How optimal wealth and optimal health go hand in hand

There are two major problems that everybody faces — health problems and financial problems — and the two are often closely connected.

Studies have found that when you build discipline in an area like exercising regularly it tends to carry over into other areas, such as saving habitually.

It also costs more to be sick than healthy. Medical debt is the No. 1 cause of bankruptcy in the U.S., and most of these people are well educated, middle-class homeowners with medical insurance. Medical debt is also the No. 1 cause of homelessness.

“It takes a certain mindset and discipline to get healthy, to fight off a disease, and also to save and invest money and not waste money on frivolous things,” says Carina S. Diamond, CFP®, AIF®, managing director of SS&G Wealth Management. “Health and wealth are naturally aligned because they both aim to help you live your best life, whatever that means to you. They both are about balance and trade-offs.”

Smart Business spoke with Diamond about steps to becoming wealthier and staying that way, and the surprising connection to health.

How can people become better disciplined about saving?

One of the biggest things — and it may sound silly — is to write it down. Just like you write down a New Year’s resolution of going to the gym twice a week, mark down that twice a year you’ll increase your 401(k) contribution or pay down your credit card debt by June.

Also, many people get an annual physical, but they don’t review their finances and update their legal documents on a regular basis. It’s common for financial planners to hear that someone has no idea where an old 401(k) is or what happened to a divorce settlement. Part of this check-up should include ensuring both spouses or partners understand the assets, debts and relevant financial matters, including where everything is.

What additional steps can help you better manage finances?

Get a handle on your expenses by tracking them, giving you an idea of the ‘burn rate.’ What does it cost to run your household every month, every quarter, every year? Sometimes this is easy, but many people have a tough time with it.

Before you can start a savings plan, you need to know what you can afford to save. Tracking expenses through a spending diary can be an eye opening experience. If you haven’t done it, it’s like when you haven’t been to the gym in awhile and you get on the treadmill. The next day, you can’t believe your legs are like rubber. People have no idea how much they are out of shape — or how much they are spending.

Once you’ve figured out where you stand, how do you move forward?

Once you’ve gathered the information, what are your goals? It’s not enough to say you want to have a good retirement someday or hope to send your kids to college. To have a useful financial plan, you have to quantify it with dollar amounts and time frames, such as ‘I want to retire in 10 years and be able to spend $5,000 a month after tax.’

The people who are most successful are the ones with set goals that they track. If you know you need help, just like you might hire a personal trainer to help you get in shape, a financial planner can help hold you accountable.

In addition, it’s important to identify and assess risks of what might happen. For example, if you or your spouse or partner became disabled and were no longer able to work, what would it do to your budget?

Is there anything else you wanted to share?

I’m a big believer in setting limits on helping others. People can get into financial trouble when they help other people too much — their kids, parents, siblings, friends, etc. For example, baby boomers have worked hard to drive a nice car, have an iPhone and go to Starbucks, but they think their kids should have those same things without earning them. Many people are subsidizing their kids’ lifestyles well into their adult lives.

If you can afford it, that’s fine, but if you plan on working until you’re 70 and then you have health problems, what will you do to ensure financial security? Like on an airplane when the cabin pressure drops, put your mask on first, then help someone else.

Carina S. Diamond, CFP®, AIF®, is the managing director of SS&G Wealth Management. Reach her at (330) 598-2208 or [email protected].

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How employers and employees can use nonqualified deferred compensation

More midsize companies are seeking to do something extra for a select group of employees, usually executive-level staff.

Nonqualified deferred compensation plans, which are not subject to the Employee Retirement Income Security Act of 1974, have no discrimination restrictions, so employers can choose to whom they offer the plan. The plans also have no restrictions on deferral amounts, unlike qualified retirement plans.

“The economy has been getting a little better, and top talent is very valuable,” says John Carey, CPA, J.D., associate director of tax at SS&G. “Companies want to take that extra step to keep people and offer them an incentive to stay a little longer.”

At the same time, participating employees can defer income tax. Although they are performing the service now, the compensation is not subject to tax until they are actually paid, which might not be until they retire and are in a lower tax bracket.

“The tax environment has become more complicated, and tax rates have gone up,” Carey says. “You can have a rate of more than 40 percent in just federal income tax. People are looking to cut that — if they defer some of the income that would otherwise be taxable now, it gets them into a lower bracket and they are not subject to some of these extra add-on taxes.”

Smart Business spoke with Carey about what to consider when setting up nonqualified deferred compensation plans.

How do these types of plans work?

A nonqualified deferred compensation plan is a contractual obligation between the employer and employee to defer the receipt of compensation until a time in the future. IRS code section 409A governs these plans. They should be in writing and entered into before any services are performed that the compensation is based upon.

There are two types of nonqualified plans — elective and nonelective. With an elective plan, the company tells the employee, ‘You have the option to defer up to X amount of your annual salary.’ Under a nonelective plan, the company offers X dollars in the future in addition to the employee’s salary. It can be tied to performance criteria or remaining with the company for a certain time period.

The company decides which plan type to offer, often with employee input. It’s critical, however, to have good advisers discussing and planning out strategically what you want to put into the plan, what you want to accomplish with it, and what it can and cannot do.

How can employees get the most benefit from nonqualified deferred compensation?

Compare your current income with where you could be in the future when getting paid the deferred compensation. Do you project that it will be to your benefit due to being in a lower tax bracket in the future?

It’s also important to pay attention to the Social Security tax. The government imposes Social Security taxes on deferred compensation when there’s no longer a substantial risk of forfeiture, or when a benefit vests. Although income taxes are not imposed on the deferred amount until paid, with elective and certain nonelective plans the benefits may become taxable for Social Security. So, it’s better for both the employer and employee if the benefits vest in periods when the employee is making more than the Social Security wage limit, which is $117,000 in 2014.

Nonqualified deferred compensation plans have to be unfunded. What does that mean for plan sponsors and participants?

As an unfunded plan, it’s subject to the risk of the company’s creditors. Even if an employee did his or her job very well, if the business gets sued and goes bankrupt, nonqualified deferred compensation funds would be available to pay creditors. It’s a risk that plan participants take, so they need to consider the company’s stability.

Many companies use an informal funding method, such as a rabbi trust. The plan sponsor sets up a trust to put the money aside, and it cannot arbitrarily grab the money, but the funds are still general assets of the company so creditors can get at the funds.

Even with the risks, more executives today are asking companies to look at nonqualified deferred compensation plans, which are an incentive to retain and attract talent in today’s tax environment.

John Carey, CPA, J.D. is associate director of tax at SS&G. Reach him at (330) 668-9696 or [email protected].

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How to maintain proper fiscal oversight through nonprofit boards

Many people join a nonprofit board of directors because they are passionate about the organization’s mission. What they really want to do is to help the organization accomplish it, but there is a host of governance responsibilities that go along with that.

Marie Brilmyer, CPA, M.Acc., a director of assurance services at SS&G, says nonprofit boards need to think about strategy, monitoring, oversight, compliance and financial health like a corporate board.

“A board needs to think ahead,” she says. “It needs to be sure that the organization can fulfill the mission today and tomorrow. It can’t be uncomfortable with profit because a model where an organization continues to lose money, and is budgeted to do so, is clearly not going to be sustained.

“While there are different nuances, at the end of the day, they really need to be looked at, whether it be for-profit or nonprofit, in a similar manner with regards to finances.”

Smart Business spoke with Brilmyer about the nonprofit board’s role in creating smart, sustainable fiscal decisions.

Many nonprofit board members are from the corporate world. How similar are the two board types?

It’s not that different. Nonprofit boards look at the executive director’s performance; corporate boards look at the CEO’s. Corporate boards look out for investors; nonprofit boards look out for the donors. The two discuss compensation, internal controls and fraud risks. Each of the respective boards’ charges can be aligned.

Nonprofit boards often have people with financial backgrounds for their expertise. The organization looks to the board to set financial policy and help management make decisions. Boards go through the budget process, review financial reports regularly, ensure investments are prudent and oversee compliance. Compliance is key because nonprofits follow rules and regulations for gifts, endowment restrictions, fundraising, lobbying, tax filings and private inurement, when a 501(c)(3)’s money is devoted to private use, not charitable purposes.

What can happen if the oversight falls short?

Not only could the nonprofit organization be unsustainable, it could lose its tax exemption status. Recently, there’s been a slight trend of nonprofits, especially in Ohio, losing that status by not properly filing taxes. Although recent IRS regulations make it easier to regain tax-exempt status, it can still cripple the organization.

How should a board be set up?

Boards need to discuss financial matters routinely, which might be more often than standard board meetings occur. At every meeting, the board should receive a formal report from the treasurer or staff — and then ask questions of those reports. Check for consistency from period to period.

Monitor restricted dollars regularly. If a donor donates money for a specific purpose, such as a scholarship, somebody must keep track of that donation to ensure it gets used for what it was intended.

Examine the organization’s internal controls. In a small organization with few employees, the board should see if it could possibly be part of that internal control function, such as acting as a check signer or reviewing certain transactions.

Assess the capabilities of the accounting staff. Is the bookkeeper capable? Are things being recorded properly, or is it somebody who is inexperienced? Assessing this upfront can help lessen the headache later when things have to be cleaned up.

Always check on compliance, whether taxes or other areas. The board needs to review and approve of tax filings, making sure they are going out the door properly.

Finally, assess the fraud risks and see if there is potential for fraud. Does staff have an open line of communication to the board? Direct communication can head off fraud that may occur later.

Board members need to know what their responsibilities are, and if for some reason they can’t fulfill them, especially for complicated matters, seek outside council.

Do board members get nervous about finding funds to pay for outside expertise?

That’s always the No. 1 concern, but often the board gets accountants involved too late. You can save time, energy and money by setting things up properly first, rather than going back in after something has been accounted for incorrectly.

Marie Brilmyer, CPA, M.Acc. is a Director of Assurance Services at SS&G. Reach her at (330) 668-9696 or [email protected].

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How to avoid running afoul of the IRS’ changing direction

The IRS is always evolving, remaking itself about once a decade.

At the end of the 1990s, the IRS underwent severe Congressional scrutiny that resulted in the Revenue Reconciliation Act of 1997 and two Taxpayer Bill of Rights to reign in the agency. The IRS lost the power to seize property without due notice and had to start sending out annual statements to both spouses.

Now, over the past four or five years, the pendulum has started to swing the other way — the IRS is perceived as not doing its job fairly or appropriately, so the agency is taking a more heavy-handed approach.

“The new IRS is dealing with a budget that was slashed by a half-billion dollars. It’s technology challenged and fraught with scandal including resignations and a new commissioner, John Koskinen. He made several early appearances in 2014, and the message is clear that resources will be put to the task at hand — combatting offshore tax evasion and tax cheats,” says Douglas Klein, CPA, EA, associate director of tax at SS&G.

Smart Business spoke with Klein, a former IRS agent, about the current state of the IRS and how business owners need to react.

What signs do you see that the pendulum is swinging the other way?

As the tax gap widens, there’s a tremendous push to collect offshore income with reporting changes and amnesty programs for offenders. For example, the Foreign Account Tax Compliance Act, which could be implemented in 2014 or 2015, requires foreign banks doing business in the U.S. to report on U.S. customers.

Also, there’s a need for tax reform. The U.S. has one of the world’s highest corporate income tax rates, around 35 percent. It’s so punitive to keep foreign assets abroad that some companies have moved to tax-friendlier foreign jurisdictions.

So, Congress, the IRS and the president are looking at how to make the U.S. tax system more competitive. Some have suggested lowering the corporate tax rate, moving to a territorial tax system, which only taxes assets under that country’s jurisdiction, and/or creating a tax holiday to allow foreign funds to return to U.S. shores.

What does this mean for business owners?

Even with the problems it faces, a heavy-handed IRS can be aggressive with better tools. In this e-filing age, information matching has improved dramatically. IRS agents are encouraged to look at your website to see where you do business, which better equips them for audits.

Business owners need to stay on their toes. ‘The IRS will never figure this out’ might have been true eight or 10 years ago — but no longer.

How can companies keep in good standing with the IRS?

Some compliance tips are:

  • Never ignore a notice. Even if you’re dealing with a personal crisis or family matter, which should come first, an IRS notice won’t go away if you put it in a drawer. Contact your accountant or tax adviser right away.
  • Use the best tax accounting system you can afford. Don’t skimp on recordkeeping — software and personnel. QuickBooks is wonderful, but it’s only as good as the people working it.
  • Be as educated as possible about all of the taxes that may apply to your business, such as sales, use, payroll, etc.
  • Consider a payroll-processing firm to handle payroll processing. The laws are ever changing in regards to employee benefits and many companies don’t have the expertise to handle this properly. Business owners may not see the benefit of administrative spending, but officers can be personally responsible for unpaid payroll taxes. In terms of the risk, outside payroll companies are inexpensive.
  • Take responsibility for the tax positions on all returns. For example, public companies require the president and/or board chairman to sign off on knowledge of the tax information. Make sure you talk with accountants, external or internal, so you can be comfortable with decisions. The most defendable tax positions come from a dialog and mutual agreement between the tax expert and taxpayer.

To find more about a changing IRS, visit the Taxpayer Advocate Service, the IRS’ independent watchdog, at

Douglas Klein, CPA, EA IS Associate director of Tax at SS&G. Reach him at (330) 668-9696 or [email protected].

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SS&G: How to decipher the tax implications of health care reform

Health care reform news, and the ever-present talk of delays, has created confusion for employers and employees alike, but they still must consider certain tax issues for 2013 and 2014.

“There’s so much information, you might ask yourself, ‘Where do I turn?’” says Kimberly Flett, CPA, QPA, QKA, director of retirement plan services at SS&G.

Beyond starting with the major federal governmental agencies — the IRS, Department of Labor (DOL) and Department of Health and Human Services (HHS) — for the rules, employers need a team of well-informed advisers.
“A plan sponsor’s burden is to make sure that they have the right players,” she says.

Smart Business spoke with Flett about tax implications of health care reform that everyone needs to know.

What do taxpayers need to know for their 2013 taxes?

High wage earners — a $250,000 threshold for married filing jointly, $125,000 for married filing separately and $200,000 for all other taxpayers — must pay a Medicare tax of an additional 0.9 percent, for a total tax of 2.35 percent. Those with $200,000 or more of income had this tax withheld at the payroll level during the year, but it doesn’t take into account spousal income. As you get your tax information together, review your W-2 to ensure payroll withheld enough, and work with your tax adviser to determine if adjustments are needed on Form 1040.

A second Medicare tax of 3.8 percent will be assessed on net investment income of high wage earners, which includes gross income from interest dividends, royalties, rents and annuities; other gross income derived from a trade or business; and gain attributable to the disposition of property. This applies to many business owners who need to make sure they’ve kept good records for their tax advisers.

Another change is with the itemized deductions on Schedule A of Form 1040. The medical expense deduction increases from 7.5 to 10 percent for those under 65.

Is the individual mandate still going ahead?

The individual mandate is still going into effect for 2014 taxes, on an individual’s Form 1040, with few exemptions. Those without health insurance coverage will pay a penalty based on the household, so a taxpayer could be paying penalties for dependents as well. The 2014 penalty is the greater of either $95 or 1 percent of modified adjusted gross income. Over time, the $95 increases to $695.

What’s crucial for employers to understand about the upcoming year?

There’s a lot of confusion surrounding the Patient Centered Outcomes Research Institute (PCORI) fee, which helps pay for the Affordable Care Act. If your company sponsors a fully insured health plan, the carrier was required to pay $1 per covered life by July 31. An additional fee of $2 per covered life is due by July 31, 2014.

However, if your company self-funds its health plan, it was required to pay the PCORI fee in July. Many businesses missed this, and therefore need to talk to their tax advisers immediately. Although guidance is still evolving, the IRS may assess penalties.

If your company has a health reimbursement arrangement (HRA) or flexible spending account (FSA) that’s not affiliated with a medical program, it’s considered self-funded and could be subject to PCORI fees for employees. Again, many employers missed these fees.

Other areas to watch are:

  • FSAs have been capped at $2,500, but an employer sponsoring one of those plans must have all document amendments related to this in place by the end of 2014.
  • Self-funded health plan sponsors must pay a reinsurance fee — $63 times the covered lives — by the end of 2014. A head count is due to HHS by Nov. 15, 2014.
  • The employer mandate may have been delayed, but 2014 is the time to plan. Start realizing how you can count your employees, and fulfill the requirements.

Finally, the DOL is now auditing health and welfare plans. They are looking to see if medical plans, HRAs and FSAs all have updated Summary Plan Descriptions. They also are checking on notice requirements, such as the Summary of Benefits and Coverage given to employees. This has been a highly unregulated area, but the DOL is starting to be active — and companies are coming under scrutiny.

Kimberly Flett, CPA, QPA, QKA, is director of retirement plan services at SS&G. Reach her at (330) 668-9696 or [email protected].

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SS&G: How to make the most of your year-end tax planning

Before year’s end, taxpayers need to talk with advisers about their personal tax situation — wages, interest income, dividend income, capital gains, pass-through income from a business and other deductions. This preliminary road map can be used to make appropriate decisions.

“Years ago, I went through a projection with a client. We didn’t move the needle on their taxes much, but the client’s wife said, ‘I feel so much better knowing in December exactly what’s going to happen in April,’” says Patricia Rubin, CPA, director of assurance services at SS&G.

By reflecting in December, taxpayers have time to plan ahead, she says.

Smart Business spoke with Rubin about maximizing year-end planning.

Alternative minimum tax (AMT) is always a big topic. How can you plan around it?

This year, Congress formalized and stabilized many AMT issues. You should do an annual calculation to determine whether AMT will apply to you. A taxpayer must calculate taxes using the regular method and then recalculate following AMT rules and pay the higher amount. AMT rules are similar to regular tax rules. However, under AMT certain items are not deductible in computing taxable income, such as state and local income taxes.

Certain taxpayers will find themselves in AMT every year, but 2014 could have different results as regular tax rates have increased.

How can you reduce taxes with year-end planning?

Donating appreciated stock to a charity is one option, and taxpayers can deduct this under either tax system. If you bought a share of stock for $1,000 that is now worth $10,000, the charity gets $10,000 and you don’t have to pay capital gains on the difference while also claiming a deduction for $10,000. There’s also charitable giving of cash and non-cash items. If you’re cleaning out your closet, make a list. You cannot deduct without specifics on the thrift shop value of donated items. You also can time payments of your state and local taxes — bunching them up and paying them in 2013, or deferring into 2014.

What are some new taxes this year?

These are a little harder to plan for, so consult with your adviser to understand if, and how, these taxes affect you. In addition to the higher tax rates, there is a new 3.8 percent Medicare tax on certain net investment income, as well as a 0.9 percent Medicare tax on earned income. Both of these new taxes apply only if the thresholds have been exceeded. The first year, you need to understand which items are subject to the tax.

In addition, there is a phase out of itemized deductions if your income exceeds the threshold amounts.

What year-end planning is available for a business owner working in the business?

The income of a business owner with an S Corporation, LLC or a partnership passes through to his or her individual return, making tax planning critical.

Make sure your retirement plan maximizes the value to you and your employees, to take advantage of planning opportunities. You can accrue what you’re going to fund into the plan in the current year and pay it next year.

Two depreciation items may be significant. Under Section 179 of the tax code, you can deduct purchases of property, plant and equipment up to $500,000. As the law stands, it drops down to $25,000 in 2014. Also, you still can get 50 percent bonus depreciation for new equipment, which is scheduled to sunset in 2014.

Other items to capture are a health insurance credit for those with less than 50 employees and a self-employed health insurance deduction, which might apply to a shareholder in a closely held company.

Overall, the promise of tax planning is to let you know what’s coming, properly plan for the appropriate deferral of income taxes and reduce your overall taxes. You may not have all three, but year-end tax planning always helps avoid surprises.

Patricia Rubin, CPA, is director of Assurance Services at SS&G. Reach her at (440) 248-8787 or [email protected].

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SS&G: How wealthy families can centrally manage assets through family offices

As a central control position for financial assets, family offices manage investments and trusts by preparing tax returns, handling bill pay and/or overseeing financial controls.

Floyd Trouten, a director of tax at SS&G, says families that use these private companies typically have an excess of $10 million in investable assets. However, no family office is alike because they are very customizable and offer a high level of service.

“A well-run family office minimizes taxes and maximizes cash flow to family members. It maximizes the amount of wealth that can pass from one generation to another. It provides a control point where assets are housed, managed and invested,” he says. “But the biggest thing is you can sleep well at night, knowing things are under control.”

Smart Business spoke with Trouten about how family offices work and why this might make sense for your family.

Why are family offices so different?

Each family has specific needs. Some may already have a third-party investment group that manages the money, so family members don’t care about investment advice if they are getting tax returns prepared. Other family offices include estate and tax consulting to maximize benefits to beneficiaries and minimize potential taxes.

With another type, the family may ask the financial advisers to be trustees. As the trustee of a family trust, the office may do bill pay and investment review. For example, if a granddaughter has an idea for an investment, it could be easier to have her bring it to the third party for review. The family office provides objective advice and lessens hurt feelings.

As another example, if a family member wants to buy into operating companies as a member of the board of directors, under the family office, the financial adviser might be asked: ‘Is this a good company to buy?’

In what areas do families with concentrated wealth typically fall short?

Some potential problems are having:

  • No financial controls on what different family members can spend.
  • Too much money not invested, and not earning anything.
  • Investments so far spread out that you really don’t know what you have.

Another area to watch is bill pay. If a family member has the tendency to give to every charity that sends a request, the family office can provide guidance to the member regarding legitimate charities and charitable goals.

Many family assets may be flow-through entities — partnerships, trusts, LLCs or S corporations, which are taxed on an individual’s return. Family offices can help ensure there’s money for the appropriate tax payments as family members may have filing requirements in multiple states, as well as the U.S. and foreign countries.

What are some other ways families can utilize accountants through a family office?

If a patriarch or matriarch has sold a company for $100 million, for example, and wants to leave money for grandchildren and children, family office advisers can help ensure inheritances are fair and reasonable. It’s important to remember that fair doesn’t necessarily mean equal. Giving more to one child than another can create difficulties, but it may be for good reason, such as health, martial circumstances, etc. Combined legal and financial counsel can help you come to sound decisions.

In addition, you must take asset protection into account. If a beneficiary receives assets outright, he or she could have those threatened in a lawsuit, divorce or bankruptcy. A family office trust, administrated by a family member trustee and a third-party trust protector, safeguards assets from being awarded to another in a legal settlement.

Each family member’s individual needs can be so diverse that it may make sense to have separate trusts for each family member, which could be more easily administered from a central point. This scenario minimizes family disputes and provides individual privacy.

There are $46 trillion in assets housed in family offices today. If your family has complex tax return and financial scenarios, then it’s worth exploring whether you fit into this space. Find out more at the Family Office Association by visiting

Floyd Trouten is a director of tax at SS&G. Reach him at (440) 248-8787 or [email protected].

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SS&G: How states are aggressively seeking taxes from out-of-state companies

The U.S. is very much a national economy — even small businesses aren’t restricted to their hometown communities. Many companies don’t know that certain activities give rise to filing requirements for income, payroll and/or sales taxes in other states.

At the same time, it’s no secret that states are having trouble making ends meet, so they are using creative ways to find companies doing business from out of state.

“States essentially are looking to find new sources of tax revenue, without increasing taxes on the folks in their own state. It’s really easy to tax the people who don’t vote for you,” says Brad Greenberg, a director of tax in SS&G’s Chicago office.

Smart Business spoke with Greenberg about being proactive with your state tax filing requirements.

How would a business know if it had a filing requirement in another state?

There are more than 11,000 taxing jurisdictions in the U.S., whether states, cities or counties. With state and local tax filing requirements, the keyword is nexus — a minimum physical connection, often through sales or delivery trucks, attending a trade show or having contractors service a machine you sold.

If you make sales to a state, you probably have a responsibility to remit sales tax. However, if your activities are restricted to sales, you may not need to pay income tax. Payroll taxes are more black and white — if you have an employee based out of another state, you’ll have a payroll tax requirement.

If your employees are working on a project in another state, depending on the length of time and that state’s tax requirements, you may need to withhold state income taxes. Rules are so varied that Congress introduced legislation for a 30-day minimum rule. In addition, some states use a concept known as economic nexus to determine filing requirements, such as Ohio’s commercial activities tax, or if you sell $500,000 or more to California, even over the Internet.

What are states doing to find businesses?

States are cross-referencing taxpayer information from various departments to generate lists of companies that are remitting payroll taxes, but aren’t remitting sales or income tax.

Then, states send out letters. One is an audit or assessment that says ‘you’ve been doing business in our state. We think you should be filing sales and/or income tax returns.’ Any business receiving this letter needs a professional to investigate whether or not a filing requirement existed. If one does, you must file returns; if there isn’t, the adviser can help explain why filing requirements don’t exist.

The other kind of letter is a nexus questionnaire, which asks about your business activities. Don’t ever try to fill out one of these yourself. They are written to create more taxpayers for that state. Tax professionals can help ensure you answer the questionnaire completely and accurately, truly reflecting your business activities, without leading the state to believe there is a filing requirement.

Why is it helpful to be proactive?

You want to sit down with your tax adviser and take a close look at your multi-state activities to recognize any issues. If you happen to be doing business in a state where you potentially owe tax, there are mechanisms to minimize your liability, interest and penalties. Your accountant can ask the state for a voluntary disclosure agreement. If you voluntarily come forward, you’ll likely have a shorter look-back period, and in many cases forgiveness of penalty.

What if the business provides services?

A professional services firm can perform work for out-of-state clients on site or virtually. The income tax filing requirements depend on whether the states in which you perform the work, and where your customers are located, apportion income based on where you provide the service (‘cost-of-performance’ method) or where the customer realizes the benefit of the service (‘market’ method). So it’s important to keep good records with respect to where employees are working on each client engagement. The rules are complex and differ from state to state.

You don’t want to be subject to the hassle of audits or filing back tax returns, or to face penalties and interest. An accountant with a strong background in state and local tax can help manage these risks.

Brad Greenberg is director of tax at SS&G Chicago. Reach him at (847) 676-2000 or [email protected].

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How to utilize federal, state and global R&D credits

Business research incentives come in so many forms across various jurisdictions that they apply to more companies than you think. Although the bulk are used in manufacturing, consumer products, biotech or pharmaceuticals, they are available to anyone developing or creating something, whether a product, process, technique, software, new technology or a new application of an existing technology. 

“A lot of people are aware that these incentives exist, but often they don’t make the leap that it applies to their company,” says Trisha Squires, director of tax at SS&G’s Chicago River North office.

A company could make nuts and bolts for 100 years using similar equipment, but if it has improved its cost margins by changing development, it could still qualify for certain research incentives, she says.

Smart Business spoke with Squires about how to ensure your company’s research and development (R&D) qualifies for available incentives.

What research incentives are available?

It’s typically a tax savings — either a credit or a deduction. Sometimes, it’s a refundable credit, so you don’t have to pay taxes in that jurisdiction. Certain global or state incentives are super deductions where, for example, you get 150 percent of the cost. You also might get tax abatements.

The federal research credit is essentially 6.5 cents on the dollar, depending on the method of calculation. You are rewarded for increasing the amount spent on R&D at a greater rate than you are for increasing your gross receipts. The credit expires and is reinstated so often that companies don’t pay attention.

The IRS spends a lot of time fighting these credits with an array of qualifications and substantiation arguments. Evidencing what you’re doing with R&D is extremely important. You must spell out the new functionality or improvements. This typically is not documented for any other reason. You have to look at the credit, and then align your facts and documentation to match the requirements. 

How do state and global credits work?

State and local incentives vary. They can be as easy as in South Carolina, which is 5 percent of qualified research expenses, or as complex as California, which has its own formula. Ohio’s tax credit for research and experimentation expenses was extended through 2013. The majority of businesses figure out their federal credit, then state. 

Globally, research incentives are less reactive. Canada has similar qualifications to the U.S., but it qualifies projects and dollars prior to the filing of returns. Europe is very friendly to R&D. In the Asia-Pacific region, companies often have tax abatements and incentives may not apply. 

Has anything recently changed in this arena?

In 2005, the IRS came out with its Tier 1 Program as an attempt to bring consistency in application to normally contentious areas, such as the R&D credit and transfer pricing. However, the initiative required more documentation and accounting on a project-by-project basis. Creating a nexus between the activity and the dollar spent on that activity was very onerous. 

The IRS got rid of the program at the end of 2012, but how it thinks about the credit and what’s required hasn’t changed.

What’s your advice for business owners?

Most companies and their people are very comfortable gathering the dollars that qualify. It’s gathering the qualitative documentation — the text that describes why they qualify for the credit — where companies fall short. These are details about who was working on the project, what their role was and what kinds of experimentation were involved. The tax department, engineering group or both have to put this documentation together, and many are not getting enough substantiation. 

You may need outside help with this, especially if it’s new to you. If your tax year is still open, you can go back three years to claim prior credits. When an adviser gathers data for one year versus four, it’s not that significantly different, so you could be looking at some worthwhile savings. 

The credits and other R&D incentives are vast and can provide substantial savings that affect your bottom line. It’s also likely that your competitors are taking them.

Trisha Squires is director of Tax at the Chicago office of SS&G. Reach her at (312) 863-2300 or [email protected].

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How to find opportunities and mitigate risk with a second glance at your tax filings

Taxes are complicated, confusing and sometimes intimidating. Even though you might want to put everything on the shelf after getting through another filing season, a checkup could be in order.

 “If your car is running fine, you shouldn’t wait until it breaks down to get it tuned up or have routine maintenance,” says Michelle Mahle, CPA, director of tax at SS&G

There are valuable tax opportunities you may be missing. Certain tax positions or reporting could help your business mitigate risk. 

“You have an opportunity to have somebody independent of what’s been done historically to come in with a fresh set of eyes,” she says.

Frank Taylor, CPA, director of tax at SS&G, says it comes down to how you feel about your current tax situation. 

“If nothing else, you can get peace of mind that everything is being handled correctly,” Taylor says.

Smart Business spoke with Mahle and Taylor about how a third-party checkup of your tax filings might uncover new opportunities and tax savings strategies.

How do you know whether your tax returns need a second glance?

First, this goes beyond the scope of just federal tax returns. It could include international, state and municipal tax compliance, as well as personal property and sales and use tax filings. An independent party can look at your business and say, ‘We should see this, and that’s a concern because it’s generally required with the business you’re operating.’ A third-party checkup can help you mitigate risk and exposure to audit, provide insight on tax strategies, and avail opportunities to secure tax credits and incentives unique to your industry.

It comes down to whether you feel comfortable. Maybe you’re unhappy about the taxes that you just paid, feel like you may be missing opportunities or just hope your next filing season will be different. A second glance or opinion may provide the peace of mind you need to stay focused on growing your business.  

What are some examples of opportunities businesses could be missing? 

Just looking at the restaurant industry, for example, there are organizations overlooking routine benefits available to them. They might be missing out on FICA (Federal Insurance Contributions Act) tip and work opportunity tax credits. Owners, previously paying alternative minimum tax (AMT), have found that their AMT credit carry forwards were handled improperly and when corrected resulted in substantial refunds. Many companies continue to improperly capitalize assets, not taking full advantage of accelerated depreciation deductions. 

Business owners in general tend to be intimidated by the Internal Revenue Service (IRS). When they are under audit or receive a notice, they just assume the IRS is right. The number of IRS audits taking place is increasing steadily. Always consult with your service provider to find out how much experience they have handling these types of matters so that you can be poised with good information and tax strategies to mitigate your risk and exposure.   

What should you look for when going to an independent party for a tax filing review?

You want someone with experience, particularly in specialty tax niche areas. There are a lot of service providers who perform very good basic federal tax compliance services. If you are feeling like your business is no longer vanilla, however, basic service may not be enough for you. The way people do business today is very different than the way business was done five years ago. Even small companies have international exposure, and almost every business crosses state lines. 

You want an independent party to have the depth and experience in both specialized areas of taxation and industries. You also want tax experts who stay on the cutting edge of legislative changes and developments, and who can identify tax saving strategies and refund opportunities. The right third party can provide a well-rounded second glance to any industry, for any circumstances, and could bring you real money in the form of refunds or credits as a result.

Michelle Mahle, CPA, is a director in Tax at SS&G. Reach her at (440) 248-8787 or [email protected].

Frank Taylor, CPA, is a director in Tax at SS&G. Reach him at (440) 248-8787 or [email protected].

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