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2018 Q4 tax calendar: Key deadlines for businesses and other employers
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. 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.
October 15
* If a calendar-year C corporation that filed an automatic six-month extension:
* File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
* Make contributions for 2017 to certain employer-sponsored retirement plans.
October 31
* Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)
November 13
* Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
December 17
* If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.
© 2018
Prepare for valuation issues in your buy-sell agreement
Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.
Issues, what issues?
Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute.
The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably.
Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.
What are our protocols?
At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:
* How “value” will be defined,
* Who will value the business,
* Whether valuation discounts will apply,
* Who will pay appraisal fees, and
* What the timeline will be for the valuation process.
It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.
Are we ready?
Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout issues when they arise. Our firm would be happy to help.
© 2018
How to reduce the tax risk of using independent contractors
Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.
For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.
Key factors
When assessing worker classification, the IRS typically looks at the:
Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.
Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.
Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.
The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.
Protective measures
Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk.
From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.
Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.
Handle with care
Keep in mind that taxes, interest and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification.
© 2018
HSA + HDHP can be a winning health benefits formula
If you’ve done any research into employee benefits for your business recently, you may have come across a bit of alphabet soup in the form of “HSA + HDHP.” Although perhaps initially confusing, this formula represents an increasingly popular model for health care benefits — that is, offering a Health Savings Account (HSA) coupled with, as required by law, a high-deductible health plan (HDHP).
Requirements
An HSA operates somewhat like a Flexible Spending Account (FSA), which employers can also offer to eligible employees. An FSA permits eligible employees to defer a pretax portion of their pay to later use to reimburse out-of-pocket medical expenses. But, unlike an FSA, an HSA is permitted to carry over unused account balances to the next year and beyond.
The most significant requirement for offering your employees an HSA is that, as mentioned, you must also cover them under an HDHP. For 2019, this means that each participant’s health insurance coverage must come with at least a $1,350 deductible for single coverage or $2,700 for family coverage. It’s okay if the HDHP doesn’t impose any deductible for preventive care (such as annual checkups), but participants can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.
The benefit of the high deductible requirement is that premiums for HDHPs are typically less expensive than for health plans with lower deductibles. You and your employees can use some or all of the money saved on premiums to fund their HSAs.
Pretax contributions
You and the employee combined can make pretax HSA contributions in 2019 of up to $3,500 for single coverage or $7,000 for family coverage. An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may contribute an additional $1,000.
The good news for you, the business owner: First, employer contributions are optional. Second, pretax contributions to an employee’s HSA, whether by you or the employee, are exempt from Social Security, Medicare, and unemployment taxes.
Growing popularity
Just how popular is the HSA + HDHP model? A 2018 report by the trade association America’s Health Insurance Plans found that enrollment in these plans increased by nearly 400% over the last 10 years — from about 4.5 million in 2007 to about 21.8 million in 2017. Of course, this doesn’t mean your business should blindly jump on the bandwagon. Contact us to discuss the concept further or for other ideas regarding affordable employee benefits.
© 2018
Ideas to Help Detect Email Scams
By this point, most us have seen email scams in our inbox. Most likely, we even have a smirk when we spot that email from out-of-the-country asking for a wire money transfer. Lately, many of these scammers are pretending to be businesses or vendors that we frequent. So, how do we tell if an email is legitimate or a scam?
The sender email address is misspelled or misleading.
Look closely at the details. A missing letter in the address or very miniscule changes indicates the email is not from the official business. Study the sending address, and make sure that the parts before and after the @ symbol are accurate.
Grammatical errors in the email.
Misspelled words, improper use of the language, or improper use of punctuation are subtle indications of a scam.
Bad formatting in the body of an email.
Blank lines, broken text, odd spacing, or incomplete formatting indicates a scam.
Beware of “winning a prize” or a “deal” that is too-good-to-be-true!
If the email congratulates you and indicates you have been selected to win a prize, it is most likely a phishing scam seeking to gain information about you and your account.
Attachments or links.
Clicking on any attachments or links in a suspicious email may execute a malicious virus or malware. In most email applications, you can hover your mouse cursor over a link and a small pop-up window will display the true destination of the link. Always hover over links in email before clicking to make sure they take you to the correct and safe destination! This example shows a link posing to be Docusign.com but, it directs you to a malicious site!
When in doubt, don’t click on the link. Instead, go to the sender’s known web address or call the sender at a known telephone number other than what may be specified in the email.
Requests for payment or personal information.
Never initiate a payment or provide confidential information based on an email without independent, verbal verification.
Examples:
You receive an email that appears to come from a vendor informing you of new payment instructions.
You receive an email that appears to come from someone in your organization that instructs you to urgently initiate a payment or provide confidential or personal information.
Business Practices and Safeguards
Preventing business email compromise requires a series of practices to strengthen the organization’s security position. The following are items to consider:
Educate employees on how to recognize phishing emails and how to practice good cyber hygiene.
Develop rigid payment authorization processes with financial personnel using various confirmation methods that perhaps include written or verbal confirmation.
When in doubt, any suspicion of a malicious or fraudulent email should be reported to your IT professional for analysis.
A Note Regarding Communication from the IRS
The IRS initiates most contacts through regular mail delivered by the United States Postal Service, not through email.
The IRS does not:
Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card, or wire transfer.
Demand that you pay taxes without the opportunity to question or appeal the amount they say you owe.
Threaten to bring in local police, immigration officers, or other law-enforcement to have you arrested for not paying. The IRS also cannot revoke your driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
All payments to the IRS should be to the “United States Treasury”.
Keep it SIMPLE: A tax-advantaged retirement plan solution for small businesses
If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help you attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2018.
The basics
SIMPLE stands for “savings incentive match plan for employees.” As the name implies, these plans are simple to set up and administer. Unlike 401(k) plans, SIMPLE IRAs don’t require annual filings or discrimination testing.
SIMPLE IRAs are available to businesses with 100 or fewer employees. Employers must contribute and employees have the option to contribute. The contributions are pretax, and accounts can grow tax-deferred like a traditional IRA or 401(k) plan, with distributions taxed when taken in retirement.
As the employer, you can choose from two contribution options:
Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. You must make the contribution regardless of whether the employee contributes. This applies to compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).
Match employee contributions up to 3% of compensation. Here, you contribute only if the employee contributes. This isn’t subject to the annual compensation limit.
Employees are immediately 100% vested in all SIMPLE IRA contributions.
Employee contribution limits
Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE IRA.
SIMPLE IRAs offer greater income deferral opportunities than ordinary IRAs, but lower limits than 401(k)s. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can also make a catch-up contribution of up to $3,000. This compares to $5,500 and $1,000, respectively, for ordinary IRAs, and to $18,500 and $6,000 for 401(k)s. (Some or all of these limits may increase for 2019 under annual cost-of-living adjustments.)
You’ve got options
A SIMPLE IRA might be a good choice for your small business, but it isn’t the only option. The more-complex 401(k) plan we’ve already mentioned is one alternative. Some others are a Simplified Employee Pension (SEP) and a defined-benefit pension plan. These two plans don’t allow employee contributions and have other pluses and minuses. Contact us to learn more about a SIMPLE IRA or to hear about other retirement plan alternatives for your business.
© 2018
High-tax states consider SALT countermoves
A grain of SALT in new IRS notice
Taxpayers who itemize deductions on Schedule A of their tax return have been able to deduct outlays for state and local income tax as well as property tax with no upper limit. (State and local sales tax may be deducted instead of income tax.) However, as of 2018, the Tax Cuts and Jobs Act of 2017 provides that no more than $10,000 of these state and local tax (SALT) expenses can be deducted on single or joint tax returns ($5,000 for married individuals filing separately).
Example: Marge Williams might have been able to deduct $20,000, $50,000, or even more in SALT payments in 2017. For 2018, Marge’s SALT deduction will be capped at $10,000. Thus, her SALT payments over $10,000 will be made with 100-cent dollars. Previously, those state and local tax bills might have effectively been paid with, say, 65-cent or even 60.4-cent dollars, depending on her federal tax bracket.
Political figures in high tax states worry that this sizable increase in net tax obligations will cause residents to flee to other states with lower taxes; moreover, residents of other states might be reluctant to move to places where taxes are steep. That may or may not be the case. After all, taxpayers subject to the alternative minimum tax have been making SALT payments with 100-cent dollars for years—SALT is an add-back item in the alternative minimum tax calculation, wiping out the tax benefit—so the new rule might not be as painful as it appears.
First responder
Nevertheless, high tax states are considering countermoves. The first state to act on this SALT pinch was New York, which enacted two-fold legislation in April. One aspect of this legislation is allowing New Yorkers to make contributions to designated health and education state charitable funds, which, theoretically, would qualify for federal and state charitable income tax deductions. Local governments are also authorized to create charitable funds.
Taxpayers making contributions to state charitable funds would also get state income tax credits, and taxpayers making contributions to a local charitable fund would get a property tax credit. The result could be reducing residents’ non-deductible SALT expenses while increasing deductible charitable donations.
The second part of the New York plan involves a voluntary payroll tax, paid by employers, starting at 1.5% and escalating to 5% in two years. This voluntary payroll tax also will generate state income tax credits. Apparently, the idea is that employers would offset the extra expense by cutting wages, which will wind up as a wash for employees because of the tax savings.
IRS takes notice
Observers wondered what the IRS would think about such “work arounds” of the new SALT limits. Their questions were answered swiftly in IRS Notice 2018-54, released in May. The IRS characterized such state efforts as attempts to “circumvent” the new law. Federal tax deductions are controlled by federal law, the notice pointed out: Just because a state says that certain outlays are deductible on federal tax returns does not necessarily make it the last word on the subject.
In the notice, the IRS announced that it will publish proposed regulations on this issue. The agency mentioned “substance over form,” indicating that challenges are likely. Officials in New York and other high tax states reportedly will continue to seek SALT relief. Tax preparers and taxpayers may want to carefully consider whether they want to be among the proverbial dogs in this fight.
Trusted advice
Deducting tax payments
The IRS lists the following types of deductible nonbusiness taxes:
State, local, and foreign income taxes
State and local general sales taxes
State, local, and foreign real estate taxes
State and local personal property taxes
Taxpayers can elect to deduct state and local sales tax instead of state and local income tax, but not both. Those who elect to deduct state and local sales tax may use either actual expenses or optional IRS sales tax tables.
Assessing the S corp
The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.
Tax comparison
The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.
But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.
You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.
S eligibility requirements
If S corp status makes tax sense for your business, you need to make sure you qualify and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:
Be a domestic corporation and have only one class of stock,
Have no more than 100 shareholders, and
Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.
In addition, certain businesses are ineligible, such as insurance companies.
Reasonable compensation
Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.
Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.
Pros and cons
S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.
© 2018
6 ways to get more value from an IT consultant
IT consultants are many things — experts in their field, champions of the workaround and, generally, the “people persons” of the tech field. But they’re not magicians who, with the wave of a smartphone, can solve any dilemma you throw at them. Here are six ways to get more value from your company’s next IT consulting relationship:
1. Spell out your needs. Define your desired outcome in as much detail as possible up front, so that both you and the consultant know what’s expected of each party. To do so, create a project scope document that clearly delineates the job’s purpose, timeframe, resources, personnel, reporting requirements, critical success factors and conflict resolution methods.
2. Appoint an internal contact. Assign someone within your organization as the internal project manager as early in the process as possible. He or she will be the go-to person for the consultant and, therefore, needs to have a thorough knowledge of the job’s requirements and be able to fairly assess the consultant’s performance.
3. Put in some prep time. Before the consultant arrives, prepare his or her workstation, ensuring that any equipment you’re providing works and allows appropriate access to the required systems — including email. Don’t forget to set up the phone, too, and add the consultant to your company phone list. Also, alert your staff that you have engaged a consultant and, to alleviate potential concerns, explain why.
4. Roll out the welcome wagon. Try to arrange an orientation on the Friday before the start date (assuming it’s a Monday). That way, you can give the consultant the project scope document as well as a written company overview (perhaps your employee procedures manual) that includes policies, safety protocols, office hours and tips on company culture to review over the weekend.
5. Keep in touch. Conduct regular project status meetings with the consultant to assess progress and provide feedback. Notify the consultant or the internal project manager immediately if you suspect the job is off track.
6. Conclude courteously. If you need to end the consulting engagement earlier than expected (for reasons other than poor performance) or extend it beyond the agreed-on timeframe, give as much notice as possible.
Act toward a good consultant as you would any valued vendor with whom you’d like to work again. After all, establishing a positive relationship with someone who knows your business could provide even greater return on investment in the future. Our firm would be happy to explain further or explore other ideas.
© 2018
Purpose, Objectives, and Benefits of the Independent Audit
The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.
Financial statement audits provide an independent, third-party opinion to participants, plan management, the Department of Labor (DOL), and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits.
The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements.
To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance that material misstatements, whether caused by error or fraud, are detected.
The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management, by:
Testing evidence supporting the amounts and disclosures in the plan’s financial statements and Department of Labor (DOL)-required supplemental schedules
Assessing the accounting principles used and significant accounting estimates made by management
Evaluating the overall financial statement presentation to form an opinion on whether the financial statements are free of material misstatement
In conducting a plan audit, the auditor has a responsibility to perform procedures with respect to the provisions of ERISA and DOL and IRS regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements.
As part the auditor’s consideration of the plan’s compliance with laws and regulations, the auditor is required to make certain inquiries and review correspondence with the DOL and IRS. The auditor also considers the effect of the transaction on the financial statements.
Tips for Cost-Effective Internal Control
Internal control is a process — affected by plan management and other personnel, and those charged with governance, and designed to provide reasonable assurance regarding the achievement of objectives in the reliability of financial reporting. Your plan’s policies, procedures, organizational design, and physical security all are part of the internal control process.
Because errors and fraud can and do occur, it is important that you establish safeguards for your plan to ensure you can adequately meet your fiduciary responsibilities. One way this can be accomplished is by implementing effective internal control over financial reporting.
Internal control will vary depending on the plan’s size, type, and complexity; whether the plan uses outside service organizations to process transactions and manage plan investments; and the size and qualifications of the department responsible for financial reporting.
Internal control should be based on a systematic and risk-oriented approach, to ensure that there are adequate individual controls in areas with high risk, and that they are not excessive in areas with low risk. Before making the decision to adopt a control, analyze the costs of establishing and maintaining it, and consider:
The potential benefits the control will provide
The possible consequences of not implementing it
Determine your plan’s internal control objectives
Individual controls should be designed to meet your system’s objectives
Establish, document and communicate your internal control
Once controls are established, it is important that they be documented and communicated to staff members who are expected to follow the policies and procedures. Staff training is a key element in ensuring the effectiveness of the plan’s internal control.
Extra: As a plan sponsor, administrator, or trustee, you are considered a fiduciary under ERISA — As such, you are subject to certain fiduciary responsibilities, and with these responsibilities comes potential liability. Your responsibilities include plan administration functions such as maintaining the financial books and records of the plan, and filing a complete and accurate annual return/report for your plan.
Independent Auditor Assistance
While an independent auditor is a valuable resource, it is important that you understand that the responsibility for investment valuation and disclosure remains with you. Hiring an auditor to perform an audit — whether full scope or limited scope — does not relieve you of your responsibility for the completeness and accuracy of the plan’s investment information reported in the Form 5500 and the financial statements.
An independent auditor may be a good resource to consult about the adequacy of valuation techniques and the related financial statement disclosures, but they cannot make the determination regarding the valuation inputs (Level I, II, or III).
Department of Labor (DOL) and AICPA auditor independence rules restrict what non-audit services auditors can perform for a plan for which they perform the annual financial statement audit.
Your plan auditor may provide advice, research materials, and recommendations to assist you in making decisions about the adequacy of your investment valuations and of the related disclosures. They may also assist you in establishing internal controls surrounding your investment valuations. Your auditor may be able to provide some assistance with the financial statement preparation, unless they are prevented from doing so under SEC independence rules for Form 11-K filers.
All About the Audit Process
There are six key steps that auditors must follow. FMD has laid out the basics that we follow below.
Step 1--Planning and Supervision
Professional standards require that the auditor adequately plan the work and supervise any assistants.
Audit planning includes developing an overall audit strategy for the expected conduct, including:
Organization and staffing of the audit
Establishing a written understanding with the client regarding the services to be performed
Obtaining an understanding of the plan’s internal controls
The nature, timing, and extent of planning will vary according to the type of employee benefit plan, the size and complexity of the plan’s operations, the auditor’s experience with the plan, and his or her understanding of the plan and its environment, including its internal control.
Step 2--Risk Assessment
Audit risk is the risk that the auditor expresses an unmodified opinion when the plan’s financial statements are materially misstated. The auditor considers audit risk in relation to the overall financial statement level and the assertion level for classes of transactions, account balances, and disclosures, and performs procedures to assess the risks of material misstatement at both levels.
Step 3--Internal Control
The auditor must obtain an understanding of the plan and its environment, including its internal control relevant to the audit, which will provide a basis for designing and implementing the audit plan.
An important part of the auditor’s planning is to look at the internal control over the financial reporting that are in place and then evaluate their effectiveness to assess the risks of material misstatement.
Step 4--Audit Testing
In developing an audit strategy, the auditor considers whether to rely on the relevant controls at the plan and the plan’s service organizations for various areas of the audit based on an assessment of factors such as:
Cost/benefit considerations
The size of the plan and prior year results of control testing
If test results indicate the plan’s controls are effective, the auditor may reduce the level of “substantive tests” he or she performs as a basis for the audit opinion.
Step 5--Evaluation
The auditor evaluates the audit evidence obtained and considers what type of audit opinion to issue. Professional standards define certain requirements and provide broad guidelines about the evaluation of audit evidence. However, the auditor also is required to exercise professional judgment to determine the nature and amount of evidence required to support the audit opinion.
Depending on the test results, the engagement team may need to adjust its audit plan, modify its tests, or perform additional procedures in response to this updated information as warranted.
Step 6--Reporting
To conclude the audit, the auditor issues the written audit report, which contains their findings.
Choosing the right accounting method for tax purposes
The Tax Cuts and Jobs Act (TCJA) liberalized the eligibility rules for using the cash method of accounting, making this method — which is simpler than the accrual method — available to more businesses. Now the IRS has provided procedures a small business taxpayer can use to obtain automatic consent to change its method of accounting under the TCJA. If you have the option to use either accounting method, it pays to consider whether switching methods would be beneficial.
Cash vs. accrual
Generally, cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid. Accrual-basis businesses, on the other hand, recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments.
In most cases, a business is permitted to use the cash method of accounting for tax purposes unless it’s:
Expressly prohibited from using the cash method, or
Expressly required to use the accrual method.
Cash method advantages
The cash method offers several advantages, including:
Simplicity. It’s easier and cheaper to implement and maintain.
Tax-planning flexibility. It offers greater flexibility to control the timing of income and deductible expenses. For example, it allows you to defer income to next year by delaying invoices or to shift deductions into this year by accelerating the payment of expenses. An accrual-basis business doesn’t enjoy this flexibility. For example, to defer income, delaying invoices wouldn’t be enough; the business would have to put off shipping products or performing services.
Cash flow benefits. Because income is taxed in the year it’s received, the cash method does a better job of ensuring that a business has the funds it needs to pay its tax bill.
Accrual method advantages
In some cases, the accrual method may offer tax advantages. For example, accrual-basis businesses may be able to use certain tax-planning strategies that aren’t available to cash-basis businesses, such as deducting year-end bonuses that are paid within the first 2½ months of the following year and deferring income on certain advance payments.
The accrual method also does a better job of matching income and expenses, so it provides a more accurate picture of a business’s financial performance. That’s why it’s required under Generally Accepted Accounting Principles (GAAP).
If your business prepares GAAP-compliant financial statements, you can still use the cash method for tax purposes. But weigh the cost of maintaining two sets of books against the potential tax benefits.
Making a change
Keep in mind that cash and accrual are the two primary tax accounting methods, but they’re not the only ones. Some businesses may qualify for a different method, such as a hybrid of the cash and accrual methods.
If your business is eligible for more than one method, we can help you determine whether switching methods would make sense and can execute the change for you if appropriate.
FMD Supports Special Olympics Event at Pine Trace Golf Club
At Fenner, Melstrom & Dooling, PLC our team has a passion for being a part of the local community. On August 6, we were one of the local sponsors for the Special Olympics of Michigan at the Special Olympics Golf Benefit at Pine Trace Golf Club which is located on South Blvd in Rochester Hills. This 27th annual golf benefit continues to help the local community, and we are thrilled to stay involved and help.
At this benefit, typically six golf skill events take place. However, due to inclement weather, Golfers were unable to participate in this part of the annual event. Instead participants and sponsors were able to enjoy a delicious meal and get to know one another!
Thank you to Mike Bylen and Pine Trace Golf Club for hosting such a great evening.
Contemplating compensation increases and pay for performance
As a business grows, one of many challenges it faces is identifying a competitive yet manageable compensation structure. After all, offer too little and you likely won’t have much success in hiring. Offer too much and you may compromise cash flow and profitability.
But the challenge doesn’t end there. Once you have a feasible compensation structure in place, your organization must then set its course for determining the best way for employees to progress through it. And this is when you must contemplate the nature and efficacy of linking pay to performance.
Issues in play
Some observers believe that companies shouldn’t use compensation to motivate employees because workers might stop focusing on quality of work and start focusing on money. Additionally, employees may feel that the merit — or “pay-for-performance” — model pits staff members against each other for the highest raises.
Thus, some businesses give uniform pay adjustments to everyone. In doing so, these companies hope to eliminate competition and ensure that all employees are working toward the same goal. But, if everyone gets the same raise, is there any motivation for employees to continually improve?
2 critical factors
Many businesses don’t think so and do use additional money to motivate employees, whether by bonuses, commissions or bigger raises. In its most basic form, a merit increase is the amount of additional compensation added to current base pay following an employee’s performance review. Two critical factors typically determine the increase:
The amount of money a company sets aside in its “merit” budget for performance-based increases — usually based on competitive market practice, and
Employee performance as determined through a performance review process conducted by management.
Although pay-for-performance can achieve its original intent — recognizing employee performance and outstanding contributions to the company’s success — beware that your employees may perceive merit increases as an entitlement or even nothing more than an inflation adjustment. If they do, pay-for-performance may not be effective as a motivational tool.
Communication is the key
The ideal solution to both compensation structure and pay raises will vary based on factors such as the size of the business and typical compensation levels of its industry. Nonetheless, to avoid unintended ill effects of the pay-for-performance model, be sure to communicate clearly with employees. Be as specific as possible about what contributes to merit increases and ensure that your performance review process is transparent, interactive and understandable. Contact us to discuss this or other compensation-related issues further.
© 2018
An FLP can save tax in a family business succession
One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.
A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.
How it works
To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children.
You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.
Tax benefits
As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.
Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.
The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2018 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.
To transfer interests in excess of the annual exclusion, you can apply your lifetime gift tax exemption. And 2018 may be a particularly good year to do so, because the Tax Cuts and Jobs Act raised it to a record-high $11.18 million. The exemption is scheduled to be indexed for inflation through 2025 and then drop back down to an inflation-adjusted $5 million in 2026. While Congress could extend the higher exemption, using as much of it as possible now may be tax-smart.
There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.
FLP risks
Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.
The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-reduction strategy.
Right for you?
An FLP can be an effective succession and estate planning tool, but it isn’t risk free. Please contact us for help determining whether an FLP is right for you.
© 2018
Is there a weak link in your supply chain?
In an increasingly global economy, keeping a close eye on your supply chain is imperative. Even if your company operates only locally or nationally, your suppliers could be affected by wider economic conditions and developments. So, make sure you’re regularly assessing where weak links in your supply chain may lie.
3 common risks
Every business faces a variety of risks. Three of the most common are:
1. Legal risks. Are any of your suppliers involved in legal conflicts that could adversely affect their ability to earn revenue or continue serving you?
2. Political risks. Are any suppliers located in a politically unstable region — even nationally? Could the outcome of a municipal, state or federal election adversely affect your industry’s supply chain?
3. Transportation risks. How reliant are your suppliers on a particular type of transportation? For example, what’s their backup plan if winter weather shuts down air routes for a few days? Or could wildfires or mudslides block trucking routes?
Potential fallout
The potential fallout from an unstable supply chain can be devastating. Obviously, first and foremost, you may be unable to timely procure the supplies you need to operate profitably.
Beyond that, high-risk supply chains can also affect your ability to obtain financing. Lenders may view risks as too high to justify your current debt or a new loan request. You could face higher interest rates or more stringent penalties to compensate for it.
Strategies to consider
Just as businesses face many supply chain risks, they can also avail themselves of a variety of coping strategies. For example, you might divide purchases equally among three suppliers — instead of just one — to diversify your supplier base. You might spread out suppliers geographically to mitigate the threat of a regional disaster.
Also consider strengthening protections against unforeseen events by adding to inventory buffers to hedge against short-term shortages. Take a hard look at your supplier contracts as well. You may be able to negotiate long-term deals to include upfront payment terms, exclusivity clauses and access to computerized just-in-time inventory systems to more accurately forecast demand and more closely integrate your operations with supply-chain partners.
Lasting success
You can have a very successful business, but if you can’t keep delivering your products and services to customers consistently, you’ll likely find success fleeting. A solid supply chain fortified against risk is a must. We can provide further information and other ideas.
© 2018
Do you qualify for the home office deduction?
Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.
Home-related expenses
Homeowners know that they can claim itemized deductions for property tax and mortgage interest on their principal residences, subject to certain limits. Most other home-related expenses, such as utilities, insurance and repairs, aren’t deductible.
But if you use part of your home for business purposes, you may be entitled to deduct a portion of these expenses, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).
Regular and exclusive use
You might qualify for the home office deduction if part of your home is used as your principal place of business “regularly and exclusively,” defined as follows:
1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use.
2. Exclusive use. You use the specific area of your home only for business. It’s not necessary for the space to be physically partitioned off. But, you don’t meet the requirements if the area is used both for business and personal purposes, such as a home office that also serves as a guest bedroom.
Regular and exclusive business use of the space aren’t, however, the only criteria.
Principal place of business
Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.
Examples of activities that are administrative or managerial in nature include:
Billing customers, clients or patients,
Keeping books and records,
Ordering supplies,
Setting up appointments, and
Forwarding orders or writing reports.
Meetings or storage
If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on your premises. The use of your home must be substantial and integral to the business conducted.
Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.
Valuable tax-savings
The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. If you’re not sure whether you qualify or if you have other questions, please contact us.
© 2018
Get SMART When It Comes to Setting Strategic Goals
Strategic planning is key to ensuring every company’s long-term viability, and goal setting is an indispensable step toward fulfilling those plans. Unfortunately, businesses often don’t accomplish their overall strategic plans because they’re unable to fully reach the various goals necessary to get there.
If this scenario sounds all too familiar, trace your goals back to their origin. Those that are poorly conceived typically set up a company for failure. One solution is to follow the SMART approach.
Definitions to work by
The SMART system was first introduced to the business world in the early 1980s. Although the acronym’s letters have been associated with different meanings over the years, they’re commonly defined as:
Specific. Goals must be precise. So, if your strategic plan includes growing the business, your goals must then explicitly state how you’ll do so. For each goal, define the “5 Ws” — who, what, where, when and why.
Measurable. Setting goals is of little value if you can’t easily assess your progress toward them. Pair each goal with one or more metrics to measure progress and success. This may mean increasing revenue by a certain percentage, expanding your customer base by winning a certain number of new accounts, or something else.
Achievable. Unrealistically aggressive goals can crush motivation. No one wants to put time and effort into something that’s likely to fail. Ensure your goals can be accomplished, but don’t make them too easy. The best ones are usually somewhat of a stretch but still doable. Rely on your own business experience and the feedback of your trusted managers to find the right balance.
Relevant. Let’s say you identify a goal that you know you can achieve. Before locking it in, ask whether and how it will move your business forward. Again, goals should directly and clearly support your long-term strategic plan. Sometimes companies can be tempted by “low-hanging fruit” — goals that are easy to accomplish but lead nowhere.
Timely. Assign each goal a deadline. Doing so will motivate those involved by creating a sense of urgency. Also, once you’ve established a deadline, work backwards and set periodic milestones to help everyone pace themselves toward the goal.
Eye on the future
Strategic planning, and the goal setting that goes along with it, might seem like a waste of time. But even if your business is thriving now, it’s important to keep an eye on the future. And that means long-term strategic planning that includes SMART goals. Our firm would be happy to explain further and offer other ideas.