Using Artificial Intelligence in the Business World

Posted on June 5, 2019 by Beth Rizkal

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

Brave New World

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

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

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

Potential Risks

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

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

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

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

Coming Soon?

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

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

AI in the Real World

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

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

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

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

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

How Can Small Business Owners Reduce Social Security and Medicare Taxes?

Posted on May 7, 2019 by Beth Rizkal

If your small business is unincorporated, you may be fed up with paying the federal self-employment (SE) tax. This tax is how the federal government collects Social Security and Medicare taxes from self-employed individuals. However, you may be able to lower your exposure to these taxes if you structure your business as a subchapter S corporation for federal tax purposes. Here are the details on how this tax-saving strategy can work.

Employment Tax on Salary Income

First, let’s review how federal employment taxes are collected for regular W-2 employees. If a taxpayer earns salaries and wages as an employee, Social Security tax will be incurred at a 12.4% rate on the first $132,900 you earn in 2019. The taxpayer’s employer will withhold half (6.2%) from his or her paychecks. The other half will be paid by the employer directly to the U.S. Treasury. No Social Security tax is incurred on any salary above the $132,900 ceiling for 2019.

Medicare tax on salary income is incurred at a 2.9% rate before rising to 3.8% at higher salary levels. (See “What is the Additional Medicare Tax?” below.) Part of the Medicare tax is withheld from the employee’s salary, and part is paid by the employer. There’s no income ceiling on the Medicare tax or the 0.9% Additional Medicare Tax.

Employment Tax on SE Income

How does the situation differ if you’re self-employed? For 2019, you’ll pay the maximum 15.3% SE tax rate on your first $132,900 of net SE income. That includes 12.4% for the Social Security tax component and 2.9% for the Medicare tax component.

No Social Security tax is incurred on SE income above the Social Security tax ceiling of $132,900 for 2019. But the Medicare tax component continues at a 2.9% rate before rising to 3.8% at higher levels of SE income. There’s no income ceiling on the Medicare tax component or the 0.9% Additional Medicare Tax.

For example, suppose your unincorporated small business generates SE income of $216,567 for you in 2019. To calculate your SE tax bill, the net SE income figure is multiplied by 0.9235 to equalize the overall tax impact of federal employment taxes on SE income and salary income.

Your business generates $200,000 of SE income after applying the 0.9235 factor. So, you’ll owe $16,480 of Social Security tax ($132,900 × 0.124), plus $5,800 of Medicare tax ($200,000 × 0.029). That’s a grand total of $22,280 in SE tax for 2019.

To make matters worse, your SE tax bill is likely to increase every year due to inflation adjustments to the Social Security tax ceiling (the “wage base”) and the growth of your business.

Tax on Salary Income for S Corp Shareholder-Employees

Salaries paid to employees of S corporations — including an employee who’s also a shareholder — are subject to federal employment taxes just like salaries paid to a regular W-2 employee. That is, the employee owes 6.2% Social Security tax on the first $132,900 for 2019 and 1.45% Medicare tax on all salary income. These amounts are withheld from the employee’s paychecks. The employer pays in matching amounts of Social Security tax and Medicare tax directly to the U.S. Treasury.

At higher salary levels, an employee (including an S corporation shareholder-employee) must pay the 0.9% Additional Medicare Tax out of his or her pocket. So, the combined federal employment tax employer rate for the Social Security tax is 12.4%, and the combined rate for the Medicare tax is 2.9%, rising to 3.8% at higher salary levels. These rates are effectively the same as the SE tax rates.

So, the bad news is that salary income for S corporation shareholder-employees is subject to federal employment tax. The good news is that S corporation taxable income passed through to a shareholder-employee and S corporation cash distributions paid to a shareholder-employee generally are not subject to federal employment taxes.

As a result, S corporations may potentially be in a more favorable position than sole proprietorships, single-member limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes, partnerships and multimember LLCs that are treated as partnerships for tax purposes.

Tax Reduction Strategy

How can you lower the burden of federal employment taxes if you’re interested in this strategy? First, structure your business as an S corporation. Then pay modest salaries to yourself and any other shareholder-employees. Finally, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.

For example, let’s suppose you own an S corporation that generates net income of $200,000 before paying your $60,000 salary for 2019. Only the $60,000 salary is subject to federal employment taxes of $9,180 ($60,000 x 0.153). That’s significantly less than the $22,280 federal employment tax bill in the previous example.

Caveats

Operating as an S corporation and paying yourself a modest salary will work if you can prove that your salary is “reasonable” based on market levels for similar jobs. Otherwise you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. That said, the risk of the IRS successfully doing that is minimal if you can demonstrate that an unrelated third party would agree to perform the same work for that same amount. Your tax advisor can help with that.

There are also some unfavorable side-effects of paying modest salaries to S corporations shareholder-employees. First, modest salaries could limit contributions to certain tax-favored retirement accounts. If the corporation maintains a SEP or garden-variety profit-sharing plan, the maximum annual deductible contribution is limited to 25% of the shareholder-employee’s salary. So, the lower the salary, the lower the maximum contribution to your account. But, if the S corporation offers a 401(k) plan, generous contributions can still be made to your account while paying modest annual salaries.

In addition, paying modest salaries could reduce Social Security benefits that shareholder-employees receive at retirement. And S corporation status can trigger some tax complexities.

For example, a separate business tax return must be filed for an S corporation, and transactions between S corporations and shareholders (including transfers of business assets to the new corporation) must be evaluated for potential tax consequences. Corporations also may be subject to various formalities under state law, such as conducting board of directors’ meetings and keeping minutes. Before choosing to operate as an S corporation, you’ll have to consider whether the additional paperwork is worth the federal employment tax savings.

Need Help?

Contact your tax advisor if you think converting an existing unincorporated business into an S corporation could help reduce your federal employment taxes. He or she can help with the mechanics of making the initial conversion under applicable state law and then handle the post-conversion tax issues. Although the March 15 deadline for electing S status has already passed for 2019, it can still be made for 2020 and beyond.

What is the Additional Medicare Tax?

For tax years beginning after December 31, 2012, the 0.9% Additional Medicare Tax potentially applies to wages, compensation and self-employment (SE) income. You must pay the Additional Medicare Tax if your wages, compensation or SE income (together with that of your spouse if filing a joint return) exceed the following threshold amounts:

Filing Status	Threshold Amount
Single or head of household	$200,000
Married filing jointly	$250,000
Married filing separate	$125,000

Your employer must withhold Additional Medicare Tax from wages if it pays you more than $200,000 in a calendar year, without regard to your filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status and wages, compensation and SE income from all sources.

Records Retention Guidelines to Remember During Spring Cleaning

Posted on May 7, 2019July 22, 2024 by Beth Rizkal

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

Guidelines for Small Businesses

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

Business Property

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

Travel Records

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

Sales Tax Returns

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

Employee and Payroll Records

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

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

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

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

Federal Tax Records

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

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

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

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

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

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

State Tax Records

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

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

Essential Personal Records

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

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

Bills and Receipts

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

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

Real Estate Records

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

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

Investment Account Statements

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

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

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

Got Questions?

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

Protect Elderly Family Members Against Financial Exploitation

Posted on May 6, 2019 by Beth Rizkal

Every year, thousands of elderly Americans fall victim to elder abuse and financial exploitation scams, sometimes at the hand of their spouses or adult children. In fact, suspicious Activity Reports (SARs) related to elder financial exploitation have quadrupled the last four years, according to the Consumer Financial Protection Bureau (CFPB).

Acknowledging the scope of this problem, in 2018, Congress passed the Senior Safe Act. It defines elder financial exploitation as “the fraudulent or otherwise illegal, unauthorized, or improper actions by a caregiver, fiduciary, or other individual in which the resources of an older person are used by another for personal profit or gain.”

The Senior Safe Act gives financial advisors and institutions some protection against lawsuits if they sound the alarm on suspicious activity in their elder clients’ accounts. Previously, many financial advisors and institutions didn’t report suspicious activity, because they were afraid of being sued by implicated individuals.

While the law provides added measures of protection, friends and family members are often the first line of defense against elder abuse and financial exploitation. Here’s how you can help your loved ones.

Learn the Categories of Abuse

The first step in preventing fraud against elders is to familiarize yourself with the different types of financial abuse. The CFPB has compiled this list of common ploys:

Exploitation by someone who can act on the victim’s behalf when armed with a power of attorney (POA) or in a fiduciary relationship,
Theft of money or property,
Investment fraud and scams, such as deceptive “free-lunch seminars” selling unnecessary or fraudulent financial services or products,
Lottery and sweepstakes scams,
Scams by telemarketers, mail offers or door-to-door salespersons,
Computer and Internet scams, including identity theft, and
Contractor fraud and home improvement scams.

Discuss this list with older friends and family members. And reassure them that if they’ve been exploited, there’s no shame in admitting it. Older people are often embarrassed about being victimized — especially when the abuser is a family member or trusted caregiver — so, they may be reluctant to bring it to the attention of another person who can help.

Get the Scoop

The more you know about your loved ones’ finances and intentions, the better. Having remote access to their bank and investment accounts allows you to monitor transactions for unusual patterns that warrant investigation. It’s also helpful to meet their advisors, including tax accountants, bankers and lawyers.

Be aware that financial and health care POA instruments can provide opportunities for dishonest caretakers to commit fraud. If you’re not the one with that legal authority, it’s important to stay connected to that person. And suggest options that offer safeguards for the elderly person. For example, a “springing” POA goes into effect only under circumstances described in the document, such as mental incompetence.

The CFPB cautions against appointing a hired caregiver or other paid helper as a POA agent. If there’s no other choice, consider requiring the POA agent to regularly report to you (or another trusted individual) about any major financial transactions taken on your loved one’s behalf.

Some POA instruments allow the agent to make routine purchases, using an account that’s funded with only enough money to cover monthly expenses. Or you might require two signatures for checks over a certain dollar threshold.

The CFPB and FDIC have created the “Money Smart for Older Adults Resource Guide” to help educate seniors about this issue. This free publication emphasizes that not all financial abuse of elderly people crosses the line to theft.

For example, a free-lunch seminar might not explicitly require participants to purchase products or services. Instead, it might entail listening to an aggressive, unrealistic sales pitch or imply that the participant owes the salesperson something in exchange for receiving a free lunch.

The resource guide also offers the following helpful tips:

Take your time when making investment choices. The phrase “act now before it’s too late” should raise a red flag.
Always request a written explanation of any investment opportunity; then get an educated second opinion.
Make checks payable to a company or financial institution, never to an individual.
Document all conversations with financial advisors and consider bringing another person to help recall the details and ask relevant questions.

When a problem occurs, it’s important to act quickly. Time is critical to resolve matters and, if possible, achieve financial restitution.

For More Information

You can’t always protect elderly loved ones from financial abuse and exploitation. But you can help minimize opportunities for them to become victims. Your financial and legal advisors can answer any questions you may have about this issue and provide ideas to fortify your loved one’s defenses.

5 Financial Tips for New College Graduates

Posted on May 1, 2019 by Beth Rizkal

Congratulations to the graduating class of 2019! As soon as a new graduate switches his or her tassel to the other side of the cap, it’s time to plan for the future — and there’s more to do than finding a good-paying job.Smart financial planning in the first few years after graduation can make a big difference in the years ahead. Here are five tips to help new grads prosper.

Watch Out for ID Theft

The conventional wisdom is that most identity theft scams are targeted at vulnerable senior citizens. But that’s not actually true. In fact, Millennials may be at an even greater risk. According to data recently released by the Federal Trade Commission (FTC), 43% of people in their 20s reported a loss due to fraud, while only 15% of those in their 70s did so.To avoid ID theft, the FTC advises you to be suspicious and use common sense before providing information or funds to unknown parties. Visit the FTC’s website for more prevention tips or to report a scam.

1. Make (and Follow) a Budget

You don’t have to be an economics major to know that you shouldn’t spend more than what you earn. However, if you really want to get ahead, do an inventory of your income and expenses. Differentiate needs from wants. For example, eating is a necessity, but eating out at restaurants should only be an occasional splurge. When drawing up your budget, figure out how much you need to live on. Give yourself an “allowance” for discretionary items and set a monthly savings goal. Beware: You don’t want to overextend yourself and then live paycheck to paycheck. This can cause stress if you unexpectedly lose your job, become disabled or incur a major medical bill or car repair.Allocate a predetermined amount from each paycheck to go directly to a separate savings account. By keeping your savings separate, you won’t be tempted to spend that amount on discretionary items, like a new jacket, concert tickets or a trip to Europe.As a rule of thumb, you should have a “rainy day fund” of three to six months of net take-home pay. If an emergency happens, you’ll be grateful for your savings.

2. Build Your Credit

Following a budget doesn’t mean you have to live an austere lifestyle. It should include a little “mad money” for fun and for discretionary spending, such as vacations, dining out, pets, clothing and personal pampering. Credit cards can be a convenient way to pay for these items and track the expenditures. Plus, credit cards often accrue rewards points that can be redeemed in the future.Most college students already have a credit card in their names. If you don’t have a card yet, sign up for one immediately and pay the charges on time every month. Doing so puts you on the road to establishing a solid credit score, which will come in handy when you apply for a car loan or mortgage.Never let your credit card balances spiral out of control. If you continue to pay off your balance every month, you’ll avoid high interest charges on outstanding amounts.You can also establish credit by:

Renting an apartment or home (instead of living with your parents),
Paying monthly bills (such as utilities, phone and cable Internet), and
Buying or leasing a vehicle.

Another financially savvy way to save money and build credit is to take advantage of interest-free financing offers on large purchases. These are often available for furniture, electronics and major appliances. But there’s a catch: Pay off the balance in full before the deal expires or you’ll likely incur high interest charges going back to the date of purchase.

3. Save for Retirement

How soon should new grads start saving for retirement? The sooner, the better. So, when you start your full-time job, take advantage of any employer retirement program as soon as you’re eligible. If you’re lucky, your employer might also contribute funds to your retirement up to a predetermined matching limit.Most employers allow workers to participate in a qualified retirement plan, such as a SEP or 401(k) plan. These programs allow you to contribute pretax dollars to the account and allow them to grow, tax free, until you withdraw funds during retirement. You also may supplement your company’s plan with IRAs and other tax-favored retirement accounts and investments.

4. Find a Place to Live

Deciding where to live is tied to many variables, including your job, family and personal preferences. But finances are the top consideration.Depending on where you live and how much you earn, you probably can’t move into your dream home right away. This is especially true if you work in a high-cost area. For instance, the cost of a studio apartment in a major city could be the same or even more than that of a 3-bedroom, single-family home out in the country.Be realistic about how much you can afford. As a rule of thumb, you generally can spend up to a third of your monthly net pay on housing. If your starting income is modest, you may have to pay a higher percentage of your take-home pay.When you have enough money for a down payment, consider buying a condominium, townhouse or single-family home. Interest rates are currently near historic lows. Plus, home ownership still offers tax benefits, especially if you expect to itemize deductions on your tax return after a purchase.Warning: The Tax Cuts and Jobs Act (TCJA) limits itemized deductions for mortgage interest and property taxes for homeowners for 2018 through 2025. The state and local tax (SALT) limit is most likely to affect taxpayers in states with high tax rates and/or those who have significant taxable income. Other options, such as sharing an apartment with a roommate, may allow you to save more money until you can afford a place of your own. Alternatively, if you can, you might live with your parents for a while and accumulate even more savings until you’re ready to move out.

5. Get Your Wheels

Depending on where you live and work, a vehicle may be a necessity or a discretionary purchase if you can get from place to place by walking, bicycling or using public transportation. Often, recent grads can’t afford their dream cars right away. So, some may lease; others choose an economical vehicle that they can finance at a reasonable interest rate. To facilitate a car loan application, follow these steps:

Check your credit to ensure that you’re entitled to a favorable rate.
Obtain quotes for loans. Get at least three rates at banks, credit unions and car dealerships.
Find a willing co-signer, such as a parent or grandparent, if your credit rating is subpar or you haven’t established any credit yet.

If you end up financing through a dealership, mainly because it’s convenient, you may decide to pay off the original loan rate later with a loan at a lower rate. If you choose this path, make sure the original loan doesn’t include any prepayment penalties.When budgeting for a new or used vehicle, remember that expenditures extend beyond the original purchase price. That is, you’ll have to pay for auto insurance, gas, maintenance and repairs. These costs can quickly add up — and may eat away at your savings.

Need Help?

From credit scores and retirement to housing and transportation, there are a lot of major decisions to make soon after graduation. Fortunately, your financial advisors can mentor you as you enter the workforce and later as you progress in your career and personal life.

Drones Fly High in the Construction Business

Posted on April 23, 2019 by Beth Rizkal

Drones have been used extensively by military units, governments and private enthusiasts. Now drone use is being adopted by companies, including construction businesses. Technically called “unmanned aerial vehicles,” drones offer contractors many practical uses. But before jumping on the bandwagon, identify a drone’s best uses for your construction company. You’ll be more likely to get a good return on your investment should you decide to buy one.

Survey Sites

Instead of relying on traditional resources to develop an overview of a job site, you can use a drone to quickly survey the area and draw up maps. Typically, drones enable you to do the job faster, at a lower cost and more accurately. So, you may be able to allocate workers typically involved in conducting surveys to other tasks.

When surveying sites, drones provide a simplified method for data collection and organization. Piloting drones remotely, you can transmit data quickly and transfer it to a cloud-based storage solution instantaneously. Authorized users of this information can then access it easily via the Internet.

Share Data

Drones with high-resolution technology, including 3D models, allow users to share data by sending a link to clients. The client can log in to the system, view the data and export it to other entities. It’s an easy way to enable multiple users to view sites. A digital surface model can indicate areas requiring special attention — for example, spots where water needs to be drained. 3D models also provide an orbital view of the entire site. Variations in the dirt patterns might show where drainage is working well or causing problems.

Clients can’t always visit sites regularly, but mere photos don’t necessarily do enough to display progress. With drone footage, clients can better view building, renovation and inspection efforts. What’s more, aerial visuals are more revealing — and appealing — than photos from the ground.

And it’s not just offsite clients who can benefit. Drones also help stakeholders track projects that haven’t yet begun. Designers and architects who your construction company often works with may use drone-collected data to develop concepts for future structures.

Monitor Jobs

When you must travel between sites, a drone can help you monitor developments at each location. Project managers want to ensure that their crews are productive. But you can also use drones to detect problems such as missing equipment or special accommodations that may be required.

Drones are flexible monitors. You can easily raise or lower their altitude based on your needs. If, for instance, a drone is flying too low to assess safety issues, simply adjust to a higher aerial view.

Conduct Inspections

Don’t put boots on the ground for inspections when drones can do the “leg work.” They enable you to check in real time the stability of structures, aesthetic issues and possible deviations during construction — all without leaving your office.

Drones can also make annual (or other regularly scheduled) inspections of completed projects easier. Instead of climbing buildings with scaffolding or harnesses, deploy a drone to safely and quickly do the job.

Improve Safety

With eyes and ears in the sky, your business may be in a better position to improve safety conditions. Drones can hover over locations that are too difficult or dangerous for workers to access. Instantly relayed images can help you identify issues that might lead to injuries.

Take construction companies that use prefabrication or modular components. Drone imaging provides data on erection sequences, crane locations and perimeter security so you’re able to pinpoint bottlenecks and forecast hazardous situations. Also, a drone can help you make more informed decisions regarding weather and other environmental concerns.

Track and Budget

In general, the more information you have for analysis, the better you can manage a construction site cost-effectively. Delays and overruns can be extremely expensive. If you use drones to look for parts of a project that aren’t working as planned, you can then act to limit the impact on your budget.

Review Projects Now

Construction companies are just starting to realize what drones can do for them. You don’t want to be left out. Scrutinize current and upcoming projects now to determine where a drone might help your business boost speed, efficiency and cost savings.

Five Suggestions on How to Make Your Factory Safer

Posted on April 19, 2019 by Beth Rizkal

The manufacturing sector ranks third in terms of days lost due to workplace injuries, according to the National Safety Council (NSC). This isn’t surprising considering many manufacturing workers operate heavy machinery and are exposed to a variety of physical and environmental hazards. In some cases, technology has helped manufacturers reduce the incidence of workplace injuries. But there’s still a long way to go. Fortunately, your company can reduce safety risks by implementing and enforcing safety precautions and properly training both supervisors and workers.

The Occupational and Health Safety Administration (OSHA), which enforces employment safety laws, says that companies can reduce lost work by almost 50 days a year by focusing on workplace safety. To ensure you’re doing everything you can, focus on five areas:

1. Equipment Use

Most workplace injuries can be traced to the misuse of equipment — including heavy machinery and tools. For example, accidents often occur when equipment is used for purposes other than its intended use. They’re also more likely if equipment isn’t kept in good operating condition or is stored improperly.

To minimize these risks, insist that workers use equipment only as intended and as they have been trained. Be sure to penalize any infractions of this rule. In addition, regularly clean equipment with industrial vacuums and other appropriate tools. Even a little dust can potentially cause fires and explosions under certain conditions. Also store equipment and tools in the right place and position. Equipment with electrical components should be kept in the “off” position when not in use. And if a piece of equipment isn’t functioning property, require workers to report it immediately so that it can be repaired or replaced.

2. Fire Hazards

Aside from the obvious risk to workers’ health and lives, workplace fires can lead to devastating financial losses. Imagine how profitability would suffer if you had to shut down operations to clean up, make structural repairs or even replace entire buildings.

If your plant uses combustible materials, house only the amount you need for the job. Extra stores could possibly turn a containable fire into a towering inferno. Also house flammable materials in secure, fire-resistant areas when not in use. Combustible waste from current operations should be temporarily stored in metal bins and discarded daily.

Finally, to minimize threats to human life, make sure everyone in your company complies with fire safety codes by keeping doorways and walkways clear and emergency exits clearly marked.

3. Slip-and-Fall Accidents

Slips and falls are common workplace incidents. Employees might take a tumble while working on ladders, using staircases or walking on slippery floors or uneven surfaces. Even a simple fall can require months of recovery and cause permanent physical injury.

Some common-sense measures can prevent most of these incidents. For example:

Keep your facilities’ aisles clear.
Clean up (or cordon off) spills immediately.
Install anti-slip flooring in any parts of your plant where liquids are frequently used.
Perform regular inspections of floors for loose boards, holes and protruding nails.
Replace damaged or inferior flooring as soon as possible.
Ensure that ladders and similar equipment are safe and in good working order.

4. Flying Objects

You should pay as much attention to hazards above workers’ heads as those below their feet. To prevent injuries from falling objects, install nets, toe boards and toe rails under parts and equipment. Require employees to store heavier objects on lower shelves and avoid stacking objects in heavily trafficked areas.

Also train workers in how to safely move objects without causing back injuries. In general, they should bend their knees and keep their backs straight when lifting. No stooping or twisting! If employees use forklifts to move objects, they should ensure that the workspace is clear of people who could be struck if the object fell out of the bucket.

5. Personal Protective Equipment (PPE)

Some workers consider PPE a hassle and may enter workspaces without proper protection. Stand firm on this point and require workers to always wear:

Safety glasses when operating machinery that may cause flying particles or when working with caustic chemicals,
Steel-toe boots where heavy materials could be dropped or a worker’s foot might be run over by a vehicle,
Gloves when hands are exposed to cuts, abrasions or puncture wounds, or when working with hazardous materials,
Ear protection when noise levels are 85 decibels or higher, and
Hard hats if overhead objects could fall and result in head injuries.

If a worker refuses to don PPE, or only complies some of the time, take disciplinary action. Of course, the carrot works just as well as the stick. Praise and reward workers who always wear PPE and comply with other safety procedures without having to be asked repeatedly.

No Guarantees

Taking these precautions won’t guarantee an injury-free workplace. However, these steps can minimize risks and reduce potential liability. You owe it to your workers and the future or your business to prioritize safety.

Hiring Minors to Work at Your Company? Know the Rules

Posted on April 9, 2019July 23, 2024 by Beth Rizkal

Hiring young people can be beneficial for all parties. But before you make any job offers, be fully aware of how youth employment is regulated under the Fair Labor Standards Act (FLSA). When employers fail to comply with these obligations, they can be prosecuted by the Department of Labor (DOL). And if the prosecution is successful, the DOL will likely publicize the results as a sobering reminder to all employers of the FLSA requirements.

Recent Examples

For instance, a fast food franchisee in the Midwest was recently charged with multiple labor law violations. They permitted several dozen employees under the age of 16 to work shifts longer than three hours on school days. The underage workers were allowed to operate certain dangerous equipment. And, the company failed to maintain proper employee work records. The result? The employer was fined nearly $50,000.

In another case, the local government of a small town was penalized for employing minors to perform hazardous jobs, which included riding in the back of trucks and operating chainsaws. The case reminds employers of “the importance of preventing employees under the age of 18 from participating in prohibited work,” the DOL’s Wage and Hour Division stated.

Under-Age Categories

There are two age brackets for youth workers:

14- and 15-year-olds, and
16- and 17-year-olds.

Different rules apply to each bracket. Minors who work for a family business (assuming the work is considered nonhazardous) are exempt from these rules. Otherwise, children generally must be at least 14 to work, according to the FLSA.

The maximum hours of work for 14- and 15-year-old employees in various non-manufacturing, non-mining, nonhazardous jobs are as follows:

40 hours per week when school isn’t in session,
8 hours per day when school isn’t in session,
3 hours per day when school is in session, and
18 hours per week when school is in session.

Also, after Labor Day and before June 1, 14- and 15-year-olds aren’t permitted to work before 7:00 a.m. or after 7:00 p.m. During the summer months, they can work until 9:00 p.m. Exceptions are made for certain work study and career exploration programs.

Workers ages 16 to17 don’t have restricted work hours. However, like 14- and 15-year-olds, they aren’t permitted to work in hazardous jobs, such as:

Manufacturing,
Construction,
Assisting with or operating power-driven machinery,
Lifeguarding in a lake, river, ocean beach or other natural environment.

Other examples of hazardous jobs are: work involving the use of ladders and scaffolding, cooking, baking, loading goods off or onto trucks, building maintenance, and warehouse work (unless clerical).

The DOL’s website provides a full list of jobs that 14- and 15-year-old workers are permitted to do. It’s important to reference this list before hiring a teenager in that age bracket, because it isn’t permissible to hire these workers for any job that doesn’t appear on the approved job list.

Exploration

If young employees are participating in a special work experience program, they might not be subject to all the usual FLSA restrictions, including the number of hours they can work during a school week.

An example is the “work experience and career exploration” program for 14- and 15-year-olds. State education departments can apply to the DOL’s Wage and Hour Administrator to set up such programs. Their purpose is to “provide a carefully planned work experience and career exploration program for students who can benefit from a career-oriented experience.”

Employers also have more flexibility with 14- and15-year-olds who are in a DOL-approved work study program, which is geared to academically oriented students. Individual schools can apply to the DOL for approval of those programs.

6 Practical Tips

Here are six practical tips offered by seasoned employers of workers who are under age 18, compiled by the DOL’s “Youth Rules” website resource center.

1. Color coding. Different colored vests are issued to employees under the age of 18 by one chain of convenience stores. That way, supervisors know, for example, who isn’t allowed to operate or clean the electric meat slicer.

2. Tracking. An employer in the quick service industry, with over 8,000 young workers, developed a computerized tracking system to ensure that workers under 16 years of age aren’t scheduled for too many hours during school weeks.

3. Policy cards. One supermarket issues teens a laminated, pocket-sized “Minor Policy Card” on the first day of work. The card explains the store’s policy and requirements for complying with the youth employment rules.

4. Training. Many employers have taken the simple, but critical, step of training all their supervisors in the requirements of the FLSA. Refresher training at periodic intervals is equally important.

5. Warning stickers. Some employers place special warning stickers on equipment that young workers may not legally operate or clean.

6. Self-check for compliance. Some companies conduct their own compliance checks of their businesses to ensure they adhere to all federal, state and local youth employment rules.

Last Words

If you’re prepared, there could be a wealth of mutual benefit in hiring young teens for certain jobs. Employers benefit from their youthful exuberance and vigor. And, while a young worker’s focus might be earning some spending money, everyone needs to make a successful entry into the working world. As with any labor policy, check your state and possibly even local government’s laws and regulations pertaining to hiring minors before taking the plunge.

Tax Issues to Consider When Small Business Owners Get Divorced

Posted on April 9, 2019 by Beth Rizkal

For many small business owners, their ownership interest is one of their biggest personal assets. What will happen to your ownership interest if you get divorced? In many cases, your marital estate will include all (or part) of your business interest.

Sometimes, divorcing spouses continue to participate in the business’s operations after the divorce settles, and then both spouses retain an ownership interest in the business. But, more commonly, former spouses are unable to effectively co-manage the business. So, one spouse retains a controlling interest and the other spouse 1) retains a passive stake in the business, 2) is bought out, or 3) is allocated other marital assets in a property settlement agreement.

How a marital estate is divvied up can have significant tax consequences. Here’s what you need to know to get the best tax results.

State Law Is Key

How you must split up assets in divorce depends largely on where you live.

Community Property States

Community property states include:

California,
Texas,
Washington,
Wisconsin,
Arizona,
Nevada,
New Mexico,
Louisiana, and
Idaho.

In these states, the general rule is that each spouse owns half of community property assets (those accumulated during the marriage) and owes half of the liabilities incurred during the marriage.

In contrast, assets that were owned by one spouse before the marriage, or that were received by one spouse as a gift or bequest during the marriage, are generally considered to belong solely to that person. Therefore, those assets aren’t included in the marital estate and split up 50/50.

Equitable Distribution States

All the other states are so-called “equitable distribution” states. Here, the general rule is that you and your spouse must split up your assets according to “whatever is fair” in the eyes of the divorce court. This often works out to be a 50/50 split.

If you don’t want to be at the mercy of the court, you and your spouse can negotiate a settlement outside of court, and the court will generally go along with your agreement. This can be a smart option, because spouses may be emotionally tied to certain assets (such as Grandma’s jewelry or a vacation home that’s been in the family for decades). And business-owner spouses may want to retain 100% of their business in exchange for other nonbusiness assets (such as a personal residence or retirement funds).
Tax-Free Transfer Rule

In general, you can divide most assets, including cash and ownership interests in a business, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under the tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

To illustrate how this works, suppose that, under the terms of your divorce agreement, you give your primary residence to your ex-spouse in exchange for keeping all the stock in your small business. This asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made incident to divorce. Transfers incident to divorce are those that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

In recent years, the IRS has extended the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gain assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets also can be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Tax Implications of Tax-Free Transfers

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — where the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold, unless an exception applies.

For example, if you qualify for the principal residence gain exclusion break, you can exclude up to $250,000 of gain from your federal taxable income, or up to $500,000 of gain if you file a joint return with a future spouse.

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex continues to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

Important: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. Always take taxes into account when negotiating your divorce agreement.

Splitting Up Qualified Retirement Plan Accounts

Many business owners set up qualified retirement plans, such as a profit-sharing, 401(k) or defined benefit pension plan. A percentage of the account balance or plan benefits may need to be transferred to your ex-spouse as part of the divorce property settlement.

To execute a transfer without owing taxes on amounts that go to your ex, you must use a qualified domestic relations order (QDRO). In effect, the QDRO causes your ex-spouse to become a co-beneficiary of your retirement account. The tax advantage comes from the fact that the QDRO also makes your ex responsible for the income taxes on retirement account money that he or she receives in the form of account withdrawals, a pension or an annuity. In other words, the QDRO causes the tax bill to follow the money.

The QDRO also allows your ex to withdraw his or her share of the retirement account balance and roll the money over tax-free into his or her own IRA (to the extent such withdrawals are permitted by your plan’s terms). The rollover strategy allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the rollover IRA. When your ex withdraws funds from the rollover IRA, he or she (not you) will owe the related income taxes.

Warning: Without a QDRO, money that’s transferred from your qualified retirement plan account to your ex-spouse is treated as a taxable distribution to you. So, your ex gets a tax-free windfall at your expense. To add insult to injury, you may also owe the 10% early withdrawal penalty tax on money that goes to your ex before you’ve reached age 59½.

Splitting Up IRAs

You don’t need a QDRO to obtain an equitable tax outcome when you turn over IRA funds to your ex under your divorce agreement. This includes money held in SEP accounts, SIMPLE IRAs, traditional IRAs and Roth IRAs. QDROs are only relevant in the context of qualified retirement plans.

However, with IRAs, you still must be careful to avoid getting taxed on money that goes to your ex. The key to a tax-free transfer is to specifically order the transfer in your divorce or separation instrument. For this purpose, the tax code narrowly defines a divorce or separation instrument as a “decree of divorce or separate maintenance or a written instrument incident to such a decree.”

A transfer that meets this requirement can be arranged as a tax-free rollover of the applicable amount from your IRA into an IRA set up in your ex-spouse’s name. Your ex can then manage the money in the rollover IRA as he or she sees fit and can continue to defer taxes until withdrawals are taken. Any future income taxes are paid by your ex (not you).

Important: When it comes to IRA transfers, don’t jump the gun. If you voluntarily give your ex-spouse some IRA funds before it’s required under a divorce or separation instrument, it will be treated as a taxable distribution to you. If a taxable distribution occurs before you’re 59½, you also may be hit with the 10% early withdrawal penalty.

New Treatment for Alimony Payments

Allocating marital assets is just one part of settling your divorce. Deciding on maintenance payments is another critical component.

The Tax Cuts and Jobs Act (TCJA) permanently disallows deductions for alimony payments required by divorce agreements signed after December 31, 2018. Such payments are federal income-tax-free to the recipient. Under prior law, payers could deduct alimony, and recipients had to include alimony in their taxable income.

This recipient-favorable change should be taken into account when negotiating divorce agreements — and when drafting prenuptial agreements in the future.

Minimizing Taxes

Like any major life event, divorce can have major tax implications, especially if you own a private business interest. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

The IRS Expands the Penalty Waiver for Underpaying Income Tax

Posted on April 4, 2019 by Beth Rizkal

The IRS announced that it is providing expanded penalty relief to certain individuals whose 2018 federal income tax withholding and estimated payments fell short of their total tax liability for the year. (Notice 2019-25)

The IRS is now lowering to 80% the threshold required to qualify for this relief. Under the relief originally announced January 16, 2019, the threshold was 85%. The usual percentage threshold is 90% to avoid a penalty.

This means that the IRS is now waiving the estimated tax penalty for taxpayers who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments — or a combination.

Why Did Some People Not Have Enough Withheld?

The U.S. tax system is pay-as-you-go. By law, it requires taxpayers to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making quarterly estimated tax payments.

The expanded relief will help many taxpayers who owe tax when they file, including taxpayers who didn’t adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017.

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

What If You Already Filed?

Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7. This form cannot be filed electronically.

If you have questions about withholding or the recently announced penalty relief, contact your Cornwell Jackson tax advisor.

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