During the next two years, there are things that employers need to know and need to be doing to comply with the Patient Protection and Affordable Care Act.
“While this was working its way through the Supreme Court, many were holding their breath waiting to see what would happen,” says Dale R. Vlasek, a member and chair of the employee benefits practice group for McDonald Hopkins. “The decision is that it is constitutional, which means that businesses must take action.”
Smart Business spoke with Vlasek about the changes businesses need to be aware of as health care reform takes effect.
How does the ruling play out for employers?
The Supreme Court determined the individual mandate — the requirement that all U.S. citizens have health insurance — and imposing a penalty or tax on those who do not purchase insurance is constitutional. Large employers effectively face a similar mandate, called shared responsibility, or ‘pay or play,’ that goes into effect in 2014, requiring that they offer a health care package that is affordable, limits an employee’s cost sharing and provides essential benefits, or the employer must pay a penalty.
Large employers are those with 50 full-time employees who worked at least 30 hours per week during the previous year. To determine if your company fits this description you should add up all the hours worked by full- and part-time employees and divide that total by 2,080. This could show that you qualify as a company with more than 50 employees and that you must provide your employees with the opportunity to participate in your benefit package or pay a penalty.
How will the mandate affect the benefits offered?
Medical benefit packages must offer a certain level of coverage. There should be a limit on cost sharing in terms of deductibles and co-insurance, and it must be affordable, which means the amount an employer can expect an employee to pay in terms of premium costs. The way the law is written, premium costs can’t be more than 9.5 percent of an employee’s household income. That can be difficult for an employer to determine, so the IRS allows employers to work from an employee’s W-2 income statement.
If the employer chooses not to offer benefits, it will pay an excise tax that is $2,000 per year, multiplied by the number of uninsured full-time employees. The employer can, however, subtract 30 employees from the total who are uncovered, leaving it to pay penalties only on the remaining
If an employer is offering coverage that some can’t afford, those employees could get into a health care exchange or potentially be eligible for subsidies or tax credits to help pay for coverage. The employer then must pay an excise tax, but only on those who are eligible for the tax credit or
How else might existing benefit plans be impacted?
Insured plans previously had no discrimination rules from a tax perspective, so, for example, you could have a plan that only covered executives. However, health care reform changes that. You can’t be discriminatory and you may need to cover broader classifications of people. This component has been put on hold while the IRS, the Department of Labor and the Department of Health and Human Services write regulations that outline how companies must comply.
Plans that were grandfathered — or those that have been in existence since March 23, 2010 or earlier and that haven’t changed, can continue to operate as they did, even if, under the new law, they could be considered discriminatory. But as the insurance industry moves to provide better benefits and makes changes, these plans are being redesigned and companies may have a difficult time remaining grandfathered.
Will flexible savings accounts face changes?
Previously, there weren’t any limits on how much pretax money employees could defer into FSAs, but the accounts are ‘use it or lose it’ so if the employee didn’t use the benefit the employee lost it. As a result, employees had to look ahead and figure out how much they might need to spend within a year.
Starting in 2013, there is a cap of $2,500 on FSAs. Employers will need to amend their plan documents and the IRS has issued guidance that says this can be done by 2014, as long as it operated in accordance with the law in 2013.
What will change from an administrative and reporting perspective?
For 2012, employers must report on W-2 forms the cost of the health benefits being provided to an employee. Initially, this requirement is limited to employers that issued at least 250 W-2s in the prior year, but eventually all companies will need to comply. On W-2s issued for 2012, companies must put in the actual costs, and for employers that are self-insured, they are required to put in the COBRA cost. There is concern that this is the first step toward making benefits taxable or using the information to determine who should pay a penalty for lack of coverage.
Also, the law requires employers to issue a summary of benefit coverage, a four-page paper that presents key features of the plan, the benefits, cost sharing and an explanation of what it pays for in three common claims scenarios. It also highlights deductibles and copays, who to talk with for more information and a glossary of common terms or a link to a website with that information.
The best strategies for employers is to begin examining their plans to ensure that they are in compliance when the new rules take
Dale R. Vlasek is a member and chair of the employee benefits practice group for McDonald Hopkins. Reach him at (216) 348-5452 or email@example.com.
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In today’s electronic age, Personal Information (PI) and Protected Health Information (PHI) are being stored on multiple technological devices. Data security is increasingly a concern as companies have become targets for people, both internally and externally, misappropriating private information.
“What is most important in the data privacy arena is for your organization to partner with vendors that have significant experience advising clients on best practices, security and storage policies that deal with data breaches, while complying with state and international data security laws,” says James J. Giszczak, a member at McDonald Hopkins. “This area of law is rapidly changing and it’s critical that the complex privacy laws are both understood and followed.”
Dominic A. Paluzzi, an associate attorney with McDonald Hopkins, says, “More than 562,943,732 data breaches have been reported since 2005, according to the Privacy Rights Clearinghouse. Of course, many have gone unreported, so this figure is more than likely three times higher.”
Smart Business spoke with Giszczak and Paluzzi about data security in the age of technology.
What information is protected and who is impacted?
PI refers to an individual’s name, coupled with a Social Security number, driver’s license number, credit card numbers, credit report history, passport number, tax information or banking records. PHI refers to medical records, health status, provision of healthcare and payment for healthcare.
Every industry is at risk when it comes to data privacy, but some are more critical, such as billing, education, insurance, staffing, health care, retail, manufacturing, accounting, financial services, legal, pharmaceutical and government/military.
Are there certain privacy laws and standards with which organizations must comply?
There are at least 35 federal laws that outline data protection or privacy protections. Forty-six states, the District of Columbia, Puerto Rico, the Virgin Islands and numerous foreign countries have legislation requiring notification of security breaches involving PI and/or PHI. It is where the affected individual resides that determines the applicable notice law.
Many of the regulations include significant penalties for failure to comply. For example, there can be up to $750,000 in penalties to a company for failure to notify affected individuals; $10,000 per violation for officers/directors personally; private civil actions for instances of non-compliance, including punitive damages and attorneys’ fees; and even prison terms of up to five years.
How can an organization minimize the risk of a data breach?
It is critical to have a comprehensive approach to data privacy and network security to limit risk and exposure. For example, a Written Information Security Program outlines an organization’s privacy policies and procedures. It sets forth the various steps your company has taken to secure PI, PHI and confidential information contained in both electronic and hardcopy form.
An Incident Response Plan is the ‘go-to’ document that identifies the appropriate internal and external resources to properly deal with a data breach. It sets forth an Incident Response Team, which is a group of decision-makers, both within and outside an organization in legal, IT, risk, human resources, marketing and public relations.
Be sure to have carefully drafted confidentiality agreements for employees, vendors and visitors to protect PI. Few confidentiality agreements encompass employee or vendor obligations regarding PI and PHI privacy. An indemnification provision can be very helpful in protecting an organization from an employee or vendor whose negligent or intentional acts result in a data breach. In that case, the company can look to the employee or vendor to recover losses incurred when it must notify affected individuals, attorneys general and other state and federal agencies of the breach.
Your company can also reduce the likelihood of an internal data breach by having appropriate IT and electronic policies as part of your data security and asset protection program. These can include a social media policy; computer usage policies that cover cell phones, USBs, laptops and personal devices; a document destruction and retention policy; and a telecommuting policy.
Organizations can purchase coverage from most of the major insurance carriers for third-party liabilities, such as disclosure of employee PI or patient PHI, both through a computer network or off-line; invasion of privacy; defamation; and security or privacy breach of regulatory proceedings. Security and privacy insurance is also available for first-party coverage, such as business interruption, costs to restore or recreate data or software resulting from failure of network security, forensic costs, ID theft resources, credit monitoring and costs associated with statutory notification requirements.
What needs to be done in the event of a data breach involving PI or PHI?
- Gather the Incident Response Team.
- Call your insurance agent, law enforcement and an experienced data privacy attorney to maintain privilege.
- Assign a breach coordinator.
- Preserve evidence of the breach and secure IT systems.
- Determine whether breach notification letters need to be sent, who should receive them, when should they be sent, what should they say or not say.
- Offer credit monitoring to affected individuals and report the incident to credit card companies and credit reporting agencies if applicable.
- Draft a press release and FAQs regarding the incident so affected individuals are well informed if necessary.
- Notify appropriate state attorneys general and other state agencies.
A comprehensive approach to data privacy and network security is necessary to avoid a data breach and is the best way to be prepared to respond to a breach when necessary.
James J. Giszczak is a member with McDonald Hopkins PLC. Reach him at (248) 220-1354 or firstname.lastname@example.org.
Dominic A. Paluzzi is an associate with McDonald Hopkins PLC. Reach him at (248) 220-1356 or email@example.com.
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Coping with government enforcement actions is disruptive, expensive and potentially crippling to your corporate image and brand. There is growing evidence that robust corporate compliance programs lead to lesser punishment. Nevertheless, many businesses lack proper internal controls and mishandle crisis situations, says Bruce Reinhart, member, McDonald Hopkins.
Smart Business spoke with Reinhart about the benefits of strong compliance programs and the consequences of breaking the law.
How has the enforcement environment for businesses changed in recent years?
First, the consequences of improper conduct have become more severe. Actions that traditionally were considered a civil or regulatory violation are now being prosecuted as a crime. More companies are being punished with debarment from government contracting and funding programs.
Second, the targets of these investigations have changed. We are seeing increasing prosecutions of corporate executives, officers and directors. Laws such as Sarbanes-Oxley created expanded individual responsibilities for corporate management. Failure to comply with these responsibilities can lead to civil or criminal enforcement action.
Third, the number of agencies with enforcement power is growing. As one example, there has been an explosion in the number of federal, state and local inspectors general whose mission is to ferret out waste, fraud and abuse in government programs. These offices have the power to conduct criminal investigations and financial audits. They can, and do, make referrals for criminal prosecution while also attempting to recoup money that they claim was misspent or misused.
Are there particular industries that are seeing more enforcement activity?
Hot enforcement targets are companies with international operations. The U.S. Foreign Corrupt Practices Act prohibits bribe payments to foreign government officials by U.S.-based companies or companies that have securities registered through the SEC. In 2010 and 2011, companies and individuals paid more than $2 billion in fines and disgorgements in FCPA settlement actions with the government. Like the FCPA in the U.S., the U.K. Bribery Act now creates criminal liability in the U.K. for bribe payments to government officials anywhere in the world. The U.K. Bribery Act is broader than the FCPA because it also provides criminal liability for commercial bribery. As businesses initiate or expand operations overseas, they increase their potential FCPA and U.K. Bribery Act exposure.
There is also increasing activity in the financial services sector. The U.S. Treasury Department continues to expand its requirements that lenders adopt anti-money laundering programs and other customer due diligence. Most recently, new requirements for residential mortgage lenders and residential mortgage loan initiators were enacted with an effective date of August 13. Failing to comply can be very expensive. For example, in August 2011, Ocean Bank in Miami, was assessed $10.9 million in civil penalties for failing to implement an effective compliance program and failing to properly train its compliance staff.
We also expect to see increased enforcement activity in the health care and government contracting sectors. The FBI and the Department of Health and Human Services Inspector General have made health care fraud a top priority. Fraud in minority and small business contracting processes is getting more attention. Other agencies are much more aggressive about tracking government funds and recovering waste, fraud and abuse. An additional wrinkle is the growth of whistleblower private enforcement suits alleging false claims to the government.
Are there tangible benefits from investing in compliance programs and aggressive crisis management?
Yes. For many years it was believed that robust compliance programs and cooperating in government investigations would mitigate punishment if some illegal conduct slipped through the cracks. In a recent case involving Morgan Stanley, the U.S. Department of Justice publicly acknowledged this for the first time. A managing director in a division based in China was criminally prosecuted for arranging a multi-million dollar bribe to a government official. Morgan Stanley was not charged. The Department of Justice said, ‘After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to [the managing director’s] conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.’
How does a business protect itself?
The first step is fostering a culture of integrity and compliance, which is not as easy as it sounds. In Ernst & Young’s 2012 Global Fraud Survey of senior executives at leading companies around the world, 15 percent of the 1,700 participants admitted they would use bribery to win or retain business, a six percent increase over the 2010 survey results.
Second, invest in compliance up front. Compliance is an integral part of an overall risk management strategy and there are many cost-effective ways to minimize compliance risk. Nevertheless, the 2012 Ernst & Young survey showed that ‘companies pursuing opportunities in rapid-growth markets face specific risks that are not always being managed effectively. For example, due diligence on third parties is expected by regulators but almost half the respondents (44 percent) reported that background checks were not being performed.’
Third, when a crisis happens manage it properly. Conduct a thorough investigation. Especially in crisis settings, better information leads to better management decision making.
Bruce Reinhart is a member at McDonald Hopkins. Reach him at (561) 472-2970 or firstname.lastname@example.org.
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Businesses today face a number of challenges in managing state and local taxes. States are struggling to meet budgets and are aggressively looking to find tax dollars by auditing, asserting nexus (filing requirements), or interpreting statutes/regulations in their favor, creating a risky environment for businesses, says John Trippier, director of multistate tax in the Multistate Tax Practice at McDonald Hopkins LLC.
“Businesses are at the highest risk ever of being contacted by state or local governments, yet their tax/accounting departments are being asked to do more with fewer people,” says Trippier.
Smart Business spoke with Trippier about what businesses can do to meet multistate and local tax challenges by focusing on the past, present and future.
What can businesses do about their past state and local taxes?
Businesses should analyze their activities and compliance in the past to determine if they are entitled to refunds or have potential exposure.
Businesses often overpay tax because tax laws are so complex, are constantly changing and are not uniform among states. Adding to that complexity, business personnel are often not adequately trained or equipped with the tools necessary to accurately make taxability decisions. Tax types commonly overpaid include sales/use, commercial activity, real/personal property and income/franchise. For example, most states have numerous exemptions from sales/use tax on purchases that are just plain missed.
Businesses should also analyze their past compliance to determine if they have underpaid tax. One common challenge for businesses is creating nexus in a state but not paying taxes to that state. In most states, no statute of limitations is running, so the state can go back to as far as when business activity began. Nexus exposure can also impact the sale of a business because a prospective purchaser does not want to assume this tax exposure.
Another common challenge is use tax. Businesses are subject to use tax if they do not properly pay sales tax on taxable transactions and must remit the use tax directly to the state. Keep in mind that not all vendors/suppliers are required to collect sales tax, thus creating a use tax liability for the purchaser. If you have not filed use tax, the statute of limitations may not be running and the state can go back to as far as when business activity began.
To mitigate potential tax liability, be proactive by filing a voluntary disclosure or participating in amnesty programs, if available. Most states will negotiate a favorable settlement of past exposure by allowing participation in these types of programs. States are becoming more aggressive and sophisticated with identifying audit targets. Audit leads are developed by using data mining to review tax-filing history to determine if a taxpayer was filing for one tax and not others.
If a business has been contacted for or is currently under audit, managing the audit process is the key to minimizing the potential liability and the disruption caused by the audit. Negotiating sample periods for what is to be sampled, determining whether to use statistical sampling, keeping the auditor focused and timely, determining taxability, negotiating tax issues, and analyzing auditor findings are all factors that need to be addressed when managing the audit process.
Some states, including Ohio, have implemented managed/participatory audit programs, which allow the business to conduct part of the audit to gain a better understanding of the tax issues and eliminate penalties and possibly interest. The states benefit because the business has a better understanding as to what is taxable for future compliance and the state has more time to audit other businesses. Businesses are approaching states to proactively request a managed/participatory audit when they are in a refund position, constantly being audited, or have never been audited.
Keep in mind that businesses should always review for overpayments when an audit is being conducted, because the state typically does not look for or calculate overpayments as part of its audit.
What can businesses do about their present state and local taxes?
Businesses should take the results of their analysis of the past and create compliance tools that help assist tax/accounting/purchasing department personnel with making accurate compliance decisions. The compliance tools can help limit the overpayments and underpayments and put businesses in substantial tax compliance. For example, a company could develop a matrix for the purchasing department so it knows the taxability of its purchases. A company may also consider setting up quarterly meetings with the sales department to ensure it knows where it is selling the products/services and what new products/services it is creating.
What can businesses do about their future state and local taxes?
As businesses are created and grow, the impact of state and local taxes on business operations is rarely considered. Businesses should consider whether their current operations can be restructured to put them in an optimal state and local tax position. Tax types commonly considered for tax planning include sales, use, commercial activity, income and franchise. Keep in mind that while the tax planning idea is important, the keys to any tax planning are actually implementing the strategy and monitoring the business activity to ensure continued tax savings. Businesses considering expansion or development of new products/delivery models should analyze the state and local tax impact of these activities to ensure proper future compliance. Additionally, businesses may be able to negotiate state and local tax credits or incentives for expanding or relocating operations in a particular location. Comparing potential locations and having the state and local jurisdictions compete for the expansion/relocation will often maximize the credits or incentives.
John Trippier, a non-attorney professional, is Director, Multistate Tax Practice, at McDonald Hopkins LLC. Reach him at (614) 458-0025 or email@example.com.
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World energy demand is exploding and the U.S. is no longer driving consumption and price. For instance, the U.S. could double the fuel efficiencies in all its cars and the amount of world oil consumption would continue to rise, says Michael W. Wise, co-chair of the Energy Practice Group with McDonald Hopkins LLC.
“Advocates exist for coal, gas, nuclear, wind, solar and many other sources of power, but the reality is that we will need all these energy sources,” Wise says. “Every year has brought new technology, changing economics and dynamic opportunities. For example, Northeast Ohio is in the running to build the first offshore wind project in North America.”
Smart Business spoke with Wise about how energy projects are driving the economy.
What is the biggest change in the energy landscape over the last five years?
Abundant cheap natural gas -— the source of this gas is in shale formations buried deep in the earth. Historically, this source of gas represented less than two percent of the total production in the United States. Today, the production percentage is approaching 30 percent. A few years ago, gigantic port terminals were being constructed and planned in order to import liquefied natural gas (LNG). Today, those terminals are being reconstructed to export that LNG.
Texas has led this effort with its Barnett Shale reservoir, which may be the largest reservoir in the United States. However, the eastern U.S. (including Pennsylvania and eastern Ohio) is now developing the Marcellus Shale reservoir and Ohio has begun to see abundant activity in its Utica Shale reservoir.
Cheap natural gas benefits our economy as it drives down the price of electricity. Old coal plants are being retired and in some cases converted to natural gas. Both these conversions and new gas-fired generation utilize more efficient turbines to provide cheaper electricity. Cheap natural gas also provides a cost break to homeowners who heat with gas and a break for large industrials that rely on gas as a component of their manufacturing.
Finally, the drilling and distribution of natural gas is revitalizing the economies of a number of states. In particular, Texas, Louisiana, Pennsylvania and Ohio are already experiencing transformational wealth accumulations.
Are there other unique ways that Ohio is positioned to capitalize on this development?
Yes, in the use of natural gas as a preferred transportation fuel. Large vehicles and some fleets have used compressed natural gas (CNG) and liquefied natural gas (LNG) as a fuel source for decades — but on a limited basis because of the volatility of pricing. With supply appearing firm for the foreseeable future, efforts are full speed to develop the CNG/ LNG potential. Just recently, GE and Chesapeake Energy announced plans to develop CNG fueling infrastructure. The utilities (Dominion and Columbia), gas marketers (IGS) and auto OEMs (Ford, Honda and Chrysler) are also active. Government is also addressing the issue as Governor John Kasich is working with the Ohio General Assembly on a series of incentives and Congress is considering adding CNG provisions to the Federal Highway Bill.
Ohio is at the crossroads of the CNG play because of the Utica and Marcellus Shale along with the existing auto supply chain infrastructure. No other state may be better able to take economic advantage of this opportunity.
What is an under-discussed component for developing a project?
For an electricity generation project, the basics have always included site control and site-related issues along with an adequate offtake or power purchase agreement. Today, many projects must also undergo sophisticated financial engineering in order to achieve financial viability. New projects often do not have adequate returns to proceed. A byproduct of cheap natural gas is a decrease in the price of base load electricity, and more expensive renewables and advanced energies like waste heat recovery and cogeneration become comparably more expensive. In a nutshell, how does $.08 power from a cogeneration project at a steel mill compete with $.05 power from a utility? Couple this with the increasing complexity of government incentives and you have a need for sophisticated professionals. Good counsel and financial advisers can help bring a project to fruition by taking advantage of tax equity, retail power pricing, complex capital leases, state and federal incentives and favorable treatment from a utility.
What is another new variable for developing energy projects in 2012?
The Investment Tax Credit has been a strong tool to finance renewable energy projects. From 2009 until the end of 2011, that program was a real game changer as a developer could choose to take a 30 percent cash grant in lieu of the credit. This allowed projects to move forward without a partner with the requisite tax appetite. With the expiration of the grant opportunity, there is once again the necessity of a tax appetite partner. This will put a premium on sophisticated financial engineering of these projects.
What is ‘hot’ in 2012?
New and converted gas fired generation. The utilities are moving into this space but a less-told story is that other types of companies are pursuing both cogen and independent power production. The goals are to take advantage of low natural gas prices, provide a long-term hedge against the return of higher electricity prices, and to also (where appropriate) provide for the steam needs of a facility.
Who is developing projects in 2012?
Homeowners are pursuing small solar and geothermal, companies are exploring wind and cogen and utilities are developing new gas fired plants and smaller renewable projects to meet their obligations under Ohio’s renewable portfolio standard. In short, anyone.
Michael W. Wise is the co-chair of the Energy Practice Group with McDonald Hopkins LLC. Reach him at (216) 430-2034 or firstname.lastname@example.org.
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If your company exports products or provides certain services abroad, you may be able to achieve significant tax savings by establishing an Interest Charge Domestic International Sales Corporation (IC-DISC).
“Despite the name, this tax saving technique is fairly straightforward,” says Mark D. Klimek, chair of the Tax Practice Group at McDonald Hopkins. “It is not aggressive from a tax standpoint or overly complicated from a legal or accounting standpoint. In fact, it’s not very complicated at all. An IC-DISC can be set up for a relatively low cost, which can easily be recovered in the first year of tax savings alone.”
Determining whether an IC-DISC makes sense for your company is as simple as looking at your export sales and profits on them and then comparing the tax savings versus the set-up costs. As for companies that already have an IC-DISC in place, Klimek says there are probably opportunities to achieve even greater tax savings.
Smart Business asked Klimek for more details on this tax saving opportunity.
How is an IC-DISC structured?
An IC-DISC is simply a separate corporation that is formed by the owners of an existing company (the ‘manufacturer’). The new corporation’s shareholders, which can be individuals or other types of business entities, make an election to treat the corporation as an IC-DISC. The IC-DISC is paid a commission on foreign sales by the manufacturer, and the manufacturer can take a deduction for the commission payment. This deduction normally generates a tax benefit of 35 percent to the manufacturer. The IC-DISC itself is a tax exempt entity; tax is paid only by the IC-DISC shareholders on dividends received from the IC-DISC. Currently, these dividends are taxed at the favorable 15 percent rate. Therefore, the tax savings occur because the commission arrangement between the IC-DISC and the manufacturer provides a corporate deduction (usually worth 35 percent) in exchange for the tax cost of a dividend to the IC-DISC shareholders (taxed at only 15 percent), generating a net tax benefit of 20 percent on the allowable commissions paid.
Is the commission limited?
Yes, the commission is limited under the IRS rules to a maximum of the greater of 4 percent of total export sales or 50 percent of profits from export sales. However, this is a very basic analysis and is really the minimum commission. A consultant can study a company’s product lines and gross sales figures and come up with very sophisticated ways to maximize the commission.
What are some of the requirements that must be met in order to qualify as an IC-DISC?
The company has to be a C corporation and can only have one class of stock. There must be an initial capitalization of at least $2,500. There is an election form to be signed by all shareholders and filed with the IRS. The IC-DISC should follow the normal corporate requirements of any other corporation There needs to be a commission agreement between the manufacturer and the IC-DISC. This commission agreement is normally flexible in terms of stating how the commission is to be calculated.
Please provide some estimates of the potential tax savings.
The tax savings depend on the profitability of the company’s export sales. A company taking the 4 percent commission on $5 million in gross export sales would save at least $40,000 of federal income taxes, assuming the tax rates are as discussed earlier. If the same company had $5 million in gross export sales and $1 million in profits and was able to deduct the 50 percent commission, the tax savings would be at least $100,000. Again, these savings are minimums; various techniques exist for increasing the effective commission by, for instance, applying the commission limitation to different product lines.
What types of related planning opportunities are associated with this technique?
You can use the IC-DISC to provide shares to family members or to employees. If it’s a family business, you can give family members shares in the IC-DISC, which will provide them with income every year, but not ownership rights in the primary business. If you’re transitioning a business to the next generation by selling shares to that generation, perhaps you’re wondering how your children will get the money to pay you for the business. You can pay them a higher salary to generate this cash, and the company can take a 35 percent deduction on that payment, but the children have to pay tax on this income at ordinary income rates so there is not much tax efficiency. If you or the children own shares in an IC-DISC, the company still gets to take the 35 percent deduction for the commission, but now your children only have to pay tax on the dividends at 15 percent (versus having to pay the ordinary income rates). You can also use an IC-DISC to provide an equity type of incentive to employees, which can serve as a motivation tool to improve productivity and increase export sales.
Does a company have to be making a certain level of sales for the IC-DISC to make sense?
Again, this depends on a company’s profitability. A company doing $1 million in export sales could save at least $8,000 per year under the 4 percent commission scenario. However, if this same company has $200,000 in profits, the tax savings would be $20,000 — still making the IC-DISC an attractive option. Anything less than $100,000 in profits on $1 million in sales would require a closer look at some of the commission-maximizing strategies to see if the IC-DISC makes sense.
MARK D. KLIMEK is chair of McDonald Hopkins’ Tax Practice Group and is a member of the firm’s mergers and acquisitions practice group. Reach him at (216) 348-5453 or email@example.com.
It was announced recently that the Utica Shale formation in Ohio is not only a source of natural gas, but oil as well. New technological advancements — especially in horizontal drilling techniques and the hydraulic fracturing of the shale (“fracking”) — along with the fact that the oil appears to be of high quality, is bringing drilling to Ohio a lot faster than originally thought.
“Drilling has been taking place in the Marcellus Shale in Pennsylvania and West Virginia for a while now,” says Jeffrey R. Huntsberger, a member of the Business Department and the Real Estate Practice Group at McDonald Hopkins LLC. “Geologists knew there was natural gas in Ohio’s Marcellus formations, but figured Ohio wouldn’t be as rich a source as Pennsylvania. All of that has changed now with the discoveries in the deeper Utica Shale formation. For example, the CEO of Chesapeake Energy Corp. recently said that his company expects to invest $10 billion per year in Ohio for the next couple of decades.”
Smart Business asked Huntsberger what Utica Shale drilling means for Ohio.
Why does the Utica Shale hold so much promise for Ohio?
The Utica Shale formation appears to hold significant amounts of ‘wet’ gas and oil. The wet gas has elements in it that are sought after by gas companies, including propane, ethane, butane, and other large molecule hydrocarbons and, in addition, there’s oil, which appears to be of high quality. Companies like Chesapeake Energy and others are excited about the wet gas and oil in Ohio.
How will drilling impact Ohio businesses?
Drilling in the Utica Shale is a game changing industrial event taking place right in our own back yard. Drilling is already taking place in southeastern and mideastern Ohio counties and promises to spread northward through the entire eastern part of Ohio. Manufacturers of tubular steel, pumps, valves, and fittings are already seeing substantial demand for their products as a result of drilling. If everything works out, we’ll have a cheap source of energy on our doorstep, which will give us an advantage in manufacturing. In addition, the byproducts of oil can be used for hundreds of industrial applications, and having a source of those byproducts right here in Ohio will be beneficial for a variety of industries. In the long-term, the drilling should stir growth.
What are the potential environmental impacts?
The major issue is water. Rural areas rely on well water (drawn from about 50 to 250 ft. deep). The shale layers are found at 5,000 feet and deeper below the surface but, in order to get there, the wells must be drilled through the water table. If the well is not drilled and cased properly, there’s a good chance that someone’s well water will be contaminated.
Fracking itself requires up to three million gallons of water per well. The crew has to drill down vertically several thousand feet and then sideways for as much as a mile. The fracking fluid, which is then inserted into the well and forced into the shale layers, is 98 percent water and sand with the remaining two percent made up of ‘nasty stuff’ — chemicals intended to help ease the hydrocarbons out of the shale. Huge pressure is created to break the shale, release the gas, and bring it back up. What comes up is contaminated with the chemicals as well as other environmentally damaging materials from the ground, such as heavy metals, which must be dealt with properly.
What kind of regulatory oversight is in place?
Almost all regulation in Ohio is through the Ohio Department of Natural Resources (ODNR). A number of years ago, the legislature took away the rights of local communities to regulate drilling. A new law (Senate Bill 165), enacted about a year ago, adds to the ODNR’s power to regulate the industry. Included in the many new provisions are restrictions on how close companies can drill to occupied dwellings and property lines; increased liability insurance required for drillers; tighter construction standards; and the requirement that fracking must not be done in a manner that creates any danger to the water or the environment.
At the federal level, the U.S. EPA is looking into the fracking process and studying the potential impact on the environment. The EPA expects that it will be well into 2012 before any preliminary comments are made, and then another two years for any regulations to be put in place. As a side note, as of September 30th, Ohio House Bill 133 authorized drilling in Ohio’s state parks.
How can landowners maximize their benefits if approached about leasing rights?
Some of the simple things you can negotiate with the companies leasing your land include the size and timing of the bonus payment; the amount of the royalty (the standard is usually around 12.5 percent of what gets produced from the well; however, this can often be negotiated to 15 or 18 percent, or even higher); and the time period for the company to hold the lease until drilling takes place. More complex negotiations involve placing restrictions on unitization (the right of the lessee to combine your property with that of other land owner lessors); prohibiting the storage of gas or the permanent disposal of toxic liquids on the property; obtaining mutual agreement on the placement of roads, wells and pipelines; and having the ground water tested before and after drilling.
Educate yourself through easily accessible materials such as those found on the Ohio Department of Natural Resources’ website. Hire an attorney who really knows this area. Don’t be quick to sign a standard lease presented to you, because these companies will negotiate.
JEFFREY R. HUNTSBERGER is a member of the Business Department and Real Estate Practice Group at McDonald Hopkins LLC. He focuses on real estate, business counseling and energy. Reach him at (216) 348-5405 or firstname.lastname@example.org.
Workplace retaliation claims are an ever-increasing litigation concern for employers. In 2010 there were more charges of retaliation filed with the U.S. Equal Employment Opportunity Commission (EEOC) than any other type of charge.
“We are certainly seeing an uptick in retaliation claims filed by current and former employees,” says Nicole Gray, an attorney in the Labor and Employment Practice Group at McDonald Hopkins. “Recent decisions by the U.S. Supreme Court that have expanded the rights of employees who complain about retaliation, energetic enforcement by federal agencies, and increased public awareness are all factors that could explain why retaliation claims are becoming more frequent.”
In addition, almost every worker can relate to a story of disagreeing with a boss and falling into disfavor as a result.
“Courts and juries are more willing to accept an employee’s claim that he or she was treated differently after voicing complaints,” Gray adds.
Smart Business asked Gray how companies can proactively manage their work forces to defend against retaliation claims.
What does it mean that an employer ‘retaliated’ against an employee?
Put simply, retaliation law prohibits employers from ‘getting even’ with an employee who 1) engages in ‘protected conduct’ (e.g., files a lawsuit or administrative charge, testifies or participates in an investigation or hearing, promotes better working conditions), and/or 2) opposes an unlawful practice. This protection is not codified in any one statute, but is found in varying forms in laws that create workplace rights, such as employment discrimination laws, wage and hour laws, and leave and benefits laws — even the bankruptcy code and state wage garnishment laws include anti-retaliation provisions.
How does an employee establish a claim of retaliation?
There are three essential elements of a retaliation case: the employee engaged in protected activity of which the employer had knowledge; the employer took an adverse action against the employee; and a causal connection exists between the protected activity and the adverse action. An employee must only have a reasonable, good faith belief that the employer’s conduct is unlawful.
For example, an employee who believes in good faith that her employer was paying women less than their male counterparts may file a charge with an administrative agency. If the agency investigates and determines that discrimination did not occur, that employee still has the right to be free from reprisal for raising her complaint.
What types of ‘adverse actions’ give rise to a claim of retaliation?
While many claims are based on an employee termination, less severe actions against an employee may also give rise to a claim (e.g., a demotion, a disciplinary suspension, or denial of a promotion). Although trivial annoyances are not actionable, more significant retaliatory treatment that is reasonably likely to deter protected activity is unlawful.
Are only current employees able to allege workplace retaliation?
No. Adverse actions undertaken after the employee’s employment has ended, such as negative job references, can form the basis of a retaliation claim. In addition, third parties within the workplace, such as relatives or close associates, who did not complain of unlawful activity may be able to establish a retaliation claim if they suffered harm based on their association with the person who did complain.
If an employee engaged in protected conduct, does that mean he or she cannot be fired?
Employees who engage in protected conduct are not untouchable, nor excused from complying with work rules and/or achieving performance standards. It simply means that their employers cannot fire them (or take other tangible, adverse action against them) for engaging in that protected conduct. A court or investigative agency will review the facts to determine whether there is evidence that retaliation was a motive for the adverse action.
Temporal proximity is also a determinative factor in retaliation claims. Close temporal proximity between the employer’s knowledge of the protected activity and the adverse employment action alone may be significant enough to constitute evidence of a causal connection. While there is no magic time period that necessarily insulates an employer from a retaliation claim, a recent decision out of Ohio’s Eighth District Court of Appeals did hold that a one-year time period between the protected activity and the adverse action, without further evidence of retaliatory treatment, was too remote in time to establish a retaliation claim.
How can employers limit their exposure to a claim of workplace retaliation?
Be aware of employee rights and recognize that employer retaliation against protected employee conduct is unlawful. Likewise, consider whether an employee has engaged in protected activity prior to taking any adverse actions. Seek the assistance of legal counsel to identify potential retaliation issues, provide training to supervisors regarding prohibited activities, and update policies to include anti-retaliation language. Employers can rebut a retaliation claim if they are able to articulate a legitimate, nondiscriminatory reason for taking the adverse action. Therefore, employers should take care to ensure that they can establish an objective reason for the adverse action taken and, whenever possible, have effective documentation that supports that reason.
Nicole Gray is an attorney in the Labor and Employment Practice Group at McDonald Hopkins. Reach her at (216) 348-5418 or email@example.com.
Serving as a director or officer on a board can be complicated, especially if the business is floundering.
Directors have certain duties to the company they are serving, but when the business is financially distressed, the beneficiaries of those duties switches to the creditors, according to Shawn Riley, the Managing Member of the Cleveland office of McDonald Hopkins LLC and co-chair of its Business Restructuring Services Department.
“In normal situations, those duties exist for the benefit of the owners,” says Riley. “However, when a business starts to experience financial distress, the obligations shift. Two questions arise: ‘When do they shift? And, how do they shift — in other words, who are beneficiaries of those duties?’”
Smart Business spoke with Riley about shifting fiduciary responsibilities and how recent court rulings are changing the rules of the game.
How are directors’ and officers’ fiduciary responsibilities defined?
The fiduciary responsibilities that directors and officers owe a business, particularly a distressed business, have been evolving. Recent court decisions suggest that the responsibilities are not as stringent as people thought they were just a few years ago.
Generally speaking, directors and officers owe their fiduciary duties to the company itself, for the benefit of the owners. To meet their fiduciary duties, directors and officers are required to fulfill two primary obligations — the duty of care and the duty of loyalty. The duty of care means they must be well informed and must reach well-reasoned decisions with respect to the company and its assets. The duty of loyalty requires that directors and officers act without conflict of interest, without benefiting themselves to the detriment of the business.
When do those duties shift?
When a company is in financial distress, case law has suggested that directors and officers have to ignore the interests of the owners and instead focus exclusively on the interests of the creditors. They must think about how to maximize the value of the business so as to pay creditors. That is a pretty significant adjustment in thinking, because directors and officers up to that point will have been running the business for the benefit of the owners.
So when, exactly, do those duties shift? Some argue that it is at the first sign of trouble. Others argue that it is only at the time of filing a bankruptcy proceeding. For others, it is the period when the business is insolvent, whether or not it is in bankruptcy. Until recently, the uncertainty over questions such as these has caused directors and officers to tread carefully.
The uncertainty in the law has diminished recently as courts over the past couple of years have introduced a dose of reason to the process. The courts have begun to suggest that the shift of duties does not occur as early as people were arguing, but rather when there is very clear evidence of insolvency, when the business simply cannot pay its debts. At that point, directors have to start thinking about the interests of creditors.
How do those duties shift?
While it seemed the rule was that directors had to completely ignore the interest of the owners, others argued that creditors’ interests and shareholders’ interest should be given equal weight.
Again, recent case law indicates that directors, even in an insolvency situation, should not ignore the interests of the owners but rather should make their primary concern the interest of creditors, at least until the point where they can demonstrate that the business is solvent again.
The continuing issue for directors and officers, however, is that this is usually judged after the fact, with the benefit of 20/20 hindsight. It is not as if, in the middle of its efforts to right itself, a business can call a timeout and ask a judge what it or its board should do. If the board is unsuccessful in turning the business around, its actions will likely be second-guessed by creditors.
Who can sue directors and officers for breach of fiduciary duties?
It is the company itself that is supposed to sue those directors and officers that it believes have breached their fiduciary duties. But it would be pretty remarkable if those directors who run the business authorize counsel to file suit against them.
Courts allow shareholders (and creditors) to assert derivative standing, in which a group of shareholders — or a creditors’ committee in a bankruptcy — sue on behalf of the company in a situation in which it would be futile to ask the company to sue. Anything that is recovered against the directors’ and officers’ insurance policies would then be distributed to the shareholders or creditors. However, the courts have started to impose tighter restrictions on the circumstances under which a creditors committee in a bankruptcy can file derivative actions. In a recent case involving a limited liability company in Delaware, the court ruled that only owners or members of the LLC could sue derivatively, meaning that creditors are not authorized to pursue directors and officers. Even if creditors could demonstrate that directors and officers clearly did something wrong that resulted in damage to creditor interests, they have no standing to pursue claims.
This may reflect a recognition that perhaps the pendulum had swung too far in one direction, authorizing aggressive lawsuits by creditors against directors and officers for marginal claims under otherwise reasonable decision points for directors. The pendulum is swinging back and the courts are limiting not only the time period claims can cover, but also the types of claims and who can file them.
This ruling may make people more willing to serve on boards, as they can join a board less worried about the potential for being sued. It should also reduce the cost of directors’ and officers’ insurance.
Shawn Riley is the Managing Member of the Cleveland office of McDonald Hopkins LLC and co-chair of its Business Restructuring Services Department. Reach him at (216) 348-5773 or firstname.lastname@example.org.
Social media has grown significantly in recent years and covers a broad range of online sites used by people of all ages, says James J. Boutrous II, a member with McDonald Hopkins PLC.
“From LinkedIn to Facebook to Twitter to other online sites that let people connect with others in their business fields, networks or friend circles, social media has exploded as a new world of communication,” says Boutrous. “With that ability comes benefits and risks.”
Smart Business spoke with Boutrous about social media and how to protect yourself — and your brand — while online.
What legal issues do companies face in the social media area?
Social media has become both a boon and a burden for businesses. The marketing power of social media sites is continuously being explored and advanced by businesses on the cutting edge of this technology. But there are legal issues surrounding social media. The rights of a business can be more easily infringed upon through the business use of social media.
For example, social media has allowed disgruntled employees, upset customers and others to attack companies and their brands online. The structure of social media and the Internet makes it easier and less costly to send an anonymous, disparaging message to hundreds or thousands of people in the blink of an eye.
Intellectual property issues, such as those involving trademarks and copyrights, can also be problematic on social media sites. The structure of such sites makes it easy for companies to promote their brands and their copyrighted material. But such technology, if not dealt with appropriately, can also make it easier for others to steal copyrighted material or copy and misuse trademarks, harming the company’s brand. Social media creates a whole new world for businesses to police when it comes to their intellectual property.
Filing a lawsuit in such circumstances may not be the best answer as it can lead to unexpected results. For example, a person or entity that has defamed a company, infringed its intellectual property or otherwise harmed it through social media can wage a very public battle with the company through social media during the lawsuit. Therefore, before filing a suit, or even threatening one, confer with your leaders and legal advisers to determine the best strategy for protecting the company’s rights and its image.
Can a business use social media to investigate potential or current employees?
Many companies search the Internet, including social media sites, to research potential and current employees. This information is readily available, but companies should keep a few things in mind.
Even if you discover something that may make you wary of hiring someone or make you reconsider an employment decision, state and federal laws, including those on discrimination, still apply. For example, simply because you found out on Facebook that a current or potential employee was pregnant does not make it OK to make an adverse employment decision based on that fact.
How should an employer deal with employees’ use of social media at work?
From a purely legal perspective, subject to local laws on privacy, courts rulings on the scope of such laws within the workplace, and existing company policies, a company can impose rules about the use of social media at work on company equipment.
However, there are also employee morale and company culture issues to consider. There should be a balance between the need to have employees focusing on work and not wasting company assets, and the realities of the place social media has in people’s lives and the company’s culture.
Further, some companies may encourage employees to use social media to increase business. However, they need to be aware that, depending on the situation, employees’ statements on their own social media site can be attributed to — and used against — the company. Businesses that encourage business use of social media should consider training employees on the appropriate use of social media.
How can businesses protect themselves on social media sites?
Whether or not they are using social media as part of their marketing strategy, businesses should be aware of what is being said about them. Social media is another area companies need to monitor.
If businesses are using social media for business purposes, they need to be aware of what they and their employees do and say on such sites. Anything a company puts out on social media sites is liable to be taken by another user for their own purposes. A company’s trademarks, copyrighted videos, marketing efforts and coupons are subject to being taken and misused.
Also realize that anything you say on a social media site, even if it stops appearing on the live Web page, can be stored forever. A statement that may be perfect for the company now could come back to harm it in the future, as litigating parties have become much more sophisticated in looking for evidence on social media sites.
Further, social media sites have features that allow others to post comments, but not all comments are good. A business should investigate the controls it has over such comments and whether the ability for others to comment can be turned off or if comments can be deleted.
However, keep in mind that such restrictions can cause a backlash if users are not allowed to post or if their posts are deleted. Recent court decisions demonstrate that employers must take appropriate precautions to avoid potential liability.
James J. Boutrous II is a member with McDonald Hopkins PLC. Reach him at (248) 220-1355 or email@example.com.