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. ●

Business owners seek more value from professional service providers

Value is not what it used to be in the professional services industry, and the result is a transformation in the way services are delivered.

Clients expect more for their money whether it be accounting work, legal counsel or even health care services, says John Schweisberger, CEO at RBZ.

“As a client, I would expect that you know what you are doing technically,” Schweisberger says. “That’s not a differentiator, in most cases. The question then becomes, do you know what your clients’ goals are from a business or a personal standpoint now and long term? That is far more important and relevant.”

A client wants to be confident the firm he or she hired to provide a service can push beyond general knowledge and has a deep understanding of his or her’s business and circumstances, as well as wants, needs and desires both for today and into the future.

“You want to have somebody who has dealt with the kinds of issues you are facing,” Schweisberger says.

Smart Business spoke with Schweisberger about strategic growth in the professional services sector and why it demands more of both the service provider and the client.

What has driven expectations in the professional services sector?

It has become a very competitive and somewhat commoditized world.

Law firms have been at the forefront of these changes and, for the last 10 years, lawyers have felt significant pressure to justify fees and use a fixed-price billing method. The call for change stems from clients asking, ‘What is your motivation to be efficient with my money?’ And, rightly so.

It’s been less prevalent in the accounting world in some respects, but it’s still changing. There will always be a need for accounting services, especially required services such as audits.

But when it comes to intricate tax work and other highly complex, nuanced situations, business owners are finding value in working with professionals to solve these matters. As a client of these services, you expect to receive significant value in return.

The introduction of cloud accounting platforms has spawned a whole sub-industry that is springing up to offer outsourced accounting to assist in these matters. It’s raising the bar on what clients expect from professional service provider and moving companies to take a closer look at what they are spending and demand greater value in return.

It could be something as simple as the filing of your company’s tax return. When you provide information to your accountant to handle this process, stay connected to it. Take the time to understand what went into that process and ask questions of your accountant. It may not lead anywhere, but it could reveal opportunities that would make the process more efficient or perhaps, even save your business money.

You owe it to yourself and your business to assess the value of the services you are getting today.

Will they be the same services you need in the future? The firm you need as your business continues to grow, change and morph into an international or global company can be quite different than the one you used during your company’s early days.

Are you confident that you will have the support you need for where you’re going, not for where you have been?

How do you compare cost vs. value?

When you are buying services, you need to be able to assess value, not just cost.

Take this example: Your accountant spends an hour transferring numbers from a K-1 to a tax return. Or, he spends an hour structuring a transaction in such a way to help you minimize your taxes and save you $5 million. Which hour is of more value?

From a client standpoint, that’s pretty easy.

The lesson is you can’t operate under the explicit assumption that every hour is of equal value. You need to have a discussion. Your accountant may be surprised to learn what you are willing to pay for truly adding value.

What’s the bottom line?

You want insight that helps you understand things about your business that you didn’t know before.

It has to go beyond peace of mind. You can’t just ask your accountant for insight and guidance, you need to demand it because otherwise, it’s just a cost to be managed. The firm that understands this is the firm that is most likely to be there for you from the start and into the future. ●

Insights Accounting is brought to you by RBZ

How new tax credits are making California a bit more business friendly

California has not been known as the most business friendly tax environment. While other states have tried to court businesses with competitive incentive programs, California has long been content to allow the many other benefits of its economy to do its talking. When Gov. Edmund G. “Jerry” Brown signed Assembly Bill 93 and Senate Bill 90 into law, everything changed.

California made a bold commitment to aggressively pursue expanding businesses, establishing a new office responsible for economic development and creating significant new tax incentives for businesses locating or expanding in California.

Smart Business spoke with Evan Stephens, tax manager at Sensiba San Filippo LLP, to find out more about two of the most significant new incentives, the California Competes Credit and the New Employment Credit.

What is the Governor’s Office of Business and Economic Development?

The Governor’s Office of Business and Economic Development (GO-Biz) is a new office that was created to be California’s point of contact for all economic development and job creation efforts.

GO-Biz has a range of objectives that include attracting, retaining and expanding California businesses. It provides resources to assist with site selection, permit streamlining, clearing of regulatory hurdles and small business assistance. It is also responsible for the administration of tax incentives, including the California Compete Credit and the New Employment Credit.

What is the California Compete Credit and how can businesses qualify?

The California Compete Credit is a credit against state income taxes for businesses locating or expanding in California.

Businesses must first apply for the California Compete Credit before applications are evaluated through a two-phase review process. Phase I is an objective evaluation where a cost-benefit analysis of each proposal will be performed. Applicants with the lowest cost to benefit ratios will be engaged to move forward to the next phase.

During phase II, GO-Biz will perform an in-depth subjective evaluation of each proposal. It will consider a number of factors including economic impact, strategic importance and the location of the proposed expansion. GO-Biz is authorized to negotiate specific terms and conditions of tax credit agreements. The agency has $151.1 million available for the California Compete Credit in fiscal year 2014/2015.

How can the New Employment Credit bring value to California businesses?

The New Employment Credit is more objective and straightforward than the California Compete Credit.
To qualify for the New Employment Credit, a business must first be located in a designated geographic area. These initial areas include pilot areas in Fresno, Merced and Riverside.

Credits will be awarded to applicants based on wages paid to ‘qualified employees’ during the credit year. New Employment Credits are equal to 35 percent per year for wages between 150 percent and 350 percent of the state minimum wage. The credits may be claimed for wages paid for 60 months from the original hire date. It should be noted that these credits can add up very quickly for qualifying businesses.

Location-based restrictions will exclude many companies from taking advantage of the New Employment Credit, but companies located within the designated geographic areas, whether large or small, could benefit substantially.

Implementing a system for identifying and qualifying new hires for New Employment Credits will allow for maximum benefit. California businesses should look closely at both the California Compete Credit and the New Employment Credit to determine eligibility. Applying for these credits is relatively simple and painless, especially when compared with the potential benefits.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How to navigate the financial risks and exposures of a product recall

You make your products with the best of intentions. You work hard to provide consumers with newer, better, higher quality products. What happens when a problem arises with a product that is already on the market? Products that malfunction or pose a danger to consumers can be a very real threat to any company.

For most manufacturers, product recalls are taboo even in casual conversation. Yet if you are in business long enough, it is likely that you will face at least one product recall. Will your recall be a bump in the road or a fatal accident for your company?

Smart Business spoke with Karen Burns, assurance partner at Sensiba San Filippo LLP, to learn how to manage product recalls, mitigating immediate financial losses while preserving the brand of the organization.

What financial exposures can result from a product recall?

There are many direct costs associated with a recall, such as shipping, storing, replacing or destroying defective products. Expenses for managing public relations can add up quickly as well.

Beyond direct expenses, other less obvious costs can loom even larger. Business interruption and lost profits are often the greatest cost of a product recall. Product liability from products that cause bodily harm to consumers or damage to property can also increase risk exponentially.

Finally, don’t overlook potential damage to your reputation and loss of brand equity. Product recalls aren’t simple or inexpensive, but costs and potential risks can be managed with proper planning.

What pre-emptive strategies can help manage risk and financial exposure?

There are three strategies that companies use to manage recall risk: reduce it, assume it or transfer it.

Reducing risk involves taking strategic actions to avoid recalls and the costs that come with them. Creating a ‘culture of quality’ that spans your entire business and supply chain can reduce the occurrence of recalls, while establishing crisis-management procedures can help you minimize the effects of any recalls that do occur.

Companies may choose to assume the risk of a product recall by carrying high insurance deductibles or self-insuring. This strategy is best utilized only by very large companies because the cost of a single recall could be catastrophic for mid-cap and small companies.

Finally, transferring risk is a good idea for any organization. Suppliers and insurers can help you recover the cost of a recall. Before a recall event occurs, ensure that you are carrying the right kind and amount of insurance. Obtain coverage for all the risks you may face during a recall. Multiple insurance policies may be applicable. Additionally, insist that key suppliers carry product recall insurance, including third party coverage.

How should companies strategically approach a recall?

It is important when facing a recall to be proactive and to act quickly. Don’t wait for your hand to be forced. Voluntary recalls are easier to manage and generally less costly than mandatory recalls. By being proactive, you can better control the situation and the conversation surrounding it.

Take a long-term view of the situation. Don’t try to cover-up a problem. Communicate honestly. Consumers are more forgiving when you acknowledge a problem quickly and take corrective action.

Don’t underestimate the time, effort and expense required. Place your financial survival and the protection of your brand at the top of your priority list.
Finally, don’t try to tackle the problem alone. You will need legal, insurance and financial assistance to get through a recall. Your lenders and investors may have to bear some of the financial burden, and your CPA can help steer those conversations.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How forensic accounting can help snuff out fraud and mismanagement

With increased regulatory demands and constant threats of fraud and misconduct, businesses have to watch their backs, especially when it comes to finances.

In many cases, having a traditional accountant is not enough. You may need instead someone who has not only accounting skills, but investigative and analytical skills as well. In other words, you need a forensic accountant.

“Forensic accounting enables business owners to get control over possible financial fraud and mismanagement and, more importantly, to deter it before it occurs,” says James P. Martin, CMA, CIA, CFE, managing director at Cendrowski Corporate Advisors LLC.

Martin says forensic accountants can help companies design effective antifraud controls and mitigate the risks of future lawsuits. They also might be used to quantify economic damages in instances where value and/or profits might be lost, or in cases of business valuations to uncover reported income or expenses.

Smart Business spoke with Martin to learn more about the role of forensic accounting.

How does a forensic accounting engagement differ from an audit?

First, forensic accounting engagements are nonrecurring and are only conducted at the request of a firm’s management.

Audits, conversely, are recurring activities.  Forensic accounting engagements are targeted assessments of specific areas of a business; they are not general assessments of the business as a whole or its financial statements.

The methodology employed in an audit is also quite different from that used in forensic accounting engagements. Audits are conducted primarily by examining financial data, whereas forensic accounting analyses are conducted by examining a wide variety of documents and interviews.

Lastly, the goals of forensic accounting engagements are yet again very different from audits. The goal of the latter is to detect the presence of material misstatements, irrespective of their cause.  Audit activities are in no way designed to help an organization deter fraud, though they may detect such activity.

Since many frauds begin on a small scale, they may go undetected by auditors if the size of the fraud is below the auditor’s threshold for materiality. In addition, even if the magnitude of a fraud is greater than the auditor’s threshold for materiality, a fraud may remain undetected by the auditor if it is well-concealed.

Forensic accounting engagements can be specifically tailored to deter fraud and potentially prevent it.

Can forensic accounting techniques be applied proactively?

Forensic accounting techniques can be used on a proactive basis in many instances, including the deterrence of fraud. More specifically, forensic accountants can proactively analyze an organization’s internal control process to determine areas of weakness and help the organization remediate these issues.

How can organizations use forensic accountants to help deter fraud?

Fraud deterrence focuses on removing one or more of the three causal factors of fraud: motive, opportunity and rationalization.

Only when each of these factors is present can a fraud occur. Motive and rationalization are generally dependent on personal situations over which the organization may have little control. This is why the opportunity for fraud is often the prime target of fraud deterrence engagements, as this factor can be controlled by an organization.

How can forensic accounting techniques be used in cases of business valuation?

Valuation professionals who are trained in forensic accounting may have significant experience in data mining and analysis, affording them the ability to supplement typical valuation techniques with information uncovered as a result of forensic accounting activities.

This additional information could result in a markedly different valuation from that which might have been calculated without the use of forensic accounting techniques, as valuations are extremely sensitive to underlying assumptions. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

A new certification process has made it much easier to get an ITIN

The Individual Taxpayer Identification Number (ITIN) was created to ensure that non-U.S. residents and other individuals who do not have, and are not eligible to obtain, a Social Security number can pay the taxes they are legally required to pay.

The application process can take a significant amount of time and requires documentation that may be difficult to obtain.

The good news is an ITIN does come with some benefits, says Stephen Rickert, CPA, a Partner in the International Tax Services Group at RBZ.

“It can lower withholding taxes on interest and dividends paid to the nonresident,” Rickert says. “It can also be used to track withholding payments made on behalf of those nonresidents, to file U.S. and state tax returns and to receive refunds. The IRS won’t refund any excess taxes without an ITIN or a Social Security number.”

An ITIN holder is not eligible for Social Security benefits or the earned income tax credit. However, if that person becomes eligible for Social Security in the future, the earnings reported with an ITIN may be counted toward the amount he or she is eligible to receive.

Smart Business spoke with Rickert about ITINs and what business owners should know about them.

Why are ITINs necessary?

An ITIN is formatted in the same manner as a Social Security number and is used for federal tax reporting only.

It is not intended to serve any other purpose. The IRS issues ITINs to help individuals comply with U.S. tax laws and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security numbers.

The number does not authorize work in the U.S. or provide eligibility for Social Security benefits or the earned income tax credit. ITINs are geared for nonresidents who have income from the U.S. from passive investments in the U. S. such as from real estate or other U.S. businesses.

It’s a tool for the IRS, which needs to track the individual’s U.S. income and payment history and can’t effectively do so via just a name.

What makes getting an ITIN difficult?

Since 2012, the IRS requires ITIN applicants to provide either original documents such as passports, ID cards, and birth certificates or certified copies to accompany the ITIN application. Notarized copies are not acceptable.

A certified document is one that the original issuing agency (i.e. a foreign country’s agency which issues passports) stamps with that agency’s official seal. Applicants must visit their home country’s embassy, consulate or other agency that is responsible for issuing passports, which obviously can become quite time-consuming.

How did the IRS make the process easier?

The IRS has allowed certain Certified Acceptance Agents (CAAs) to verify on behalf of the IRS the authenticity of underlying documentation required to be submitted with the ITIN application. So instead of being required to travel overseas to obtain this verification, it can be gained through a CAA, either through face-to-face or live video interviews.

Firms go through mandatory IRS training and background checks to gain this endorsement. Once it’s complete, the IRS will accept certifications from these firms.

What do business owners need to know?

If you have non-U.S. investors, whether you are a corporation, a partnership or a limited liability corporation, you need to be aware that these investors will be pulled into the U.S. and/or state tax systems and be required to obtain ITINs.

You are required to comply with the tax withholding and reporting obligations on payments made to non-U.S. investors. ITINs are required for withholding. To facilitate this process, you should advise your investors to obtain these ITINs in advance of receiving any funds from the investment to avoid any unnecessary withholding.

Advise individuals to get at least three copies of everything to protect themselves against documents being lost in transit. The process can be cumbersome, so it’s best to only have to go through it once. ●

 

Insights Accounting is brought to you by RBZ

Santa Claus brings an extra SBD, with some fine print included

Ohio’s small business income tax deduction (SBD) is just one of the ways legislators have sought to further stimulate the state’s economy. As the New Year approaches and taxpayers look toward the 2014 tax year filing season, even more relief is on the way.

Smart Business spoke with Joe Popp, JD, LLM, tax manager, Rea & Associates, to find out about what changes are in store for the small business income tax deduction.

Who can claim a SBD?

In October, the Department of Taxation reported that only half the number of small business owners who were expected to claim the 2013 deduction actually did. Maybe the owners — and their CPAs — weren’t up-to-speed on what kind of things qualify for the deductions. Or maybe they weren’t even aware of the deduction at all.

The SBD is available to a wide range of individual taxpayers who have Ohio-sourced business income, which can come from many different sources such as a residential rental property or select owner wages. As a good rule of thumb, if a taxpayer received a K-1 from a company that has locations, property or payroll in Ohio, the taxpayer is eligible. The same is true if the taxpayer has an activity in Ohio reported on personal schedule C or F. Investment income in a trust or pass-through entity, where investing is the business activity of that entity, can also qualify for the SBD if the income is passed through to an individual taxpayer.

What can small business owners expect when they file their 2014 personal income tax returns?

The SBD already allows individual taxpayers with Ohio-sourced business income to claim a 50 percent deduction on the first $250,000 of Ohio-sourced business income that they have. For the 2014 tax year, however, taxpayers are eligible to claim an additional deduction on this income.

How much more? Where is the matter at the state government level?

Legislation authorized up to an additional 25 percent deduction for a total of 75 percent on the first $250,000.

But there was a set pool of money to fund that, the legislation didn’t mandate an additional 25 percent (it just set a cap not to exceed), and Ohio retains the ability after Jan. 1, 2015, to draw funds from that pool to pay for budget shortfalls in several other departments.

So it’s possible you might not know just how much additional deduction you could get for some time. For now, think of this deduction as 50 percent, plus a “mystery bonus” of up to 25 percent more.

Stay tuned for more guidance on this from Ohio.

How does this deduction affect business owners who want to retire or sell their businesses?

This deduction provides an interesting opportunity for more mature companies that are currently structured as C corporations. Generally speaking, it is easier to produce great tax outcomes on the sale of a pass-through entity than a C corporation.

The SBD is also denied to owners of C corporations on their wages and on the income coming from the C corporation.

The SBD can help ease the pain of a C to S partnership conversion by providing an annual cash savings as large as $6,000 to $10,000 per owner.

While this might not be a strong enough reason to do the conversion on its own, if a business owner has a mature company that is not retaining profits to grow, and is thinking about selling the company soon, this is a great time to do the C to S partnership conversion.

Who knows how long the SBD might be on the books? The savings opportunities now make this a great time to consider accelerating a move from a C corporation structure if that was in the plans down the road.

Insights Accounting is brought to you by Rea & Associates

How to get started on a risk-based approach to third-party management

Companies interact with thousands of third parties. Even small companies have connections outside their walls with vendors, joint venture partners, customers, licensed distributors, royalty owners, supply chain intermediaries and even competitors that can impact their achievement of objectives.

“The number of third parties can be astounding and those relationships carry risk. So, a risk-based approach is needed ensure the most critical risks are considered,” says Jody Allred, partner in Risk Advisory Services at Weaver.

Smart Business spoke with Allred about how organizations can get started on assessing and managing third-party risks.

Why is this becoming more important?

As globalization and outsourcing have expanded so that companies can stay competitive, it’s become more evident that companies can be responsible for the actions of the third parties they work with. Companies need to take ownership even in an outsourced environment, especially consumer products companies and retailers concerned about reputation management.

There is also the issue of higher corporate visibility due to new regulatory requirements. One example of this is the SEC’s conflict minerals disclosure rule that requires companies to disclose the origin of certain metals from Central Africa.

What can happen if these risks aren’t managed?

Several incidents in the news highlight the need for third-party risk management. For example, Apple has faced significant concerns over the labor practices of its primary supplier of iPhone and iPad assembly in China. While this issue came to light in 2011, it continued in the news throughout 2013 and still lingers today.

In another instance, an HVAC contractor had access to Target’s internal network for billing and project communication. In 2012, the contractor’s account was leveraged to gain access to the network and plant malware that resulted in 40 million stolen credit cards, a 46 percent drop in fourth quarter profit in 2013 and the removal of the company’s CEO.

Do companies typically take the time to manage third-party risk?

The largest, first-class organizations and those in highly regulated industries like banking and insurance may have third-party risk management programs, but the average manufacturer or oil and gas company likely has not fully dealt with this issue.

How can organizations get started?

The biggest hurdle is obtaining the information needed to evaluate third-party risk because most companies don’t capture and collect the necessary data to build risk profiles. In order to properly evaluate their vendors and other external relationships, organizations must consider:

  • Financial stability.
  • Control environment.
  • Technology environment.
  • Dependency.
  • Access to information and intellectual property.
  • Items critical in the supply chain.
  • Regional risk.
  • Operational characteristics.
  • Regulatory and compliance interaction.

If you don’t have this information on-hand, you can build processes to capture the data over time. You have to start somewhere. So, consider what information you do have, and rate your third parties based on the financial, regulatory, operational and reputational risks. You cannot tackle thousands of vendors at once, but you can focus on those that present the most risk using your initial risk-based scoping.

Once you establish more formal protocols, you can build an evolving third-party risk management function to identify and respond to all risks on an ongoing basis. This may include auditing a vendor, implementing a compliance program, establishing corporate guidelines and/or better communicating your expectations.

Do you have any other recommendations?

Third-party risk management requires communication and collaboration across the organization — business units, senior management, operations and administration. It cannot be a siloed responsibility of a compliance group. Organizations that spend time to identify, understand, manage and navigate risk benefit from insights into risk influences that are strategic to business success.

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