How to improve your board with the viewpoints of outsider advisers

Organizations with more than a couple million dollars in revenue should have outside board advisers. And this has become even more important for business owners as the business environment has grown more complex.

“We get blinded to doing things one way or the other,” says Floyd Trouten, a tax partner at BDO USA LLP, who serves on several for profit and not-for-profit boards. “Maybe we get a little myopic in our view. We’ve always done it this way. We’re going to continue to do it this way. That’s probably the wrong approach.”

Outside board advisers provide a different viewpoint, even though at times the conversation may become difficult.

“I’ve been on a board where an owner said, ‘Why am I having this board meeting? I don’t like what you are saying. You’re trying to tell me how to run my business,’” Trouten says. “But we’re not trying to tell you how to run your business. We’re trying to share some insights into your business that you’re not listening to.”

Smart Business spoke with Trouten about the benefits of having outside advisers on your board.

Why are outside board members a good resource?

It’s very helpful from a business perspective to get multiple approaches and viewpoints from outsiders who can help you make decisions. Some people look at things in a way that others just don’t see, and a board allows you to have access to advisers you wouldn’t normally have.

Also, sometimes a board member can say something to an employee or work to resolve something because it’s hard for the owner to be a prophet in his or her own land. Or, perhaps management needs to reach out to board members to report something that the owner isn’t sharing.

The more complex your business, and the more growth it’s undergoing, the more help you may potentially need.

What’s the ideal make-up of a board?

If you don’t want a board for the image only, you want more outside than inside advisers. You have enough of an inside view already. If you have a five-person board, you would have two from the inside and three from the outside. If you have a seven-person board, the board should be three from the inside and four from the outside.

Who should serve on it?

You want to find board members who can work in groups and are willing to share ideas, success and failures — people who sweat over issues, roll up their sleeves and try to help make the business better. A ‘yes’ person is not a good trait in the long run.

It can be helpful to look for subject matter experts. For example, if you are in sales/distribution, consider someone from a different industry who knows a lot about sales and distribution. This adviser could provide good ideas. Or if your company is poor at branding, consider someone who has had a long career in communications.

In some cases, people ask someone who has name recognition because he or she can open doors. But that may not be the best move if it doesn’t improve your company.

Retired CEOs also serve on a lot of boards, but their effectiveness depends on how far they are removed from the business world.

You want people with experience who have insights and some gray hair, no hair or colored hair, as the case may be.

How do you find the right people?

You can ask your attorneys, accountants, bankers, people in industry, etc. You can do a board search. You can ask colleagues or other business leaders at networking events. You want someone who can help make decisions with you, so search carefully.

What else would you advise?

The board is not there to run the day-to-day business. It’s there to help set direction, help make decisions and help strategically plan.

You need to have board meetings at least three times a year. The company and management should provide board education about the nature of the business, so the board can be more helpful.

You don’t want a board that never gets into your factory or warehouse. A board that sees it up close can get a lot of different insights into what’s going on.

Insights Accounting & Consulting is brought to you by BDO USA LLP

New cyberthreats make network testing more important than ever

There are many threats that can compromise a company’s computer network. Many businesses, however, don’t fully understand what can happen when networks aren’t configured properly, or are outdated.

“Prudent business owners invest in services to provide better assurance to their customers that they’re taking steps to protect stakeholder data,” says Gregory J. Skoda, Jr., CISA, principal at Skoda Minotti. “Without certain preventative and detective systems in place, someone can easily gain access to your network. It will only get more important to take steps to protect your business as attacks become more prevalent.”

Smart Business spoke with Skoda about protecting company computer networks.

What tests can be conducted to measure the strength of a network’s security?

There are two common tests: a vulnerability assessment and a penetration test.

Vulnerability assessments use software to scan computer networks to identify system issues. Examples of this could be old systems, unpatched software, default manufacturer credentials or passwords that could allow an outsider easy access to a network.

A penetration test is a controlled attempt to exploit the weaknesses found in the vulnerability assessment. These tests could be attempts to crack passwords and use default login credentials to compromise a network. This can help discover how severe a vulnerability issue could be. There are also times when a vulnerability assessment shows there are potential problems, but the penetration test shows it’s actually a false positive.

How often should tests be conducted?

Depending on the type of organization and nature of the business, vulnerability tests could be conducted multiple times per day. Businesses that host websites are running assessments constantly, but most businesses would be fine running quarterly checks. Penetration tests are usually done annually.

It’s advisable for companies that have made technology infrastructure or network changes to perform these scans during, or immediately after, such an event to ensure there are no holes in the security protocols.

Why should companies conduct these tests?

One of the important reasons to conduct these tests is to identify what systems are connected to a network. With wireless capability and myriad device connections that can be tied to a company’s network, it’s important to know who or what is requesting access to your systems.

Companies lose an element of control when mobile devices or laptops connect to their network, and that could lead to a catastrophe. Testing ensures all systems are up to date and reaffirms that security measures are actually in place and functioning. They can also validate that the procedures your internal IT department or external IT consultant has performed are working. Companies may also need to show that their security measures are in compliance with applicable regulatory standards and customer requirements.

Conducting regular network assessments can provide assurance to customers or other stakeholders that your systems are secure. That sentiment can mean more if those tests are conducted by an independent third party. It can help put customers at ease if they know that proper steps are being taken to protect their information.

What should companies look for in a provider?

Hire a provider with the right experience, skills and tools to properly perform the testing. Look for an independent, third-party IT auditing expert that will work in partnership with your team.

You will also want to find a provider that is a Certified Information Systems Auditor, Global Information Assurance Certification Certified Penetration Tester, Certified Information Systems Security Professional or is comparably certified, and ask which tools and methodologies are being used. Review the provider’s references and case studies.

New exploits and hacks appear daily that can be used to gain access to a company’s network. It’s important to regularly inspect the strength of your systems to ensure your network is secure against new threats.

Insights Accounting & Consulting is brought to you by Skoda Minotti.

Why enterprise risk management is key to an effective growth strategy

For many owners the value of their business is the largest asset on their personal balance sheet.  As such, it is critically important to manage risk factors that could reduce opportunities and diminish value.

“Evaluating and addressing risk through an effective enterprise risk management process is fundamental to achieving a company’s goals”, says Stephen Christian, Managing Director of Kreischer Miller.

A growth strategy without addressing attendant risks may result in unexpected consequences which limit the chance of success.

Smart Business spoke with Christian regarding the importance of an enterprise risk management system for growing, privately held companies.

What is enterprise risk management?

Enterprise risk management (ERM) is most often defined as methods and processes used by organizations to manage risks related to the achievement of objectives. Risks come in many forms—geopolitical, financial, customer, supply chain, regulatory, litigation, rising costs and so on. Properly managing these risks will help to achieve desired goals.

What does risk management have to do with growth?

All companies that pursue growth take on risk—increasing headcount, adding equipment, entering into new markets, investing in new technology, dealing with new suppliers – all have attendant risks that should be anticipated, planned for and managed. If you omit risk factors from strategic planning, you will be more vulnerable to interruptions and road blocks to growth.

Isn’t this a public company issue?

Absolutely not. Public companies are often larger and more geographically dispersed, thus dependent on systems and processes to drive success. They generally have significant resources invested in evaluating and planning for risk factors that may impede success. Private companies, although perhaps not as large or sophisticated, operate in a fast-paced, complex and, more often than not, global marketplace.

We live in a new era of growing and diverse threats and obstacles to our businesses. All companies must protect their strategy and growth desires by effectively managing risk.

Who should be responsible?

Assuming you do not have a risk management department headed by a chief risk officer, most often this initiative is led by the COO or CFO.

Such a person is often in the best position to look across the organization and focus on the big picture.

This person in turn communicates with the CEO and/or board of directors. The leader of the initiative will have strategic interactions with key people throughout the organization to discuss potential risk factors and their possible impact on desired strategies.

How do you implement an effective ERM system?

First you need to understand the importance of such a system in achieving your goals and be committed to setting a tone at the top. Then assign leadership responsibility to the right person and clearly set forth the expectations for the initiative. The group or person charged with developing the ERM system will identify risks that could impact the business, assess their likelihood and magnitude and determine appropriate responses.

This process often involves scenario planning—what happens if costs go up, access to inventory from another country is interrupted or employment markets tighten. An often overlooked aspect of a successful ERM system is the need to periodically update your findings.  We live in a constantly changing world and these changes often impact the risk factors that can affect a successful business.

Companies need to be resilient and anticipate obstacles to growth and success. Don’t wait until it is too late to plan and make adjustments. The earlier you anticipate potential problems, the more alternatives you will have to navigate changes necessary to ensure you accomplish your goals. So as you plan your future growth strategies, you will be well served to make ERM an integral part of the plan. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

Three things you need to know about your lender

Now that the economy is showing some traction and the business environment is continuing to improve, business owners are looking at opportunities to expand their businesses, including hiring additional team members, purchasing new equipment and making acquisitions.

Such plans often require outside capital, and commercial banks can provide an affordable source of funds.

“The more that you know about your lender, the better your chances will be in securing business credit at favorable terms,” says Mark G. Metzler, CPA, CGMA, Director of Audit & Accounting at Kreischer Miller.

Smart Business spoke with Metzler on the three issues you need to know about lenders.

What are the key factors that lenders use in their decisions?

Lenders assess credit risk based upon factors including credit/payment history, income and overall financial situation. These are commonly referred to as the ‘5 C’s':

1. Character. What kind of borrower will you be for the bank? Character is the general impression you make on the potential lender. It is a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan. Companies don’t repay loans, people do. Your educational background, experience in business and in your industry, the quality of your references, and the background and experience of your management team will all be considered in making this assessment.

2. Credit history. Qualifying for different types of credit hinges largely on your credit history. Many lenders use credit scores to help them in their lending decisions, and each lender has its own criteria, depending on the level of risk it finds acceptable for a given credit product.

3. Capacity. This is the monthly or annual revenues question. No lender is interested in providing a loan to someone who has no means to repay it. Lenders will consider cash flow available to service debt (EBITDA) and the company’s debt service coverage ratio.

4. Collateral. Lenders may make both secured and unsecured loans. Lenders may require you to pledge assets like real estate or capital equipment as collateral. Alternative lenders might consider your accounts receivable, inventory or monthly credit card receipts as collateral.

5. Capital. Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. To your lender, capital represents your ‘skin in the game.’ Remember that bankers are highly risk-averse and want to ensure borrowers have some skin in the game. From their perspective, borrower’s capital will make it harder to walk away.

How have regulations impacted banks and their willingness to lend?

Historically, commercial lenders were not burdened by the same degree of regulations as consumer and mortgage lenders. It was not uncommon that a few notes on a napkin, or a handshake over drinks, were all that a lender needed to initiate a commercial loan request.

That changed with the enactment of the Dodd-Frank Act which has had a significant impact on the manner in which banks conduct business. Dodd-Frank increased the compliance stakes in the commercial application process through new data collection requirements.

Consequently, the timeline from initiation of a loan request to settlement has expanded. New regulations make it more advantageous for a borrower who may need to restructure a loan to find another bank rather than to stay with the current lender.

A loan restructured with an extended amortization with a current lender may be considered a troubled loan, whereas with a new lender it may not be.

Are there intangible factors that a business owner should consider?
Similar looking banks may have a different appetite for providing loans to certain industries. One lender may be interested in technology companies, while another may avoid them.

Additionally, depending upon the size of the bank, the bank may be near its lending capacity for a certain industry.

Business owners should speak with their financial advisers who can assist in matching the company with the right lender. It’s all about relationships, and working together to achieve a common goal. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

How to judge whether a nonprofit is running at its fullest potential

Two years ago a TED Talk by Dan Pallotta reverberated across the country, starting a movement to change the way many people viewed the administrative costs of nonprofit organizations.

Also in 2013, the leading sources of information on nonprofits — GuideStar, Charity Navigator and BBB Wise Giving Alliance — wrote a letter to donors, as part of an overhead myth campaign.

“There’s this stigma,” says Ellyn Lefko, CPA, assurance manager at BDO USA LLP. “Donors want to believe that they are giving their money to the cause. They forget about the fact that helping the cause doesn’t exist if you don’t have the infrastructure throughout the organization to deliver that mission.”

Smart Business spoke with Lefko about whether administrative costs are a bad thing when it comes to nonprofit organizations.

What do administrative expenses for nonprofits typically include?

These are whatever costs are necessary to run the organization that aren’t program related. It’s the general infrastructure, such as the back office staff, IT set-up, training, leadership development, strategic planning, marketing, PR, etc.

Why has overhead been viewed so negatively by donors?

Nonprofit organizations are required to show on their Form 990 how they allocate administrative, fundraising and program expenses. Donors look at that and ask, ‘How much of the dollar that I give is going to directly help the children or feed the hungry?’ They often judge the organization by the overhead ratio — the percentage of administrative costs out of the total expenses the nonprofit has for the year.

How did the TED Talk and the overhead myth campaign address this issue?

The example in the TED Talk* was that you could run a bake sale and earn $75 for your nonprofit with no overhead. Or you could spend $200 on a radio ad campaign, reach more people and bring in $500 while also having the benefit of increasing your exposure and donor base. Why is it wrong to spend more if you end up better off?

The CEO of a corporation makes six or seven figures, but the CEO of a hunger charity is scrutinized if he or she makes $80,000. How can a nonprofit get the best talent that can execute new strategies if it cannot pay market salaries?

If the organization doesn’t pay for good accounting staff, it won’t have adequate controls and fraud is more likely to occur. If there’s turnover year after year, the nonprofit will be playing catch-up and the records won’t be in order. If the IT system isn’t up to date, computers could consistently crash.

It’s a penny-wise, pound-foolish mentality. Are you really doing what’s best just because you want donors to believe that every single dollar goes to the mission? The mission isn’t there without the overhead.

How should nonprofits and their leadership find the right balance of expenses?

It can be difficult, but investing in the overhead can enable nonprofits to reach more people, and be more effective and efficient. Therefore, the organization needs a good understanding of its true costs, so it can try to be consistent and appropriate in how it allocates funds.

The leadership also needs a clear idea of the nonprofit’s goals and what it will take to achieve those goals. If you’re building a new facility that will further the mission, the administrative costs will go up significantly — but it’s not necessarily a bad thing in that scenario.

Donors may be concerned with expenses and overhead, so be transparent and educate them. Instead of only looking at the overhead ratio, encourage them to ask different questions. What is the effectiveness of your organization? How efficiently do you carry out your mission? How many participants did you reach?

Just like in corporate America, the nonprofit needs to consider ROI and value. Look at your fundraising efficiency. How much does it cost you to raise a dollar, and how successful are you in doing that?

This doesn’t mean administrative costs should run amuck, but it can mean taking on a different mindset at what the nonprofit potentially loses by focusing so tightly on overhead costs.

*To learn more about the overhead myth, visit http://overheadmyth.com or www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.

Insights Accounting & Consulting is brought to you by BDO USA LLP

How to get ready for an audit — before the auditor comes

As audit season comes to an end, it’s a good time to reflect on what went well and what you could have done better to ensure a smoother, more efficient audit.

“Audits can be disruptive to your business if you aren’t fully prepared,” says Deborah Sabo, assurance senior director at BDO USA LLP. “Auditors have to come in and ask a lot of questions. And we ask for support from the accounting personnel.

“The key to being ready is to do as much preparation beforehand as possible,” she says. “Keeping organized records, an ongoing general ledger account review and a reconciliation of all balance sheet accounts will help make our job and your job easier — and can result in a more efficient, effective audit.”

Smart Business spoke with Sabo about how companies can prepare for their next audit, to make it as smooth as possible.

What is the most important step a company should take when preparing for an audit?

The most important thing is to actually close your books before the auditor arrives. If you haven’t gone through an analysis of your accounts, it makes the audit a longer and more difficult process for both you and your auditor.

Auditors also send a list of required information, sometimes referred to as a prepared by client (PBC) list, which your organization needs to gather in advance. That information from the PBC list needs to be available on the first day the auditors are at your location.

Ideally, you should be closing your books on a monthly or quarterly basis, so you already know that you have accurate financial information. The CFO and/or CEO needs to review the financial statements on a regular basis to make sure things look right.

Is that part of a long-term strategy a business can employ to keep it prepared?

Yes. You shouldn’t just be concerned about your books and records when the auditors arrive. On a monthly basis, all of your balance sheet accounts should have a schedule that analyzes each of those accounts and is tied to your trial balance.

In addition, you should review your monthly transactions to ensure vendor invoices are properly coded to the correct general ledger account. For example, your accounts payable clerk may get a vendor invoice for advertising and accidentally code it to the printing general ledger account. By reviewing all your transaction activity regularly, you can identify mistakes sooner.

It can be painful to implement a control process at first, but it makes it so much easier going forward. If your internal resources are inadequate, a good accountant can help you set up sound procedures and schedules.

Why is it so important that organizations are ready?

During the busy season, auditors are working with multiple clients trying to meet multiple deadlines — all in a short period of time.

If you aren’t ready for an audit on the date you set, you run the risk of your auditor not being able to reschedule right away because his or her days are already so packed helping other clients. The window of time he or she has available is probably very small, and if you have to delay your audit you could end up missing a deadline.

In that case, there can be financial repercussions.

Your bank may require the audit by March 31 or April 30, and if you don’t make that date you’ve violated your debt agreement. A bank would have the right to call the note or whatever debt there is, but usually the lender will charge a higher interest rate or fee. The auditor cannot issue the audit report until you get a written waiver from the bank — and that waiver could cost $5,000.

How can a required audit be an opportunity to improve the company?
Auditors are looking to understand your business so they can identify any risks associated with your company and where mistakes could happen.

This allows them to provide recommendations, such as better internal controls to make your processes more efficient or ideas for improved processes that control your cost structures.

They also can tell you about additional business resources that are available to you to improve your business. ●

Insights Accounting & Consulting is brought to you by BDO USA LLP

S corporation vs. LLC: Which is the better option?

One of the first tasks a new business owner must address involves the question — What type of entity should I choose to operate my business?

“A common tax consideration is a desire to avoid double tax in which the operating profit of a business is taxed initially at the entity level, followed by an additional tax when after-tax profit is distributed to the owners,” says Michael R. Viens, Director, Tax Strategies, Kreischer Miller.

Smart Business spoke with Viens about considerations that may arise should you decide to operate a business venture as a pass-through entity, either a limited liability company (LLC) or an S corporation.

Does incorporation help protect personal assets from a business?

When a company decides to operate a business using a formal intermediary entity, it’s typically to shield the business owners’ personal assets from the risks of the business’s creditors. Both LLCs and S corporations offer this benefit. But there are formalities that must be addressed to assure such results.

Some advisers argue that the formalities and related paperwork are more of a burden for an S corporation. For example, there are annual meetings and corporate minutes requirements. An LLC avoids such requirements. Such activities need not be a material burden, however, and offsetting this issue is the greater clarity an S corporation offers with its formal ownership structure.

S corporations do have greater restrictions on ownership than LLCs. Permitted S corporation shareholders are both limited in number (no more than 100) and type (generally, U.S. citizens or permanent residents and certain trusts).

What are the tax implications between the two types of entities?

An owner in an LLC is treated as a partner in a partnership for tax purposes and partners do not qualify as common-law employees with regard to the partnership. LLC owners cannot receive W-2 wages in which tax is withheld, and thus owners are required to make quarterly estimated tax filings, a consideration that could weigh against using an LLC.

Wages paid to an S corporation owner for services performed are subject to Social Security and Medicare taxes but allocations of S corporation profits will not be.
Allocations of LLC profits to a member who performs services in the LLC generally will be subject to Social Security and Medicare taxes. For a service-oriented business venture, this can favor an S corporation. It is important to note, however, that tax reform provisions now being considered would potentially eliminate the favorable benefit currently realized by S corporation shareholders.

Where the activities of the business venture do not involve personal services but rather some form of investment activity, passive income limitations may prevent the use of an S corporation. Using an LLC for ownership of real estate involved in rental activities is usually preferred.

If a business venture will own property likely to appreciate in value and a reasonable prospect exists that new owners will acquire a future interest, an LLC provides for favorable tax considerations to such owners. They may acquire a stepped-up basis to be used to determine both deductions flowing to them as well as their share of any gain or loss upon disposition of such assets by the LLC. No such basis step-up is allowed to S corporation shareholders.

Where losses may be anticipated from business operations, an LLC may provide a better outcome to the owners since loss limitations referencing owners’ basis will typically include mortgage and other debt inside the entity. S corporation shareholders are limited to their stock basis and any personal loans they have made to the entity.

Which type is better?

It is not uncommon for there to be some level of uncertainty about which form represents the best solution when a new business venture is launched. In such circumstances, consider going with an LLC approach at least initially while reserving the option to change to an S corporation in the future. Such a change can generally be carried out with little or no immediate tax implications, while a move in the opposite direction can present significant tax costs.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Outsourced accounting service can help smooth your operations

Many businesses fail to realize that when they reach $150,000 in revenue from taxable sales or services, they are subject to a commercial activity tax. And that’s not all they may miss, says Dawn M. Gainer, Managing Director of Small Business Services at Skoda Minotti.

“For instance, taxable sales for sales tax purposes and taxable sales for commercial activity purposes are different,” she says.

Smart Business spoke with Gainer about leveraging outsourced accounting services to stay focused on core competencies.

What is the top concern of small to midsize businesses regarding finances? Businesses are spending too much time on their financials; not just on bookkeeping, but analyzing the numbers when that really is not their area of expertise. Many business owners either don’t have the time to work on financials or don’t have the expertise to handle the responsibility correctly.

Business owners should spend their time doing what they do best and let consultants help them with functions that lie outside their wheelhouse.

How might accounting services help? Those who own a business, regardless of its size, have multiple business taxes to consider. If you have employees, there are payroll taxes and workers compensation. If you sell a product or service, it may be subject to sales tax, and once a certain level of sales within Ohio is reached, you are responsible for the Commercial Activity Tax. An accounting firm can serve as a client adviser and help with compliance while also filing and paying any requisite taxes owed by the company.

If a company has fixed assets, the firm can maintain the fixed asset listing, calculating depreciation and other items such as gains or losses on disposal of assets. The firm also can help if the company disposes of or purchases assets frequently — guiding it through the financial/tax reporting system.

What other financial management services can firms provide? Accounting services firms can handle payroll responsibilities for a business or interact with a company’s outsourced payroll service. The responsibility for payroll could be split between the two outsourced partners, with the payroll service being responsible for paying employees and the accounting firm responsible for preparing the payroll tax returns. An accounting firm can also work closely with payroll companies to make sure the information that comes from the payroll service is incorporated into the financials of the business correctly, accurately and timely.

What other advantages can a firm offer? Working with financial experts allows a business owner to focus on what the owner does best — running his or her business. If you are a business owner, sometimes you feel have to be a jack-of-all-trades, and something is going to suffer.

If payroll taxes, sales taxes and commercial activity taxes are not filed properly and timely, there could be significant penalties and interest that accumulate. An accounting services firm can help lessen a business’s income tax burden by ensuring that the company takes advantage of all the business deductions to which it is entitled. A firm will classify things appropriately throughout the year and advise a business on best practices.

An accounting firm can help a company manage its business by providing the right tools: financial statements that are accurate and timely that can be used to analyze the business and offer revenue enhancement, and/or cost reduction strategies. A firm can also offer guidance on reading those financial statements so a business knows — and understands — its financial health at any point in time.

Also, if a company needs to look for bank, other debt or equity financing, the lender is going to ask for a proper set of financials. Often, the lender is going to ask if your accountant has reviewed them, thereby adding credibility to the numbers.

Another advantage is an accounting firm is able to offer different service levels. You may not need a firm to handle day-to-day bookkeeping, but you would like a monthly or quarterly review of your financial data; that can be arranged. Many firms also offer on-demand support — whenever you need help or have a question, call your firm; together, you’ll assess whether it’s a routine or complex issue and the firm can offer suggestions or solutions to resolve the issue.

Insights Accounting & Consulting is brought to you by Skoda Minotti 

How to stay compliant with out-of-state taxes and minimize penalties

States are hungry for revenue, which means nexus questionnaires that determine the connection required for a state to be able to levy a tax on a person or company are on the rise.

States send out these questionnaires after identifying potential non-filers. One of the ways they do this is by auditing in-state companies that do business with out-of-state vendors. In this environment, to be compliant and minimize your potential penalties, it’s important to stay proactive.

“It’s a matter of understanding your exposure,” says Deborah R. Kovachick, CPA, MT, director of tax at SS&G. “It really depends on the facts and circumstances of your unique company.”

Smart Business spoke with Kovachick about why nexus has become a hot topic and what to do about it.

How has the definition of nexus evolved?

Nexus used to require a physical presence in a state, such as owning or renting tangible property or having employees who performed services in the state. Today, not only are more companies conducting business on a multi-state basis, but taxes also may capture a broader range of activities.

In 1959, Congress enacted Public Law 86-272 to provide protection from state income tax for out-of-state sellers of tangible personal property whose activities in a state didn’t go beyond solicitation of sales. This law doesn’t apply to state gross receipts taxes, sales and use taxes or franchise taxes, so the nexus threshold is lower for these taxes.

What do Internet sales mean for nexus?

Internet sales have caused states to lose tax revenue from people who previously purchased products from in-state retailers and paid sales tax. At some point, federal legislation on Internet sales will even out the playing field, but it’s still stalled in Congress.

Today’s situation puts a spotlight on nexus and filing responsibility. It has caused some states to change tax statutes or how they interpret statutes to recapture lost revenue. For example, a company may have no other contact with a state, but if sales go over $500,000 or apportionment factors in that state are greater than 25 percent of total apportionment, nexus could be established.

Will states ever have uniform rules?

No, the country is just too vast, both geographically and culturally. The states and their constituents need and want to control how they generate tax revenue.

How can businesses stay in compliance?

When initiating business in a state or starting a new business line, a company must consider the ramifications on its state tax filing requirements.

As for old activities, there may be no statute of limitations. If no returns have been filed, states can go back to when a company started doing business there and assess tax, interest and penalties. The penalties can be severe — 25 percent or more in some states on top of the tax assessed — and interest can really add up.

Those at risk should consider investing in a nexus study to determine their exposures. This includes:

  • Businesses with a heavy concentration of sales in a state where they are not filing.
  • Companies providing services to clients and conducting activities in a state that go beyond the solicitation of sales of tangible personal property.
  • Owners who are considering selling, to see if eliminating or reducing exposure can provide a clean bill of health to potential buyers and prevent reductions in the business selling price. State tax exposures are a hot topic during due diligence.

How does a nexus study work?

Nexus studies start with fact gathering to understand where and how a company is conducting its business and the volume of business in various jurisdictions.

After tax experts determine where there are filing requirements, they can help calculate potential exposure — tax, interest and penalty — in each jurisdiction. Then, you can make an informed decision about whether or not to take action. If you decide to reduce or eliminate that exposure, a third-party can approach the state to minimize the look back period and generally get any penalty abated by negotiating a voluntary disclosure agreement with the state.

Only by being proactive and determining where you have nexus can you understand any tax exposure.

Insights Accounting & Consulting is brought to you by SS&G

How to review your mid-year financials to boost your paycheck, reduce taxes

Most taxpayers, when you get down to it, have similar tax returns year after year.

But some years, your situation may have changed and as a result, your tax position will be affected. For example, did you get married? Have you had a baby or adopted a child? Is a son or daughter now in college or perhaps you returned to college yourself?

If you have become accustomed to the idea of a big refund equating “bonus,” it may be time to understand what that means. “In short, you are loaning the government your money interest-free throughout the year, instead of having that money in each paycheck. Mid- year is a great time to look at how your withholding is shaping up,” says Jenna Staton, EA, Tax Manager at Skoda Minotti.

Smart Business spoke with Staton for some tips as to why it’s a good time to check your tax situation now to help position you favorably for the rest of the year.

What is the first step I should take when I review my mid-year tax situation?

Make sure you’re claiming the correct number of exemptions. Remember, the more exemptions you claim on your W-4, the less that is deducted from your paycheck. This is especially important for taxpayers who have been married or plan to get married in 2014. Even if you get married on Dec. 31, you’re deemed to be married all year.

The same is true for divorce situations. You might have had your withholding as ‘married;’ if you change to ‘single,’ your tax rate and bracket could change significantly.

If I have medical expenses, what should I keep in mind?

There is a medical expense threshold of 10 percent of your adjusted gross income. Meaning, if you make $100,000, you’d have to spend $10,000 in medical expenses out of pocket before you’d receive $1 of deductions. Most taxpayers do not qualify for a medical expense deduction.

However, at this point, you can look at the first half of the year medical expenses and group those together then look ahead at the remaining months; perhaps you need glasses or dental work — you want to get it all done within the calendar year because that’s when you may have a combined amount that provides the medical expense deduction.

Remember, you can’t deduct contributions to your Health Savings Account or your Flexible Spending Account.

What is important to remember about charitable donations?

People often donate their clothing and household items but don’t know what they should list as the value. I always send them to the Goodwill website. It’s a very good website that lists how much their items are worth.

What about contributions to a 401(k) account?

Generally, you make a pre-tax contribution through your company payroll of up to $17,500. Those age 50 and over may be able to contribute a catch-up contribution by adding $5,500 to their deposits this year, for a total limit of $23,000. This money will grow tax-free for retirement.

Can you give some advice about preparing for storm damage?

It’s always good to have pictures or videos of your personal belongings before a situation arises; you can use them to substantiate the value of the item. The more detail and documentation you have, the better.

Back up records electronically via CD, DVD, flash drive or external hard drive and store it and other pertinent paperwork at an alternate location such as a safety deposit box or the cloud. As far as important papers, IRS. gov stores prior tax returns if they become lost or damaged in a weather- related situation. 

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