The Check 21 Act, passed in 2003, had a dramatic impact on businesses’ cash flow by allowing banks to send digital versions of checks — eliminating the need for physical copies. Similarly, important developments are on the horizon to further enhance payment capabilities, says Tom Hoffman, senior vice president and manager of the Treasury Management Services Division at Bridge Bank.
“We’re seeing a lot of start-up technology companies focused on creating better ways to process payments, and adapters to allow accounting systems to interact with bank services,” Hoffman says.
Smart Business spoke to Hoffman about methods to help manage cash flow and services that may be available in the future.
How can a business tell what treasury management services might be needed?
A good banking partner should conduct initial assessments when clients start working with the bank, and also meet with clients on a regular basis to review needs.
For example, a growing business wanted to see if any changes could impact its treasury management needs. It had acquired a health insurance business in Southern California that processes COBRA payments, and payments were being mailed to central accounting at the company’s headquarters in Northern California. That’s a slow process. The business was able to set up a remote deposit capture (RDC) scanner to process checks electronically. There also are fields in the RDC platform for record keeping — for a payment of $100, the insurance company is paid $95 and $5 is kept for processing. Deposits are now made immediately, which speeds up cash flow and improves the flow of transaction data to the accounting system.
It’s a good idea to meet with your bank’s treasury management adviser at least annually to review your account. Look over the fees you’re paying, determine whether the services are worth the cost and see if there are other services you could be using.
Do businesses often pay for services that aren’t utilized?
It happens all of the time. There might be a base charge for Automated Clearing House (ACH) service and no activity. Maybe the business thought it was necessary, not realizing that if you’re not the party originating the ACH transaction, you don’t need the service. That can be confusing to many people. One of the benefits of treasury management consultation is that your bank should catch these oversights and alert you to save your business money.
How can business owners benefit from new solutions on the horizon?
Many start-up technology companies are working on adapters to create better ways to use existing payment rails such as the check clearing system, ACH, ATMs, and debit and credit cards. If you’re overseas, you can use your ATM card at a bank in London; so, why can’t you send a payment to an international vendor through this network and have an immediate settlement?
Technically, it can be done, but there are a lot of issues — international transfers are done through the Office of Foreign Assets Control. However with such efficiency, those things will be addressed. It can take two to four days to send a wire transfer internationally. It would be attractive to deliver a system to settle that immediately.
In terms of treasury management, the next step is to integrate enterprise resource planning systems with banking services. That’s already happening at Fortune 500 companies. The future is finding technology to create adapters that will connect the company’s banking services with its accounting platform. Businesses will be able to evaluate cash needs and reconcile the accounting system on a daily basis, rather than waiting for paper statements. It’s just a matter of creating an interface with whatever accounting software is being used.
One start-up company has a platform to upload accounts payable — all of the invoices a business receives — so payments can be reviewed and approved via tablet. CFOs want the ability to see every invoice and approve payment, even when traveling.
We’re going to see a lot of innovation. It might not be as dynamic as a new payment system, just modifying the ways existing systems are used to make cash flow more streamlined and free up working capital. Check 21 was a good example of that, and the efficiency, economic and environmental gains were tremendous. ●
Insights Banking & Finance is brought to you by Bridge Bank
Some companies can’t afford or simply don’t perceive the need for in-house legal counsel. However, many are seeing the benefits of using outside legal help regularly, rather than when a problem is at hand, says Enrique Marinez, a partner at Ropers Majeski Kohn & Bentley PC.
“Smaller and midsize businesses need to be proactive and preventative in addressing issues that could lead to litigation problems. The role of general counsel should be one of collaboration and proactive planning to address some of those eventualities before they become problems,” Marinez says.
Smart Business spoke with Marinez about how to best utilize outside counsel to provide a level of service that replicates having in-house expertise.
Why has the role of outside counsel changed?
There’s been a proliferation of the use of electronic media and technology, which brings additional challenges that not all companies have kept up with. One problem that’s prevalent now concerns the handling of electronic media — how to store backup tapes and how often backups should be run. Companies need to have polices and procedures in place to put holds on emails and electronic information when a claim or other circumstance arises.
Another problem area is dealing with employee complaints. You need to have policies to address complaints about the workplace environment — someone claims they’ve been sexually harassed or discriminated against because of age or race. There should be a procedure for how to investigate claims.
Other employment issues can range from someone not being paid proper overtime, providing for proper meal and rest breaks or items like smartphones. If you send employees work-related texts, should you be paying for the phone?
If you have policies and procedures to guide you through these issues, you can follow those when a problem arises rather than responding in the heat of the moment.
Can’t these policy needs be determined by meeting with counsel on a regular basis?
Exactly. Risk management should be part of every company’s business plan. Part of that is meeting with a legal professional who can guide them so they’ll be better positioned when a problem arises. That should be on the agenda at meetings.
Often, counsel attends board meetings or company leaders visit to address issues such as policies and procedures for handling complaints and other employment issues. Believe it or not, there are a lot of companies that do not have employee handbooks.
Meet with counsel on a quarterly basis to make sure risk management procedures are in place and to ensure you have proper liability insurance, including directors and officers, and employment liability coverage. Make it part of the business plan to discuss preventative measures, so you’re better able to address situations as opposed to being reactive.
Do companies just not think about using outside counsel that way, or is it that they don’t want the expense?
It’s a little of both. Some people think that you use a lawyer only when you have a problem. But much of the problem can be ameliorated on the back end when there are preventive measures taken upfront. And, yes, there is a cost, but it’s often much less than waiting until a problem requires litigation. For example, if you don’t change your car’s oil, then the engine blows out and you’re paying $3,000. That type of analogy fits exactly for the use of outside counsel.
Plus, establishing an ongoing relationship with a law firm provides additional benefits. Counsel has experience dealing with other companies and exposure to how they have addressed employment issues. For example, a multiservice firm deals in many different disciplines and can help with insurance issues, obligations in real estate contracts and things of that nature.
Outside counsel should be viewed as an extension of your company that can provide assistance similar to in-house. It’s unfortunate that many companies don’t have a dedicated attorney to work with them and only seek legal assistance when there is a problem. When you reactively act on the defensive, things do not go as well as they could. Address issues head-on before they become the subject of litigation. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
While brick-and-mortar stores add apps to reach customers on tablets and smartphones, e-commerce retailers are exploring ways to establish traditional storefronts, says Frank Kaufman, a partner and National Retail Practice Leader at Moss Adams LLP.
“The hottest topic these days is the omnichannel approach. Retailers want to engage customers at all points,” says Kaufman. “It’s about how you push information to consumers. That could be through text messages, social media, or signing them up for a geo program so you can identify their location and send a coupon to their phone when they’re near your store.”
Smart Business spoke with Kaufman about retail trends and the impact the Marketplace Fairness Act could have on the industry.
What does it take to implement omnichannel retailing?
Historically, brick-and-mortar stores were slow to embrace the Internet until there was a compelling argument to do so. It’s now evolved to a scenario where you have multiple avenues to engage the consumer at all points.
People are buying merchandise using smartphones, they don’t need to use a computer. With that in mind, how do you push information to consumers? It’s not just through traditional ads, but also texts and tweets.
Walgreens conducted a study that illustrated the effects of omnichannel. They measured annual sales at a base of $1 for traditional customers at stores. They found when that same customer goes online at some point to place an order, that goes to $2.50. And if they can get that person to load an app on a tablet or smartphone, that customer spends $6.
They go even further by giving the app the ability to map out the shortest distance to walk to find items in the store. Shoppers can get curbside service as well.
Pacific Sunwear enhanced the shopping experience by giving sales associates tablets. If a customer likes a garment, the associate can pull up a dozen other items that go with it and find them for the customer. Sales made through the tablets increased 50 percent over purchases at the registers. It’s all about giving extra value for someone coming into the store, making the experience better.
Why are e-commerce businesses interested in opening brick-and-mortar stores?
Even Amazon.com has said it’s going to find locations. One trend is buy today, have today, where you can buy online and pick it up at the store. It comes down to serving an immediate need. Even with Amazon Prime and free shipping, Amazon still can’t get items to the customer today. But the online retailer said it will not move forward until developing a model that’s different and unique to Amazon from the customer experience standpoint.
What impact will the Marketplace Fairness Act have on the retail industry?
The act, which requires online and catalog retailers to collect sales tax at the time of transaction, will ultimately pass; it passed the Senate in May and the House has it. The challenge is not getting agreement, but how to put it into effect. It’s not about having 50 states, it’s really 680 different jurisdictions and trying to determine where a sale has occurred and who gets the tax revenue. A company in California sells an item to someone in Ohio and it’s shipped from a business in New York — who made the sale?
However, what we’re finding is that it will not alter purchasing habits significantly, except for high-priced items involving $200 in sales tax or more. Studies show the impact on buying decisions is ridiculously low, less than 2 percent. Amazon went along because it knows it doesn’t matter — the convenience it can provide makes sales tax a non-factor.
It’s going to be a zero sum game because people will spend at the same level, it’s just that a portion of the funds will be redirected through the government channels and more money will go into local communities.
Whether consumers buy online or in stores, they are doing their homework. About 50 percent of purchases in stores have been researched online. It’s all connected. The goal for any consumer product company is to get an app on a smartphone, the device people have with them 24/7. Then combine that with a store where they can get it now. ●
Insights Accounting is brought to you by Moss Adams LLP
It used to be that buyers would send out purchase orders with standard terms and conditions, and sellers would ship the product with invoices containing their own conditions. Now that more business is conducted online, conditions are agreed to by click-wrap — clicking a box to accept the terms of the website.
That causes problems when employees wind up agreeing to terms that greatly benefit the seller or supplier to the detriment of the purchaser, says Todd C. Baumgartner, a partner at Brouse McDowell.
“For whatever reason — it might be psychological — there is a lot less negotiation with terms and conditions on websites. It’s important to know what you’re agreeing to, and negotiate if you need to protect your interests,” Baumgartner says.
Smart Business spoke with Baumgartner about how to handle click-wrap agreements and potential problems when they’re agreed to without proper review.
How are differences resolved when buyers and sellers have different terms?
The Uniform Commercial Code has standard rules to follow when that happens. But what’s occurring now is that, General Electric, for example, uses a website instead of putting terms and conditions on the back of invoices. There is no paper going back and forth. GE has the clout to pull that off — companies will just accept the terms in order to be GE’s supplier. But you can negotiate terms and conditions on websites.
A 2002 case, I.Lan Systems Inc. v. Netscout Service Level Corp., demonstrates what can happen with these click-wrap contracts. The buyer, I.Lan Systems, negotiated an extensive software license agreement with all sorts of protections. However, whenever there was an update to the software, it was downloaded from a website by the IT department. Every time that happened, they downloaded a new license agreement that voided the prior one. The new agreements were skewed in favor of the software company, stating that it was not responsible if the software crashed the computer system. When that happened, there was fairly extensive damage, but the court ruled the software company was only liable for the original purchase price.
It’s critical that companies understand every time an IT employee clicks these buttons, they’re getting a new software licensing agreement whether they realize it or not.
What’s the best way to deal with click-wrap agreements?
Don’t just click boxes. Have the head of the IT department review everything, and set up a policy in-house with appropriate procedures so these matters are presented to the right decision-makers.
If there’s something in the agreement that’s not acceptable, depending on your leverage, you can tell the software company you’re not doing click-wrap updates or negotiate an agreement covering the updates.
Click-wrap agreements are not necessarily a bad thing for the buyer or seller, but it’s important that it’s mentioned in bold at the bottom of your invoice or purchase order that the terms are on the website. The seller also needs to keep track of the terms and conditions it had. Then, if a company comes back later and claims it didn’t understand the terms, or didn’t know what was agreed to, sellers can produce what was on the website two years ago.
What sort of problems can arise years later?
Many times disputes are about specifications that the product was supposed to meet, and if it didn’t meet those specifications, what damages might be involved. As a supplier, you want to limit your consequential damages to replacing the product. A buyer will argue that it lost revenue as a result of the defective product. If the agreement doesn’t have the proper damage limitation, it’s going to be a problem for the supplier.
Are purchase agreements done differently online?
Essentially they’re set up the same way; it’s just that people are less likely to negotiate something that’s on their computer screen. Companies will still ask for changes to terms and conditions on a website, but the number of requests for changes drops substantially. Everyone’s classically conditioned to review a contract in Microsoft Word line-by-line; as businesspeople we’re still catching up with the fact that websites can be changed. ●
Insights Legal Affairs is brought to you by Brouse McDowell
Problems with the launch of the federal health insurance exchange website are removing it as an option for many employers and employees this year.
“How can I advise someone whether to enroll in an employer plan or buy from the exchange when I can’t get on the exchange to make a comparison before the employer’s open enrollment period is up? For the 33 states with a federal hand in operating the exchange, it’s nearly impossible to get any data,” says Paul J. Baranowski, CLU, ChFC, team leader in Account Management at Benefitdecisions, Inc.
Smart Business spoke with Baranowski about strategies to consider in the wake of the problematic launch of the exchange.
How are health plans changing as a result of the exchange?
On the employer side, there’s a stronger move toward defined contributions, providing a set dollar amount and letting employees chose their plan. In the past, there was concern this approach might be too hard on employees with families. It’s easier now for companies to make this transition because the Affordable Care Act (ACA) can be cited as a reason for change.
For larger-sized employee groups, cost increases are still primarily driven by the group’s own claims experience. However, many small to midsize, fully insured employer groups are facing sizable premium increases due to insurers’ expectations of an influx of less healthy people coming on the books, pass-through ACA fees and less flexibility in underwriting methodology. These employers may have little choice financially but to move to something like defined contribution plans.
From a regulation standpoint, a defined contribution plan potentially sets up a method for allowing family members to get subsidies to purchase coverage through an exchange, once ACA is revised to accommodate this. Clients in the hospitality, restaurant and retail businesses are moving toward plans that are purposefully unaffordable — the plan meets minimum coverage requirements but is too expensive, so employees go to the exchange and get a subsidy. Because these industries have a high degree of turnover, the business risk of paying $167 for every month an employee is on the exchange is a fairly low liability.
Exchanges are also giving an extended life to employers putting in a health reimbursement account (HRA) underneath a high-deductible health plan. While employers need to be careful about some new restrictions, and the HRA has to be integrated with the medical plan, this can mitigate employees’ costs while reducing total employer fixed premium costs.
In addition, there’s a strategy that involves offering a plan with minimum essential coverage, which can mean providing unlimited preventive-care-only coverage. This would push employees to get coverage through exchanges and qualifies them for the subsidy.
When do you expect the problems with the exchange will be worked out?
It will take several years to bring stability and less complexity to the market. With all of the uncertainty, plus ACA medical loss ratio rules, carriers won’t take the risk of selling underpriced plans since they’re no longer allowed to recoup losses.
Unfortunately, this means no real price advantages just yet to employers purchasing health coverage, whether in or out of exchanges. There still isn’t any serious movement on affecting the cost of health services and changing behavior at the individual level, but at least there will be more plan choices to give to employees.
On the flip side, reform has several positive advantages. It’s a huge plus for people with preexisting conditions who had been denied coverage, particularly the many small business owners or sole proprietors who previously had to make tough life decisions, such as putting off retirement, because they couldn’t get a decent health plan. This also has closed the door on what once was a possible problem when switching employers.
Although some positives exist, nothing in health care is free — that’s being clearly demonstrated. As a result, even small employers need to explore all possible strategies, keep up on the continuous regulatory changes and be ready to consider doing something unconventional. ●
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.
First, the Small Business Health Options Program (SHOP) health insurance exchange was delayed. That was followed by a delay in the release of community ratings for small group programs. On top of that, there’s confusion about whether businesses with less than 50 employees, which are not governed by the Affordable Care Act (ACA) mandate to provide health insurance, can utilize health reimbursement accounts (HRAs) to buy individual coverage.
“The ACA places significant limitations on HRAs, and they are the only vehicle these companies have to distribute dollars employees can use to pay for premiums. The question is whether businesses that are exempt from the mandate are impacted by other aspects of the ACA. There will need to be some guidance as to whether it applies,” says William F. Hutter, CEO of Sequent.
The delays and uncertainty have left small businesses with few options for health insurance at a time when they need to finalize plans for 2014.
“That inherently creates a violation of rules because there’s a 60-day notice requirement to inform employees of any plan changes,” Hutter says. “We think the notice will be interpreted so that companies might be able to make a plan change, but not a cost change — the employer would have to pick up any difference. But that factor also has to be determined.”
Smart Business spoke with Hutter about problems with the rollout of the ACA exchanges and how reform continues to affect businesses of all sizes.
Should the 19 million people who were told their coverage was terminated have been surprised?
That was known back in 2010; it was written about. Plans were cancelled because the ACA changed requirements for insurers and the plans they provide. Plans are not only registered on a federal level but also on a state-by-state basis. Each state has a department of insurance to oversee plans and rate structures. A carrier needs to meet new requirements under ACA and state mandates, but when a plan design is changed, it is no longer grandfathered. It has to be terminated or withdrawn, and a new plan is submitted and approved. Whether this will be true going forward is uncertain.
If you are self-insured, the opportunity to keep the same plan is greater. Companies that self-insure can continue their plans as long as they don’t make significant changes.
Are self-insurance plans exempt from many ACA requirements?
Yes, that’s why companies have been exploring the option of self-funding arrangements. It’s a strange set of rules, but you can choose to cover or not cover certain things as long as they aren’t considered minimum essential coverage requirements. However, you can’t do it in a limited way; you can’t decide to cover autism, but only up to $10,000 a year. You have to choose to not cover it or cover it completely.
What self-funding does is create more predictability for companies because they purchase a stop-loss policy to limit their liability. Health insurance costs will continue to rise because of an aging demographic. The plan design can help keep increases to 4 to 6 percent annually instead of 30 or 40 percent.
Is that option also available to small businesses with fewer than 50 employees?
It can be, although you can’t do it like a big company would because a small employer doesn’t have the numbers to mitigate the risk of large claims.
Self-insurance is a design plan issue. Being self-insured with a specific stop-loss point might work. If you have 30 employees, you can have a stop-loss of $10,000 each. Then you need to figure out your actuarial funding for it and reserve that amount to pay for claims and expected losses. If you have a healthy group, it makes sense.
Small businesses also can join a pool for health insurance. That’s a service HR consultants or chambers of commerce provide, through an aggregation model, for clients or members to get health care. They don’t provide health care but establish a contractual arrangement with a company that does.
But the problem with the ACA is that new information is coming so quickly, and it takes months to rethink your health insurance strategy. This will continue to be difficult for companies to work through. ●
Insights HR Outsourcing is brought to you by Sequent
Even with the proper insurance coverage, recovering from a disaster can be difficult for businesses that have not thoroughly prepared for the rebuilding process. Disaster plans and insurance money may not be enough to save a company that hasn’t tested its ability to address a crisis.
“Yes, there’s insurance to protect against a disaster, but what happens after the catastrophe occurs? It’s great to have a written plan in place, but if you don’t do a trial run or an audit of the plan, how do you know it’s going to work?” says Derek M. Hoch, president of Leverity Insurance Group.
Smart Business spoke with Hoch about the basics of disaster recovery and how insurance supplements the planning process.
What is often overlooked in terms of disaster planning?
Both business owners and key employees can become complacent because there is a plan in writing; they assume it will automatically work. Employees read the plan, understand their role, then over time there is no refresher about what they specifically need to do in that job function if a disaster were to occur.
From an insurance aspect, it’s easy enough to get monetary relief and rebuild if you insure the building structure and business personal property. What often gets overlooked is business interruption, or business income coverage. This is a major component in any businesses risk management program. It represents the economic loss, the potential loss of key employees, ongoing payroll and utility expenses, as well as any extra expenses that you normally wouldn’t have if the disaster didn’t occur. There are a lot of variables that business owners do not think about until after a disaster, and those costs are often overlooked and underinsured.
The problem with business interruption insurance is that it’s a difficult number to determine. There are business income worksheets and calculations that can be made, but it’s not a static number like replacing a building, which has a specific dollar amount.
What is necessary, once the written plan is in place?
Companies will put the plan in writing and explain it to employees, but never conduct a test because they don’t want the disruption to their business for a half or full day. A catastrophic event could occur at any moment. You may need to shut the business down in order to:
- Test the facilities.
- Make sure employees relay the proper information to the correct people or authorities.
- Confirm anything done off-site to back up systems is in place, and you’re not losing valuable information and data that would compromise the sustainability of the operation.
Companies don’t want to disrupt their businesses. What they don’t realize is that one day off to test their plan could potentially save them thousands or even millions of dollars.
Why is it vital to reopen quickly, and what can businesses do to speed up the process?
Unless you’re in a niche industry, planning for a disaster is vital because you will have competitors able to come in and supply your customers when you are shut down. This is the equivalent of business death, because the longer it takes, the more customers and employees will go elsewhere.
Your insurance broker/risk manager should sit down with you and — just as you do regarding the physical structure and assuring adequate coverage — walk you through the potential disasters that could happen and help formulate what necessary steps to take to ensure sustainability. It’s really a team approach, asking open-ended questions and letting the business owner talk about their business, so a plan can be instituted. This plan will complement the other forms of insurance coverage you purchase to protect the rest of your business.
You can try to prepare for everything, but having a plan in place and practicing it at least annually can help get you back up and running earlier in the event of a disaster. ●
Insights Business Insurance is brought to you by Leverity Insurance Group
As we emerge from the worst recession in memory, employers are cautiously rebuilding their workforces. Many long-term unemployed are starting to get interviews and offers, and some are seeing a new wrinkle: credit background checks.
Those checks might unearth financial problems that would cause an employer to reject a candidate. But beware of the Fair Credit Reporting Act (FCRA), the Consumer Credit Reporting Reform Act and additional state laws.
It is important to protect the company’s bank account by ensuring that access is limited to those who can be trusted. So how can you tell for sure? While there is no fail-safe guarantee, credit background checks can raise red flags early in the process.
“The wisest course for employers is to make the best hires they can, using all of the legitimate, nondiscriminatory information accessible to them within the law,” says Karen C. Lefton, a partner in the Labor & Employment group at Brouse McDowell.
Smart Business spoke with Lefton about her recommendations on conducting credit background checks.
What steps should a company take as it makes hiring decisions?
1) Get the candidate’s consent for the credit check in advance and in writing. Work with your attorney to create a clear consent form. It should state that the candidate acknowledges and agrees that the consumer-reporting agency will furnish a report to the employer, and that the employer intends to use the information for employment purposes.
2) Engage a reputable consumer-reporting agency, one well versed in the limitations of the FCRA, to conduct the review.
3) Provide the agency with reasonable criteria for its review, such as verification of the applicant’s Social Security number, balances totaling $2,000 or more that are at least 60 days past due, lack of credit, current garnishments on earnings, overdue child support or other outstanding collections of $2,000 or more.
4) Make sure the report is limited to the criteria sought. If the search turns up information that the employer should not know about — the candidate’s disabled child, for example — that information should be withheld to insulate the employer from any allegation of discrimination in the hiring process.
5) Before taking adverse action, provide the candidate with written notice that a copy of the report is available, as is a summary of his or her rights under the FCRA.
Keep in mind that errors occur. The ‘John Smith’ applying for a job may not be the same ‘John Smith’ with a horrendous credit history. Fairness requires that all candidates be given the opportunity to contest black marks. Only then can you ensure that hiring decisions are based on bona fide qualifications, or the lack there of. The hiring decision should be based largely on whether there is increased company risk, whether that risk is outweighed by the benefit of the candidate’s other credentials and the specific access his or her new position gives him or her to company funds.
Can credit checks be used as a basis to not hire or promote someone?
Yes, if you have followed the steps outlined. You are not required to hire a CFO mired in debt to collect your receivables or to pay your bills. Further, the FCRA does not distinguish between job candidates and current employees, meaning that consumer reports may be used to evaluate a person for promotion, reassignment or retention. But, again, employees must give conspicuous consent to the performance of credit checks.
What should be part of a background check, and does it vary by position?
Good credit and sound financial history are absolutely essential when an employee has access to money, whether yours or a customer’s. And don’t be lax because the sums aren’t huge. A local library employee, fired after $350,000 was discovered missing, goes on trial for aggravated theft later this month, accused of stealing nickels and dimes regularly over six years. Criminal background and driving records also might be relevant. A history of violence or criminal behavior are disqualifying for employees working in secluded areas with customers or in the customers’ homes. A bad driving record can knock out a delivery position candidate. Employers must be vigilant to avoid putting customers, co-workers or the public in peril due to bad hiring decisions. ●
Find out more about Brouse McDowell’s Labor & Employment law services.
Insights Legal Affairs is brought to you by Brouse McDowell
A few simple steps you can take now will pay dividends when tax time rolls around next April, says Steve Gross, CPA, a partner at Skoda Minotti.
“Start now as opposed to waiting until late December and rushing to accomplish your goals. There are some very simple strategies you can follow now to reap the benefits when tax time arrives,” Gross says.
Smart Business spoke with Gross about tax tips, including a credit that is scheduled to expire this year.
What are some basic things to consider to reduce tax liability?
A few things you might want to look at are:
- Charitable contributions. Make any donations before the end of the year — you can put the donation on a credit card, even if the card payment isn’t due until January 2014, and still list the deduction in 2013. If you aren’t an itemized taxpayer, you may consider accelerating your 2014 pledges, whether that is one or several, to reach the totals needed to itemize and take advantage of the deduction. This also applies to pass-through entities; if you’re an owner of a partnership or shareholder in an S corporation, donations are deducted as a separate line item.
Another opportunity to realize charitable contributions is to donate unused or unwanted — but still in usable condition — household items and clothing to a qualified charitable organization. By doing so, you’ll get a deduction for the fair market value.
- Estimated tax payments. While fourth quarter estimated federal and state taxes are not due until Jan. 15, you could pay the state estimate by Dec. 31 and get the deduction this year.
You may also consider accelerating payment for your real estate taxes. Some taxpayers who don’t itemize every year because they don’t have enough in deductions can pay the entire real estate tax bill for one full year in January, and then again in full in December of the same year. This may help you reach the limit to itemize.
- Capital gains and losses. If you’ve sold stocks and had capital gains, it might make sense to look at your portfolio for any loss positions you might want to sell to offset the gains. The capital gains tax increased from 15 to 20 percent in 2013, and gains may be subject to the 3.8 percent additional Medicare tax on excess passive income.
- Energy credits. The residential energy credit, which technically expired at the end of 2011, was reinstated through 2013 and provides up to 10 percent of qualified expenses, up to a $500 lifetime limit, for the installation of energy-saving exterior doors, windows or air conditioners.
- Business property. Under Section 179 of the tax code, you may elect to deduct the cost of qualified business property purchased and placed in service during the year. The maximum deduction allowed for 2012 was $500,000, subject to a phase-out for acquisitions above $2 million.
Under the American Taxpayer Relief Act of 2012 (ATRA), these limits are extended through 2013. Absent new legislation by Congress, the maximum allowance will plummet to $25,000 in 2014. The ATRA also preserves 50 percent bonus depreciation on any remaining cost of qualified property your business places in service this year.
The bonus depreciation tax break is generally scheduled to expire after 2013.
Are these things you should be reviewing every year?
Yes. In addition, pay careful attention to the fair market value of the non-cash charitable contributions. Many organizations provide guidelines for establishing the fair market value of used property.
Tax rates are not changing in 2014, but when there is a major change in rates, depending on which way they’re going, that might influence what you do in a particular year. Your tax adviser should be in-step with the changes in tax law and if they will affect you. It would be impossible for any taxpayer to fully understand the variety of scenarios, given the complexity of ‘if/then’ situations surrounding deductions. ●
Find out more about Skoda Minotti's tax planning and preparation.
Insights Accounting & Consulting is brought to you by Skoda Minotti
At first glance, dropping health insurance for employees and sending them to the exchanges sounds like a win for everyone. Companies can give raises to make up the difference for employees, who then buy insurance for less, and everyone saves money.
But that’s not the result when you factor in all of the numbers, says William F. Hutter, CEO of Sequent.
“Drop your health insurance and give employees the same money is the mantra we keep hearing. It is not a simple decision and should not be treated as such for middle-market companies,” Hutter says.
Smart Business spoke with Hutter about the costs associated with this decision, and its potential impact on your business.
Would companies rather not worry about health insurance because of its volatility?
Companies are tired of thinking about health insurance; it’s becoming another distraction away from their business. Of course, that’s just considering cost and not taking into account the cultural issues involved with the perception of whether you’re taking care of your employees.
For example, a client was advised that it could save money by sending everyone to the exchange and just giving employees raises. That has proven to be a fallacy. When you review all of the numbers, the savings are not there.
The company has 109 employees, and 79 are covered by the health plan. It has a high deductible, so the company contributes to a health reimbursement account (HRA) for employees.
Basic costs of the plan are:
- Total insurance premiums — $653,000.
- Company share — $522,400.
- Employees’ share — $130,600.
- Company HRA cost — $200,000.
- Total cost to company — $722,400.
Dropping insurance and giving those employees $7,500 in raises each — a total of $592,500 — would appear to save the company $129,900. But you have to consider the total cost impact, including deductible burden, taxes and penalties.
What are the tax implications under this scenario?
Because of the loss of the pre-tax deduction, employees and the company both pay more in taxes on the $592,500 in raises — $199,937 by employees and $73,395 by the company.
There’s also an Affordable Care Act (ACA) penalty of $114,000 the company would be required to pay because it would no longer be a health plan sponsor. And now the employees also are paying all of the plan deductible, so that’s another $158,000, assuming a $2,000 deductible.
When you consider all of those factors, the total cost is $779,894, or about $57,000 more to not offer health insurance. When shown the entire picture, the client was blown away.
Are there other variables to consider, even if dropping health insurance for employees made financial sense?
In addition to how it would be perceived by employees, there’s a concern about making a decision based on the short term. Organizations need to think more strategically, rather than looking just at how to fix a current problem.
No one knows how the exchanges are going to shake out. They are getting a tax subsidy for the first two years in the form of a $62 annual tax on every employee covered by an insurance carrier outside of the exchanges. In theory, that provides a pool of money carriers can draw on until the exchanges find their own balance regarding enrollees, costs and risks. That could result in a significant increase in premiums in two years when the subsidy goes away.
Also, you want to be cautious about dropping insurance and giving up the tax advantage of sponsoring a plan because it’s difficult to go back. That’s really the objective of the ACA — it’s a revenue enhancement bill rather than a health care bill. That goes back to the 2005 study by Sens. Max Baucus and Chuck Grassley, which flowed right into health care reform.
This analysis and case study is a dramatic illustration of how the changes written into health care reform are really about closing tax loopholes. Companies may be better off keeping the tax advantage of health care for themselves and their employees by providing access to predictable health care coverage. ●
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