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Inflation Reduction Act Expands Valuable R&D Payroll Tax Credit
When President Biden signed the Inflation Reduction Act (IRA) into law in August, most of the headlines covered the law’s climate change and health care provisions. But the law also enhances an often overlooked federal tax break for qualifying small businesses.
The IRA more than doubles the amount a qualified business can potentially claim as a research and development (R&D) tax credit to offset its payroll tax for tax years starting after 2022 — to a maximum of $2.5 million over five years. The credit allows a qualified business to leverage the substantial R&D tax benefit even if it has little to no income tax liability, potentially freeing up significant cash flow.
Background on the pre-IRA credit
The Protecting Americans from Tax Hikes (PATH) Act created a permanent incentive for eligible start-up companies to pursue R&D activities within the United States. The Section 41 tax credit for qualifying in-house and contract research activities already existed, but early-stage companies that hadn’t yet incurred income tax liability couldn’t take advantage of it.
The PATH Act revised the Sec. 41 credit to allow taxpayers to elect to apply up to $250,000 of the credit against their share of the Social Security, or FICA, tax for their employees, rather than against income tax. The revision became effective for tax years that began after Dec. 31, 2015.
The payroll tax election is available to taxpayers with 1) gross receipts of less than $5 million for the tax year, and 2) no gross receipts for any tax year more than five years prior to the end of the current tax year. The latter requirement essentially limits the payroll tax credit to start-up companies. If the taxpayer had a tax year of less than 12 months, the gross receipts must be annualized for a full year.
Be aware that not all research is eligible. To qualify for the credit, the research must be:
Performed to eliminate technical uncertainty about the development or improvement of a product or process, including computer software, techniques, formulas and inventions,
Undertaken to discover information that’s technological in nature (meaning based on physical, biological, engineering or computer science principles),
Intended for use in developing a new or improved business product or process, and
Elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
Qualifying research expenses include wages for employees involved with the research, supplies to conduct it and amounts paid for the use of computers. They also include 65% of the amounts paid or incurred for contractors.
The credit equals the smallest amount of 1) the current year Sec. 41 credit, 2) an elected amount not exceeding $250,000, or 3) the general business credit carryforward for the tax year (before application of the payroll tax credit for the year). Note that the general business credit carryforward limit doesn’t apply to S corporations or partnerships.
The IRA expansion
Under the PATH Act, a qualified small business could elect to apply its R&D credit against only the 6.2% Social Security tax. Beginning with the 2023 tax year, eligible businesses will be allowed to apply an additional $250,000 against their 1.45% Medicare tax liability.
While the total maximum credit is now $500,000, that amount is bifurcated. You can apply no more than $250,000 against each prong of payroll tax liability — FICA and Medicare, respectively.
As under the PATH Act, you can claim the credit for no more than five years. Existing aggregation rules, which treat related entities as a single taxpayer for purposes of determining gross receipts, also continue to apply. Any credit is allocated among the entities, but each entity must make the election separately.
Claiming the credit
You can make a payroll tax credit election by having us complete the appropriate portion of Form 6765, “Credit for Increasing Research Activities,” and submit it with your income tax return. To then claim the credit, complete Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities” and attach it to your employment tax return.
You can apply the credit to offset payroll tax no earlier than the first quarter after you file the return reporting the election. The credit can’t exceed the amount of tax imposed for any calendar quarter. Unused amounts can be carried forward.
What if you were eligible for the R&D credit previously but didn’t claim it because you were unaware of it or for another reason? The IRS recently tightened the requirements to claim a refund of the R&D credit.
To be considered sufficient, a refund claim must:
Identify all the business products and processes to which the Sec. 41 research credit claim relates for the relevant year.
For each business product and process, identify all research activities performed, all individuals who performed each research activity and all of the information each individual sought to discover.
Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year. (This may be done using Form 6765.)
These so called “items of information” must be submitted when the refund claim is filed, along with a declaration signed under penalty of perjury verifying their accuracy. If your refund claim is deemed deficient, you’ll receive a letter providing 45 days to cure the deficiency.
More to come
The IRS is expected to issue guidance on the expanded small business R&D tax credit, as well as revised tax forms for 2023. Contact us if you think you may qualify, now or in the past.
© 2022
Shine a Light on Sales Prospects to Brighten the Days Ahead
When it comes to sales, most businesses labor under two major mandates: 1) Keep selling to existing customers, and 2) Find new ones.
To accomplish the former, your sales staff probably gets some help from the marketing and customer service departments. Succeeding at the latter may be more difficult. Yet perhaps the most discernible way a sales department can help boost a company’s bottom line is to win over prospects consistently and manageably.
Laser focus on lead generation
Does your marketing department help you generate leads by doing things such as maintaining an easily searchable database of potential customers for your products or services? If not, it’s probably time to refine or possibly even overhaul your lead generation process.
Customer relationship management (CRM) software can help. When salespeople have a clear picture of a likely buyer, they’ll be able to better focus their efforts. If you haven’t invested in CRM software, or significantly upgraded yours in a while, this is something to strongly consider.
Reduce wasted time and effort
There’s really no aspect of a business that can’t be improved by waste reduction. Effective salespeople spend their time with prospects who are the most likely to buy from them, not with those who might maybe buy something someday but will take a monumental effort to win over.
A worthy prospect generally has clearly discernible and fulfillable needs, a readily available decision maker, strong and verifiable financials, and a timely need or desire to buy. Apply these qualifications to any person or entity with whom you’re considering doing business. If a sale appears highly doubtful from the get-go, it’s probably best to move on.
Ask the right questions, then listen
When talking with prospects, your sales team must know what draws buyers to your company. Sales staffers who make great presentations but don’t ask effective questions about prospects’ needs are typically doomed to mediocrity.
They say the most effective salespeople spend 20% of their time talking and 80% listening. Whether these percentages are completely accurate is hard to say but, after making their initial pitch, a good salesperson actively listens to the prospect’s responses and then asks insightful questions based on solid research.
Be a problem solver
Your sales staff needs to know — going in — how your product or service can solve a prospect’s problem or accomplish a goal. Without a clear offer of a solution, what motivation does the prospect really have to spend money?
Preparation is key. Be sure you’re adequately investing in industry and market research, as well as the continued education of your sales team, to position yourself as a problem solver for your customer base.
The sales are out there
Businesses face great challenges right now in the form of inflation, rising interest rates and persistent supply chain slowdowns. Nonetheless, the economy soldiers on and there are customers out there looking to buy. Contact us for help quantifying your sales process so you can identify feasible ways to improve it.
© 2022
Formalizing Your Business’s BYOD Policy
When the pandemic hit about two and a half years ago, thousands of employees suddenly found themselves working from home. In many cases, this meant turning to personal devices to access their work email, handle documents and perform other tasks. Even before COVID, more and more businesses were allowing employees to use their own phones, tablets and laptops to get stuff done.
By now, many companies have established firm bring-your-own-device (BYOD) policies. Other businesses, however, have taken a more informal approach, allowing their policies to evolve with minimal documentation. Whichever camp your company falls into, it’s a good idea to regularly review and, if necessary, formalize your BYOD policy.
Key questions
A comprehensive BYOD policy needs to anticipate a multitude of situations. What if a voluntary or involuntary termination occurs? What if a device is lost, shared or recycled? What if it’s infected by a virus or malware? How about if a device is synced on an employee’s home cloud? Other key questions to address include:
Who pays the bill? Payment policies vary widely. For example, an employer might pay for an unlimited data plan for employees. Any charges above that amount are the employee’s responsibility.
Who owns an employee’s cell phone number? This is a big deal for salespeople and service representatives — especially if they leave to work for a competitor. Customers may continue to call a rep’s cell phone, leading to lost sales for your business.
Are employees properly password-protecting their devices? A policy should require employees to not only use passwords, but also implement two-factor authentication if feasible. In addition, users need to set up their devices to lock if left idle for more than a few minutes.
Legal ramifications
A BYOD policy needs to address the fact that using a personal device for work inevitably opens the door for an employer to access personal information, such as text messages and photos. State that the company will never intentionally view protected items on a device, such as privileged communications with attorneys, protected health information or complaints against the employer that are permitted under the National Labor Relations Act.
In case your business becomes involved in a lawsuit, its data retention policies should address how data is stored on mobile devices and gathered during litigation. Keep in mind that Rule 34 of the Federal Rules of Civil Procedure covers all devices, including personal ones that access a company’s network.
Financial impact
Formalizing your BYOD policy should involve spelling it out in a written user’s agreement that all participants must sign. Consult a qualified attorney in drafting such an agreement. Contact us for help assessing the tax and financial impact of allowing employees to use personal devices vs. buying technology assets and providing them to your workforce.
© 2022
Want to See into the Future? Delve Deeper into Forecasting
For a company to be truly successful, its ownership needs to attempt the impossible: see into the future. Forecasting key metrics — such as sales demand, receivables, payables, and working capital — can help you manage overhead, offer competitive prices and keep your business on firm financial footing.
Although financial statements are often the starting point for forecasts, you’ll need to do more than just multiply last year’s numbers by a projected growth rate in today’s uncertain marketplace. Here are some tips to consider.
Pick your time frame
Forecasting is generally more accurate in the short term. The longer the period, the more likely it is that customer demand or market trends will change.
Quantitative methods, which rely on historical data, are typically the most accurate. However, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.
Define your demand
Weather, sales promotions, safety concerns, and other factors can cause sales to fluctuate. For example, if you sell ski supplies and apparel, chances are good your sales tend to dip in the summer.
If demand for your products or services varies, consider forecasting with a quantitative method. One example is “time-series decomposition,” which examines historical data and allows you to adjust for market trends, seasonal trends, and business cycles.
You also might want to invest in forecasting software. These solutions allow you to plug other variables into the equation, such as the short-term buying plans of key customers.
Assess your data
Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use “exponential smoothing,” a simple yet fairly accurate method that compares historical averages with current demand.
If you want to forecast for something you don’t have data for, such as a new product or service, you might use qualitative forecasting. Alternatively, you could base your forecast on historical data for a similar product or service in your lineup.
Get intensive for inventory
If you operate a business with extensive inventory, forecasting is particularly critical. As you’ve likely learned over time, you’ve got to establish accurate methods of counting inventory and adjust levels as appropriate to best manage cash flow.
For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as by geographic location.
Craft your crystal ball
The optimal forecasting approach for any business will depend on multiple factors, such as its industry and customer base. Contact us to discuss the forecasting practices that make the most sense for your company.
© 2022
The Inflation Reduction Act Includes Wide-Ranging Tax Provisions
The U.S. Senate and House of Representatives have passed the Inflation Reduction Act (IRA). President Biden signed the bill into law on August 16th. The IRA includes significant provisions related to climate change, health care, and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is projected to reduce the deficit by around $90 billion over the next 10 years.
Although the IRA falls far short of Biden’s originally proposed $2 trillion Build Back Better Act, the $430 billion package nonetheless is a sprawling piece of legislation bound to affect most Americans over time. Here’s an overview of some of what the bill includes.
SIGNIFICANT TAX PROVISIONS
For starters, how is the federal government going to pay for all of it? Not surprisingly, new taxes are part of the equation (along with savings from, for example, lower drug prices). But the bill is designed to not raise taxes on small businesses or taxpayers earning less than $400,000 per year. Rather, wealthier targets are in the crosshairs.
The first target is U.S. corporations (other than S corporations) that have more than $1 billion in annual earnings over the previous three years. While the current corporate tax rate is 21%, it’s been well documented that many such companies pay little to no federal income tax, due in part to deductions and credits. The IRA imposes a corporate alternative minimum tax of 15% of financial statement income (also known as book income, as opposed to tax income) reduced by, among other things, depreciation and net operating losses. The new minimum tax is effective for tax years beginning after December 31, 2022.
Private equity firms and hedge funds are exempt from the minimum tax. They could have been covered by a provision that generally includes subsidiaries when determining annual earnings. The tradeoff is that the IRA now will extend the excess business loss limitation for certain businesses for two years.
Although the initial bill language also closed the so-called “carried interest” loophole that permits these interests to be taxed as long-term capital gains rather than ordinary income, the loophole ultimately survived. Democrats agreed to remove the provision closing it to secure the vote of Sen. Kyrsten Sinema (D-AZ) — but they added another tax to make up for the lost revenue. The IRA will now impose a 1% excise tax on the fair market value when corporations buy back their stock.
The IRA also provides about $80 billion (over 10 years) to fund the IRS and improve its “tax enforcement activities” and technology. Notably, the IRS budget has been dramatically slashed in recent years, dropping by 20% in 2020, compared to 2010. The CBO estimates that the infusion of funds will allow the IRS to collect $203 billion over the next decade from corporations and wealthy individuals.
CLIMATE AND ENERGY PROVISIONS
The IRA dedicates about $370 billion to combating climate change and boosting domestic energy production. It aims to reduce the country’s carbon emissions by 40% by 2030.
The legislation includes new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, the bill provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.
CLEAN VEHICLE CREDIT
The current tax credit for qualified plug-in electric vehicles has been significantly revised in the IRA. Currently, a taxpayer can claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.
The credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.
The bill changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral and battery component requirements. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles.
The clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.
The IRA also contains a tax credit for a used plug-in electric drive vehicle purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations.
HOME ENERGY IMPROVEMENTS
Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. And a “Clean Energy and Sustainability Accelerator” will use public and private funds to invest in clean energy technologies and infrastructure.
HEALTH CARE PROVISIONS
The IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps Medicare enrollees’ annual out-of-pocket drug costs at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program.
The IRA also should reduce health care costs for Americans of all ages who obtain health insurance coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. These subsidies had been scheduled to expire at the end of 2022.
MUCH MORE TO COME
The IRA is a sweeping piece of legislation that affects many sectors of U.S. business, as well as most citizens. Additional information, guidance and regulations related to its numerous, far-reaching provisions are inevitable. We’ll keep you up to date on the developments that could affect your finances and federal tax liability.
© 2022
Evaluating An ESOP From A Succession Planning Perspective
If you’ve been in business for a while, you’ve probably considered many different employee benefits. One option that might have crossed your desk is an employee stock ownership plan (ESOP).
Strictly defined, an ESOP is considered a retirement plan for employees. But it can also play a role in succession planning by facilitating the transfer of a business to the owner’s children or employees over a period of years in a tax-advantaged way.
Not a buyout
Although an ESOP is a retirement plan, it invests mainly in your own company’s stock. ESOPs are considered qualified plans and, thus, subject to the same IRS and U.S. Department of Labor (DOL) rules as 401(k)s and the like. This includes minimum coverage requirements and contribution limits.
Generally, ESOP distributions to eligible employees are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put” options or an “option to sell” — at fair market value during certain time windows.
While an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control gradually. During the transfer period, owners’ shares are held in an ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.
Mandatory valuations
One big difference between ESOPs and other qualified retirement plans is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.
The fair market value of the sponsoring company’s stock is important, because the DOL specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP essentially provides a limited market for its shares.
Costs and entity choice
Although ESOPs can be an important part of a succession plan, they have their drawbacks. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Plus, there are costs associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.
Another disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to the corporate form to establish one of these plans. This raises a variety of financial and tax issues.
It’s also important to consider the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.
A popular choice
There are about 6,500 ESOPs and equivalent plans in the United States today, with roughly 14 million participants, according to the National Center for Employee Ownership. So, if you decide to launch one, you won’t be alone. However, careful planning and expert advice is critical. We can help you evaluate whether an ESOP would be a good fit for your business and succession plan.
© 2022
Key aspects of a successful wellness program
Wellness programs have found a place in many companies’ health care benefits packages, but it hasn’t been easy. Because these programs take many different shapes and sizes, they can be challenging to design, implement and maintain.
There’s also the not-so-small matter of compliance: The federal government regulates wellness programs in various ways, including through the Health Insurance Portability and Accountability Act and the Americans with Disabilities Act.
Whether your business is just embarking on the process of creating one or simply looking for improvement tips, here are some key aspects of the most successful wellness programs.
Simplicity and clarity
“Welcome to our new wellness program,” began the company’s memo. “Attached is a 200-page guide, featuring a complex point system that will determine whether you qualify for incentives, and a lengthy glossary of medical terminology.”
See the problem here? The surest way to get a program off to a bad start is by frontloading it with all sorts of complexities and time-consuming instructions. Granted, there will be an inevitable learning curve to any type of wellness program. But the simpler the design, the easier it will be to explain and implement. Remember that you can update and increase a program’s complexity as it becomes more ingrained in your company’s culture.
Clarity of communication is also paramount. Materials should be well-organized and written clearly and concisely. Ideally, they should also have an element of creativity to them — to draw in participants. However, the content needs to be sensitive to the fact that these are inherently personal health issues.
If you don’t have anyone in-house who can handle these criteria, consider engaging a consultant. In addition, have your attorney review all materials related to the program for compliance purposes.
Carefully chosen providers
At most companies, outside vendors provide the bulk of wellness program services and activities. These may include:
Seminars on healthy life and work habits,
Smoking cessation workshops,
Fitness coaching,
Healthful food options in the break room and cafeteria, and
Runs, walks or other friendly competitive or charitable events.
It’s critical to thoroughly vet providers and engage only those that are skilled and qualified. Neglecting to do so could mean that, even if you create and communicate a solid program, the initiative will likely fail once employees show up to participate and are disappointed in the experience.
Return on investment
Of course, there will be upfront and ongoing costs related to a wellness program. Contact us for help assessing these costs while designing or revising a program and tracking them over time. The ultimate sought-after return on investment of every wellness program is a healthier, more productive workforce and more affordable health care benefits.
© 2022
Weathering the storm of rising inflation
Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic?
Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.
Government response
For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken.
For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022.
This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.”
Otherwise, major tax relief this year is highly unlikely. Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.
Strategic moves
So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition.
Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses. Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment.
Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.
Optimal moves
Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions.
© 2022
How to keep remote sales on point
The pandemic has dramatically affected the way people interact and do business. Your company likely undertook various changes to adapt to the initial lockdowns and the ongoing public health guidance over the past two years.
An interesting byproduct of the crisis is that it created a somewhat involuntary experiment in remote work. Many businesses that were previously reluctant to allow telework — and remote sales, in particular — have learned that they can be highly effective.
If your company continues todeploy a remote sales staff, don’t assume it will “run itself” or that this tech-based approach is finished evolving. Here are some tips on keeping remote sales on point.
Devise sound strategies
No matter what the method, sales efforts should be targeted. Remote sales teams can lose their focus when they’re able to literally reach out to the world via the Internet. Don’t let sound sales and marketing strategies fall by the wayside.
For example, it’s far easier to sell to thoroughly researched prospects or, best of all, existing customers — who are already familiar with your products or services and those with whom you have an established relationship.
Continuously leverage technology
This might sound like a silly point given that remote sales are wholly dependent on technology to occur, but tech solutions are constantly evolving. Stay on the lookout for video chat and virtual meeting solutions that might work better for your business.
In addition to video-based products, other types of technology can enhance or support the sales process. For instance, software platforms that enable you to create customized, interactive and visually appealing presentations can help overcome some of the challenges of remote sales. And salespeople can use brandable “microsites” to:
Share documentation and other information with customers and prospects,
Monitor customers’ activities on these sites, and
Tailor follow-ups appropriately.
Also, because different customers have different preferences, it’s a good idea to offer a variety of approaches to communication — including email, texts, instant messaging, videoconferencing and live chat. Good old-fashioned phone calls should, of course, be an option as well.
Provide an outstanding experience
The ultimate goal of any remote sales team is to close deals and bring in revenue. But, rather than getting too caught up in the numbers, your salespeople should always be cognizant of the experience they’re helping provide customers.
Today’s buyers, whether consumer or business-to-business, largely prefer the convenience and comfort of self-service and digital interactions. That’s half the battle. However, your remote sales staff must still ensure that customers’ experiences with both your technology and people are overwhelmingly positive. This might entail occasionally taking off their sales hats and donning a customer service or tech support hat to solve a problem.
Stay competitive
The lasting impact of the pandemic isn’t yet completely clear, but the manner in which it has accelerated the use of remote technology is readily apparent. To stay competitive, businesses need to continue incorporating and enhancing remote sales techniques and IT solutions. Let us assist you in weighing the costs, risks and advantages of your investments in this area.
© 2022
6 steps to easing employees’ fears about innovation
Business owners often find the greatest obstacle to innovation isn’t the change itself, but employees’ resistance to it. Their hesitation or outright defiance is frequently driven by fear.
Some workers might worry about how the innovation will alter their jobs — or whether it will even eliminate their positions. Others could reject the concept and believe that the change will hurt, rather than help, the company.
To better ensure the success of your next innovative project, you’ll need to ease the fears and win the support of your employees. Here are six steps that can help:
1. Create a communications strategy.
As specifically as possible, describe the innovation’s purpose and expected impact. For example, if you’re implementing a new software platform, let employees know how the innovation will help the business. Will it streamline operations? Open new markets? Bolster the company’s reputation as an innovator?
From there, explain how the innovation will affect and improve employees’ jobs. Going back to our example, this could mean pointing out how the software platform eliminates longstanding redundancies, improves data capture and security, and “upskills” employees’ tech savvy.
Be transparent about how a change could present initial challenges. For instance, suppose a new accounts payable system will simplify invoice processing, but it will also mean employees need to substantially alter their workflows. Let workers know how you’ll revise processes, as well as the steps you’ll take to help them with the transition.
2. Solicit input.
Long before rolling out an innovation, ask employees at all levels and departments about the concept and, over time, the details. Doing so might start with issuing an employee survey and then later holding “town hall” meetings to discuss how the project is evolving.
Remember, the more often workers can provide input, the more likely they are to buy in to the change. And the discussions could yield insights that prove invaluable to the innovation’s success.
3. Assemble an implementation team.
The team should include a leader, typically a management-level employee, who understands your company culture and can navigate the bureaucratic landscape. It should also include at least one “champion” — ideally, a lower-level worker who can help win the hearts and minds of fellow rank-and-file employees.
4. Provide training.
As feasible and relevant, plan to offer training related to the innovation. Be sure to factor this into the budget. Employees often fear a major change because they’re unsure they’ll be able to master a new process or technology. Provide the education and resources they’ll need to successfully adapt.
5. Start small.
Many businesses conduct a “beta test” well before the full rollout. This essentially means asking a small group of employees to try the innovation so you can catch oversights and fix glitches. Doing so can not only prevent disappointment or even disaster, but also build excitement about the big change as word spreads about how enjoyable and effective it is.
6. Ask for help.
Many small to midsize companies lack the staff and resources to design and implement a major innovation. You might need to allocate some of the project budget to outside consultants. Contact us for help creating that budget, as well as weighing the costs vs. benefits of any innovation you’re considering.
© 2022
Businesses: Act Now to Make the Most Out of Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) significantly boosted the potential value of bonus depreciation for taxpayers — but only for a limited duration. The amount of first-year depreciation available as a so-called bonus will begin to drop from 100% after 2022, and businesses should plan accordingly.
Bonus depreciation in a nutshell
Bonus depreciation has been available in varying amounts for some time. Immediately prior to the passage of the TCJA, for example, taxpayers generally could claim a depreciation deduction for 50% of the purchase price of qualified property in the first year — as opposed to deducting smaller amounts over the useful life of the property under the modified accelerated cost recovery system (MACRS).
The TCJA expanded the deduction to 100% in the year qualified property is placed in service through 2022, with the amount dropping each subsequent year by 20%, until bonus depreciation sunsets in 2027, unless Congress acts to extend it. Special rules apply to property with longer recovery periods.
Businesses can take advantage of the deduction by purchasing, among other things, property with a useful life of 20 years or less. That includes computer systems, software, certain vehicles, machinery, equipment and office furniture.
Both new and used property can qualify. Used property generally qualifies if it wasn’t:
Used by the taxpayer or a predecessor before acquiring it,
Acquired from a related party, and
Acquired as part of a tax-free transaction.
Qualified improvement property (generally, interior improvements to nonresidential property, excluding elevators, escalators, interior structural framework and building expansion) also qualify for bonus depreciation. A drafting error in the TCJA indicated otherwise, but the CARES Act, enacted in 2020, retroactively made such property eligible for bonus depreciation. Taxpayers that placed qualified improvement property in service in 2018, 2019 or 2020 may, generally, now claim any related deductions not claimed then — subject to certain restrictions.
Buildings themselves aren’t eligible for bonus depreciation, with their useful life of 27.5 (residential) or 39 (commercial) years — but cost segregation studies can help businesses identify components that might be. These studies identify parts of real property that are actually tangible personal property. Such property has shorter depreciation recovery periods and therefore qualifies for bonus depreciation in the year placed in service.
The placed-in-service requirement is particularly critical for those wishing to claim 100% bonus depreciation before the maximum deduction amount falls to 80% in 2023. With the continuing shipping delays and shortages in labor, materials and supplies, taxpayers should place their orders promptly to increase the odds of being able to deploy qualifying property in their businesses before year-end.
Note, too, that bonus depreciation is automatically applied by the IRS unless a taxpayer opts out. Elections apply to all qualified property in the same class of property that is placed in service in the same tax year (for example, all five-year MACRS property).
Bonus depreciation vs. Section 179 expensing
Taxpayers sometimes confuse bonus depreciation with Sec. 179 expensing. The two tax breaks are similar, but distinct.
Like bonus deprecation, Sec. 179 allows a taxpayer to deduct 100% of the purchase price of new and used eligible assets. Eligible assets include software, computer and office equipment, certain vehicles and machinery, as well as qualified improvement property.
But Sec. 179 is subject to some limits that don’t apply to bonus depreciation. For example, the maximum allowable deduction for 2022 is $1.08 million.
In addition, the deduction is intended to benefit small- and medium-sized businesses so it begins phasing out on a dollar-for-dollar basis when qualifying property purchases exceed $2.7 million. In other words, the deduction isn’t available if the cost of Sec. 179 property placed in service this year is $3.78 million or more.
The Sec. 179 deduction also is limited by the amount of a business’s taxable income; applying the deduction can’t create a loss for the business. Any cost not deductible in the first year can be carried over to the next year for an unlimited number of years. Such carried-over costs must be deducted according to age — for example, costs carried over from 2019 must be deducted before those carried over from 2020.
Alternatively, the business can claim the excess as bonus depreciation in the first year. For example, say you purchase machinery that costs $20,000 but, exclusive of that amount, have only $15,000 in income for the year it’s placed in service. Presuming you’re otherwise eligible, you can deduct $15,000 under Sec. 179 and the remaining $5,000 as bonus depreciation.
Also in contrast to bonus depreciation, the Sec. 179 deduction isn’t automatic. You must claim it on a property-by-property basis.
Some caveats
At first glance, bonus depreciation can seem like a no-brainer. However, it’s not necessarily advisable in every situation.
For example, taxpayers who claim the qualified business income (QBI) deduction for pass-through businesses could find that bonus depreciation backfires. The amount of your QBI deduction is limited by your taxable income, and bonus depreciation will reduce this income. Like bonus depreciation, the QBI deduction is scheduled to expire in 2026, so you might want to maximize it before then.
The QBI deduction isn’t the only tax break that depends on taxable income. Increasing your depreciation deduction also could affect the value of expiring net operating losses and charitable contribution and credit carryforwards.
And deduction acceleration strategies always should take into account tax bracket expectations going forward. The value of any deduction is higher when you’re subject to higher tax rates. Newer businesses that currently have relatively low incomes might prefer to spread out depreciation, for example. With bonus depreciation, though, you’ll also need to account for the coming declines in the maximum deduction amounts.
Buy now, decide later
If you plan on purchasing bonus depreciation qualifying property, it may be wise to do so and place it in service before year end to maximize your options. We can help you chart the most advantageous course of action based on your specific circumstances and the upcoming changes in tax law.
© 2022
No parking: Unused compensation reductions can’t go to health FSA
Among the many lasting effects of the pandemic is that some businesses are allowing employees to continue working from home — even now that the most acute phases of the public health crisis seem to be over in some places. This decision is raising some interesting questions about fringe benefits.
For example, in IRS Information Letter 2022-0002, the tax agency recently answered an inquiry involving a qualified transportation plan participant whose employer now lets him work from home permanently. To avoid losing dollars he’d previously set aside for parking, the participant asked whether he could transfer unused compensation reductions to his health Flexible Spending Account (FSA), which his employer offered through its qualified cafeteria plan.
No cash refunds
The letter explains that, under an employer’s qualified transportation plan, unused compensation reduction amounts can be carried over to subsequent plan periods and used for future commuting expenses. Caveat: employees can’t receive benefits that exceed the maximum excludable amount in any month.
However, cash refunds aren’t permitted — even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits. Furthermore, the U.S. Code prohibits cafeteria plans from offering qualified transportation fringe benefits. And IRS rules don’t allow unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA offered though a cafeteria plan.
The letter also notes that COVID-19-related relief for FSAs gives employers the discretion to amend their cafeteria plans to permit midyear health FSA election changes for plan years ending in 2021.
Note: IRS Information Letters provide general statements of well-defined law without applying them to a specific set of facts. They’re provided by the IRS in response to requests for general information by taxpayers or members of Congress.
Limited flexibility
The qualified transportation rules for fringe benefits have largely proven themselves flexible enough to handle most situations arising from the pandemic.
Many companies permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. Compensation reductions set aside for one qualified transportation benefit, such as parking, can even be used for a different transportation benefit, such as public transit — again, so long as the plan permits it, and the maximum monthly benefit isn’t exceeded.
However, as the inquisitive participant in the IRS information letter learned, the flexibility of fringe benefit rules has its limits. Because some financial loss could occur due to changing circumstances, businesses should clearly articulate this risk to employees when offering compensation reduction elections.
Complexities to consider
The right fringe benefits can help your business attract and retain good employees. But, as you can see, there are many complexities to consider. Let us help you weigh the risks vs. advantages of any fringe benefits you’re currently offering or considering.
© 2022
Businesses looking for outside investors need a sturdy pitch deck
Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.
Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.
To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:
Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.
Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.
Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.
Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.
Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?
Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.
Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.
Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.
Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.
Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.
Ask for help. As you undertake the steps above — and before you meet with investors — contact our firm. We can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.
© 2022
ERISA and EAPs: What’s the deal?
In recent years, more and more businesses have increased efforts to support the well-being of their employees. This means not only providing health care benefits, but also offering other initiatives designed to help workers cope with challenges such as substance dependence, financial planning, legal woes and mental health issues.
Among the options usually considered is an employee assistance program (EAP). These programs typically offer a set of benefits intended to address circumstances and challenges that might adversely affect employees’ ability to work. Benefits may include short-term mental health or substance abuse counseling or referral services, as well as financial counseling and legal services.
When considering an EAP, many business owners eventually ask a common question: Will the program be subject to the Employee Retirement Income Security Act (ERISA)?
Medical care
The answer depends on how the EAP is structured and what benefits it provides. Generally, an arrangement is an ERISA welfare benefit plan if it’s a plan, fund or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services.
Indeed, the category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress or other issues — is considered medical care. Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan.
Even if an EAP primarily uses referrals, it could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If the EAP provides any benefit subject to ERISA, then the entire EAP must comply with the law — even if it also provides non-ERISA benefits.
Beyond ERISA
When considering an EAP, you should first determine whether it will be subject to ERISA. The law’s provisions address critical compliance matters such as:
Creating a plan document and Summary Plan Description,
Performing fiduciary duties,
Following claims procedures, and
Filing IRS Form 5500.
However, an EAP that’s considered a group health plan will also be subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity.
Another point to keep in mind: EAPs that receive medical information from participants — even if they only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA).
An EAP might not be subject to other group health plan requirements. One that meets specified criteria can be defined as an “excepted benefit” not subject to HIPAA portability and certain Affordable Care Act requirements.
A worthy idea
The idea of offering your employees an EAP is well worth considering. This is particularly true now that businesses are under increased pressure to retain their workers. We can help you assess the costs, advantages and risks of one of these programs.
© 2022
360-degree feedback helps business owners see the big picture
Business owners are regularly urged to “see the big picture.” In many cases, this imperative applies to a pricing adjustment or some other strategic planning idea. However, seeing the big picture also matters when it comes to managing the performance of your staff.
Perhaps the best way to get a fully rounded perspective on how all your employees are performing is through a 360-degree feedback program. Under such an initiative, feedback is gathered from not only supervisors rating employees, but also from employees rating supervisors and employees rating each other. Sometimes even customers or vendors are asked to contribute.
Designing a survey
As you might have guessed, a critical element of a 360-degree feedback program is the written survey that you distribute to participants when gathering feedback. You can inadvertently sabotage the entire effort early on if this survey is poorly written or difficult to complete.
For starters, keep it as brief as possible. Generally, a participant should be able to fill out the survey in about 15 to 20 minutes. Ask concise questions that have a clear point. Be sure the language is unbiased; avoid words such as “excellent” or “always.” Ensure the questions and performance criteria are job-related and not personal in nature.
If using a rating scale, offer seven to 10 points that ask to what extent the person being rated exhibits a given behavior, rather than how often. It’s a good idea to use a dual-rating scale that includes both quantitative and qualitative performance questions.
Another good question is: To what extent should the person exhibit the behavior described, given his or her job role? By comparing the answers, you basically perform a gap analysis that helps interpret the results and reduces a rater’s bias to score consistently high or low.
Encouraging buy-in
To optimize the statistical validity of 360-degree feedback results, you need the largest sample size possible. Tell feedback providers how you’ll analyze their input, assuring them that their time will be well spent.
Also, emphasize the importance of being objective and avoiding invalid observations that might arise from their own prejudices. Ask providers to comment only on aspects of the subject employee’s performance that they’ve been able to observe.
Even with anonymous feedback, you should require some accountability. Incorporate a mechanism that would enable someone other than the subject of the evaluation — for instance, a senior HR manager — to address any abuse of the program. And, of course, ensure that subjects of the feedback process can work with their supervisors to act on the input they receive.
Taking it slowly
If a 360-degree feedback program sounds like something that could genuinely help your business, don’t rush into it. Discuss the idea with your leadership team and take the time to design a program with strong odds of success. Finally, bear in mind that you’ll likely have to fine-tune the program in years ahead to get the most useful data.
© 2022
Business owners, lean into sales staff retention
Although there have been some positive signs for the U.S. economy thus far in 2022, many businesses are still reeling from last year’s “Great Resignation.” This trend of a historic number of workers voluntarily leaving their jobs, combined with the difficulty of hiring new employees, didn’t spare sales teams. However, one could say that the Great Resignation only threw gasoline on an existing fire.
Historically, sales departments have always trended toward higher turnover rates. Maybe you’ve grown accustomed to salespeople coming and going, and you believe there’s not much you can do about it. Or can you? By leaning into sales staff retention a little harder, you could avoid the worst of today’s uncomfortably tight job market and hang on to your top sellers.
Improve hiring and onboarding
Retention efforts shouldn’t begin with those already on the payroll; it should start during hiring and ramp up when onboarding. A rushed, confusing or cold approach to hiring can get things off on a bad foot. In such cases, new hires tend to enter the workplace cautiously or skeptically, with their eyes on the exit sign rather than the “upper floors” of a company.
Onboarding is also immensely important. Many salespeople can tell horror stories of being shown to a cubicle with nothing but a telephone on the desk and told to “Get to it.” Today, with so many people working remotely, a new sales hire might not even get that much attention. Welcome new employees warmly, provide ample training, and perhaps give them a mentor to help them get comfortable with your business and its culture.
Reward loyalty
Even when hiring and onboarding go well, most employees will still consider a competitor’s offer if the price is right. So, to improve your chances of retaining top sales producers and their customers, consider financial incentives.
Offering retention bonuses and rewards for maintaining and increasing sales — in addition to existing compensation plans — can help. Make such incentives easy to understand and clearly achievable. Although interim bonus programs might be expensive in the near term, they can stabilize sales and prevent sharp declines. When successful, a bonus program will help you generate more long-term revenue to offset the immediate costs.
Encourage ideas
Because they work in the trenches, salespeople often have good ideas for capitalizing on your company’s strengths and shoring up its weaknesses. Look into forming a sales leadership team to evaluate the potential benefits and risks of strategic objectives. The team should include two to four top sellers who are taken off their regular responsibilities and tasked with retaining customers and maintaining sales momentum during strategic planning efforts.
The sales leadership team can also serve as a clearinghouse for customer concerns and competitor strategies. It could help with communications to clear up confusion over current or upcoming product or service offerings. And it might be able to contribute to the development of new products or services based on customer feedback and demand.
Buck the trend
Sales departments in many industries will likely continue to have relatively high turnover rates, but that doesn’t mean your business can’t buck the trend. Give your salespeople a little more attention and input, and you could retain the staff needed to maintain and improve your company’s competitive edge.
© 2022
5 ways to control your business insurance costs
Common sense dictates that every company, no matter how small, should carry various forms of business insurance. But that doesn’t mean you should pay unnecessarily high premiums just to retain the coverage you need. Here are five ways to better control your insurance costs without sacrificing the quality of your policies:
1. Review coverage periodically. Make sure existing policies reflect your current circumstances. For example, if you’ve sold or sunset some equipment, remove it from your schedule of current assets. If you’ve reduced the number of workers on your payroll, adjust workers’ compensation estimates accordingly. (We’ll address this further below.) On the other hand, if you’ve added equipment, vehicles or staff, see that they’re appropriately covered.
2. Shop around. Spend some time and effort to compare coverage and costs of various insurers. Investigate whether you qualify for any discounts that you’re not getting. To facilitate the process, you might want to engage an insurance specialist in your industry. The right expert can help you weigh the total, true costs of various policies and advise you without a vested interest in selling you a particular product.
3. Actively manage workers’ compensation coverage. In some industries, such as construction and manufacturing, workers’ comp is a major focus. In others, business owners might pay little attention to it if accidents rarely occur. Be sure that you keep up with the costs of this coverage and make regular adjustments as the nature of work changes.
Workers’ compensation insurers assign risk classification codes to employees based on their duties, responsibilities, and level of exposure to the risk of injury or illness. Higher risk means higher premiums so, at least annually, check that you’re classifying employees accurately. For example, if an employee who now works from home is still classified as someone who travels regularly or works in a higher risk location, your premiums may be needlessly inflated.
4. Consider higher deductibles. If you’re comfortable assuming some additional risk, and your cash flow is strong enough, calculate whether you can save on premiums by raising the deductibles on certain policies. It could be worth paying a higher deductible so long as the premium savings is enough to cover a claim or two if they do occur.
5. Prioritize safety. Keeping employees safe is a worthy goal in and of itself, of course. But emphasizing the importance of safety to managers, supervisors, employees and any independent contractors you might have on-site can also positively affect your company’s insurance costs. After all, the premiums you pay are based in part on your claims history. There are various steps that every business should take to avoid injuries and illness:
Provide safety training to new hires,
Conduct drills and refresher training for current employees,
Issue personal protective equipment, as appropriate, and
Strictly enforce safe work practices with no exceptions.
By keeping your employees safe, and promoting wellness in every respect, you’ll not only decrease the likelihood of costly insurance claims, but you’ll also likely contribute to higher morale and more robust productivity. We can help you measure and assess your insurance costs so you can make the right adjustments without incurring unnecessary risk.
© 2022
Should your business address retirement plan leakage?
Under just about any circumstances, the word “leakage” has negative connotations. And so it follows that this indeed holds true for retirement planning as well.
In this context, leakage refers to early, pre-retirement withdrawals from an account. Now, as a business owner who sponsors a qualified retirement plan, you might say, “Well, that’s my participants’ business, not mine.”
However, there are valid reasons to care about the issue and perhaps address it with employees who participate in your plan.
Why it matters
For starters, leakage can lead to higher plan expenses. Fees are often determined on a per-account or per-participant basis. When a plan loses funds to leakage, total assets and individual account sizes shrink, which tends to hurt administrative efficiency and raise costs.
More broadly, if your employees are taking pre-retirement withdrawals, it could indicate they’re facing unusual financial challenges. These usually have a negative impact on productivity and work quality. What’s more, workers who raid their accounts may be unable to retire when they reach retirement age.
Of course, the COVID-19 pandemic has put many people in difficult financial positions that have led them to consider withdrawing some funds from their retirement accounts. More recently, “the Great Resignation” might have some account holders pondering whether they should quit their jobs and pull out some retirement funds to live on temporarily or use to start a gig or business of their own.
What you might do
Perhaps the most important thing business owners can do to limit leakage is educate and remind employees about how pre-retirement withdrawals can diminish their accounts and delay their anticipated retirement dates. While you’re at it, provide broader financial education to help workers better manage their money, amass savings, and minimize or avoid the need for an early withdrawal.
Some companies offer emergency loans that are repayable through payroll deductions, thus providing an avenue around the use of retirement funds. Others have revised their plan designs to reduce the number of situations under which plan participants can take out hardship withdrawals or loans.
Minimize the impact
“Roughly 22% of net contributions made by those 50 or younger leaks out of the retirement savings system in a given year,” according to a 2021 report released by the Joint Committee on Taxation.
Some percentage of retirement plan leakage will probably always occur to some extent. Nonetheless, being aware of the problem and taking steps to minimize it are worthy measures for any business that sponsors a qualified plan. We can answer any questions you might have about leakage or other aspects of plan administration and compliance.
© 2022
Prudent technology upgrades call for some soul searching
By now, most business owners view technology upgrades as inevitable. Whether hardware or software, the tech your company relies on to operate will need to change slightly or even drastically for you to stay competitive.
Strange as it may sound, technology upgrades demand a bit of soul searching. That is, before spending the money, you need to dig deep for insights about what your business really needs and whether your employees or customers will appreciate your efforts.
Ask the right questions
Begin the decision process with a series of inquiries. That is, sit down with your leadership team and ask questions such as:
What are the specific functionalities that we need?
Do we need hardware, software or both?
If software, are we looking at an entirely new platform or a smaller upgrade within our existing systems?
Assuming you already have a technology infrastructure in place, compatibility is an issue, too. If you’re using an older operating system, new software could be buggy or flat-out incompatible. In either case, you could incur substantial additional costs to update or replace your operating system, which might involve new hardware and impact other software.
When deciding whether to upgrade internal systems, get input from your staff. For example, your accounting personnel should be able to tell you what types of reports they would want from upgraded financial management software. From there, you can establish criteria for comparing different packages.
If you’re considering changes to a “front-facing” system, you might want to first survey customers to determine whether the upgrade would improve their experience. Ask them questions about what works and what doesn’t to assess whether major or minor changes are needed.
Create a “hot list”
As you’re no doubt aware, there’s no shortage of hardware and software vendors out there. So, just as you’d do your homework on a major asset purchase or the lease of a large office space, do it for a technology upgrade as well.
Generally, longevity is a plus. Look for companies that have been in business for at least five to 10 years, have a track record of successful implementations and can provide references from satisfied customers. Also find out what kind of technical support is included with your purchase.
For example, if you’re doing a software upgrade, is training part of the package? If not, you’ll likely need to send one or more IT staffers out for training or engage a third-party trainer, both of which will cost you additional dollars. And keep in mind that, if you buy a top-of-the-line system but the vendor’s customer service is nonexistent, you and your employees probably won’t be happy.
Your goal is to create a “hot list” of top vendors. With this list in hand, you can get down to the serious business of comparing the various bids. To aid you in this critical decision, ask for free trial periods or online demos to help you choose the best product for your company.
Ensure a happy ending
You’ve likely heard horror stories of businesses that haphazardly attempted to upgrade their technology only to lose time, money and morale fixing the resulting problems. Approach this task cautiously to ensure your upgrade story has a happy ending. For help estimating the costs and projecting the financial impact of a tech upgrade, please contact us.
© 2022
Approach turnaround acquisitions with due care
Economic changes wrought by the COVID-19 pandemic, along with other factors, drove historic global mergers and acquisitions (M&A) activity in 2021. Experts expect 2022 to be another busy year for dealmaking.
In many cases, M&A opportunities arise when a business adversely affected by economic circumstances decides that getting acquired by another company is the optimal — or only — way to remain viable. If you get the chance to acquire a distressed business, you might indeed be able to expand your company’s operational scope and grow its bottom line. But you’ll need to take due care before closing the deal.
Looking at the long term
Although so-called “turnaround acquisitions” can yield substantial long-term rewards, acquiring a troubled target can also pose greater risks than buying a financially sound business. The keys are choosing a company with fixable problems and having a detailed plan to address them.
Look for a business with hidden value, such as untapped market opportunities, poor leadership or excessive costs. Also consider cost-saving or revenue-building synergies with other companies that you already own. Assess whether the return on investment will likely exceed the acquisition’s immediate costs and ongoing risks.
Doing your homework
Successful turnaround acquisitions start by understanding the target company’s core business — specifically, its profit drivers and roadblocks.
If you rush into the acquisition, or let emotions cloud your judgment, you could misread the company’s financial statements, misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action. This is why so many successful turnarounds are conducted by buyers in the same industry as the sellers or by investors, such as private equity funds, that specialize in a particular sector.
During the due diligence phase, pinpoint the source(s) of your target’s distress. Common examples include:
Excessive fixed costs,
Lack of skilled labor,
Decreased demand for its products or services, and
Overwhelming debt.
Then determine what, if any, corrective measures can be taken. Don’t be surprised to find hidden liabilities — such as pending legal actions or deferred tax liabilities — beyond those you already know about.
You also might find potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance against that of its industry peers can help reveal where the potential for profit lies.
Identifying cash flows
Another critical step in due diligence is identifying cash flows, both in and out. Determine what products or services drive revenue and which costs hinder profitability. Does it make sense to divest the business of unprofitable products, services, subsidiaries, divisions or real estate?
Implementing a long-term cash-management plan and developing a forecast based on receipts and disbursements is also critical. Revenue-generating and cost-cutting measures — such as eliminating excessive overtime pay, lowering utility bills, and collecting unbilled or overdue accounts receivable — can often be achieved following a thorough evaluation of accounting controls and procedures.
Reliable due diligence hinges on whether the target company’s accounting and financial reporting systems can produce the appropriate data. If these systems don’t accurately capture transactions, and fully list assets and liabilities, you’ll likely encounter some unpleasant surprises and struggle to turn around the business.
Structuring the deal
Parties to a business acquisition generally structure the deal as a sale of either assets or stock. Buyers generally prefer asset deals, which allow them to select the most desirable items from the target company’s balance sheet. In addition, the buyer receives a step-up in basis on the acquired assets, which lowers future tax obligations. And the buyer gets to negotiate new contracts, licenses, titles and permits.
On the other hand, sellers typically prefer to sell stock, not assets. Selling stock simplifies the deal, and tax obligations are usually lower for the seller. However, stock sales may be riskier for buyers because the business continues to operate uninterrupted, and the buyer takes on all debts and legal obligations. The buyer also inherits the seller’s existing depreciation schedules and tax basis in the company’s assets.
Developing a plan
Current market conditions will likely continue to generate turnaround acquisition opportunities in many industries. We can help you conduct data-driven due diligence and develop a strategic M&A plan that minimizes potential risks and maximizes long-term value.
© 2022