Red Spot Design2, Author at The CJ Group

When Rolling Over Can Be the Wrong Strategy

Posted on August 29, 2017 by Red Spot Design2

When you retire or change jobs, it is generally a good idea to roll over your employer-sponsored qualified retirement plan balances into a traditional IRA.

But that advice may change if the employer-qualified plan account holds appreciatedcompany stock. In that case, you could be better off withdrawing the shares, paying the taxes, and holding the stock in a taxable brokerage firm account. Here is why.That way, you avoid an immediate tax hit and continue to benefit from tax-deferred earnings growth until you withdraw money from the IRA.

An Example to Show the Mechanics of the Strategy

Let’s say you retire from your job at age 60. As part of a lump-sum distribution from your company-sponsored, qualified retirement plan, you receive 2,000 shares of employer stock. The shares have a cost basis to the plan of $10,000 and a current market value of $80,000.

You expect the stock to continue to appreciate, so you don’t plan to sell in the near future. Instead of rolling the shares into an IRA, you deposit them in a taxable brokerage house account. You then pay tax at your ordinary rate of, say 25%, on the $10,000 cost basis amount. So the federal income tax hit is $2,500 (25% of $10,000). Since you are older than age 55, you don’t owe the 10% premature withdrawal penalty tax.

Your tax basis in the shares is now $10,000. You can roll over some or all of any other money received in your lump-sum distribution tax-free into a traditional IRA.

Years later, you die after the employer shares have appreciated to $180,000. Your heirs will receive a federal income tax basis step-up equal to the post-distribution appreciation in value ($100,000 in this example).

When your heirs sell the stock, they will owe capital gains tax on the $70,000 worth of net unrealized appreciation ($80,000 market value as of the plan distribution date minus the $10,000 cost basis in the shares). Assuming a 15% capital gains rate, the total federal income tax hit on the $180,000 worth of stock is only $13,000:

$2,500 paid by you when you received the shares as part of the lump-sum distribution.
$10,500 (15% of the $70,000 of net unrealized appreciation) paid by your heirs when the shares are finally sold.
That amounts to an effective federal income tax rate of only 7.22%.
In contrast, if you had rolled the employer shares over into an IRA, your heirs would eventually owe tax at ordinary income rates on the entire $180,000. In all likelihood, the resulting federal income tax hit would be at least 25%, or $45,000.

Tax Deferral

The net unrealized appreciation of the shares goes untaxed until you sell them. As long as the shares are part of a lump-sum distribution from your retirement accounts, you pay current tax only on the retirement plan’s cost basis in the stock. The cost basis is generally the value of the shares when they were acquired by the plan. The net unrealized appreciation is the difference between cost basis to the plan and the shares’ market value on the date they are distributed to you.

If the shares have appreciated substantially, the plan’s cost basis could be a relatively small percentage of the shares current market value as of the distribution date. However, the cost basis could still be significant in absolute dollars, so the tax hit may be more than a nominal amount.

In addition, if you are under 55 years of age when you leave your job, you generally have to pay the 10 percent federal tax penalty on premature withdrawals. That might be worth it, though, if the taxable income, which is equal to the cost basis, is small.

Tax Savings

When the net unrealized appreciation is taxed, it automatically qualifies as a long-term capital gain eligible for favorable capital gains rates (see IRS Notice 98-24). As you know, the current maximum federal rate on long-term capital gains is only 20%, compared with a maximum 39.6% on ordinary income.

Additional Tax Savings

Appreciation of the shares after the distribution also qualifies for the favorable capital gains rates, provided you hold the stock for more than 12 months after receiving them from the plan.

Even More Tax Savings

If you own the stock when you die, your heirs are entitled to a federal income tax basis step-up for any post-distribution appreciation. However, when they sell the shares, the net unrealized appreciation will be taxed under the “income in respect of a decedent” rules. The good news is the unrealized appreciation will be taxed at the favorable rates for long-term capital gains. (see IRS Revenue Ruling 75-125)

In contrast, if you roll the employer stock over tax free into an IRA, you pay tax on the stock gains only when the shares are sold and you take withdrawals from the IRA. The net unrealized appreciation and post-distribution appreciation will count as ordinary income, so you or your heirs will owe as much as 39.6% in taxes rather than the favorable capital gains tax. (See right-hand box.)

Before following this tax-saving strategy, be sure the shares qualify and are part of a lump-sum distribution. The rules are tricky, so consult with your tax adviser if you have questions or want to discuss whether this maneuver will work for you.

Franchisor Enters Agreement to Help Franchisees Comply with Labor Laws

Posted on August 29, 2017 by Red Spot Design2

Sonic Industries Services, Inc, franchisor of the SONIC drive-through restaurant chain, has entered into a voluntary agreement with the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) to help its independently owned and operated franchise locations comply with the federal labor laws.

SONIC Drive-In restaurants are the nation’s largest drive-in chain, serving approximately 3 million customers daily. Nearly 94% of its 3,500 drive-in locations are locally owned and operated. SONIC has been the subject of several wage theft lawsuits that involved workers alleging that they didn’t receive overtime after working 40 hours in a week and were required to work “off the clock.”

As part of the agreement, SONIC will provide a forum and the resources needed to assist the WHD in educating its drive-in owners, managers, and employees nationwide.

Fair Labor Standards Act

The FLSA requires that covered, nonexempt employees be paid at least the federal minimum wage of $7.25 per hour as well as time and one half their regular rates for every hour they work beyond 40 per week. It also requires employers to maintain accurate records of their employees’ wages, hours and other conditions of employment.

The WHD will provide compliance assistance tools designed for the franchise restaurant industry. The package will include video and online training, educational articles for use in internal company publications, and sample training materials for use in company staff meetings. The WHD will also make representatives available to provide training and compliance assistance to SONIC franchisees. In addition, the WHD and SONIC will collaborate using publicly available data to promote franchisee compliance with the Fair Labor Standards Act.

The agreement states that it is not “an admission” by SONIC that it “is a joint employer of the workers employed by its franchisees. WHD recognizes that the existence of a franchise relationship, in and of itself, does not create joint employment.”

The SONIC agreement is similar to an agreement that the WHD entered into with the Subway restaurant chain in 2016.

WHD Deputy Administrator for Program Operations, Patricia Davidson, noted that the WHD will “encourage other franchisors to follow SONIC’s example and take similar steps to benefit their franchises’ employees and owners by complying with the law.” She believes that complying with the wage and hour laws makes good business sense, rather than paying back wages, damages, and penalties for violations.

Utilize Data Collected on the Shop Floor

Posted on August 28, 2017July 22, 2024 by Red Spot Design2

Idle machines, production bottlenecks, equipment breakdowns, absent employees, new orders — these are just some of the factors that can disrupt production and eat into your company’s profit.

Could you improve control, workflow and decision-making abilities if you had real-time tracking of work in progress? One software solution that’s starting to gain acceptance is the shop floor control system, otherwise known as the manufacturing execution system (MES). It enables planning and real-time tracking either as a stand-alone system or integrated with an enterprise resource planning system.

The manufacturing execution system provides information about activities from orders to finished goods. It is particularly useful for managing operations that run small batches and process numerous varied orders, such as those typical of pharmaceutical, computer chip and chemical product manufacturers. It involves four major stages:

1. Planning begins with the customer order. Process times and materials are determined, and the due date and truck loading date are entered into the program.

2. Scheduling is set up according to how the new order fits into work already in production. The system sees the forest, as well as the trees, so that process sequencing of all orders utilizes each machine or workstation to its advantage. Schedules can be printed and posted. Workstations aren’t totally locked into the schedule.

For example, if there are two identical machines scheduled to divide one job equally, the supervisor might see that one machine and operator could do 60 percent of the order, which would allow the other machine operator time to cross-train another employee. The MES program also provides specifications, instructions and drawings for the job, and computer numerical control machine operators can download “recipes” for running their machines.

3. Tracking is handled in real-time and displayed on computer monitors. The system identifies and tracks components by reading bar-coded labels or travelers. When a problem occurs, such as a delay in getting materials, the schedule can be updated and the changes communicated to every workstation.

4. Reporting and documenting work in progress lets everyone know if processes and the orders themselves are completed as scheduled. As an order moves through production, each workstation makes an entry into the system upon the completion of its work and explains any deviation from work as scheduled.

On one level, the cost savings realized by using a manufacturing execution system are derived simply from greater efficiencies in the day-to-day utilization of equipment and labor. On another level, MES reports provide valuable data that can aid a company’s decision-making ability. They amass important information such as processing history, time on line, time in queue and rejection rate.

Note: Once you get MES reports, be sure to use them. One study found that many companies miss the boat by failing to train managers to use the information available to them.

Business ID Theft: Is Your Data at Risk?

Posted on August 28, 2017 by Red Spot Design2

The IRS and state tax authorities have made significant strides in curbing individual identity theft over the last two years.

IRS Focuses on Preventing Business ID Theft

“The IRS, state tax agencies and the tax community have worked hard to turn the tide against tax-related identity theft. We’re making progress in protecting individuals but we still have more work to do,” said IRS Commissioner John Koskinen in a recent press release.

Trends in ID Theft

But cyber attacks against businesses are on the upswing. Here are some simple ways business taxpayers can help protect their data from hackers.

The IRS recently announced that the number of individuals reporting identity theft in the first half of 2017 has declined dramatically compared to 2015 and 2016. For the first five months of 2017, about 107,000 individual taxpayers reported stolen IDs. In comparison, 297,000 victims filed reports during the same time period in 2015 and 204,000 in 2016.

Put simply, individual ID theft dropped 47% over the last year. The IRS attributes the decrease to safeguards put in place during the 2016 Security Summit.

Unfortunately, the IRS has also noted an increase in ID theft involving business tax returns. While the number of businesses affected was relatively low, the potential dollar amounts were significant:

Year	Estimated business ID theft cases through June 1	Estimated losses
2015	350 tax returns	$122 million
2016	4,000 tax returns	$268 million
2017	10,000 tax returns	$137 million

The victims of business ID theft include corporations, estates and trusts, and partnerships. These days, hackers are bolder and increasingly tax savvy in their scams. For example, they may use stolen data to file bogus business tax returns and then collect refunds. Or they might post the stolen data for resale on the so-called “Dark Net” so other criminals can file fraudulent tax returns.

Tax professionals have been helping clients take appropriate security measures to prevent business ID theft, but problems persist. “We need help from the tax community to combat cybercriminals and raise security awareness,” IRS Commissioner John Koskinen noted.

Ways to Combat Business ID Theft

Because business ID theft can be so costly, prevention and early detection measures are critical. Here are some simple, but effective, security measures you should consider:

Make cybersecurity a top priority.

Similar to an annual business plan, your company needs a formal cybersecurity plan that identifies a step-by-step approach for detecting ID theft. When breaches happen, your plan should trigger a prompt, thorough response.

Safeguard intellectual property.

Companies should store all employee and customer data, along with other proprietary records, such as financial statements and prior years’ tax returns, in a safe location. Shred nonessential documents before throwing them out, and limit access to your employer ID number to parties with whom you initiated the contact. Share sensitive information via the Internet or email only if the recipient is trusted (such as your lender or tax preparer) and the site is secure.

Use the latest cybersecurity technology.

This includes firewalls, antivirus and antimalware software, and spam filters. Also exercise common sense: Don’t download files, click on links, or open pop-ups or attachments sent from unknown sources. Stored files should be encrypted for your protection and for the benefit of customers.

Educate employees.

Conduct periodic training sessions to remind employees about the latest scams, such as phishing emails where hackers pose as familiar businesses or colleagues to steal sensitive information. They should also be aware of your cybersecurity plan and each person’s role if a breach occurs.

Use prepaid credit cards for purchases.

Prepaid employee credit cards limit your potential for losses when employees make purchases from suppliers and vendors. If a card is breached, the company can lose only what’s prepaid and you can immediately deactivate the card.

Monitor business credit reports.

It doesn’t take much effort to monitor your company’s profiles from the three major business credit bureaus: Equifax, Experian, and TransUnion. Subscribe to their monitoring services for round-the-clock access. What’s more, you can choose to receive real-time email notifications about suspicious activities affecting your company’s credit rating.

Guard your master list.

Some companies track all their accounts and passwords in a master list, which can be convenient, but dangerous. A dishonest employee or hacker who manages to gain access to that list has the key to all your company’s information in one fell swoop, so you’ll need to be extra cautious with security measures.

Finally, contact your tax professional promptly if you believe you’ve been victimized. He or she can help you get in touch with the appropriate law enforcement authorities, business credit bureaus and financial institutions.

No Guarantees

No preventive measure is 100% fail safe. The IRS and tax preparers are expanding their efforts to educate businesses and prevent breaches. You can also help lower your risk by crafting a formal cybersecurity plan, educating employees and implementing various other proactive security measures.

Which Employees or Positions Do You Rely on Most?

Posted on August 27, 2017July 23, 2024 by Red Spot Design2

It’s standard operating procedure for marketers to segment customers according to their value to the organization, to ensure that those who are most vital to the growth and profitability of a company are well-cared-for and don’t disappear. The same needs to be done with regard to employees. Appearances can be deceiving.

For example, your largest customer measured by dollars generated could also be among your least profitable, if that customer consumes an inordinate amount of your time and other resources. In the same way, some employees at the high end of your compensation scale might not be nearly as valuable to you as some on the lower end. Higher-paying positions might have more to do with labor market traditions and preconceived assumptions about certain roles within a company than the actual value added to a company’s operations. In some businesses, the greatest draw for customers might be a friendly and knowledgeable receptionist, though he or she is likely to be among the lowest paid on staff.

Suppose, in your labor market, network IT professionals command a good salary. Your business needs an IT professional, so you pay the market price to recruit and keep one on board. But if you’re assuming that that employee is more vital to your success than an exceptional customer service representative simply because the former earns twice as much as the latter, you could be wrong.

Skills Quadrant Model

One insightful framework for taking a fresh look at your workforce, known as the Lepak & Snell model, is a four-quadrant, skills-based paradigm dividing employees by value of particular skills to your organization and the skills’ uniqueness in the labor market. The visual result is a box with the following four quadrants.

High skill value, high skill uniqueness: these employees are considered the “criticals.”	High skill value, low skill uniqueness, these employees are the “professionals,” skilled and semi-skilled.
High skill uniqueness, low skill value: these employees are the “specialists.”	Low skill value, low skill uniqueness: these employees are the “doers.”

You’ll probably assess your employees’ skills on the value spectrum based on criteria such as the ability to lower costs, increase revenue, strengthen customer relationships, foster team collaboration, offer creative ideas and solve problems.

The uniqueness-of-skills spectrum depicts the degree to which employees’ skills are narrowly applicable to your organization, and, thus, harder to find in the labor market. Let’s say you produce a unique, expensive and complex product. It takes years for employees involved in the production to develop the necessary talent. Those employees will be rated highly on the skill spectrum. The same principle is applicable to specialized services.

The purpose of the framework isn’t solely to categorize your current employees, but also to help you organize your workforce structure by job function. You can create a generic organizational chart by department or by division and assign job titles and functions to the four quadrants. For example, a sales manager position might require an employee who qualifies as a critical employee. Chances are you’ll need employees representing all four quadrants in most if not all departments.

After you’ve completed your generic organization chart, compare it to your actual one and analyze the inconsistencies: Are some departments understaffed in terms of skill? Overstaffed? If so, why? Is any action warranted, either in the short-term or over a longer period of time? What would be the operational consequence of having to fill vacancies in any of those positions?

Identify the Criticals

As previously noted, employees whose skills combine high value and uniqueness are known as the “criticals,” that is, critical to your success. Putting those criticals at the top of your retention priority list makes sense, though there are no guarantees that you can keep them on board in spite of your best efforts. Even if a competitor doesn’t lure these employees away, today’s society is increasingly mobile and people move away or seek new challenges or retire.

That’s why you need to think carefully about your talent pipeline and succession planning, so that when critical employees leave, you don’t want to be left in the lurch.

Employees who don’t fall into the “critical” quadrant, assuming they satisfy your performance criteria, can’t be taken for granted. Just because an employee isn’t critical doesn’t mean you would welcome the burden of finding a replacement. But by using this talent quadrant lens, you have a clearer view of how to prioritize your efforts to keep employees engaged and content with their jobs.

Finally, keep in mind that maximizing employee engagement and satisfaction — whether it be that of a critical employee, professional, specialist, or other — often requires a tailored approach, as opposed to one-size-fits-all. For example, emphasizing tangible forms of compensation could cause you to lose some of your criticals who find motivation in other ways.

The Lepak & Snell model isn’t the “be all and end all” of understanding your workforce. If it doesn’t seem applicable to your organization, find one that will allow you to consider other ways of looking at how effectively you’re leveraging your organization’s substantial investment in “human capital.” Expect to find a few surprises if you do.

Put Social Networking Sites to Work for Your Dealership

Posted on August 24, 2017 by Red Spot Design2

If you’re thinking that social media is just for teenagers, think again. More than half of those logging on to social media sites are in their mid-thirties or older.

Traditional media outlets such as newspapers, radio, and television have long served the purpose of delivering one-way messages, like your dealership’s advertising.

Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

You’ll find a number of technologies under the umbrella of social media, including e-mail, instant messaging, blogs and social networking websites.

In fact, sites like Facebook and Twitter have now surpassed traditional search engines when it comes to reaching new car prospects, according to J.D. Power and Associates.

The end result? Social media is not only changing the way your customers access news and information, but how they do business. If your dealership has not yet embraced the power of social media, it might be time to take another look.

What Radio Station Do You Drive?

Brandcasting is what manufacturers, including some auto dealers, are doing to promote their products in a way that is less intrusive and more inviting. Rather than employing the traditional media to do “push” marketing, they are using social media to “pull” the audience in. How? By cleverly linking the public’s passion for cars with their passion for music through a dealership-provided “radio station.”

The radio station is brand-specific and is linked from the dealer’s website. The public can access the station 24/7 on their computers or smart phones, and play the music in the background while they migrate to other sites or answer e-mail. If a listener should happen to visit the actual brick-and-mortar dealership, he or she would likely hear the same station playing in the showroom or as the “on hold” music during a phone call.

The idea, of course, is to marry the listener’s love for cars to the dealer’s brand. Towards that goal, the music is embedded with subtle messages that promote the dealership’s new and used cars as well as its service specials. Think of it this way: the music is the precious cargo, and the marketing messages are the Styrofoam packing peanuts that fill in the empty spaces along the journey.

It’s a clever idea that goes straight to the heart of selling… using shared interest to turn a prospect into a friend.

Two Success Stories

If branding, communication and targeted marketing efforts are not compelling enough, consider the following social networking success stories:

Texas Dealer, Domestic Automobiles. A dealership in Texas recently launched into the realm of social networking. To get the ball rolling, the dealer decided to tie its social networking initiative into a fundraiser for Haiti relief. For every fan added during a specified time frame, a dollar was donated to the Haiti relief effort. To further sweeten the transaction, the dealership’s corporate offices jumped on board and matched the dealership’s pledge.

Employees spread the word about this fundraiser through posts on their own social networking sites. And, in just over a week, the dealership added several hundred fans. These additions not only translated into several thousands of dollars donated to Haiti relief, but, the fundraising and fan-raising effort garnered a significant amount of publicity for the dealership as well as an online following.

Minnesota Dealer, Foreign Automobiles.Interested in entering the social networking realm, but concerned about the time commitment, one Minnesota dealer adopted software made expressly for dealers interested in expanding their social networking ventures. Within days, the dealership boasted a number of accounts, including one on Facebook. In addition to establishing a presence, the software integrated with the dealership’s dealer management system, which allowed for their inventory to be displayed directly on their Facebook page.

The dealer added more than 150 fans during the first week and received recognition from a number of traditional media sources. The dealer now averages 35 client and prospect interactions per week as a result of this social networking initiative.

Social Networking Websites

Separate from our professional lives, many of us have a profile on at least one social networking website. That’s why many businesses, large and small, are employing this innovative new marketing tool. Automobile dealerships are no exception.

Adopting these technologies, however, involves more than creating a profile or fan page for your dealership. To really be effective, it requires a shift to a culture of transparency. And, it is this window into your dealership that makes it more important than ever for your message to be consistent at every point of contact with current and prospective customers.

How Social Media Puts You Out Front

Establishing a presence on social networking sites can give your dealership a competitive edge in several ways, including:

1. Brand Enhancement.

Profiles, fan pages and participation in groups all serve to build awareness about your dealership’s brand. They also provide an opportunity to interact with current customers as well as begin the relationship-building process with prospective ones.

2. Open Communication.

Social media, including social networking, is based on the principle of two-way communication.

Your dealership can benefit from both the positive experiences and negative feedback that customers voluntarily share. Not only can you address these customer concerns publicly, but you then have the chance to make any necessary improvements. You have the unique opportunity to make lemonade out of lemons.

3. Target Marketing.

Establishing a presence on social networking sites can help you identify, and subsequently target, potential customers. While the need for advertising through traditional media outlets may not be eliminated, the ability to target marketing communications reduces overall costs and provides a greater return on your marketing investment.

Tapping into social networking analysis tools may also assist with targeted marketing efforts. What if, for example, you knew that online discussions about trucks and SUVs waned during the prior 12-month period, while conversations about fuel efficiency, including hybrids, increased significantly?

Now there is some market intelligence to take under advisement when developing your marketing message. It is important, however, to keep in mind that overt advertising on social networking sites can be received negatively, so your message should be developed with that caution.

Social Networking Best Practices

Whether you are new to social networking, or a seasoned veteran, it’s important to:

Make a Commitment.

Social networking, like most marketing tools, requires a commitment to time and possibly finances — perhaps even cultural change within your dealership — in exchange for successful results.

Be Visible.

Make sure that your brand remains consistent between the various social networking sites. Develop a communications plan that keeps your dealership visible, but that does not overwhelm your online following.

Listen First, Respond Second.

Once your program is established, monitor the social buzz daily to keep a pulse on both current and potential customers. Much like a dinner party, you must listen before you respond. Then, once you have a clear picture of what is being said online, you can determine a course of action.

Keep it Local.

Customers and prospective customers alike want to do business with dealerships that are within driving distance. Keep this in mind as you develop and refine your social networking plan.

Make it Easy.

Remember to make it simple for people to find you. Add social networking information to business cards as well as your dealership’s Web site.

If your dealership hasn’t yet gotten its feet wet in the world of social networking, it may be time to rethink your marketing strategy. Establishing a presence on social networking sites can be particularly effective when it comes to heightened brand awareness for your dealership and for identification and targeting of potential customers. In addition, finding ways to tie social networking initiatives into community efforts can create a win-win situation for everyone involved.

Beware of a 100% Personal Liability Penalty

Posted on August 23, 2017 by Red Spot Design2

A “100% penalty” can be assessed against a responsible person when federal income tax and/or federal employment taxes are withheld from employee paychecks but aren’t handed over to the government.

This Trust Fund Recovery Penalty got its informal “100% penalty” moniker from the fact that the entire unpaid amount can be assessed against a responsible person (or several responsible persons). The purpose of the penalty is to collect withheld but unpaid federal taxes from individuals who had control over an employer’s finances.

Often, operating a business as a corporation protects the individual owner from personal liability for some corporate debts. In cases of unpaid payroll taxes, however, the corporate shield or corporate veil is “pierced” and the IRS looks past the corporation to the responsible person to pay the debt.

Determining Who’s Responsible

The 100% penalty can only be assessed against a responsible person. That could be a shareholder, director, officer or employee of a corporation; a partner or employee of a partnership; or a member (owner) or employee of a multi-member LLC. It can also be assessed against an employee of a sole proprietorship or an employee of a single-member (one owner) LLC. To be hit with the penalty, the individual must:

Be responsible for collecting, accounting for, and paying withheld federal taxes, and
Willfully fail to remit those taxes (willful means intentional, deliberate, voluntary and knowing, as opposed to accidental).

The mere authority to sign checks when directed to do so by a superior doesn’t make a person responsible. There must also be knowledge of and control over the finances of the business. However, responsible person status can’t be deflected simply by assigning signature authority over bank accounts to another person in order to avoid the 100% penalty. As a practical matter, the IRS will look first and hard at individuals with check-signing authority.

The courts have examined several factors beyond the authority to sign checks when they determined who had responsible person status. Those factors include whether the individual:

Is an officer or director,
Owns shares or has an entrepreneurial stake in the company,
Is active in managing the day-to-day affairs of the company,
Can hire and fire employees,
Makes decisions regarding which, when, and in what order debts or taxes will be paid, and
Exercises daily control over bank accounts and disbursement records.

Outside Parties Can Be Responsible

In certain circumstances, outside parties such as lenders and advisors can also be responsible persons. For example:

A bank had the authority under a loan agreement with a delinquent corporation to oversee much of the corporation’s operations. It exercised this authority by honoring some checks but dishonoring others and was found by the IRS to be a responsible person.
A volunteer member of a charitable organization’s board of trustees had knowledge of the organization’s tax delinquency and authority to decide whether to pay the taxes. The individual was determined to be a responsible person by the IRS.
The president of a day care center’s board of directors, who wasn’t paid for his work and wasn’t involved in day-to-day operations, was held to be a responsible person because he secured loans for the center, directed its tax payments, and reviewed its financial reports. Therefore, he was found to be sufficiently involved in the center’s financial affairs to make him a responsible person.
The executor of a decedent’s estate was found to be a responsible person when the operators of an inn (which was an asset of the estate) failed to remit withheld federal taxes.

Conclusion

If you can be held personally liable for failure to remit withheld employment taxes — whether or not you’re an owner or officer of the company — make sure that Uncle Sam is paid in a timely fashion. And keep in mind that in some cases, the IRS can go after several people.

If you’re tagged, you may ultimately prove that you aren’t a responsible person, but that could be expensive. Consult with your tax advisor about what records you should be keeping to avoid exposure to this expensive penalty.

Not Paying Over Employment Taxes Can Even Lead to Prison

In one 2016 case, the president of a construction company was sentenced to 18 months in prison for employment tax fraud and ordered to pay restitution to the IRS in the amount of $677,350, according to the U.S. Department of Justice (DOJ).

The 52-year-old man failed to collect, account for and pay over employment taxes to the IRS. The DOJ stated in a press release that he “chose to withhold employment tax from his employees, and use those funds for his personal benefit, inflicting substantial harm on the U.S. Treasury and gaining a competitive advantage over his law-abiding competitors.”

Real Estate Investors: Let’s Talk about Like-Kind Exchange

Posted on August 21, 2017 by Red Spot Design2

Are you thinking about divesting a real estate investment and then replacing it with another property? If you sell appreciated property outright, you’ll incur a taxable gain, which lowers the amount available to spend on the replacement property. But you may be able to defer your tax bill (or even make it disappear) with a Section 1031 like-kind exchange.

Unfortunately, there are rumors that upcoming tax reform legislation could eliminate the time-honored like-kind exchange privilege. So, while tax breaks for like-kind exchanges are still in place, it could be a good idea to complete any like-kind exchanges that you’re considering sooner rather than later. Here’s what you need to know about like-kind exchanges under the current tax rules.

Beware of the Boot

To avoid any current taxable gain in a like-kind exchange, you must not receive any “boot” in the transaction. Boot means cash or other property that isn’t of a like kind to the relinquished property. When mortgaged properties are involved, boot also includes the excess of the mortgage on the relinquished property (the debt you get rid of) over the mortgage on the replacement property (the debt you assume).

If you receive any boot, you’re taxed in the year the property is sold on a gain equal to the lesser of:

1. The value of the boot, or

2. Your overall gain on the transaction based on fair market values.

So, if you receive only a small amount of boot, your exchange will still be mostly tax-free (as opposed to completely tax-free). On the other hand, if you receive a significant amount of boot, you could have a large taxable gain.

The easiest way to avoid receiving any boot is to swap a less valuable property for a more valuable property. That way, you’ll be paying boot, rather than receiving it. Paying boot doesn’t trigger a taxable gain for you.

What Constitutes Like-Kind Property?

You can arrange for tax-free real property exchanges as long as the relinquished property (the property you give up in the exchange) and the replacement property (the property you receive in the exchange) are of a like kind. Under Internal Revenue Code Section 1031 and related guidance, “like-kind property” is liberally defined. For example, you can swap improved real estate for raw land, a strip center for an apartment building or a boat marina for a golf course.

But you can’t swap real property for personal property without triggering taxable gain, because real property and personal property aren’t considered like-kind. So, you can’t swap an apartment building for a cargo ship. You also can’t swap property held for personal use, such as your home or boat. Inventory, partnership interests and investment securities are also ineligible for like-kind exchanges. As a result, the vast majority of tax-free like-kind exchanges involve real property.

In 2002, the IRS clarified that even undivided fractional ownership interests in real estate (such as tenant-in-common ownership interests) can potentially qualify for like-kind exchanges. For example, if you sell an entire commercial building, you don’t need to receive an entire commercial building as the replacement property in order to complete your tax-free exchange. Instead, you could receive an undivided fractional ownership interest in a building as the replacement property.

What Happens to the Gain in a Like-Kind Exchange?

Any untaxed gain in a like-kind exchange is rolled over into the replacement property, where it remains untaxed until you sell the replacement property in a taxable transaction.

However, under the current federal income tax rules, if you still own the replacement property when you die, the tax basis of the property is stepped up to its fair market value as of the date of death — or as of six months later if your executor makes that choice. This beneficial provision basically washes away the taxable gain on the replacement property. So your heirs can then sell the property without sharing the proceeds with Uncle Sam.

The like-kind exchange privilege and the basis step-up-on-death rule are two big reasons why fortunes have been made in real estate.

However, as noted earlier, the like-kind exchange privilege could possibly be eliminated as part of tax reform. Even if that doesn’t happen, the estate tax might be repealed, which could also ultimately reduce the tax-saving power of like-kind exchanges.

Why? An elimination of the step-up in basis at death might accompany an estate tax repeal. For example, with the 2010 federal estate tax repeal (which ended up being temporary and, essentially, optional), the step-up in basis was eliminated, and that could happen again. An elimination of the step-up in basis would mean that a taxpayer inheriting property acquired in a like-kind exchange would have the same basis in the property as the deceased, and thus could owe substantial capital gains tax when he or she ultimately sells the property.

What’s a Deferred Like-Kind Exchange?

It’s usually difficult (if not impossible) for someone who wants to make a like-kind exchange to locate another party who owns suitable replacement property and also wants to make a like-kind exchange rather than a cash sale. The saving grace is that properly executed deferred exchanges can also qualify for Section 1031 like-kind exchange treatment.

Under the deferred exchange rules, you need not make a direct and immediate swap of one property for another. Instead, the typical deferred like-kind exchange follows this four-step process:

1. You transfer the relinquished property (the property you want to swap) to a qualified exchange intermediary. The intermediary’s role is to facilitate a like-kind exchange for a fee, which is usually a percentage of the fair market value of the property exchanged.

2. The intermediary arranges for a cash sale of your relinquished property. The intermediary then holds the resulting cash sales proceeds on your behalf.

3. The intermediary uses the cash to buy suitable replacement property that you’ve identified and approved in advance.

4. The intermediary transfers the replacement property to you.

This series of transactions counts as a tax-free like-kind exchange, because you wind up with like-kind replacement property without ever taking possession of the cash that was transferred in the underlying transactions.

What Are the Timing Requirements for Deferred Like-Kind Exchanges?

For a deferred like-kind exchange to qualify for tax-free treatment, the following two requirements must be met:

1. You must unambiguously identify the replacement property before the end of a 45-day identification period. The period starts when you transfer the relinquished property. You can satisfy the identification requirement by specifying the replacement property in a written and signed document given to the intermediary. That document can list up to three properties that you would accept as suitable replacement property.

2. You must receive the replacement property before the end of the exchange period, which can last no more than 180 days. Like the identification period, the exchange period also starts when you transfer the relinquished property.

The exchange period ends on the earlier of: 1) 180 days after the transfer, or 2) the due date (including extensions) of your federal income tax return for the year that includes the transfer date. When your tax return due date would reduce the exchange period to less than 180 days, you can extend your return. An extension restores the full 180-day period.

Will Like-Kind Exchanges Survive Possible Tax Reform Efforts?

Under the current tax rules, like-kind exchanges offer significant tax advantages, but they can be complicated to execute. Your tax advisor can help you navigate the rules.

Looking ahead, it’s uncertain when and if tax reform will occur and whether the tax benefits of a like-kind exchange will survive any successful tax reform efforts. So, if you own an appreciated real estate investment and you’re contemplating swapping it out, it may be advisable to enter into a like-kind exchange sooner rather than later.

Follow Detailed Recordkeeping Rules for Vehicle Expense Deductions

Posted on August 18, 2017 by Red Spot Design2

Many business owners fail to follow the strict tax rules for substantiating vehicle expenses. But if your business is audited, the IRS will most likely ask for mileage logs if you deducted vehicle expenses — and it tends to be especially critical of the amount deducted if you’re self employed or you employ relatives. While the basics seem simple, there are numerous exceptions.

Mileage Logs

Taxpayers can deduct actual vehicle expenses, including depreciation, gas, maintenance, insurance and other vehicle operating costs. Or they can use the standard mileage method, which allows a deduction based on the standard rate for each mile the vehicle is driven for business purposes. For example, the standard mileage rate is 53.5 cents a mile for 2017 (down from 54 cents per mile for 2016). If you drive 1,000 miles for business purposes in 2017, you could deduct $535 under the standard mileage method.

Regardless of the method used, the recordkeeping requirements for mileage are the same. They’re also the same whether you’re the only employee who uses a vehicle, you employ others who use company vehicles, or an employee uses his or her own vehicle and is reimbursed by the company.

Vehicle logs must provide the following information for each business trip:

Date,
Destination,
Business purpose,
Start odometer reading,
Stop odometer reading, and
Mileage.

Employees who use their own vehicles must provide these details to their employer. If an employer reimburses an employee without the required documentation, the reimbursement is taxable income. If an employee uses a company vehicle, the IRS considers any usage that’s unaccounted for as personal use and the value of unaccounted usage should be included in the employee’s income for the employer to secure a deduction.

The IRS requires “contemporaneous” recordkeeping for mileage. That means a recording at or near the time of the trip. You can record the mileage at the time of the trip and enter the business purpose at the end of the week. But waiting much longer could raise suspicion about the validity of the vehicle log and potentially jeopardize your entire vehicle deduction.

The tax agency requires varying levels of detail, depending on the circumstances. For example, you might be able to list only the customer’s name if you visit someone regularly to demonstrate new products, provide service and take orders. But cold calls to prospective customers may require a more detailed write-up in your vehicle log. A single entry may be enough for visits to several customers in the same day, but you may need to log any detours taken for personal reasons, such as personal errands or lunch with your spouse.

In some cases you may be able to avoid recordkeeping if your company maintains a formal policy forbidding employees from using company vehicles for personal reasons. However, the exception has numerous rules and restrictions. For instance, the policy must be written and meet six conditions, and the exception applies to only employees who aren’t “control” employees, such as:

Employees who are appointed by the board or shareholders or an elected officer whose pay is $100,000 or more,
Directors,
Employees who earn at least $205,000 annually, and
Employees who own a 1% or more share of equity, capital or profits in the business.

Exceptions to the Rules

We’ve used the term “vehicle,” because the recordkeeping rules apply to more than just cars. Technically, every vehicle is subject to the rules. But the IRS permits specific exceptions for the following vehicles that are unlikely to have more than a minimum amount of personal use:

Delivery trucks with seating only for the driver or only for the driver plus a folding jump seat,
Buses with a 20-person minimum seating capacity,
Special purpose farm vehicles, and
Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.

Not listed above are more obvious exceptions, such as cement mixers, combines and bucket trucks. In addition, the IRS permits exceptions for trucks or vans that have been specially modified so that they aren’t likely to be used more than a de minimis amount for personal purposes. An example is a van that has only a front bench for seating, has permanent shelving that fills most of the cargo area, constantly carries equipment and has been custom painted with the company’s name and logo.

Simplified Recordkeeping

Complying with the IRS mileage recordkeeping rules can be tedious, especially for workers who drive significant distances for business purposes. Here are some ways you can simplify the process:

Use technology. Mileage logs don’t have to be kept in a written diary or day planner — you can download an app to your tablet or cell phone to track mileage. These apps typically allow you to take a picture of the odometer for the beginning and ending mileage. If you allow this method, require workers to back up their electronic mileage logs regularly to prevent loss of mileage records. Alternatively, you might use GPS tracking of company vehicles to help document mileage.

Apply sampling methods. The IRS allows taxpayers to use the mileage for regular routes — for example, if you visit the same customers on a fixed weekly schedule — and extrapolate the sample mileage over the entire tax year. This can save time, but you’ll have to show that the sample is valid. And if the route changes midyear, you’ll have to show how you updated the sample.

The easiest way to simplify recordkeeping for vehicle expenses is to use the standard mileage rate, rather than tracking actual expenses. Doing so eliminates the need to save gas receipts and maintenance records. But the downside is that this method tends to understate expenses, particularly if you drive an expensive gas guzzler or pay above-average insurance premiums. If a vehicle’s business use is high but its total use is low, actual fixed costs — such as insurance and depreciation — are likely to be higher on a per-mile basis than with the standard mileage rate.

Ongoing Attention

Vehicle expenses can quickly add up for businesses — as well as for individuals who are tracking mileage for itemized medical or charitable deductions, or supplemental business activities such as managing investments in local businesses or rental properties. But as easily as they add up, so too can vehicle deductions vanish in an IRS inquiry.

The key to preserving your deductions is maintaining up-to-date mileage records. Too often, taxpayers assume they can put together a mileage log the night before the IRS visits. That rarely works. For example, the IRS questioned a situation in which the taxpayer used the same pen over a two-year period. In another case, the IRS noticed that the taxpayer claimed to be at the post office and an hour later was at a client 110 miles away. In cases where there are more than a few discrepancies, the IRS often denies all vehicle expense deductions, claiming the mileage log wasn’t credible. On top of losing your deduction, you also might face penalties and interest for underpaying your tax liability.

When it comes to the recordkeeping requirements for vehicles, the IRS rarely allows exceptions for its strict rules. Don’t assume you qualify for an exception, check with your tax advisor first. He or she can help you navigate the complicated vehicle recordkeeping rules with confidence.

Identifying Weak Links to a Successful Transition

Posted on August 16, 2017 by Red Spot Design2

If we can determine that there is, in fact, a potential buyer for the company based on a number of attractive assets and an initial calculation of business value, we can then pursue additional constraints to realizing the preferred value.

An owner may not be satisfied by the initial calculation, believing that the company can be worth far more. This may be true. We can identify weak links or bottlenecks that impede a higher value. According to the Theory of Constraints methodology, common constraints that impede a goal (in this case, a favorable multiple for your business), can include the following:

Physical – Equipment or other tangible items such as material shortages, lack of people or lack of space
Policy – Required or recommended ways of working that are outmoded or restricting
Paradigm – Deeply ingrained beliefs or habits that impede throughput
Market – Production capacity exceeds sales

When we begin the conversation with a manufacturer — or any business owner — about some of the factors holding back a successful business transition, all four of these constraints can arise over time. An owner, for example, may strongly believe that a family member will take over the business, and that family member has not given the owner any reason to believe otherwise. This is a paradigm constraint in which the owner needs to be open to the possibility of a Plan B to mitigate the risk that this family member won’t or can’t take over.

Physical constraints may include workforce shortages or outmoded equipment; these require a longer-term and strategic approach to attracting and training talent as well as applying throughput improvements to the production floor. Market constraints may require diversification of product lines to maintain throughput that matches market cycles. And policy constraints can be addressed by looking at “how things have always been done here” to how they can be done better.

Policy constraints can be the biggest constraint to business transition planning because they tie closely to ingrained cultural beliefs about how things are done. It may require an outside advisor to identify policy constraints and to walk owners through a process of improvement. An open communication process can also support policy change when new employees come on board and are able to suggest improvements in process or production.

Of course, a big paradigm constraint is the constraint of time. Owners often say they don’t have time to think about business transition planning because they are too busy running the company. Perceived lack of time leaves owners with a lack of knowledge about their business value, which creates assumptions, misguided hopefulness and inertia. Transition planning is left to waste away in quadrant three of priorities: important but not urgent.

If time is a major constraint to business planning, the Theory of Constraints introduces the “five focusing points” to eliminate this constraint.

Beware of inertia creeping back in. Business transition planning is not a “one and done” activity. It will require regular attention over several years to monitor progress on business value improvements, delegation of owner responsibilities to experienced and stable team members, and development of contingency plans. Increasing your time to work on the plan is a big initial step toward committing to increased year-to-year profits and fair value for your business.

Continue Reading: Taking the Critical Path Towards Succession

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience at Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas.

Contact him at gary.jackson@cornwelljackson.com.

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