With the rise of artificial intelligence (AI), businesses across almost every sector find themselves entering uncharted territory. While still in its infancy, AI offers the potential to transform virtually every aspect of how companies operate.

Brave New World

AI is expected to increase revenue and profits, lower costs, drive improvements in customer service and assist in the creation of innovative new products and services. In fact, a recent survey estimates that AI will contribute roughly $15.3 trillion to the economy by 2030. The effects of AI and its close cousin, machine learning (ML), will ripple across all sectors of the economy, from professional services firms to manufacturers to retailers.

What makes AI so powerful is its ability to automate all manner of business processes ranging from the mundane to the complex. For example, AI can help automate routine transactions, find anomalies in vast pools of data, and accelerate the speed of research and development efforts.

Moreover, AI systems are designed to learn from experience. That is, the more transactions a system encounters and dissects, the greater its ability to handle subsequent transactions.

Potential Risks

AI isn’t without risks, however. In addition to the cost of purchasing automated equipment and training staff to use the technology, AI solutions require high-quality data and time to analyze it.

It also takes time for companies to envision the role of AI within their operations, select or build a suitable tool, and provide it with enough exposure to the company’s data to learn and optimize its approach. So, companies tend to be slow to adopt and benefit from AI.

There are additional challenges to adopting AI. With much of their data residing in legacy systems, companies often lack the technical expertise to extract what they need to fuel AI platforms. Furthermore, despite an unprecedented buzz around AI and its transformative nature, many businesses have a hazy understanding of its potential — and its limitations.

Finally, given the secrecy perpetuated by those using AI, companies must embark on a journey of discovery to determine how AI might create value within their environment. Inevitably, failed initiatives can make a company gun-shy when pursuing future investments and cause them to abandon AI efforts before they can achieve their full potential.

Coming Soon?

Today, many companies are experimenting with AI and ML. But they’re not yet as commonplace as, say, cloud computing. It’s too soon to assess how long it will take for companies to deploy them successfully to improve how they operate. Nevertheless, AI will play an important role in shaping the future of business for the foreseeable future.

If you’re considering AI solutions, contact your financial professional for help crunching the numbers. He or she can help evaluate whether the benefits justify the costs, as well as identify potential pitfalls.

AI in the Real World

How are companies in your industry using artificial intelligence (AI) to improve day-to-day operations? Most people equate AI with robots that replace human workers on the production line, drones that deliver supplies and automated checkouts at retail stores.

However, the most common application of AI is detecting and fending off computer security intrusions in the IT department, according to a recent Harvard Business Review article. Rather than replacing IT professionals, AI systems help employees identify suspicious activity and thwart hacking attempts. In addition, AI systems can help the IT department more efficiently resolve employees’ tech support issues and ensure workers are using technology only from approved vendors.

AI is being used by marketing and sales personnel to analyze customers’ online shopping patterns and recommend similar items or promotions that might be of interest. It also can help analyze transactions to reduce fraud and bad debts.

AI and machine learning (ML) are even being applied in old-fashioned industries like publishing. For example, Associated Press (AP) currently uses automated software to draft thousands of quarterly earnings reports based on digital data feeds from a financial information provider. Rather than replacing human editors, AP’s automated system frees up time for editors to focus on writing in-depth stories on business trends.

Even CPAs are jumping on the bandwagon. During audit fieldwork, don’t be surprised if your auditors use AI to enhance their testing procedures. For example, rather than relying on random sampling to test inventory pricing or revenue recognition procedures, auditors equipped with AI software can analyze an entire population in a fraction of the time.

Warm weather and rainy days bring the urge to purge. But before you clean your file cabinets or declutter your computer files, it’s important to review these guidelines.

Guidelines for Small Businesses

The retention guidelines are slightly different for small business records. Here are some best practices to consider.

Business Property

Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

Travel Records

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.

Sales Tax Returns

State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax advisor.

Employee and Payroll Records

Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This time frame should cover various state and federal requirements. However, never throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.

Time cards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.

Keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.

Important: The more records you store, the greater the likelihood that your data will be stolen or hacked. Destroying sensitive documents and files can reduce the chances that you or your company’s employees and customers will become identity theft victims.

Federal Tax Records

Most tax advisors recommend that you retain copies of your finished tax returns indefinitely to prove that you actually filed. Even if you don’t keep the returns indefinitely, hold onto them for at least six years after they’re due or filed, whichever is later.

It’s a good idea to keep records that supportitems shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if you missed a deduction, overlooked a credit or misreported income.

Which records can you throw away today? You can generally throw out records for the 2015 tax year, for which you filed a return in 2016.

You’re not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there’s no time limit for the IRS to launch an inquiry.

In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

State Tax Records

The previous guidelines are all geared toward complying with federal tax obligations. Ask your tax advisor how long you should keep your records for state tax purposes, because some states have different statutes of limitations for auditing tax returns.

Plus, if you’ve been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit’s completion. So, hold on to all tax records related to an IRS audit for a year after it’s completed.

Essential Personal Records

Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:

Birth and death certificates,
Marriage licenses and divorce decrees,
Social Security cards, and
Military discharge papers.
These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.

Bills and Receipts

In general, it’s OK to shred most bills — like phone bills or credit card statements — when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.

If you purchase a big-ticket item — like jewelry, furniture or a computer — keep the bill for as long as you have the item. You never know if you’ll need to substantiate an insurance claim in the event of loss or damage.

Real Estate Records

Keep your real estate records for as long as you own the property, plus three years after you dispose of it, and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.

These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.

Investment Account Statements

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, and dividend reinvestment and investment expenses, such as brokers’ fees. It’s a good idea to keep these records for as long as you own the investments, plus until the expiration of the statute of limitations for the relevant tax returns.

Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.

If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don’t dispose of any ownership documentation until the statute of limitations expires.

Got Questions?

Before you clear your files of old financial records, discuss the records retention requirements with your tax advisor. You don’t want to be caught empty-handed if an IRS or state tax auditor contacts you.

The IRS recently issued guidance on the new deduction for up to 20% of qualified business income (QBI) from pass-through entities under the Tax Cuts and Jobs Act (TCJA). It aims to clarify when the QBI deduction is available for income from rental real estate enterprises.

The QBI deduction is allowed only for income from a business. But the term “business” isn’t defined in the statutory language. When the TCJA became law, it was unclear whether a rental real estate activity could count as a business for QBI deduction purposes. Here’s how the new guidance helps clarify the issue.

Defining a Business under the QBI Regulations

What does the term “trade or business” mean for QBI deduction eligibility purposes? It refers to an activity that’s a trade or business under Section 162 of the Internal Revenue Code, which allows  deductions for business-related expenses.

Unfortunately, determining what constitutes a trade or business for Sec. 162 purposes requires parsing old court decisions. Under case law, a rental activity will generally be a Sec. 162 trade or business unless the property owner just collects the rent without doing much else, such as under a triple net lease arrangement.

However, IRS regulations stipulate that the licensing of tangible or intangible property that doesn’t qualify as a Sec. 162 trade or business can still be treated as a trade or business for QBI deduction   purposes. How? The property must be rented or licensed to a trade or business conducted by the individual or a pass-through entity that’s commonly controlled.

Basics of the QBI Deduction

The QBI deduction is potentially available to eligible noncorporate owners of pass-through business entities for tax years beginning in 2018 and extending through 2025. The deduction is scheduled to disappear after 2025, unless Congress extends it.

For QBI deduction purposes, pass-through entities are defined as:

• Sole proprietorships,
• S corporations,
• Single-member limited liability companies (LLCs) with one owner that are treated as sole proprietorships for tax purposes,
• Partnerships, and
• LLCs that are treated as partnerships for tax purposes.

The QBI deduction is complex and involves a number of rules. For example, the deduction:

• Is only available to individuals, estates, and trusts. (We refer to all three as “individuals” to keep things simple.)
• Doesn’t reduce an individual’s adjusted gross income (AGI). In effect, it’s treated the same as an allowable itemized deduction.
• Doesn’t reduce net earnings from self-employment for self-employment tax purposes.
• Doesn’t reduce net investment income for purposes of the 3.8% net investment income tax (NIIT).

Income from the trade or business of being an employee doesn’t count as QBI. Also excluded from QBI are reasonable salaries collected by S corporation shareholder-employees and guaranteed payments received by partners (or LLC members treated as partners for tax purposes) for services rendered to partnerships (or LLCs) or for the use of capital by partnerships (or LLCs).

Important: The QBI deduction can also be claimed for up to 20% of an individual’s income from qualified real estate investment trust (REIT) dividends and up to 20% of qualified income from publicly traded partnerships (PTPs).

Potential Limitations

Above specified income levels, the QBI deduction for income from an eligible business can’t exceed the greater of:

• 50% of W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified depreciable property used in the business.

In addition, the QBI deduction is phased out for income from specified service businesses. Examples include doctors, lawyers, accountants, actuaries, actors, singers, consultants, athletes, investment managers, stock traders and any other trade or business where the principal asset is the reputation or skill of one or more of its employees.

For 2018, these limitations are phased in when the business owner has taxable income (calculated before any QBI deduction) above certain levels. These income limits are indexed annually for inflation. Here are the income-based phase-in thresholds for 2018 and 2019:

	2018 Phase-In Range	2019 Phase-In Range
Married filing jointly	$315,000-$415,000	$321,400-$421,400
Married filing separately	$157,500-$207,500	$160,725-$210,725
Other taxpayers	$157,500-$207,500	$160,700-$210,700

These limitations are phased in over a taxable income range of $50,000, or $100,000 for married couples who file joint returns.

Under another limitation, an individual’s allowable QBI deduction can’t exceed the lesser of:

• 20% of QBI from qualified businesses plus 20% of qualified REIT dividends plus 20% of  qualified publicly traded partnership (PTP) income, or
• 20% of the individual’s taxable income calculated before any QBI deduction and before any net capital gain amount (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

New Guidance for Rental Real Estate Enterprises

The IRS recently issued Notice 2019-7 to clarify when the QBI deduction can be claimed for income from rental real estate enterprises. The notice includes a safe-harbor rule for determining whether a rental real estate enterprise can be treated as an eligible business for QBI deduction purposes.

If a rental real estate enterprise fails to qualify for the safe-harbor rule, it can still be treated as a business for QBI deduction purposes if it meets the general definition of a business set forth in the QBI regulations. Unfortunately, that definition isn’t very clear. (See “Defining a Business under the QBI Regulations” above.)

For purposes of eligibility for the safe-harbor rule, a rental real estate enterprise is defined as an ownership interest in real property held for the production of rents and may consist of an ownership interest in multiple properties.

To rely on the safe-harbor rule, the individual or pass-through entity must own the interest directly or through an entity that’s disregarded for federal income tax purposes. Such entities include single-member LLCs that aren’t treated for tax purposes as separate entities apart from their owners.

Taxpayers must either treat:

• Each property held for the production of rents as a separate enterprise, or
• All similar properties held for the production of rents as a single rental real estate enterprise.

Commercial and residential real estate can’t be treated as part of the same enterprise. Taxpayers also aren’t allowed to vary their treatment of properties from year to year, unless there’s a significant change in facts and circumstances.

Eligibility Requirements

To be eligible for the safe harbor, the taxpayer must pass an hours-of-service test. For tax years beginning before January 1, 2023, at least 250 hours of rental services must be performed each year in the enterprise.

For tax years beginning after December 31, 2022, the 250-hour test can be met in any three of the five consecutive tax years that end with the current tax year. But if the enterprise has been held for less than five years, the 250-hour test must be met for each post-2022 tax year.

For tax years beginning after December 31, 2018, eligible taxpayers must maintain separate books and records for each rental real estate enterprise to keep track of each enterprise’s income and expenses. Taxpayers must also maintain contemporaneous records (including time  reports, logs, or similar documents) to establish:

• Hours spent on rental services for the enterprise, and
• Descriptions of all rental services performed, including the dates and who performed the  services.

For purposes of meeting the hours-of-service test, rental services include:

• Advertising to rent or lease real estate,
• Negotiating and executing leases,
• Verifying information contained in prospective tenant applications,
• Collecting rents,
• Managing daily operations,
• Performing routine maintenance and repair of property,
• Purchasing materials, and
• Supervising employees and independent contractors.

Rental services can be performed by owners, employees, agents and independent contractors. Rental services do not include financial or investment management activities, such as:

• Arranging financing,
• Procuring property,
• Studying and reviewing financial statements or reports of operations,
• Planning, managing or constructing long-term capital improvements, and
• Traveling to and from properties.

Real estate used as a residence by the taxpayer (including an owner or beneficiary of a pass-through entity) for any part of a tax year isn’t eligible for the safe-harbor rule. Real estate rented or leased under a triple net lease also isn’t eligible. With a triple net lease, the tenant or lessee, in addition to paying rent and utilities, agrees to pay taxes, fees and insurance, and to be responsible for property maintenance.

Ready, Set, Go

The Notice 2019-7 guidance on the eligibility of rental real estate enterprises for the QBI deduction isn’t final. But it can be relied upon until final rules are issued by the IRS. Meanwhile, taxpayers should be aware that complying with the recordkeeping requirements in Notice 2019-7 may be a challenge. Your tax advisor can help you set up procedures to meet the challenge.

Injury and illness reports aren’t generally fascinating reading material. Even so, the Occupational Safety and Health Administration (OSHA) requires most businesses to fill out detailed reports of work-related injuries and illness, and to post them conspicuously. From February 1 through April 30 the logs (known as OSHA Form 300 logs) for the prior calendar year must be displayed in an area where employees can view them.

Depending on the size of your company and the industry you’re in, you may qualify for an exemption. The details are outlined below.

Company Size and Industry

If you had more than 10 employees at any time throughout the year, even if your head count was 10 or fewer for 11-1/2 months, you’re subject to OSHA’s recordkeeping and reporting requirements. 

Traditionally, companies in the retail, insurance, finance and real estate sectors have been considered exempt. Since 2015, however, OSHA has used a more elaborate industry classification system to determine “low-hazard” exemption status based on the North American Industry Classification System (NAICS). To find your business’s industry code, visit the NAICS site.

In addition to industries that have long been required to report to OSHA, there’s a list of “partially exempt” industry sectors. And there’s a list of sectors added since 2015, all of which must maintain injury and illness logs. If you’re in doubt about whether your industry is covered by OSHA, contact your area OSHA office to be sure. Also, even if you’re off the hook with federal reporting, check with your state to determine what, if any, state reporting and posting standards you must adhere to. 

Reporting Basics

If you’re new to tracking OSHA reports, here’s a quick reminder of what you need to know. The basic recordkeeping and reporting requirements for companies that fall under the requirement involve these three forms:

• Log of Work-Related Injuries and Illnesses OSHA Form 300 (and others listed below), which you can find on OSHA’s website.

• Summary of Work-Related Injuries and Illnesses (OSHA Form 300A), and

• Injury and Illness Incident Report (OSHA Form 301).

With a little luck, you won’t have any work-related injuries or illnesses to include on those forms, but you’ll still need to keep and post the log even if it’s empty. On the positive side, “no news” is good news.

OSHA Form 300 logs can be highly detailed. In addition to a basic description of an injury or illness, you must also provide the number of days away from work, or working with modified duties. “Modified duties” is considered a work restriction, even if the employee’s job is only changed in a minor way.

What should you do with Form 300 logs once they’re complete? Don’t send them to OSHA, but don’t dispose of them. You could later undergo an OSHA inspection and must be able to show you’ve properly maintained logs or face penalties.

Serious Cases

If you’ve never had a serious injury or illness at your business, you might be unaware that such cases need to be promptly reported directly to OSHA, either by telephone or using an online form on OSHA’s website.

Here are the specific deadlines you need to know:

• Reportable events must be logged within a week.

• Events that involve inpatient hospitalization, amputation or eye loss (both of which presumably would also involve an inpatient hospitalization), within 24 hours.

• Fatalities must be reported within eight hours.

Common Reporting Errors

Until you become familiar with keeping OSHA logs, it cab be easy to miss details. Here’s a list of common reporting errors to avoid in the event your records are inspected.

• Failing to have a company executive certify the accuracy of data reported on forms.

• Failing to report medical treatment (other than basic first aid, which is exempted).

• Not using or including an employee’s description of the illness or injury.

• Not reporting incidents that involve temporary or contract workers,

• Misclassifying an illness as an injury. Incidents cumulative in nature (for example,  noise-induced hearing loss) are generally considered as “illnesses.” In contrast, an injury involves a single exposure or event.

• Not reporting an incident because the employee didn’t report it to you until several days afterwards.

• Using work days instead of calendar days to report the number of days away from work or days worked under restrictions necessitated by the injury or illness.

Last Words

Given the detailed reporting that OSHA requires, you may wonder if all that work benefits your company in any way, apart from the avoidance of penalties. Consider this: The practice of reviewing your own records of reported injuries or illnesses can provide insight on patterns or conditions that you need to address to improve the safety of your workplace. That’s always a win.

 

New Year’s is traditionally a time to make resolutions for the upcoming months. Once you set  your personal goals, it’s time to get serious about your business goals. Here are ten changes you might consider making — and sticking to — to put you on track to prosper in 2019.

1. Compare 2018 financial performance to the budget.

Did you meet the goals you set at the beginning of 2018? If not, why? Analyze variances between budget and actual results, and evaluate what changes you could make to get closer to achieving your goals this year. In some cases, you might need to look at several years’ results to understand what’s happening and how problems can be resolved.

2. Create a three-year capital budget.

What large investments will you need to make to grow your business and maintain its competitive edge? Such investments can be both tangible (for example, purchasing new equipment and launching new product lines) and intangible (for example, training to develop employees’ technical and soft skills).

The depreciation deductions reported on your income statement aren’t just bookkeeping notations. Machines, equipment, furniture, vehicles and other types of capital equipment eventually wear out and become obsolete, so you’ll need to maintain, update and replace these assets on a regular basis.

3. Assess the competition.

Make an honest appraisal of the quality of what your business sells versus what competitors sell. Are you doing everything you can to meet (or exceed) customer expectations? Staying ahead of the competition is critical in a free market economy. Loyalty and inertia will allow you to retain some customers over the short term. But, over the long run, you’ll likely be out of business if you lose your competitive edge.

4. Nurture vendor relationships.

Many companies are so focused on building and maintaining customer relationships that supplier relationships fall by the wayside. At the start of each year, review your contracts with key vendors to find out whether their products and services are fairly priced. Long-term vendor relationships can be helpful if you need to ask for more generous payment terms or a rush emergency shipment. But periodically renegotiating contracts or even switching vendors can help ensure that you’re getting the best possible terms and service.

5. Benchmark employee compensation.

Look at your entire compensation package, including wage and salary rates and benefits. How does it measure up against competitors? In today’s tight labor market, employees might be tempted to leave for greener pastures. So, review compensation studies and job listings — or talk to local recruiters — to gain some objective insight into what’s reasonable in today’s job market.

You might not be able to afford immediately giving workers a large pay raise. But you can react sympathetically if an employee asks for a raise, make gradual increases to improve below-market rates, or find low-cost ways to boost morale and prevent turnover.

6. Review insurance coverage.

Don’t assume that your insurance agent is on top of your property casualty and liability coverage. Property values or risks may change — or you may add new assets or retire old ones — requiring you to increase or decrease your level of coverage. A fire, natural disaster, accident or out-of-the-blue lawsuit that you’re not fully protected against could put your business on a downward spiral. Along similar lines, be sure you have current operational contingency plans to stay open and minimize disruptions in case disaster strikes.

7. Seek independent feedback on marketing efforts.

Companies often spend a lot on marketing. But are your efforts generating tangible results? Set up focus groups or hire outside professionals to evaluate the quality of your company’s website, branding, advertising and social media presence. Then review the findings with an open mind. Address any shortcomings and consider discontinuing ineffective campaigns. It’s easy to fall in love with your creative efforts, but your customers might have different opinions.

8. Conduct a personal time assessment.

Business owners tend to be overachievers. But there comes a time when you need to delegate lower-level tasks to others. Controlling everything 24/7 can wear you down. It also sidetracks you from two critical tasks: 1) proactive, strategic planning, and 2) building a successful management team. Gradually transitioning managerial tasks to subordinates builds their confidence and improves job satisfaction. Employees are loyal to employers who provide opportunities for professional development.

9. Conduct a personal skills assessment.

Do you (or other members of your management team) need to acquire any new skills or knowledge to help run the business more effectively? Highly effective people seek continuous improvement and renewal, both professionally and personally. Complacency is bad news for growing your business.

10. Analyze market trends.

What direction is your industry heading over the next five or ten years? Consider trends in technology, the economy, the regulatory environment and customer demographics. Anticipating and quickly reacting to trends are the keys to a business’s long-term success. Companies don’t operate within a vacuum. Trends can be positive or negative, creating either opportunities or threats. Either way, it’s important to give yourself time to formulate a strategic response to make the best of it.

This may be a daunting list. But as the familiar Chinese proverb states, a journey of a thousand miles begins with a single step.