to report their beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Comment: The CTA is generally intended to increase transparency, and thus discourage the use of shell companies, which is an important step in the fight against money laundering, terrorist finance, corruption, and other criminal behavior.

The Secretary of the Treasury has issued regulations implementing these reporting requirements effective January 1, 2024. The information reported under the CTA will not be available to the general public and may only be used for law enforcement, national security, or intelligence purposes.

Entities Subject to Beneficial Ownership Reporting

All corporations, S Corporations, limited liability companies, and partnerships or other similar entities created under the law of a State or Indian Tribe, or formed under foreign law and registered to do business in the United States (reporting companies) must disclose information regarding their beneficial owners to FinCEN.

Entities Exempt from Reporting

Certain entities do not have to report beneficial ownership under the CTA. These are generally heavily regulated entities that already report such information to other federal agencies or companies with real business activities that are not perceived to be a high risk for money laundering. Exempt entities include, among others:

• Companies that employ more than 20 people, report more than $5 million of revenue on their tax returns, and have a physical presence in the United States

• Public companies

• Financial institutions such as banks, bank holding companies, and credit unions

• Insurance companies

• Investment companies

• Broker-dealers

• Pooled investments

• Tax-exempt organizations

• Information required to be reported

Reporting companies must disclose the identity of each beneficial owner of the company and each applicant with respect to the company. The reported information must include:

• Full legal name

• Date of birth

• Current residential or business street address

• Unique identifying number from an acceptable identity document (such as a driver’s license or passport) or a unique identity number generated by FinCEN.

Beneficial owner and applicant

A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

1. exercises substantial control over the entity, including CEO, CFO, and COO, OR

2. owns or controls not less than 25% of the ownership interests of the entity.

The following individuals are not beneficial owners for this purpose:

1. an individual acting as a nominee, intermediary, custodian, or agent of another individual

2. an individual acting solely as an employee of the entity

3. an individual whose only interest in the entity is through a right of inheritance

4. a creditor of the entity, unless the creditor is also a beneficial owner

5. a minor child if the parent or guardian’s information is reported

An applicant with respect to a company is an individual who files an application to form an entity in the United States or to register a foreign entity to do business in the United States.

Effective date of reporting

The CTA reporting requirements take effect as of January 1, 2024. The initial report is due no later than January 1, 2025.

Entities formed or registered after January 1, 2024, must report beneficial ownership to FinCEN at the time of formation or registration. Existing entities must file a report within 30 days of any change to their beneficial ownership information.

Penalties

Failure to report or update beneficial ownership information or providing false information may result in civil penalties of up to $500 per day and criminal penalties of up to $10,000 and/or imprisonment of up to two years. An exemption may apply if an individual acting in good faith corrects any inaccurate information within 90 days of submitting the inaccurate report.

The unauthorized disclosure of reported information may also lead to a $500-per-day civil penalty and a criminal penalty of up to $250,000 and/or imprisonment of up to five years.

Contact the FMD team for more information.

Cost containment: An important health care benefits objective for businesses

As the Fed continues to battle with inflation, and with fears of a recession not quite going away, companies have been keeping a close eye on the costs of their health insurance and pharmacy coverage.

If you’re facing higher costs for health care benefits this year, it probably doesn’t come as a big surprise. According to the National Survey of Employer-Sponsored Health Plans, issued by HR consultant Mercer in 2022, U.S. employers anticipated a 5.6% rise in medical plan costs in 2023. The actual percentage may turn out to be even higher, which is why cost containment should be one of the primary objectives of your benefits strategy.

Really get to know your workforce

To succeed at cost containment, you’ve got to establish and maintain a deep familiarity with two things: 1) your workforce, and 2) the healthcare benefits marketplace.

Starting with the first point, the optimal plan design depends on the size, demographics, and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their health care benefits. Determine which offerings are truly valued and which ones aren’t.

If you haven’t already, explore the feasibility of a wellness program to promote healthier diet and lifestyle choices. Invest in employee education so your plan participants can make more cost-effective healthcare decisions. Many companies in recent years have turned to high-deductible health plans coupled with Health Savings Accounts to shift some of the cost burden to employees.

As you study your plan design, keep in mind that good data matters. Business owners can apply analytics to just about everything these days — including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then adjust your plan design appropriately to close these costly gaps.

Consider expert assistance

Now let’s turn to the second critical thing that business owners and their leadership teams need to know about: the health care benefits marketplace. As you’re no doubt aware, it’s hardly a one-stop convenience store. Many companies engage a consultant to provide an independent return-on-investment analysis of an existing benefits package and suggest some cost-effective adjustments. Doing so will entail some expense, but an external expert’s perspective could help you save money in the long run.

Another service a consultant may be able to provide is an audit of medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Regarding pharmacy benefits, as the old saying goes, “Everything is negotiable.” The next time your pharmacy coverage contract comes up for renewal, explore whether your existing vendor can give you a better deal and, if not, whether one of its competitors is a better fit.

It’s doable … really

Cost containment for health care benefits may seem like a Sisyphean task — that is, one both laborious and futile. But it’s not: Many businesses find ways to lower costs by streamlining benefits to eliminate wasteful spending and better-fit employees’ needs. The FMD Team can help you identify and analyze each and every cost associated with your benefits package.

© 2023

The IRS warns businesses about ERTC scams

The airwaves and internet are inundated these days with advertisements claiming that businesses are missing out on the lucrative Employee Retention Tax Credit (ERTC). While some employers do indeed remain eligible if they meet certain criteria, the IRS continues to caution businesses about third-party scams related to the credit.

While there’s nothing wrong with claiming credits you’re entitled to, those who claim the ERTC improperly could find themselves in hot water with the IRS and face cash-flow problems as a result. Here’s what you need to know to reduce your risks.

ERTC in a nutshell

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers could receive credits worth up to $26,000 per retained employee. The credit may still be available on an amended tax return.

The requirements are strict, though. Specifically, you must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,

• Experienced a significant decline in gross receipts during 2020 or in the first three quarters of 2021, or

• Qualified as a recovery startup business — which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021. (Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERTC.)

In addition, a business can’t claim the ERTC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness or it used to claim certain other tax credits. Also, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.

Prevalence of scams

The potentially high value of the ERTC, combined with the fact that employers can file claims for it on amended returns until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim the credit. These fraudsters wield inaccurate information and inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees in the thousands of dollars or commissions as high as 25% of the refund received.

The IRS has called the amount of misleading marketing around the credit “staggering.” For example, in recent guidance, the tax agency explained that contrary to the advice given by some promoters, supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.

ERTC fraud has grown so serious that the IRS has included it in its annual “Dirty Dozen” list of the worst tax scams in the country. In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as “1099 Tax Pros,” with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERTCs and COVID-related sick and family leave wage credits for their clients.

Fraudsters have been able to monopolize on the general confusion and uncertainty around the ERTC. A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.

Although it’s unclear how much progress the IRS has made on the backlog, the agency has announced that it has entered a new phase of intensified scrutiny of ERTC claims. It’s stepping up its compliance work and establishing additional procedures to deal with fraud in the program. The IRS already has increased its audit and criminal investigation work on ERTC claims, focusing on both the promoters and the businesses filing dubious claims.

If you fell into the trap and are among those businesses, you could end up on the hook for repayment of the credit, along with penalties and interest, on top of the fees you paid the promoter. That could make a substantial dent in your cash flow.

Even if you’re eligible for the credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. As the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

Moreover, providing your business and tax documents to an unscrupulous promoter could put you at risk of identity theft.

Red flags to watch for

The IRS has identified several warning signs of illegitimate promoters, including:

• Unsolicited phone calls, text messages, direct mail, or ads highlighting an “easy application process” or a short eligibility checklist (the rules for eligibility and computation of credit amounts are actually quite complicated),

• Statements that the promoter can determine your ERTC eligibility within minutes,

• Hefty upfront fees,

• Fees based on a percentage of the refund amount claimed,

• Preparers who refuse to sign the amended tax return filed to claim a refund of the credit,

• Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers), or

• Refusal to provide detailed documentation of how your credit was calculated.

The IRS also warns that some ERTC “mills” are sending out fake letters from nonexistent government entities such as the “Department of Employee Retention Credit.” The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.

Protect yourself

Taking several simple steps can help you cut your risk of being victimized by scammers. First, if you think you may qualify for the credit, work with a trusted professional — one who isn’t proactively soliciting ERTC work. Those who are aggressively marketing the credit (and in some cases, only the credit) are more interested in making money themselves and are unlikely to prioritize or protect your best interests.

You also should request a detailed worksheet that explains how you’re eligible for the credit. The worksheet should “show the math” for the credit amount as well.

If you’re claiming you suspended business due to a government order, ensure that you have legitimate documentation of the order. Don’t accept a generic document about a government order from a third party. Rather, you should acquire a copy of the actual government order and review it to confirm that it applies to your business.

Proceed with caution

No taxpayer ever wants to leave money on the IRS’s table, but skepticism is warranted whenever something seems too good to be true. If you believe your business might be eligible for the ERTC, we can help you verify eligibility, compute your credit, and file your refund claim. FMD can also help you determine how to proceed if you claimed the ERTC improperly.

© 2023

5 tips for more easily obtaining cyber insurance

Every business should dedicate time and resources to cybersecurity. Hackers are out there, in many cases far across the globe, and they’re on the prowl for vulnerable companies. These criminals typically strike at random — doing damage to not only a business’s ability to operate but also its reputation.

One way to protect yourself, at least financially, is to invest in cyber insurance. This type of coverage is designed to mitigate losses from a variety of incidents — including data breaches, business interruption and network damage. If you decide to buy a policy, here are five tips to help make the application process a little easier:

1. Be detail-oriented when filling out the paperwork. Insurers usually ask an applicant to complete a questionnaire to help them understand the risks facing the company in question. Answering the questionnaire fully and accurately may call for input from your leadership team, IT department, and even third parties such as your cloud service provider. Take your time and be as thorough as possible. Missed questions or incomplete answers could result in denial of coverage or a longer-than-necessary approval time.

2. Establish (or fortify) a comprehensive cybersecurity program. Your business has a better chance of obtaining optimal coverage if you have a formal program that includes documented policies for best practices such as:

• Installing software updates and patches,

• Encrypting data,

• Using multifactor authentication, and

• Educating employees about ongoing cyber threats.

Before applying for coverage, either establish such a program if you don’t have one or strengthen the one in place. Be sure to generate clear documentation about the program and all its features that you can show insurers.

3. Create and document a disaster recovery plan. An effective cybersecurity program can’t focus only on preventing negative incidents. It must also include a disaster recovery plan specifically focused on cyber threats, so everyone knows what to do if something bad happens.

If your company has yet to create such a plan, establish and implement one before applying for cyber insurance. Put it in writing so you can share it with insurers. Review your disaster recovery plan at least annually to ensure it’s up to date.

4. Prepare to be tested. Some insurers may want to test your company’s cyber defenses with a “penetration test.” This is a simulated cyberattack on your systems designed to uncover weak points that hackers could exploit. Before applying for cyber insurance, conduct a thorough assessment of your networks and, if necessary, train or upskill your employees to follow protocols and be wary of “phishing” schemes and other threats.

5. Consider a third-party assessment. To better uncover weaknesses that could result in a denial of coverage or unreasonably high premiums, you may want to engage a third-party consultant to assess your cybersecurity program, as well as your equipment, network, and users. Doing so can be beneficial before applying for cyber insurance because some IT security firms maintain relationships with insurers and can help streamline the application process.

Like most types of coverage, cyber insurance is a risk-management measure worth exploring with your leadership team and professional advisors. Contact FMD for help determining whether buying a policy is the right move and, if so, for assistance analyzing the costs involved and developing a budget.

© 2023

Should your business add a PTO buying feature to its cafeteria plan?

With the pandemic behind us and a red-hot summer in full swing, many of your company’s employees may be finally rediscovering the uninhibited joys of vacation.

Your workers might be having so much fun, in fact, that they might highly value being able to buy even more paid time off (PTO) as an employee benefit. Such a perk could also catch the attention of job candidates. Well, it’s all possible if your business sponsors a cafeteria plan (sometimes referred to as a Section 125 plan).

Compliance requirements

A “PTO buying” feature under a cafeteria plan allows employees to prospectively elect, during the annual open enrollment period before the beginning of each plan year, to buy additional PTO beyond that which they’d otherwise receive from their employer. These purchases typically occur via salary reductions or flex credits.

The rules for PTO buying under a cafeteria plan are complex, but let’s review a couple of the most critical compliance requirements. First, the PTO buying feature must not defer compensation from one plan year to the next. This means that PTO bought under the cafeteria plan generally must be used, cashed out, or forfeited by the end of the plan year. Employees can’t carry over the PTO for use in a later plan year.

If you opt to permit employees to cash out unused PTO at the end of the plan year, you’ll need to clearly inform them that these dollars will be included in their taxable income. Employers can also choose to set up the plan feature so that employees simply forfeit unused PTO when the plan year ends. However, before going this route, you should check into whether your state’s laws restrict such forfeitures.

Second, something called the “ordering rule” applies. The IRS refers to additional PTO bought through a cafeteria plan as “elective” PTO. The ordering rule requires employees to use nonelective PTO before elective PTO. Thus, they can use their purchased PTO only after exhausting all PTO earned under normal compensation.

The practical consequence of the ordering rule is that employees must expend all their PTO — whether elective or nonelective — to prevent a cash-out or forfeiture of any elective PTO at the end of the plan year. Thus, a PTO buying feature under a cafeteria plan may not be a good fit for businesses with PTO policies that allow employees to carry over unused nonelective PTO to future years. And, again, a buying feature might conflict with state laws that prohibit forfeiture of unused PTO.

An appealing benefit

Being able to buy additional PTO may not only be an appealing way to give employees more “beach time,” but also (and on a more serious note) a means of giving staff members more flexibility to care for their mental health. However, as mentioned, the rules involved are complex, so you’ll need to design and manage this cafeteria-plan feature carefully. Contact FMD for further information and assistance.

© 2023

Consider adverse media screening to vet vendors, customers and others

Whether you know it or not, if your business has ever applied for a commercial loan, you’ve likely been subject to “adverse media screening.” Under this commonly used practice, a prospective borrower is “screened against” various media sources to determine whether the person or entity has been a party to any suspicious, unethical, or illegal activities.

Well, two can play that game. Many companies now use adverse media screening to evaluate key vendors, business partners (such as in joint ventures), or major customers that will demand a substantial amount of time and resources. Vetting such parties can help you uncover issues — such as accusations of fraud or litigation for nonpayment — that could make you think twice about getting involved with them.

4 steps to safe screening

Given the vast amount of online data and the potential legal risks in play, conducting adverse media screening requires a careful, methodical approach. Consider taking these four steps:

1. Develop a formal policy. To ensure that adverse media screening meets your needs without triggering legal exposure, draft a formal policy governing its usage. Among other things, the policy should:

• Identify the sources you intend to access,

• Clarify what actions are off-limits, and

• State how you plan to use any negative information discovered.

• Ask your attorney to review the policy before rolling it out.

2. Create clear categories. Adverse media screening can cover a broad range of activities. So, create various categories to consistently classify potential red flags. Examples might include civil proceedings, criminal misconduct, environmental violations, regulatory scrutiny, and financial crimes. Doing so will help focus your due diligence efforts and make it easier to analyze information sources.

3. Verify everything. To generate traffic, some news outlets do little to verify the accuracy of their stories. Rely only on information providers with high ethical standards and established histories of accurate reporting. This is particularly important when using social media. For any accusation or story, always look for corroboration and verification from multiple reputable sources.

4. Automate the process, if necessary. Rather than relying on employees to manually research and gather information, you can procure software that uses artificial intelligence to scan the internet and analyze massive amounts of data. This may entail a substantial investment, so it’s not something to consider until and unless the volume of adverse media screening you’ll be doing grows to a certain point.

An enhancement, not a replacement

To be clear, adverse media screening is a potential enhancement to the due diligence process that every business should use when scrutinizing vendors, partners, and big customers. It shouldn’t replace fundamental steps like checking credit reports and following up on references. FMD can help you assess the costs vs. benefits of allocating resources to this practice.

© 2023

Strong billing processes are critical to healthy cash flow

Once a business is up and running, one fundamental aspect of operations that’s easy to take for granted is billing. Often, a system of various processes is put in place and leadership might consider occasional billing mistakes to be part of the “cost of doing business.”

However, to keep your company financially fit, it’s imperative to regularly check in on your billing processes to ensure they’re as efficient, effective, and accurate as possible.

Resolve mistakes quickly

Many billing problems originate from a gradual deterioration in the quality of products or services. You may be giving customers an excuse not to pay their bills if products are showing up late or damaged — or not at all. The same goes for services that aren’t provided in a timely, satisfactory, or professional manner.

When it comes to billing processes, common mistakes include invoicing a customer for an incorrect amount or failing to apply promised discounts or special offers. Be sure to listen to customer complaints and track errors so you can identify trends and implement effective solutions.

In addition, regularly verify account information to make sure invoices and statements are accurate and going to the right people. Set clear standards and expectations with customers — both verbally and in writing — about your policies regarding pricing, payment terms, credit, and delivery times.

On the flip side, work closely with your managers and supervisors to ensure employees are well-trained to enforce billing policies. Staff members should prioritize quick resolutions to billing mistakes and disputes. They should also ask customers to pay any portion of a bill not in question. Once the matter is resolved, the customer should be politely asked to pay off the remainder immediately.

Tighten up timeliness

For invoice-based businesses, regularly sending out bills late can negatively impact collections. Familiarize yourself with current industry norms before setting payment schedules.

Traditionally, such schedules tend to be based on 30-, 45- or 60-day cycles. But times may have changed — particularly now that so much billing is done electronically. What’s more, many companies permit their most important or largest customers to set their own customized payment schedules. If this is the case for you, be sure to adjust your cash flow expectations and projections to recognize these variances.

As mentioned, today’s technology is driving how most businesses handle billing. An automated system can generate invoices when work is complete, flag problem accounts, and generate useful financial reports.

If you haven’t already, consider sending invoices electronically and enabling customers to pay online. Doing so can greatly speed up payment. Like any software, however, you’ll need to reassess it from time to time to determine whether you need an upgrade.

Control what you can

There are so many aspects to doing business that are unpredictable — the global, national, and local economies; customer tastes and demands; and disruptive competitors. That’s why it’s so important for business owners to be proactive about the things they can control. FMD will help you assess the efficacy of your billing processes and identify ways to improve cash flow.

© 2023

Hiring family members can offer tax advantages (but be careful)

Summertime can mean hiring time for many types of businesses. With legions of working-age kids and college students out of school, and some spouses of business owners looking for part-time or seasonal work, companies may have a much deeper hiring pool to dive into this time of year.

If you’re considering hiring your children or spouse, there could be some tax advantages in play. However, you’ll need to be careful about following the IRS rules.

Employing your kids

Children who work for the business of a parent are subject to income tax withholding regardless of age. If the company is a partnership or corporation, children’s wages are also subject to Social Security and Medicare taxes (commonly known as FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes — unless each partner is a parent of the child.

However, substantial savings are possible for a business that’s a sole proprietorship or a partnership in which each partner is a parent of the child-employee. In such cases:

• Children under age 18 aren’t subject to FICA or FUTA taxes, and

• Children who are 18 to 20 years old are subject to FICA taxes but not FUTA taxes.

As you can see, substantial tax savings may be in the offing depending on your child’s age. Avoiding FICA or FUTA taxes, or both, means more money in your pocket and that of your child.

It’s also worth noting that children generally are taxed at lower rates than their parents. Moreover, a child’s income can be offset partially or completely by the child’s standard deduction ($13,850 for single taxpayers in 2023). If your child earns less than the standard deduction, income is tax-free for the child on top of being deductible for the business.

Hiring your spouse

When your spouse goes to work for your business, that individual’s wages are subject to income tax withholding and FICA taxes — but not FUTA taxes. Employers generally must pay 6% of an employee’s first $7,000 in earnings as the FUTA tax, subject to tax credits for state unemployment taxes paid. Thus, you’ll save the money you’d otherwise spend for a nonspouse employee’s FUTA taxes.

It’s important that your spouse is treated and compensated as an employee. When spouses run a business together, and they share in profits and losses, the IRS may deem them partners — even in the absence of a formal partnership agreement.

You also may reap some savings from hiring your spouse if you’re a sole proprietor and have a Health Reimbursement Arrangement (HRA). Your family can receive tax-free reimbursement from the business for medical expenses, and the business can deduct the reimbursements — reducing your income and self-employment taxes. HRA reimbursements aren’t subject to FICA taxes and the plan itself is a tax-free fringe benefit for your spouse. Do note, however, that this strategy isn’t available if you have other employees.

Handling it properly

Whether you decide to hire a child or spouse, or both, you’ll need to step carefully. Assign them actual job duties, pay them a reasonable amount, and keep thorough employment records (including timesheets as well as IRS Forms W-4 and I-9). Essentially, treat them as you would any other employee. The FMD team can help you handle the situation properly.

© 2023

Virtual currency lands in the IRS’s crosshairs

While the value of virtual currency continues to fluctuate, the IRS’s interest in it has only increased. In 2021, for example, the agency launched Operation Hidden Treasure to root out taxpayers who don’t report income from cryptocurrency transactions on their federal income tax returns.

Moreover, the Inflation Reduction Act, enacted in 2022, allocated $80 billion to the IRS, with much of it designated for enforcement activities. However, the Fiscal Responsibility Act, enacted in May 2023, will claw back $21.39 billion of that amount by the end of 2025. The IRS’s strategic operating plan for 2023 through 2031 lays out the agency’s intention to ramp up enforcement related to digital assets. If you buy, sell or otherwise engage in transactions involving virtual currency, you need to stay up to date with the latest tax developments.

Terminology

The IRS defines a “virtual asset” as any virtual representation of value that’s recorded on a cryptographically secured distributed ledger or similar technology. The term includes:

• Convertible virtual currency (meaning it has an equivalent value in real currency or acts as a substitute for real currency) such as Bitcoin,

• Stablecoins (a type of currency whose value is tied to the value of another asset, such as the U.S. dollar), and

• Non-fungible tokens (NFTs).

According to the IRS, cryptocurrency is an example of a convertible virtual currency that can be used as a payment for goods and services, digitally traded between users, and exchanged for or into real currencies or digital assets. Cryptocurrency uses cryptography to secure transactions that are digitally recorded on a distributed ledger (for example, blockchain).

Taxation of transactions

For federal tax purposes, digital assets are treated as property. Thus, transactions involving virtual currency are subject to the same general tax rules that apply to property transactions, such as purchases and sales of stock or real estate.

Several types of virtual currency transactions can trigger reporting obligations, including:

Sales. If you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. The gain or loss equals the difference between your adjusted tax basis in the currency and the amount you receive for it. You should report the amount you receive on your federal income tax return in U.S. dollars (see below for more information on reporting obligations).

Your basis is the amount you spent to acquire the virtual currency, including fees, commissions, and other costs. Your adjusted basis is your basis increased by certain expenditures and reduced by certain deductions or credits.

Property exchanges. If you exchange virtual currency that you hold as a capital asset for other property (including goods or other digital assets), you must recognize a capital gain or loss. The gain or loss is the difference between the fair market value (FMV) of the property you receive and your adjusted tax basis in the virtual currency. If, as part of an arm’s length transaction, you transfer a digital asset and receive other property in exchange, your tax basis in the property you receive is its FMV at the time of the exchange.

Payment for services. If you receive virtual currency for performing services — regardless of whether you perform the services as an employee or an independent contractor — you recognize the FMV of the currency when received as ordinary income. The FMV will also be your tax basis in that asset.

On the flip side, if you pay for a service using virtual currency that you hold as a capital asset, you’ve exchanged a capital asset for the service and will have a capital gain or loss. In addition, the FMV of virtual currency that’s paid as wages, at the date of receipt, is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax. It also must be reported on Form W-2, “Wage and Tax Statement.”

Reporting obligations

You may have noticed a new line on your individual federal income tax return in recent years. The 2022 version asks:

“At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

If you answer “yes,” you must report all related income, whether as income, a capital gain or loss, or otherwise (for example, as a gift).

The Infrastructure Investment and Jobs Act (IIJA), enacted in late 2021, created additional new reporting requirements for digital asset transactions. These provisions were enacted with an eye toward generating additional tax revenues to help fund infrastructure projects. The requirements provide the IRS with more information to work from and establish more potential compliance tripwires for taxpayers who engage in virtual currency transactions.

The IIJA expanded the definition of brokers that are required to report their customers’ gains and losses on the sale of securities during the tax year to the IRS on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” The form generally requires a description of each sale, the cost basis, the acquisition date and price, the sale date and price, and the resulting short- or long-term gain or loss.

Under the IIJA, operators of trading platforms for digital assets, such as cryptocurrency exchanges, are subject to the same reporting requirements as traditional securities brokers. The effective date remains to be seen, though, as the IRS hasn’t yet issued final regulations with instructions. After the new rules take effect, cryptocurrency platforms will need to collect Form W-9, “Request for Taxpayer Identification Number and Certification,” from their customers.

The IIJA also amended existing anti-money laundering laws to treat digital assets as cash for purposes of those laws. As a result, beginning in 2023, businesses must report to the IRS when they receive more than $10,000 in digital assets in one transaction or multiple related transactions.

Such transactions should be reported on IRS Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business.” To complete the form, a business will need to gather the name, address, and taxpayer identification number, among other information, from the payer. Failure to comply may lead to significant civil and criminal penalties.

Enforcement tool

One way the IRS may uncover digital assets is through the use of a “John Doe summons.” The U.S. Department of Justice notes that “because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS.” By asking a court to serve a John Doe summons on a crypto dealer or exchange, the IRS can find out information about a person’s account.

In one recent case, an individual challenged the IRS’s use of a summons to obtain his account information from a virtual currency exchange. He argued it was unconstitutional. A U.S. District Court disagreed and ruled that the IRS’s actions “fall squarely” within its powers to pursue unpaid taxes. (Harper, DC NH, 5/26/23)

An evolving area

With its new infusion of enforcement funding, the IRS’s focus on virtual currency transactions is likely to intensify. FMD helps you stay in compliance with the applicable rules and requirements.

© 2023

In financial planning, forecasts and projections aren’t the same

Businesses are rightly encouraged to regularly generate professionally prepared financial statements. Doing so is important for both understanding your own financial position and providing accurate, comprehensive information to stakeholders such as investors, lenders, and advisors.

However, keep in mind that financial statements are historical records. They depict the state of the company at a given point in time — not where it will likely be in the future. For the latter purpose, you need to create either a forecast or a projection. But aren’t those two things the same? Not exactly.

Defining the terms

The American Institute of Certified Public Accountants (AICPA) addresses the distinction under its AICPA Attestation Standards Section 301, Financial Forecasts and Projections. The organization differentiates the two terms as follows:

Forecast. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.

Projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if…?”

Making the distinction

Indeed, the terms “forecast” and “projection” are sometimes used interchangeably. However, as the AICPA’s definitions make clear, there’s a noteworthy distinction. That is, a forecast represents expected results based on the expected course of action. These are the most common type of prospective reports for companies with steady historical performance that plan to maintain the status quo.

On the flip side, a projection estimates the company’s expected results based on various hypothetical situations. These statements are typically used when management is uncertain whether performance targets will be met. Thus, they may be more appropriate for start-ups, fast-growing or transforming companies, or businesses evaluating long-term results where customer demand or market conditions will likely change.

Rolling along

Regardless of whether you opt for a forecast or projection, the report will generally be organized using the same format as your financial statements — with an income statement, balance sheet, and cash flow statement. Most prospective statements conclude with a summary of key assumptions underlying the numbers. Such assumptions should be driven by your company’s historical financial statements, along with a detailed sales budget for the year.

Instead of relying on static forecasts or projections — which can quickly become outdated in an unpredictable marketplace — some companies now use rolling 12-month versions that are adaptable and look beyond year-end. Doing so enables you to better identify and respond to weaknesses in your assumptions, as well as unexpected changes to your situation.

For example, a business that suddenly experiences a shortage of materials could experience an unexpected drop in sales until conditions improve. If the company maintains a rolling forecast, it should be able to revise its financial plans more effectively for such a temporary disruption.

Getting in the ballpark

Bear in mind that few forecasts or projections are completely accurate. The future really is that hard to predict. However, a carefully created and timely forecast or projection can “put you in the ballpark” of what’s to come and help your business succeed at financial planning. FDM can assist you in generating properly prepared financial statements as well as useful forecasts and projections.

© 2023

Why businesses may want to consider ESG in strategic planning

When engaging in strategic planning, business owners and their leadership teams must consider various factors. These commonly include the state of your industry, the national and local economies, the company’s financial position and cash flow, and opportunities in the marketplace.

However, in today’s world, where transparency is everything, another factor that may be important for some companies is a clearly defined approach to environmental, social, and governance (ESG) issues.

3 areas of focus

As a general concept, ESG (as it’s often called for short) focuses on three areas:

1. The environmental component considers your company’s impact on the environment, including the energy it uses, the waste it produces, and the resources it consumes.

2. The social element examines your business’s relationships with people, communities, and institutions. It includes fair labor practices; worker health and safety; diversity, equity, and inclusion; and your company’s impact on the people of the community or communities where it operates.

3. The governance portion includes policies, practices, and procedures your business adopts to govern itself. Considerations include ethics, transparency, legal compliance, executive compensation, supply-chain management, data protection, and product quality and safety.

The idea is that, to be a good “corporate citizen,” it’s important to recognize the impact of your company’s activities on the environment, the people it employs, and those it interacts with. And it’s equally important to implement business practices that minimize potentially adverse effects.

Who’s watching

Not everyone agrees on the importance of ESG. However, as mentioned, businesses of certain types or in certain areas may find themselves under pressure from various parties to implement ESG initiatives.

For starters, some customers are increasingly considering ESG — particularly environmental impact and fair labor practices — when making buying decisions. Similarly, certain investors are making ESG performance a priority when deciding whether and how to invest their capital. These stakeholders may be interested in not only how your company handles ESG, but also how your suppliers and other business partners do as well.

Moreover, many governing authorities at the global, national, state, and local levels are prioritizing ESG. A business could incur costly fines and reputational damage for not complying with laws or regulations related to:

• Environmental issues such as pollution and carbon emissions,

• Social issues such as labor relations, worker health and product safety, and

• Supply-chain issues such as human rights violations and the use of conflict minerals.

In addition, public entities may impose ESG standards that go beyond the legal requirements on certain projects. This can seriously impact businesses that rely heavily on government contracts.

Changes in the labor force may also have an impact. Generally, younger workers tend to consider a potential employer’s ESG practices when deciding where to work. And employees of all ages are increasingly more attuned to whether a company mindfully handles the many issues involved. In short, ESG may affect hiring and employee retention.

Something to think about

As you and your leadership team check in on this year’s strategic goals and develop new ones, you may want to assess whether and how ESG might affect your company. It’s something that many businesses are focused on — and you just might discover some ways to differentiate yourself from the competition.

© 2023

Is it time for a targeted marketing campaign?

If you’ve been in business a while, you might assume that you know exactly who your customers are. But, as the saying goes, “life comes at you fast.” Customer desires, preferences, and demographics can all shift before you know it.

One way to avoid getting caught off guard is to regularly conduct a targeted marketing campaign. This is an analytical approach to studying a company’s market, breaking it up into segments and focusing marketing efforts on the most potentially profitable ones.

Gather demographic data

The first step is to collect as much customer demographic information as possible. As mentioned, your customer base may have slowly shifted over the years and you’re still reaching out to people who, for whatever reason, have become a smaller proportion of buyers. Examples of straightforward demographic variables that you can gather for analysis include:

• Age bracket,

• Gender,

• Income level,

• Education, and

• Location (home and work).

For instance, if you cater to people who live near your business, the reason for a shift in your customer base could be as simple as a turnover in neighborhood demographics. Such a shift could account for a slow loss of business because you’ve failed to reposition or modify your product or service to better connect with the new demographic.

Look at the big picture

Next, review the purchasing patterns of different demographic groups in your existing customer base. Who are your most and least profitable customers? Monitor buying patterns over time, including which segments are growing and shrinking.

Also evaluate demographic trends in the broader market to determine whether any shifts you’re seeing in customer base are consistent with broader demographic trends. The answer will hold important implications for your marketing strategy.

For example, if you’re operating in a demographic area that’s bucking trends in the wider market, you’ll probably want to shift your marketing focus as the trends catch up with your locale. Or, if you’re looking to aggressively grow your business, you may need to expand your marketing efforts to a broader audience than your current customer base.

Consider cluster analysis

When conducting a targeted marketing campaign, many companies choose to group similar people into “clusters” to more effectively market products or services to them. Commonly referred to as “cluster analysis,” this approach is helpful when basic demographic criteria might not be strong indicators of whether someone is likely to be interested in the product or service being offered.

Once you’ve identified the market segments that you want to target, figure out how to best connect with them. Personalize your market segmentation strategy to each cluster’s preferred mode of communication. This is sometimes referred to as using “emotional intelligence when communicating with customers.”

Finally, keep in mind that you also need to supplement your demographic research with competitive intelligence. If competitors are miles ahead of you in reaching a demographic that you intend to target, you’ll need to factor that into your strategy. Indeed, you might decide not to try to expand into that segment if the effort would require a huge investment with a low likelihood of success.

Use the data wisely

To be clear, this has been just a general overview of targeted marketing campaigns. There are many different approaches you could apply and a variety of metrics to potentially track. FMD can help you review your financials to determine how to budget for an optimal targeted marketing campaign, as well as how to best use the data gathered.

© 2023

What is the difference between Prevailing Wage Act and Davis-Bacon Act?

Prevailing Wage requires employers working on Michigan state-funded projects to pay employees on those projects wages and fringe benefits similar to union-level wages and benefits.  This applies to both contractors and subcontractors.  With the exception of lease build-outs, if a project greater than $50,000 involves employing construction mechanics (e.g., asbestos, hazardous material handling, boilermaker, carpenter, cement mason, electrician, office reconstruction and installation, laborer including cleaning debris, scraping floors, or sweeping floors in construction areas, etc.) and is sponsored or financed in whole or in part by State funds, state contractors must pay prevailing wage.

Here are some helpful links:

• The Michigan Department of Technology, Management, and Budget Frequently Asked Questions link (Please note the reference to year 2022 is the latest on this site)

• Michigan Labor and Economic Opportunity - Bureau of Employment Relations - Wage and Hour Division website has additional information on prevailing wage requirements

• This links to Prevailing Wage by Michigan county.

The Davis-Bacon Act requires the payment of prevailing wage rates, which are determined by the US Department of Labor (DOL), to all laborers and mechanics on federal government construction projects in excess of $2,000.  Generally, Michigan’s minimum wage rates exceed the DOL wage rates.  Here is a link to the Davis-Bacon Act and Frequently Asked Questions.

The Prevailing Wage Act is ENROLLED HOUSE BILL No. 4007 now known as Act No. 10 Public Acts of 2023.

It requires prevailing wages and fringe benefits on state projects; to establish the requirements and responsibilities of contracting agents and bidders; to make appropriations for the implementation of this act; and to prescribe penalties.

• Sec. 2. (1) Every contract executed between a contracting agent and a successful bidder as contractor and entered into pursuant to advertisement and invitation to bid for a state project which requires or involves the employment of construction mechanics, other than those subject to the jurisdiction of the state civil service commission, and which is sponsored or financed in whole or in part by the state shall contain an express term that the rates of wages and fringe benefits to be paid to each class of mechanics by the bidder and all of its subcontractors, shall be not less than the wage and fringe benefit rates prevailing in the locality in which the work is to be performed. Contracts on state projects which contain provisions requiring the payment of prevailing wages as determined by the United States Secretary of Labor pursuant to 40 USC 3141 to 3148 or which contain minimum wage schedules which are the same as prevailing wages in the locality as determined by collective bargaining agreements or understandings between bona fide organizations of construction mechanics and their employers are exempt from the provisions of this act.

• (2) A contractor or subcontractor shall pay to its construction mechanics wages and fringe benefits at the rates required under an applicable contract for a state project.

What does the Prevailing Wage law mean?

a.  Michigan has reinstated its prevailing wage law, which requires the payment of wages to employees working on state-funded projects at the “prevailing wage in the locality.” This requirement was previously in place from 1965 to 2018.

b.  The “prevailing wage” is a level set by the state that is similar to the union-level wages and fringe benefits that all employers performing state-funded projects in the locality are required to pay to employees. State-funded projects include the construction, alteration, repair, installation, demolition, or improvement of public buildings, schools, works, bridges, highways, or roads. 

c.  The prevailing wage requirement will apply to contracts entered into or bids made after the law goes into effect (90 days after the end of the current legislative session, which is expected to be mid to late March 2024). Contracts that require payment of prevailing wages established by the U.S. Secretary of Labor or which contain minimum wage schedules as set forth in local collective bargaining agreements or understandings between bona fide organizations of construction mechanics and their employers are exempt from the provisions of this act.

d.  After the law is in effect, the Commissioner of the Michigan Department of Labor and Economic Opportunity will be responsible for establishing the prevailing wage rates for all classes of employees required to perform a state-funded construction project prior to accepting bids from contractors. 

e.  Contractors awarded a project will be required to post the prevailing wages at the construction site and maintain accurate records of the actual wages and benefits paid to employees. 

f.  Contractors that fail to pay prevailing wages may have their contract terminated, be required to pay any excess costs incurred by the state for contracting with a new employer, and be fined up to $5,000. 

g.  Contractors and their subcontractors are jointly and severally liable for costs associated with a violation. 

h.  Contractors are also prohibited from discharging or discriminating against a skilled or unskilled mechanic, laborer, worker, helper, assistant, or apprentice working on a state project who reports or was about to report a violation or suspected violation.

What is the Davis-Bacon Act?

a.  The Davis-Bacon Act requires the payment of prevailing wage rates, which are determined by the US Department of Labor (DOL), to all laborers and mechanics on federal government construction projects in excess of $2,000.

b.  The act is named after its sponsors, James J. Davis, a Senator from Pennsylvania and a former Secretary of Labor under three presidents, and Representative Robert L. Bacon of Long Island, New York. The Davis-Bacon act was passed by Congress and signed into law by President Herbert Hoover on March 3, 1931.

c.  In Michigan as of January 2022, a contractor must pay all covered workers at least $11.25 per hour (or the applicable wage rate, if it is higher) for all hours spent performing on a federal government construction contract.

If you have further questions please contact your advisor at FMD.

Addressing pay equity at your business

Businesses today are under increased pressure to fully understand and thoroughly respond to the issue of pay equity. And neither of these two broad undertakings is particularly easy.

First, fully understanding what pay equity is and whether and how it’s played out at your company calls for research, analysis, and perhaps some difficult discussions. The second part, responding to it in practical and effective ways, can entail changing long-standing employment processes and investing in additional training and communications initiatives.

Philosophy and practice

Simply defined, pay equity is the philosophy and practice of “equal pay for equal work.” That doesn’t mean everyone receives the same amount of pay. It means compensation is free of unjust biases historically related to demographic factors such as age, race, gender, disability, national origin, and sexual orientation. Employees’ pay, both upon hire and as adjusted through raises, should be determined on the basis of objective, relevant factors such as education and training, experience, skills, performance, and tenure.

As mentioned, determining whether pay inequities exist within your business will entail a careful and honest assessment. Many companies conduct a formal pay equity audit. This is a thorough statistical analysis of compensation history, policies and structure. The audit’s objective is to identify any inconsistencies, gaps and incongruities that can’t be rationally explained.

Best prevention practices

To prevent instances of inequitable pay at your company, here are some best practices to consider:

• Use only initials or random ID numbers during early screenings of job candidates. Minimizing the ability to distinguish candidates by ethnicity or gender can reduce the likelihood of biases in hiring and initial compensation decisions.

• Refrain from asking candidates their pay histories. Women and people of color are more likely to have been paid less in their previous positions. Using historical compensation to set their current salaries only compounds pay disparities.

• Generate objective criteria for recruiting, hiring, compensating, evaluating and promoting employees. Implement standard pay ranges that reflect each position’s value to the business.

• Limit the ability of managers or supervisors to singlehandedly adjust pay for specific individuals. Such one-off decisions can lead to pay inequities.

• Help managers and supervisors understand pay equity. Training will help them recognize how to best develop a culture that embraces pay equity and discuss the issue with their employees.

• Communicate openly and regularly with staff. Let employees know how you set compensation and reassure them that they can discuss pay with their supervisors without fear of retaliation. More transparency tends to foster greater pay equity.

Tough questions

Make no mistake, pay equity is a tricky issue that can raise a lot of tough questions. Dealing with it won’t be a “one and done” activity. However, establishing your business as one that pays equitably will bolster your “employer brand” in today’s competitive labor market. Our firm can help you conduct a pay equity audit as well as better understand all aspects of your compensation structure.

© 2023

Businesses, be prepared to champion the advantages of an HSA

With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.

The basics

An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 major advantages

There are three major advantages to an HSA to clearly communicate to employees:

1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.

3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the upsides

Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact FMD for help evaluating the concept and assessing the costs of health care benefits.

© 2023

Strengthen strategic planning with competitive intelligence

Business owners and their leadership teams are rightly urged to engage in regular strategic planning to move their companies, thoughtfully and consciously, in a positive direction.

However, no matter how sound a set of strategic objectives might be, it’s always important to bear in mind that your competitors have plans of their own. That’s why you should consider integrating competitive intelligence into your strategic planning efforts.

What to look for

The term “competitive intelligence” generally refers to the process of legally and ethically gathering and analyzing information about competitors to better anticipate market trends, analyze industry developments and compare business practices. It can help you collect valuable data and analytics about each competitor’s:

• Financial performance,

• Products and services,

• Market position,

• Focus or business direction (or related changes),

• Growth or expansion plans,

• Mergers and acquisitions activity, and

• Joint ventures or strategic alliances.

You should also be looking for signs of weakness in competing companies. Have they closed offices or facilities? Do they seem to be desperately looking for employees? Are they embroiled in one or more legal disputes?

How to do it

Putting competitive intelligence into practice may conjure dramatic images of ethically dubious cloak-and-dagger corporate espionage. But there are a multitude of perfectly above-board ways to collect the massive amount of data often available about other businesses.

For starters, simply chatting with customers and prospects, bankers and insurance reps, professional advisors, and other business contacts at trade shows, conferences and other networking events can help keep you in the know.

Back in the office, you can designate an employee (or several) to scan major daily newspapers, community news sources, and trade and other business publications for pertinent stories about your competition and industry. In addition, make sure you’re on the mailing lists for competitors’ brochures, catalogs, press releases, annual plans and other print collateral.

And, of course, there’s the internet. Obviously, you or someone on your team needs to be very familiar with your biggest competitors’ websites and blogs. What are they focused on? What changes are they making — or failing to make?

If competing companies are active on social media, follow those accounts and take note of major announcements, sales and so forth. You may also want to join online discussion groups or forums related to your industry where you might pick up news or clues about competitors.

Additionally, explore harnessing the powerful search engines and resources offered by various third-party providers. For example, Dun & Bradstreet provides industry, market and company-specific intelligence and analytics about both public and private businesses. Meanwhile, the U.S. Securities and Exchange Commission provides free public access to the filings of public companies via its EDGAR database.

Many ways

As you can see, there are many ways to gather competitive intelligence legally and ethically. And what you learn can strengthen your existing strategic planning or even inspire you to go in a new and better direction. Contact us for help integrating relevant financial data and projections into your strategic objectives.

© 2023

How businesses can use stress testing to improve risk management

If you’ve been following the news lately, you’ve surely heard or read about the sudden rise in concern about the banking industry. Although the story is still unfolding, an important lesson for business owners is already clear: You’ve got to be constantly on guard against the many risks to your company’s financial solvency.

One way that banks are advised to guard against catastrophic failure is to regularly perform “stress testing.” Doing so entails using various analytical techniques to determine whether and how the institution would be affected by specified financial developments or events.

But this advice isn’t necessarily restricted to banks. Businesses can use stress testing as well to get a better sense of how they should respond to a given threat.

Identify major risks

To get started on a basic stress-testing initiative, you’ll generally need to identify four types of risk to your company:

1. Operational risks, which cover the day-to-day workings of the business and can include dealing with the impact of a disaster arising from natural causes, human error or intentional wrongdoing,

2. Financial risks, which involve how the company manages its finances and protects itself from fraud,

3. Compliance risks, which relate to issues that might attract the attention of government regulators, and

4. Strategic risks, which refer to the business’s grasp of its own market as well as its ability to respond to changes in customer preferences.

When examining threats in each category, be as specific as possible. No detail or technicality is too small to factor into your assessment.

Meet with your team

Once you’ve identified the pertinent risks in each category, meet with your leadership team and professional advisors to improve your collective understanding of each threat. Even more important, discuss the anticipated financial impact of the identified risks and your company’s ability to absorb or adjust to the projected negative effects.

The ultimate objective is to develop a game plan to mitigate every identified risk. For example, if your business operates in an area prone to natural disasters, such as earthquakes or wildfires, you obviously need an evacuation and disaster recovery plan in place.

But other situations aren’t so obvious. For instance, if your company relies heavily on a key person, you should develop a viable succession plan and consider buying insurance in case that person unexpectedly dies or becomes disabled.

Focus on continuous improvement

Risk management is a continuous improvement process. New threats may emerge, old ones may fade — and even the best-laid plans tend go awry when left untended. Meet with your leadership team at least annually to conduct stress testing and assess the most current threats to your company. Contact us for help gathering and organizing relevant financial data and developing accurate projections.

© 2023

Keep an eye out for executive fraud

Occupational fraud can be defined as crimes committed by employees against the organizations that they work for. Perhaps its most dangerous variation is executive fraud — that is, wrongdoings by those in the C-Suite. Senior-level execs are in a prime position to not only inflict substantial amounts of financial damage, but also severely impair the reputation of the business in question.

While your leadership team is likely made up of trustworthy colleagues, it’s still a good idea to keep an eye out for executive fraud and set up defenses against wrongdoing.

3 points of the triangle

Forensic accountants use a paradigm called “the fraud triangle” to explain why occupational fraud occurs. It has three points:

1. Pressure. Executives may feel they need to maintain a lavish lifestyle that involves things such as multiple real estate properties, expensive cars and exotic vacations. The resulting pressure can drive some individuals to overextend their personal finances until debts become insurmountable. Executives may also feel they have to pump up sales numbers or falsify financial statements to shore up their professional performance.

2. Opportunity. As mentioned, these individuals often have the access and authority to commit fraud without getting caught immediately. This is particularly true when the company doesn’t implement or enforce strong internal controls.

3. Rationalization. Dishonest execs may think “everybody does it” or that they “deserve” more than they legitimately earn. Substance abuse or a gambling problem can also impair judgment.

Beyond internal controls

There’s no doubt that internal controls are imperative to preventing and detecting any occupational fraud. However, to best prevent executive fraud, you may need to take extra steps.

At many businesses, senior managers have the authority to override internal controls. So, for starters, establish strict policies regarding when it’s permissible to do so. If an executive believes an override of internal controls is necessary, require a second opinion and thorough documentation.

Beyond that, mandate anti-fraud training for everyone. Sometimes executives are allowed to opt out of such training; this sends the wrong message to both the execs themselves and everyone else.

Also, set up reporting measures. An anonymous hotline enables rank-and-file workers to share concerns and suspicions about fraud without risking their jobs. Ensure the hotline’s integrity by providing only those who need to know, such as fraud investigators, access to the tips. In fact, to ensure a fair and unbiased investigation of any tip that comes in, consider engaging an external fraud expert to investigate every legitimate-seeming allegation.

In cases of verified executive fraud, don’t shirk your responsibility to prosecute. Many businesses are tempted to sidestep civil litigation or criminal prosecution for fear of bad publicity. But allowing executives to commit fraud with little to no real-world ramifications may only increase the likelihood that it happens again.

Transparency is key

In closing, we’d be remiss not to mention the importance of an empowered audit team. Whether your company uses internal or external auditors, or a combination of both, give them unfettered access to financial records and other pertinent information. If the audit team encounters a roadblock, they need to know whom to contact and how to proceed. Contact us for help preventing fraud at your business, whether from executives or anyone else.

© 2023

ACA penalties will rise in 2024

Recently, the IRS announced 2024 indexing adjustments to the applicable dollar amount used to calculate employer-shared responsibility penalties under the Affordable Care Act (ACA).

Although next year might seem a long way off, it’s best to get an early start on determining whether your business is an applicable large employer (ALE) under the ACA. If so, you should also check to see whether the health care coverage you intend to offer next year will meet the criteria that will exempt you from a penalty.

The magic number

For ACA purposes, an employer’s size is determined in any given year by its number of employees in the previous year. Generally, if your company has 50 or more full-time employees or full-time equivalents on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone who provides, on average, at least 30 hours of service per week.

Under the ACA, an ALE may incur a penalty if it doesn’t offer minimum essential coverage that’s affordable and/or fails to provide minimum value to its full-time employees and their dependents. The penalty in question is typically triggered when at least one full-time employee receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

Next year’s penalties

The adjusted penalty amounts per full-time employee for failures occurring in the 2024 calendar year will be:

• $2,970, a $90 increase from 2023, under Section 4980H(a), “Large employers not offering health coverage,” and

• $4,460, a $140 increase from 2023, under Sec. 4980H(b), “Large employers offering coverage with employees who qualify for premium tax credits or cost-sharing reductions.”

The IRS uses Letter 226-J to inform ALEs of their potential liability for an employer shared responsibility penalty. A response form — Form 14764 (“ESRP Response”) — is included with Letter 226-J so that an ALE can inform the IRS whether it agrees with the proposed penalty. A response is generally due within 30 days. Be on the lookout for this letter so that you’re prepared to promptly review and respond if the IRS contacts you.

Questions and ideas

Careful compliance with the ACA remains critical for companies that qualify as ALEs. Growing small businesses should be particularly wary as they become midsize ones. Our firm can answer any questions you may have about your obligations as well as suggest ways to better manage the costs of health care benefits.

© 2023

Supreme Court: Overtime rules still apply to highly compensated employees

If you were told someone earns more than $200,000 annually, you might assume the person is a salaried employee who’s ineligible for overtime pay. However, as demonstrated in the recent U.S. Supreme Court case of Helix Energy Solutions Group, Inc. v. Hewitt, this isn’t always a safe assumption.

The FLSA rules

Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. A workweek doesn’t need to be a calendar week — for example, a Wednesday to Tuesday workweek would qualify.

To be exempt from overtime (and minimum wage) regulations, most employees need to be paid at least $684 per week or $35,568 annually. This is known as the salary level test. An exempt employee must also pass the job duties test, the conditions for which vary by position. For instance, to qualify for the executive exemption, the job duties test stipulates that:

• The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise,

• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalents, and

• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other employment status change must be given particular weight.

Case details

In the aforementioned Supreme Court case, the employee involved was a “tool-pusher” whose duties included supervising other offshore oil rig workers. He was paid a daily rate ranging from $963 to $1,341 per day, resulting in earnings of more than $200,000 annually. Under the compensation scheme, the daily rate increased each consecutive day worked.

The employee filed suit claiming his employer violated the FLSA’s overtime provisions. In response, the company argued that he was exempt from overtime pay as a “bona fide executive.”

To qualify for such an exemption, an employee must meet the salary level and job duties tests as mentioned above. But the employee also needs to satisfy the salary basis test. Under FLSA regulations, a bona fide executive may satisfy the salary basis test if the person is a highly compensated employee (HCE) — that is, one who earns at least $107,432 or more per year (or $100,000 per year before January 1, 2020).

The Court’s decision

The Supreme Court held in a 6-3 ruling that an HCE who’s paid at a daily rate is not considered to be paid a salary. Therefore, the employee in question wasn’t exempt from receiving overtime pay.

In its majority opinion, the Court reasoned that the HCE rule isn’t only a “simple income level” test for the purposes of exemption. It noted that the employer could have satisfied the exemption if the daily rate was a weekly guarantee that satisfied applicable regulations, or if compensation had been a straight weekly salary.

The Court wasn’t swayed by the company’s objection that paying a weekly guaranteed daily rate or straight weekly salary would have resulted in the employee receiving compensation for days he didn’t work. According to the Court, this only further showed that the employee wasn’t paid a salary and, thus, didn’t meet the requirements for the exemption from overtime pay.

Current and compliant

The business in this case joined many others that have been tripped up by the FLSA’s rules. If your company pays employees overtime, our firm can help you stay current and compliant with the latest applicable regulations.

Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984, February 22, 2023 (U.S. Supreme Court)

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