Kristen Hampshire

The coming year is a quiet one for health care reform implementation, but 2012 is significant in terms of whether the Patient Protection and Affordable Care Act (H.R. 3590) we know as the Health Care Act will continue as is.

The question is whether the act is constitutional in whole or part, and with two opposing federal appellate court decisions, the case has landed on the doors of the U.S. Supreme Court, which will decide whether to accept the case this year.

What next? And if the case is heard by the court this year, how will the decision affect the future of health care reform? We won’t know until 2012.

“Although 2012 is a quiet year in terms of what new provisions and regulations are required,” says Christopher Huryn, a partner at Brouse McDowell who works out of the firm’s Akron office in its Health Care Practice Group. “It’s a watershed year in many respects.  2012 will likely set the stage for where we go and how far we go with the Health Care Act as it stands today.”

For now, it’s a wait-and-see game.

Smart Business spoke with Huryn about what businesses should know about health care reform.

What court decisions have already been made concerning the Health Care Act?

Two conflicting federal appellate court decisions were made this year.  Most recently, in August 2011, the United States Court of Appeals for the Eleventh Circuit (Alabama, Florida, Georgia) ruled that the individual mandate portion of the Health Care Act, which requires that all individuals have a defined level of health care coverage (or else be penalized), is unconstitutional. However, the court ruled that only this portion of the act was unconstitutional, and did not strike down the rest of the act.

Meanwhile, in June 2011, the Court of Appeals for the Sixth Circuit (Ohio, Michigan, Kentucky, Tennessee) issued a decision upholding the individual mandate, ruling that it is constitutional to require individuals to purchase health care. In response to these decisions, several trade groups, the U.S. Department of Justice, and 26 state attorneys general, including Ohio Attorney General Mike DeWine, filed petitions with the U.S. Supreme Court, asking the court to decide whether the Health Care Act is unconstitutional, in whole or part.

How soon could the U.S. Supreme Court make a decision about the constitutionality of the act?

In the coming months, the Supreme Court will decide whether to accept the appeal and hear the case during its current term, which began October 2011. With two conflicting rulings from the appellate courts, the procedural process to get this issue to the Supreme Court has been accomplished. However, although the process is complete, and both proponents and opponents are eager to get a decision on the Health Care Act, we must wait and see whether the Supreme Court agrees to accept the case.  If it does, the court will likely hear oral argument in early 2012 and issue a decision by June or July of 2012.

What are some possible outcomes if the Supreme Court accepts the appeal and hears the case during this term?

The Supreme Court could rule that the entire Health Care Act is constitutional. Then, implementation of provisions and requirements would continue on schedule. Or, the court could rule that part or parts of the act are unconstitutional, such as the individual mandate. In that instance, legislators could go back to the drawing board to rewrite the unconstitutional issue(s). Or, the entire act could be ruled unconstitutional, and then we’re back to square one, although some contractual arrangements will continue, such as  health insurance policies currently in effect that include provisions already implemented under the current Health Care Act.

For now, no one knows what will happen. We could be looking at very different health care reform legislation down the road if the current act is deemed unconstitutional. Or, we might continue on the very path we are going down today, implementing provisions over several years leading up to 2014.

What can business owners do in the meantime?

First, eligible business owners should be sure to take advantage of the Small Business Health Insurance Tax Credit. This credit is worth up to 35 percent of a small business’s premium costs in 2010 (25 percent for tax-exempt employers). On January 1, 2014, the rate increases to 50 percent (35 percent for tax-exempt employers). The credit phases out gradually for employers with average wages between $25,000 and $50,000, and for employers with the equivalent of 10 to 25 full-time workers. Talk to a professional about whether your business qualifies.

Second, before making any changes to your current health care coverage, keep in mind that certain ‘edits’ to your plan will not uphold the plan’s grandfathered status. A grandfathered plan is the one you had on or before March 23, 2010, when the Health Care Act was put into effect. You are allowed to keep that plan and, depending on the coverage, it could cost less than plans required by the individual mandate that goes into effect in 2014. So be sure to seriously consider any changes that could cause your plan to lose its Grandfathered status and could dramatically affect your bottom line in the future.

For now, the bottom line for businesses is to continue to work hard, be innovative and meet your customers’ needs — and wait to see what the Supreme Court decides in 2012.

Christopher M. Huryn is a partner with Brouse McDowell at the firm’s Akron office. Contact him at (330) 535-5711 or churyn@brouse.com.

In any economy, smart tax planning can protect income and provide opportunities for businesses to maintain their financial well being. In a tough economy, partnering with a tax professional who can help you devise a strategic plan can help you avoid surprises and can provide a critical advantage.

“We are in terrible financial times. There are lots of losses in the marketplace and income is down for many people,” says Cathy Goldsticker, member, tax services, Brown Smith Wallace LLC, St. Louis, Mo.

Rather than putting tax planning at the bottom of the agenda, start thinking about ways to cut your losses and gain tax advantages through deductions and other smart investment moves.

“There are important tax planning decisions that can be made now, and over the next year, that can give individuals and businesses more leverage as they weather the financial storm,” says Martin Doerr, member in charge, tax services, Brown Smith Wallace.

Smart Business spoke with Doerr and Goldsticker about smart tax planning strategies to consider implementing before the end of 2011, and what to be aware of for 2012.

When should a traditional IRA be converted to a Roth IRA, and what are the pros and cons?

If your traditional IRA has lost substantial value, consider converting it to a Roth IRA this year because the tax on the conversion is based on fair market value. Because that has dropped in 2011, the tax cost of the conversion will be lower.

The benefit of converting an IRA to a Roth IRA is the ability to grow the investment with tax-free earnings and later withdraw the money without paying tax. The flip side is recharacterizing a Roth IRA back to a traditional IRA if the Roth has lost significant value since making the conversion to a Roth. If the IRA was converted to a Roth IRA in 2011, it can be recharacterized in the same tax year. You have until the extended due date of your 2011 tax return to do this (Oct. 15, 2012).

On the other hand, if you are 59-and-a-half or older and the value of your traditional IRA has plummeted, consider liquidating the investment if the value is less than your tax basis (your nondeductible contributions),  as doing so would earn you a miscellaneous itemized tax deduction.

There are many issues to consider, including the impact on AMT, so talk to your accountant about whether this strategy makes sense for you.

How can an investor make the most of stocks that have lost value?

Many people have stock market losses that will carry forward, and there may be no tax advantage in generating more losses in 2011. You might sell gain stocks to use up those losses, then repurchase them immediately. There is no ‘wash sale’ rule for gains.

The success of this plan depends on the investment portfolio, strategy and market view.  Whether you think there is more appreciation left in gain stocks now, or you want to move out of those stocks and into different ones, if you have losses to use, there is effectively no tax when gain stocks are sold. And you will have higher basis in your stocks, which may be helpful if capital gain rates increase in the future.

How can someone take advantage of the $5 million gift exemption?

The current lifetime gift limit is $5 million per taxpayer, so a husband-wife household can take advantage of a combined $10 million tax-free gift. These limits apply to tax years 2011 and 2012, and, given the fluctuation of rules, this is a great opportunity for high-net-worth taxpayers to pass on their wealth to their children.

What tax benefits are available for 2011 capital purchases?

Now is the time to invest in qualifying business equipment and still realize the 100 percent bonus depreciation. New equipment such as technology, furniture and, in certain cases, leasehold improvements, can be written off. That makes 2011 a great year to put new equipment in service or make construction improvements. Bonus depreciation is scheduled to reduce to 50 percent for 2012, and, after that, it is not yet known if it will be renewed.

How do income tax rates for 2011 compare to potential rates in 2012?

Income tax rates are scheduled to remain the same, with slight adjustments based on the Consumer Price Index. However, if you have qualifying deductions, it’s best to use those in 2011 to realize tax savings sooner.

On the other hand, if you have income that can be deferred, it would be wise to defer that until next year and pay that tax later.

What planning can be done to minimize the Alternative Minimum Tax?

This burdensome tax can be an unpleasant surprise for many people.  The AMT exemption, approximately $74,000 for couples in 2011, is up slightly from 2010 but is scheduled to drop considerably next year. Even with the larger exemption, care should be taken to capture and protect all of your tax deductions. For example, if you have substantial deductions and you are in AMT, consider deferring, if you can without penalty, state taxes,   real estate taxes and investment expenses until 2012, since none of these is deductible against AMT.

However, if your 2011 regular tax is larger than your AMT, accelerate, if possible, payment in 2011 for state income tax, real estate tax and investment expenses.

Is charitable giving still a beneficial tax planning activity?

Whether or not you are subject to AMT, continue charitable giving if your heart is there for the organization. Assuming you still want to support the nonprofit, there are options. For example, if you are 70-and-a-half or older, you can make a donation directly from your IRA, which allows you to offset taxable income.

Martin Doerr is member in charge, tax services at Brown Smith Wallace LLC, St. Louis, Mo. Reach him at mdoerr@bswllc.com or (314) 983-1350. Cathy Goldsticker is member, tax services at Brown Smith Wallace. Reach her at cgoldsticker@bswllc.com or (314) 983-1274.

Moving a business or opening a new office is a complex operation, and the ability to make a smooth IT transition is critical for reducing downtime, maintaining productivity and avoiding frustration for employees and clients.

“Moving is a formidable task,” says Shawn Sturgeon, sales engineer manager at Time Warner Cable Business Class. “A business can prepare by carefully planning how IT systems will be disconnected, relocated and installed at the new location. The key is to minimize the risk of downtime, which can be a serious financial and customer-relationship threat.”

Planning is critical to the success of a move, and Sturgeon emphasizes the importance of documenting IT processes and involving the right technology staff, from the chief information officer to network administrators. Ultimately, the key is to manage technology in such a way that customers will not notice the move, as their calls will continue to be answered and their needs tended to, their e-mails will arrive without error and the company will continue to provide service.

Smart Business spoke with Sturgeon about how to effectively manage technology when moving or opening new offices, from the initial planning to the decommissioning of old equipment.

What should businesses consider as they are planning a move to ensure a smooth IT transition?

Companies that keep detailed documentation of their IT systems and processes will find it easier to prepare for a move than those that do not put these integral business operations in writing. As a standard course of business, you should maintain a solid library of documentation that identifies what systems the company runs and what services the business uses.

What is included in the company’s IT inventory? What telephone lines exist, and what lines do these phones ring to when dialed? What contracts with external IT resources does the company hold? Who is responsible for managing specific technology roles, and what do those jobs include?

Proper documentation not only impacts your ability to manage technology during a move, but it can also reduce turnover in IT staff and ensure that the company maintains its IT intelligence if a key technology employee leaves the business. Because if your network administrator or IT manager leaves, does anyone know how to keep technology operations running? Your documentation will lay the groundwork for a moving plan.

While planning, begin to take inventory of what IT infrastructure you will move to the new location and what equipment you will retire. Will you need to buy more equipment? What services will you transfer, and will you need different or more IT services? What providers do you currently work with, and will you transfer this business when you move?

Begin planning as much in advance as possible, and be sure to communicate openly with technology staff and all employees so there is an understanding of what will happen on move day.

Who should be involved in the IT system moving process?

A key part of planning is identifying who is involved in the moving process and the role of each individual. In advance, identify who will be involved in the move from top level down to the workstation level with the people who will physically move the equipment and set it up.

Generally speaking, in large organizations, the chief information officer will head up the team, including an IT director down to telecom managers, IT managers and network administrators. In smaller firms, there might be a single person responsible for IT operations who oversees the move. Additionally, external resources will assist with the move in various capacities. These might include systems integrators that manage day-to-day operations of servers and applications, and service providers, such as telephone system vendors, Internet providers, wireless network providers, etc.

How can a technology move be executed to minimize downtime and frustration?

While there is certain to be some downtime during a move, the key is to minimize the time during which your business is disconnected. Identify, based on team members, how much time is required to set up each workstation. Then decide the best time to move, whether that is during a weekend or a weekday night.

Timing will likely depend on how quickly you can make the move and on the complexity of your move. Decide who will physically move the equipment — movers who specialize in IT relocation, or internal staff? Once equipment and service have arrived at the new location, who will put them in place and connect them, and how will they be tested to be sure all technology is operational?

How can a business securely decommission technology that isn’t going to make the move?

What will you do with old servers or systems you decide to no longer use after the move? You need a plan for how to decommission this equipment and how to ‘clean’ it to ensure that there is no business-critical information left on hard drives, servers and other hardware. There are agencies that specialize in disposing of IT equipment so be sure to ask them how they manage to do this securely. Along the same lines, determine what services must be disconnected at your old business location. Otherwise, you could end up paying double for services that were not cancelled.

Moving technology is a complex feat, but by involving a team of responsible individuals who understand their role in the moving process and employing outside vendors such as trusted service providers that understand your technology needs, you can make the process go smoothly and reduce costly downtime.

Shawn Sturgeon is a sales engineer manager for Time Warner Cable Business Class Midwest. Reach him at (330) 572-3913 or shawn.sturgeon@twcable.com.

Now is the time to seriously consider how you classify real estate expenditures, including building purchases, major renovations, tenant improvements and smaller projects such as acquiring fixtures.

In the current tax environment, there may be an opportunity for your business to turn slowly depreciating cash expenditures (tax write-offs) into tax-deductible items that can be fully depreciated in one year. The result is a lower tax payment in the current year.

The key to claiming this benefit is to reclassify costs by unraveling items from your overall real estate investment. Then, you can identify which of those costs qualify for accelerated depreciation. The process is called a cost segregation study, and any business with real estate expenditures should consider having one done.

“Now more than ever, it’s important to save on real estate and construction project costs. One of the ways to do that is to realize available tax benefits,” says Cathy Goldsticker, member, tax services, Brown Smith Wallace LLC, St. Louis, Mo.

Many businesses are not aware of the tax benefits that a cost segregation study can uncover. And as tax planning season closes in, now is a good time for your business to discuss this opportunity with a CPA who has experience performing cost segregation studies.

“With this bonus depreciation tax law scheduled to expire at the end of fiscal 2011, we can’t be certain there will be an extension of this tax benefit, so businesses should consider how they can take advantage of this remarkable write-off,” says Nick Lombardi, manager of risk services and energy services practice leader, Brown Smith Wallace.

Smart Business spoke with Goldsticker and Lombardi about how cost segregation studies work, how they benefit companies and what your business can do to act on this opportunity now.

What is a cost segregation study?

A cost segregation study involves moving portions of property development from long-tax-life assets to shorter-life schedules. Essentially, cost segregation is a tax planning strategy that allows businesses to accelerate deductions and defer tax payments for real estate expenditures, which include land improvements, furniture and equipment.

Items are unraveled from the total asset cost and assigned an individual cost amount. Qualifying items can be depreciated separately and many times more quickly. For example, you could depreciate decorative lighting or furniture 100 percent in the current year, when, historically, a typical real estate depreciation tax write-off schedule for commercial property is 39 years. Many times, costs can be reclassified from ‘land,’ a nondepreciatable asset, to classifications that will provide an immediate tax benefit. Accelerated tax write-off schedules are a tremendous benefit for businesses. Engaging in a cost segregation study can tease out those qualifying expenses.

What does a cost segregation study involve?

It requires formal documentation of the cost basis — the real estate expenditures that are being depreciated — and a reliable method for depreciating those assets on the accelerated schedule that allows 100 percent depreciation over one year. The process includes observation, pictures, measurements and an engineering analysis to determine which items can be unraveled from your real estate expense. The study involves a present value analysis that details how much qualifying items are worth, a mathematical analysis and the application of tax law. A team of professionals, including an experienced accountant and an engineer who specializes in cost segregation studies, is important to ensure that proper documentation is compiled to support the shorter-term depreciation schedule. While the process seems complicated — and it does involve many moving parts — cost segregation studies are quite efficient when professionals have the resources to perform them effectively. A study can take as little as four to six weeks to complete, and, considering the potential tax benefit, the time is well spent.

When does it make sense to hire a professional to perform a cost segregation study?

Any business that has made a land improvement or purchased furniture or equipment in the last several years might be a candidate for a cost segregation study. And don’t discount smaller projects. The cost of performing a study is less when the project scope is smaller, so there is a benefit to engaging in a study for less complex real estate endeavors.

How can a cost segregation study directly benefit a business?

For one, faster depreciation on tax-deductible items frees up cash flow for a business. This is critical, especially now when so many companies are struggling to maintain a healthy cash flow. Cost segregation allows a business to maximize bonus depreciation or the depreciation of qualified leasehold improvements. These studies can be done at any time, with benefits realized very quickly. The study can be retroactive, meaning projects completed, or qualifying purchases made in the past several years, can be re-examined and costs segregated to take advantage of this tax benefit. Talk to your tax professional about lookbacks and projects that you’ve completed in the past one to four years that could warrant a cost segregation study.

How can a business prepare for a cost segregation study?

 

Proper, specific documentation is critical, which is why hiring a professional who specializes in cost segregation studies is crucial. This person will create the documentation to support the rationale for depreciating items in a much more efficient manner for tax purposes. So when preparing for a study, ask the professional about the process, find out if there is a specialized engineer on staff to help and be prepared to assist with the documentation process, including taking pictures and measurements to create the necessary documentation. The process is seamless, and it doesn’t take long to realize potential savings of thousands of dollars.

Cathy Goldsticker, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at cgoldsticker@bswllc.com or (314) 983-1274. Nick Lombardi, PE, is manager of risk services and energy services practice leader at Brown Smith Wallace. Reach him at nlombardi@bswllc.com or (314) 983-1323.

Recovery from the economic recession has been gradual and has changed the banking environment. The financial industry took a major hit, and the result has been increased regulation, stricter lending policies and a number of mergers and acquisitions that have left the banking landscape forever altered.

After riding out the storm, the financial industry today is cautiously optimistic. While lenders continue to be risk-averse, they are also strengthening their balance sheets by building capital, thereby creating available funds to loan to potential borrowers. Business owners are in a position to take advantage of historically low interest rates and develop relationships with the competitive banks that want to earn their business, says John Helmuth, a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.

“Banks are recovering and getting stronger, and that is good news for businesses,” says Helmuth.

Smart Business spoke with Helmuth about the challenges facing the financial industry and how smart business owners can capture opportunity in today’s banking environment.

What key challenges are banks facing?

The economies in the United States and overseas are impacting financial institutions and affecting their ability to grant loans to individuals and businesses of all sizes.

Banks are no different than other businesses that have experienced financial hardship during the last few years. We are witnessing a very slow recovery from the recession, and, while the credit environment is improving, financial institutions are still acting conservatively as they adhere to increased regulation.

In addition, some banks have experienced significant credit losses, particularly in residential and commercial real estate, which contributed to the significant financial collapse that occurred in the recent past. There are also additional credit losses resulting from loans that were perhaps too risky or aggressive.

Meanwhile, banks are dealing with a deterioration of collateral values if they have loans or financing that is tied to the value of an asset, particularly in real estate or in capital expenses such as equipment for companies in manufacturing. Because asset values have decreased, financial institutions are faced with more frequent and independent appraisals of those assets.

Revenue growth for financial institutions has also been a challenge, as many banks have reduced the number of loans that they grant and are taking a stricter approach to lending. That results in reduced income from interest. And because of today’s historically low interest rates, banks are not recovering as much through interest income for those loans outstanding.

What major impact do business owners feel from a challenged banking environment?

While there are opportunities for strong businesses to obtain loans, banking industry regulation has led to stricter credit approval processes. So, borrowers might find it more challenging to obtain financing at the levels needed to run or grow their businesses.

But the good news is, with more aggressive competition among banks, financial institutions are actively looking for good customers — business clients that are poised to grow and that need additional credit to make capital investments. With many banks sporting stronger balance sheets, coupled with low interest rates, now is a great time for businesses to take advantage of the current banking environment and the products that financial institutions have to offer.

Will those low interest rates be increasing soon?

We don’t see any signs of interest rates increasing because recovery from the recession has been very slow. By maintaining these historically low interest rates, the goal is to avoid slipping into another recession.

And so far, it’s working. With rates so low, businesses that are in a position to secure financing can really leverage their credit dollars and get more for their money.

What direction can you provide business owners in light of today’s economy and the state of the financing industry?

Business owners should communicate openly and often with their bankers. Share both the good news and the bad. Tell the story — what challenges the business faced, what the business did to overcome those obstacles and what the plan is for the future.

Now more than ever, banks are looking beyond the numbers. So many businesses in all industries experienced losses over the past few years. There’s more to a credit decision today than the balance sheet and operating results, although these are  still of significant importance.

Banks that have developed strong relationships with business owners want to maintain those relationships. And this is especially true as financial institutions continue to merge and organizations work to retain their customers.

John Helmuth is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 241-4600 or jhelmuth@kmco.com.

For U.S. companies considering export sales, the potential incremental transportation costs, selling expenses, duties and other costs can create a financial barrier to entry.  This complicates a tough environment in which manufacturers are working to cut costs and go lean to compete in a difficult global economy.

The potential silver bullet is an export incentive that could save you as much as 10 cents of tax on every dollar of export profit. The Interest Charge Domestic International Sales Corporation (IC-DISC) tax incentive has been in place since the 1970s but has been underutilized. However, taking advantage of this tax incentive can change your financial picture and help you compete in today’s world market.

“Businesses that implement an IC-DISC can reduce the U.S. tax cost for export sales profits by more than 50 percent,” says Doug Eckert, member and international tax practice leader, Brown Smith Wallace LLC, St. Louis, Mo. “It is an opportunity to save tax dollars on export sales so companies can reinvest that money back into their operations. This incentive is designed to encourage U.S. businesses to manufacture in the U.S. and export, with the hope that export sales on an after-tax basis will be at least as profitable as domestic sales.”

Smart Business spoke with Eckert about how IC-DISC can benefit your company and how you can qualify for the export incentive.

What is the IC-DISC tax incentive, and how does a company qualify?

The IC-DISC incentive permits qualifying U.S. taxpayers to exclude at least 50 percent, and often more, of their export income. Any company that manufactures, produces or grows products in the U.S. can qualify for IC-DISC benefits, as long as those products are exported.

Basically, you qualify if your products or goods are produced in the United States and contain at least 50 percent U.S. content — meaning that goods can contain some foreign components — and if you are selling to a customer outside the United States. The customs duty value of imported components must be less than half of the sales price of the finished exported goods.

Also, you don’t have to be the actual exporter to qualify for IC-DISC. You can still qualify if you sell goods to a customer for use outside the United States.

In addition, distributors that don’t actually manufacture goods can qualify for an IC-DISC as long as the product is manufactured in the U.S. and they export the products.

How does the tax incentive work?

To take advantage of IC-DISC benefits, you set up a separate corporation that elects to be an IC-DISC. Generally, this company would not have employees or operations.

A portion of the export profits are allocated to the IC-DISC company. There are several different allocation rules, of which, 50 percent of the export profits is the most common method.  However, it is allowable to use 4 percent of gross receipts, or a method called the marginal costing method, which allows averaging of domestic sales profits and export sales profits to determine the profit that may be allocated to the IC-DISC. Taxpayers may choose the method that allocates the maximum profit to the IC-DISC.

The profit allocated to the IC-DISC is not subject to U.S. federal tax. The remaining profit stays with the exporting company.

For example, say your company makes $2 million in export profits. The IC-DISC will report receiving $1 million in export commission income, and your company will reduce its $2 million of export profits by a deduction payable to the IC-DISC, leaving only $1 million of income subject to tax.

Your company then pays tax of $350,000 (a 35 percent rate) and the DISC does not pay tax. At the time the DISC distributes its profits to individual shareholders, the distribution is taxed at the qualified dividend rate of 15 percent.

Therefore, the profits in the IC-DISC are ultimately subject to tax of $150,000 in this example, compared to a tax of $350,000 had the IC-DISC not been in place, a savings of $200,000. That amounts to a savings of 10 cents for every dollar of export profits by starting an IC-DISC and taking advantage of this tax incentive.

Can service companies qualify for the incentive?

There are carve-outs for specific industries such as software that some people may not define as a product. Also, service companies providing architectural or engineering services for construction projects outside the U.S. may qualify for an IC-DISC.

These provisions are very specific, so service firms should talk to an international tax adviser about whether they qualify.

What steps should a company pursue to take advantage of the incentive?

Talk to a tax professional who is well versed in international affairs so you can be assured that you are setting up the IC-DISC properly and realizing its full tax advantage. Essentially, to receive IC-DISC benefits, you must set up an IC-DISC corporation that is separate from the manufacturing company. The IC-DISC must be a newly formed C corporation. You then elect to be treated as an IC-DISC within 90 days, which makes the entity nontaxable for federal tax purposes.

How can implementing an IC-DISC fit into a company’s bigger tax picture?

For companies with export income, this is an opportunity to defer taxation or take advantage of lower dividend tax rates that are set to expire Dec. 31, 2012.

To ensure that the IC-DISC company is properly structured, you should work with a CPA firm with IC-DISC specialists who can guide you through the process, including all the structuring and compliance issues.

Doug Eckert is a member and the international tax practice leader at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1268 or deckert@bswllc.com.

 

 

Nearly every business function can be outsourced, and today more companies are exploring ways to delegate tasks to professionals outside of their organizations as they seek ways to reduce their fixed costs.

“During the most recent recession, companies felt the pain resulting from a lack of focus on cost containment. As in most recessions, the knee-jerk reaction was to aggressively reduce personnel costs,” says Christopher Meshginpoosh, director-in-charge of the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.

Now, with leaner work forces and the pressure to do more with less, businesses need the flexibility to scale their businesses as demand returns, but they don’t necessarily want to increase their payrolls. As a result, many companies are looking to outsource a wide range of business processes.

The good news is that, as a result of maturation of the outsourcing market and vast technological improvements, there are virtually no limits to what a company can outsource. Gone are the days of simply passing off payroll activities to third-party firms. Today, entire departments can be outsourced.

“In the quest to remain competitive, a lot of companies are devoting their time and energy to the processes they can manage most efficiently and effectively in house,” says Meshginpoosh. “And many of the remaining processes can be outsourced.”

Smart Business spoke with Meshginpoosh about opportunities to outsource business processes and how this can benefit companies.

What business functions can companies outsource?

Over the last decade, the breadth of activities that can be outsourced has expanded dramatically. Today, there are very few functions that cannot be outsourced. Rather than just outsourcing payroll, companies might choose to outsource their entire human resource functions. Or, rather than just outsourcing distribution, companies might outsource large portions of their supply chain management to third-party firms with deep supply chain and logistics capabilities.

More recently, the trend is to outsource large pieces of business to a single service provider rather than assigning processes to a large pool of different service providers. By dealing with one provider, companies can minimize the time and energy associated with the management of multiple vendors.

What are the benefits of letting go of some of these tasks?

One of the most significant, tangible economic benefits is the ability to turn a fixed cost into a variable cost. While a company might surrender a portion of profits during peak periods of activity, it can dramatically reduce the negative impact during slower periods.

Perhaps more important is the less tangible benefit that results from allowing the company to focus more closely on the areas that create a competitive advantage for it. For example, if a company’s competitive advantage centers on the unique products it delivers to customers, outsourcing activities such as logistics, warehousing and fulfillment might allow managers to spend more time focusing on product development, preserving the company’s competitive advantage.

What are the first steps a company should take before outsourcing?

First, a company must truly understand where it creates value. What are the key aspects that differentiate it from its competitors? Also, companies must be careful to avoid outsourcing activities  in which the risks outweigh the potential benefits.

Another question to ask is how essential the activity is to the business. How does it impact customers and critical employees? Is the function one of the company’s core competencies? Does performing the activity require deep knowledge or expertise that is only held by company employees?

How can a company reduce risk when delegating business tasks to a third party?

First, ensure that the third party is financially strong and that it has the infrastructure, systems and personnel necessary to support the activities that will be outsourced. Additionally, determine whether outsourced activities will be performed on site or at the vendor’s locations, and consider the potential impact on customers, personnel and other business processes. It’s also important to ask for references and find out what other companies have to say about the potential vendor.

Additionally, many outsourcing companies have annual examinations of internal controls formerly referred to as SAS 70 reports, which can provide insight into potential issues related to specific vendors. Obtaining and analyzing these reports during the planning and vendor selection process can help identify processes that the company should retain, as well as help weed out potential vendors.

How can a company find a reputable outsourcing firm?

A good place to start is your accounting firm, because it most likely has had experience with many clients who have had successes and failures with outsourcing initiatives. This experience can be incredibly valuable to management teams and owners as they try to separate critical from noncritical functions and assess risks resulting from outsourcing business processes, as well as analyze the potential economic impact associated with outsourcing.

By ensuring that they leverage this experience in the decision-making process, companies can maximize the probability of success with outsourcing initiatives.

Christopher Meshginpoosh is the director-in-charge of the Audit & Accounting Group at Kreisher Miller, Horsham, Pa. Reach him at cmeshginpoosh@kmco.com or (215) 441-4600.

Technology moves fast, and advances in information technologies, along with changes in work force behaviors, are driving the need for faster, higher-bandwidth data solutions.

Businesses that want to stay ahead of the pack need tailored, fast data solutions.

“It’s critical for businesses today to map their current and future data needs and to partner with a data provider that can offer customized access solutions,” says Jitesh Bhayani, vice president of marketing for the Midwest Region, Time Warner Cable Business Class.

As data-intensive activities such as online collaboration, video viewing and Web conferencing grow more prominent, businesses need the bandwidth to support these functions. Clients, vendors and colleagues expect to communicate with businesses online, and your systems need to have the speed to make it happen.

Smart Business spoke with Bhayani about innovations in data and bandwidth and what opportunities are available for businesses.

What data trends are driving the need for more bandwidth?

Forecasts show that business Internet traffic will double between 2009 and 2014, and in 2010, Internet traffic demand among businesses in North America grew by 17.2 percent. The way employees work today in a Web-connected world is driving this demand.

There’s an emphasis on continued collaboration and companies are interacting online with customers through platforms such as e-commerce. Work environments are highly dependent on being connected to the Internet — a Forrester Research survey revealed that 72 percent of employees use a Web browser hourly or daily. Over time, a business can easily exceed its available bandwidth, and the answer is a higher-speed data solution.

What technologies give businesses greater capability to collaborate online?

Internet-based technology and software have advanced so that businesses can collaborate more readily with satellite offices, vendors, partners and customers. The days of passing paper are over as the ease and speed of sharing documents electronically increases and businesses recognize the cost effectiveness and environmental friendliness of using Internet-based tools for collaboration.

For example, with Web conferencing, employees do not have wasted travel expenses and unproductive time spent en route to a meeting location. Web conferencing is an alternative to in-person meetings, and it’s an ideal tool for conducting product demonstrations or service calls with customers.

Meanwhile, cloud computing with the use of Web-based business software frees up employees to work anywhere, anytime and still be connected to the office. These tools are often called Software-As-a-Service (SaaS), and include e-mail, calendar, project management and accounting systems. Basically, a business rents the amount of the application it needs and accesses it through an Internet connection. As more businesses use cloud computing, these firms will require higher-speed solutions and more bandwidth.

How does social media impact a business’s need for higher-speed solutions?

With the rapid growth of social networks such as Twitter, Facebook and LinkedIn, businesses have new opportunities to reach more people and respond to customers more effectively. They can share their corporate environment through blogs. They can use social networks to connect with potential clients, build relationships with peers, vendors or prospects, and get the word out about their products and services.

Looking ahead, social media will integrate even more software applications and advanced Web services, which will put more of a strain on existing data solutions. Businesses need to assess whether they will have enough speed and bandwidth to accommodate emerging technology. Now is a good time to consult with a data solutions provider and take an inventory of what your business’s current data capabilities will allow. Do you have room to grow? What are your plans for technology integration? Discuss your current and future needs with a provider that can act as a partner and customize a solution.

How can a business customize data services and add bandwidth?

The amount of bandwidth you need will depend on the number of employees in your company and the Web-based applications you use. Take stock of your current business situation. What high-speed data challenges do you face as you prepare for the future? What are your current bandwidth levels? A data solutions professional can help you understand what tier of power and speed you will need for optimal business performance.

What options are available for power and speed?

There are several tiers of power and speed, so first consider what your businesses needs on a day-to-day basis. Then think about goals for the future. Will you do more cloud computing with Web-based software programs for accounting or project management? Are you ramping up your video conferencing to avoid windshield time? Will more employees work outside of the office from satellite locations or home offices?

For businesses that use e-mail and basic Web applications, broadband Internet access can provide ample bandwidth and speed. Businesses that do more data sharing and use Web-based applications and require advanced connectivity are better served by wideband Internet access. For businesses that need a dedicated, scalable solution to meet growth and security requirements, there is dedicated Internet access. Start by talking with a solutions provider who can explain how each of these options works, and help you understand what level of power and speed you need to accomplish your business goals today and in the future.

Jitesh Bhayani is vice president of marketing for the Midwest Region of Time Warner Cable Business Class. Contact a Time Warner Cable Business Class account consultant at (877) 407-4260 to discuss your communications needs.

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 kstern@bswllc.com.

Private companies that create value have five things in common: They have a strong culture, a specific strategy, clarity in their business model, quality people and they meet certain financial markers that indicate whether the organization is successful, says Mario Vicari, director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.

“Decisions about who you are as a company, how you compete, your market position, how you organize your business model and the quality of your team are key factors in creating value for private companies,” says Vicari.

Smart Business spoke with Vicari about how these factors drive value and how private firms can position themselves to attract and retain capital.

How does a company’s culture impact its value?

Every company’s view of its culture is different, but ultimately, key leaders should answer these questions: What are you passionate about? What makes you different from other companies that provide similar products or services? What really matters to you at the end of the day? And, how do you make your core beliefs clear to employees? In essence, how do you walk the talk?

Culture and core values set the foundation of the firm and drive high-level decision making. Without knowing who you are and why you exist, a company lacks direction and has a difficult time gaining buy-in from stakeholders, including employees, vendors, clients and end-users. Before you can build a company, you must know what you believe in and who you are.

The highest-performing companies have this written down, and communicate it and live it with their employees. A strong culture is what binds the company together and makes it unique.

Where does a company’s strategy come into play?

A business must know its position in the market and how it can best serve the right customers. How will you compete in the market? What is the definition of a perfect customer for your business? How will you differentiate your company from others in your space? Will you compete based on price or value?

A company’s strategy is often linked to its history and has to do with its core strengths. Identifying what you are really good at and focusing on markets that play to your strengths are critical. Also, the best companies are crystal clear about the definition of an ‘A’ customer and focus like a laser on that target customer. Part of determining positioning is to identify the specific markets and customers you will serve.

It is important to be discriminating in making these choices. The best companies know that they can’t be all things to all people.

Why is the business model important?

The business model represents the way the company organizes itself to fulfill its strategy.  Ultimately, a business model answers the question, ‘How will you uniquely fulfill the promise of delivering value to the marketplace?’

It is about how the company organizes itself to execute its strategy. Do you fulfill the promise of what your culture says you should be doing, and how do you fulfill the promise you make to your customers? Once you know who you are and how you will compete, the business model outlines how your people and processes will achieve company objectives.

A business model is the coordination of activities within the business that addresses how you will go to market and deliver value to the customer.

How does a company get its people on board with the culture, strategy and business model?

Behind every strong organization is a group of talented leaders — a team. Often, private companies that don’t grow are hampered because the CEO is the smartest person in the room; they don’t hire people who are better than themselves.

In the best companies, CEOs surround themselves with very high-level skills in critical parts of the company and allow these people to lead.  Companies that create value are constantly assessing whether they have the right people in the right positions in the company, and whether each person is delivering his or her maximum potential.

Strong company executives make tough decisions when people aren’t performing. A business cannot execute plans without really strong people, and great companies are not afraid to make a change if key people are not measuring up.

What financial metrics indicate that a private company is creating value?

Ultimately, margins and cash flow drive value. These metrics indicate whether a company has strength in pricing and whether it is managed efficiently. If good margins and returns on sales are produced, the cost structure is solid and the business is likely in a niche where it can compete on a value proposition and not solely on price.

Other metrics that are important reflect efficient allocation of capital — return on equity and return on assets. The best companies can do more with less, and they are careful about allocating capital to get the highest returns on their assets and equity.

Capital is scarce and hard to create in private companies, which is why it is so valuable. The private companies that create the most value are discriminating in their capital allocation decisions.

Mario Vicari is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or mvicari@kmco.com.