The Internal Revenue Service defines the depreciable life of a building as 27.5 to 39 years. But that doesn’t mean that all assets grouped with the building have to be on the same depreciation schedule.
A cost segregation study can identify personal property assets that can be reclassified to allow for a shorter depreciable life.
“By accelerating depreciation deductions, you’re deferring taxes, which creates a cash flow benefit.” says Robert W. Haggerty, CPA, Partner, Tax Services at Brown Smith Wallace.
Smart Business spoke with Haggerty about what assets might qualify and the potential benefit to businesses.
How does a cost segregation study work?
Typically, blueprints or architectural drawings are used to identify what went into the building. Engineers analyze the drawings and perform site visits to identify qualifying property. Information from the general contractor or estimating manuals is used to determine the cost. A tax analysis is performed, which involves reviewing court cases and rulings that address which particular assets qualify for a shorter life.
Cost segregation studies can be performed anytime you build, acquire or expand. If the cost is $1 million or more, it is worth looking at.
The IRS also allows you to do a ‘catch-up adjustment.’ For example, if you bought or built a building five years ago and didn’t do a cost segregation study, you could still do one today and take the benefit on your current tax return.
With certain income tax rates rising, it’s a nice time to consider a catch-up adjustment.
What types of assets typically qualify for shorter depreciation?
Generally, property that is unique to a particular trade or business qualifies for a shorter life. An example I often use is the lights used to showcase merchandise in a retail store. Those lights are considered five-year property even though, by definition, lighting is part of the building. Not only do the light fixtures qualify, but so does the wiring and the portion of the electrical system supporting the fixtures.
Manufacturing facilities benefit the most from cost segregation studies because they typically have a lot of specialty systems or design inherent in the building that function as part of the manufacturing process. A large portion of the plumbing, electrical and HVAC systems qualify for a shorter life. Even the concrete floors can qualify. Hospitals and medical facilities are another industry with big benefits from cost segregation. Think about all of the specialty systems in a medical setting.
What are the tax benefits?
The benefit is the deferral of income taxes by accelerating depreciation expense. Moving costs from a 39 year building life to a five or seven year life can significantly increase depreciation expense for the building. Cost segregation studies can provide a permanent, time-value-of-money benefit of 10 to 50 times the cost of the study, which typically runs $5,000 to $10,000. Studies for larger projects can be much more costly, but the benefit usually increases with the cost of the project.
Any new developments of interest to businesses?
Yes, businesses can also take advantage of new final ‘Repair Regulations’ and proposed ‘Partial Disposition Regulations,’ which were issued in September 2013.
Under the old rules, you could not retire a portion of a building, so taxpayers who had a roof replaced, for example, could have two layers of roofs depreciating on their books. The new rules allow you to write-off the old roof.
In situations where it may be difficult to quantify the portion of the building that relates to the old roof — there might be only one asset on the books called ‘building’ — we are helping clients quantify the amount of the partial disposition.
Windows, interior build-outs and elevator replacements are other examples of items that may be eligible for partial disposition.
The Repair Regulations offer some safe harbors for small businesses and include de minimis rules that can apply to all taxpayers. So, there are even opportunities for businesses to take some tax deductions with very little effort. ●
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Computing personal property taxes can be a chore for businesses, particularly if the company’s locations cross various state and local jurisdiction boundary lines. Each state has its own statutes, due dates, assessment ratios and instructions that must be adhered to for a company to be considered “compliant.” These property tax requirements vary greatly and most often have late penalties for missing deadlines. However, digging into these very statutes and instructions can also provide an opportunity to minimize your company’s tax burden.
“Many will run the fixed asset ledger right out of the system and that’s what they’ll report,” says Jenna R. Kerwood, CMI, a principal in Tax Services at Brown Smith Wallace.
However, that usually results in paying more taxes than what is owed because not all assets are taxable. Often, fixed assets are capitalized at a project level, which results in inaccurate reporting for property tax purposes. There may be costs that are not taxable or components of the cost that should be removed. The taxability of these assets can be determined by examining the state and county websites, statutes, assessor manuals and return instructions.
Smart Business spoke to Kerwood about what constitutes personal property and why it’s worth the effort to keep an accurate track of assets.
What is the difference between real estate and personal property?
Real estate refers to land and buildings. Personal property is defined as tangible property that’s movable. It can be difficult to distinguish between the two, especially with manufacturing facilities, and each state has different rules and instructions.
Most states have a three-prong test:
- Can the item be moved without destroying the real estate?
- What is the primary purpose the item serves? The more special its use, the more likely that it will be considered personal property.
- What was the owner’s intent?
The key is whether it would destroy or cause permanent damage to the building if you were to remove the item.
What is the basis of property tax assessments?
The basis of value for real estate and personal property is fair market value — the amount a willing buyer would pay in a market when there’s no duress, such as a bankruptcy or foreclosure. Fair market value is subjective, which gives you an opportunity to analyze all of the capitalized cost to determine how best to reflect the ‘fair market value’ of the asset.
When reporting assets for property tax purposes, you need to understand their physical life, use, maintenance schedules, etc., in order to depreciate correctly. Items with a short life have faster depreciation. Manufacturing equipment might have computerized components that can be placed on a shorter life with a more reasonable depreciation schedule.
How can businesses lower their tax burden?
Start with fixed asset accounting records. When filing personal property tax returns, you report the original cost of the asset by year of acquisition. Companies might have a retirement policy by which they dispose of, melt down or cannibalize an asset, but that’s not reflected on the books.
It’s best to address problems on the front end. Review the asset ledger for listings that don’t look right — focus on the high dollar items or assets with ‘miscellaneous’ as the description. Scrutinize asset invoices and review them with the people who know them; it might be the plant manager for the manufacturing facility, facilities person for the furniture and IT people for the computer asset listing. Another area to consider is depreciation. The county will tell you the rate, but that may not be accurate and is negotiable.
How much can be saved?
Conservatively, businesses can lower personal property taxes by 20 percent. Most state rates are at 2 percent. When you tell a company that cleaning up asset lists can save $30,000 or more, it gets their attention.
Jenna R. Kerwood, CMI, is a principal, Tax Services, at Brown Smith Wallace. Reach her at (314) 983-1360 or email@example.com.
For more on this and other tax topics, visit Brown Smith Wallace's Tax Insights.
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Recovering from a flood or fire is hard for a business. But dealing with problems caused by a lack of business continuity plans or inadequate insurance can make it worse.
“The better you can plan for how to deal with an incident, the better off you’ll be,” says Lawrence J. Newell, CISA, CBRM, QSA, CBRM, manager of Risk Advisory Services at Brown Smith Wallace. “I say ‘incident’ because it could be something not always thought about in typical disaster terms, such as a breach of credit card information.”
Smart Business spoke with Newell and William M. Goddard, CPCU, a principal in the firm’s Insurance Advisory Services, about developing business recovery plans and the insurance options available to reduce risk.
What goes into a business continuity/recovery plan?
One component is a business impact analysis, placing a value on what the business needs to operate. Layered underneath are the business processes, which include the business continuity plan and its identifying process flows. For example, length of shutdown is part of the business continuity plan, which contains timelines.
Then there is the disaster recovery plan, which covers anything the business depends on that is IT related. Information has more value than just the data because of the intelligence built around it. So you need to identify where that data is processed, stored or transmitted.
There is also a communication plan, making sure an incident is communicated upward, downward and outward — upward to the executive management team, downward to the enterprise and outward to customers and business affiliates. Part of the communication plan is identifying the impact, whether it’s a simple outage or a more widespread incident such as a tornado, flood or hurricane.
What options are available to manage risk?
In the example of a credit card breach, there are risk reduction processes such as applying security standards developed by the credit card industry. There’s also cyber risk insurance, which insures costs to locate the problem, including hiring experts to do that, notification of cardholders, and business interruption loss.
What do businesses need to know about disaster coverage in insurance policies?
Generally, what we think of as disasters — earthquakes, hurricanes — are covered under property insurance. But business insurance policies also contain sublimits. For instance, you can have $100 million insurance coverage, but the sublimit might be $25 million for a flood. Policies carry different sublimits, and a company planning to use insurance to cover these disasters needs to be aware of them.
What is co-insurance, and how does that impact claim payments?
After a loss, the insurance company will judge the value of a building, say it’s $1 million. A co-insurance clause is typically 90 percent, meaning that the building should be insured to 90 percent of its value — so you’ve bought $900,000 insurance coverage on a $1 million building. If it burned to the ground, you would be paid $900,000. But if you only bought $800,000 insurance coverage and were supposed to buy $900,000, all recovery is based on having 88.8 percent of the coverage you should have. If a small warehouse fire causes $100,000 in damages, you wouldn’t be paid $100,000, but $88,800. This concept of co-insurance is frequently in policies and can be punitive for loss recovery.
How can insurance costs be reduced?
Insurance companies will inspect your property and following their recommendations can make you a better risk, reducing premiums. It’s also important to figure out exactly what coverage you need — it’s best to get an independent adviser. There have been many court cases involving inadequate insurance; they’re expensive to bring and hard to win. It’s better to get it right when you buy the policy, so you should have someone other than the person who’s selling you the insurance answer your questions and conduct an analysis of your needs.
William M. Goddard, CPCU, is a principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or firstname.lastname@example.org.
Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or email@example.com.
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Data breaches are becoming more commonplace, causing millions of dollars in damages for companies that have personally identifiable information (PII) hacked by cybercriminals.
“Think about all of the losses you can incur. Not only do you have to hire a security expert to find what happened, you may be assessed fines or penalties by the merchant’s acquiring bank or payment card brand. In addition, you could be responsible for credit card charges made by the criminals and lose business because no one trusts you anymore,” says William M. Goddard, CPCU, principal, Insurance Advisory Services at Brown Smith Wallace.
Smart Business spoke with Goddard and Lawrence J. Newell, CISA, CISM, QSA, CBRM, security and privacy manager, about protecting companies from cybercrime.
How do cybercriminals access networks?
One typical method is spear phishing. Unlike traditional phishing attempts, which are fraudulent emails sent at random claiming to be from a reputable organization like a bank or eBay, spear phishing emails are sent to targeted employees or customers of a company.
The email appears to be coming from the company and requests that the recipient click on a link, which then goes to a fraudulent website. They may ask for personal information or they may launch a virus they’ll use to get into your network.
If you click on the link, it launches a program in the background that goes onto your workstation and canvasses the network for other vulnerabilities. The program collects data, whether that’s credit card information or other PII, and uploads it to the cybercriminal.
How can you reduce cyberattack risk?
The first thing to do is develop an information security policy, document it and disseminate it throughout the organization.
Other protective measures are:
- Conduct an inventory of authorized devices on your network. Guests can come into your place of business with a laptop and leave a device on your network that goes undetected. That device could have Trojan horses or viruses that, when executed, plant a program on your network.
- List an inventory of software allowed to run on workstations or servers. That helps when looking for rogue programs or software installations.
- Install an anti-virus program to detect malware. Anti-virus protection also needs to be maintained and updated for the latest definitions.
- Run vulnerability and penetration tests on servers and networking equipment to make sure you don’t have unnecessary services running that could lead to a vulnerability and potential unauthorized access.
- Prevent data loss by running programs to detect outbound calls or connectivity to remote sites that are not authorized to receive data output.
- Create security awareness within your company to ensure that people who have access to information are not sharing anything that is confidential or private.
- Develop an incident response plan to react to a breach and quarantine activity before it spreads throughout the network.
Companies think they’re protected because they are compliant with some standard such as PCI, but that’s no guarantee their systems will not be compromised. Your security program needs to go beyond PCI and focus on more than credit card information. Cybercriminals go after the easiest target along with whatever PII is available that has value. For instance, not-for-profit organizations may have names, addresses and checks with banking information; all of that information is valuable to somebody. For similar reasons, credit cards are often targeted because they’re so widespread and it’s the easiest information to sell.
What can companies do to protect against losses if they are hacked?
A variety of insurance policies cover things like the cost of fines, notification that PII has been compromised, liability and business interruption. All cyber policies are slightly different, and you have to be careful to buy the right coverage.
Businesses are smart enough to buy fire insurance in case a building burns down. Cyberattacks can be just as damaging, depending upon what happens and what information has been compromised.
William M. Goddard, CPCU, is principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or firstname.lastname@example.org.
Lawrence J. Newell, CISA, CISM, QSA, CBRM, is manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or email@example.com.
Brown Smith Wallace can help you with cybersecurity. Visit them here to learn more.
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Companies are being challenged to protect vast amounts of proprietary and confidential information. And now, many are being held to an even higher standard when it comes to protected health information (PHI).
“The Health Insurance Portability and Accountability Act (HIPAA) has existed since 1996. It’s well established that covered entities — health care providers, benefit plans and clearinghouses — have a responsibility to ensure the privacy and security of PHI. Recently, the rules have been tightened to also cover business associates — organizations with which a covered entity shares PHI. These changes mean that business associates now have to fully comply and be accountable under the HIPAA security rule,” says Tony Munns, member, Risk Advisory Services, at Brown Smith Wallace.
Smart Business spoke with Munns about the final omnibus rule and what actions businesses should take.
What prompted the new rule?
A significant number of data breaches were from business associates who were not as diligent as they should have been, and covered entities were not selecting business associates with the appropriate rigor. A notable example involved an insurance company that had a business associate who was responsible for off-site storage of sensitive data. The business associate was using a garage, which was left unlocked and wasn’t climate-controlled. That contracting choice has led to separate investigations by both California and federal regulators.
What action should companies be taking?
The Department of Health and Human Services said that it’s not sufficient to just have an agreement, there needs to be satisfactory assurance that the business associate can and does follow proper procedure. Entities covered by HIPAA have until Sept. 23, 2013, to update their business associate agreements. Current agreements do not have to be changed until they’re up for renewal, but in any case all agreements have to be updated by Sept. 22, 2014.
What steps should companies take to comply with the legislation?
- Understand the new requirements and the impact on the business.
- Update business associate agreements.
- Apply the satisfactory assurance mandate.
Review existing agreements and perform due diligence to get comfortable with the practices of your business associates. This might involve requesting that audits be performed, such as Statement on Standards for Attestation Engagements No. 16 reports. In the insurance company example, no one examined whether the person contracted to provide off-site storage was capable of providing it to the level expected.
What are other requirements of the final omnibus rule?
The new rule requires that individuals be informed that their information has been breached. Managing breaches is no longer sufficient. Meanwhile, business associates are not required to provide a notice of privacy practices or designate a privacy official; they only need to comply with the general privacy requirements and all security measures, much like covered entities.
The definition of a breach was also changed from ‘a significant risk of financial, reputational or other harm to an individual’ to ‘an acquisition, use or disclosure of PHI in a manner not permitted.’ Under the old rule, companies that didn’t believe information was compromised didn’t need to classify it as a breach. Now they have to report the breach, but can apply mitigation to demonstrate there was a low probability of harm.
What are the penalties?
There are four categories:
- Ordinary breaches, such as an error or lost equipment — $100 to $50,000 per violation.
- If reasonable due diligence would have revealed the violation — $1,000 to $50,000 per violation.
- Conscious, intentional failure or reckless indifference, but the breach was corrected — $10,000 to $50,000 per violation.
- Conscious, intentional failure or reckless indifference and the breach was not corrected — $50,000 per violation.
For all violations, the cap is $1.5 million. And there will be more enforcement.
Tony Munns is a member, Risk Advisory Services at Brown Smith Wallace. Reach him at (314) 983-1297 or firstname.lastname@example.org.
We can help you with HIPAA compliance.
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The financial impact of the Patient Protection and Affordable Care Act (PPACA) may seem to be its most challenging aspect. Mitigating that impact may seem like the most practical solution. However, Ron Present, health care industry group leader at Brown Smith Wallace, says, “There are a lot of strategic implications to what you do and how you do it. Management should avoid just calculating the math and saying, ‘This saves us money so it’s what we’re doing.’”
To that point, Bill Goddard, principal, insurance consulting at Brown Smith Wallace, says, “You should consider many potential solutions before making a decision that could drastically diminish your ability to retain and acquire talent, and keep your workforce engaged.”
Smart Business spoke with Present and Goddard about dealing with health care insurance after the PPACA from a cost and strategic perspective.
How has the PPACA affected private insurance?
Starting Jan. 1, 2014, employers with 50 or more full time or full-time equivalent employees, considered large employers, must offer health insurance that fits certain affordability and coverage criteria or face a penalty. This could have an immediate impact on an employer’s cost to provide health insurance because a group of employees that had not had insurance may enroll in the plan and because of pre-existing conditions or high use of care, will cost the employer a significant amount of money.
Also, the health care law changes the status of some who had been considered part timers for insurance purposes to full-time employees. In some industries, many employees have not historically taken health insurance, sometimes as much as 66 percent of a company’s workforce. These employees will need to be offered coverage, potentially tripling costs.
How might that impact employers?
Companies are calculating their potential risk to cost. However, that’s only one aspect. The other is the strategic impact.
Some companies have considered limiting their variable hour, or part time, employees, to less than 30 hours per week to reduce the number of employees considered full time. To maintain an adequate workforce, such changes can require hiring additional employees, or changing existing employees’ workloads and job descriptions to keep up production and prepare for 2014.
Should employers not provide coverage?
Let’s say a large employer decides not to offer health insurance and instead pay the $2,000 per employee (minus 30) penalty, which may seem cheaper. However, the law requires individuals to have insurance regardless of employer coverage, so employees may leave for a competitor that provides it. Those who stay out of necessity may always be looking for another employer that provides coverage, lessening their productivity and loyalty while raising turnover, which is a significant expense.
Counsel employees. Let them know that they can refuse insurance coverage from the employer and either purchase insurance through a public exchange/marketplace or instead pay an annual penalty. Employees may prefer to pay the penalty instead of paying far more each month for coverage.
How can employers that provide insurance cope with rising premiums?
Large employers offering health insurance to a population of purely full-time employees can potentially control premium costs by forming a captive insurance company. This is an insurance company that non-insurance companies with 50 or more full-time employees can start. It is generally owned by the company that forms it and insures a limited population, typically just its own employees.
Another potential solution is to form a private exchange, which may be complementary to forming a captive insurance company, in that the entity forming it creates its own marketplace, which means it may qualify as providing insurance with a defined contribution that may help control costs.
Bill Goddard is a principal, insurance consulting, at Brown Smith Wallace. Reach him at (314) 983-1253 or email@example.com.
Ron Present is a health care industry group leader at Brown Smith Wallace. Reach him at (314) 406-5105 or firstname.lastname@example.org.
WEBSITE: For more on this topic, visit http://bswllc.com/industries/health-care.
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Taxpayers, investors and the stock market anxiously awaited the changes promised in the American Taxpayer Relief Act of 2012 (the Act) only to find that most passed provisions in the Act generally create more questions and concerns for the 2013 tax year and beyond.
To help unravel the changes made to the current tax laws that impact business owners, Smart Business spoke with Cathy Goldsticker and Robin Bell, tax partners at Brown Smith Wallace LLC. They outlined the Act’s relevant changes and the ways business owners can take advantage of many of its provisions and identify areas for tax planning opportunities.
What effect did the extension of many tax provisions have on business tax?
One key business provision is the ‘Section 179’ expensing election for first year tax write-offs of furniture and equipment, which has been retroactively increased to what it had been in 2011. For 2012, there is a $500,000 immediate write-off available on up to a $2 million investment in equipment and furniture. Without this change, it would have been $139,000.
This means, if you bought more than $2 million in qualifying business assets, you would lose the ability to write off the $500,000 in year one. Conversely, if you bought qualifying assets in 2012 that totaled less than $2 million, you can write off $500,000 in 2012 immediately and depreciate the remaining purchase price over the prescribed IRS life.
The change ultimately results in added choices for business owners because, for some businesses, writing off $500,000 in 2012 is not such a good idea. For an S Corp. or a partnership, for example, it may be better to take the write-off over several years because the rates for higher-income individuals, which will be a marginal rate of 39.6 percent instead of 35 percent, makes waiting generally the better option. However, if you have a high income this year, but next year, you anticipate it will be lower, it might make more sense to take it in 2012.
On the other side, since the tax rates of C Corps. remain at 35 percent and it’s unclear whether rates will change, it would probably behoove that type of company to take the immediate expensing.
Additionally, the 50 percent bonus depreciation for the purchase of new business assets was retroactively reinstated to the beginning of 2012. But faster depreciation might not be the best choice if you expect a bigger benefit from a future deduction, similar to the Section 179 consideration. Also, the research and development credit was made retroactively available for 2012.
Were any permanent tax law changes made?
The one permanent tax law change that receives attention year after year relates to the alternative minimum tax and is referred to as ‘the AMT patch.’ It’s mostly applicable to middle-income and lower earners and has become permanent at $78,750 (married amount), with annual inflation adjustments. AMT affects business owners because many operate as S Corps. and partnerships, which means the tax is paid by the owner(s), not the business.
Another permanent tax law change is the estate and gift tax exclusion that’s now $5.12 million. It was widely believed that after 2012, the exclusion would decrease significantly by reverting back to the pre-2001 tax law amount. When it was believed it would expire, many undertook gifting and other estate planning measures before the end of 2012. Freezing it at the higher level enables many more people to take advantage of this provision.
What are the tax benefits for C Corps. that elect to become S Corps.?
There was a reduction in the S Corp. recognition period for built-in gains tax. If you’re currently a C Corp., you can make an election to be treated as an S Corp. for income tax purposes. When you make the election, you may have a double tax (built in gain tax) on certain asset dispositions during a 10-year period. Historically, the rule has been that from the day of conversion for 10 years, certain assets sold had additional income tax due on the difference between your basis in them at that time and their fair-market value. The 10-year period became five years for 2011 and that will continue for 2012 and 2013 under the Act. This provision is making it easier to avoid double taxation on certain assets or selling your business, but it’s also accelerating some collection by the IRS because in the first year there may be revenue to collect on certain transactions.
There are many reasons to change from a C Corp. to an S Corp., but the driver of avoiding double taxation could be part of a sound tax strategy. The Tax Act has raised the individual tax bracket up to 39.6 percent for higher-income taxpayers, so it’s possible a C Corp. structure, which utilizes a 35 percent maximum tax rate, is better.
Another permanent tax law change is the estate and gift tax exclusion that’s now $5.12 million. It was widely believed that after 2012, the exclusion would decrease significantly by reverting back to the pre-2001 tax law amount. When it was believed it would expire, many undertook gifting and other estate planning measures before the end of 2012. Freezing it at the higher level enables many more people to take advantage of this provision.
How were individual tax laws affected?
Although tax rates for lower-income taxpayers remain the same, higher income ($450,000 or higher) will now have a marginal tax rate of 39.6 percent (married taxpayers). Also, the capital gains and dividends tax rate is now 20 percent for higher-income taxpayers instead of 15 percent. These are just the basic income tax rates stemming from the 2012 Tax Act, but there is also a 3.8 percent Medicare tax coming with the implementation of health care reform on much of the same income. Another Tax Act provision reduces the tax benefits of personal exemptions and itemized deductions. Individual taxpayers are going to lose some itemized deductions and some or all of their personal exemption deductions as their income grows (phase-outs). This was the case when the Bush tax laws were in effect a few years back and didn’t get changed, modified or removed with the 2012 Tax Act. For the 2010 and 2011 tax years, these itemized deductions and personal exemption phase-outs disappeared. Because Congress didn’t do anything permanent to change the law, the phase-outs are in effect again, so the tax benefits for these two items are reduced.
What changes were made to estate and gift taxes?
The tax rate increased from 35 percent to 40 percent on taxable estates or deceased individuals with assets in excess of $5.12 million, indexed for inflation.
If you haven’t given away roughly $5 million from your estate in 2012, you have another chance because the larger exclusion remains in the law.
Another important aspect of the estate and gift tax is the portability feature of the exclusion. Historically, one person was entitled to an exclusion when they died. The Act made permanent a provision that allows one spouse to pass their unused estate exemption to their living spouse, doubling the amount the surviving spouse can gift during their lifetime without incurring a tax.
There are effects on this portability provision should the surviving spouse remarry, so make sure tax advice is obtained.
Which energy credits and provisions were extended?
Many credits for energy-efficient home improvements, appliances, new construction, two- and three-wheeled plug-in electric vehicles and alternative fuel sources were extended. However, while the credits have been preserved, there are still limitations on the applicability and amounts of the credits.
From a general perspective, the energy incentives should be here to stay and more should be in the pipeline. Those who are interested in understanding them should do a careful cost/benefit analysis on your purchase or construction.
That’s not to minimize the environmental impact of these purchases, but sometimes it is very expensive to try to be energy-efficient. And sometimes, the benefit from the credit perspective side does not offset the cost of trying to be green.
Ultimately, if you’re inclined to be green, that’s wonderful, but proceed with caution because the tax benefit may not outweigh the costs.
Cathy Goldsticker, CPA, is a partner, Tax Services at Brown Smith Wallace LLC. Reach her at (314) 983-1274 or email@example.com.
Robin Bell, CPA, is a partner, Tax Services at Brown Smith Wallace LLC. Reach her at (314) 983-1217 or firstname.lastname@example.org.
Now that the 2012 presidential election is in the history books, a lot of attention has befallen the health care industry, particularly in terms of “health care exchanges” due for implementation under President Barack Obama’s health care reform beginning Jan. 1, 2014.
Ron Present, principal of health care advisory services at Brown Smith Wallace in St. Louis, Mo., says, “On a broad level, these health care exchanges are like an Amazon.com for insurers to offer their services. But there are implications for employers that can be far-reaching.”
He says while these exchanges can offer certain employers a way to unload the burden of providing health insurance to employees, business owners should carefully consider the implications — in terms of strategy, cost, and talent acquisition and retention — such a move could have.
Smart Business spoke with Present about health care exchanges, what they are and how they might impact health insurance options for employees.
What are health care exchanges?
On the broadest level, they’re a marketplace that offers health care coverage options for a given geographic area. It’s an access listing point for insurance companies to identify what costs and benefits would be available for customers in one collected area. These portals will look different depending on whether it is a federal- or state-created exchange, and the options within would, of course, differ accordingly.
When someone goes on the exchange, that person would be presented with a multitude of options through carriers like Aetna and United Healthcare, and those selections would be made by a user based on demographic data, type of coverage and so on. The exchange calculates costs, eligibility, payment options and such, allowing potential buyers to decide what’s best for them. Then it’s up to the buyers to decide what suits them best.
What’s really interesting in light of the election is that a lot of states are talking about not complying with this provision of health care reform. Exchanges are supposed to be in place by Jan. 1, 2014, and notifications of intent to the federal government by the states were supposed to be completed by Nov. 16, 2012. However, U.S. Department of Health and Human Services Secretary Kathleen Sebelius recently has extended the deadline to Dec. 14. The problem is, if states don’t have a state health care exchange set up, they’ll have to revert to the exchange that’s set up on the federal level, with more federal involvement. It’s an interesting irony for those resistant states.
How can health care exchanges benefit businesses from an accounting perspective?
Exchanges are currently geared to individuals and small businesses, with the definition of the latter differing by state guidelines. The most common definition of small business is one with fewer than 100 employees; those entities may be able to use an exchange to purchase insurance for group employees, which in theory opens them up to a better deal. The buying power of a large group is good for smaller employers and helps keep their overall costs down — think standards and levels of cost.
The other theory is, that in going to these exchanges, so many people will be buying insurance that the insurance competitors with similar benefits will make things interesting. It’s anticipated that by 2016, or perhaps 2017, this model may open up for larger employers, as well.
How did the election results change the way health care exchanges are viewed?
The big impact of the election is that health care reform is here to stay, so many individuals and companies who took the wait-and-see approach are now scrambling. Some 42 percent of health care providers hadn’t really done much at all about it leading up to the election, according to a recent survey by Modern Healthcare.
Are there tax advantages to health care exchanges?
It’s difficult to discern, but the penalties and the taxes aren’t really related to the exchange itself so much as they are to the actual health care reform. If we’re focusing specifically on the exchange, you could say that if certain employers opt to cut all health insurance, they might decide that it is cheaper to leave employees to find their own health insurance. It leaves them open to a bit of a double whammy though. The employer would have to pay a penalty for noncompliance, and it would no longer have the deductible from the insurance side.
How can business owners prepare for changes in health care exchanges?
Work with your accountant to do a complete financial analysis of your business. A lot of the issues in health care reform are more strategic than financial. The real challenge is looking at the ‘What if I don’t offer insurance?’ model, because the financial implications are mostly related to not doing it.
The jury’s still out on how it will all play out. But even those situations aren’t just a black-and-white number-crunching approach. It’s looking at what your competitors are doing. You might ultimately be saving money by not offering health care, but if you’re unwittingly losing your best employees to a competitor, where is the savings? Maybe you’re paying the price another way without really counting the cost.
Ron Present is principal, health care advisory services, at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1358 or email@example.com.
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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 firstname.lastname@example.org or (314) 983-1274.
Robin Bell, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at email@example.com or (314) 983-1217.
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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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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 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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Insurance is purchased in a confusing marketplace. There’s no sticker price on property and casualty (P&C) insurance and the cost structure can be difficult to comprehend. P&C insurance prices are based on complex market fluctuations and numbers that make it difficult for many to understand.
That can be frustrating to those used to having control over the costs in a business, says Bill Goddard, director of insurance consulting at Brown Smith Wallace LLC, St. Louis, Mo.
“Insurance pricing is cyclical and difficult to predict, causing unexpected budget surprises,” says Goddard.
Over the last several years, the cost of property and casualty insurance has been decreasing. With this gradual decline in cost, companies have gotten comfortable with their insurance premiums and, as a result, may be paying less attention to loss claims and best practices that can help mitigate insurance costs.
This is about to change because 2012 is bringing price increases to property and casualty insurance — another reason why CFOs will now hate this unpredictable cost.
Smart Business spoke with Goddard about why insurance pricing is difficult to understand and how businesses can better prepare to manage the cost.
Why is insurance a difficult area?
First, insurance has its own language. Who has time to learn it? Second, it’s not a logical marketplace in terms of pricing. You can’t simply compare costs apples-to-apples and choose a plan. There are variables because of the actuarial pros working behind the scenes. Third, you get calls from salespeople all the time, which can be overwhelming.
Also, the insurance world is very short on ideas about how to control costs. If your insurance prices are going up, you need innovative ideas to help you control the cost. That’s why bringing in a professional consultant with insurance experience is so valuable.
Finally, there is a lack of good benchmarking data in property and casualty insurance. You can’t compare the cost of insurance at one business to another and can’t determine if what you are paying is higher or lower than average because there are so many factors involved.
What is causing prices to increase this year?
Insurance is cyclical in nature, and the cost is impacted by many factors, one of which is the availability of capital. When the stock market is an unappealing place to invest, investors instead may choose to infuse capital into the insurance industry, where they could potentially see a better risk-reward result.
For example, those who invested in writing earthquake insurance would have earned sizable profit in the last seven years or so because there have not been any major earthquake events in the United States. These investments in insurance increase the supply, which decreases the price for businesses that need policies.
The dynamic behind rising property and casualty insurance pricing is that, with the stock market loosening up and investors making other choices besides insurance for their capital, there is less supply in the insurance market, resulting in a greater cost for those who demand the product.
What kinds of companies are going to feel the most pain from increased insurance prices, and what can they do about it?
Businesses with a bad loss history will be the first to feel the insurance cost increases. For example, take a company that pays $300,000 for workers’ compensation insurance and maintained that premium for years despite losses of $320,000. Because the insurance market was soft, the insurer didn’t want to lose that company’s business, and the company continued paying the same premium despite losses that exceeded this dollar amount.
Now, that company could hear differently from its insurance company, which may increase costs to $390,000 to make up for past years’ losses and net a profit this year. The key is to watch your losses: Does your history make you a risky business for an insurer?
If the answer is yes, you should work to position your company to earn a better premium by putting in place safety programs or improving claims procedures.
A consultant who specializes in insurance can help you identify ways to work with your broker to reduce your premium despite industrywide price increases.
What will the impact be on companies that have a good loss history?
There is an opportunity for these companies to save money on insurance rather than absorb cost increases if they choose to take on more risk. This could be accomplished by increasing their deductible and, as a result, paying a lower premium.
This can be risky for companies that do not have a firm grasp on their loss history — you must know your numbers before you take on more risk. Otherwise, you’ll watch more money go out the door, because if you increase your deductible, pay less premium, but have several loss claims, you’ll cancel out any savings. Perform a risk analysis and then determine whether your company can afford to take on more risk.
How can CFOs get a handle on their companies’ insurance?
The best solution is to bring in an independent adviser who has deep experience in the insurance industry and who can carefully analyze your risk, benchmark your business, help choose the best insurance provider based on your size and scope, and act as a consultant working with your broker to protect your bottom line.
Many companies do not have in-house insurance experts. An independent consultant with insurance industry expertise can provide real value on an as-needed basis. The consultant can act as your part-time risk manager, representing you in this difficult marketplace.
Bill Goddard, CPCU, is director of insurance consulting at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1253 or email@example.com.
Insights Accounting is brought to you by Brown Smith Wallace LLC
Outsourcing accounting services is a proven, cost-effective solution for businesses of all sizes, even those that have dedicated accounting personnel.
It’s a popular trend in the current economy. When companies decide to streamline operations, staff reduction is an obvious consideration. Business owners may figure they can handle cutting checks, or they disperse various accounting responsibilities among managers. But these tasks can be time-consuming and take leaders away from their primary roles.
“In the past few years, companies have reduced their staffs,” says Karen Stern, member in charge of BSW Small Business Services LLC, an affiliate of Brown Smith Wallace LLC in St. Louis, Mo. “Often, they seek to downsize personnel who can only do one job, such as a bookkeeper, who only handles payroll.”
An outside firm can provide a valuable third-party perspective and the experienced, licensed and trained personnel to complete mission-critical tasks. You can outsource payroll, analysis and preparation of special documents such as property tax returns, or any other accounting function.
Smart Business spoke with Stern about what accounting services can be outsourced and how it saves valuable time and money.
What types of companies can benefit by outsourcing the accounting function?
Any company from a mom-and-pop shop to a Fortune 500 corporation can utilize outsourced accounting services. Depending on the size of the company and its accounting workload and demands, a business might decide to leverage a single task, such as payroll, to an accounting/tax services provider. A Fortune 500 company might hire a firm to manage all back office work. Another company might require a professional to analyze its property tax reports.
On the other hand, a business might want the firm to act as the bookkeeper and take on all accounting duties. Keep in mind, firms that provide a full range of accounting services have the ability to look at a company’s financials from a tax perspective, as well.
What types of services can be outsourced?
Any and all accounting services can be outsourced, whether it’s receivables, payables or payroll — anything that is considered a bookkeeping task. And delegating these duties to a professional accounting/tax services firm will not compromise your security. Payroll is password protected, and there is complete anonymity.
Accounts are never discussed outside of the company, nor are they discussed with those inside the company who are not directly involved in those accounting processes.
What are the benefits of outsourcing?
First, there is the time management benefit. For example, in a smaller company, perhaps the owner’s spouse is managing payroll and keeping the books when that person could instead be selling or analyzing financials — responsibilities that are important to the growth of the company. Larger companies can farm out aspects of accounting such as payroll and free up their staff accountants’ workloads.
Second, the outsourced firm performs more efficiently. When a business outsources accounting tasks, the firm taking on those responsibilities does not require benefits or vacation time. The firm won’t call in sick, and there aren’t phone calls to answer, meetings to attend or other distractions.
The ease of transitioning to an outsourced firm is surprising for many clients. A professional accounting/tax services firm can quickly drop in and analyze company financials, clean up books, set up processes and procedures, and train employees to read financial statements.
What is a typical delivery model?
Outsourced services can be provided electronically or in person. Some clients prefer to have professionals in the office physically writing checks and managing other accounting tasks. It’s important for them to have the personal contact. Other clients like the convenience of a professional who works remotely and performs accounting tasks electronically.
These days, it’s easy to outsource services by using cloud computing, where information can be shared in real time. Many clients rely on a combination of personal and electronic services to meet their accounting service needs.
How does outsourced accounting help decrease a company’s risk?
The main risk with accounting services is safeguarding one’s assets. A company is exposed to innumerable risks when there is a single bookkeeper or one back-office clerk who makes all the deposits, writes the checks, pays the bills and reconciles the bank accounts.
These risks can be alleviated by involving a third party, a professional accounting/tax services firm that brings separation of duties to the financial process at the company. Perhaps the payroll clerk still writes checks and makes deposits, and the outsourced firm reconciles bank accounts so there is another party reviewing the work. Or, the outsourced firm might take over the check writing and bank reconciliation, or any combination of duties.
The key is to split those duties so that all of a company’s financial information isn’t managed by one person. For this reason alone, it’s a good idea to include an outside professional in the company’s accounting practices — and the efficiencies and cost savings the company will realize are an added bonus.
Karen Stern, CPA, is member in charge of BSW Small Business Services LLC, an affiliate of Brown Smith Wallace LLC in St. Louis, Mo. Contact her at (314) 983-1204 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.
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 firstname.lastname@example.org. Susan Nunez is principal, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or email@example.com.
As technology makes doing business overseas an option for more and more companies, American firms are exploring their international options.
Once a business decides to open operations in one or more countries outside the United States, the tax hurdles crop up and executives are faced with complicated decisions concerning acquisitions, hiring employees, tax structure and transfer pricing. Getting it right is critical to protect a business from multiple layers of taxes and fines as both the federal government and foreign governments focus on enforcing complex international tax laws, says Doug Eckert, member and international tax practice leader, Brown Smith Wallace LLC, St. Louis, Mo.
“U.S. businesses with international operations should develop a tax strategy in conjunction with international expansion to minimize tax costs from the beginning,” Eckert says.
Smart Business spoke with Eckert about what businesses should consider when expanding their operations beyond U.S. borders.
What should a business know when venturing beyond U.S. borders for the first time?
The greatest challenges a company faces are personnel hiring outside of the U.S. where human resource laws are significantly different, managing foreign customer expectations and managing cross-border tax consequences, including transfer pricing, an area where significant penalties can arise for companies that do not transfer goods at ‘arm’s length pricing.’
The initial business plan needs to take into account each of these areas.
What key tax issues do companies face when expanding internationally?
Once a company makes the decision to expand outside of the U.S., it first has to determine how it will distribute its products or services, and whether to use third-party distributors or its own employees to manage its foreign operations.
The initial determination of whether a U.S. company needs its own foreign subsidiary is often determined by its customers. This usually occurs when the customer requests that import taxes, duties and VAT (value added tax) are managed by the U.S. seller. At this point, a foreign subsidiary is generally required to manage these taxes within the local country.
Then several key questions arise. Should the company be a corporation or branch (income or loss is subject to immediate U.S. taxation) of the U.S. parent? How should the company be funded, whether through debt or equity? How can profits be transferred tax efficiently to the U.S. parent?
The U.S. has the second-highest corporate tax rate in the world. Careful international tax planning is required in order to repatriate overseas profits to the U.S. to avoid paying the disparity between the U.S. and foreign tax rates, or even more. Governments are ready and willing to take your money if you don’t plan carefully.
What challenges does a business face when making an international acquisition?
The ultimate challenge is how to repatriate earnings to the U.S. to service the acquisition debt in a tax-efficient manner and avoid paying the incremental U.S. tax in the process. This process is managed by setting up a tax-efficient acquisition structure and, in many cases, pushing acquisition debt into the overseas operations. Managing foreign currency risk as part of this process is also an important consideration.
An example of what not to do is to enter into a structure in which cross-border payments, dividends and interest will be subject to withholding taxes. In some situations, this could cause the overall rate of tax to exceed the U.S. statutory tax rate of 35 percent. To avoid this, it is important to design an acquisition structure that will allow cash to be flexibly managed within the structure in a tax-efficient manner.
What new legislation could impact a company’s international tax position in the next year?
In 2010, Congress enacted several new tax laws that impede the ability of U.S. multinational corporations to credit foreign taxes paid. The most significant of these laws are the ‘foreign tax credit splitter rules’ and the ‘covered asset acquisition rules.’
The foreign tax credit splitter rules preclude foreign taxes from offsetting U.S. taxes until the related foreign earnings are subject to U.S. taxation. The covered asset acquisition rules deny U.S. companies from taking a portion of their foreign tax credits in cases where the value of the foreign assets is stepped up to fair market value. This generally occurs in the context of an acquisition.
Both of these rules narrow the options available to U.S. corporations to avoid paying the difference between foreign tax rates and the U.S. tax rate when repatriating funds to the U.S.
Essentially, these rules will likely increase U.S.-based multinationals’ U.S. tax liability. Given this legislation and the current complexity of U.S. international tax law, companies should talk with a professional to understand how these tax rules interplay.
Ultimately, all these rules come down to a large modeling exercise to minimize your global taxes.
Doug Eckert is a member and international tax practice leader at Brown Smith Wallace. Reach him at (314) 983-1268 or firstname.lastname@example.org.
There is a lot of buzz around businesses going green, but opportunities to do so are still limited.
Despite ambitious plans to implement renewable energy tools and programs, “the green economy has not yet emerged,” says Nick Lombardi, manager of risk services and energy services practice leader at Brown Smith Wallace LLC.
While some states have adopted renewable energy portfolios, there is no federal standard. And most of the sweeping, green-minded efforts that have been discussed in Washington, D.C., the past few years are still on the table.
That said, there are still things that businesses can do to improve energy efficiency and take advantage of tax credits and incentives for retrofitting commercial property and purchasing equipment.
“Only use what you need,” Lombardi says. “And consider purchasing more efficient lighting, training employees and replacing inefficient motors and other equipment to save on energy costs.”
Smart Business spoke with Lombardi about how to realize savings and reduce energy consumption by taking advantage of available tax credits and incentives and implementing efficiency measures.
How can a business take advantage of green initiatives?
There is no real answer. When the current administration stepped in, there was a lot of hype around developing a green economy. However, much of that has not been implemented, as incentives and government programs remain stalled. How can a business take advantage of a systematic program that doesn’t yet exist?
The good news is that there are some specific opportunities for businesses that are interested in undertaking renewable energy projects. These have been in place for some time and will continue to be available for businesses moving forward. For example, the EPACT (Energy Policy Act of 2005) tax credits apply to commercial buildings that implement energy-efficient measures. If an organization meets certain energy-efficiency standards, it can earn a tax deduction for the facility of up to $1.80 per square foot. Additionally, there are federal investment tax credits available for renewable projects such as installing a wind turbine, or photovoltaic equipment to produce solar energy.
Businesses should also check into local renewable energy programs that may be available through utilities. For instance, some of the most accessible incentives are earned through installation of high-efficiency lighting. Before making any retrofits, however, you should talk to a professional who is well versed in energy consumption and green tax credits.
What are other ways companies can reduce energy expenditures?
Initiating an internal training program to educate employees about energy-saving basics will go a long way toward reducing energy costs. Your mantra should be, ‘Don’t use what you don’t need.’ Highlight the importance of simple things, such as turning off lights when office spaces are not in use, and powering down computers at the end of the day.
Computers demand a lot of energy, and companies can reduce their usage by simply adopting conscientious habits, such as not allowing employees to disable a computer’s standby mode.
Utilize natural light whenever possible, and use occupancy sensors as a cost-effective way to ensure that lights are only on when necessary. Also, daylight harvesting systems are more accessible and affordable to install now. These systems involve lighting that dims and brightens depending on available natural light in a space. There are rebates and incentives available for installing this type of technology.
What is electric power factor, and what impact does it have on utility bills?
Electric power factor is the ratio of the ‘real power’ flowing to the machine to the ‘apparent power,’ the amount of energy a machine uses versus the energy the machine produces. It’s complicated to understand, but essentially, the measurement is the portion of electric energy that is doing the work and not stored or captured in back-and-forth magnetic energy.
There is a misconception that improving this ratio will drastically reduce utility bills. The way electricity is metered, only energy that is ‘doing the work’ is measured. Analyze your utility bill and you will see that the power factor component is an infinitesimal portion of your expense.
The best way to save on utility costs is by focusing on efficiency and considering upgrading to high-efficiency motors, especially those used in pumps, fans and other long-running machinery.
How do usage spikes affect my bill?
There is another utility myth — that huge spikes in power usage drive up costs. When you turn on a large bank of lights, or power up a big machine, the energy surge is depicted on a utility bill as a significant uptick. These energy surges last a fraction of a second, or a couple seconds, at most. Many believe that by reducing these spikes, one can control energy costs.
However, utilities measure electric demand over 15-minute intervals, and those brief, though enormous, spikes hardly change the average. So don’t get sold on devices that claim to reduce those huge spikes and reduce your electric bill. If you want to save money on electricity, the tried-and-true methods are to upgrade to more efficient equipment, monitor usage of items such as lights and computers, and educate employees about wise energy use.
Meanwhile, talk to your utility company or a professional about your rate structure to be sure you’re on the right rate.
Nick Lombardi, PE, is manager of risk services and energy services practice leader at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1323 or email@example.com.
When talking about tax strategy for 2010 and beyond, the only sure thing is change.
Some tax laws are expiring and others are being enacted to stimulate the economy, presenting tax deduction opportunities for businesses and individuals.
While keeping track of those changes can be difficult and time-consuming for a busy executive, an experienced tax consultant can help you identify opportunities to benefit from the changes and develop your tax strategy, says Cathy Goldsticker, CPA, member, tax services at Brown Smith Wallace LLC.
“As the government works to reduce unemployment and stimulate jobs and the economy, tax strategy is the low-hanging fruit, and an expert can help you identify it,” says Goldsticker.
Planning is critical, and businesses should begin working now with an adviser to start identifying tax strategies to help minimize taxes, says Martin Doerr, CPA, member in charge, tax services, Brown Smith Wallace.
“There are lots of details to finalize and decisions yet to be made, such as the 2011 tax rate or whether certain tax cuts that are expiring this year will be renewed,” says Doerr. “However, businesses should look at everything on the table so they don’t miss any tax opportunities.”
Smart Business spoke with Goldsticker and Doerr about how to plan your rapidly approaching 2010 year-end tax strategy in a fast-changing tax environment and the steps you can take to maximize deductions.
What items can trigger Alternative Minimum Tax (AMT), and what steps can be taken to mitigate the loss of valuable tax deductions?
AMT was created to ensure that wealthy individuals and businesses pay a minimal level income tax. When calculating regular income tax, minus deductions, a separate alternative calculation is also figured.
The taxpayer must pay the higher of the two, and with all of the tax changes coming down the pike, more individuals and businesses will be paying AMT in fiscal 2011 and beyond.
That said, it’s important to consult with a tax adviser and determine how taking deductions or allowable depreciation will affect the overall tax picture. With AMT, certain business and individual tax deductions, such as property taxes, state/local taxes and investment expenses, are not recognized, thereby preventing taxpayers from getting the full benefit of these deductions.
There are some steps businesses can take to mitigate AMT: Slow down allowable depreciation on qualifying property by using a straight-line rather than accelerated depreciation method; defer certain deductions to a subsequent year because these deductions will not provide tax benefit in a year when a taxpayer owes AMT; and project whether AMT is likely in 2011 to plan future tax strategies accordingly.
How can self-employed individuals, such as partners, sole proprietors and S corporation shareholders, minimize self-employment tax?
Consider ways to receive business funds without owing self-employment taxes. Set up rental property and establish supporting operations.
For instance, rather than a business purchasing equipment, the individual buys it and rents it back to the business at fair market value. While that income is subject to income tax, it is not subject to self-employment tax.
Another suggestion that applies only to S corporations is to withdraw income as distributions rather than taking income as wages once reasonable wages are paid. Investor distributions are not subject to Social Security and Medicare taxes, but wages are.
Finally, for business owners of C corporations, now is a great time to consider taking dividends out of the company because they will be taxed at 15 percent this year, without incurring self-employment tax. Next year, that dividend tax will increase to 20 percent, and perhaps more, depending on how tax law plays out.
What should taxpayers know about selling a second home at this time?
Now may not be the time to sell a second home. In today’s environment, sellers who are fortunate to have a profit will pay 15 percent capital gains rates (plus sales tax where applicable) on that profit. This is different from when you are selling a primary residence, where sellers are usually exempted from capital gains tax.
But here’s the real clincher with selling a second home now: Not only do you pay capital gains tax if you make money on the sale, if you sell it at a loss, you do not get to take a deduction. Selling is a lose-lose situation.
Also bear in mind that if you have a foreclosure on the property, there could be hidden tax consequences. Hold out on selling that second home and consider renting; it may be your best option.
Does retirement plan funding still make sense in today’s tax environment?
Employer-sponsored plans, such as 401(k)s or certain IRAs, provide a tax deduction for the employer, and the employee is not taxed on the income. Employers wanting to fund benefits for their employees are wise to consider a retirement plan. A lot of businesses already have these plans in place, they just need to maximize them. The old adage to ‘buy low and sell high’ is a popular strategy, and that’s exactly what’s going on now in the retirement plan funding environment.
Tax law changes are approaching, but, with uncertainty as to which changes will occur, a proactive tax strategy will position businesses to maximize the benefits. Tax planning is essential in times of change.
Cathy Goldsticker, CPA, is a member, tax services, Brown Smith Wallace LLC. Reach her at (314) 983-1274 or firstname.lastname@example.org.
Martin Doerr, CPA, is a member in charge, tax services, Brown Smith Wallace LLC. Reach him at (314) 983-1350 or email@example.com.
If your business has been underpaying its taxes, look out: States are seeking ways to increase their budgets by increasing their sales tax audit activity on companies that may not even realize they are underpaying.
In the ever-changing landscape of state tax law, many businesses have a difficult time understanding how much sales tax to pay and which transactions are taxable. As a result, businesses can end up paying hefty assessments.
“The keys are to set up your accounting system to accurately capture the data used to calculate the amount of sales tax due, know the laws in the state in which you operate and consult with a professional who understands the application of the sales tax laws and procedures in that state,” says Susan Nunez, state and local tax services principal at Brown Smith Wallace LLC.
Smart Business spoke with Nunez about how to make sure you’re compliant with state sales/use tax laws and how to work through a sales tax audit.
If a supplier does not charge sales tax on the purchase of tangible personal property, is the purchasing company still required to pay the tax?
Yes, if the transaction occurs in a state that imposes a sales tax on the transaction. However, it is important to note that many states, including Missouri, have numerous sales tax exemptions for different industries and/or types of purchases that may apply to transactions otherwise subject to sales tax.
If you conclude that the transaction is exempt, you should provide the supplier with an exemption certificate for the state in which the item will be used. It is still your responsibility to maintain documentation that your claimed exemption is valid under that state’s laws.
What can a company do if it determines that it overremitted sales tax to a state?
Most states offer a mechanism for taxpayers to request a sales tax refund. The process generally involves submitting a refund claim, filing amended returns and attaching supporting schedules and invoices within a certain time period. The time period or statute of limitations is typically three to four years to file a refund claim. Most states require the seller to give the amount refunded back to the purchaser; others, however, do not have such a requirement.
What should a company do if it did not collect and/or remit sales tax on transactions it suspects are taxable?
If a company never remitted tax in a state in which it was doing business, the best course of action is to enter into a Voluntary Disclosure Agreement (VDA) with the state. This allows the company to anonymously ‘come clean’ with the state. The benefits of this approach include a limited look-back period of typically three to four years and, in certain circumstances, an abatement of certain tax penalties.
Because this filing is anonymous, a consultant can negotiate with the state to reach the best result for the company. In some cases, this can be prospective filing only, which means not having to pay any taxes for prior periods. If you’re in this situation, you should talk to a tax professional about the VDA process in the relevant state.
If a company sells a product, does it have to collect tax in every state where it has customers?
That depends on whether the business has a physical presence in the state in which the sale takes place. Nexus includes a state’s right to assess tax on an out-of-state business. A nexus-creating activity usually means a physical presence in the state for sales tax purposes, such as a store front, equipment or employees.
What is the typical sales tax audit process?
First, a company will receive a letter from the state that includes a request for documents. You are generally asked to sign a waiver, which, when signed, gives the state authority to waive the statute of limitations period. It’s best to sign this waiver; cooperation will generally make the audit process go more smoothly.
Next, a state auditor will review your fixed asset purchases, expense items and sales transactions. The information is analyzed, and you will eventually receive a preliminary audit report. You’ll have an opportunity to reply to items flagged for assessment. This review may occur a couple of times before a final assessment is issued.
Once the final assessment is issued, as a taxpayer, you are allowed to appeal the auditor’s findings to an administrative tribunal or state court system. It’s important for you to reach out to tax professionals who are well versed in the state laws where your business operates. Having a third party represent you will ensure that audits are completed accurately and in a timely manner and that excessive assessments and unreasonable deadlines are not imposed on your business.
What can companies do to mitigate their sales and use tax issues?
One department should take responsibility for establishing procedures to assist your company in maintaining accurate records used to calculate the tax. That department should also make the tax decisions related to various purchase and sales transactions.
Creating tax matrices to use as a guide can assist in reducing tax issues. These matrices should be updated on an annual basis to stay current with state tax laws.
Your company should also consult with a tax professional who specializes in state and local tax issues so that you receive knowledgeable advice on compliance issues and on planning ideas to better manage your tax positions across all the states in which you operate.
Susan Nunez is a principal at Brown Smith Wallace LLC. Reach her at (314) 983-1215 or firstname.lastname@example.org.
Continuous controls monitoring (CCM) has been on the radar for many companies for the last 20 years, but only recently have organizations really pushed toward meeting this goal. In a broad sense, CCM is a systemic way of verifying transactions and reducing operational, compliance and financial risks. And a key goal is to catch control failures quickly, before they cause too much damage. “If you detect errors as quickly as possible, you’ll have less revenue loss and exposure to risk,” says Janet Beckmann, CPA, data analysis practice leader at Brown Smith Wallace LLC. The impetus for initiating CCM depends on the company but usually is prompted for one of three reasons: because the company experienced loss or fraud and wants to make sure it never happens again; time-intensive processes need to be automated so the company can work more efficiently; or a proactive company has security concerns in a certain area of the business, such as payroll or accounts payable. “Companies first need to determine their key objective,” says Beckmann. “From there, a system can be put in place to help maintain optimum control and identify problems so they can be solved before causing revenue damage.” Smart Business spoke with Beckmann about the value of CCM and what organizations should consider when planning a system. What is continuous controls monitoring, and how does it work for a business? Over time, CCM has become somewhat of a generic term that means a system that verifies transactions. But, in its true sense, CCM is a system that runs live, identifies problems as they arise and alerts people immediately. For example, if a CCM system is in place and someone inputs vendor invoices, the system will signal potential duplicate payments before checks go out the door. However, CCM also means having ongoing processes that help a company better control its environment. For instance, a company may only want to run the system once each quarter or twice annually, depending on the risk assessment and the company’s goals. Regardless of what type of system is put in place, CCM protects a business from fraud and revenue leakage while enhancing the overall control environment. What are the benefits of a continuous controls monitoring system? Ultimately, CCM serves as a highly effective risk assessment tool that allows companies to track key performance indicators and quickly respond to change, rather than waiting until end-of-year financial statements to catch errors or revenue leakage. A system can reduce the risks associated with operations, compliance and finances, and can help stop revenue leakage such as overpayments, duplicate checks and other administrative errors. Also, it can facilitate fraud protection by enhancing the control environment. When employees recognize that a system is in place to watch all transactions and collect data, this raises awareness and tends to improve overall operations. Everyone is more careful because the company is committed to improving controls. Finally, CCM can improve efficiency in an organization by automating time-consuming processes. For instance, one person may spend three out of four weeks in a month working on a single reconciliation. If that process is automated through a CCM system, the employee is freed up to focus on other areas of the business. Where can a company derive the most value from a continuous controls monitoring system? That depends on the company’s objectives. If a company fears that revenue is not growing as it should, a CCM system will help track trends by time, location, product and employee to identify where expectations are not being met. Doing a trend analysis to get this information can be quite difficult, so this is where a CCM system can be very helpful. Companies that work with large quantities of data — millions of transactions, for example — may need to monitor the business in a global sense, as opposed to watching over each business unit; there is no limit on the size or quantity of data that a CCM system can handle. Also, companies with disparate systems that are not effectively linked are at a higher risk for control failure unless a CCM system is put in place. No matter what the goals of the company are, once red flags and patterns that indicate suspicious transactions are identified, the problems can be solved. What is necessary for a continuous controls monitoring system to be effective? The system must be flexible to suit a company’s needs. An off-the-shelf system can’t be truly efficient for every business. It’s worthwhile to invest in a customized system that aligns with your company’s objectives. Also, the system must be simple — the more user-friendly, the better. To take full advantage of the system, a business must have follow-up and reporting policies in place; for example, a system may be set up to produce reports that managers review. Finally, a company must determine how the system and data will be managed. Will it be outsourced, or overseen by someone in-house? It’s a good idea to consult with a professional while going through the risk identification process to pinpoint areas where a system will be most effective. Janet Beckmann, CPA, is the data analysis practice leader at Brown Smith Wallace LLC. Reach her at (314) 983-1254 or email@example.com.
As business owners look ahead to the future, many of them are planning on how to transition out of their company. Given that a business owner’s greatest asset is generally his or her company, it’s important to understand the business’s real worth well before it’s time to exit. A proactive business valuation performed well before an ownership change can provide an owner with a roadmap for improving the bottom line, driving profit and increasing overall value over time. Ultimately, this means a more favorable payoff when the time comes to execute a succession plan. “To maximize business value, owners need to develop a strategy to build institutional value,” says Barry Worth, member and director of mergers and acquisitions, Brown Smith Wallace LLC, St. Louis. But aside from simply determining the company’s worth, an owner should dig deeper and work to understand the various components of a business valuation. What areas of the business are driving value and what parts are profitable? And just as important, what departments or product lines or people are not contributing to the bottom line? “A proactive business valuation is about looking at the value of the company, then reaching below and peeling off the layers to identify what components of the business are really driving value,” said Bill Willbrand, tax and accounting member, Brown Smith Wallace. Smart Business spoke with Worth and Willbrand about how a business valuation can serve as a strategic growth tool for your business. Why should a business undergo a business valuation years before an ownership change? By performing a business valuation well before initiating any sort of exit strategy, you can create a baseline, a planning document to use as a roadmap for building value. A valuation can help you focus on key components of the business, understand what areas of the business are really driving value and identify weak spots that are detrimental to the worth of a company. For example, a valuation may show that a certain product line is not actually contributing to the financial success of the company. This might be a surprise to owners, who never fully investigated the product line’s contribution from a value proposition perspective. Based on these findings, the company can set goals to eliminate or sell off the product line and focus its energies on areas of the business that have the greatest impact on profitability and long-term value. A business valuation forces you to really tease out value drivers and spoilers, and it gives you a baseline so you can develop a plan and begin to measure progress. How can a business valuation enhance shareholder value? Through a business valuation, a company can determine its true value drivers. Those might include key client relationships, location, proprietary technology or any number of critical success factors. A valuation illustrates where a company should focus its efforts in order to grow the value of the business and maximize dollars invested in growth. Simply put, investors want to know where to focus time, talent and capital, and a business valuation can highlight those promising areas. You wouldn’t throw money at a product that wasn’t a value-driver. Also, keep in mind, shareholders are the true owners of a business, so a valuation is a critical exercise for identifying corporate differentiators that deliver shareholder value. How can a business owner use a valuation to increase a company’s worth? A valuation can help you begin with the end in mind and create a plan to focus on enhancing areas of the business that promise profit. Once you identify areas of the business that improve profit, you can stop doing the things that don’t. For example, you could eliminate a product line in order to focus your company’s talent and capital on a product that will raise the overall value of the business. A valuation truly serves as a critical planning document that can help you make key business decisions in the areas of customers, people, process and finance. When these four components fall into place, a company has a balanced scorecard and is in the best position to improve its value. What are the keys to developing a value enhancement process? The valuation establishes a baseline and a better understanding of the key value drivers. These are different in every company, but there are three basic areas that affect the value of every company: people, systems and strategy. Management depth and quality affect a company’s value. A company can immediately improve the bottom line, and its overall value, by establishing sound contracts with key personnel. Second, financial and accounting systems are important to assess the value of a company. Third, a company that has vision and a plan to reach its goals is more valuable than one without such a focus. Simply performing a business valuation improves value because it gives owners a clear picture of where the company stands and what components will help it grow profitably. How does an owner get started with a valuation process? Seek out accredited individuals specializing in business valuation who know how to really dissect a business, analyze financial statements and project to the future. While maintaining their independence and objectivity, valuation professionals can apply their business knowledge and recommend steps you can take to improve the overall value of your business. BARRY WORTH is a member and director of mergers and acquisitions and turnaround consulting and BILL WILLBRAND is a member in tax and accounting at Brown Smith Wallace LLC. Reach Worth at (314) 983-1202 or firstname.lastname@example.org. Reach Willbrand at (636) 754-0200 or email@example.com.
With health care reform under way and economic pressure bearing down on businesses of all sizes, companies are combing their budgets to cull unnecessary expenses. One area that’s often overlooked is dependent eligibility for health care benefits.
On average, companies can save 3 to 8 percent on their health insurance costs by simply identifying and dropping ineligible participants, says Janet Beckmann, CPA, principal, risk services and data analysis practice leader at Brown Smith Wallace LLC, St. Louis, Mo. The key is to conduct a dependent eligibility verification audit to identify “eligibility creep” that can occur over time.
“Employers of all sizes will be taking a hard look at their health insurance plans and benefits as a result of health care reform. While they’re doing that, it’s a good time to perform an audit to ensure everyone on your plan has proper eligibility,” Beckmann says.
An independent firm can conduct a comprehensive, document-based audit that gathers data from employees to verify eligibility, says Larry Pevnick, CPA, CFF, member in charge of insurance and reinsurance services at Brown Smith Wallace.
“This is an opportunity for businesses to save money without reducing benefits to their employees, so it’s a win-win,” Pevnick says. “They can cut their budgets without touching a health care plan that employees value and need.”
Smart Business spoke with Beckmann and Pevnick about how dependent eligibility audits can result in significant savings for your company.
Why should employers conduct an audit?
Between health care reform and our current economy, employers are working hard to save costs anywhere they can. Some think that the only way to save money is to reduce the benefits they offer employees, but that’s not always the case.
By identifying dependents on their health insurance plans who are not eligible, companies can typically save 3 to 8 percent.
Knowing that business owners are focused on savings, health insurance brokers are also getting on the bandwagon to recommend their clients have a dependent eligibility verification audit performed.
What benefits do businesses realize from a dependent eligibility verification audit?
The biggest benefit is immediate cost savings, which can amount to hundreds of thousands of dollars when companies drop ineligible dependents from their plans. As a result, future claim costs are reduced, as well. Employers also gain a better understanding of their participant plan costs and have an opportunity to clean up their eligibility.
How often should an audit be performed?
That depends on the size and operation of the company. Large employers may want to perform an audit every two to three years. If one has never been performed, now is a great time to start. Audits should be performed more frequently for organizations with many part-time and/or transient workers because they are more likely to find a larger number of dependents who do not belong. Also, perform an audit any time there are major changes in operations, such as following an acquisition or merger, and after layoffs or reorganization.
How should an audit be conducted?
The key is to make sure employees are respected during the process because they will be asked to supply personal and other confidential documents to verify their eligibility for health insurance. Managers and those involved in the audit — which usually includes human resources and/or benefits administrators — should communicate clearly to employees, letting them know that everyone is being asked to furnish such information, no one is being singled out and all information will be kept confidential. Next, a third party that specializes in these audits will begin collecting data, including birth certificates, marriage licenses, tax forms, custody agreements, adoption certificates and other court-related documents that verify a dependent’s eligibility. A call center number gives employees an independent resource for asking questions, which is also a key to minimizing the involvement of management so the process remains unbiased, fair and efficient.
Look for a firm that will make the best use of technology to simplify the process and provide a complete audit. For instance, we perform an employee eligibility verification audit using data analysis tools to compare 100 percent of the employee master data set to eligibility files. Those are also compared to claims to pinpoint the exact dollar amount paid for ineligible participants. Those claim costs typically cannot be recovered. The process is about identifying future cost savings. Quantifying the results is helpful when prioritizing or justifying new processes and procedures for in-house eligibility verification going forward.
When is the best time to perform an audit?
Any time that is not a particularly busy time of year for employees. You may want to consider when open enrollment occurs and how employees will be affected if dependents are identified and dropped from the plan.
What should an organization consider when choosing a service provider to conduct an audit?
First, be sure the firm has the experience to staff the process and its goals are to reduce costs and save time. For instance, rather than paying for postage to send letters of request to employees for gathering documents, can the firm set up a website where employees can log on and see what documents they need to provide? Ask the firm how it will make the process respectful, confidential, efficient and fair. Communication is key during the entire audit process. The firm should be prepared to educate your employees so that everyone is comfortable with the process. The firm should also understand your key objectives, which typically include the importance to the company’s financial well being and maintaining the company’s current level of benefits.
Janet Beckmann, CPA, is principal, risk services and data analysis practice leader at Brown Smith Wallace. Reach her at firstname.lastname@example.org or (314) 983-1254.
Larry Pevnick, CPA, CFF, is member in charge of insurance and reinsurance services. Reach him at email@example.com or (314) 983-1247.
The time will inevitably come — whether by choice or not — when you are no longer able to run your business.
So what can you do now to ensure the business and the wealth that you’ve grown will go on without you? Create and execute a succession plan, says Bill Willbrand, a tax and accounting member at Brown Smith Wallace LLC in St. Louis, Mo.
“It is estimated that more than $10 trillion will transfer over the next 10 to 15 years as baby boomers retire,” says Barry Worth, member and director of mergers and acquisitions at Brown Smith Wallace. “When you think in terms of the amount of wealth that has been lost over the last two to three years, succession planning is key for preserving the value of a business for its owners.”
Creating and executing a succession plan, in conjunction with a strategic plan that lays out a company’s vision, can help keep a business on track toward its long-term goals, says Worth. But it can be difficult to set aside the time to do so.
“Many key managers and owners are so wrapped up in day-to-day problems that they never take time to focus on the long-term goals of the business,” says Worth.
Smart Business spoke with Willbrand and Worth about how to construct and implement a succession plan to prevent loss of wealth and ensure that your business will continue without you.
Why is succession planning so crucial to a business?
Succession planning is a tool to help transition the business properly and preserve the value that the owners have worked a lifetime to achieve. Such a plan will put the best talent in place to carry on the vision the company has outlined in its strategic plan.
In the case of the death of a key manager or an illness that takes an owner out of the loop, there needs to be a successor in place who can step in and fill those shoes, someone who has the same intellectual capital to devote to the business. Without a succession plan, the business may never achieve its full value.
What are the primary steps in the succession planning process?
First, the company needs to clarify its needs and willingness to commit to a plan. Commitment to the process is essential. Next, the business leaders must step back and take a good, hard look at the talent pool. What are the strengths and weaknesses of potential successors?
The strategic plan is a critical guide in this exercise, as key managers determine what skills are necessary to achieve the company’s vision. For each candidate, you also need to determine whether the individual has the desire to lead the business. Does that person possess the right skills? If you want to transition to a successor who prefers to do something else in life, the plan won’t work.
Once you complete the assessment, the business should identify a successor and begin to build a supportive team around that person.
How can a company prepare the chosen successor to transition into the leading role?
After identifying the successor, leadership must review the successor’s strengths and weaknesses and do a gap analysis to determine what training is necessary. What skills will help this person gain the intellectual capital necessary to be a strong successor?
Mentoring programs should be put in place to help the successor transition to the leadership role so he or she can succeed in leading the company to its full value.
How does the process differ for succession in a family business?
When family dynamics are involved, an owner’s views on who should take over the business can be skewed. A favorite son might be positioned as the successor rather than a younger daughter or a cousin who has better skill and experience.
These issues get sticky. It’s important to set egos aside and also recognize that the business may need more than one successor — perhaps one leader who is not family — to help realize the company’s vision.
Sometimes, the right answer is to dispose of the business and secure the value for the family. But, if you decided to keep the business in the family, now is the best time financially to hand the reins over to the next generation through a gift or a sale, because shares and assets are worth less today, so taxes will be lower.
Is the process something business owners can do on their own?
Anything’s possible, but outside advisers can be critical to helping guide a business owner through this process.
An outside advisory board can provide a forum of third-party, trusted individuals who help direct the succession process and monitor the execution of the plan. Those advisory board members might include seasoned business owners, industry peers, consultants, attorneys and CPAs.
The idea is to get an independent perspective on the process so you learn the best practices for creating and executing a succession plan.
Bill Willbrand is a member in tax and accounting and Barry Worth is a member and director of mergers and acquisitions and turnaround consulting services at Brown Smith Wallace LLC. Contact Willbrand at (636) 754-0200 or firstname.lastname@example.org. Contact Worth at (314) 983-1202 or email@example.com.
For very sound reasons, your business carries various types of insurance coverage to protect it from liabilities and reduce risks. But some insurance policies — such as cyber risk, environmental and pollution liability — are expensive or difficult to obtain.
As a result, many businesses forgo insuring for these risks through traditional insurance channels, essentially self-insuring, but not setting aside funds, for those critical liabilities.
“Businesses have a lot of self-insured risk, whether they realize it or not,” says Bill Goddard, CPCU and director of insurance consulting at Brown Smith Wallace LLC. “A company may go out and buy a policy to cover its building in case of a fire, but it may not buy insurance to cover the building in case of an earthquake. Most companies buy insurance policies with deductibles — another form of self insurance.”
Rather than exposing your business to risks that could drain profits, you might want to consider starting a captive insurance company, essentially an insurance company owned and operated by your business. It serves as a tool to cover those self-insured liabilities and can also provide your company with tax benefits.
“In today’s marketplace, it makes sense for small and medium-sized businesses to at least consider starting their own captive insurance company,” says Alan Fine, CPA, JD, and a tax partner at Brown Smith Wallace LLC in the insurance services practice.
“A captive insurance company will allow you to smooth out the cost of insurance over a longer period of time,” Fine adds.
Smart Business spoke with Fine and Goddard about how starting a captive insurance company could make sense for your company, no matter what its size.
What is a captive insurance company?
A captive insurance company is an insurance company owned by a business. It allows a business to organize and formalize a program of self insurance and to buy insurance for risks that are very difficult or expensive to obtain in the traditional insurance market.
This arrangement is attractive for businesses of all sizes because, by owning a captive insurance company, you are, by definition, keeping the profit. On the other hand, when you pay a premium to a commercial insurer, part of what you pay is profit to the insurance company.
Also, if you buy insurance from an insurance company and your company is a better risk than others insured by that company, you will still pay a higher premium because the insurance company has to cover the losses of the other insureds.
If your company is a good risk, you can probably self insure your business for less by starting a captive.
How does a captive insurance company work for businesses of all sizes?
By setting up a captive insurance company, you are creating a rainy day fund in case your business confronts a risk that is not covered by the traditional insurance policies you buy from a commercial carrier. A captive insurance company is like a forced savings plan: You put money aside into the captive in case you need it to cover a risk.
What should a business consider before making the decision to start a captive insurance company?
A captive insurance company is a fit for businesses that can answer yes to the following questions. Do you have risks that you are presently self insuring? Does your company have positive cash flow? Is your business profitable? Many owners want to know how much money they can save annually by starting a captive.
While each situation is different, most small to mid-sized captives tend to save between $200,000 and $400,000 each year. You don’t have to wait for a renewal period to start a captive — and the sooner you start one, the faster you begin saving money on insurance costs over the long term.
Are there tax advantages businesses can realize by starting a captive?
Assuming your business is structured properly, you receive a tax deduction for your premium payment into the captive. Should you need to use the funds to cover a risk, the money is there.
Also, if insurance premiums paid to the captive are less than $1.2 million, your business might not have to pay tax on the underwriting profits. So, if you charge your business insurance premiums that are less than the $1.2 million cap, according to Section 831(b) of the Internal Revenue Code, and do not use the money to cover liabilities that year, those profits are tax-free.
Keep in mind that you must have a business reason for setting up a captive insurance company. An adviser who understands the tax and insurance aspects of captives can provide valuable insight to your specific situation.
What are the estate planning advantages?
One of the estate planning tools associated with a captive insurance company is the ability to have a captive insurance company owned by successors (e.g. grandchildren). For instance, a grandfather who started a captive might pay $1 million for earthquake insurance. If no earthquake occurs that year, those dollars are passed tax-free to a grandchild (who owns the captive). Experienced estate planners can assist businesses with such arrangements.
What are the first steps to establishing a captive insurance company?
The first step is to evaluate your risks and make an assessment of what your business is currently or should be self insuring. This is best done by hiring an adviser who is well versed in both the tax and insurance portions of captives. It’s not enough for a professional to just understand the tax angle, or only focus on insurance. From there, the adviser will help you structure a captive that will truly benefit your company and ensure that the captive qualifies as an insurance company for tax purposes.
Alan Fine, CPA, JD, and Bill Goddard, CPCU, specialize in advising businesses on captive insurance companies at Brown Smith Wallace LLC in St. Louis, Mo. Reach Fine at (314) 983-1292 or firstname.lastname@example.org. Reach Goddard at (314) 983-1253 or email@example.com.
It’s a dangerous time for businesses, and even those with decades of operating experience can find themselves facing bankruptcy or liquidation as flaws in their business plans become apparent.
“Most business owners and managers have not seen times like this before, and they are not sure how to manage through it,” says Barry Worth, director of mergers and acquisitions and turnaround consulting at Brown Smith Wallace LLC. “It’s a brand new world of change. Businesses that are not really looking at their business models and thinking ahead may not exist in the future.”
A weak business model that worked in good times may not hold up in more turbulent ones, and businesses must recognize their problems and seek help to get back on track before it’s too late.
“Essentially, that means a business owner or manager has to admit to failure,” Worth says. “Their emotions are wrapped up in their business, and seeing the situation clearly is nearly impossible. They just don’t know how to get out of the spot they’re in. They can meander on and eventually go out of business, or they can seek help from advisers who can see them through their situation.
“By seeking out valuable professional help, most can pull out of it, reorganize their business and retain their family wealth over time.”
Smart Business spoke with Worth about how to get a troubled business back on track.
What’s the first step that companies in trouble should take to get back on track?
First, they must recognize and admit that they are in trouble, and then seek help from a turnaround consultant or other trusted advisers who can provide guidance. Businesses should bring in a third party to assess the situation and help them design a plan for recovery — or for whatever the owner’s goals may be for the business.
While many business owners hesitate to discuss tough times with their bankers for fear of losing financing, bankers are well connected with turnaround consultants and can provide helpful referrals. Banks want to help the businesses they’ve entrusted their money with, so reach out in times of hardship and be honest with your banker about the situation.
Also, consider speaking to an attorney, who may also be able to suggest consultants who can help.
Once a company admits financial hardship and seeks help from a turnaround consultant, what is the next step?
A turnaround consultant’s role is to first come into the business and immediately stabilize the situation, improve the cash flow and get the company to the point where it is not bleeding. After that, the consultant will begin to conduct an in-depth analysis to determine what is creating problems in the business.
The consultant will look at the organization as a whole and determine what is generating the problems. There’s no one-size-fits-all plan, and finding a solution requires the involvement of ownership, managers, supervisors and, to some extent, staff.
The overall process can take 30 to 45 days, sometimes longer. That’s why it’s critical to seek help early on. Continuing to run the business ‘as usual’ could result in having a business that no longer exists down the road.
What solutions can businesses consider to help them deal with extreme financial hardship?
Businesses could file Chapter 7, which is liquidation, where assets are sold off. Another option is Chapter 11, which is reorganization, where consultants help the company get back on sound financial footing and the courts rule on the plan. Chapter 11 is designed to allow a company to continue operating into the future but leave behind certain debts, and the courts may dismiss various types of company liabilities, such as loans or accounts payable.
Or, companies can seek additional equity to help sustain cash flow by bringing in private investors or equity groups. Refinancing is also a possibility for some businesses. This can be accomplished through private equity groups, asset-based lenders or banks.
Finally, an owner can sell the business to another owner.
How can a company determine the best direction for its current situation?
Owners should engage in heart-to-heart discussions with advisers while examining their goals for the business. Some owners become so emotionally burdened and worn out from running a financially crippled organization that they are ready to move on. They want to file bankruptcy, liquidate or sell.
Others want to preserve the jobs they created for so many employees. They see a future in the business, but they need a fresh start.
For many businesses, there is hope for turning around their situations. It’s just a matter of seeking professional help so they can pull out of the mess they’re in, retain their family wealth and jumpstart a company they’ve invested in emotionally and financially.
An outside adviser can bring in a clear perspective, fresh ideas and a plan for action. As a result, many of these troubled business stories can and do have happy endings.
Barry Worth, CPA/ABV, CVA, CM&AA, is director of mergers and acquisitions and turnaround consulting for Brown Smith Wallace LLC. Reach him at (314) 983-1202 or firstname.lastname@example.org.
As consumers rely more on debit and credit cards as opposed to cash, merchants are facing increased risk exposures if they don’t have proper security measures in place. Cyberthieves troll for information on merchant networks, which has resulted in significant security breaches that have made headlines.
In 2004, a consortium of credit card companies, including Visa, MasterCard, Discover and American Express, banded together to set Payment Card Industry (PCI) Data Security Standards. These standards direct merchants that process, store or transmit credit card information to maintain a secure environment. And if your business accepts credit or debit cards, the standards apply to you.
“Business owners have to comply with those security standards and implement safeguards to protect customer information,” says Ron Schmittling, security and privacy practice leader at Brown Smith Wallace LLC.
Smart Business spoke with Schmittling about how your company can meet PCI standards and protect against security breaches.
What is PCI compliance, and who must comply?
The three keywords for PCI compliance are process, store and transmit. If your organization processes, stores or transmits credit card information, you must maintain a secure environment as laid out by the PCI standards. So, if customers or vendors use debit or credit cards to make purchases from your business, you must be compliant. This includes meeting 12 standards, which can be broken down into six key areas: building and maintaining a secure network; implementing safeguards to protect cardholder data; maintaining a vulnerability management program; applying strong access control measures; regularly monitoring and testing network security; and enforcing an information security policy.
Your policy will ultimately drive the compliance process, so the first step is to take a security inventory of your business to determine how compliant it is, what security measures are in place and what weak spots must be addressed. An outside adviser with experience in security and privacy can provide feedback on how to structure a plan. This framework will set the tone for your internal compliance strategy and help protect your business.
PCI security standards are not laws; they are a method of self-imposed regulation by the consortium of credit card companies. There are no federal mandates in place, but there is a move in that direction since some states have started to pass laws or require organizations to comply with PCI Data Security Standards. This trend is expected to continue in association with the Data Breach Notification Laws movement.
What are the consequences of failing to comply with the standards?
At their discretion, payment brands such as Visa or MasterCard can fine acquiring banks $5,000 to $10,000 a month for PCI compliance violations. Banks are likely to pass these fees on to noncompliant merchants. Many banks have begun notifying noncompliant merchants of their need to comply or face fines.
You should review your merchant agreement and note any penalties and fees for noncompliance, which can include prohibiting merchants from processing credit card transactions, higher processing fees and other restrictions. Any fraud loss associated with a compromise in security may be borne by the merchant starting on the date of the security breach. Depending on the level of security negligence, the FTC could become involved and impose significant federal fines, up to $250,000 and/or up to five years in prison.
Not knowing is not a viable excuse for noncompliance and could cost you and your organization. It is your responsibility to understand your merchant agreement and what the PCI standards mean to your organization.
What steps can a company take to become PCI compliant?
Compliance responsibility depends on your merchant level, and there are four levels as defined by PCI Data Security Standards. Level 1 merchants are those that process more than 6 million transactions a year. It is important to note the annual transactions are measured in volume, not dollars. Level 2 includes merchants that process 1 to 6 million transactions per year. Level 3 covers merchants with 20,000 to 1 million e-commerce transactions per year. Level 4 includes any merchant with fewer than 20,000 e-commerce transactions per year, and all other merchants with fewer than 1 million transactions annually.
Companies in Levels 2, 3 and 4 follow the same compliance process that includes completion of an annual self-assessment questionnaire and having quarterly network scans performed by a PCI Approved Scanning Vendor (ASV). The results are submitted to the merchant’s bank. Level 1 merchants follow similar procedures, but also are required to have an annual on-site review completed by a Qualified Security Assessor (QSA), a PCI-certified provider and have an annual network penetration test performed. The QSA will submit the merchant’s Report on Compliance to its merchant bank. The PCI Council lists ASVs and QSAs at www.pcisecuritystandards.org.
Where should an organization start on its PCI compliance initiative?
The most important step is to set an internal policy of how you’ll address PCI compliance and information security. Too many times, organizations rush into identifying a new product they think will fix PCI compliance or information security problems instead of organizing their efforts around the organization’s overarching policies and processes.
Once that policy has been defined and implemented, an organization can begin to enforce it and truly drive its compliance initiatives. But compliance starts with your information security policy and security controls. Many organizations struggle with where to start, as PCI compliance can be a daunting and complex task. Reaching out to a QSA to kick-start your PCI compliance efforts is a great first step.
Ron Schmittling, CPA/CITP, CISA, CIA, is the security and privacy practice leader at Brown Smith Wallace LLC in St. Louis, Mo. Reach him at (314) 983-1398 or email@example.com.
Technology is a fantastic tool that should enable you to run your business more effectively and efficiently. But if your technology isn’t helping you achieve your corporate goals, you may need a guest conductor.
You may have a good team that manages the network and provides good desktop support, but is what they are doing in sync with your business goals? You may or may not need better instruments, better players or new systems, but it’s difficult to know when you don’t have strategic IT management.
Many small to medium-sized businesses lack this critical aspect that enables IT to work in harmony with the business and enhance the top and bottom lines.
“IT advisory services act as a mentor to management to make sure they’re getting the best value,” says Tony Munns, who leads the IT advisory team at Brown Smith Wallace LLC. “These services help companies maximize the value associated with the use of technology and ensure that the technology provides the business with information to make decisions faster and more efficiently.”
An IT adviser can serve as a one-stop shop for executives who know their technology could be working smarter but don’t know how to achieve those gains. For instance, if you are not sure what technology you need for your business, an independent professional can help you figure out which IT systems work best with your business strategies.
“IT advisory services can help you formulate a strategic vision and put a plan in place so you can shift from tactical to strategic use of IT, making IT an investment rather than an expense,” says Munns.
Smart Business spoke with Munns about how an independent IT professional adviser can help a company operate more efficiently, decisively and competitively.
What are IT advisory services?
IT advisory services are more than tech support or a representative who sells software. IT advisory services link IT to business goals and help a company get the best value for its IT investment. For instance, an independent adviser might help a company better understand the cost of maintaining a legacy system versus investing in a more integrated system.
An adviser can serve as a system architect who can redesign the IT infrastructure to remove bottlenecks and improve security, functionality, efficiency and the results a company gets from its IT investment. Ultimately, IT is about having efficient access to information to make better, faster decisions. If IT isn’t helping your business do that, it may be time to change your approach.
This process is beyond the expertise of many executives, and it’s hard to justify the cost of adding that expertise to the management team. An independent adviser who can serve as a facilitator and educator is the most cost-effective solution.
Why is it important for a business to link its technology to its business plan?
It enables the company to execute its strategy, and it’s the infrastructure that holds the company together and leverages its personnel. Above all, it is about return on investment. In IT, it costs money just to stand still. So, it’s essential that IT investment dollars are well spent. IT systems can differentiate a company from its competition and provide vital information to help make decisions that can give a company a competitive edge.
How can you move beyond fighting IT fires to create a more strategic department?
Many companies are either underserved by their IT systems or what they’re using is purely tactical — the IT guys keep operations running but do nothing more. Companies tend to buy new software or other IT components only when something has to be replaced.
An IT adviser can give management the confidence to lift the business out of that day-to-day mentality and focus on an IT strategy. That may include migrating to a more efficient infrastructure, improving security or privacy, helping meet compliance requirements or assisting in upgrading or updating decisions.
The key is to be proactive, not act after something in the IT infrastructure breaks. An IT advisory team helps a company think beyond today and work toward a technology infrastructure that will last.
What should a business owner ask before entering into a relationship with an IT adviser?
To make sure you get the most out of an IT advisory relationship, ask yourself these questions: Are you concerned about the cost of IT and struggling to understand the value? Are your systems prohibiting you from doing your job effectively? Do you wish you could do more with your IT systems? Do you have information at your fingertips to make business decisions? How easy is it to get the information you need from your IT system? Are you aware of the IT systems available for your business?
An IT adviser will help you answer these questions and develop a plan so that your IT investment becomes aligned with your business goals.
How can a business measure the value of its IT investment?
When technology has the capability of measuring key performance indicators (KPI) such as sales and efficiency, then management can see the value of investing in an integrated system that does more than accomplish tasks. IT should ‘think’ for a business in the sense that it compiles the statistics, numbers and data necessary to make the right decisions.
That value is measured in those KPIs. When the IT systems are integrated and linked to the business strategy, those KPIs should improve — and you’ll like the score.
Tony Munns, CISA, FBCS, CITP, is the leader of the IT advisory team at Brown Smith Wallace LLC. Reach him at (314) 983-1297 or firstname.lastname@example.org.