Top earners may be surprised at all the additional taxes they’re paying when they file in April.
Christopher Axene, CPA, a principal in Tax Services at Rea & Associates, says many people could have exactly the same income as they had the previous year, but experience a 6 percent increase in their tax rate nonetheless.
“If they’re not doing tax planning or getting some idea where they stand, it might be a shock for some people,” he says.
Smart Business spoke to Axene about tax changes for 2013 that could sneak up on filers who haven’t accounted for the additional liability.
What are the key tax changes top earners can expect for 2013?
The increase in tax rates is the most significant change, going to a new top rate of 39.6 percent compared to the 35 percent rate in the past for couples with an annual income of more than $450,000.
There’s also a 3.8 percent surtax on net investment income. That applies to individuals with $200,000 or more in adjusted gross income (AGI) and couples with $250,000 or more.
Rates are increasing for capital gains and dividends, going from 15 to 20 percent. The AGI threshold for the 20 percent rate is $400,000 for individuals and $450,000 for couples.
Couples with W-2 income over $250,000 will also see an additional 0.9 percent Medicare tax this year.
Because of all of these changes, it’s important to start doing tax planning now.
Are there things that can be done to lessen the tax burden?
It’s not so much about getting away from these taxes; it’s a matter of being aware of their impact. It doesn’t make sense to take a pay cut just to pay less tax.
Most people will be withholding enough for the 39.6 percent tax rate, so that’s not likely to cause surprises. But the 3.8 percent surtax on investment income isn’t being withheld, and there’s no withholding tax associated with dividends. People might be making estimated payments, but payments based on prior year tax rates won’t be sufficient come April.
While there aren’t any major loopholes or tax havens, making the maximum contributions to a retirement plan continues to be a powerful tax deferral tool both for employees as well as the self-employed. Another thing to consider is the IRA distribution available to people who are over 70½ years old. As long as they are charitably inclined, they can take a distribution up to $100,000 from their IRAs and give that directly to a qualified charity. Those dollars won’t be included as taxable income, but they don’t get a tax deduction for the contribution either. For those who don’t need the money, it can be a useful tool to satisfy the yearly minimum distribution requirement and fulfill charitable goals.
Other than that, you could save on taxes by manipulating when income is earned or when deductions are paid. If you own a business and have control over your income, it might make sense to spread income over multiple years or bunch deductions into one year in order to maximize lower tax rates.
Should people who expect to owe more make additional tax payments now?
Run projections, get estimates and figure out what will be your tax liability. If you need to make up a difference, perhaps withhold more out of a bonus check in December or make an estimated payment in January to lessen the hit in April.
It’s more important this year than any recent year to run projections, particularly for high-income earners. About 90 percent of taxpayers probably don’t need to worry about this, but that top 10 percent could see tax rates going up 6 to 8 percent because of the new add-ons and new top tax rate. Income tax surprises usually aren’t a good thing. Start planning now for what will be coming in April 2014. ●
Christopher Axene, CPA, is a Principal in Tax Services at Rea & Associates Reach him at (614) 889-8725 or firstname.lastname@example.org.
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Your company doesn’t need to have laboratories filled with beakers to be eligible for tax credits provided for research and development (R&D) activities.
“Many people don’t think they’re doing the type of research that qualifies. But in this context, research is a tax definition. And while there may be similarities to the laboratory sense of the word, it covers a wider range of activities,” says Christopher E. Axene, CPA, a principal in tax services at Rea & Associates, Inc.
Smart Business spoke to Axene about activities that qualify for credits and the application process.
What is the credit?
It’s an income tax credit available to U.S. companies for R&D activities within the U.S. While companies conducting research are already deducting those expenses, the credit is better because it’s a dollar-for-dollar reduction in their tax liability.
The credit has been around since the early 1980s, but has expired many times and continues to be extended by Congress every year. It’s set to expire again at the end of 2013 unless Congress takes action.
There are three main categories of credits:
- Labor or the wages of people involved in R&D activities.
- Supplies expended as part of the process.
- Costs relating to hiring an outside company to assist with research, provided that the company paying for the services is at risk regarding the success or failure of the work.
For most companies, only the first two categories would apply.
There are two types of credits, a regular credit and a simplified credit. The regular credit is often referred to as a 20 percent credit, which is something of a misnomer because there’s an adjustment to prevent double dipping. Since companies are already deducting the expenses on their tax returns, the net credit given is 13 percent. Few companies claim this credit because of the detail required with the filing. The simplified credit is more common and is 4.5 percent of every R&D dollar spent.
Is the credit just for manufacturers?
No, it has wide potential applicability because it’s not limited to a particular industry. It’s truly about whether a business is performing qualified research. Lean manufacturing and Six Sigma certainly qualify, but so do other activities. For example, a software company that averages $10 million in annual revenues routinely gets $80,000 a year in credits because it continually upgrades and enhances its products.
There’s a four-part eligibility test for the credit:
- There must be some uncertainty that the activity is undertaken to eliminate. If you know the result before you start a process, it wouldn’t qualify.
- It must be for a permitted purpose, such as to develop or improve a product or process.
- There has to be a process of experimentation. Failure is a good thing — it shows a process.
- It must be technological in nature, which means it relies on a hard science. It’s physical, biological or computer engineering rather than one of the social sciences.
Why don’t more companies apply for the credit?
Many aren’t aware of the credit because advisers haven’t informed them or they don’t use advisers. Others don’t think they do R&D because they don’t have employees wearing lab coats.
There also are owners of pass-through entities who don’t bother applying because the tax credit is not available to individuals who are subject to the alternative minimum tax (AMT). If it were allowed as a credit against AMT, the percentage of people taking the credit would skyrocket.
Keep an open mind, have a conversation and determine whether the benefit is worth the time and effort to file the necessary paperwork. Also explore the state-level R&D incentives that can apply regardless of whether or not the federal credit is claimed. ●
Lean and Six Sigma were developed for manufacturing, but are gaining momentum within service industries.
“Both Lean and Six Sigma have been used almost exclusively in manufacturing. Now you’ll see black belts in all fields, from IT to financial services to health care,” says Chris Liebtag, a Lean Six Sigma Black Belt with Rea & Associates.
Smart Business spoke with Liebtag about Lean Six Sigma, a program that melds the two disciplines for maximum benefit.
What are the origins of Lean and Six Sigma?
Six Sigma originated at Motorola, but its roots can be traced through the Quality Circle Movement of the ’70s to the Total Quality Management teaching of the ’50s. It is a project-based methodology seeking quality and consistency. Lean, on the other hand, has a very complete toolkit and is mostly concerned with identifying and eliminating waste or non-value-added steps.
Lean Six Sigma combines the basic tenants of both to look at ways to remove non-value-added steps in a process and improve quality.
What types of businesses can be improved by implementing Lean Six Sigma?
It’s been very strong in health care and financial services. An emergency room might want to look at the process of admitting patients, or a medical billing organization that sends bills to multiple entities might want to determine how long it takes and ways to accelerate the process.
There must always be a business rationale; clients define the value and you’re looking to satisfy their needs and remove wasteful steps.
Should everyone in the company be trained?
It’s important to at least be exposed to the concepts. It does involve a cultural change within an organization, so implementation will require everyone to adopt the mindset of always looking for ways to continuously improve. Select employees should be trained as facilitators, but everyone should be thinking about how to better serve clients.
The results likely will be increased customer satisfaction, an enhanced business reputation and a competitive advantage. If you can deliver your product or service faster than competitors at a higher quality or even a lower price because of operational efficiency, it provides an enormous advantage.
Does that require Lean Six Sigma?
Efficiency and customer satisfaction initiatives can be tackled without Lean and Six Sigma. However, these techniques have been proven to be very effective when it comes to controlling costs and improving satisfaction among clients and employees. Employees are empowered to better their work environment, which eliminates turnover and produces a happier workforce. In turn, that leads to improved customer satisfaction. Lean Six Sigma provides a framework to generate these gains.
Does Lean Six Sigma need to be adjusted to fit the company?
The most successful projects are tailored specifically to address industry- or business-specific circumstances. The 30,000-foot view concepts and methodologies can be applied almost universally — define a problem, measure the variety of steps within that problem or process, and then analyze and improve it. However, the best results are produced by combining the tools and methods of Lean and Six Sigma with industry expertise. That industry expertise component also helps generate buy-in among employees.
How important is it to set goals for improvement?
You should always start with the end in mind, even if that goal might not be immediately achievable. If you want to reduce costs by 10 percent, process changes are designed to produce that result. You might only get to 8 percent — that doesn’t mean it wasn’t a worthwhile enterprise, it just presents an opportunity to continually improve toward that goal.
The idea behind Lean Six Sigma is continuous improvement. It isn’t designed to be a ‘one-and-done’ initiative. It’s a change in culture whereby employees embrace the mindset that the business needs to get a little better each year and sustain the gains. Lean Six Sigma is more than a technique or a process, it’s a discipline and approach to running your business. ●
Chris Liebtag is a Lean Six Sigma black belt at Rea & Associates. Reach him at (614) 923-6586 or email@example.com.
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The U.S. Department of Labor (DOL) has increased its compliance enforcement efforts and is expected to conduct more benefit plan audits to determine if the companies that sponsor them are meeting those requirements.
“This is an area of focus for the DOL. A lot of time was spent preparing fee disclosure regulations, and follow up is likely to ensure plan sponsors are using that information. An increase in audits hasn’t been announced, but more auditors are being added to the ranks,” says Andrea McLane, manager, Benefit Plan Services, at Rea & Associates.
Smart Business spoke with McLane about what the DOL expects of plan sponsors and how to meet those expectations.
Do fee disclosure regulations cover all benefit plans?
The primary area of concern is with retirement plans since so many accumulated assets and safeguards are needed to ensure the plans provide income to employees when they retire. The DOL is also looking at welfare plans to make sure those with 100 participants or more are filing Form 5500s.
But the emphasis in the fee disclosure regulations is on fiduciary or other compliance issues regarding retirement plans. The regulations were meant to simplify the explanation of fees so that plan sponsors, with assistance from consultants, can better understand fee structures and evaluate when services were necessary and fees were reasonable.
What can plan sponsors do to document that plan fees are reasonable?
There are two approaches that can be taken to help you meet fiduciary responsibilities:
- Request for proposal (RFP).
You can issue an RFP every three to five years and compare the responses to current provider costs to determine whether fees are competitive. However, it’s difficult for the average plan sponsor to review RFPs because there’s no format for disclosures, making an apples-to-apples comparison challenging.
It’s much easier for plan sponsors to benchmark their fees. You can do this using data from your current service provider only. This method isn’t objective and is of a lower quality. It also may not meet fiduciary responsibilities when it comes to the process of choosing a provider. The best solution is to find a good, independent benchmarking service. While not a requirement, the DOL set an expectation that plan sponsors will benchmark and at least check the reasonableness of their fees.
An investment policy statement (IPS) can help you select and monitor plan investments. An IPS isn’t required, but it’s tough to monitor investments without one. It will also help ease DOL anxiety concerning the level of governance provided. Many investment advisers supply an IPS as part of their services.
Is a benchmarking report enough to satisfy plan sponsor fiduciary responsibilities?
It goes a long way, particularly regarding record keeping fees, but you still have to make sure you have proper oversight and aren’t relying too much on provider assurances. Most high-profile cases the DOL has undertaken have dealt with fees at the fund level. For example, Wal-Mart wasn’t using the best possible share class of funds in its plan — it was using retail-class funds. In this case, the retail giant relied on its trusted advisers too much and didn’t ask enough questions. An independent benchmarking report would have identified that fund fees were too high for a plan of such magnitude, giving Wal-Mart the opportunity to make changes.
Demonstrating that you have a process in place to monitor the investment decision-making of your plan should suffice. The DOL will not second-guess the success, or lack thereof, of the investment decisions within the plan. But it can identify when there is no documented process to monitor service providers, preventing you from meeting your fiduciary responsibility. Without documentation, the DOL will conclude de facto that the fees are unreasonable and the plan is not compliant, resulting in enforcement actions and penalties. It also leaves you open to participant lawsuits for breach of fiduciary duty.
Andrea McLane is manager, Benefit Plan Services at Rea & Associates. Reach her at (614) 889-8725 or firstname.lastname@example.org.
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Fraud costs companies about 5 percent of revenue, totaling about $3.5 trillion internationally, according to a 2012 report by the Association of Certified Fraud Examiners.
“It can have impact beyond the initial financial loss,” says Mark Van Benschoten, CPA, a principal at Rea & Associates. “Fraud damages the reputation of a business, which could lead to a loss of revenue and loss of jobs; there can be a spiral effect. Stopping fraud is about protection of the corporate entity.”
Smart Business spoke with Van Benschoten about fraud and how companies can protect themselves.
What are ways that employees commit fraud?
Some of the most common fraud happens because of inadequate segregation of duties, not communicating consequences, employee turnover, crisis conditions and poor communication. However, there are so many specific ways fraud is committed. Actually, employees who are determined to steal find new ways all the time to try and bypass a company’s systems.
What should a business tell its employees about fraud?
It’s important to set the tone about fraud from the top. Employees will react to the tone of the business owner. They may also read an owner not taking a stand on fraud as a signal that it’s OK. Business owners and management have to make it clear that they take fraud seriously and it will not be tolerated; they want to hear about what’s happening in the business. Consider putting an ethics hotline in place so your employees can anonymously report what they see.
A hotline sounds like Big Brother watching, is it?
An ethics hotline is one of the most cost-effective means of combatting fraud. In fraud cases where there is a hotline in place, the average loss is $100,000. Compare that to a company without a hotline and the amount rises to $180,000.
It’s not a matter of tattling on a co-worker. It’s about job creation. It’s about protecting the corporate image. The amount stolen from a company is one thing, but the potential losses that could happen from the negative impact on a business’ image could be devastating. This gives employees the opportunity to protect their jobs as well as those of the other honest people they work with.
There are other benefits, too. For example, if someone at a company uses a forklift in an unsafe manner, any employee that witnesses the situation can call the hotline to report it anonymously. Management can then rectify the situation and avoid a costly accident.
If a company has an audit, isn’t that enough to catch fraud?
Audits are not specifically designed to catch immaterial fraud. Audits do provide reasonable assurance about the presentation of the financial statements in coordination with Generally Accepted Accounting Principles. No auditor can, or will, guarantee that an audit will catch any case of fraud.
In most cases, someone has to speak up internally for fraud to be discovered. An outside auditor is only there once or twice a year, and his or her job is to ensure there is good financial reporting.
What other steps can companies take to prevent fraud?
It’s important that businesses have good internal controls in place. In situations where the owner is very involved with every aspect of the business, different checks and balances would be needed than in instances where the owner is hands off. With internal controls, you have to weigh costs versus benefits. It’s about how much you’re willing to pay to manage risk. You wouldn’t spend $11,000 to save $10,000.
It would be nice to say ‘do these three things and you’ll be protected,’ but there is no one-size-fits-all solution. Preventing fraud is about limiting opportunity, having good internal controls and making sure employees understand that fraud will not be tolerated by anyone — from the top down.
Mark Van Benschoten, CPA, is a principal at Rea & Associates. Reach him at (614) 889-8725 or email@example.com.
Learn more about implementing an ethics hotline at www.reacpa.com/red-flags.
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2013 Healthcare Reform Seminar
In mid-July, Smart Business held the 2013 Healthcare Reform Seminar, presented by SummaCare, and sponsored by Rea & Associates, Sequent, Roetzel & Andress, The Greater Akron Chamber, and hosted by Firestone Country Club. More than 200 people heard insight, advice and strategy from a panel of experts on what employers need to know about healthcare reform.
Contact these insightful panelists to learn more: