Tax planning is especially complex this year given the turbulent political environment and a litany of tax laws due to expire at the end of 2012. From bonus depreciation to capital gains tax rates, if Congress fails to act and these provisions and others are allowed to expire, taxpayers could carry a significantly heavier financial burden in 2013.
“We know that tax laws are going to change, but we’re just not sure how,” says Cathy Goldsticker, CPA, member, tax services, at Brown Smith Wallace, St. Louis, Mo.
This year, more than ever, it is critical that businesses/business owners consult with their tax advisers as early as possible to discuss the what-ifs so they are prepared in December when we have a better idea of what 2013 tax law will bring, she says.
“All you can do with this level of uncertainty is plan, plan, plan,” says Robin Bell, CPA, member, tax services, at Brown Smith Wallace. Businesses and individuals should have several options depending on the outcome of the election.
Smart Business spoke with Goldsticker and Bell about tax provisions due to expire in 2012, and how business owners can best prepare and be flexible in light of the uncertain tax environment.
What measures can business owners take given tax law uncertainty?
Businesses that have not yet met their Section 179 threshold 2012 of $560,000 can invest in qualifying equipment and furniture so they can take the full write-off this year. Until the calendar year turns, the bonus depreciation of 50 percent still applies, and we’re not sure what will happen to this tax advantage next year.
Along the same lines, consider taking advantage of the current 15-year depreciation rate on qualified leasehold improvements, which fall into the three categories of commercial, retail and restaurant. This could roll back to the traditional 39-year depreciation tax write-off if the provision is not extended for 2013.
What could happen to the current low capital gains and dividend tax rates that are due to expire in 2012?
If nothing is done to extend current tax rates into 2013, the existing lower capital gains rate will expire. The 15 percent extended tax rate bracket changes to a 20 percent tax rate. Dividend income reverts from a 15 percent tax rate to a taxpayer’s ordinary income tax rate, which could be as high as 39 percent.
For business planning purposes, it may make sense to pay out dividends, if your corporation has accumulated earnings and profits, before the end of the year so those are taxed at the current 15 percent rate.
A potential capital gains and dividend tax rate hike could drastically affect retirement and investment planning, as well. Individuals may want to reconsider their investment strategy in dividend-paying stocks and choose exempt or fixed-income bonds, depending on projected rates of return.
What is known for certain about the 2013 tax situation?
Tax rates will not decrease, but it is not known how much they may increase or if possibly they may stay the same. That depends on how tax legislation shakes out at the end of 2012 following the presidential election and the decisions that Congress makes before new legislation starts during the lame duck session or afterward.
What we do know for certain is that the Medicare surtax is current law as part of the Patient Protection and Affordable Care Act. This 3.8 percent tax on net investment income will be imposed starting with the 2013 tax year on the lesser of an individual’s net investment income for the tax year or the amount by which their modified gross income exceeds the threshold amount that tax year — $250,000 for joint filers, $125,000 for married filing separate and $200,000 for all other filers. Essentially, this is a double tax that applies to individuals since this is a non-deductible tax.
Additionally, the 2 percent decrease to the Federal Insurance Contributions Act (FICA) rate that has been in effect for the past two years expires on Dec. 31, 2012, restoring the rate to 6.2 percent on wages and self-employment income. This will affect the take-home pay of all employees and owners.
For closely held businesses, it is important to consider salary management — look at payments and strategize the source of those payments in the most tax-efficient way.
Finally, the 3 percent ‘haircut’ for itemized deductions and personal exemptions is also set to expire in 2012. Bear in mind that itemized deductions and exemptions are phased out as income increases, so taxpayers will not get the benefits of all of their deductions as they have in the recent past. This calls for income management; if your income will increase in 2013, that may disallow some of your tax benefits and, theoretically, could put you in a higher tax bracket.
What additional tax provisions should individuals keep on the radar as they plan for 2012 and beyond?
For those taking advantage of the Refundable Alternative Minimum Tax (AMT) credit, this is set to expire in 2012. Also, the $1,000 child credit will revert to $500 if the provision is not extended.
Beyond these provisions, there is a laundry list of tax law changes that could occur in 2013 if there is no tax bill passed in 2012 or early 2013. We know there will be at least some change. To know what these changes will be, we need to see how the tax structure shakes out after the election and final congressional session of 2012. That said, the best way for business owners and their families to prepare is to plan carefully, including working out several tax scenarios. Then, wait to act until there is a clearer picture of 2013 tax legislation.
Last but not least, remember, there is an opportunity to transfer significant family wealth without incurring gift tax before the end of the year, and those opportunities might go away if the estate/gift tax structure is not extended.
Cathy Goldsticker, CPA, is a member, tax services, at Brown Smith Wallace LLC, St. Louis, MO. Reach her at email@example.com or (314) 983-1274.
Robin Bell, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at firstname.lastname@example.org or (314) 983-1217.
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With year-end tax season in full swing, a cloud of uncertainty hovers over businesses. Forecasting what 2013 will bring in terms of tax rates and legislation is difficult because of the impending presidential election and the unknowns about whether the Bush-era tax cuts will be extended.
What will happen to tax rates in 2013? How could estate planning be affected? Is now the time for your business to buy equipment?
“This year, the traditional planning techniques of deferring income and accelerating deductions may not be appropriate, depending on what happens with tax rates,” says Michael R. Viens, director, Tax Strategies, at Kreischer Miller, Horsham, Pa.
Viens recommends businesses plan early but hold off on executing any specific plan until the post-election dust settles and Congress gives some indication of its direction concerning late 2012 or early 2013 tax legislation.
Smart Business spoke with Viens about how businesses can best prepare and position their organizations to be flexible in light of the uncertain political and economic climate.
How is this year different in terms of tax planning?
A key concern is tax rates and whether they will increase in 2013. If nothing happens legislatively by year-end, tax rates are scheduled to increase, impacting a number of events. Traditional business tax strategy focuses on deferring income and accelerating deductions, keeping as much cash in the business as possible. But such a strategy, if employed this year, may create higher taxable income in 2013, with the potential for a higher tax bite that could more than offset 2012 tax savings. Once the election is over, we should have clearer indications as to the likely tax regime in 2013 and beyond and will be in a better position to make decisions regarding implementation of specific tax planning initiatives.
Start planning now. Work through the what-ifs with your advisers, but wait before pulling the trigger until after the election.
Is now a good time to purchase equipment?
The purchase of appropriate qualifying equipment is a common year-end activity for businesses that wish to take advantage of the value of bonus-depreciation opportunities that allow an immediate 50 percent write-off, and a Section 179 expense deduction that allows deduction of the full amount of the purchase price of the equipment, up to $139,000, in the year in which it was purchased and placed in service. Bonus-depreciation provisions expire Dec. 31, 2012, and the Section 179 deduction is scheduled to revert to $25,000 for tax years beginning in 2013, unless extended.
With equipment purchases, economics should drive the decision, with tax impact being secondary. If the equipment is important and acquiring it today means the business will be in a better position than it would be buying it in January, purchasing now likely should win the day. But all things being equal, a purchase in December versus January may be worth considering once it is understood what tax deductions and rates will apply in 2013.
How might an equipment purchase in 2012 be more beneficial than in 2013 if the current tax structure is not continued?
Say a business purchases qualifying equipment for $1 million and places it in service in December 2012. It immediately gets a $500,000 tax deduction in 2012 per the 50 percent bonus depreciation rule and may also receive normal first-year depreciation for another $100,000. That equals a $600,000 deduction in 2012. And with a 35 percent tax rate, the tax savings is $210,000, resulting in a net short-term cash outlay for the equipment at $790,000.
If this purchase is deferred until January 2013 with no bonus depreciation and a new 40 percent tax rate, the business may save in the short term only $80,000 in cash rather than $210,000. However, due to subsequent depreciation, the business would realize a total of $240,000 in tax savings on the same $600,000 deduction that would be otherwise accelerated into 2012.
The business should weigh the longer-term $30,000 tax savings from deferring the equipment purchase into 2013 against an earlier short-term tax savings. The choice involves tradeoffs — short-term cash flow versus the present value of longer-term higher tax savings. Without knowing what 2013 will bring, planning for both scenarios is key.
How should businesses proceed with succession planning given tax law uncertainty?
Estate taxes are of importance to business owners in transferring ownership to the next generation, and there is uncertainty regarding those provisions. There are currently opportunities to transfer significant family wealth without incurring gift tax due to historically high lifetime gift exemption levels. But this could go away if the estate/gift tax structure is not extended. Businesses transferring ownership should discuss opportunities now with an attorney and their tax adviser.
What traditional year-end tax planning techniques still apply, regardless of what the tax law brings?
Address safe harbors to avoid underpayment penalties. Because many businesses are seeing 2012 earnings that are more robust than in 2011, a prior year-based 100 or 110 percent (applicable for higher income taxpayers) safe harbor comprised of withholding and/or estimated tax payments may be an easy answer. A business with a tax liability of $100,000 in 2011 could use a $110,000 safe harbor and make up a shortfall when tax returns are due next April.
What planning strategy can business owners adopt to prepare for unknown 2013 outcomes?
Develop a Plan A and Plan B, working out how your business will react if tax law continues as is, and what decisions will be implemented if the current tax opportunities and tax rates change. Depending on the position of the business and owner circumstances, this year may require a more robust planning process than in the past, which is a good reason to enlist an experienced accountant and begin the tax-planning dialogue early.
Michael R. Viens is director, Tax Strategies, at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
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Missouri is focused on attracting and retaining businesses by creating a positive economic environment. One way the state has worked to enhance its economic position is by implementing tax laws that benefit the business community. For instance, during 2012, three bills were passed by the state legislature that expand current exemptions and deduction opportunities for businesses that meet certain criteria.
“Missouri is attempting to assist businesses during this time of economic recovery,” says Susan Nunez, the state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. “The state is looking for ways to enhance business and the passing of these tax laws demonstrates those efforts.”
As a result of the recently passed bills, purchasers now have a more direct avenue for obtaining refunds of overpaid taxes, more businesses may take advantage of expanded transportation asset exemptions, and partnerships and S corporations now can claim a job creation deduction that was previously only available to corporations.
Smart Business spoke with Nunez about the bills that were passed and what opportunities these tax laws may introduce for businesses.
How is Missouri streamlining the process for obtaining refunds for overpaid taxes?
House Bill 1504 (HB1504) creates an avenue for a purchaser to obtain overpaid sales and use tax directly from the Department of Revenue and sets forth steps on how to obtain refund claims. Prior to the passing of HB1504, if a purchaser realized that it overpaid taxes to a vendor, the purchaser was required to contact the vendor and request the vendor to file a refund claim with the Department of Revenue on behalf of the purchaser. If a vendor was not willing to cooperate, the purchaser lacked authority to pursue a refund of the overpaid tax with the Department of Revenue directly and thus lost the opportunity to obtain the refund of taxes it erroneously paid.
Meanwhile, if the Department of Revenue sent a notice to the vendor in response to a purchaser’s request for a refund, that purchaser may have missed its opportunity to respond or appeal due to the lack of due diligence on the part of the vendor. Overall, it was a struggle for purchasers to obtain refunds for taxes they paid to their suppliers. Additionally, vendors who did cooperate with their customers request to submit refunds potentially had an additional risk of being audited by the state.
With the passage of HB1504, the purchaser receives its refund from the state, not the vendor, so the process is more efficient and effective. A purchaser who has overpaid taxes must contact the vendor in writing requesting the vendor to assign its right to the refund. If the vendor agrees and signs the letter, the purchaser can file a refund claim directly with the state and include a copy of the letter. Once the claim is filed, reviewed, and approved by the Department of Revenue, the state will notify the vendor and, upon approval, will refund the overpaid tax directly to the purchaser.
Because the refund is paid directly from the Department of Revenue to the purchaser, the process is streamlined and can easily be audited. In addition, it relieves some of the vendor’s burden because it does not need to utilize its own resources to obtain such refunds.
How has Missouri expanded the exemption for transportation assets?
Historically, there have been transportation asset exemptions that applied to assets used for the transportation of persons or property for hire by common carriers. Since the original exemptions were adopted, the U.S. Department of Transportation has changed the rules regarding common carriers, and many businesses have obtained and now operate their own fleets of qualifying assets. To allow more businesses to take advantage of the exemption, the new law enhanced the existing exemptions by the addition of a transportation asset exemption.
The new exemption applies to purchases or leases by all motor carriers that operate motor vehicles that have a licensed weight of 54,000 pounds or more. Additionally, this new exemption is a bright line exemption. If a business operates as a motor carrier, with a truck licensed for the requisite weight, the exemption requirements may be met.
How can partnerships and S corporations now take advantage of a job creation deduction?
When original legislation was passed providing a deduction from income tax for new jobs created in Missouri for certain qualifying small businesses, the language in that bill limited the tax opportunity to corporations. It did not apply to partnerships or S corporations because those are pass-through entities that do not pay income tax, as they are taxed at the owner level. Missouri recently passed a remedy to correct this oversight in the original law, which allows owners of partnerships and S corporations to pass the deduction through to their owners. This change is reflected in House Bill 1661, and it is great news for small businesses of all types that are creating jobs in the state.
What steps should a business take to determine eligibility for these tax advantages so it can reap the benefits?
First, business owners should present their fact patterns to their attorneys or accountants when discussing whether these opportunities will apply to them. Do they operate a fleet of trucks that transports goods? Are they currently claiming a transportation exemption? Are they creating jobs in the state?
A knowledgeable professional can provide guidance by reviewing a business’s operations, its tax posture, understanding the scope of the particular law and how these laws may affect the taxpayer’s everyday business.
Susan Nunez is a state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. Reach her at (314) 983-1215 or firstname.lastname@example.org.
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When times are tough, the temptation for employees to dupe the system and steal cash or assets increases. The economy is a key driver in fraud activity, and over the last several years, organizations of all sizes have been victimized.
So is the fraud environment improving now that there’s news of an uptick in the economy? Not yet, says Jason Buhlinger, a supervisor in financial advisory services at Brown Smith Wallace LLC, St. Louis, Mo.
“While there may be signs of the economy getting a little better, people still feel uncertain — and as long as that feeling is in the back of their minds, there is motivation and a rationalization to steal,” Buhlinger says.
Companies are running leaner, which means there is less management oversight at some firms, and others have eliminated internal audit personnel. One person may be doing the job of two or more employees, so the work force is spread thin. And that may mean that no one is watching should an employee decide to commit fraud.
“Imposing internal controls becomes harder to accomplish with less staff,” Buhlinger says.
Now is not the time to let your guard down as a business owner.
“The longer the economy trickles along, we’ll continue to see people who are looking for easy ways to get cash,” Buhlinger says.
Smart Business spoke with Buhlinger about the types of fraud being committed and how to establish strong internal controls to protect your business.
What specific economic factors drive individuals to commit fraud?
The recession began in December 2007, and at one point, the Dow Jones Industrial Average was down as much as 50 percent. People had to become more frugal. Those who planned on retiring early had to re-examine that goal as they watched their investment savings dwindle. And home prices dropped significantly in some areas of the country.
All of a sudden, the asset values that many people counted on were gone and they had to figure out a way to supplement that. This is where the fraud triangle comes into play — opportunity, rationalization and pressure. All three of these stress points have increased in the past several years, and this continues to be the case.
As long as people feel a sense of economic uncertainty, that can evolve into rationalization and pressure to find more money somehow. When the opportunity to commit fraud presents itself, rather than taking the higher moral road, as they might in better times, they justify the act and take that opportunity. Your organization can’t realistically eliminate all rationalizations and pressures, but it can manage the opportunity side of the triangle.
What types of fraud are most common today?
Asset misappropriation remains the most common type of fraud. That includes, but isn’t limited to, cash theft, payroll schemes and inventory theft, to name a few. A worker might file false expense reports and pocket the cash, or take product from a warehouse and sell it for a profit.
Stealing from cash registers $20 at a time can go unnoticed if proper controls aren’t in place. Asset misappropriation tends to involve smaller amounts of money, but those dollars add up over time.
What are the components of an effective fraud awareness program?
Organizations need to take a proactive approach to prevent fraud. Owners need to be involved in the financial aspect of the business rather than passing that role off entirely to a manager. For example, we recently handled a fraud case in which a CFO had complete financial control of the company and could take whatever he wanted. If their company had implemented the critical concept of segregation of duties, it would have been more difficult for him to pull off fraud.
Segregation of duties is critical to prevent fraud, and this can be a challenge in small businesses. That’s why owner involvement is critical at every level of a business, from reviewing financial statements to checking in at the cash registers. It also helps if organizations provide a way for employees to anonymously report fraud through a tip line or even a simple suggestion box.
By keeping fraud at the forefront of your business, you will discourage those who are teetering on the edge of committing fraud. And with internal controls in place, you will be more likely to catch fraud early before it causes significant damage to the business.
How can a business be proactive about creating a culture of honesty?
It’s important to create a fraud prevention program and talk about it regularly with employees. Hold quarterly meetings to discuss fraud and internal controls. Let everyone know your organization has a zero tolerance policy. By making employees aware that fraud is on the radar and no one is going to get away with it, you decrease the rationalization and opportunity for fraud to occur.
Begin a fraud prevention program to learn what areas of your business are susceptible to fraud. A risk assessment will help you zero in on entry points for fraud so you can watch those areas carefully.
A certified fraud examiner (CFE) can help you get that fraud policy on paper, and it’s a good idea to incorporate it into your employee handbook. Secure a commitment in writing from every employee that they understand the policy and the ramifications if fraud is committed.
Jason Buhlinger, CFE, AVA, is a supervisor in financial advisory services at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1310 or email@example.com.
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The remainder of 2012 presents a significant opportunity to gift assets and take advantage of unprecedented tax benefits. With the increase in the gift tax and generation-skipping tax (GST) exemptions to $5,120,000, wealthy individuals should be having serious discussions about whether it makes sense to take advantage of this window of opportunity.
There’s no time like right now to make small to large gifts, without shouldering a gift tax burden, and time is of the essence because the window may be closing. The gift and GST exemptions are set to expire on Dec. 31, 2012 — and no one is sure what 2013 and beyond hold, given the uncertainty of an election year. It is possible that gifting opportunities at this level will not be available after the New Year.
“We know what the law is today and what we expect the law to be for the balance of 2012, but next year, after the election, today’s gifting opportunities could go away,” says David Heilich, principal, tax services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Heilich about estate tax planning tools that wealthy individuals should consider before the increased exemptions potentially expire at year end.
What gifting tools are advantageous for wealthy individuals right now?
In 2011, there was an increase in the gift exemption from $1 million to $5 million, which was adjusted for inflation in 2012 to $5,120,000. This is a significant increase, since in 2010, the gift limitation was $1 million.
Additionally, there is the GST exemption of $5,120,000 that allows an individual to transfer wealth to generations beyond children, to grandchildren and future generations. Essentially, the GST exemption protects those assets for a longer period of time before the IRS can assess an estate transfer tax. The ability to make large gifts without paying gift tax to a trust for the benefit of future generations is a significant opportunity that could expire after Dec. 31, 2012. After this point, the exemption will ‘sunset’ because the Tax Reform Act of 2010 only changed the law for 2010-12, and the estate, gift and GST tax laws could revert back to the 2001 law of $1 million estate, gift and GST exemptions with a maximum tax rate of 55 percent, compared to today’s 35 percent.
Who should consider taking advantage of gifting before year end?
Anyone with assets worth $5 million or more, depending on their age and type of assets, should be having serious discussions about their current estate and their motivations and desires for their wealth. Other factors to take into account are potential inheritances, small business appreciation, earnings potential and charitable intentions. Consider both your net worth today and your potential net worth in the future. Make sure you know how to best use today’s estate and gift tax vehicles.
What steps are necessary to execute a gift before the close of 2012?
The critical first step is — don’t wait to act. It’s not too late, but time is of the essence with estate planning. It’s not an overnight process, although it is possible to accelerate planning in order to get gifts in place before Dec. 31, 2012.
When you meet with a qualified estate planning adviser, he or she will first provide education about the laws. From there, a snapshot of the net worth of the estate is gathered, boiling it down to a one-page summary of assets and liabilities. Many times, individuals do not realize how much they are really worth until going through this exercise.
During this time, the adviser will review the current estate plan and the assets of the estate. It is important to understand all trusts (revocable and irrevocable) and entities that are in place, along with a review of any current life insurance policies, and to make sure your health care directives, durable powers of attorney and beneficiary designations are in line with your wishes.
After you create an estate plan, it is important to review your estate plan annually, as well as upon any important ‘life events,’ and update the plan as necessary. This is all part of the process of determining how and what to gift before the end of 2012 and creating an estate plan that accomplishes your goals and desires.
What is an example of how gifting can work if planned properly?
For those who have not taken full advantage of their life exemptions and for whom it makes sense to make a lifetime gift, a wise gifting vehicle is an Irrevocable Trust. This vehicle allows the client to make gifts to a trust and allocate the GST exemption.
In essence, there are two pieces to the gifting puzzle: a gift to the trust, and if the trust includes grandchildren, the potential to apply the GST tax exemption when filing the gift tax return. Ultimately, this means the client is able to transfer the assets today without paying current gift tax and move all of the appreciation out of their estate. If the succeeding generation leaves the assets in trust, those trust assets could potentially be free of estate tax in perpetuity. However, keep in mind that this is just an example of how gifting can work, and it is important to understand a client’s assets and goals before creating a plan.
What other gifting tools can relieve tax burdens at this time?
Another component of gifting is the annual exclusion — think of this as a ‘freebie’ from the IRS. You can give $13,000 individually to anyone (and married couples who consent to gift split can gift up to $26,000 to anyone). The annual exclusion gifts are not added back to your estate and are a simple way to transfer assets to the next generation.
No one knows what 2013 will bring, but we do know that right now the window is open, and it is a great time to review and update your estate plan and consider taking advantage of these unprecedented opportunities.
David Heilich is Principal, Tax Services at Brown Smith Wallace in St. Louis, Mo. Reach him at firstname.lastname@example.org or (314) 983-1273.
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A dissatisfied client takes his complaints to the public forum by publishing statements calling your product junk and your operation a joke. A competitor slams your business on an online forum, accusing your firm of producing dangerous products.
How do you defend yourself, and do you have a case for a lawsuit?
“The Internet opens up a worldwide web of opportunity for people to publish their opinions about anything and everything, says Ian Simpson, a shareholder specializing in liability and defamation at Garan Lucow. And once alleged defamatory statements are published, the damage is already done.
“Deciding whether to move ahead with a lawsuit requires analyzing whether you have a legal basis for an action because you have to prove all of the elements of a claim and understand that it often takes a lot of resources to pursue the case.”
Smart Business spoke with Simpson about defamation, how free speech is protected and when to take action against a party that is making defamatory statements about your business or product.
What is defamation?
Generally, defamation is a false accusation of wrongful conduct, or a malicious misrepresentation of someone or some entity’s words or actions that is published to third parties, causing damage. Libel is the written form of defamation, and slander is the verbal form. Classic examples of defamation where damages are presumed include lack of chastity or criminal conduct. Defamation includes untrue statements with defamatory meaning that could harm a reputation, generally without charging criminality or lack of chastity. In most cases, damages have to be proven rather than presumed. The statements must be published and available to the public — not merely be stated in a confidential document — resulting in damage.
What defenses are used to protect those charged with defamation?
Truth is generally a defense under the First Amendment of the United States Constitution. Most matters of opinion are protected against claims of defamation, as such statements cannot be proven as true or false. For example, ‘In my opinion, Company X’s products are not high quality’ is a protected statement. Further, in the United States, public figures, celebrities, politicians and others who put themselves in the public spotlight are generally unable to sue for defamation unless they can prove the statements were made with actual malice.
Is a business owner considered a public figure?
Another area where statements are generally protected, unless actual malice is found, are matters of public interest. A private company may be involved in a public dispute of interest to consumers. This essentially places it in an arena similar to that of a ‘public figure’ because policy favors granting increased protections to statements made in controversies of interest to the public. Say a company is involved in coal mining and environmental safety. Because this issue is of public interest, alleged defamatory statements become a matter of public concern and are protected under the law unless malice is proven.
How has the Internet impacted companies’ vulnerability to defamatory statements?
The Internet essentially gives the public a speakerphone to air opinions online, and those statements are protected as long as they are expressly stated as opinion and not made with malicious intent. Further, federal law generally protects businesses that merely serve as online conduits for the statements of others (online review sites, for example) are generally protected against claims of defamation, although the maker of the comment may still be liable. Similarly, most blog sites, if not the posts themselves, are protected by law.
Although companies that operate as mere forums are generally protected, there is no similar protection for a company that is not considered a forum of opinion that adopts, republishes or retains defamatory statements.
The crux of many defamation cases is how opinions are stated. They must be couched as opinions to be protected. Where a person or company has stated opinions as ‘fact,’ the risk of liability is greatly increased.
What are the first steps to stop a party from making defamatory statements?
First, consult with an attorney. Typically, an attorney will create a cease-and-desist letter expressly demanding the person or company making the alleged defamatory statements stop immediately. If the person or company does not stop voluntarily, a written demand for a retraction of the statements will be made.
A written demand for a retraction will set the stage for future litigation. If no retraction, published in a similar manner to the original statement, is made, additional damages may be obtained if a lawsuit is pursued. Note that the statute of limitations for a claim of defamation is one year from the date of the publication of the alleged defamatory statements, so aggrieved parties must act promptly to protect their rights to bring an action under the law.
How can a business protect itself from being the victim of a defamation suit?
Always discuss with an attorney strong matters of opinion or statements about competitors or matters of public interest before those statements are published. Also, consider bringing in a legal adviser to train employees on Internet commentary and what is permissible and acceptable. It is generally ill-advised to be interviewed for any publication without consideration of the potential for defamation that may exist in the making of casual comments in such interviews, and the right to review the interview to reconsider any such comments before publication is essential.
Defending a defamation suit can be expensive and can effectively destroy a business. We highly recommend companies in the publishing and Internet business carry insurance covering claims of alleged defamation.
Ian Simpson is an attorney at Garan Lucow specializing in liability and defamation law. Reach him at email@example.com or (248) 952-6456.
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The only sure thing with health care reform is that things are changing. No one is sure how, exactly, those changes will play out as current reform legislation is reviewed in the Supreme Court, or what will happen following the presidential election.
That uncertainty makes planning for the significant and steadily escalating cost of health care a real challenge for businesses. As costs increase, how can employers continue to provide benefits that attract and retain quality workers while managing their expenses?
“One of the things that employers should be doing now is reviewing their health care costs to begin to identify ways to control their costs, regardless of what happens with health care reform,” says Ron Present, principal, health care advisory services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Present about what employers should know about the current state of health care reform and how they can begin to prepare for the future.
What are employers’ greatest concerns surrounding health care reform?
The biggest fear is that their health care costs will increase significantly, and that is a valid fear. Then there is the question of how to manage expenses while continuing to offer quality benefits to employees. In today’s market, companies must begin to view health care as more than just an employee benefit — it’s a recruiting and retention tool that provides companies with a competitive advantage.
Employers must look at benefits from a strategic perspective and consider how they can position their health insurance offering as an incentive. At the same time, they must manage the bottom line, and that won’t be easy. In addition, there is widespread confusion about health care benefits in light of the uncertainty in health care reform. In the end, it is the responsibility of — and perhaps opportunity for — employers to clearly communicate to their employees about the company’s benefits.
How could the individual mandate affect employers?
The individual mandate is a law requiring that all individuals purchase health care insurance or pay a penalty that will phase in during 2014. The individual mandate, as part of the health care reform legislation, is currently being reviewed by the Supreme Court, and it’s a sticky issue.
Is it constitutional to mandate that all citizens have health insurance? Is it fair to charge a penalty to employers for not offering health care benefits? And because the mandate has been written into the tax code — and the Supreme Court cannot rule on tax code issues unless there has been harm done — will the court be able to rule on the individual mandate before it is set to go into effect in 2014? A key related question is how the upcoming presidential election will impact the legislation.
The health care reform plan could be tossed aside completely, altered or kept fully intact.
What decisions will employers be forced to make regarding health care legislation?
Concerning the individual mandate, employers must determine whether it’s more financially prudent and culturally sensible to offer benefits to employees or to pay the penalty for not doing so. A discussion with an experienced tax professional who is well-versed in health care reform legislation can help employers consider the financial impact of this decision and determine the right course of action.
Meanwhile, companies will need to heighten their monitoring of hourly employees because those who work 130 or more hours per month will be automatically eligible for company health care benefits if the current legislation stands. If employers do not abide by this and exclude those employees, they will pay a steep penalty. This becomes particularly complicated with part-time and shift workers and in situations in which workers are picking up additional shifts, which may push them over 130 hours in a given month. Employers will need to carefully monitor employees time on a real-time basis and manage employees in terms of their monthly/hourly workloads. Currently most systems track data on a pay period basis (weekly, bi-weekly, semi-monthly). Companies will need to ensure they have systems in place to be able to track hours on a monthly basis.
What should business owners be emphasizing in their communications with employees?
According to an ADP HR/Benefits Pulse Survey on Employee Benefit Tools, 40 percent of employees do not understand their current benefits plan. It is critical to drive home to employees the value of the health care benefits that you offer. Communicate often, and reach out to employees in face-to-face meetings, through e-newsletters, mailers that go home to spouses and dependents, and via the company intranet.
Emphasize the importance of wellness and enforce employee accountability, communicating that the healthier they are, the less they could pay for their monthly health insurance premium. Be proactive by implementing wellness programs including incentives for better nutrition or exercise.
What should employers be doing right now in light of the current uncertainty?
Now is the time to get discerning input on the strategic and cost differentials of offering health insurance versus paying a penalty for not doing so. You should explore ways to reduce cost, without sacrificing benefit and identify systems to put in place that will improve real-time reporting.
The keys to success will be having sound knowledge of the current situation and a strong framework in place before you need to make the upcoming changes and decisions you face as health care reform is implemented. With these two essential procedures under your belt, you will be in a position to make wise strategic decisions for the ongoing health of your business.
Ron Present, CALA, CNHA, LNHA, is principal, health care advisory services, at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1358 or firstname.lastname@example.org.
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Your responsibilities as the sponsor of a retirement plan are more significant than you may realize. It’s not enough anymore to simply hire a service provider to manage the plan and offer it to your employees. As a plan sponsor, there is a tremendous amount of fiduciary responsibility, and decision-makers are held to an expert standard in the eyes of the Department of Labor (DOL).
If they don’t have the skills to meet such stringent standards, plan sponsors need to retain outside experts to guide them through the decisions that must be made on a recurring basis, or risk running afoul of the law.
“Many plan sponsors rely on their providers to do everything for them,” says Andrew Gracan, retirement plan advisor at First Commonwealth Financial Advisors. “Because of this, not only is there a misunderstanding of their fiduciary obligations but the tendency is to run the plan on auto-pilot unless there is a major operational issue to be addressed. However, due to ramped-up enforcement and litigation surrounding retirement plans, it’s important for plan sponsors to understand their obligations and have processes in place to ensure their plans are compliant,” Gracan says.
Smart Business spoke with Gracan about key issues plan sponsors must address.
Why are plan sponsors most at risk right now?
Retirement plans and the activities of their fiduciaries are being placed under a microscope. No longer do participants have multiple plans to rely upon in retirement. The 401(k) plan is the primary retirement vehicle for the majority of today’s workforce, and the burden of savings rests on the employee. With personal savings rates and Social Security in a questionable state, a retirement epidemic is waiting in the wings.
Second, the financial crisis has exacerbated this potential epidemic and taken a toll on participant account balances, drastically changing retirement expectations and causing HR issues for companies in their workforce succession planning function. Finally, 401(k) participants bear the majority of the costs and risk associated with their plan, a dramatic change from the traditional defined benefit plan.
As a result, the government has enacted sweeping legislation through the Plan Sponsor and Participant Fee Disclosure regulations. The first wave of required fee disclosures goes into effect July 1, 2012, and with participant level fee disclosures going into effect Aug. 31, plan sponsors are assessing how their plans and their participants will be affected.
Plan sponsors also face the burden in a major increase of DOL investigations. For the past few years, the DOL has provided plan sponsors a comprehensive educational campaign focusing on helping them understand their fiduciary responsibilities. However, the time for enforcement has begun. In 2011, the EBSA closed 3,472 civil litigations, with 2,301 resulting in monetary settlements of $1.39 billion.
Why is now a critical time for business owners acting as plan sponsors?
Due to the increased government focus, litigation and negative publicity associated with retirement plans, it is important to understand the fiduciary obligations that go hand in hand with sponsoring a retirement plan. Plan sponsors are realizing it is important to be familiar with the fiduciary requirements that are placed upon them and the service providers they hire, as they are personally liable for these decisions. In addition, enforcement and legislative actions are forcing plan sponsors to take a proactive role in understanding the reasonableness of fees being charged to their plans and determining whether conflicts exist with the service providers.
What is the biggest mistake plan sponsors make with retirement plans?
The biggest mistake is not realizing that ignorance is not a viable defense. If plan sponsors don’t fully understand their fiduciary responsibilities or processes, it is their responsibility to hire a ‘prudent expert’ who does. Oftentimes sponsors view retirement plans as a product rather than a process and assume the service provider (or nonfiduciary broker or financial consultant) is giving them the necessary fiduciary guidance to mitigate risk. However, this is a major misconception, especially if the service providers are giving fiduciary advice but not taking written liability for it.
Completely understanding your fiduciary obligations, whether or not service providers are taking written fiduciary responsibility for their actions, and whether or not there are inherent conflicts of interest that exist with the service provider, are paramount to the process of being a prudent fiduciary.
How will the requirement of detailed fee disclosures affect plan sponsors?
The most imminent task will come from the plan sponsors disclosures scheduled to be delivered on July 1. The new regulations are designed to provide plan sponsors with a full disclosure of fees charged to the plan, and sponsors must ask if their fees are reasonable, how to determine whether fees are reasonable, and whether they should hire an expert to determine reasonableness.
How can plan sponsors mitigate risk?
Plan sponsors must fully understand their fiduciary responsibilities and the role their service providers play in their retirement plans. While most believe their responsibilities fall within remitting timely employee contributions, overseeing the record-keeper and monitoring investment options in the plan, these are only part of their core responsibilities. The key is for plan sponsors to be prepared to defend all of the decisions made concerning their retirement plan and to show that they have defined processes that can be measured and repeated. If you, as a fiduciary, do not understand your obligations, or don’t have the information or knowledge to run the plan for the exclusive benefit of participants, it is your responsibility to hire an expert who does.
Andrew Gracan is a retirement plan advisor at First Commonwealth Financial Advisors. Reach him at AGracan@fcbanking.com or (412) 690-4592.
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Your parts distributor has always been reliable, offering you prices that its competitors couldn’t beat. It was a great deal for you — until the distributor went bankrupt.
You find another supplier and move on. But months — or years — later, you are called on by a bankruptcy trustee that has been appointed to oversee the bankruptcy case. The trustee says that the commodity you were purchasing was priced much lower than market rate. And because the trustee’s job is to collect funds in this case, he’s delivering you with a lawsuit to charge you with paying the difference between your below-market prices and the market rate for those years you purchased the commodity.
“Increasingly, customers of bankrupt businesses are being caught by surprise with fraudulent transfer claims asserted by bankruptcy trustees, who claim that they received a deal that was too favorable,” says Alan Koschik, co-chair of the Commercial & Bankruptcy Practice Group at Brouse McDowell. “These claims seek to renegotiate sale transactions long after they took place and create a new layer of uncertainty for certain business transactions.”
Smart Business spoke with Koschik about how businesses can help protect themselves against fraudulent transfer claims.
What are fraudulent transfers and when do they most commonly occur?
Technically, a fraudulent transfer claim is a transfer of property that is made with the intent to hinder or delay a creditor, or put property beyond their reach. In typical cases, a debtor might transfer his home or savings accounts to another person, an insider such as family or a spouse.
Fraudulent transfer claims most often arise in these familiar situations: transfers to insiders, as described; so-called upstream guaranties of a corporate parent’s debt by a business that ultimately cannot pay its creditors; and leveraged buyout transactions that cause an insolvent debtor to take on too much debt while permitting former equity holders to cash out of the business.
What is surprising about the new class of fraudulent transfer claims?
The new class of claims is distinctly different from these typical cases. They do not involve insider transactions, or extraordinary transactions. The claims are being charged against customers that have engaged in day-to-day business transactions, such as simply buying a commodity a company sells.
The customer isn’t trying to defraud or hinder anyone; it simply wants to buy the product and the seller (debtor) is offering an attractive price. However, bankruptcy trustees are seeking to change the price term of regular sales transactions long after they were completed by arguing that the value paid was less than ‘reasonably equivalent.’ Litigation ensues and usually involves an expensive debate about the sufficiency of the price.
What typical business transactions could lead to fraudulent transfer claims?
Sales of commodities are the most typical sales that can trigger a fraudulent transfer claim because a bankruptcy trustee has access to pricing information. Commodities are traded in a variety of exchanges, so trustees can look up idealized prices and make comparisons to prices actually paid to the debtor, the business that went bankrupt. Then, the trustee can calculate the difference and come up with a figure that he contends the customer should have paid.
The trustee justifies this based on commodities prices, charging that the debtor would have collected X more dollars if it had charged the reported market price. Commodities are more likely to be subject to a pricing comparison and lead to a fraudulent transfer claim than, say, accounting or legal services that are typically considered unique and less likely to have a non-negotiable ‘market price.’
In case of a lawsuit, what defenses can a business raise?
These new fraudulent transfer claims can be challenged with the argument that non-insider customers that negotiate at arm’s length set their own market price and should not bear the burden of guarantying the debtor-seller’s debts to its creditors. The customer shouldn’t have to help pay the vendor’s debt just because it was offered a lower price on a commodity during a regular business transaction.
A non-insider customer’s negotiated price should be considered to be ‘reasonably equivalent value’ by definition and the trustee’s claim should fail. However, the problem is that litigation is a lengthy, costly process, and customers frequently end up paying more in a settlement.
How can businesses protect themselves against fraudulent transfer claims?
If your business purchases commodities, dig deeper when vendors offer a surprisingly low price. Why is the price so low? How long has the company been in business? Are you aware of the financial state of the vendor’s business? Is it in trouble? How much lower than market rate is this vendor charging?
While it’s prudent in business to seek out vendors with competitive prices, if a deal seems too good to be true, it just might be. That said, if you move forward with a vendor offering a price you can’t resist, engage in a futures contract or swap agreement. These transactions are common in the commodity trade, and there are safe harbor defenses built into the bankruptcy code regarding futures trading.
It’s a good idea to consult with your attorney if you engage in commodities purchases to discuss pricing and the potential risks associated with fraudulent transfer claims. Then protect your business by making decisions not based solely on cost.
Alan Koschik is co-chair of the Commercial & Bankruptcy Practice Group at Brouse McDowell. Reach him at email@example.com.
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Fraud floods the news these days, and any organization that lacks anti-fraud controls places itself at an increased risk of trying to plug leaks after the fact.
Many companies assume the greatest risks come from those outside the company, but oftentimes, fraud is committed by longtime employees who know how to work the system and disguise the financial leak, or by disgruntled workers who feel the company owes them something. Creating an anti-fraud policy is not enough; you also need to build an anti-fraud program and conduct regular assessments to truly mitigate the risk.
“The main type of fraud we are seeing today is asset misappropriation, which happens quite often,” says Ron Steinkamp, principal, risk advisory services, Brown Smith Wallace LLC, St. Louis, Mo.
Smart Business spoke with Steinkamp about common fraud red flags and how businesses can effectively implement anti-fraud tools to mitigate risk.
How prevalent is fraud?
The Association of Certified Fraud Examiners (ACFE) 2010 Global Fraud Survey found that a typical organization loses 5 percent of annual revenue to fraud, with the average fraud occurring for 18 months before being detected. While any business is a potential target, the industries most commonly victimized are banking/financial, manufacturing, and government and public administration. Generally, there are three types of fraud: asset misappropriation, corruption and financial reporting. Asset misappropriation includes fraudulent disbursements, theft of cash receipts and other activities in which individuals steal or misuse resources. These frauds are the most frequent, with a median loss of $135,000, according to the ACFE.
With corruption — in which an employee uses influence in a business transaction to obtain personal benefit — there is a median loss of $250,000. The least frequent form of fraud is financial statement fraud, the intentional misstatement or omission of material information in an organization’s financial report. However, its median loss exceeds $4 million.
What are some common red flags for fraud?
Incentive, opportunity and rationalization are the three characteristics that form the fraud triangle and are the red flags of fraud. Typically, fraud occurs where there is incentive or need, such as personal debt, living beyond one’s means or job frustration. Second, there is an opportunity, such as access to cash or inventory, weak internal controls, close relationships with suppliers or vendors or weak management. An individual may rationalize the fraud, feeling as if he or she is not being fairly compensated, or justify stealing money with the intention of paying it back. The fact is, this payback never happens.
How can an organization prevent fraud in a cost-effective manner?
The key is to create an anti-fraud culture, which begins by setting the tone at the top. Leaders must set the example by behaving ethically and openly communicating expectations to employees. There must be a formalized code of conduct founded on integrity that is communicated to all employees, and all employees must be treated equally.
Many businesses establish anti-fraud policies but fail to follow through with the key step of educating employees. Fraud prevention begins during hiring, when companies should conduct thorough background checks on potential employees. Upon hiring, employees should be trained on company policies and procedures, including the anti-fraud code of conduct. To foster an ongoing ethical environment, refresher training should be conducted regularly. By creating an environment where fraud is not tolerated and attempts at fraud are promptly dealt with, a business sends the message to employees, vendors and clients that dishonest behavior will not be tolerated.
What are the best ways to detect fraud?
The best way is to leverage your employees who are often the first to detect fraud. That’s why it’s very important to have an anonymous method of providing tips, such as a phone system or web-based tool. This should be available to customers and vendors, as well. Such a reporting system builds awareness of the anti-fraud culture and gives individuals a way to safely and effectively report suspicions. Other effective ways to detect fraud are by identifying fraud risks and by management’s implementation and monitoring of appropriate internal controls. Periodic internal audits are also a strong detection method.
What are some anti-fraud tools that can be used?
The foundation of an anti-fraud workplace is a formalized company code of conduct, which should include detailed guidance on permissible and prohibited behaviors and actions. The code should outline employees’ responsibilities in the prevention and detection of fraud, and explain the process for communicating concerns about potential fraudulent activities. It’s also important to have a clear, accurate picture of your fraud risks. Where are your weak spots? Are you unintentionally providing opportunities for fraud to occur?
A fraud prevention checkup will help frame the picture. This high-level assessment of an organization’s fraud health focuses on fraud risk oversight, ownership and assessment. It includes reviewing fraud policy, controls and detection efforts. A more detailed fraud risk assessment includes identifying how fraud could occur within critical processes and who might be in a position to commit it. Fraud monitoring involves using data analytics to highlight red flags and potential errors, fraud, inefficient operations and targets.
A formal fraud review/investigation is best directed by a Certified Fraud Examiner (CFE), who can conduct a thorough, independent, objective review and provide solutions. Don’t wait until you’re under water to stem the tide. Proactive measures can prevent fraud and well designed detection programs can uncover existing abuses.
Ron Steinkamp, CPA, CIA, CFE, is principal, risk advisory services at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1238 or firstname.lastname@example.org.
For more information on this topic, please see: Fraud Prevention Checkup
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