Category: Business Services

Posted on Jul 19, 2016

cybersecurity

Our world is more interconnected than ever before. The Internet has become an integral part of everyone’s business and personal lives. But along with Web-based opportunities come risks of breaches and associated losses. The U.S. Department of Homeland Security has launched a series of education seminars this October as part of National Cybersecurity Awareness Month. The goals are to raise awareness about cybersecurity and to increase the U.S. resiliency against the threat of a cyber incident. Here, we reveal findings from two recent studies that underscore the importance of protecting your business against data breaches.

Sobering Statistics

The second-quarter 2015 Duke University / CFO Magazine Global Business Outlook survey revealed that approximately four out of five U.S. companies had experienced at least one serious outside hacking attempt to steal, make public or change important data in the last year. Breach rates were even higher among European companies (92%) and those with fewer than 1,000 employees (85%). In the third-quarter 2015 Global Business Outlook survey, data security once again made the list of top 10 CFO concerns.

A recent claims study by NetDiligence, a cyber risk assessment and data breach services provider for the insurance industry, reports that the average cost of a cyber breach in 2015 was nearly $674,000. But the NetDiligence dataset includes some claims that haven’t yet been paid, and it estimates that the average cost could rise to $1.1 million, assuming self-insured retentions are met.

Most of these claims involved losses of records containing personal identifiable information (45%), followed by payment card information (27%) and personal health care information (14%). Nearly a third of the incidents involved hackers. The health care and financial services industries accounted for the most claims (21% and 17%, respectively). But the largest claim overall occurred in the retail industry.

Preventive Measures

What steps has your company taken to minimize data breach risks? The first step in any cybersecurity plan is identifying your “crown jewels,” the data that’s most valuable to your organization. Depending on your industry, that might be trade secrets, financial data or customer data, for example. Focus most of your attention on making these assets more secure. Doing so requires an understanding of who has access to your most valuable intellectual property assets, including employees and third-party vendors.

Protecting against cyber threats is an ongoing chore that requires buy-in from everyone in your organization. The most common data security technique reported by CFOs in the Global Business Outlook survey was installing new software (64% of respondents). In addition, approximately one-third of respondents plan to train employees about breach prevention, install updated IT hardware or hire a data security firm to review their protocols.

Other ways to beef up your company’s cybersecurity measures include:

  • Installing the latest software, hardware or application updates on every device as soon as they’re released by the manufacturer. Doing so can help thwart hackers who troll for patches and updates to exploit the latest system vulnerabilities. Nimble hackers can then use these vulnerabilities to steal data before businesses have a chance to install the fix.
  • Limiting the number of devices connected to the Internet and minimize off-site risks. For example, consider limiting which employees can work from home. It’s also important to educate employees about the risks of cyber breaches and to install encryption software on devices that link to external networks. Employees who take devices out of the office expose your company’s data to less-than-secure home networks and public hotspots that provide wireless Internet access.
  • Fortifying your defenses against losses from breaches with cyber liability insurance. Professional and general business liability insurance policies generally don’t cover losses related to a hacking incident. Cyber liability insurance can cover a variety of risks, depending on the scope of the policy. It typically protects against liability or losses that come from unauthorized access to your company’s electronic data and software.

Instead of purchasing a standalone cyber liability policy, you can add a cyber liability endorsement to your errors and omissions policy. Not surprisingly, the coverage through the endorsement isn’t as extensive as the coverage in a standalone policy.

Business owners and managers should carefully read their policies to understand what types of incidents are specifically excluded from coverage. And, remember, no type of cyber liability insurance is a suitable replacement for sound cybersecurity policies and procedures. Other well-resourced preventive measures can also reduce your premiums for cyber insurance.

Year-End Planning

National Cybersecurity Awareness Month is a perfect time to launch an educational program for your employees about these risks and preventive measures. If you’re unsure where to start, forensic accountants are familiar with ways to identify and reduce costly cyber breach risks. Giving some extra attention to cybersecurity before year end will help your business start off 2016 on the right foot.

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Posted on Jul 11, 2016

SB Blog Cover 1200pxNumerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, small business owners can plan ahead with these 5 mid-year tax strategies inspired by the recent legislation.

5 Tax Breaks for Small Businesses

1. Buy equipment. The PATH Act preserves both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year. For 2016, the maximum Sec. 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. Without the PATH Act, the 2016 limits would have been $25,000 and $200,000, respectively. The higher amounts are now permanent and subject to inflation indexing.

Additionally, for 2016 and 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Sec. 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on December 31, 2019.

2. Improve your premises. Traditionally, businesses must recover the cost of building improvements straight-line over 39 years. But the recovery period has been reduced to 15 years for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. This tax break was reinstated and made permanent by the PATH Act.

If you qualify and your premises need remodeling, you can recoup the costs much faster than you could without this special provision. Keep in mind that some of these expenses might be eligible for bonus depreciation.

3. Ramp up research activities. After years of uncertainty, the research credit has been made permanent under the PATH Act. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that’s essentially determined using a historical average of research expenses as a percentage of revenues. There’s also an alternative computation for companies that haven’t increased their research expenses substantially over their historical base amounts.

Research activities must meet these criteria to be considered “qualified”:

  • The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
  • There must be an intention to eliminate uncertainty.
  • There must be a process of experimentation. In other words, there must be a trial and error process.
  • The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Effective starting in 2016, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. In addition, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.

4. Issue more stock. Does your business need an influx of capital? If so, consider issuing qualified small business stock (QSBS). As long as certain requirements are met (for example, at least 80% of your corporate assets must be actively used for business purposes) and the investor holds the stock for at least five years, 100% of the gain from a subsequent sale of QSBS will be tax-free to the investor — making such stock an attractive investment opportunity. The PATH Act lifted the QSBS acquisition deadline (December 31, 2014) for this tax break, essentially making the break permanent.

5. Hire workers from certain “target groups.” Your business may claim the Work Opportunity credit for hiring a worker from one of several “target groups,” such as food stamp recipients and certain veterans. The PATH Act revives the credit and extends it through 2019. It also adds a new category: long-term unemployment recipients.

Generally, the maximum Work Opportunity credit is $2,400 per worker, but it’s higher for workers from certain target groups. In addition, an employer may qualify for a special credit, with a maximum of up to $1,200 per worker for 2016, for employing disadvantaged youths from Empowerment Zones or Enterprise Communities in the summer.

New transitional rules give an employer until June 30, 2016, to claim the Work Opportunity credit for applicable wages paid in 2015.

Midyear Small Business Tax Planning Meeting

We’re almost half way through the tax year. Summer is a great time for small businesses to get a jump start on tax planning. Contact your Cornwell Jackson tax adviser to estimate your expected tax liability based on year-to-date taxable income and devise ways to reduce your tax bill in 2016 and beyond.

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Posted on Jun 9, 2016

Recordkeeping

When starting a small business, taking the time to set up your recordkeeping system properly, right from the beginning, will save you time and money down the road — and could make the difference between success and failure.

Certified public accountants (CPAs) are experts in small business finance including taxes, financial reporting, business advisory, personal financial planning as well as bookkeeping and payroll processing.

According to CPAs, good recordkeeping preparation and planning can:

  • Make tax preparation easier. Back-up documentation may save you taxes, interest charges and penalties if the Internal Revenue Service (IRS) ever questions your return.
  • Allow you to comply with multi-state taxes, such as sales taxes (including internet sales) and payroll taxes.
  • Give you a better handle on your overall financial position, how your business is performing and help your CPA identify financial and tax planning opportunities.
  • Create efficiencies throughout the business by spending less time locating documents and information.
  • Provide your successor with a roadmap to your financial affairs if you die or become incapacitated.

BASIC CONSIDERATIONS

One of the first things you will need to determine is whether to use a traditional paper filing system, an electronic filing system or a combination of the two. You should carefully consider the pros and cons of each type of system in light of your business needs and resources.

CONVENIENCE AND FLEXIBILITY

To keep up with your recordkeeping, it’s important to build a system that is convenient. Electronic records are very easy to transport. You can move the equivalent of boxes of paper documents with the click of a mouse via encrypted email or a secure portal. When stored in the Cloud or a secure portal, you can work on them from home, the airport or the beach. CPAs work with both electronic and physical records, but your CPA will have specific recommendations due to the requirements for business recordkeeping in your state and/or within your industry. Be sure to consult with your CPA to find the recordkeeping system that best suits your needs.

RELIABILITY

Paper files are extremely reliable, provided you follow documented protocols for setting up and maintaining them. They are not susceptible to server failures or power outages. Nor are they dependent on the ongoing support of a systems vendor. Paper files, however, are susceptible to floods, fires and other natural disasters. It’s difficult and costly to maintain redundant backups of paper records. Although electronic media can also be easily damaged or destroyed, redundant backups are generally easily made and recovered.

SECURITY AND PRIVACY

Identity theft, fraud, privacy law violations and numerous other crimes have been enabled by electronic recordkeeping systems. Even some of the most sophisticated electronic security systems have been compromised. As a business owner you have a responsibility under multiple laws and regulatory bodies to protect the confidentiality and security of your customer’s records. Electronic records can be kept secure when proper measures are taken to protect privacy, but this is an entirely different process from keeping filing cabinets locked and installing an office security system. Because you are legally responsible for your data, you should NOT depend solely on your electronic recordkeeping systems vendor to ensure the security of your electronic records.

STORAGE

When it comes to storage, electronic files clearly have the advantage. The longer you’re in business and the more you grow, the more burdensome the space requirements for paper records. Many businesses resort to offsite records storage both to save space and to mitigate the risk of records being destroyed. At some point, paper records typically need to be shredded, which is labor intensive and costly.

COSTS

The cost of electronic record storage has become highly affordable compared to traditional paper-based systems. Some original documents should still be kept in paper copies, but the vast majority can be digitized.

FILE LOCATION AND ACCESS CONTROL

Although your filing system will need to be tailored to meet the needs of your specific business, the following elements can help you avoid common pitfalls.

STANDARD PROTOCOL

When it comes to filing, almost everyone has his or her own ideas about how they’d like to see the files organized. If left unchecked, one person’s innovation soon becomes another’s frustration. Set a standard protocol for every type of file, then teach, monitor and enforce it.

CENTRAL LOCATION For security and emergency purposes, keep all files in one central location that can easily be accessed without being dependent on a single person. The same principle applies to electronic files, which should be kept on a shared server or Cloud provider’s system rather than on an individual’s PC workstation.

LIMIT ACCESS

Access to files should be limited to only those who have a specific business purpose for doing so and security protocols should be set up accordingly. An advantage to most electronic recordkeeping systems is that a date and time stamp log is automatically generated each time a user accesses a file. If you implement an electronic system, you should periodically review access logs and follow-up on any unusual activity.

SAFE DEPOSIT BOX

Documents that are difficult or costly to replace should be kept in a safe deposit box. Your safe deposit box should hold any records of ownership such as deeds and titles and original business documents such as articles of incorporation, corporate resolutions, bylaws, partnership agreement, minutes from annual meetings, loan documents and so on. Because access to your safe deposit box could be delayed in emergency situations, keep copies in a clearly marked paper or electronic file. Additional copies should be held by your attorney.

FINANCIAL OVERVIEW

With your recordkeeping system in place, prepare a procedures manual explaining it for employee training purposes and in case someone outside the business needs access due to a long-term illness or other emergency. Be sure to include the location of important documents as well as insurance policy information. You should also list bank and investment accounts, as well as all credit accounts with account numbers. Also, you should list information on other debts, including mortgages and loan documents. Give a copy of this manual to trusted family members, your attorney, CPA and trustees, if any.

Setting Up Your Bookkeeping System

Your instinct may be to just set up bookkeeping system “from a box” of purchased software or from the Cloud. However, before you set up your system, you’ll want to talk to our team of CPAs about purchasing software that is right for your type of business and easy to use.

Your CJ CPA can help you design the proper chart of accounts that will give you key information on your business and will save you time in the long run. If you plan to manage your books in-house, making the investment in a system that works with that of your CPA could prove to be more strategic when seeking advice and easier when it comes to closing the year end, generating financial reports and filing income tax returns.

SB Recordkeeping CoverGuide to Small Business Recordkeeping

To download the Guide to Small Business Recordkeeping, which includes a list of what documents your business must keep and for how long, click here.

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Posted on May 25, 2016

Retaining Payroll Records

As if payroll record retention and recordkeeping wasn’t already difficult enough, another layer of complexity has been added by the Affordable Care Act (ACA).

Now that the ACA rules are firmly in place, here’s a brief rundown of several areas of concern for record retention. This list is based on information provided by the IRS, the Social Security Administration (SSA) and the Department of Labor (DOL).

ACA Requirements

The IRS administers health insurance coverage requirements under the ACA. The law currently requires employers with 50 or more full-time employees or full-time equivalents to provide at least minimum essential coverage. For the IRS, employers must file these informational forms:

  • 1094-B, Transmittal of Health Coverage Information Returns,
  • 1099-B, Health Coverage,
  • 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and
  • 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Employers should retain copies for at least three years or be able to reconstruct the data for that time period.

Federal Income Tax and FICA Requirements

Wages are subject to both federal withholding and Federal Insurance Contributions Act (FICA) taxes. The Social Security tax portion of FICA is equal to 6.2% of the first $118,500 of wages in 2016. The Medicare tax portion is equal to 1.45% on all wages.

Generally, employers must retain income tax and FICA tax records for at least four years from the date of the employee’s tax return due date. They must also keep information regarding wage continuation payments that the employer or a third party makes under an accident or health plan. This information should include the start and end dates of the time off from work and the amount and weekly rate of each payment.

Copies of documents filed on paper or electronically must be kept for at least four years after the tax return due date or, if later, the date the tax is paid. This includes the entire Forms 941 series and any W-2 forms sent but returned as undeliverable. It is permissible to destroy original W-2 forms if they can be electronically reproduced.

Employers filing claims for refunds, credits or abatements on income and FICA taxes, must hold on to related documents for at least four years. Companies with health insurance, cafeteria, educational assistance, adoption assistance or a dependent care assistance plan providing tax-free benefits must keep records establishing that the plans meet statutory requirements.

Finally, employers in businesses that require tip reporting must keep records substantiating any information returns or employer statements on tip allocations for at least three years after the return or statement is due.

FUTA Requirements

Under the Federal Unemployment Tax Act (FUTA), employers must withhold amounts for unemployment payments. The FUTA rate is 6% on the first $7,000 of wages, but can be reduced by as much as 5.4% for credits on contributions to state unemployment programs.

Employers must retain records for four years from the later of either the date they file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return or the date they pay the tax. The records should include:

  • Compensation paid to employees during the year,
  • Compensation subject to FUTA tax,
  • State unemployment payments (separating out any employee contributions),
  • All information on Form 940, and
  • Any difference between total compensation and the taxable amount.

Note: Currently, only Alaska, New Jersey and Pennsylvania require employee contributions.

FLSA Requirements

The Fair Labor Standards Act (FLSA) governs minimum wage and overtime pay rules. Employees must be paid at least the minimum wage and one and one-half times their regular rates of pay for overtime unless they are exempt.

Every covered employer must keep certain records for each non-exempt worker. Generally, these records should include the employee’s full name, Social Security number, address, birth date if younger than 19, sex and occupation, as well as:

  • Time and day workweek begins,
  • Hours worked each day,
  • Hours worked each week,
  • Basis on which wages are paid,
  • Regular hourly pay rate,
  • Total daily or weekly straight-time earnings,
  • Total overtime earnings for the week,
  • Additions to or deductions from wages,
  • Total wages paid each pay period, and
  • Date of payment and pay period covered

Records on which wage computations are based, such as time cards and piecework tickets, wage rate tables, work and time schedules and records of additions to or deductions from wages need to be kept for only two years. The remaining records should be held for at least three years.

Your CJ Payroll adviser can help ensure that you follow all the rules for retaining payroll records.

The Annual Payroll Tax Forum

The American Payroll Association (APA) is touting its mid-year Payroll Tax Forum.

This is a one-day course the not-for-profit group is offering in 18 cities from June 13 to June 24. The forum will focus on the latest payroll-related changes from Congress and various federal agencies.

Scheduled topics include:

  • Health insurance data reporting required by the Affordable Care Act (ACA),
  • Taxation and reporting of executive employee compensation,
  • Preparation for a proposed increase to the white collar exemption minimum salary requirement, and
  • Planning for the accelerated W-2 and 1099 filing dates.

The program will also include reviews of recent legislative and regulatory changes, the annually adjusted wage bases and benefit limits, as well as a discussion of revisions to IRS forms and publications. The forum is open to anyone involved in an organization’s payroll. More information is available at the APA website.

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Posted on May 16, 2016

Checklist 1200

Sound planning is one of the most critical factors to the success of your business. Before you started your business, you likely put together a plan for your start-up expenses and projected monthly revenues and expenses. Now that your business is up and running, your plan will need to be adjusted regularly to match your actual performance.

If you’re like most small business owners, time is your most scarce resource. Conducting a monthly or quarterly financial health checkup with your local certified public accountant (CPA) can provide a substantial return on your financial planning time because it allows you to leverage the expert training and experience of a CPA who advises many small business owners.

By reviewing the following aspects of your business, your CPA team at Cornwell Jackson can help you identify and correct problem areas before they become crises.

Small Business Check-in List

Here are some of the things you need to think about when you conduct a periodic checkup on your business:

KEY PERFORMANCE INDICATORS (KPIs)
KPIs vary for each type of business. Your CPA can help you develop KPIs most relevant to your business, formulate them into a dashboard and review them with you on a regular basis. Most CPAs can also provide you with comparative data based on their extensive experience with other businesses as well as other industry sources.

STRATEGY AND PLANNING
Small owners don’t have the luxury of a strategic planning department, and daily operations consume most of your time. Your CPA can serve as your strategy adviser and help you boil your strategy down into measurable goals and review your progress on a regular basis.

SALES FORECASTING
In the beginning, your sales forecast was based on market research, your sales and marketing plan and your best estimates based on experience in your industry. Even the best start-up sales forecasts need to be reworked in light of new information you’ve learned from actual operating performance. Because your CPA advises many small businesses, he has extensive experience with sales forecasts and can perform a periodic checkup to see whether your sales forecast is realistic in light of your specific circumstances.

GROSS PROFIT MARGIN
Amid frequently changing costs and pressure to make sales, many small business owners find it challenging to keep up with whether they’re maintaining adequate profit margins to sustain their business. Your CPA can help you calculate and track gross margins by product or service, by customer (or customer group) or by job. Most importantly, your CPA can help you identify causes of margin erosion and recommend changes you can make to get your margins back on track.

CASH FLOW FORECASTING
Cash flow management makes the difference between success and failure for most businesses. Your CPA can provide you with the kind of professional cash flow forecasts an in-house finance department would provide to management in a larger business. Your CPA can help you answer the questions: What will our cash balance look like during our slow season? Will we need to borrow to cover shortfalls? Do we have a large enough line of credit?

ACCOUNTS RECEIVABLE (A/R)
Accounts receivable can be difficult to forecast until you have enough history to identify trends. In many cases your CPA has access to trend and benchmark data for other businesses similar to yours and can help you forecast seasonal fluctuations and compare your A/R performance to industry benchmarks. Your CPA can also help you identify needed adjustments to your credit and collection policies. Here are some of the things you need to think about when you conduct a periodic checkup on your business: 3

ACCOUNTS PAYABLE (A/P)
Sometimes an accounts payable problem arises suddenly. But more often problems develop over time and can be corrected before they become crises. Your CPA can review your accounts payable and help you develop a plan to resolve payment issues and prevent them from occurring.

INVENTORY
For many businesses, inventory is a major draw on operating capital and cash flow. If your business has seasonal fluctuations, inventory forecasting can be difficult. Your CPA can help you forecast your inventory needs and evaluate inventory financing options from suppliers, local banks and commercial lenders.

PAYROLL
For most businesses, payroll is a major expense. Your CPA can help you locate industry benchmarks and develop a scorecard for you to monitor. CPAs can also provide an objective checkup on your health care expenses, retirement plan and other employee benefits. If you need specific benefits help, your CPA can provide you with a referral to a specialist.

BANKING
Most lenders include certain loan covenants in their lending agreements such as a requirement to maintain certain types of insurance coverage, to meet a certain debt to income ratio and so on. Failure to maintain these requirements could result in penalties or even worse — having your loan called. Your CPA can help you develop a scorecard to monitor and stress-test your loan covenants in light of your financial forecasts. If a loan covenant breach is likely, your CPA can help you develop a plan to bring your business back into compliance or to renegotiate covenant requirements with the lender.

TAXES
You don’t want a big surprise tax bill when you file your annual return, but you don’t want to tie up more capital than necessary in your estimated quarterly tax payments. Your CPA can check your performance and projections against your estimated tax payments to help you avoid surprises at tax time.

REGULATORY COMPLIANCE
Laws, regulations and financial reporting standards change frequently. Failure to comply can result in costly penalties from state and federal authorities or place you in technical default of loan covenants with your bank. Your CPA can help you identify regulatory changes that could impact your business and assist you with compliance.

EMERGENCIES
Preventing emergencies is one of the benefits of scheduling regular checkups with your CPA. But you can’t predict some situations such as the loss of a major customer, a lender unexpectedly calling a loan, a personal health problem or other unpredictable event. When you’ve been meeting with your CPA on a regular basis, your CPA knows your business and is in a better position to help you when an emergency arises. Because your CPA is specially trained and advises many small businesses, your CPA is uniquely qualified to advise you on your financial options in a crisis situation.

SB Quarterly Pulse Check Cover

To download this checklist from the AICPA, click here.

In this guide, we cover:

  • Strategy and Planning
  • Cash FLow Forecasting
  • Gross Profit Margins
  • Key Performance Indicators (KPIs)
  • and more!

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Posted on May 9, 2016

Startup Financing

It’s no secret that you will need capital to launch your new business. Many entrepreneurs struggle to get their businesses off the ground because they’re unable to secure adequate funding. The good news is that billions of dollars are available to fund small business ventures like yours.

Before you begin the process of securing capital, you will need a written business plan that defines your business, management team, market, products and services, competitive advantage and the financial forecast and analysis that determines the proper amount and type of financing.

Determine Capital Needed for Fixed Assets

As you prepare the financial part of your business plan, you’ll need to provide a detailed list of your capital needs separated into the following categories that correspond to common asset categories and specific types of business loans. Consider the following as you create your list of capital needs.

  • Location — Will you buy, build or lease? What kind of materials and labor might you need to build out the space?
  • Equipment — List every major piece of equipment you will need and provide the cost for each and consider options for a capital lease versus making a purchase.
  • Technology — Divide your list into hardware and software. Don’t include software, data storage or website hosting that will be acquired on a subscription basis. Those services generally should be listed as operating expenses.
  • Furniture and fixtures — List the quantity and prices from major distributors for desks, file cabinets, tables, chairs, shelving, displays, cubicles and so on.
  • Vehicles — List cars and trucks essential to the operation of your business, such as delivery or service vehicles. Fleet vehicles may also be leased.

Evaluating Types of Working Capital Financing

The types and terms of working capital loans vary significantly depending on their intended purpose and corresponding risk. The following are some of the more common ones.

Lines of Credit

Lines of credit are common sources of short-term working capital financing. often, a business is approved for a line of credit up to a certain amount — much like a credit card — and the line can be used for fluctuations in accounts receivable, inventory and seasonal business cycles. Many banks won’t extend a line of credit until your business has been operating for 12 months. Generally, you will pay interest on your outstanding balance on a monthly basis. The principal of your loan is “callable” by the bank subject to the notification requirement of the note. Lines of credit typically are secured by accounts receivable and inventory and can also be required to be personally guaranteed by the business owner and subject to restrictive covenants.

Trade Credit

As your business begins to grow, establishing trade credit with your primary suppliers will help you finance your growth — often at no cost to you. Trade terms usually are 30 days, but in some industries (retail for example), you can negotiate substantially longer terms once you’ve established a relationship with a supplier. The key to establishing trade credit is “ask,” and when terms are extended to you always pay on time. Your first trade account will serve as a credit reference for your next and so on.

Preparing for Requests and Questions from Potential Lenders

While every loan program has specific forms you need to submit, you will likely need to provide much of the same information to each of the lenders for different loans. These documents include:

  • Personal Background
  • Resumes
  • Business Plan
  • Personal Credit Report
  • Business Credit Report
  • Income Tax Returns
  • Financial Statements
  • Bank Statements
  • Collateral
  • Personal Guarantee
  • Additional Legal Documents

For a detailed list of the documents that each lender will likely request, download the Guide to Acquiring Startup Financing, which includes a comprehensive Business Loan Application Checklist.

In addition to providing the above documentation for your new business, be prepared for lenders who will likely ask the following questions.

  • Why are you applying for this loan?
  • How will the loan proceeds be used?
  • What assets need to be purchased, and who are your suppliers?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team and what are their qualifications?
  • Why do you think this business will be successful?

As you make your way through the financing process and begin evaluating your funding options, keep in mind that your local CPA can be your most trusted professional business adviser. Your local CPA already advises other small businesses in your area and has relationships with local banks, insurance agents, attorneys, investors, municipal and county regulatory officials and more. Your CPA can be an important ally in helping you determine how much capital you need, evaluate available funding options and choose the ones that best meet your needs.

SB Startup Financing Guide CoverFor the complete guide on how to acquire startup financing for your small business, click here to download. In this guide, certified public accountants (CPAs) offer their most helpful tips on the following topics.

  • Forecasting revenue, expenses, and operating capital requirements
  • Types of working capital financing
  • Determining capital needs for fixed assets
  • List your personal assets and liabilities
  • Identify potential funding sources
  • Financing package development
  • Business loan application checklist

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Posted on May 6, 2016

Small Business Legal Structure

One important consideration when starting your business is determining the best legal organizational structure. Why? Because it will affect operating efficiency, transferability, control, the way you report income, the taxes you pay and your personal liability.

Four basic structure types are available:

  • Sole proprietorship
  • Partnership — general and limited
  • Corporation — S corporation, C corporation
  • Limited liability company (LLC)

The choices can be complicated — and errors can be costly. Business legal structures are regulated by state governments, but your county or municipality also may have license requirements. What’s more, current tax laws make it difficult to change your legal structure after you begin operating. Making the right decision before you open for business is very important. How do you decide which legal structure is best for you and avoid potential problems? Consult with a certified public accountant (CPA). A CPA can help you make well-informed choices, explain how business structure affects your organization’s bottom line and file the necessary paperwork to start your business, if you’d like.

Below we have listed the pros and cons to each structure type in an overview and comparison grid that will help you consider the right structure for your new business.

Business Structure Pros and Cons

Structure Type

Pros

Cons

Sole Proprietorship
  • Inexpensive to start and simple to run
  • One level of tax on net income
  • No separate tax return
  • Unlimited personal liability
  • Ownership limited to one person

Partnership
  • Ownership not limited to one person
  • One level of tax on net income
  • Income and expenses allocation can be unrelated to percentage of ownership
  • Unlimited personal liability
  • Each partner legally responsible for the business acts of other partners
  • Requires separate tax returns

S Corporation
  • Limited personal liability for shareholders
  • Business net income taxed as personal income of shareholders
  • Requires separate tax returns
  • Restrictions on adding investors
  • Net income must be allocated according to percentage of ownership

C Corporation
  • Limited personal liability for shareholders
  • Easy to transfer ownership and add investors
  • Perpetual continuity presumed
  • Requires separate tax returns
  • Net income may be double taxed
  • More costly to set up and maintain

Limited Liability Company (LLC)
  • Limited personal liability for members
  • Income and expenses can be allocated in a manner unrelated to percentage of ownership
  • Not automatically perpetual like S or C corps
  • More costly than a sole proprietorship to set up and maintain

 

Your CPA can help you decide what type of entity and structure is best for your particular situation and type of business. There are situations where forming multiple entities may better accomplish your objectives. For example, a family
business may want to separate its land, buildings or other fixed assets from the operating business and lease them back to the operating business to have a different equity ownership by family members who may not be active in the
business’s day-to-day operations. You should evaluate the decision to choose an entity in which the tax attributes pass through to the owners in light of the
other income or losses that you and other owners have and the extent to which you will have a tax basis in the entity. Other considerations include your objectives for an exit strategy or transitioning the business ownership on to the next generation.

Pages from SB Legal Structure Selection Guide - Publish

For more information on which legal structure is right for your business, download our Whitepaper – Guide to Selecting Your Small Business Legal Structure, which includes entity type comparisons of the following topics:

  • Operational and Control
  • Investment
  • Continuity and Transferability
  • Legal Liability
  • Compensation and Payroll Taxes
  • Tax Years

Contact the Cornwell Jackson Business Services team for more information. We’re small business experts.

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Posted on May 2, 2016

DCEO-Accounting_MNS2965
In May 2016, we were honored to participate in the D-CEO Magazine Accounting Roundtable. Our newest partner, Mike Rizkal, CPA sat down with other leaders from accounting firms in the Dallas area to discuss the current state of business accounting, economic variables, and the various trends that affect our clients.

To read the full article on DCEO’s website, click here.

How is the location of a CPA firm office relevant to the decision to work with them?

Location is still a big factor, but no longer a deal breaker. Due to advancements in technology, we can now serve more clients that aren’t geographically located in our backyard while still maintaining the efficiency and personal touch of a face-to-face meeting. The advancements in online collaboration and meeting tools have changed our industry significantly and will continue to play an important role in how we service our clients. We invest in technology that matches our clients’ desire for convenience, and then we address their preferences for communication to deliver the best service possible. For traditional tax and audit compliance, those services are built around collaboration and often work best with a local CPA. However, a firm that has the capability to work remotely through cloud-based technologies can bridge the gap of geographical distance.

Is bigger better? How does the size of firm impact clients?

In our experience, going with a bigger firm doesn’t always guarantee better services or solutions. It is all about balance. Certainly for some larger entities and public companies a “name” firm carries weight with investors. However, in the middle market segment in which we serve, service is paramount and our competitive fees create more flexibility for ownership. Clients should focus on finding a firm with a solid reputation within the financial community that directly impacts them. When searching for an accounting firm, companies should consider: direct and easy access to partners, the capabilities of the firm to help solve their problems or provide referrals to other trusted service providers.  The most common reason for change to a new CPA firm is that the client felt “lost in the shuffle.” Therefore, it is important to find a firm that can deliver on the level of service offered during the proposal process. Don’t  buy based on size alone.

Do your clients rely on their CPA firm to make recommendations of trusted advisors in other service areas?

We spend a lot of time making sure we have strong alliances so we can refer clients to someone we trust. If we are not confident in the level of service they will provide, we do not refer them. The key to a successful recommendation is to know the needs of your client first, then match them with a specific service provider with experience that meets those needs at a value-based cost. Matching the personality of the client with the potential service provider is also an important factor in the referral selection. We go beyond simply providing a recommendation. It is our hope to provide a referral that leads to a successful relationship.

We spend a significant amount of time in the business community developing relationships that we believe can benefit our clients. Even after the referral, our team stays involved to ensure our client has a positive experience and the desired results are achieved.

How are your clients balancing the importance of providing strong earnings for banking needs versus reducing the amount of taxes paid?

All clients are looking for opportunities to reduce the tax burden while continuing to produce strong financial results that attract capital. We have found the answer to this question to be a combination of strategic tax and financial planning. This is often achieved through balance and communication.

There are several strategic tax planning opportunities that do not negatively impact the company’s earnings or common financial measurements. Banks are not purely concerned with earnings, but instead focus on the overall stability and financial health of the company.

We feel that it is important to help our clients through strategic planning to reduce the tax burden while maintaining strong financial performance. Then we work with our clients to communicate these strategies to their financial institution. We have often found that communication helps manage surprises and keeps our clients and their lenders on the same page regarding specific tax planning strategies and expected earnings.

How do tax laws and incentives in Texas benefit your clients?

Texas undoubtedly is one of the most business friendly states in the nation and has one of the lowest tax burdens in the country. Clearly, based on current economic performance of the state, Texas has done a good job incentivizing companies to do business in the Lone Star state. Unlike many other states, Texas does not impose a personal income tax or a corporate income tax. Texas’ margins tax was established to provide a broader, fairer tax assessed at a lower rate. There are numerous other tax incentives and laws that make Texas a business friendly state, including property tax incentives, sales and use tax exemptions for manufacturing, research and development and business relocation deductions, just to name a few. We look at every advantage and weigh it against the goals and financial results of every client before recommending a solution.

What unique marketing programs have you implemented to grow your business?

We are being very segment focused and promoting thought leaders in the industries we serve. We are increasing our web presence to encourage online leads, because a lead indicator among growing firms is website visits. We haven’t prioritized our website in the past, and I think the industry in general has underestimated buyer behaviors toward online search and comparison shopping.

We are promoting technologies that reduce client fees and improve operational efficiencies. Especially in services where we are experts, we are looking at solutions that make us attractive to clients for outsourcing such as payroll services.

What are obstacles that impede the growth of your clients’ businesses?

The biggest obstacles to growth are often corporate governance and finding and attracting talent. There are many issues that affect our clients’ businesses. Few owners can solve them all on their own. Many business owners are top-line focused and struggle to address the other challenges affecting the company primarily due to lack of time. Business owners need to invest inside the company as much as focus on new business development in order to remain competitive on all fronts. Keeping talent, investing in the right technologies and managing a diverse and mobile workforce are the biggest challenges to growth.

What is the best formula for creating a valuable and successful relationship between you and your client?

The key to creating a valuable and successful relationship is proactive involvement and communication. We strive to be actively involved in our clients’ businesses through tax planning and regular interaction throughout the year. Every client wants to feel attended to on a professional and personal level. We have leveraged internal resources, technology and our team to ensure follow-up with clients so they are well informed during every stage of the engagement. Our focus as professionals, then, is to exceed expectations with our attention and value-added services.

How should companies evaluate the effectiveness of their accounting firm?

Companies can evaluate the effectiveness of their accounting firm by assessing whether they feel the firm goes above and beyond to meet their expectations.

  • Is the team simply completing the task they’ve been assigned or are they spending time proactively planning for the engagement to ensure the best client results in the most efficient manner?
  • Is the accounting firm providing the right level and type of communication as to the status of the project and the expected delivery date?

Proactive service means showing clients what they want before they know they want it. Clients need to hold their accounting firm to a standard of meeting promises and expectations. A CPA must be engaged in the relationship to know what can make a difference.

As a trusted advisor, what are you doing differently today to provide additional value to your clients?

We are striving to be more than just a service provider. We want our clients to view us as a resource to help with their business challenges. We encourage communication by offering an unlimited phone calls and meetings retainer to every client.  We want our clients to know that simply calling us to discuss a solution is not going to cost them.  These conversations often uncover opportunities and needs and enhance our client relationships.

Our professional team brings value to the table from a background of various industries and experiences, which can often be translated into a unique solution for our clients’ needs.

How has the use of technology impacted how clients run their business — are they willing to make the investment in this economy?

The advancements in technology and increases in efficiency it creates are often too big to ignore. During the recent downturn of the economy, companies sought out opportunities to leverage technology to decrease overhead and increase profitability. Although there has been some economic improvement, companies continue to look for new ways to increase efficiency. This is often achieved by leveraging new technology. We focus on making technology recommendations that fit our clients’ needs and help our clients assess the cost/benefit of their technology investments. It can be as simple as setting up ACH bill payment through their bank or investing in an ERP system. We live in a technology-based world at a time of high competition and increased demand for efficiency. Our clients are willing to invest in solutions that reduce overhead costs, increase efficiencies and help them remain competitive in today’s economy.

What are the most important issues impacting your client base today?

There are numerous issues impacting our clients, including increased competition, pricing, talent retention, taxes, succession planning, changes in healthcare regulation, increased compliance complexity and demand for efficiency.

We take pride in helping our clients navigate these challenges by being proactively involved in their business. Clients need an advisor to help prioritize and weigh their decisions, provide insight based on experience in their industry, and assess the financial impact of these decisions. Our goal is to help our clients make the best decision they can to provide a solution they can be confident in.

How do you keep up to date on issues that impact your clients?

We attend trade shows and conferences within our industry and the industries in which our client operate. Spending time with our clients is how we get the first-hand information on issues and trends affecting their industry. We see it as part of our job to stay in contact and be experts in our clients’ segments. We want to give clients a head start on what’s coming — and it’s constantly changing.

Often the concerns of here and now outweigh what’s coming in the future. It’s natural. Attending these conferences helps our professionals stay aware of upcoming changes in the industry, which allows us to provide knowledge to our clients regarding the latest trends, and in turn this helps our clients succeed in today’s competitive market.

What keeps your clients up at night?

The issues that keep our clients up at night are numerous and often different based on the industry in which they operate and the lifecycle stage of their business. Companies are always balancing the long-term decisions to remain competitive with the short-term concerns about payoff. What’s the short-term reward for the long-term investment? It’s human nature to worry about that. Are we on the right track? Can we keep the key people we need to succeed? Not to mention the normal concerns all business owners face, such as meeting revenue targets, maintaining healthy cash flow, technology investment and managing increased regulation. During these times of increased complexity it is important to find a trusted advisor that can help navigate the ever-changing business environment.

 

MR Headshot

Mike Rizkal, CPA has been with Cornwell Jackson for over ten years, and leads the firm’s benefit plan and financial statement audit practice. He specializes in providing a variety of services to privately-held middle market businesses, with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries.

View Mike Rizkal’s full bio here.

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Posted on Apr 26, 2016

Tax Developments for Partnerships

 

In recent months, there have been several significant tax developments for partnerships. They also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners that are affected by the developments.)

Here are quick summaries of what’s brewing on the partnership tax front.

Accelerated Due Dates

The long-standing due dates for filing partnership federal income tax returns (Form 1065) were changed by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

For partnership tax years beginning after December 31, 2015, partnerships must file Form 1065 one month earlier than before. That means they’re due two and one-half months after the close of the partnership’s tax year — or March 15 for calendar-year partnerships. As before, six-month extensions are allowed. The deadline is adjusted for weekends and holidays until the next business day.

Under prior law, a partnership’s Form 1065 was due three and one-half months after the close of the partnership’s tax year — or April 15, adjusted for weekends and holidays, for calendar-year partnerships.

Important note. This change affects the due date for 2016 Forms 1065 for partnerships that use the calendar year for tax purposes. Those returns will now be due on March 15, 2017.

Changes to Varying Interest Rules

In August 2015, the IRS issued new final regulations that modify and finalize the so-called “varying interest rules.” These rules were previously contained in proposed regulations issued in 2009.

The varying interest rules are used to determine partners’ percentage interests in partnership tax items — including income, gains, losses, deductions and credits — when the partners’ interests change during the year. For example, interests can change due to the entrance of new partners or the exit of existing ones.

The new final regs require that 100% of all partnership tax items be allocated among the partners. In addition, no items can be duplicated, regardless of the allocation method adopted by the partnership.

The new final regs allow partnerships to use either of these two methods to determine distributive shares of partnership tax items when partners’ interests vary during the year:

Interim-closing-of-the-books method. Here, a snapshot of the partnership’s income statement from the beginning of the tax year through the date of the ownership change is used to allocate tax items up to that point of the partnership’s tax year.

Annual proration method. Alternately, partnership tax items for the year can be prorated based on the number of days that an entering or exiting partner is a member of the partnership.

Different methods can be used for different variations that occur within the same tax year. The new final regs are effective for partnership tax years that begin on or after August 3, 2015. For calendar-year partnerships, these changes will be effective for the 2016 tax year.

Partnership Audits

The Bipartisan Budget Act of 2015, which was passed in November 2015, changes how the IRS will audit partnerships. However, the new partnership audit rules generally won’t take effect until partnership tax years beginning in 2018. Until then, the current partnership audit rules will remain in effect unless the partnership voluntarily chooses to follow the new rules sooner.

Family Partnerships

The Bipartisan Budget Act also includes some important new tax provisions for family partnerships. For tax purposes, a family partnership is one that’s composed of members of the same family.

For many years, some taxpayers and tax professionals had argued that the existing family partnership rules provided an alternative test for determining who’s a partner in a partnership, without regard to how the terms “partner” or “partnership” are defined under the general partnership tax rules found in the Internal Revenue Code.

As a result, many partnerships have taken the position that if a person holds a capital interest in a partnership that was acquired as a gift, the partnership’s existence must be respected for tax purposes. They took this position regardless of whether the parties had demonstrated that they actually joined together to conduct a business or investment venture.

The new law attempts to eliminate this argument by making several statutory amendments. First, it clarifies that Congress did not intend for the family partnership rules to provide an alternative test for determining whether a person is a partner in a partnership.

Instead, the new law clarifies that the general partnership tax rules regarding who should be recognized as a partner for tax purposes apply equally to interests in partnership capital that are created by gift. Put another way, the determination of whether the owner of a capital interest that was acquired as a gift is a bona fide partner for tax purposes would be made under the generally applicable partnership tax rules.

Additionally, the new law removes statutory language that implied that the owner of an interest in partnership capital could always be treated as a partner if capital was a material income-producing factor for the partnership.

These amendments take effect starting with tax years beginning after December 31, 2015. So, for calendar-year family partnerships, 2016 federal tax returns could be affected.

Disguised Partnership Payments for Services

In July 2015, the IRS issued new proposed regulations that would treat certain arrangements that result in payments to partners as disguised payments for services, rather than as an allocation of partnership profits and a related distribution of cash.

The proposed regulations are mainly aimed at changing the tax treatment of so-called “fee waiver arrangements,” under which partnership service providers give up their right to receive current fees in exchange for an interest in future partnership profits. Such arrangements are common in the private-equity and hedge-fund industries.

Private-equity firms and hedge funds are often classified as partnerships for tax purposes. And they typically charge investors a 2% fee on managed assets. In many cases, such arrangements are accompanied by a fee waiver arrangement in which the private-equity or hedge-fund manager exchanges all or a portion of its not-yet-earned management fee for an interest in the fund’s future profits.

The tax planning objective of such arrangements is to allow the manager to trade current fee income — which would be treated as high-taxed ordinary income and be subject to federal employment taxes — for an interest in future capital gains collected by the fund. These future capital gains would be taxed at lower rates.

The proposed regulations would use a facts-and-circumstances approach to determine if such an arrangement should be treated as a disguised payment for services, rather than as a distribution of partnership profits. The proposed regulations list six non-exclusive factors that may indicate that an arrangement constitutes in whole or in part a disguised payment for services. These proposed rule changes would become effective when and if they’re issued in the form of final regulations.

Navigating the Rules

The tax rules for partnerships and multi-member LLCs are complicated. And they change frequently due to new tax legislation and new or updated IRS guidance. This article summarizes some key partnership taxation developments that have occurred in recent months.

Consult your tax adviser if you have questions or want additional information.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s compliance practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas. Contact Gary today to learn more about IRS Audits for partnerships, and to see if your business is at risk.

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Posted on Feb 18, 2016

Snowfalls across the country have shattered long-time records this year, paralyzing transit systems and roads, and preventing hundreds of thousands of people from making it to their jobs.

This raises the question: What are the payroll consequences of situations like this?

What Happens When Workers Are on Call?

Due to the nature of your business, you may have some workers who are typically required to be on call.

If the office is closed due to a winter storm and on-call employees cannot effectively use the time for their own purposes, the FLSA says the employer must pay the employee for the on-call time. But employers don’t have to pay on-call workers who are at home and are free to use the time for their own purposes.

Note that this is the general rule under the FLSA. State laws may impose different or tougher requirements.

Background

Although state law may control outcomes, the relevant statute on the federal level, as well as in many states, is the Fair Labor Standards Act (FLSA). The FLSA, initially enacted in 1938 and modified numerous times since, establishes rules for overtime, minimum wages, record-keeping and other employment matters in both the public and private sectors.

The application of those rules often depends on the characterization of an employee as exempt or nonexempt. For instance, nonexempt employees arentitled to overtime pay, while exempt employees are not. Most employees covered under the FLSA are treated as nonexempt employees although there are numerous special rules and exemptions contained within the law.

Certain jobs are defined as being exempt, such as outside sales employees (inside sales employees are nonexempt). However, the classification generally depends on three FLSA tests: the salary level test, the salary basis test and the duties tests.

1. Salary level test: Employees who earn less than $23,600 a year ($455 a week) are nonexempt. Virtually any employee earning more than $100,000 a year is exempt.

2. Salary basis test: Generally, employees are paid on a salary basis if they have a guaranteed minimum amount of money to count for any workweek. This amount doesn’t have to be total compensation — in fact, it often is not — but it must be a finite amount. Some rules of thumb indicating that employees are salaried are:

  • If they are paid by an annual salary divided by the number of paydays in a year; or
  • When the actual pay is lower for work periods in which the employee logs fewer hours.

In any event, however, whether or not this test is met depends on the particular facts and circumstances.

3. Duties test: Employees who meet the salary level and salary basis tests are treated as exempt only if they also perform exempt job duties. These FLSA exemptions are limited to employees who perform relatively high-level work. Whether the duties rise to the level of an exempt employee depends on exactly what they are.

Mere job titles or position descriptions are of limited value. For example, a secretary doesn’t become exempt by being called an administrative assistant, nor do CEOs become nonexempt if they are referred to as clerks.

There are three categories of exempt job duties: executive, professional and administrative. Significantly, job duties are exempt executive duties if the employees:

  • Regularly supervise two or more individuals;
  • Have management as the primary duty of their positions; and
  • Have some genuine input into the job status of other employees, such as hiring, firing, promotions or assignments.

You can find more detailed information on the differences between exempt and nonexempt employees here.

Winter Weather

If employees are forced to miss work due to inclement weather, the FLSA applies the following standards:

Exempt employees: If the business shuts down due to the weather, exempt employees must be paid their regular salary for any closing lasting less than a week. Under the FLSA, an employer cannot reduce exempt employees’ pay based on the quantity of the work if they are ready, willing and able to work, but work is not available.

Consequently, deducting pay when closing the office for less than a week could affect the employees’ exempt status. However, a private employer may deduct the absence from the exempt employees’ paid vacation or time off as long as they receive their full weekly salary.

If the business remains open, but the employees simply cannot get to work because of weather conditions, an employer may deduct an exempt employee’s salary for a full day’s absence. Under the FLSA, a deduction of a full day’s pay is allowed when an exempt employee is absent for personal reasons without jeopardizing the employee’s exempt status, but not for an absence of less than a full day.

Nonexempt Employees: Under the FLSA, employers generally are not required to pay nonexempt employees for any days they do not actually work. Thus, employers aren’t required to pay employees for days when the office is closed due to the weather.

But this doesn’t apply to nonexempt employees who are paid on a fluctuating workweek basis. These employees must be paid their full weekly salary for any week in which work is performed — even if they miss workdays due to a storm.

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