Adam Burroughs

A software company’s primary cost is people. They don’t necessarily need to purchase equipment, furniture or fixtures. They need engineers and money to pay salaries.

“That’s going to be very different from a non-tech manufacturing company that needs big pieces of equipment to make their widget,” says Mike Lederman, senior vice president and regional market manager with Bridge Bank.

This means the types of loan products needed by technology companies are going to be unique to that industry.

“Look for a banking partner that is going to understand your business and not just look at the numbers,” he says.

Smart Business spoke with Lederman about the financing options for technology companies through the stages of their life cycle and how a company can surround itself with a strong support network.

What loan products are available to pre-profit/venture-backed startup technology companies?

Starting from early stage to more mature venture-backed startup companies, step one may be an invoice financing facility where a lender is financing individual invoices. Also consider a revolving asset-based line of credit, which uses accounts receivable to establish a borrowing base instead of specific invoices.

Next would be a general accounts receivable line of credit, which is structured much like an asset-based line but with fewer lender controls based on a company’s stronger balance sheet. Banks also could add a non-formula line of credit that you draw on and pay interest on the outstanding amount, much like a home equity line of credit.

On the term debt side, banks offer growth capital term loans, which come with financial covenants. This structure may include a six-month, interest-only period followed by 30 months of equal principal payments plus interest.

Also available are equipment term loans, structured very similarly to growth capital loans, but instead of funding the money up front the bank would finance the equipment a company purchases. The bank is looking more at the equipment purchase price to structure the availability.

Banks also offer a venture term loan, which is similar to a growth capital loan but without financial covenants. That’s a good fit for a company that has raised equity capital within the last year and wants to extend runway between equity rounds, in order to increase valuation for the next equity round.

Finally, bridge loans are a great way to help with working capital shortfalls prior to a defined liquidity event, typically an equity round.

What particular needs might a tech startup have that differs from startups in other industries?

A lot of Software As a Service companies will be the host for the software they deploy to their customers, so buying or renting space on servers is a big expense as their customer base grows and uses more bandwidth.

Where banks can help is with working capital shortfalls, meaning you’re past the development stage and you’re actually selling your products, but you have to pay your suppliers before your customer is paying you. You might have to pay at net 30 and you’re getting paid at net 90; that’s where a bank can add tremendous value with short-term working capital until you can collect from your customers.

How and why do loan structures change as a company evolves throughout its life cycle?

As a company matures, it has additional needs. On day one it might have only a few customer invoices, but as a company grows it gains new customers each comprising 10 to 40 percent of total accounts receivable. Now the company can qualify for a more traditional line of credit. Once revenues increase or an equity round closes, a company can consider growth capital or venture debt to support long-term working capital needs as opposed to the short-term line of credit used to pay vendors before receiving customer payments.

What should a technology startup look for in a banking partner?

Numbers are important, but understanding the particular needs of the company is what differentiates a bank from its competitors. Avoid working with a bank that is only interested in your investors. Venture capital investors are an integral part of how banks underwrite credit, but it shouldn’t be the reason they do the deal.

Also, work with the same relationship manager at the bank throughout your life cycle — from the time you open your first checking account to an IPO — because he or she is going to know your history. Continuity is key to a successful relationship, and working with a bank that allows that is important.

Should the entrepreneur expect to provide the bank with a personal guarantee?

Not if it has received equity capital from an institutional investor. If a company hasn’t attracted institutional equity capital and hasn’t been able to sustain positive cash flow, a personal guarantee may be required. Banks need to understand there is someone willing to stand behind the company. The guarantor is responsible for the loan, but the bank’s expectation is there are other company assets to help repay the bank in a liquidation scenario.

How can service providers help you?

It’s important for an entrepreneur to be surrounded by a network that can provide service and support so he or she can focus on building the business. Get an attorney, bank and CPA that do a lot of work with technology startups. They can help with introductions, advice or serve as a sounding board. Focus on building the business and use your network of service providers to bring in partners. Attorneys and CPAs are phenomenal referral sources for banks and vice versa because entrepreneurs realize this is important to keep in mind as they grow their business.

Mike Lederman is senior vice president and regional market manager with Bridge Bank. Reach him at (415) 230-4834 or mike.lederman@bridgebank.com.

Insights Banking & Finance is brought to you by Bridge Bank

U.S. patent law is going through some changes with the implementation of the America Invents Act (AIA), and these changes could affect businesses.

“The biggest change is that in the past, a patent would be awarded to the first to invent and under the AIA, it is now the first to file,” says Tim Nauman, a partner with Fay Sharpe LLP.

The transition represents a big change in U.S. patent culture because the first to invent system in the U.S. was viewed by many as beneficial to entrepreneurs. If you were the first to invent, you could fight for the patent regardless of how quickly someone else filed for it. However, under first to file, some say it is now the one with the most resources who gets to the patent office first who wins.

Smart Business spoke with Fay Sharpe partners Joe Dreher, Eric Highman and Nauman about how changes to U.S. patent law will impact businesses when they take effect in March 2013.

What benefits come with the change in the patent law?

The U.S. was historically the only country that issued patents under first to invent, so this harmonizes U.S. laws with those in other countries. People want consistency; they don’t want to deal with different laws in each country.

Also, the determination of who invented first was sometimes a complicated process, called interference, which the Patent Office or federal District Court would undertake in the event of a dispute over who came up with an idea. The new system eliminates that administrative or court proceeding with regard to this issue, which created some uncertainty for businesses

What can companies do to stay competitive, given the changes to the law?

Ideally, if you think of an idea today, file it today. But while there is no quicker process to getting an invention application on file and established, reality would tell you that this probably isn’t going to happen.

Companies are accustomed to having their employees/inventors fill out an invention disclosure form that they then submit to an internal review process. But that takes time. So under the AIA, the best thing to do is file a provisional patent application as quick as possible and flesh out the internal review details later so as not to get beat to the Patent Office.

While that takes care of the early part, filing multiple provisional applications is just as important because as the idea transforms into a marketable concept, it can change. As the development process goes forward, there could be other features that need to be filed in much the same way as the first. If you haven’t described all of those features in the original filing, you can potentially be second to someone who has.

What’s the difference between a provisional and a nonprovisional application and which is preferred?

In the U.S., provisional patent applications can serve as a basis for garnering an early filing date. It establishes a reliable priority date for “first to file” purposes, but a patent won’t be issued from it. Rather, a nonprovisional patent application must be filed within one year from the earliest provisional application.  It is the nonprovisional application that is searched and substantively examined by the U.S. patent examiner. The official fees for nonprovisional applications are more than twice as expensive, so it makes sense to file multiple provisional applications quickly and at a lower rate.

However, there are competing concerns of getting the provisional application filed quickly and getting it filed with sufficient detail. It’s important to get as much detail as possible in the provisional application(s) because only that which is disclosed in a provisional application is entitled to the priority date. If there isn’t enough detail in the application to make the invention work, it may not qualify for patent protection.

Does public disclosure by the inventor impact rights to a patent?

The best approach is to file a detailed provisional application before the product is made public or file as soon as possible after the disclosure.  If the application is not filed before public disclosure, the inventor still has one year from such disclosure to file a patent application in the U.S.  However, under the AIA, this one-year grace period is subject to someone else filing modifications or variations ahead of the inventor’s patent application on what has been disclosed. There is a risk that businesses might suffer from a false sense of security thinking that they don’t have to file their patent application immediately because of public disclosure.  Therefore, if the disclosure has occurred, file the detailed provisional application as soon after as possible.

Foreign filing considerations may also come into play.  If you file for a patent application in the U.S., you have one year in which to file in a foreign country with the benefit of your first filing date.  However, if you publicly disclose your invention before you file your patent application, you destroy your patent rights abroad.  So, public disclosure before filing is not advisable if you are going to file for a patent in another country.  Filing a provisional application prior to public disclosure preserves the potential of getting foreign patent rights.

What should companies do ahead of enactment of the new laws?

Under the current law, you can go back and prove an earlier invention date. For applications filed under the new law — beginning March 16, 2013 — it’s first to file, which means you can’t go back before your initial filing date to prove earlier invention.

Before AIA takes hold, finish all of your provisional applications and, in some instances, convert existing provisional applications with added features/subsequent development work to nonprovisional applications by March 15, 2013 so you still have the benefit of the first to invent law.

Tim Nauman, Eric Highman and Joe Dreher are partners at Fay Sharpe. Reach them at (216) 363-9000.

Insights Legal Affairs is brought to you by Fay Sharpe.

To the surprise of many, manufacturing is growing in strength in Northeast Ohio, and manufacturing properties are rapidly being bought up.

Terry Coyne, SOIR, CCIM, an executive vice president with Grubb & Ellis, says interest rates are low and demand is real, but the vacancy rates for manufacturing properties haven’t come down to the point where there have been dramatic price increases.

Bearing in mind that, in real estate, industrial property is a leading indicator of economic trends, says Coyne.

“The big-picture story is that manufacturing is leading industrial out of the recession in a hurry,” says Coyne. “It’s a good time to be a landlord and a bad time to become a tenant, which we haven’t said in three or four years.”

Smart Business spoke with Coyne about the office and industrial real estate markets in Northeast Ohio, and the conditions that have put it where it is today.

What’s happening with real estate in Northeast Ohio?

Industrial’s vacancy rate is almost always historically lower than the office vacancy rate. In Ohio, we’ve got many industrial companies, so prospective buyers have more of a base to choose from. There are fewer office properties because we’re not a headquarters-type location for regional offices. Currently, Akron’s industrial vacancy rate is 10.6 percent and office vacancy is 11.9 percent, while Canton’s industrial vacancy rate is 9.5 percent and office is 11.6 percent.

We went into the recession with high vacancy rates and are coming out with vacancy rates that are decreasing at a speed I’ve never seen. We’re down 100 basis points in nine months, which is good for any market in the U.S.

If you have a building that has any manufacturing capabilities, such as a crane, or a lot of power, or that is near railroad tracks, it’s a great time to be an owner. It’s surprising how quickly we’re coming out of the industrial recession.

The market for office properties has mostly stabilized and has turned the corner. There aren’t as many vacancies coming online because the unemployment level has gone down quarter over quarter in our metro area for three quarters in a row, and that’s reflected in absorption in the office market.

We are seeing better rental increases in industrial, better sale prices relatively speaking in industrial and, if things continue, office-type jobs should see a rebound in the next 12 to 18 months.

What’s driving this trend?

Real demand is increasing because manufacturers that have survived the recession are adding capacity or are reshoring and bringing jobs back to the U.S. The increase in transportation and labor costs in China and Asia means that the financial delta between operating there and in the U.S. is not that great. As a result, manufacturers are mitigating their risks, especially in regard to quality and timely delivery, by having goods produced here.

Also, the manufacturing market is very strong because of organic growth and, especially in Akron and Canton, because of oil and gas. The oil and gas market is adding jobs and absorbing industrial buildings, and Canton has become a headquarters for office space for those in the oil and gas market, positively impacting the region.

How is demolition impacting the real estate market?

Scrap prices were high a few years ago up until last summer. When scrap prices are up, demolition increases, but prices have since come down for ferrous metals. As a result, demolition won’t increase again until the price rises above $400 per ton. There are a lot of people combing through our market looking for the next building they can demolish, but a lot of it has been picked over.

Demolition affects the market because it wipes out buildings that are functionally obsolete. Those types of properties tend to attract low-end tenants that don’t generate a lot of income tax for cities or much in real property taxes. So from a big picture, macro perspective, demolition is a nice way to clean things up.

What about repurposing?

The competition to repurposing is demolition. It’s interesting because a lot of those opportunities are gone. And now that users have real demand, they are becoming competitors to redevelopers.

I think you’ll see a little less repurposing because we are a market that likes to own buildings — put a loan on them, build up equity and sell them. In the past three or four years, it’s been hard to get a loan, so it’s been a great time to be a redeveloper buying up properties and leasing them to those who can’t get loans. Now, however, loans are easier to get, demand is real and that will slow down the redevelopment side of the world.

Is now a good time to buy?

Low natural gas prices mean that if you’re a manufacturer, you want to locate here because one of your materials is cheap. Add that to the trend of reshoring and organic growth, and now you have three demand drivers that are real, whereas in the past you only had one.

Is it a macro shift? I hope it is, because then you’re looking at something that’s generational in scope, and if that’s the case, you’d better buy something as fast as possible.

Also working to our advantage is that when people manufacture items in the U.S., they make them in the Midwest. People are coming back, and all those laborers with the necessary skill sets and the infrastructure are here, so if you’re going to bring it back, you’re going to bring it back to where it was made the first time.

Terry Coyne, SOIR, CCIM, is an executive vice-president with Grubb & Ellis. Reach him at (216) 453-3001 or terry.coyne@grubb-ellis.com.

Insights Real Estate is brought to you by Grubb & Ellis

The crowdfunding component of The Jumpstart Our Business Startups Act (JOBS) is designed to help startup and emerging growth companies raise capital through new securities exemptions.

“It’s a promising platform for companies that are already doing small-dollar raises of capital,” says Jeff Roberts, a director at Kegler, Brown, Hill & Ritter. “With the high cost of capital from venture and angel funds and the general unavailability of bank funding, small businesses, startups and emerging growth companies are looking for different ways to raise funds, so they are very excited about the possibility of crowdfunding. It’s worth the hype because currently, raising capital is expensive and investors are hard to locate.”

Smart Business spoke with Roberts about how to benefit from crowdfunding.

What is crowdfunding?

Crowdfunding concepts have been in the market for quite some time with companies like Kickstarter providing a platform for businesses to raise money through donations. With the passage of the new JOBS Act, businesses will soon be permitted to issue equity to investors based upon a securities exemption that allows companies to raise up to $1 million annually from non-accredited, small-dollar investors such as friends and family, and those who want to place their money somewhere other than the stock market. Funds will be raised through regulated online crowdfunding intermediaries.

Investors will be limited in the amount of money they can invest. According to the JOBS Act, investors with an annual income or net worth of at least $100,000 can invest up to 10 percent of their annual income or net worth. Those with a net worth of less than $100,000 can invest the greater of $2,000 or up to 5 percent of their income or net worth. The dollar amounts at risk on the front side are small, which helps alleviate the fear of some skeptics who think some investors may spend their life’s savings on a fraudulent venture.

What kinds of companies should consider crowdfunding to raise capital?

Local restaurants (or other small businesses with dedicated customer followings) that need to make certain capital improvements can go out and raise the money for those projects through these online intermediaries. Any startup company that doesn’t generate a lot of income up front could also take advantage of the crowdfunding platform, though such companies may have more difficulty in generating a buzz.

The financial disclosure requirement for raising $100,000 or less is not as great as raising between $100,000 and $500,000. In the latter case, you have to provide reviewed financials, and in raising more than $500,000, companies have to provide audited financials. The cost of providing those financials has been a roadblock for some small startups. When their accounting bill can be $10,000 to $20,000 before they raise a dime, it can be prohibitive to their market access. Given the cost profile, companies with less than $100,000 in financial needs may be best served by this new platform.

What are the potential legal risks associated with crowdfunding?

Companies seeking to raise funds though this exemption need to be more concerned about compliance with state laws that govern corporations, limited liability companies and other entities because, given the relaxed federal regulation, greater emphasis will likely be placed on state law fiduciary duties.

If Ohio can come up with some sort of regulatory scheme that makes it efficient to raise capital this way, then it could become the Delaware of crowdfunding. A lot of the governmental bodies and politicians like that idea and are behind it, but it’s still early. And since federal regulations will trump state law, how this will be regulated between states is still up in the air.

What could change about crowdfunding regulations?

Crowdfunding won’t become a reality until the end of the year because the SEC has 270 days from the date of enactment to put its regulations in place. While some specifics are included in the JOBS Act, there are still some open questions and equity cannot be raised through the crowdfunding securities exception until the regulations are released. What worries me is that the SEC, in an attempt to hurry up and get something out there, might throw out proposed regulations that are not really well thought out, which may create additional road blocks that effectively eviscerate the purpose of the JOBS Act, which is to make it easier and cheaper to access money.

What can companies do now?

Put it on your radar as an opportunity. Some companies considering doing raises in the next six months are operating under the old SEC rules and might put off those investments until they can see what happens with crowdfunding. But otherwise, not much can be done until we know what that landscape looks like.

If a company is interested in crowdfunding, where should it start?

Seek out legal counsel because this is such an unknown area. Issuers of crowdfunding equity are going to have questions about which intermediary to use. Should they go through a licensed broker/dealer instead of a crowdfunding intermediary? How much money should they raise? What are they going to have to provide in the way of financial disclosures? Hopefully, as the market develops, the process will become more efficient and well defined and the cost of fundraising will decrease.

The ability to go to nonaccredited investors online and the ability to reduce transaction costs by not expending substantial amounts of money on securities compliance is a step in the right direction, but time will tell how successfully crowdfunding can be implemented and what type of demand it generate.

 

Jeff Roberts is a director with Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5465 or jroberts@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Once you have researched long-term care insurance and are seriously considering buying a policy, there are still many things to consider before your purchase, says Robert D. Coode, a Principal and Registered Representative at Skoda Minotti.

“Make sure you’re doing it for the right reasons and are not being swayed by unsubstantiated sales pitches,” Coode says.

He says potential buyers should consider possible increases to the premium over time; the definition of terms, such as what constitutes an assisted living facility in different states; the financial strength of the institution from which the policy is being purchased; and the chance that an unscrupulous agent is out to inflate his or her commissions to the detriment of the client.

Smart Business spoke with Coode about buying long-term care insurance and what to be wary of before jumping into a policy.

What is long-term care insurance?

Long-term care insurance helps those with chronic illness, disability or those who are unable to perform the basic activities of daily living to offset the cost of care. These policies generally cover services not addressed by health insurance, Medicare or Medicaid.

Are all types of care facilities covered through these policies?

Currently there are no national standards for what constitutes a long-term care facility. This means that an assisted living facility or adult daycare could have one meaning in a particular policy or state and another elsewhere.

This can pose a problem if you buy a policy in one state and retire to another. There could be no facilities in your new state that match the definitions in your policy. To protect yourself, make sure you understand exactly what the policy covers before you buy it.

If I purchase a policy now, will premiums remain the same over the life of the policy?

With most policies, your age at the time you purchase the policy is a factor in determining premiums. However, that doesn’t mean your premiums will stay the same as long as you own it. In fact, your premiums can increase if your insurance company establishes a rate increase for everyone in your class and the state insurance commissioner approves increase.

As a relatively new type of insurance, long-term policies could be more susceptible to rate increases because insurance companies lack a sufficient amount of underwriting data to predict the number and size of claims they can expect in the future. Unfortunately, if your insurance company raises premiums, taking your business elsewhere might not be that simple. Any premium on a new policy will still be based on your age, which will be older, and your health, which might be worse than when you initially bought the coverage. So no matter when you buy your policy, make sure you can afford the premiums both now and in the future.

Is the financial stability of the insurance carrier relevant to the purchasing decision?

A large number of unexpected long-term care claims could potentially devastate an insurance company that isn’t financially strong. So before you buy a policy, it’s always a good idea to check the company’s financial rating by using a rating service such as Standard & Poor’s, Moody’s, A.M. Best or Fitch Ratings. You can also check with your state’s insurance department for more specific financial information on particular companies.

Is a long-term care policy a good tax write-off?

Although it’s true that premiums paid on a tax-qualified long-term care policy can reduce your tax burden, it’s important to note that you must itemize deductions to be eligible. This type of insurance premium falls under the write-off for medical and dental expenses, which is limited to expenses exceeding 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $60,000, you are able to deduct only that portion of your unreimbursed medical and dental expenses, including long-term care premiums, exceeding $4,500.

However, there’s another caveat. Even if your premiums exceed 7.5 percent of your adjusted gross income, you can’t include all of the premiums in your deduction for medical and dental expenses. Instead, your premiums are deductible according to a sliding scale that’s contingent on your age. So what might look like a great tax write-off at first might not be so great after all.

Also, it’s important to note that beginning in 2013, the threshold to deduct medical expenses will be raised from 7.5 percent of adjusted gross income to 10 percent. The threshold increase will be delayed until 2017 for those ages 65 and older.

What should someone keep in mind when switching policies?

Although in some cases a new policy might have an attractive added benefit that your old policy doesn’t, red flags should go up if an insurance agent encourages you to ditch your old policy for a new one without providing a clear explanation of the added benefits.

For one thing, your premiums are based on your age and health at the time you purchase the policy. So all other things being equal, your new policy will be more expensive. For another, you run the risk that a pre-existing condition won’t be covered under the new policy.

If you’re unhappy with your current policy, an alternative might be to upgrade it rather than replace it. Unfortunately, there are unethical agents who make misleading comparisons of long-term care policies in an attempt to get you to switch products for no more reason than to boost their commission.

If you’re considering switching policies, make sure you understand exactly what the new one offers, whether the additional coverage is important to you and what you’re giving up in the exchange.

Robert D. Coode is a Principal and Registered Representative with Skoda Minotti. Reach him at (440) 449-6800 or rdcoode@smcofinancial.com.

Insights Accounting & Consulting is brought to you by Skoda Minotti

Are you getting the most that you can out of your property? If you’re not using cost segregation — a little-known method to accelerate tax deduction applied to capitalized costs for many property owners and lessees — you may be missing out.

Scott Smith, an associate in the Tax Solutions Group of Plante Moran an affiliate of Plante Moran CRESA, says that this technique is often overlooked during the construction and acquisition of property, but in both of those transactions, it could provide immediate cash benefits.

“Using cost segregation as part of your planning can potentially free up money to do more on your project or to get back on budget,” Smith says.

In many cases, 10 to 30 percent of a building’s cost can be reclassified into shorter-lived asset classes, such as personal property and land improvements. These asset classes have significantly shorter depreciable lives than that of the building itself, allowing for faster write-offs than would normally be available by classifying the building as one item.

Smart Business spoke with Smith about how to apply cost segregation and the benefits you can realize by doing so.

What is cost segregation?

Cost segregation is the process of taking capitalized costs that generally depreciate over decades and doing a detailed engineering study that fully utilizes IRS laws and rules that allow you to accelerate depreciation. A cost segregation professional who is familiar with construction and the tax laws will apply the facts and circumstances to any given facility to maximize the benefit to the property owner.

What are the benefits to undertaking such a study?

Many property owners will put an entire property on their fixed asset schedule as a single line item and, as such, it will depreciate uniformly over time. Cost segregation takes the depreciation that would normally accrue over 39 or 27.5 years and makes it available to be depreciated between five and 15 years. This creates a net present value that frees up money for the taxpayer to do things such as expand the business, fund future projects and buy new furniture.

For example, reclassifying $100,000 in assets from 39-year property to five-year property will result in approximately $19,000 in net present value savings, assuming a 6 percent discount rate and a 40 percent composite tax rate.

What assets can cost segregation apply to?

In an office setting, it can apply to items such as carpeting, wallpaper, decorative lighting and cabinetry. In manufacturing, assets such as process electrical, process piping and HVAC, and equipment foundations should be considered. The depreciable life on these assets is generally five or seven years.

On the outside of a building, look at land improvements such as parking lots, site lighting, landscaping, retaining walls, sidewalks, curbs and gutters. The depreciable life on these assets is generally 15 years.

What types of companies should consider cost segregation?

It is beneficial for companies that have built, renovated or acquired a facility and need to offset some of their income — really, any company that has to capitalize costs that it has paid for. In general, the value of the construction or acquisition should be in excess of $1 million to feel the benefit from a cost segregation study. Companies can even go back in time. Say, for example, you purchased a building in 2006 and put it on your fixed asset schedule. Provided that the documentation and records are good, you can do a cost segregation study in the current year and ‘catch up’ any missed depreciation, all the way back to 2006, in the same year. This missed depreciation is called a 481(a) adjustment and can be claimed by filing the proper paperwork without having to amend any prior tax returns.

When is it a good time to do cost segregation?

The best time to do it is right after you buy, renovate or construct property, for several reasons. The documentation at that time is readily available and not collecting dust in a box somewhere. Also, the people associated with the construction are still available and information is fresh, which ultimately increases the quality of the study because fewer assumptions need to be made.

Who should conduct the study?

Choose someone who’s reputable and qualified. The IRS has issued an Audit Technique Guide that serves as an outline of what a quality cost segregation study includes and who is most capable of doing it.

If you use the wrong person — someone who is not familiar with tax law or construction — that person might not provide the detail that you need to pass an IRS audit if one should occur, which could result in interest and penalties. Make sure that you’re working with someone who understands both engineering and tax law to ensure that you get good results.

Why should companies take advantage of this opportunity now?

For certain years, the IRS has said that not only can you accelerate depreciation through cost segregation, you can also qualify for substantial bonus depreciation in the first year on new property. This year, the rate is 50 percent, which means that you’ll accelerate the depreciation on half of a qualifying item’s value, in addition to the percentage you would normally get in the first year. Imagine depreciating more than half of your new carpeting or parking lot in the first year. If you constructed property in 2011, the rate is an unprecedented 100 percent.

Businesses should take advantage of this opportunity now, as it is currently set to expire at the end of this year.

Scott Smith, LEED AP, is an associate in the Tax Solutions Group for Plante Moran, an affiliate of Plante Moran CRESA. Reach him at (248) 603-5203 or scott.smith@plantemoran.com.

Insights Real Estate is brought to you by Plante Moran CRESA

ICD-10, an international disease coding system, is mandated for adoption in the U.S. by Oct. 1, 2014, and will require health care organizations to switch from the soon-to-be outdated ICD-9.

Srividya Thyagarajan, head of Healthcare Center of Excellence for HTC Global Services, says the change will impact providers of health care services, insurance companies, billers that deal with health care claims, government agencies that report statistics on morbidity, disease outbreaks, and researchers who are looking to prevent diseases. The changes will allow for capture in greater detail about the disease diagnosed and the procedures performed. This additional detail will provide better tracking of outcomes of care, severity of disease and conditions and management of risk and health status.But first, organizations need to train their personnel to understand and interpret the additional detail.

“At the end of the day, all of this is to improve health care quality and lower costs,” Thyagarajan says. Smart Business spoke with Thyagarajan about what organizations in the health care field need to be doing ahead of the deadline.

What is ICD-10 and what changes will it bring?

ICD-10 is part of the International Classification of Diseases coding system, defined by the World Health Organization to normalize the standards by which diseases are coded throughout the world. This helps us better understand and manage morbidity, mortality and disease outbreaks around the globe. ICD-10 is the 10th revision of the code set.

The revision will offer more specific details that can help analyze and prevent diseases. As an example, in ICD-9, the current coding standard, you would classify any type of injury to the arm as a fracture of the arm. In the new code set, you would provide more detail, such as where on the arm the fracture is, which arm is it on, whether it is an open or closed fracture and whether this is the initial encounter or subsequent encounter.   Such additional detail will help in understanding the severity of the condition and the type of care provided. This will help better manage care, cost and outcomes.

What areas of payers’ business cycles will this impact?

Almost all areas of the Payer’s business cycle will be impacted, including strategic processes, operational processes and support processes. A big part of a payer’s operation is receiving and processing claims, all of which carry the disease/ diagnosis codes, as well as a description of the procedures used to remediate the disease. This part will be heavily impacted. It will also impact a Payer’s strategic processes like utilization management, network management, disease management  because ICD-10 has a lot more data that can help Payers make decisions on paying for performance and incentivizing positive and preventive health services.

ICD-10, through its more detailed descriptions, can help in Payer support processes such as Fraud detection. It allows more detailed reporting to the government agencies that collect data and statistics on areas such as immunizations, disease outbreaks etc.

However, while providing additional details could help in understanding the cause and location of the disease, it could also lead to a decrease in reimbursement. As in the previous example, if, in ICD-9, only ‘fracture of the arm’ could be listed to classify a number of injury diagnoses regarding the limb, in ICD-10, the greater detail would require you to specify if it was the first encounter or subsequent encounter in the Claim. The Claim may be reimbursed at different levels for the first encounter and subsequent encounters.

To help ease into the transition, many payers are pledging financial neutrality for the first two years that the new code is implemented. This will mean a continuation of the reimbursement levels paid through ICD-9 until the Provider contract is up for renewal.

Can the required changes to an organization’s information technology systems be handled internally?

If an organization has a large IT department, it could handle the changes internally, but because IT is not part of their core business, they should look at IT vendors and suppliers that have expertise in large application system migrations. Many in the industry are thinking of this simply as an IT problem, but IT is the least of the worries. The larger part of it is the business policy and process changes to accommodate and deal with the greater specificity.

Is there a penalty for not complying with ICD-10?

No, there have been no penalties announced by the Center for Medicare and Medicaid Studies, but that doesn’t mean there won’t be an announcement later. Moreover, whatever has been negotiated in existing Payer-Provider contracts will have to be respected. Not being in compliance could result in delayed reimbursements for Providers and administrative overheads for Payers.

How much time should organizations dedicate to preparing for these changes?

If you really want to position your organization from a strategic standpoint, invest in ICD-10, make it part of your future and embrace it now. Decide how you’re going to code and determine how it will affect your bottom line. While organizations should have started preparing in 2010, there is still time if you start now. The fact that the deadline has been moved from 2013 to 2014 should not make organizations use it as an excuse to procrastinate.

Many have been approaching the change as if it’s a small problem that will go away after October 2014 as long as they accept the codes. However, after ICD-10 is implemented, crutches such as mapping services -- which link claim language from one version of the code to another -- will have to be thrown away for a more permanent adoption of the new standards. You have to make policy, process and system changes to ensure you leverage the additional detail to your advantage.

ICD10 can improve quality of care and lower cost, but organizations need to accept the change and use the additional details intelligently to derive these benefits.

Srividya Thyagarajan is head of Healthcare Center of Excellence for HTC Global Services. Reach her at Srividya.thyagarajan@htcinc.com.

Insights Health Care is brought to you by HTC Global Services

Innovations in lighting technology are set to reshape the way offices and factories are lit in just a few years. While one innovation promises to deliver exciting possibilities that previously couldn’t be realized in video projection and custom fixtures, another will provide greater efficiency in lighting that can lower a company’s carbon footprint.

“This will be the future,” says Bryan Burkhart, principal lighting designer for Alfa Tech. “It will be everywhere — homes, businesses, institutions — and it will replace what we’re currently using in fluorescent and incandescent.”

He says LEDs are here to stay. They’ve been accepted in half the time it took for the general industry to accept compact fluorescent lights and they’ll only get more efficient.

Smart Business spoke with Burkhart about emerging lighting technologies and how they might affect business operations in the near future.

What new lighting technologies are you seeing?

Optical Waveguide Technology (OWT) uses new Light-Emitting Diode (LED) technology and channels the light through extrusions — formed polymers — to distribute a defined light stream. The materials used can be very thin and clear, much like a sheet of glass. They can direct the light anywhere you want and there’s very little light wasted in areas that you don’t want it. The fixtures will eventually be economical to produce because they’ll use less material and will be thinner and more elegant, providing uniform light without revealing the source.

Also available are Organic Light Emitting Diodes (OLED), in which the OLED is created by placing thin films of carbon-based materials between two conductors and applying a current, making the entire material luminous. The material becomes the light fixture, and it can be folded, twisted and formed any way you want. Theoretically, you could coat a ceiling or wall with it and have a continuous path that would serve as a video screen or light source. It’s also thin enough that it could be incorporated in clothing.

What are the applications of these technologies?

For Optical Waveguide Technology, you can have a range of fixtures mounted on the ceiling, wall, or used at the desk level as task lights. They’re so thin and low profile that they can be incorporated into all types of office furniture providing uniform light while reducing surface brightness, such as on a desk. Businesses can reduce their energy footprint because they can produce more light using fewer watts and direct it to where it is needed.

In manufacturing, current LEDs are blindingly bright light sources used in high-bay applications that are blasting a tremendous amount of light down in order to equal the traditional high-intensity discharge lamps that produce white light. With Optical Waveguide Technology, you can provide precise illumination on machine rows for someone to do very fine work.

OLEDs have greater application potential across numerous industries because of the huge push for monitors to be thinner. In one to two years, there could be a switchover in televisions and monitors because OLEDs provide richer colors, truer black displays and are incredibly thin.

In vehicle manufacturing, this technology can be utilized in heads-up displays or mounted in door panels. Light fixtures can also be blended into the manufacturing equipment, so no matter how complicated or tiny that space is you could have a light fixture that can illuminate that area. It also gives you the ability to create custom fixtures using any color that can be built in any space. Companies could do anything from a simple luminous panel to hooking into a sequencer that can transform a lighting fixture into a video screen. OLED applications will predominantly be in the video market, but will have a place in custom lighting fixtures as well.

What is the return on investment?

In a typical fluorescent fixture environment that replaces its T8 lamps with LED fixtures with a control system, the return on investment is anywhere between five and 10 years. With Optical Waveguide Technology, you’re probably going to be looking at returns on investment of three to four years.

For OLEDs, there’s going to be no return on investment in the beginning. It’s going to be the ‘wow’ factor of being the first person to own a television that blends right into the wall. They’re not very efficient when it comes to thermal conductivity — 100 percent of the energy isn’t being generated into light. However, its benefit is that it can be used in very flexible materials.

How does the cost of replacement and repair play out against the energy savings over time?

Right now, if an LED burns out in a fixture, you’re pretty much buying a whole new one. With Optical Waveguide Technology, you will swap out a modular LED source that snaps into place. It will be very economical. Currently, it takes an electrician to change an LED board or array because if one burns out, they’re likely disconnecting a part or all of the board. But eventually, with the new technology, anyone could do it.

What other benefits might a company gain by using this new technology?

OWT fixtures are more efficient, generate less heat and increase the amount of light cast, which translates into a smaller carbon footprint. You’re seeing more projects in more cities that have Leadership in Energy and Environmental Design requirements, and this technology could translate to gaining additional LEED points.

Are these technologies available now?

OLEDs are being implemented in lighting fixtures right now, and I believe they could be used for television products in the second half of this year, but the latter will be prohibitively expensive. OWT is about nine months away. If you have a project that’s nine to 12 months out, you could utilize this technology.

Bryan Burkhart is principal lighting designer for Alfa Tech. Reach him at (408) 487-1317 or bryan.burkhart@atce.com.

Insights Technology & Engineering is brought to you by Alfa Tech

Employment litigation is on the rise, especially in California, as an increasing number of pro-employee regulations can trap unwary employers.

“Litigation is expensive, and the consequences of not understanding employment laws can be severe,” says Laura Fleming, Shareholder in Stradling Yocca Carlson & Rauth’s Labor and Employment Practice Group. “In addition, being embroiled in a lawsuit can be distracting and can negatively impact employee morale. It makes good business sense to prevent employment litigation to the extent possible.”

Smart Business spoke with Fleming about five strategies that can help you avoid costly employment litigation.

What role does a company’s human resources department play in preventing litigation?

It is very important to invest in your human resources department. HR functions can be technical, and even counterintuitive. The executive team should be free to focus on the business goals of the company; they should not have to personally handle HR issues on a day-to-day basis.

Ideally, companies should have dedicated HR professionals with experience and training. I encourage employers to pay for membership in local human resources associations, which can provide ongoing training on new regulations to their HR staff. Also, make sure the HR department has access to employment counsel.  A short phone call up front is much less expensive than heated litigation later.

For smaller businesses with limited funds, outsourcing is an option. For example, your payroll company might have human resources support available.

How can termination of an employee get a company in trouble?

Termination can be a trigger for litigation.  If you’re going to fire somebody, it should not be done rashly. Managers may send the employee home, or place the employee on administrative leave pending investigation, never fire an employee on the spot. Always consult with HR, and possibly employment counsel, depending on whether the termination is high risk. For example, a company may consider terminating an employee having performance problems. That employee may then come in with a doctor’s note requesting accommodations, or make a complaint about harassment or discrimination. Even where the employee is simply trying to avoid termination — perhaps especially when he or she is doing so — the termination has now become high risk. It is the job of HR and employment counsel to reduce that risk. You can still hold the employee accountable for performance. However, make sure everything is well documented before you terminate. It could take weeks or months to get all of the pieces into place, but patience generally pays off in lowering the risk of  litigation.

How can offering severance help decrease the risk of litigation?

Severance pay is an insurance policy against litigation. In exchange for it, the employee should be required to sign a release waiving all claims against the company. Being a little more generous with severance pay can encourage employees to take the deal. It can also help them think kindly of you when they leave.

How important is it that companies properly classify employees?

Whether employees should be hourly/nonexempt, or salaried/exempt is a tricky issue with huge litigation potential. With hourly employees, you must pay overtime, keep time sheets and provide meal and rest periods. Salaried employees receive the same wage regardless of how much they work per day.

There are limited number of categories of employees who may be paid on a salary basis. Employers who are not familiar with these should review them with an HR professional or counsel. At the same time, employers can pay anyone by the hour, so when in doubt, classify employees as hourly nonexempt.

Incorrectly classifying an employee as salaried can bring penalties including back overtime pay, meal and rest period premiums, and penalties for paperwork violations. Some employees may want to be paid on salary for flexibility, but if the position does not meet the legal criteria for exemption, don’t take the risk.

What are the litigation risks of social media activities?

Most employees are on social media. The ‘millennial’ generation is especially prone to blurring the line between personal and professional communications. Employers may search public websites to gather information on potential hires, but be careful. Certain activities on social media are protected and unlawful to use in an employment decision. Race, religion, disability status, gender and sexual orientation are protected categories, and it is a violation of the law to use this information to discriminate against applicants.

Once applicants become employees, they have even greater rights with regard to social media activities. Many employers don’t realize that the National Labor Relations Act protects employees who discuss or complain about working conditions, even if they are not union members. Protection extends to employees who use social media to discuss their jobs, or their supervisors, with co-workers. As a result, a company that disciplines or fires an employee for such action could find itself in trouble with the National Labor Relations Board.

Companies should avoid ‘spying’ on the social media activities of their employees and should never attempt to ‘hack’ into an employee’s private, password-protected site. Nonetheless, there are social media activities that an employer must address, including disclosure of confidential information and misuse of intellectual property. In addition, if an employee is using social media to sexually harass a colleague, and that is impacting the work environment, the company has a duty to respond.  If an employee’s activities do not impact the business, I would recommend turning a blind eye.

Laura Fleming is a Shareholder in Stradling Yocca Carlson & Rauth’s Labor and Employment Practice Group. Reach her at (949) 725-4231 or lfleming@sycr.com.

Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth

A Supreme Court ruling on the constitutionality of the Patient Protection and Affordable Care Act is expected at the end of June, which could unravel the reform that employers have been dealing with since the first wave of provisions rolled out in 2011.

“These provisions generally caused employers to pay more for their benefit plans,” says Sandy Ageloff, Health and Group Benefits leader, Southwest, for Towers Watson. “This impacted a number of large employers in the self-funded category, with a cost increase somewhere in the range of 0.5 percent to 2 percent.”

While you might be tempted to take a wait-and-see approach instead of preparing for additional provisions set to roll out in 2014 and 2018, that could be dangerous.

“It’s better to have a portfolio of scenario planning rather than having the act upheld and be saying, ‘We were waiting to see what would happen before we did anything,’” says Ageloff.

Smart Business spoke with Ageloff about how employers need to shift their strategic focus around the role health benefits play today and determine what role they should play in the future.

How could the upcoming Supreme Court decision on health care reform impact employers?

Regardless of the outcome, this will generate strong political reactions from both sides of the aisle. If upheld, we expect to see Republicans in Congress attempt to repeal certain provisions of the legislation and to defund specific elements, especially the state insurance exchanges set to begin in 2014.

If the legislation is ruled unconstitutional, we expect the Supreme Court will make a high-level statement and push it back to Congress and the Oval Office to sort out. The challenge is that a number of things that have been implemented would be politically difficult to undo for both parties, such as the 100 percent preventive care clause, the removal of lifetime maximums on coverage and the expansion of dependent coverage. Even if the government is silent on those provisions, the question becomes, ‘Would employers and insurance carriers actually undo them?’

With a ruling due so soon, why shouldn’t employers wait to see what happens?

Employers should act now because of the very broad business implications that health care reform could have. Employers should be treating it as business contingency planning and need to understand their options.

Also, there are multiple touch points, such as underlying health care costs, attraction and retention, and work force composition. Employers that have large seasonal, part-time and variable work forces might face issues in 2014 when they have to offer coverage to anyone working 30 or more hours per week. These employers have a very fundamental business decision to make about how to structure their work force and they might want to redefine how they manage workers. By the time the Supreme Court decision comes out, there won’t be much time for large employers to have their strategy in place by January 2014.

What else do employers need to keep in mind regarding health care reform?

The next milestone is 2014, when state insurance exchanges are set to go live, the individual mandate for all U.S. citizens to enroll in some form of health care coverage or pay a penalty will be enforced, and employers who offer coverage and don’t meet certain eligibility and employee contribution affordability requirements will face government penalties.

It’s important for employers to understand who in their workforce meets those eligibility requirements. If they don’t, it will trigger a penalty on the employer’s entire work force population. For large organizations (e.g., a company with 5,000 eligible employees), penalties could reach $10 million, depending on the scenario.

What consequences could result if employers pass on health care increases to employees or reduce benefits?

In the U.S., benefits are a top-five attractor for employees looking externally for a position, and it influences retention and engagement. Employees have become more sophisticated at evaluating not only their take-home pay but also the benefits that employers offer.

Top talent is difficult to attract and retain. The challenges for employers are making sure they are in the right competitive phase and are not overbenefitting people, as well. Finding the balance between what employees want and what employers can afford is important.

How can employers cope with current changes to the health care laws?

Cost control is one way to create a sustainable benefits plan. Another is to focus on employee health. There’s a need to decrease the rate of increasing costs. While the Consumer Price Index remains in the low single digits, health care costs are trending as a three- to four-time multiplier on the general CPI number. As a result, employers with business growing at a much slower rate face health care costs that are growing exponentially. By focusing on the health of employees, employers can change the rate of increases over time.

What are challenges of focusing on the health of employees?

The two biggest challenges are capturing employees’ attention and making them comfortable with the fact that the employer has a sincere interest in their well being. There’s a growing sense of skepticism about why employers care about employees’ health, so making sure they understand what’s in it for them is important. Make sure they understand it’s a win-win — employers have healthier employees who are at work more often and who are more vital and engaged, and employees gain a better quality of life. They have the chance to become fitter and healthier, spend less of their own money on health care and live longer to enjoy the fruits of retirement.

Sandy Ageloff is Health and Group Benefits leader, Southwest, at Towers Watson. Reach her at (310) 551-5709 or sandy.ageloff@towerswatson.com.

Insights Human Capital Solutions is brought to you by Towers Watson