SHOP, drop, roll or self-insure: It’s not too late to examine all health insurance options and switch

The 2015 tax season will soon be in the rearview mirror. But that doesn’t mean businesses should stop evaluating health insurance options. Since the dawn of the Affordable Care Act (ACA), businesses have been trying to figure out what’s the best route to take when it comes to health care coverage. There are a handful of options — all with unique pros and cons.

“Health care insurance options are something all businesses should be evaluating continuously,” says Joe Popp, tax manager at Rea & Associates. “Just because a business decides one route is best right now doesn’t mean that it will be the most effective or efficient choice down the road.”

Smart Business spoke with Popp about five health insurance options — Small Business Health Options Program (SHOP), drop, roll, self-insure and private exchange.

What is the SHOP and who benefits?

The SHOP is the business portal to exchange insurance. Right now in Ohio, it’s available only to companies with fewer than 50 full-time equivalent employees.

It’s best for a company that is having trouble paying for coverage or doesn’t want to contribute a lot for insurance, and whose employees generally wouldn’t get a premium tax subsidy. The employer can put as much or as little toward insurance as it wants, but the employees still can pay with a pre-tax deduction.

The drop option is self-explanatory, but doesn’t it hurt the employees?

If a business drops health insurance coverage altogether, employees would have to buy insurance on their own. If the employee qualifies for premium subsidies or cost sharing they often get better quality coverage for a lower price than with their employer.

Dropping coverage may be the best option for companies whose employees would be eligible for premium subsidies, meaning relatively low income individuals or families with many children and relatively high income (single breadwinner families).

How does roll work?

You continue with your current coverage, even though it may be inefficient in the short term. Many people decided last December to renew early and roll over coverage to get another year of reduced ACA compliance and cost.

This is typically the best option for those with more than 50 employees who want to take a wait and see approach. With uncertainties in legal challenges, new requirements coming online in future years and the exchanges still in their infancy, choosing to delay a major change for a few years is a perfectly fine strategy.

What is the self-insure option?

The employer takes on the risk that an insurance company normally takes, up to a certain dollar amount, and gets a stop-loss plan over the top for a smaller premium. The employees still pay into a system, but often at lower amounts.

For the employer, some years you’ll ‘win’ and some you’re going pay a few large deductibles. As long as, on average, you come out better in the years when no one has high medical costs, the business as a whole wins. This is a good option for those with 100-plus employees as they can more effectively spread risk.

How does the private exchange operate?

Instead of using the federal government’s exchange, you access a custom exchange with a smaller set of providers. It’s best for employers with 100-plus employees.

Your company can set up a private exchange and employees pick what they want with a monthly stipend. The employer contribution might cover the bargain basement $6,000 deductible coverage, and if employees want better coverage, they pay in. It’s like shopping on with a gift card from the employer.

When do employers need to make a decision?

Before your next insurance renewal date, evaluate these options to see if one is more efficient. Think about it, talk to employees and run numbers to see what it could do for employer and employee costs. Do the groundwork now, even if you don’t end up making a change until next year or after.

Insights Accounting is brought to you by Rea & Associates

Equipment appraisal: When you may need one and what to expect from it

At some point in time, almost every business owner will be faced with the question -— what is your machinery/equipment really worth? Book value is rarely an accurate representation of what the equipment is really worth. The ones asking want to know the real value, one that is accurate and can be substantiated.

Knowing when this question might arise and what to expect when it does could enable a business owner to be prepared with an answer… even before being asked.

Smart Business spoke with Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC, about machinery and equipment appraisals.

When is it time to have a certified appraiser evaluate a business’s equipment?

There are more than 20 reasons why businesses may need a machinery/equipment appraisal. Some of the most common reasons for appraisals are mergers and acquisitions, business valuations, bankruptcy, financing and SBA lending, insurance, buy/sell agreements, property taxes and partnership dissolutions. A certified, reputable appraiser has the training, expertise and knowledge to provide a value that can be substantiated and reflects the true value of the equipment.

Are there different types of certified appraisal reports?

Yes, according to the Uniform Standards of Professional Appraisal Practice (USPAP) for personal property appraisals, section 8, there are two types of written appraisals; Appraisal Reports and Restricted Appraisal Reports. A Restricted Appraisal is one in which the client and intended user of the report are the same. However, if the intended user(s) includes someone other than the client under USPAP standards, the appraiser must use the Appraisal Report format. If anyone other than the appraiser’s client will be relying on the report, it cannot be a Restricted Appraisal Report.

How long does an appraisal take?

It will depend on several factors; first, how much equipment is being appraised. A large factory with thousands of pieces of machinery will take far longer than a small restaurant with only a couple of dozen pieces of equipment.

Other factors that can affect how long the appraisal will take are timing requirements — when do you need it, how many levels of value are being requested, and the type of equipment is it rare or can comparable items be easily found.

What will a certified appraisal cost?

Every appraisal has different requirements. The simplest answer is the cost will vary with the scope of work.

What can I expect during the process?

Expect the appraiser to view the equipment and document any pertinent information that will help to identify the equipment. The appraiser will ask about the make, model and serial number of the equipment, its condition, whether it has been properly maintained and if there are maintenance records and if the equipment has special features or upgrades. Appraisers may let clients know in advance what they will be looking at and any documentation they will need so that it can be available during the inspection.

Once the appraiser has documented the equipment. the research process begins. The appraiser will establish a value for the machinery/equipment and then write and certify the report.

Is the appraiser required to personally view the equipment?

An appraiser does not need to personally view the equipment. The appraiser can rely on another party (including the client) to provide necessary documentation. This is considered a “desktop appraisal,” and the appraiser is required to disclose this within the report and in the report certification.

What should a business owner look for when choosing an appraiser?

When choosing an appraiser, a company shouuld only use a “qualified appraiser.” This individual, as defined by the IRS, has earned an appraisal designation from a recognized professional organization for competency in valuating property. Also, qualified appraisers regularly prepare appraisals for which they are compensated and demonstrate verifiable education and experience in valuating the type of property being appraised.

Accounting is brought to you by Cendrowski Corporate Advisors LLC


How financial reporting can help foster board member involvement

From time to time, nonprofit organizations may experience a lack of engagement of their board members during regular board meetings. There could be many reasons why board members are not engaged in meetings, but sometimes it’s up to an organization’s staff to find ways to involve board members more in the decision-making process.

Smart Business spoke with Ben Antonelli, CPA, a principal at Rea & Associates, to learn more about what nonprofit organizations can do to increase board member engagement during board meetings.

What are some possible reasons for decreased board engagement?

While a large majority of board members have a passion for their organization’s exempt purpose, they may not be as engaged when it comes to making financial decisions. Maybe the organization’s internal financial reports are not provided in a timely fashion, are too detailed or do not provide narratives to be reviewed prior to meetings.

In order for board members to make sound decisions, they need to be equipped with the right information.

How and when should board members be provided with information?

Board packets and presentations that include financial reports should be available to board members several days before the meeting. Sending out the packet the night before the meeting can put unnecessary pressure on the members, and may make it difficult for them to make educated, well-thought financial decisions during these meetings.

How much detail should be provided in the financial reports given to board members?

Nonprofit organizations should be mindful about the level of financial detail provided to board members. There may be times when they are provided with too much financial data on large spreadsheets. It may be difficult for board members to digest and analyze the information in the time leading up to and during the meeting.

Although detailed financial data should be available to board members upon request, financial statements reviewed during board meetings should be limited to summarized data. In addition (and this varies by organization and industry), relevant metrics or ratios should be given.

This report should show the increase or decrease in various metrics over time, usually multiple years. In order to be meaningful, organizations should use the same report format during all meetings so board members can become familiar with it.

What else should be included in board meeting packets?

  • Show an analysis of the actual budget versus the approved budget or operating plan. Most organizations operate with an approved budget or operating plan. If organizations do not have such a budget, it is critical to create one. For organizations with a budget, showing a comparison of the actual budget versus the approved budget for the past month and the year to date is useful.
  • Provide a brief narrative of financial results. In addition to financial data, a narrative explaining the organization’s analysis of the most recent financial results is also very helpful. Organization staff typically knows much more about the organization than the individual board members, so providing an explanation as to why the numbers are the way they are will help provide a level of context.
  • Disclose the basis of accounting if it is different from generally accepted accounting principles (GAAP). Many organizations that produce annual board-approved GAAP financial statements also produce monthly board reports on a separate basis. If an organization reports this way, a simple footnote or disclosure to the board stating that a different basis exists will help avoid any confusion at the end of the year.

An engaged board can help propel an organization forward, and likewise, a disengaged board can hold it back.

Organizations should give board members the tools they need to be active, strategic and valuable.

Insights Accounting is brought to you by Rea & Associates

There’s much to consider before bringing foreign employees to the U.S.

Foreign-based businesses are increasingly expanding their global operations into the U.S. As they do, they’re bringing talent with them from their home countries.

Most foreign businesses thoroughly prepare employees for the move. Many, however, do not convey the full impact of relocating their workforce, especially the resulting tax implications for employees.

Smart Business spoke with Lourdes Rabara, a tax professional at Sensiba San Filippo LLP, to learn about the challenges of transferring foreign workers into the U.S. She also discusses best practices business owners should implement as they plan their expansion.

What are some of the biggest challenges involved in relocating employees to the U.S.?

Expanding into the U.S. can be a complicated process for both the business owner and the employees. How the move is executed can lead to the successful growth of the firm, or if mismanaged, the failure of the company.

A critical step for business owners who are planning a move is to appoint a team of business advisers to assist them with the vast amount of preparation required. There are key areas of support business owners should provide to their employees. These include offering financial assistance and opportunities to meet with a tax professional, and talking with an HR professional to address cultural changes, language and workplace requirements. Business owners should ask their financial adviser to share referrals to other service providers with whom they have a trusted relationship.

What financial effects should be considered?

Business owners need to ensure that their employees have the financial tools to make the transition. As a best practice, business owners should have an equalization policy in place. This policy is specifically designed to ensure that each employee’s real income is equalized with the income they were receiving at home. That consideration takes into account all financial variables including changes in cost of living, taxes and more.

A financial adviser can help clients build plans that include understanding and calculating all of the financial effects of transplanting employees. This should ‘make them whole’ for any loss of income or expenses incurred because of the move.

What are the employee tax ramifications that employers should consider?

Tax compliance can be difficult for U.S. citizens. For foreign employees working in the U.S., compliance requirements can be overwhelming without proper guidance. Business owners should have resources available in advance to help their employees navigate the financial and tax implications.

Many factors can affect the tax situations of foreign employees. Considerations include how long they will be working in the U.S., marital status, the tax situation in their home country, foreign assets held and more. For example, if an employee will be working in the U.S. for more than 183 days, he or she may be treated as a resident of the U.S. That would mean worldwide income must be considered.

There could also be an issue of double taxation and the application of foreign tax credits. If an employee is involved in the ownership of foreign companies or holds substantial foreign assets, he or she may have additional reporting requirements.

Working in the U.S. can be challenging on many levels. Employers who desire happy, productive employees should make every effort to ensure the transition is as smooth as possible. Partnering with a U.S. based adviser that is experienced with the issues that affect foreign companies expanding into the U.S. is a great first step.

Insights Accounting is brought to you by Sensiba San Filippo LLP

What small businesses can do to prevent and detect occupational fraud

All things change, yet all things remain the same. The Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse (“ACFE Report”) is consistent with the organization’s prior studies, as to which entities are most likely to be victimized by fraud and measures that can be taken to effectively deter and detect fraud.

Businesses continue to be plagued with “occupational fraud,” the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

“Occupational fraud can be classified into three broad categories: asset misappropriations, corruption and financial statement fraud,” according to Natasha Perssico, forensic accountant, and James Schultz, Principal, at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Perssico and Schultz regarding the issues of fraud and steps that small businesses can take to reduce fraud.

How common is the occurrence of fraud in small businesses, and what impact can it have?

Small businesses having fewer than 100 employees are more frequently victimized by instances of occupational fraud, accounting for nearly 30 percent of fraud cases reported. The risk to small business as targets of fraud is compounded by the fact that many small business owners think they cannot afford to invest in fraud prevention and detection policies and procedures. In actuality, small businesses cannot afford to not implement fraud prevention and detection procedures. However, median losses for small businesses and large entities are quite close in dollar amount — $154,000 and $160,000 respectively. While a larger organization might be able to absorb losses and recover from a financial blow of this magnitude, a smaller business might not be able to recover.

What steps can be taken by small businesses to prevent fraud?

Small businesses owners will be relieved to know that there are many simple, effective and affordable practices that could be implemented by small business. Here are some key steps for owners to employ to minimize acts of fraud:

  1. Segregation of Duties. Many small businesses rely on one person to open mail, process payments, make bank deposits, pay invoices, handle petty cash and reconcile bank statements. Such unchecked access creates an opportunity for fraud and misappropriation of assets. Segregating accounting responsibilities so that no single individual controls all of the financial activity and reporting of that financial activity reduces the risk of fraud.
  2. Insist on receiving and reviewing bank statements first. You should have the original or a duplicate bank statement sent to your home address or a secure P.O. Box directly from the bank. Make it a regular habit to review bank statements for missing checks, checks that are out of order, checks written to unfamiliar suppliers or other unknown persons and checks made out to a third party but endorsed by someone in your company. Informing your employees that you review the bank statements independently of accounting personnel will also serve as a fraud deterrent.
  3. Review accounts receivables, cash receipts, and uncollectible accounts. Understanding trends and investigating changes in accounts receivables and cash receipts is a useful practice. Unexplained declines in cash receipts and increases in uncollectible accounts write offs could be a flag that misappropriation of cash is occurring before bank deposits. Sending customers account statements is a good procedure that can possibly reveal any discrepancies as customers will complain if the amounts said to be owed by them are erroneously overstated. Write-offs of uncollectible accounts should also require approvals.
  4. Educate employees about what behaviors are unacceptable and how to report suspicions of fraud. Employee tips play an important role in fraud detection. Employees should be informed that fraud is unacceptable, how fraud can negatively impact the organization, and how it can negatively impact the employees personally.

What are some positive results of implementing a fraud prevention program, and who can help in creating a good program?

For small businesses even simple procedures can make a large impact on the company’s image and financial health. Organizations with strong and frequently communicated fraud deterrence policies are better situated for early fraud detection and the mitigation of large losses due to long running frauds. Further, holding other operational issues aside, organizations with strong anti-fraud programs also benefit from a less risky image leading to greater shareholder, creditor, and employee confidence in the organization.

Organizations unfamiliar with fraud prevention and fraud risk assessment programs should rely upon qualified fraud experts in conducting and implementing these important processes.

Insights Accounting is brought to you by Cendrowski Corporate Advisors.

Should you start your own insurance company? Consider the benefits

Traditionally, business owners have turned to the insurance industry for protection against risks associated with their professions, including malpractice litigation and product liability. As a result, insurance companies have been able to charge high premiums for their services. But what if business owners started their own?

Smart Business spoke with Christopher Axene, CPA, a principal at Rea & Associates, to learn about captive insurance companies and how they can be used to help business owners lower their taxes while increasing wealth.

What is a captive insurance company and how can it be used as a tax planning tool?

Captive insurance occurs when a company or service professional purchases insurance coverage from an insurance company they also own and control, and this can be a desirable option for many business owners.

The captive insurance option allows business owners to pay insurance premiums to their own insurance company and claim the tax deduction associated with this expense as they normally would. But instead of paying another insurance company, they pay the premiums to themselves.

Furthermore, because of a provision in the tax law, the captive insurance company doesn’t pay taxes on the premium income it collects, as long as the premiums total no more than $1.2 million per year.

Another tax consideration for those interested in starting their own captive insurance company is that at the end of the coverage term, the unspent premiums can be reinvested and any dividends received will be taxed at a significantly reduced rate. The law says that captive insurance companies can deduct 70 percent of the dividends they receive from stock portfolio investments.

Is a captive insurance company still a valid safeguard against risk?

To be considered ‘insurance’ and a valid safeguard against risk by the IRS, the captive insurance company must meet two qualifying factors — risk shifting and risk distribution. Risk shifting means that risk can be shifted from the business to the captive insurance company.

Achieving risk distribution is a little harder because it means that the captive insurance company must be a part of a risk distribution system — a group of captives that share each other’s risks. Typically, the premiums one would pay into their insurance are used to safeguard their business against smaller risks. For larger issues, such as a malpractice claim, funds to help settle the claim would be pulled from the distribution pool.

How do I know if a captive insurance company is the right strategy for my business?

Business owners across all industries are eligible to establish a captive insurance company, but certain factors may make this strategy more desirable to larger companies. First, upfront costs should be considered. This would include any research conducted on the business, service fees and any legal considerations associated with setting up the entity. But once it’s established, there are service providers that are available to manage the captive, giving business owners the freedom to concentrate on their business.

Second, while a captive insurance company can help an owner realize significant tax savings and increase wealth, using this entity as a tax planning strategy is only possible if few (or no) claims are made against their business — at least during the first few years to give the owner time to reinvest the premiums they originally paid into the captive.

In other words, if an owner sets up a captive insurance company and is forced to make a claim in the first year or two, the owner may wind up diminishing the account and owing more than what the owner has, which isn’t an optimal outcome for anybody.

When done properly, a captive insurance arrangement can provide business owners with a cheaper insurance coverage solution. At the same time, when claims history is low, the profits of the captive can be reinvested for the owner’s benefit.

Insights Accounting is brought to you by Rea & Associates

Avoiding the pitfalls, reaping the benefits of a C-corp to S-corp switch

Most business owners understand the importance of selecting the optimal corporate structure and tax status for their companies, but fewer know about the process, benefits and potential pitfalls of converting an existing business from a C-corporation to an S-corporation.

Smart Business spoke with Jay Lee, a tax specialist at Sensiba San Filippo LLP, to learn more about S-corp conversions and to get an analysis of the benefits of potential S-corp conversions — looking at both short and long-term costs, benefits and roadblocks.

What are the most important considerations for a company considering an S-corp conversion?

Business owners should take a comprehensive, long-term approach when considering an S-election. They must determine whether they qualify for S-corp filing status. S-corps can have no more than 100 shareholders, who must be U.S. citizens or resident aliens, and can only have one class of stock. C-corps with international owners or several classes of stock will not qualify to make an S-election. Companies should consider current funding and potential future methods of funding before electing to be taxed as an S-corp.

Tax ramifications may be the next decision point. At the federal level, income from a C-corp is taxed twice — once at the corporate level and second at the shareholder level when dividends are paid. In contrast, income from an S-corp is taxed only once at individual income rates, while distributions to shareholders can generally be made tax-free. Some states, however, impose a corporate-level tax for S-corps. For example, California imposes a lower 1.5 percent tax to S-corps compared to 8.84 percent to C-corps, providing additional incentive for conversion.

What critical issues could drive the decision to convert to an S-corp?

While the tax benefits of filing as an S-corp may seem straightforward, converting to an S-corp may have some lingering corporate level taxes from activity as a C-corp. For example, there is a net unrealized built-in gains (BIG) tax that imposes a corporate-level tax to an S-corp when disposing assets within the recognition period, which was five years in 2014 and currently 10 years for conversions occurring in 2015 and beyond. The tax is assessed on the amount that the fair market value exceeds the tax basis of an asset at the time of conversion. Proper planning should be considered when converting to an S-corp, as disposing of certain assets such as inventory may be inevitable in the normal course of business.

Special consideration should be made for cash basis corporate taxpayers. Assets such as accounts receivables may not appear on the face of the balance sheet and can be overlooked as an asset subject to BIG tax once the receivables are collected. An uninformed taxpayer may unexpectedly be hit with the BIG tax for sales or services performed as a C-corp and taxed at the highest corporate tax rate of 35 percent because of the conversion.

The BIG tax is subject to the highest corporate tax rate of 35 percent if assets are disposed of within the recognition period after conversion. Companies should be aware of corporate-level taxes as they are considering the conversion in order to manage cash flows and to allow for proper planning to minimize the tax effects.

How should business owners approach this important decision?

The decision to convert from a C-corp to an S-corp should be a well-planned, strategic decision that considers both short- and long-term plans for the business. While tax considerations are important, current and future ownership, funding considerations and the business owner’s exit strategies are also critical.

Insights Accounting is brought to you by Sensiba San Filippo LLP

More than a resolution for a business, controlling cash flow is a responsibility that’s essential

This is the time business owners search for a resolution that will help make 2015 one of the best years yet for their organizations. But instead, they should stop searching and look at their company’s cash flow.

Managing a business’s cash flow is critical, especially if an organization is interested in protecting its liquidity and future growth. Business owners know that various sources of cash are available to them, but do they have a plan in place to help manage it once it has been acquired?

Smart Business spoke with Dave Cain, CPA, principal at Rea & Associates, to find out how business owners can start the new year on the right foot.

Why is managing cash flow important?

Cash flow is the lifeline of a business — not to mention a powerful management and accountability tool — and a 13-week cash flow projection will provide the business and its stakeholders a detailed picture of how well the business is doing. In addition, it can empower the management team to become more accountable to the business’s success.

Internally, a regularly maintained cash flow projection will help a company develop timely and attainable goals. When the business owner and the management team have a better idea as to how much money is going out and coming in (and why), they can adopt plans to manage the cash flow in a more favorable way.

When the business is managing cash acquired from an external source, the projection becomes a way to provide stakeholders with the information they need to monitor their investment. For example, a bank may require the company to provide quarterly financial information to ensure that it complies with the terms of their investment.

What does a business owner need to include in the cash flow projection?

To generate a strong projection, business leaders must include data from a variety of sources. For example, analyze accounts receivable to determine ways to quickly turn them in to cash or to better manage sales and improve profitability. Current inventory levels can also be reviewed. Excess inventory is cash that has already been spent and is not being used effectively; therefore take the time to review and segregate inventory that is old or obsolete and consider whether it can still be used to generate cash.

Another area to review and organize is accounts payable, which will help the financial team manage when payments are made.

Finally, look at the non-core assets and determine how much money is being spent to offer them. Are they viable? Do they align with the current client base? If not, maybe they should be discontinued in favor of an offering or initiative that produces greater revenue for the organization.

What goes into properly maintaining a 13-month cash flow projection?

A proper cash flow projection is based on facts — not on what a business expects (or hopes) will happen. If this is the company’s first attempt to create a projection, the initial step should be to look at the company’s historical trends, current initiatives and any internal and external factors that may impact the financial security of the business. This includes past, present and future billing and payment patterns.

It is also important to make sure that the cash the business needs on a weekly schedule is based on fixed and recurring costs. If this is established, then variable costs and expected sales may be estimated.

After the historical data has been compiled and the cash flow projection has been put into action, the company should set aside a time each week to update the data with current figures and information. This step is important if the cash flow projection will be used as a management tool.

With regular maintenance, the cash flow projection will become an accurate representation of the organization’s financial wellness while providing a framework for generating short- and long-term success.

Insights Accounting is brought to you by Rea & Associates

Navigating the murky waters in a new era of electronic discovery

As technology has advanced, courts have struggled to apply federal statutes such as the Electronic Communications Privacy Act of 1986 (ECPA) in discovery. Issues regarding retrieval of electronically stored information by third parties have been ripe for litigation.

“The treatment of cloud computing-related issues in court has not been entirely clear, and case law has exemplified the fact that courts have been forced to enter unchartered territory with these types of issues,” says James P. Martin, managing director at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Martin regarding the issues that can arise when attempting to obtain information in the new era of electronic discovery.

What is cloud computing?

Cloud computing describes an IT model in which computing resources can be obtained and utilized on an as-needed basis.

The end user is provided a turnkey solution that is supported and maintained by the service provider at a remote location where data is stored. ‘The cloud’ is a term referring to the pool of resources hosted on the Internet.

What are some common cloud data sources that should be considered in litigation?

People and businesses are putting more content in the cloud continuously, and a lot of that data could be of interest to adverse parties in litigation.

Cloud computing applications include hosted email products, such as Gmail or Hotmail, picture hosting services, text message services, hosted document processing, as well as social media services such as Facebook and Twitter.

How does this affect electronic discovery?

Moving to a cloud computing solution does not remove an organization’s document retention requirements, and many cloud solutions tout their ability to help organizations meet statutory requirements. If a cloud vendor performs services to the public, access to data is subject to Stored Communication Act (SCA) restrictions.

What is the SCA?

Data hosted by a third-party service provider may be covered by the SCA (18 U.S.C. §§ 2701-2712). This act was included as Title II of the ECPA.

The SCA states that ‘a person or entity providing an electronic communication service to the public shall not knowingly divulge to any person or entity the contents of a communication while in electronic storage by that service.’

The SCA was primarily written to protect the end user of computing services from government surveillance. In civil litigation, some courts concluded that contents of communications cannot be disclosed to litigants even when presented with a civil subpoena.

When the ECPA, which governs the interception and monitoring of electronic communications, was passed, cellular telephones and other electronic media for storing information did not exist.

However, 28 years later, it remains a central legislation restricting the release of electronic communications held by a third-party. As technology has frequently outpaced legislation pertaining to discovery procedures, it comes as little surprise that courts struggled with issues about retrieval of electronic communications in litigation.

How can a litigant obtain information subject to the SCA?

The SCA defines three categories of information; each category has different requirements to obtain the information.

In litigation, the parties will tend to need access to ‘contents,’ such as email conversations and documents, which has the highest threshold. Contents generally require a subpoena with notice, a court order with notice or search warrant.

One wrinkle is that the SCA defines a ‘court of competent jurisdiction’ only as any district court of the U.S. and the Court of Appeals.

How are courts dealing with third party information?

According to the ECPA, one allowable avenue for production is to obtain the permission of the entity controlling the account to produce the data; however, the identity of that entity is not always clear in complex litigation with multiple parties involved. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Why more companies than you think are eligible to claim R&D tax credits

You don’t have to wear a white coat and work in a lab to qualify for R&D tax credits.

“Many companies have misconceptions about what is necessary to qualify for and substantiate an R&D credit,” says Carolyn Driscoll, JD, LLM, a senior manager for R&D tax services at Moss Adams LLP.

“The tax definition of R&D is broad and can apply to a multitude of companies.”

In addition, many companies already have systems in place to document their R&D efforts and claim the credit.

“Your meeting minutes, test plans and results, and project tracking systems are good platforms to document the R&D tax credit,” Driscoll says. “Everyday business practices may already be supporting and documenting your R&D efforts.”

Smart Business spoke with Driscoll about state and federal R&D tax credits and how they can help your company realize significant cost savings.

What is the tax definition of R&D?

To be eligible for the credit, your R&D expenses must meet each of the following criteria:
■  The purpose of the research must to be to create a new or improved product or process resulting in increased performance, function, reliability or quality.
■  The activities must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
■  Technical uncertainty must be encountered at the outset of the project.
■  An iterative process of experimentation must be performed to resolve the technical uncertainty described above.

What is the current status of the federal R&D tax credit?

The Tax Increase Prevention Act of 2014 (TIPA), which was signed into law on Dec. 19, 2014, extends (among other items) the R&D tax credit, which had expired on Dec. 31, 2013. The renewed credit contains the same provisions as its earlier incarnation and now covers the period from Jan. 1, 2014, through Dec. 31, 2014. For companies already using the credit, the renewal provides an extension for 2014. For companies that haven’t yet taken advantage of the credit, now may be a good time to explore potential savings for 2014 as well as up to three previous tax years.

How do you document your R&D efforts?

Create a project tracking mechanism.

Make sure your company’s general ledger allows for categorization of specific development activities.

If you’re using third-party contractors, be sure to retain the contract or invoice that details the activities the contractor is undertaking. Take notes at meetings, and make sure everyone present is listed.

That’s an easy way to document not only the activities that are occurring, but also the individuals participating in the development efforts. The key is to develop a system that memorializes the process.

Documentation is a critical component in supporting credit claims, and because it is such a lucrative opportunity, it’s often highly scrutinized by taxing authorities.
If your company is implementing or planning to implement an enterprise resource planning system, that’s a good time to say, ‘OK, let’s add this level of granularity here to make sure we’re tracking our R&D costs.’

The key is to leverage what you are already doing as a starting point to support and document your qualifying work.

How much can you save through R&D tax credits?

The benefit can be significant.

When the federal credit is combined with the California credit, the savings can amount to around 10 cents on every qualified dollar spent.
So if you spend $1 million on qualifying research, you can receive $100,000 in the form of the credit.

The first step is to talk to a specialist — either a CPA or an R&D tax credit specialist — to see if your company performs work that may qualify. ●