It has been touted as the most significant financial reform since Franklin D. Roosevelt’s New Deal.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, created in response to the financial crisis of the last few years, was signed into law almost one year ago. While not all of its 387 rules have been adopted, the scope of reform will affect investment advisers, investors, business owners, management and the public for years to come.
According to Todd Crouthamel, a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller, Securities and Exchange Commission chairman Mary Schapiro said, “The purpose of the legislation is to create a more effective regulatory structure, fill regulatory gaps, bring greater public transparency and market accountability to the financial system, and give investors protections and input into corporate governance.”
“By the time it is fully adopted, the Dodd-Frank Act will impact virtually every aspect of our financial lives,” says Crouthamel. “The task is enormous, with 145 rules scheduled for adoption in the third and fourth quarters of 2011, plus 30 that are behind schedule.”
Smart Business spoke with Crouthamel about the impact of this legislation on private fund investors and investment advisers.
How will this legislation impact private fund investors?
The Dodd-Frank Act increases the net worth and investments under management requirements for an individual to qualify to invest in private funds. The rules exclude the value of an investor’s primary residence in determining net worth, and this will likely prohibit more investors from investing in private funds. SEC registration is also a significant issue. Many private fund advisers, who were previously not required to register with the SEC, will likely be required to register. This increased oversight may result in additional protections for the private fund investors; however, these protections will not be free. Private fund advisers are going to incur significantly more administrative costs in complying with the SEC requirements, and some of those costs may be passed along to investors.
What effect does the legislation have on SEC oversight of investment advisers?
The debate continues as to who should have regulatory oversight over registered investment advisers. The SEC is overburdened and the number of exams that it can complete is relatively small in relation to the number of advisers. As such, advisers with assets under management of $100 million or less are required to deregister with the SEC and to register with their state agencies.
The Dodd-Frank Act called for a study on enhancing adviser examinations. In January 2011, the SEC’s Division of Investment Management reported the results of its analysis and recommended that Congress consider one, or a combination of, three approaches to strengthen the SEC investment advisers’ examination program. First, it suggests authorizing the SEC to impose user fees on SEC-registered advisers to fund examinations. Second, it proposes authorizing one or more Self-Regulating Organizations to examine SEC-registered advisers. Finally, it recommends authorizing the Financial Industry Regulatory Authority to examine dual registrants for compliance under the Advisers Act. This could result in a political battle between the rules-based system by which broker/dealers are governed and the principles-based system governing registered advisers.
How does the Dodd-Frank legislation impact public company compensation disclosures?
In January 2011, the SEC adopted rules regarding shareholder approval of executive compensation and golden parachute compensation agreements. New rules also require additional disclosure and voting regarding golden parachute compensation agreements with certain executive officers in connection with merger transactions. All of these required votes under the new rules are nonbinding; differences between investors’ recommendations and actions taken by boards of directors could embarrass a company and lead to directors not being re-elected.
Finally, the proposed rules include provisions that require institutional advisers to report their say on pay votes. This provision has not yet been adopted, but it will certainly increase advisers’ administrative costs.
What widespread financial reform is also included in this legislation?
The Dodd-Frank Act extends to credit rating agencies, which were at the center of the recent financial crisis. As a result, Dodd-Frank includes provisions designed to improve the integrity of these credit ratings, including requiring many of the agencies to submit an annual report regarding their internal controls governing the implementation and adherence to procedures and methodologies for determining credit ratings.
There are also new whistleblower rules that provide increased incentives to individuals who voluntarily provide the SEC with original information about a securities law violation, which leads to successful enforcement by the SEC, with sanctions of greater than $1 million.
What can be expected going forward?
Because so much of the Dodd-Frank Act has not been finalized, it is difficult to determine what all of the final regulations will look like. For investment advisers, the challenge will be to stay current with new regulations and to ensure the firm’s policies and procedures reflect the new regulations. For investors, the challenge will be to decipher additional reporting requirements and follow who will ultimately be responsible for oversight of the investors’ advisers. Keeping a watchful eye over the coming months will be critical for advisers and investors alike to ensure they understand the latest developments and how they will be affected.
Todd Crouthamel is a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.
Change happens. Are you making the most of it? Are you considering relocating your business or hiring employees? What about diving into research and development, or purchasing new, more efficient equipment to improve manufacturing processes?
If you are thinking about these or any other business-related initiatives, tax credits and incentive opportunities could have a significant impact. You may also be eligible for grants, low-interest financing or reduced utility costs, says Shawndel Rose, manager of State and Local Tax, Brown Smith Wallace LLC, St. Louis, Mo.
“Credits and incentives have been around for years, but as the economy changes, so does the nature of these opportunities. The financial position of the state you live in is impacted right along with your business, so why not make use of these tax opportunities while continuing to grow and develop your business,” says Rose.
Smart Business spoke with Rose about how tax credits and incentives work and what businesses can expect this year in light of the economy.
How do tax credits and incentives work for businesses?
Credits and incentives work in a number of ways for businesses. One way is to encourage economic development in the state. For example, many states encourage businesses to invest in new property or machinery and equipment. Relocating operations, expanding current operations and job creation are other focus areas.
Some of the most beneficial credits and incentives are based on maintaining or increasing a business’s work force.
A second way they work is to induce businesses to engage in certain activities, such as research and development and ‘going green.’ Oftentimes, they encourage businesses to relocate operations to a distressed or revitalization area.
Job training to increase employee skills and help develop the state’s work force is another encouraged activity. There are also rewards for hiring employees who may belong to a protected class, such as veterans or those considered difficult to employ.
As you can see, there are a host of opportunities to encourage business growth and to expand and enrich business operations while reducing your tax burden and, ultimately, saving money.
What is the difference between a credit and an incentive?
Credits are statutory and are designed to encourage specific activities. They can be based upon payment of other taxes. For example, if a business pays sales tax or property tax, it could generate a credit to be used to offset an income tax liability.
It’s important to know that some credits require preapproval from the government agency awarding the credit. Credits are typically claimed on a taxpayer’s state or local income, franchise, or net worth tax return and may be carried forward if unused in the current year. Some are even refundable.
Incentives are benefits that are negotiated with state or local economic development, taxation or other government officials as an inducement to locate or expand operations in a specific jurisdiction. Unlike credits, incentives must be negotiated well in advance of a firm commitment.
The financial benefit of the incentive may be reflected in a variety of ways, not necessarily on your state income tax return. Because they are contractual in nature and require each party to perform certain activities, the contract typically contains a recapture provision that requires repayment of the incentive and/or imposes a penalty if the contract requirements are not satisfied.
Incentives offer businesses negotiating power. For example, if a company is planning to build a new facility, it could approach the states of Illinois and Missouri and ask what benefits each can provide. The company can then compare the proposed benefits to determine which state’s package would result in a better financial outcome.
How can credits and incentives benefit businesses?
Cash flow is always a priority for businesses. Tax credits and incentives can help a business reduce or even eliminate certain costs to increase cash flow. Such costs may include human resource activity (i.e., training/screening costs), acquisition, site-preparation and public infrastructure (i.e., rail, sewer, etc.), just to name a few.
Companies may also have an opportunity to reduce telecommunication and utility costs. These decreased costs, as well as cash grants and refundable tax credits, all result in increased cash flow.
In addition, successful negotiation can produce a reduced effective tax rate or preferential tax treatment, such as special apportionment.
What is the credit and incentive environment like today, and what does this mean for businesses?
That depends on the state. Generally, states are struggling financially and many are taking a step back to review credits and incentives to ensure that these tools are producing the intended results. In Missouri, for example, the governor created the Missouri Tax Credit Review Commission to assess the 61 current credit programs operating in Missouri and to make recommendations.
A report distributed in February noted that the commission recommended eliminating or not reauthorizing 28 credits and improving efficiency in another 30 credits. Connecticut and New Jersey are taking similar action.
For businesses, there are still great opportunities to use these tax-advantaged resources, but they should spend time with a tax professional who can provide direction so the company can realize the full benefit of potential credits and incentives that match its strategy.
Shawndel Rose is manager, State and Local Tax for Brown Smith Wallace, St. Louis, Mo. Reach her at email@example.com or (314) 983-1356.
In today’s business environment, companies cannot afford downtime and breaches of security that can compromise client and proprietary information.
A company’s network security can be compromised in a number of ways, from denial of service attacks to viruses, giving outsiders access to company resources. And a network that isn’t properly protected and monitored can inhibit employee productivity, says Darren Wolner, director of corporate product management at Time Warner Cable Business Class.
“Downtime has the potential to put a company out of business,” says Wolner.
Implementing a managed security solution can reduce the risk of network security breaches and the downtime that results from systems being compromised.
Smart Business spoke with Wolner about how companies can put security in place and basic steps that can make a big impact on a business’s IT infrastructure.
What is network security?
Network security includes provisions and policies to prevent and monitor unauthorized access, misuse, modification or denial of the computer network and its resources.
In a secure network environment, only users with assigned passwords can gain access to information on the network. Network security can include private and public networks, and it can give businesses the ability to control how users — their employees — access information on the network. For example, a company might limit access to certain Internet sites or programs. Or perhaps only managers or key employees can gain access to certain areas of the network.
A business can decide who accesses what on the network when security solutions are put in place. In the most general sense, network security begins with a username and password, called one-factor authentication.
To add additional security, companies might put into place two-factor authentication, which can include a security token such as an ATM card or mobile phone. Three-factor authentication involves using additional information, such as a fingerprint or retinal scan.
The level of network security depends entirely on a company’s needs, who should gain access to information and the organization’s vulnerability to security breaches.
Having a protected network prevents disruptions in your business and internal sabatoge.
What are some common breaches of network security that companies experience?
One common type of network security breach is a denial of service attack. This is when a computer or network limits or prevents access to the Internet by flooding it with requests, usually for a website, online resource or e-mail. The result is a system overload.
Also, viruses that infect files can be very damaging. Malware, adware and spyware can compromise network security and, ultimately, when a company does not put systems in place to secure its network, outsiders can gain access to inside resources.
How can a business begin to protect its network?
First, a business should consult with its existing telecommunications provider to determine what solutions are currently being offered. While a company can set up its own firewall, it pays to partner with a firm that specializes in network security and that can ensure that you have the tools to reduce your risk of the system being compromised.
A business must know quite a bit about network security in order to deploy a solution and maintain its integrity. A provider can offer an all-in-one solution that provides protection in a managed way. Once you determine what network security is in place now at your business, get referrals for other network security providers and talk to them about the options. Technology changes rapidly, so businesses should find out what new solutions are available. Ask a specialist to draft a network security plan that will protect the entire business.
What levels of network protection are available?
Managed security solutions offer a wide array of features and options that are scaled to serve businesses of all sizes, from small operations to corporate enterprises. The standard features included in a network security solution are a fully managed firewall device, 24/7/365 system monitoring and management, management reporting, gateway anti-virus and anti-spyware protection, intrusion prevention, content filtering and the ability to access the network remotely from a virtual private network.
Putting this suite of network security tools in place will not only protect the business from security breaches, it will enable it to get more productivity from its network and employees. For instance, if a business can control which websites employees visit through management reporting tools, that eliminates time wasted on surfing the Internet or using personal e-mail and social networks. The company can decide what level of management reporting to put in place, but it’s nice to have this option available to truly optimize the way the network is used for daily workflow and to accomplish business goals.
What are the benefits of having a fully protected network?
Ultimately, having a protected network prevents disruptions in your business and internal sabotage. It protects a business from the outside in, and from the inside out. With a solid managed security solution in place with content filtering and other features, companies can better understand how they utilize bandwidth and avoid threats from viruses and denial of service attacks that can harm the business.
Darren Wolner is director of corporate product management for Time Warner Cable Business Class. Contact a Time Warner Cable Business Class account consultant at (877) 612-7474 to discuss your communication needs.
Service organizations and companies that rely upon these third-party service providers are in for a change. For years, service organizations had an independent CPA firm perform an audit in accordance with Statement of Auditing Standards No. 70 (SAS 70). These SAS 70 reports were provided to customers and their auditors to provide assurance they had effective internal controls related to the services being provided. On June 15, 2011, SAS 70 was effectively replaced by Statement on Standards for Attestation Engagements No. 16 (SSAE 16), which will bring added complexity while increasing the quality and utility of these engagements.
“More companies today are outsourcing different parts of their business to third-party service organizations,” says Tony Munns, who leads the IT risk advisory team at Brown Smith Wallace LLC, St. Louis, Mo. “These outsourcing relationships expose companies to additional risks related to the service organization’s systems. While activities can be outsourced, these companies still remain responsible for risk management. These standards allow service organizations to provide assurance to customers that their responsibilities are understood and being handled properly.”
Smart Business spoke with Munns about the change from SAS 70 to SSAE 16 reporting and what service organizations and their customers need to know to meet the new standards.
What are the different types of engagements that can be performed?
The AICPA has introduced three types of service organization control (SOC) reports to address controls at a service organization.
SOC 1 — This is very similar to the old SAS 70. It focuses on controls relevant to customers’ financial reporting processes. A SOC 1 engagement is generally used to provide assurances to customers and their auditors concerning their financial reporting processes.
SOC 2 and SOC 3 — These engagements are designed to focus on security, availability, processing integrity, confidentiality, or privacy principles at the service organization. These engagements allow service organizations to address certain compliance and operational risks that are often very important to customers.
In addition to SOC 1, 2 and 3, there are other AICPA attestation standards that allow auditors to perform engagements to report on a number of different subject matters.
Why do service organizations have these examinations performed?
Customers want to have confidence in the quality and reliability of activities being performed by their service providers. These engagements help service organizations build trust with customers related to their service delivery processes and controls. Some service organizations view these engagements as an opportunity to differentiate themselves from their competition, while others just see them as the cost of doing business.
How will the new standards impact service organizations?
Most importantly, service organizations now have the option to focus these engagements on areas of risk that may be important to their customers. Service organizations need to make sure they understand the needs of their customers and discuss the various options to arrive at the appropriate type of engagement.
The new standards also will place additional responsibilities on the service organization to ensure the comprehensiveness and accuracy of the information contained in the reports. Service organizations will now be responsible for providing a written assertion about the fairness of the presentation of the description of their system as well as the suitability of the design and operating effectiveness of their controls. SAS 70 allowed service organizations and auditors some flexibility regarding the scope of the engagement, which resulted in some engagements not fully addressing the customers’ needs. The new standards should help to improve the quality of these reports.
One other important aspect of the change is that SSAE 16 is based on international standards. This increases service organizations’ ability to utilize these reports on an international basis.
Does this address a service organization’s security and privacy practices?
Some organizations have incorrectly used a SAS 70 to give assurances to customers regarding their security and privacy practices. While a SAS 70 often included testing of security controls specified by the service organization, it generally did not evaluate security and privacy practices against a comprehensive and objective standard. SSAE 16 allows a service organization to do so. SOC 2 and SOC 3 engagements focus on controls addressing security, availability, processing integrity, confidentiality and the privacy of its systems and information.
How do these changes impact customers of service organizations?
These companies need to be aware of the changes and which reports best serve their needs. Companies need to understand what is being outsourced and what important risks and responsibilities are being addressed by the service provider. This will help guide what types of assurances your company requires and the reports that address those needs.
What should a service organization be doing now to prepare for the transition to SSAE 16?
Evaluate whether you have the appropriate system of internal controls, policies and procedures. People are sensitive about the impact of data breaches and the security of information, and it’s important to be able to assure clients that you are managing data with the highest integrity. The new standards impose some additional responsibilities upon the auditor and organization. While the impact will vary for each organization, service organizations should establish a defined transition approach to reduce the potential for surprises.
Tony Munns is the leader of the IT advisory team at Brown Smith Wallace LLC, St. Louis, Mo. Reach him at (314) 983-1297 or firstname.lastname@example.org.
As the supply chain evolves in today’s demand-driven environment, where end users “want it yesterday,” all players in the chain must collaborate to meet customer expectations. Businesses must foster relationships to thrive by listening to what customers value, understanding common goals and designing mutually agreed-upon expectations.
The lesson that all companies can learn from today’s changing supply chain is that despite technology, nothing beats knowing the customer, says Robert S. Olszewski, director-in-charge of the distribution industry group at Kreischer Miller, a certified public accounting firm located in Horsham, Pa.
“There is an art to supply chain management; painting a picture that connects a network of interrelated businesses to provide products or services required by the customer,” says Olszewski. “Customers need to know that the suppliers of their products or services have their best interests at heart; that’s a tremendous value to end users. A successful business must have personal relationships to garner an understanding of its customers.”
Smart Business spoke with Olszewski about supply chain trends and how these changes will affect manufacturers, suppliers, distributors and end users.
What are the key trends in supply chain management?
Overall, supply chains have become more agile in response to the risks associated with lengthy and slow-moving logistics pipelines. Businesses are forced to continually review how their supply chains are structured and managed. Several factors within the United States have caused companies to seek alternatives as a result of pressures to squeeze additional costs out of operations. Businesses are looking beyond U.S. borders to find more cost-efficient opportunities to manufacture or obtain products.
Second, significant changes in communication are driving change in the supply chain and will continue to do so as technology advances. No one can predict where communications technology will lead the supply chain in the future; we only know that it will continue to make the supply chain operate faster and more efficiently.
Third, there is an emphasis on diversification in the supply chain given recent natural disasters and political turmoil that have had a serious impact on the way products get from a manufacturer to a distributor and, finally, to the end user. Similar to the concept of diversifying investment options, we are seeing an emphasis on ‘source’ diversification.
Finally, collaboration is increasingly important as businesses work to source products from manufacturers and deliver them to customers in the most efficient, cost-effective manner.
How is globalization changing the way products travel from their source to U.S. companies?
Businesses in the supply chain recognize that order fulfillment and delivery times are essential. To that end, businesses that import products are looking beyond traditionally busy international ports, such as those in California, and exploring other alternatives.
Understanding the options may provide some security in unforeseen circumstances and provide more flexibility in accessing imported goods faster. Of course, this can come at a cost, but the ability to get products faster in today’s dynamic supply chain is a priority for some companies.
How are distributors in the supply chain differentiating themselves in a market that is driven by cost-savings and squeezing out the middle-man?
Distributors play a critical role in the supply chain as the coordinator of logistics. They are the ones who comprehend customer demands and ensure that efficiencies are realized, schedules are met and cost savings are gained. In markets where goods are becoming commoditized, distributors recognize that they must do more. They often play a valuable role in our dynamic supply chain as educators, industry experts and consumer advocates.
The concept of providing value and being more than just another link in the supply chain to customers applies to all industries and markets.
Successful businesses realize that it’s not necessarily about the products and services they sell; it’s how they service and partner with their customer base.
What obstacles and opportunities does the supply chain face?
The challenge for distributors in the supply chain comes with customers looking to purchase direct from the manufacturer. Over the years, drop shipments have become more prevalent to meet customers’ expectations for fast delivery. While it would seem that drop shipment cuts out the distributor, this is not the case. In fact, the distributor still serves as the logistics coordinator without having the cost burden of carrying inventory and storing it. Today, distributors are fine-tuning their operations to expedite orders as efficiently as possible to meet demands.
As the supply chain becomes increasingly complex with globalization, technology and customer demands, successful businesses are acutely aware of the need to adapt and evolve with the times to meet customers’ needs in more ways than ever before.
Robert S. Olszewski is director-in-charge of the distribution industry group, at Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Cloud computing can help businesses harness the portability and convenience of Web-based IT services, and if your company hasn’t started investigating this new technology, now is a good time to start.
Cloud computing provides businesses with ease of maintenance, scalability and cost reduction, says Sassan Hejazi, director of the Technology Solutions group at Kreischer Miller, located in Horsham, Pa. Specifically for accounting and financial departments, offsite management of these systems can be particularly valuable from a security and updating standpoint.
Meanwhile, more businesses are looking to the cloud for services instead of purchasing software or overseeing systems in-house that can instead be managed off-site by specialists. Rather than dealing with the limitations of traditional in-house software, companies can simply turn to the cloud and access the programs they need from anywhere.
“Like a utility, when you plug an appliance into an outlet, you get power,” says Hejazi. “You don’t know where that power comes from or who manages the production of that power; all you know is that the power is there when you need it. The IT world is evolving into a utility-based commodity that is very sophisticated and being delivered by specialists. We are now increasingly accessing the technology via ‘the cloud.’”
Smart Business spoke with Hejazi about how businesses can use cloud computing in finance/accounting and other disciplines to streamline their IT portfolios.
What is cloud computing, and how can it work for businesses?
Cloud computing refers to using Web-based applications and services provided by offsite providers. A simple example is e-mail such as Gmail or Hotmail. You can access these services from anywhere with an Internet connection, and you never have to worry about upgrading the program or running out of storage.
Today, most software and hardware providers also offer a ‘cloud strategy,’ so businesses can shift systems they currently manage in house to the cloud and save time, money and resources.
Essentially, cloud computing is the next phase of the Internet evolution. Rather than the Internet serving as a tool for communication, it also can house the systems and services you use to conduct business so you can access these applications anywhere.
What advantages does cloud computing bring to financial and accounting departments?
When finance and accounting departments manage their systems internally, they are responsible for upgrading these systems regularly and keeping up with software changes so they can run them efficiently. The resources required to keep these systems operating at peak performance can be draining, and there’s no reason to expend resources this way now that there are off-site, Internet-based options.
A growing number of applications from leading companies offer cloud-based versions of their accounting and financial systems, which allow businesses to leverage capacity without having to invest in internal resources for basic system maintenance. Cloud-based systems give companies economies of scale because the provider serves many different companies. As a result, resources are highly productive, trained and specialized, giving companies better ROI than if they operated their own system in-house. Essentially, cloud computing allows companies to shift from an internal to an external service provider.
Another advantage is that cloud-based systems are scalable. Companies can easily add more users to increase capabilities, or decrease users to scale back. Also, cloud computing allows companies with multiple locations to access information. Employees can work from home offices or on the road and use the system, as long as there is an Internet connection.
Is cloud computing secure?
There is always some level of risk involved because if a company loses its Internet connection, it cannot access its cloud-based systems. However, this is becoming less of an issue with the newer wireless devices. With a cloud-based system, you also have the ability to access information from anywhere should internal issues such as a system crash occur.
Regarding security, the providers of these offsite systems must earn a SAS 70 certification, which involves rigorous security audits. Generally, they have better backups and disaster recovery than most companies that manage systems internally.
Rest assured, cloud computing has evolved significantly in recent years to become a strong option for companies of all sizes. Of course, to minimize risk, management teams should conduct a thorough study of alternatives and create a cloud computing roadmap.
What should a company consider when evaluating which IT services can be shifted ‘to the cloud’?
First, take an inventory of all hardware and software systems — your portfolio of IT assets. Divide that portfolio into distinct groups, for example, by department and by function, and analyze each section.
How old is the technology? How well supported are the systems? How could operations be improved? Tie this into the bigger picture of business objectives: How does existing software/hardware support your goals for the future? This exercise will help you focus on cloud computing as a business value proposition. As you do this analysis, consider the cost of purchasing systems. It’s not just what you pay today for software/hardware. Figure the total cost of ownership, including periodic upgrades and maintenance.
This is where cloud computing offers a real economic advantage. For scalability, ease of maintenance and lower cost of ownership, cloud computing offers competitive systems that give companies increased flexibility and the ability to access information from anywhere.
Sassan Hejazi is director of the Technology Solutions group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Economic stress is impacting organizations of all shapes and sizes, particularly state governments.
Missouri, like most states, is aggressively enforcing tax laws to increase revenue. However, there is some light on the horizon, and scattered pockets of opportunity dotting the scene. Unlike the governors of some states, Missouri’s governor has not proposed any state tax increases to balance the budget. Instead, the governor is focused on reducing government spending by $1.8 billion in 2011.
And legislative efforts appear to follow suit. There are two proposed bills that support taxpayers: The first is a tax amnesty program and the second is a bill to repeal the Missouri franchise tax over a five-year period.
In addition, a recent Missouri Supreme Court decision held in favor of the taxpayer. The issue involved the application of a sales tax exemption on materials purchased and used by a real property contractor. The decision is very favorable for certain qualifying businesses.
However, collection efforts are on the rise in Missouri. The state has increased audit activities and the quantity and type of tax notices it is issuing.
According to Susan Nunez, principal, and Pam Huelsman, manager, in the Tax Services practice at Brown Smith Wallace LLC, more than ever, all states — including Missouri — are cracking down on state income and sales tax compliance.
“Although the Missouri Department of Revenue is increasing its collection efforts, there are still opportunities for taxpayers in both the state income tax and sales tax areas,” says Nunez.
Smart Business spoke with Nunez and Huelsman about the types of income tax elections and sales tax exemptions available to Missouri taxpayers that could present tax benefits for businesses.
What is the current tax climate in Missouri?
Missouri has been experiencing a sharp decline in revenue collections and the result is an increase in taxpayer notices and ramped-up collection efforts. For instance, the state is matching the data within its own system to identify taxpayers who might be registered for one type of tax but not another.
The state is also partnering with other states’ departments of revenue, the IRS and Customs to receive information regarding tax filings, residency and shipments made into the state. With the expansion of tax collection tools, taxpayers are more likely to receive some type of correspondence from the state.
These notices typically require a response within a given time period, and an untimely response may result in severe financial penalties. Although it may seem stressful and complicated, the key is for taxpayers to realize that they have rights. They should discuss such notices with a tax professional and respond to any notice received in a timely manner.
Taxpayers should also keep in mind that they may have opportunities to offset these increasing assessments. Consult with a tax professional to keep abreast of new rules and partner with someone who will help you advocate for your rights in the event of a notice, audit and/or assessment.
What notable income tax elections are available for Missouri taxpayers?
For Missouri income tax purposes, a couple of elections are available. First, a corporation that is a member of a federal consolidated group can choose to file as a separate legal entity in Missouri, or as part of the entire federal group. Depending on each taxpayer’s specific fact pattern, one election is likely more advantageous than the other.
Factors that generate tax differences include tax base and property, payroll and sales within and without the state.
Additionally, Missouri offers a ‘three factor’ apportionment election and a ‘single factor’ (sales only) apportionment election. The single factor calculation is unique and, again, depending on a taxpayer’s specific facts and circumstances, may prove to be beneficial.
Keeping up with these details can be burdensome for business owners, thus, taxpayers should consult with a state tax professional to assist in analyzing the various Missouri filing options.
What are some of the sales tax exemptions that present opportunities for taxpayers?
There are several exemptions in Missouri. The manufacturing exemptions apply to manufacturers of tangible property. There are very specific factors that a taxpayer must meet for these exemptions to apply, some of which are not obvious.
However, once these factors are met, the exemptions can provide substantial state and local tax benefits to qualifying taxpayers.
Missouri provides another exemption that applies to manufacturers and processors of product. The application of this exemption is similar to, but somewhat broader than the manufacturing exemptions discussed above. Qualifying taxpayers may reap tax benefits under this exemption as well; however, it should be noted that, unlike the manufacturing exemptions, this exemption does not apply to local sales tax.
So, while the tax traffic sign in Missouri might read ‘proceed with caution,’ the benefits gained from the proper application of Missouri’s income tax elections and sales tax exemptions can offset the overall rise in tax assessments.
SUSAN NUNEZ is principal, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or email@example.com.
PAM HUELSMAN is manager, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or firstname.lastname@example.org.
If a tornado struck your business, or a lightning strike caused you to lose data, do you have a plan in place to make sure that your company can continue operating?
Disaster can strike at any time, and it is critical for every company to have a business continuity or disaster recovery plan in place to ensure the business can sustain operations. Some organizations may opt not to invest the time and resources required to develop a business continuity strategy, but it is simply not wise to operate without a backup plan, says Larry Newell, manager, risk services, and IT infrastructure practice leader at Brown Smith Wallace LLC, St. Louis, Mo.
“Business continuity planning is essentially succession planning,” says Newell. “You never know when a business disruption will take place, and companies need to be prepared. The cost of a business disruption will generally far outweigh this type of investment.”
Developing a plan for business continuity or disaster recovery involves asking lots of what-ifs, gaining buy-in from key managers and business unit leaders, and developing an all-encompassing plan so that the organization can continue operating seamlessly.
Smart Business spoke with Newell about why businesses should invest in business continuity and disaster recovery strategies and what to include in these mission-critical plans.
What is the difference between a business continuity plan and a disaster recovery plan?
The two overlap somewhat, but there is a fine line between how these plans function. The focus of a business continuity plan is to create a backup that mimics the critical business processes a company has in place and the tools needed to support those processes.
The business identifies what those critical processes are. For instance, an accounting firm might need to ensure that software programs containing client data are up and running, and the associates can always communicate with their clients. So data and communication are critical to business continuity.
A disaster recovery plan is IT-centric, focusing on IT services that support the business and designing preventive controls and recovery techniques. This is where high-availability systems really come into play — the speed and ease with which a company can shift to the alternate site.
Why should a company invest in a business continuity or disaster recovery plan?
Like any component of succession planning, business continuity or disaster recovery plans answer the question, ‘What’s next?’ No business can anticipate the types of disasters that can disrupt daily business or shut down their operations entirely. But once disaster strikes, whether that is a weather incident, data loss or power outage, all you can do is react.
Businesses that have sound disaster and continuity plans in place are least impacted by tragedies and interruptions. You don’t want to become a statistic. It’s important to protect your company assets by thinking about alternatives to your current processes.
An adviser with experience in risk management and IT protection can be a great resource, as most plans center on IT and accessing/resuscitating data.
How do you develop a business continuity or disaster recovery plan?
First, there must be support from executive management and participation from business unit leaders, who can provide insight on the processes that must be protected and duplicated to continue business-as-usual in case of disaster. And there must be a plan champion who will take ownership of the planning process.
Creating a plan takes time: It requires a thorough analysis of the company’s operations and asking tough questions about processes and procedures. Essentially, a company must identify the back-end operations that enable it to service customers, and then devise a plan to protect those operations. Knowledge from an IT administrator is critical during this process.
How in-depth should a plan be?
The depth of your plan will depend on your client or customer dependencies and regulations, such as the Financial Institution Regulatory Authority or Federal Financial Institution Examination Council.
Basically, a plan should mitigate the highest risk and impact across the enterprise.
Also keep in mind that a plan has diminishing returns at some point. Treat it like a living document that is regularly updated as your business changes.
What common mistakes do businesses make when developing a plan?
The biggest mistake is not having a plan at all. Also, many organizations fail to think big picture when they create the plan. They may focus on a particular business unit that is considered high impact, when there are other vulnerabilities in the organization that should be addressed. Including business unit leaders will help you tease out the critical processes that require protection throughout your organization.
Ideally, you should include a crisis management plan, identify critical business processes to develop the business continuity plan and then create a disaster recovery plan that is IT-centric. You should test these plans at least annually to be sure that they work effectively for your organization.
Consulting with an adviser who can help you identify risky areas of your business that should be protected with a business continuity or disaster recovery plan will give you an important outside perspective to make sure your plan is tight.
Larry Newell is manager, risk services, and IT infrastructure practice leader at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1218 or email@example.com.
Most businesses use online banking in some capacity, but not all of those are taking advantage of the tools available.
The value of online banking goes deeper than just the convenience of tracking your cash flow. Through online banking, businesses can improve productivity, quicken access to cash, transfer funds between accounts, initiate wire transfers, pay vendors and more, says Roger Schnorr, senior vice president of business banking, Old Second National Bank, Aurora, Ill.
“Online banking makes good fiscal sense to any business as there is less time and effort involved in every transaction,” says Schnorr. “It’s safe and simple; in short, it’s smart money management.”
Smart Business spoke with Schnorr about how businesses can get the most out of online banking tools to save both time and money.
How can a business use remote deposit capture to improve efficiency and cash flow?
Remote deposit gives businesses the ability to deposit checks by using scanning hardware and online scanning banking software. The bank provides the scanner, which is about the size of a typical toaster. The scanner is connected to the office computer.
The business can scan checks at any time and deposit funds into any number of accounts. The scanning device simply reads the check and deposits it into the specified account.
The real benefits of this tool are same-day credit of funds and the time savings that results from depositing checks remotely rather than having to make a trip to the bank. With faster access to funds, a business can use that money to pay down debt or invest it in interest-bearing accounts.
Ultimately, remote capture can enhance cash flow and accelerate the pace that money is deposited into an account, which is a good thing.
What system should a business put in place to maximize online banking?
One system a business may want to include is Bill Pay, where it would be able to pay bills online. Once the payees are set up, it would take very little time to pay bills, which can help the business owner in better time management.
That said, a company can authorize other individuals to use online banking, just as it would authorize people to sign checks. Online account access may be granted to your chief financial officer, treasurer or whoever manages the books.
How can a business owner be sure that its online transactions are protected from fraud?
Banks are heavily invested in security to ensure that all customers are protected from fraud. The company authorizes certain employees to initiate and approve the wire request. The employees are each given a secure token that works in conjunction with their password.
Another added security feature is using dual control, which eliminates one person from being able to send an outgoing wire without another person doing the approval.
Beyond this, there are tools businesses can utilize as checks and balances to prevent fraud, one of which is Positive Pay. Positive Pay is a popular cash management tool that banks provide to prevent check fraud. The customer issues the bank a file with check numbers and dollar amounts for all checks issued. The bank only pays items with serial numbers and dollar amounts matching the company file.
Positive Pay is an additional stop-gap for fraud in addition to a company’s existing measures.
How can a business use online services to wire money quickly and safely?
Here again is where online banking shines as an efficient, effective and secure tool for transferring money. Online wire transfers allow businesses to initiate their own wire transfers without stepping foot into the bank, which is a real convenience.
This service is becoming more popular with businesses of all sizes that need to transfer funds without the need to leave the office. The bank will only accept transactions initiated by employees the company has authorized, so the company can rest assured that the transfer is safe.
How do sweep accounts work with online banking?
The ability to sweep funds between accounts allows the company to best manage its cash. Say the company maintains a noninterest-bearing operating account and a money market account that pays interest.
A balance threshold is determined in advance. Funds that exceed that threshold are then swept into an interest-bearing account.
The sweep account also may be set up to sweep excess funds toward a line of credit. Automated principal paydowns will reduce the company’s interest expense.
All of these features and functions will give the company the freedom to manage its funds more efficiently, with the convenience of banking when and where desired.
Roger Schnorr is senior vice president of business banking for Old Second National Bank in Aurora, Ill. Reach him at firstname.lastname@example.org or (630) 844-8557.
After some challenging years in a recessionary economy, businesses aren’t the only ones feeling the crunch.
States — including Illinois — are hurting, and to regain strength, they are more closely enforcing tax law and, in some cases, increasing taxes.
According to Pam Huelsman and Susan Nunez from Brown Smith Wallace LLC’s Tax Services Practice, the state of Illinois is in a difficult financial position. The state currently imposes a multitude of taxes, and recent legislation increased the personal income tax rate by 67 percent, increased the corporate income tax rate by 46 percent and suspended the net operating loss carryover deduction for taxable years ending after Dec. 31, 2010, and prior to Dec. 31, 2014.
Senate Bill 2505 was signed into law by Gov. Pat Quinn on Jan. 13, 2011. The tax rate for individuals, trusts and estates will increase from 3 percent to 5 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions thereafter. The corporate income tax rate will increase from 4.8 percent to 7 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions occurring thereafter. The personal property replacement tax remains unchanged.
In addition to the income taxes on both personal and corporate income, the state imposes a Retailers’ Occupation Tax on sales of tangible personal property and a Service Occupation Tax on transfers of tangible personal property incidental to a sale of a service. Retailers and servicemen collect these taxes at rates which range from 6.25 percent to 9.75 percent, including both state and local taxes.
Both the Retailers’ Occupation Tax and Service Occupation Tax have a compensating use tax applied to tangible personal property acquired from out-of-state vendors. Certain exemptions from these taxes are available to qualifying taxpayers. But despite this foreboding tax climate, there are still opportunities for businesses to earn tax credits.
Smart Business spoke with Huelsman and Nunez about Illinois taxes and how your business can benefit from sound tax planning.
What is the current business tax climate in Illinois?
The financial situation in the state is serious. Illinois isn’t paying bills, and everyone is feeling the pain. The state imposes many taxes and, as shown by the rate increase for both personal and corporate income taxes, it will likely continue to look for ways to raise revenue through taxes.
What tax credit opportunities are available for businesses in Illinois?
The good news is that, despite heightened audit activity and increased taxes, there are tax breaks for businesses that qualify. An example is the Manufacturer’s Purchase Credit. Qualifying manufacturers earn a state sales tax credit of 50 percent of the state sales tax that would be paid on purchases of exempt manufacturing equipment. This credit can be applied toward the sales/use tax imposed on production-related purchases that do not qualify for the exemption.
Let’s say a manufacturing company purchases a $100,000 piece of manufacturing equipment, which would incur a state sales tax of $6,250 if not for the exemption. The company would earn a credit of half that amount, which is $3,125. It’s a win-win for companies: They are able to utilize the exemption and earn a credit to apply to tax owed on purchases of production-related equipment.
What opportunities are available for businesses to help them create jobs?
Effective June 30, 2010, businesses with 50 or fewer employees can take advantage of Small Business Job Creation Tax Credits. Every new job created and retained for one year earns credits against the state withholding tax.
The maximum credit is $2,500 per employee, and businesses must meet certain salary thresholds to qualify. The credit will be available beginning July 1, 2011, for those qualifying companies that have, since June 30, 2010, hired and retained new employees.
What are enterprise zones, and what benefits do those in Illinois provide?
The Illinois Enterprise Zone Program is designed to stimulate economic growth and neighborhood revitalization in economically depressed areas of the state. Illinois’ enterprise zones offer a multitude of tax benefits for businesses located in the zones, including sales and use tax exemptions for building materials, property tax abatements and investment tax credits for business income taxes.
To illustrate, Madison County has three enterprise zones and St. Clair County has four. You should consult your tax professional regarding these zone benefits.
What are some tax compliance issues that businesses should be aware of?
Many businesses understand and collect sales tax but are unaware of a compensating use tax due on purchases made from out-of-state vendors.
Given the current environment, it’s a particularly good idea to consult with a knowledgeable tax accountant to determine your potential use tax liability and avoid costly state audit liabilities.
Also, businesses should keep current with the applicable sales tax rates in their local jurisdictions. Businesses that do not collect the proper rate will be required to furnish additional taxes not collected from customers.
It’s definitely a case of pay now, or you’ll really pay later.
Pam Huelsman is manager, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or email@example.com. Susan Nunez is principal, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or firstname.lastname@example.org.