Is Your Cloud Provider Still Meeting Your Company’s Needs?

Like many businesses, yours has probably jumped aboard the cloud computing bandwagon … or “skywagon” as the case may be. How’s that going? Some business owners pay little to no attention to a cloud provider once the service is in place. Others realize, perhaps years later, that they’re not particularly satisfied with the costs, features and cybersecurity measures of their cloud vendors.

Given the value of the data and documents that you store in the cloud, it’s a good idea to occasionally review your provider and determine whether you’re still making a good investment.

Are you getting these benefits?

As you’re likely aware, cloud computing providers offer a secure network of third-party servers that you, the customer, can access online. Thus, rather than relying on your own computers or servers, you can remotely store, process, manage and share documents and data. You might also have access to various software. Here are the benefits that you should be enjoying:

Lower costs. Cloud customers typically pay a monthly subscription fee or are billed based on actual usage. Reputable providers regularly upgrade their offerings and provide free security patches.

Scalability. You should be able to scale up or down as your data storage or processing needs change. For example, you might generate more data during seasonal peaks.

Convenience. Cloud services shouldn’t be limited to certain geographic areas or within restricted time frames. You should be able to access your documents and data from anywhere, anytime and on any device.

Many of today’s cloud providers also allow businesses to share documents and data with vendors to facilitate production and streamline workflow, as well as to provide some level of access to authorized advisors or other parties such as lenders.

How secure are you?

Serious concerns about cybersecurity in every industry have caused many business owners to “do a double take” when it comes to cloud computing. So, first and foremost, when evaluating your provider or shopping for a new one, verify basic security features. These include firewalls, authorization restrictions and data encryption. Also investigate:

How frequently the cloud is updated,
Whether data is backed up in multiple locations around the country,
Whether the service has experienced any data breaches recently,
How quickly the provider has responded to security threats, and
Whether you can retrieve your data in a nonproprietary format should the service go out of business.

Reputable providers offer continuous data backup and disaster recovery capabilities, so you shouldn’t have to worry about losing important records because of a physical server failure or a lost or broken hard drive. But, beware, the language of your service agreement might leave you ultimately responsible for any data breach. Consider negotiating restitution clauses into your contract.

Regular reassessment

Cloud services are just like any other technology investment — the features and security risks will evolve over time and call for regular reassessment. Let us assist you in weighing the costs, risks and advantages of your cloud provider.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

Small-sized manufacturers may enjoy several tax advantages allowing them to reduce tax bills, defer taxes and simplify the reporting process. Federal tax rules used to generally define a “small business” as one with average annual gross receipts of $5 million or less ($1 million or $10 million in some cases) for the three preceding tax years. The Tax Cuts and Jobs Act (TCJA) increased the threshold to $25 million for tax years beginning after 2017.

The increased threshold expands eligibility for small business tax benefits to a greater number of manufacturers. It also simplifies tax compliance by establishing a uniform definition of “small business.” Previously, different thresholds applied depending on the tax accounting rules involved, as well as a company’s industry and whether it carried inventories.

Small business benefits

Potential benefits of small business status include:

Use of the cash accounting method. Eligible manufacturers that pass the gross receipts test are eligible to use the cash method of accounting for tax purposes. The cash method allows a business greater control over the recognition taxable income during a year.

Avoidance of inventory accounting requirements. Eligible manufacturers need not account for inventories, which can be complex, time consuming and expensive.

Relief from uniform capitalization rules. Eligible manufacturers are exempt from these rules, which require companies to capitalize rather than expense certain overhead costs, adding complexity to the tax reporting process and potentially increasing their tax liability.

Eligibility for the completed contract method. Eligible manufacturers can use the completed contract method, rather than the percentage-of-completion method, to account for long-term contracts expected to be completed within two years. This allows them to defer tax until a contract is substantially complete.

Full deductibility of business interest. The TCJA generally capped deductions for net business interest expense at 30% of adjusted taxable income. Eligible manufacturers are exempt from this limit.

Related entities’ receipts included. When determining your manufacturing company’s gross receipts, you must include not only your own receipts, but also those earned by certain related entities, such as other members of a parent-subsidiary group, a brother-sister group or combined group under common control.

See the small picture

If your manufacturing company’s average gross receipts are $25 million or less, contact us to find out whether the business is eligible for small business tax benefits. If you are, we can determine whether it would be worthwhile to change accounting methods to take advantage of these benefits. If the business is not, there may be planning opportunities to qualify for these benefits in the future.

“Thanks, but no thanks.” If you expect to receive an inheritance from a family member, you might want to use a qualified disclaimer to refuse the bequest. As a result, the assets will bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

Why would you ever look this proverbial gift horse in the mouth? Frequently, using a qualified disclaimer will save gift and estate tax, while redirecting funds to where they ultimately would have gone anyway. This estate planning tool is designed to benefit the entire family. Be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received.

Reasons for using a disclaimer

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Consider these possible reasons from an estate planning perspective:

Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the federal gift and estate tax exemption. For 2022, the exemption amount is an inflation-adjusted $12.06 million.

Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is an inflation-adjusted $12.06 million for 2022.

If GST tax liability is a concern, you may wish to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance, but using a disclaimer can provide a deduction because the assets will pass directly to the charity.

Before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, talk to us to better determine if it’s the right move for you.

Is your business hiring? Many companies are — in fact, an employment report released by the U.S. Department of Labor earlier this month revealed that nonfarm payrolls increased by 390,000 in May, and the unemployment rate held steady at 3.6%.

As the job market continues to feel the impact of “the Great Resignation,” the competition for talent remains fierce. One area of the hiring pool that many businesses overlook is older workers. If your company still has open positions, consider the possibility of filling them with workers age 55 and up.

Strengths to look for

Although it’s true that many Baby Boomers have retired, and a few members of Generation X might soon be joining them, plenty of older workers remain available to provide value to the right company.

They offer many benefits. For starters, they’ve lived and worked through many economic ups and downs, so the word “budget” tends to keenly resonate with them. In addition, many are well connected in their fields and can reach out to helpful resources right away. Seasoned workers tend to be self-motivated and need little supervision, too.

How to welcome them

Adding older employees to a workforce predominantly staffed by Gen Xers, Millennials and perhaps members of Generation Z (currently the youngest group) can present challenges to your company culture. However, there are ways to welcome older workers while easing the transition for everyone.

First, ensure internal communications emphasize inclusivity. If you’re concerned that your existing culture might hinder the onboarding process for older workers, begin addressing the potential obstacles before hiring anyone, if possible. Reassure current employees that you’ll continue to value their contributions and empower their career paths.

Second, consider involving other staff members in the hiring process. For example, you could ask those who will work directly with a new hire to sit in on the initial job interviews. You’ll likely experience less resistance if an older employee’s co-workers are involved from the beginning. Just be sure that every participant understands proper interviewing techniques to avoid legal problems.

Third, as appropriate and feasible, offer training to managers who might suddenly find themselves supervising employees with many more years of work experience. Learning to listen to an older worker’s suggestions while sticking to the company’s strategic objectives and operational procedures isn’t always easy.

Finally, consider a mentorship program. Bringing in new employees of a different age group is an opportune time to investigate the potential benefits of mentoring. By pairing newly hired older workers with younger staff members, you could see both groups learn from each other — and the business grow as a result.

A welcome addition

Older workers are often a welcome addition to many companies — and not just as full-time employees. They tend to fit in well as part- or flex-time workers as well. Need help? We can assist you in assessing this idea or other ways to improve the cost-effectiveness of your hiring efforts.

Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.

Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.

For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.

Special situation

Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.

While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”

Two options

The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.

From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action.

If most of your employees have worked from home since the start of the pandemic or are only gradually transitioning back to onsite work, your office may be emptier than in pre-COVID days. This can make theft easier. “Creepers” can gain access to offices or other physical facilities via unlocked doors and social engineering techniques and steal whatever they can get their hands on. They may even engage in corporate espionage and network hacking.

Common schemes

In a common creeper scheme, individuals pose as employees. They might enter a normally locked office by chatting with employees outside the building, then follow them through the door. If questioned, they could claim they left their badges at home. When the coast is clear, they steal purses, mobile devices and other valuables left on desks or in unsecured drawers.

Or creepers employed by rival companies could enter an office after hours with a stolen keycard or through an unlocked door. They might wear office-appropriate clothing and move confidently. That way, if building security or someone else questions them, they’re better able to pretend they have every right to be in the office. They may steal confidential information, such as printouts of sales numbers or blueprints of new products, or even hack into a business’s IT network.

In other cases, creepers use uniforms and props such as mops, toolboxes and clipboards to pose as cleaners and maintenance workers. They may wear stolen or forged ID badges, assuming that no one will examine them too closely — and they’re usually right.

Taking proactive steps

To protect your business and its employees’ property, keep all doors locked, even during work hours. Issue keycards and photo-ID badges to workers and instruct them to be on the lookout for possible intruders. They shouldn’t automatically assume, for example, that someone wearing coveralls and carrying a ladder is authorized to be there. And they shouldn’t unlock the door for anyone — even if that person seems like an employee — unless they know for certain he or she is.

If workers are uncomfortable approaching a possible intruder, they should immediately report the person to your office manager or building security. The stranger in question may well be an authorized visitor, but it’s better to be safe than sorry. Also ask employees to report the presence of former employees. They may claim they’re visiting old coworkers, but in reality, they may have been recruited to carry out corporate espionage.

Even if you don’t keep high-value inventory or electronics on the premises, install security cameras. And instruct employees to lock up purses, wallets, keys and mobile phones whenever they leave their workspaces — even if it’s only for a few minutes. All computers should be password-protected.

Employees are the best defense

Even if your office or physical facility is fully staffed, criminals can find ways to infiltrate the space by blending in with the crowd. Regularly warn employees about suspicious signs. They can be your best defense. Contact us for help preventing fraud and other forms of theft.

Recent supply shortages may cause unexpected problems for some businesses that use the last-in, first-out (LIFO) method for their inventory. Here’s an overview of what’s happening so you won’t be blindsided by the effects of so-called “LIFO liquidation.”

Inventory reporting methods

Retailers generally record inventory when it’s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. You have choices when it comes to reporting inventory costs. Three popular methods are:

1. Specific identification. When a company’s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is sold.

2. First-in, first-out (FIFO). Under this method, the first units entered into inventory are the first ones presumed sold. This method assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices.

3. LIFO. Under this method, the last units entered are the first presumed sold. Using LIFO usually causes the low-cost items to remain in inventory. Higher cost of sales generates lower pretax earnings as long as inventory keeps growing.

Downside of LIFO method

LIFO works as a tax deferral strategy, as long as costs and inventory levels are rising. But there’s a potential downside to using LIFO: The tax benefits may unexpectedly reverse if a company that’s using LIFO reduces its ending inventory to a level below the beginning inventory balance. As higher inventory costs are used up, the company will need to start dipping into lower-cost layers of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed the company to defer. This is commonly known as LIFO liquidation.

For more information

Accounting for inventory is one of the more complicated parts of U.S. Generally Accepted Accounting Principles. Fortunately, we can help evaluate the optimal reporting method for your business and discuss any concerns you may have regarding LIFO liquidation in today’s volatile marketplace.

Many popular retirement and health care plans must comply with the Employee Retirement Income Security Act (ERISA). Employers that sponsor one could one day receive a request from the U.S. Department of Labor (DOL) for plan-related documents. Such a request usually initiates a DOL civil investigation, often referred to as an “audit.”

If this happens to your organization, address the inquiry immediately. Failure to provide requested documents to the DOL can lead to a penalty assessment, and a prompt and cordial response can establish a positive rapport with the investigator. DOL audits generally follow a predictable path:

Initial document request. Generally, a plan sponsor learns of an audit when it receives a letter or phone call from the DOL’s Employee Benefits Security Administration (EBSA) advising “plan officials” of the investigation and requesting a detailed list of documents. The investigation may be general in nature or target a specific issue.

On-site review and interviews. The investigator may arrange to visit the plan sponsor’s offices and could request additional documents for review during the visit, such as payroll and claims processing records. Often, the investigator will gather relevant information by interviewing one or more individuals responsible for the plan. (Note: During the COVID-19 pandemic, some investigations have been conducted virtually.)

Investigation findings. If the investigator finds no ERISA violations, EBSA will send a closing letter stating that the investigation is complete, and no further action is contemplated. If the investigator does find violations, EBSA will issue a voluntary compliance notice letter identifying the violations and inviting plan officials to voluntarily make corrections.

Correction and settlement. Whenever possible, EBSA seeks voluntary compliance through full correction of identified violations and restoration of plan losses. After negotiating a corrective action with plan officials, the agency will issue a detailed settlement agreement.

A typical agreement requires evidence of the correction and provides that, if EBSA determines that the agreement’s terms have been fulfilled, no further enforcement action will be taken regarding the specified violations. When voluntary compliance isn’t achieved, EBSA may refer a case to DOL attorneys for litigation. Some situations are inappropriate for voluntary correction, such as those involving fraud, criminal misconduct, or severe or repeated fiduciary violations.

Fiduciary violations. ERISA imposes a mandatory 20% penalty on any amounts recovered from a fiduciary or other person for a fiduciary breach, including amounts recovered under a settlement agreement. Generally, EBSA assesses the penalty in a separate letter, though the penalty may be addressed in the settlement agreement.

Closing letter following correction. After EBSA confirms that corrective action has been completed and any penalties have been paid, it will send a closing letter indicating that compliance was achieved.

These steps could be completed in a matter of weeks or take a year or more, depending on the:

Complexity of the plan design,
Issues identified in the investigation,
Availability of documents and individuals for interviews,
Degree of cooperation between plan officials and EBSA, and
Number of potential violations.

In the event of a DOL audit, our firm can provide support throughout the process.

Does your college-aged child have a basic estate plan? In more cases than not, the answer is “no.” The good news is that the summer months are the perfect time to enlist the help of an estate planning advisor to create a plan, as your child will be available to sign the documents before heading to school in the fall.

Here are the four critical estate planning documents college-bound students should have:

Will. Although your child is still in his or her upper teens or early twenties, he or she isn’t too young to have a will drawn up. The will specifies the disposition of his or her assets and can tie up other loose ends of the estate.
Health care power of attorney. With a health care power of attorney, your child appoints someone to act as his or her proxy or surrogate for health care decisions. Typically, a parent is designated as the attorney-in-fact for this purpose.
HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you and your spouse. Absent a HIPAA authorization, making health care decisions could be more difficult.
Financial power of attorney. This legal document enables you and your spouse to conduct financial activities on your child’s behalf. A “durable” power of attorney, which is the most common form, continues in the event that your child becomes incapacitated.

If you and your child are ready to create a basic estate plan, please don’t hesitate to contact us. We’d be pleased to help give your family the peace of mind that comes with having an estate plan.

Accounts payable is a critical area of concern for every business. However, as a back-office function, it doesn’t always get the attention it deserves. Once in place, accounts payable processes tend to get taken for granted. Following are some tips and best practices for improving your company’s approach.

Be strategic

Too often, businesses take a reactive approach to payables, simply delaying payments as long as possible to improve short-term cash flow. But this approach can backfire if it puts you on bad terms with vendors.

Poor vendor relationships can affect delivery times, service quality and payment terms. A proactive, strategic approach to payables can help you strike a balance between optimizing short-term cash flow and getting along well with vendors.

It’s also critical to explore the potential benefits of early payment discounts, volume discounts or other incentives that can eventually improve cash flow. That doesn’t mean you should accept every available discount. Obviously, the decision hinges on whether the long-term benefits of the discount outweigh the immediate cost of, for example, paying early or buying in bulk.

Strengthen selection and review

Implement policies, procedures and systems to ensure that you properly vet vendors and negotiate the best possible prices and payment terms. Create preferred vendor lists so staff members follow established procedures and don’t engage in “maverick” buying — that is, purchasing from unauthorized vendors.

Review vendor contracts regularly, too. Create and maintain a database of key contractual terms that’s readily accessible to everyone. With an understanding of payment terms and other important contractual provisions, employees can use it to double-check vendor compliance and avoid errors that can result in overpayments or duplicate payments.

Leverage technology

Automating accounts payable with the right software offers many benefits. For one thing, an automated, paperless system can increase efficiency, reduce costs and speed up invoice processing. And, of course, the ability to pay invoices electronically makes it easier to take advantage of available discounts.

In addition, automation can provide greater visibility of payables and better control over payments. For instance, cloud-based systems provide immediate access to account information, allowing you to review and approve invoices from anywhere at any time. The best automated systems also contain security controls that help prevent and detect fraud and errors.

Naturally, there’s an upfront cost to buying good accounts payable software and training your staff to use it. You’ll need to find a solution that suits your company’s size, needs and technological sophistication. You’ll also incur ongoing costs to maintain the system and keep it updated.

Pay attention to payables

Don’t underestimate the impact of accounts payable on the financial performance of your business. Taking a “continuous improvement” approach can enhance cash flow and boost profitability. Let us help you devise strategies for the optimal tracking and handling of outgoing payments.

If your manufacturing company is like many others in the industry, you’re having difficulty finding top-notch new hires to expand your workforce as well as to replace employees who are retiring or quitting. At the same time, you’d like to reduce your tax liability for 2022.

Practical solution: Kill two birds with one stone by hiring workers from certain “target” groups. This move can help close the skilled labor gap, and you may qualify for a tax credit — the Work Opportunity Tax Credit (WOTC) — at the same time. What’s more, if your company employs certain teenagers during the next few months, it may be in line for a special “summertime” version of the WOTC.

WOTC rules and the target groups

The WOTC is designed to encourage employers like manufacturers to hire workers from several disadvantaged groups. Generally, the credit equals 40% of a worker’s first-year wages of up to $6,000, for a maximum credit of $2,400 per qualified worker. However, the WOTC may be larger in certain situations. For instance, it may be claimed for the first $24,000 of wages paid to certain disabled veterans, for a maximum credit of $9,600 per qualified worker.

There’s no limit on the number of credits a manufacturer can claim. For example, let’s say that you hire 10 eligible workers to ramp up operations this year. As a result, you may be able to claim a total credit of $24,000 if each eligible employee is paid at least $6,000 in wages in 2022.

Each employee must complete at least 120 hours of service. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of the business (such as a maid working in the employer’s home). In addition, the credit generally can’t be claimed for employees who’ve previously worked for the employer.

The WOTC has expired and been reinstated multiple times in the past, mostly for only a year or two. But in 2021 it was extended for five years, through 2025.

The list of target groups eligible for the WOTC has remained relatively stable in recent years with just a couple of tweaks. Currently, it covers the following groups:

Qualified IV-A Temporary Assistance for Needy Families recipients,
Qualified veterans (including disabled veterans),
Ex-felons,
Designated Community Residents,
Vocational rehabilitation referrals,
Supplemental Nutrition Assistance Program recipients,
Supplemental Security Income recipients,
Long-term family assistance recipients, and
Qualified long-term unemployment recipients.

Calculating the credit

A manufacturer can count $6,000 of first-year wages per employee beginning from the employee’s start date. This amount increases to $10,000 for long-term family assistance recipients and $12,000, $14,000 or $24,000 for certain veterans. If the employee completed at least 120 hours but less than 400 hours of service, the wages are multiplied by 25%. If the employee completed 400 or more hours, all the wages are multiplied by 40%.

Thus, as previously noted, the maximum credit available for first-year wages generally is $2,400, but it can be as high as $9,600 for certain veterans. In addition, for long-term family assistance recipients, a 50% credit may be available for up to $10,000 of second-year wages, resulting in a total maximum credit over two years of $9,000 per qualified worker ($10,000 × 40% plus $10,000 × 50%).

3 key limits

Be aware that three key limits apply to employers claiming the WOTC:

No income tax deduction is allowed for the portion of wages equal to the amount of the credit determined for the tax year.
Other employment-related credits generally are reduced with respect to an employee for whom a WOTC credit is allowed.
The credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year. (However, a one-year carryback and 20-year carryforward of unused business credits is allowed.)

Because of these limits, there may be times when a manufacturer might elect not to have the WOTC apply. Also, other rules may prohibit the credit or require an allocation of the credit under certain circumstances.

Basking in a summertime WOTC

There’s still time to take advantage of a special version of the WOTC for hiring certain disadvantaged youths during the summer months. The summertime WOTC is available if you employ individuals who are age 16 or 17 and reside in an empowerment zone, enterprise community or renewal community.

Under this version of the WOTC, only wages paid for services performed between May 1 and September 15 can be counted. The credit amount generally equals 25% of a worker’s qualified first-year wages up to $3,000, for a maximum credit of $750 per worker.

However, the summertime credit increases to 40% of a worker’s first-year wages up to $3,000 if the youth works 400 hours or more. In this case, the maximum credit per qualified worker is $1,200. Be aware that if your company employed the youth prior to this summer, you can’t claim the credit for that worker.

Contact us for details

It’s important to be aware that your manufacturing company must comply with a complex certification process before it can claim a WOTC. We can help you coordinate these activities as well as answer any questions.

How often does your company generate a full set of financial statements? It’s common for smaller businesses to issue only year-end financials, but interim reporting can be helpful, particularly in times of uncertainty. Given today’s geopolitical risks, mounting inflation and rising costs, it’s wise to perform a midyear check-in to monitor your year-to-date performance. Based on the results, you can then pivot to take advantage of emerging opportunities and minimize unexpected threats.

Appreciate the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that have been struggling during the pandemic.

For example, you might compare year-to-date revenue for 2022 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. It’s also important to track costs during an inflationary market. If your business is starting to lose money, you might need to consider 1) raising prices or 2) cutting discretionary spending. For instance, you might need to temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. A low stock of key inventory items might foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Recognize potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might result from informal accounting practices that are common midyear (but are corrected by you or your CPA before year-end statements are issued).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, tend to paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked finance managers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact us to help with your interim reporting needs. We can fix any shortcomings by performing additional procedures on interim financials prepared in-house — or by preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.

Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.

The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible and has limited redemption and liquidation rights.

If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)

Holding period requirement

The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.

Taxable income limitation

The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.

Illustrative example

Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).

Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.

The Internal Revenue Service issued Announcement 2022-13, increasing the optional standard mileage rate for the final six months of 2022 from 58.5 cents per mile to 62.5 cents per mile. The new rate will be effective from July 1, 2022, through December 31, 2022. The old rate of 58.5 cents per mile will remain in effect through June 30, 2022.

The new rate for deductible medical or moving expenses for active-duty members of the military will be 22 cents for the remainder of 2022, up 4 cents from the rate at the start of the year. The 14 cents-per-mile rate for charitable organizations, set by statute, remains unchanged.

In the IRS press release, IRS Commissioner noted: “The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices. We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

Employers should ensure that they properly account for the rate increase beginning July 1, 2022.

Business owners and investors are understandably concerned about skyrocketing inflation. Over the last year, consumer prices have increased 8.3%, according to the latest data from the U.S. Bureau of Labor Statistics. The Consumer Price Index (CPI) covers the prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. This was a slightly smaller increase than the 8.5% figure for the period ending in March, which was the highest 12-month increase since December 1981.

Meanwhile, the producer price index (PPI) is up 11% over last year. This was a smaller increase than the 11.2% figure for the period ending in March, which was the largest increase on record for wholesale inflation. PPI gauges inflation before it hits consumers.

Key impacts

For your business, inflation may increase direct costs and lower customer demand for discretionary goods and services. This leads to lower profits — unless you’re able to pass cost increases on to customers. However, the possible effects aren’t limited to your gross margin. Here are seven other aspects of your financial statements that might be impacted by today’s high rate of inflation.

1. Inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is measured at the lower of 1) cost and 2) market value or net realizable value. Methods that companies use to determine inventory cost include average cost, first-in, first-out (FIFO), and last-in, first-out (LIFO). The method you choose affects profits and the company’s ending inventory valuation. There also might be trickle-down effects on a company’s tax obligations.

2. Goodwill. When estimating the fair value of acquired goodwill, companies that use GAAP are supposed to apply consistent valuation techniques from period to period. However, the assumptions underlying fair value estimates may need to be revised as inflation increases. For instance, market participants typically use higher discount rates during inflationary periods and might expect revised cash flows due to rising expenditures, changes in customer behaviors and modified product pricing.

3. Investments. Inflation can lead to volatility in the public markets. Changes in the market values of a company’s investments can result in realized or unrealized gains or losses, which ultimately impact deferred tax assets and liabilities under GAAP. Concerns about inflation may also cause a company to revise its investment strategy, which may require new methods of accounting or special disclosures in the financial statement footnotes.

4. Foreign currency. Inflation can affect foreign exchange rates. As exchange rates fluctuate, companies that accept, hold and convert foreign currencies need to ensure they’re capturing the correct rate at the appropriate point in time.

5. Debts. If your company has variable-rate loans, interest costs may increase as the Federal Reserve raises interest rates to counter inflation. The Fed already raised its target federal funds rate by 0.5% in May and is expected to increase rates further over the course of 2022. Some businesses might decide to convert variable-rate loans into fixed-rate loans or apply for additional credit now to lock in fixed-rate loans before the next rate hike. Others may restructure their debt. Depending on the nature of a restructuring, it may be reported as a troubled debt restructuring, a modification or an extinguishment of the debt under GAAP.

6. Overhead expenses. Long-term lease agreements may contain escalation clauses tied to CPI or other inflationary measures that will lead to increased lease payments. Likewise, vendors and professional service providers may increase their prices during times of inflation to preserve their own profits.

7. Going concern disclosures. Each reporting period, management must evaluate whether there’s substantial doubt about the company’s ability to continue as a going concern. Substantial doubt exists if it’s probable that the entity will be unable to meet obligations as they become due within 12 months of the financial statement issuance date. Soaring rates of inflation can be the downfall of companies that are unprepared to counter the effects, causing doubt about their long-term viability.

We can help

Inflation can have far-reaching effects on a company’s financial statements. Contact us for help anticipating how inflation is likely to affect your company’s financials and brainstorming ways to manage inflationary risks.

During the early stages of the COVID-19 pandemic, many cash-short small businesses turned to their banks, while others sought help from family and friends. Unfortunately, these sources weren’t enough in all cases. When government aid arrived, it was too late for some companies. For others, government loans and grants helped but didn’t fill the cash shortfall.

The resulting crunch provided an opening for organized crime enterprises to infiltrate the corporate world. Of course, organized crime has always represented a threat to legitimate businesses. But the increasing number of fraud schemes perpetrated by criminal gangs means you should examine your company’s transactions more closely.

Common schemes

Organized crime has several ways of inserting itself into your business. Look out for the following common scenarios:

Extortionate loans. When faced with a lack of cash, desperate owners may be willing to accept any form of financing — no matter the strings attached. However, rates and terms offered by organized crime can cripple and even destroy a business.

Instead of seeking any form of black-market financing, contact banks with which you do business, your credit card company and alternative lenders. Although traditional lenders generally require high credit scores and extensive financial documentation to underwrite a loan, some alternative lenders rely on eCommerce activity alone to issue debt.

Substandard suppliers. Organized crime sometimes forces companies to buy products and services from vendors the criminals control. Initially, they may offer competitive or below-market terms. But over time, they typically raise prices and may enforce payment with threats of violence. In exchange, you’ll probably receive inferior goods.

If a prospective supplier presents a compelling case for switching, exercise caution. Be particularly wary if the company is under new ownership and the new owners appear unfamiliar with the products and services they ostensibly sell. If in doubt, stick with your original vendor until you have the time to research suitable replacements.

Government loan “partnerships.” An organized crime group may offer to facilitate quick access to government funds disbursed via financial institutions. To make this happen, criminals corrupt a bank loan by paying a bank employee to quickly rubber stamp an application and approve the disbursement of funds within days. In return for loan facilitation, the criminals require a portion of the loan proceeds.

Know that applying for government aid can take time. However, early in the pandemic, banks appointed to disburse COVID-19 relief funds generally processed most requests within 10 days.

Cheap business acquisitions. Sometimes, the only option available to businesses short on funds is to sell. Troubled companies can attract the attention of criminals because they can buy assets for a fraction of their value and use a business to launder proceeds of illegal activity.

If you intend to sell your company, work with reputable M&A, tax and valuation advisors. The process may take longer than selling on the black market, but an aboveboard transaction will help you avoid legal headaches involving criminals who will likely wish to conceal their identities and the nature of the transaction. With a legitimate sale, you can also be certain you’ll receive the price and terms negotiated with the buyer.

Consider other options

Although organized crime is an ever-present threat, financial and social emergencies can aid criminals and fraudsters. You might be tempted by easy capital offered by these shady characters. But given the potential repercussions to your business, there are almost always better options available. Contact us today if you have questions about protecting your business.

The best laid plans can go awry. After your death, events may transpire that you hadn’t anticipated or couldn’t have reasonably foreseen. There’s no way of predicting the future, but you may want to supplement your existing estate plan with a trust provision that gives a designated beneficiary a “power of appointment” over some or all of the trust property. Essentially, this person will have the discretion to change distributions from the trust or even add or subtract beneficiaries.

Assuming the holder of this power fulfills the duties properly, he or she can make informed decisions when all the facts are known. This can create more flexibility and adaptability within your estate plan.

2 types of powers

There are two types of powers of appointment:

“General” power of appointment. A general power of appointment allows the holder to distribute assets to anyone, including him- or herself, his or her estate or the estate’s creditors. The property is usually included in a trust but may be given to the holder outright. Also, this power of appointment can be transferred to another person.

“Limited” or “special” power of appointment. Here, the person holding the power of appointment can give the property to a select group of people who’ve specifically been identified by the deceased. For example, it might provide that a surviving spouse can give property to surviving children, as he or she chooses, but not to anyone else. Thus, this power is more restrictive than a general power of appointment.

Whether you should use a general or limited power of appointment depends on your circumstances and expectations.

Tax impacts

The resulting tax impact may also affect your decision to use a general or limited power of appointment. The rules are complicated, but property subject to a general power of appointment is typically included in the taxable estate of the designated holder of the power. However, property included in the deceased’s estate currently receives a step-up in basis to fair market value on the date of death. Therefore, your heirs can sell property that was covered by a general power of appointment with little or no income tax consequences.

In contrast, property covered by a limited power isn’t included in the holder’s estate. However, the heirs inherit the property with a carryover basis and no step-up in basis. So, if the heirs sell appreciated property, they may be liable for high capital gains taxes.

Generally, if estate tax isn’t a concern, a general power of appointment may be preferable. We can help you determine if adding a power of appointment is right for your situation.

Every business wants to engage in strategic planning that will better position the company to sell more to current customers — and perhaps expand into new markets. Yet the term “strategic planning” is so broad. It’s easy to get overwhelmed by all the possible directions you could go in and have a hard time choosing a path. Here are a few simple ways to make strategic planning a reality.

Focus on who you already know

One cost-effective strategy is to work more closely with current customers by strengthening and expanding those relationships. After all, they’re presumably satisfied with the products or services you’re currently offering, so they’re likely willing to try others. Ask about their needs, listen to their responses and look for ways to better serve them and boost revenue.

Another strategy is to partner with other compatible businesses, perhaps locally or in your industry. You might not be able to produce certain complementary products or services, but you could team up with another company that can and, together, both businesses could see their bottom lines grow.

Dig deeper into social media

By now, most companies have dipped their respective and figurative toes into social media. These online platforms can be a cost-effective way to highlight specific products or services, as well as to familiarize the buying public with your brand and culture. Of course, you’ve got to handle social media promotions carefully — customers tend to be turned off by a barrage of posts that basically shout, “Buy this!”

Nonetheless, digging deeper into the use and analytics of social media can play a viable role in a broader strategic plan. Many professionals recommend alternating posts that focus on specific products or services with those providing helpful, informative content to followers. For example, a cybersecurity firm might offer tips on staying safe online.

Reevaluate your pricing strategy

Although increasing prices might boost revenue if sales remain steady, scattershot price jumps can prompt customers to go elsewhere. That’s why a critical component to any strategic plan must be designing a pricing strategy that boosts revenue without simply slapping on a higher price tag.

One option is bundling products or services and then offering the bundle at a lower price than what customers would pay in total for each item individually. Customers enjoy the savings while the company boosts sales, often with minimal additional effort.

Another way might be to offer a subscription service. Customers get uninterrupted access to the products or services they need, and the business establishes an ongoing revenue source.

Don’t hesitate

A good strategic plan first addresses broad objectives and then narrows down to specific steps. The next time you and your leadership team get stuck, don’t hesitate to back up and look at some big picture issues. Let us assist you in assessing the profitability impact of any of the strategic planning ideas you come up with.

Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.

Here are some answers to questions about the option.

Why is the election important?

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Which businesses are eligible?

To qualify for the election a taxpayer:

Must have gross receipts for the election year of less than $5 million and
Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.

Are there limits on the election?

Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.

The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.

The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.