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Author: Red Spot Design2

Understand Your Social Security Retirement Benefits

Posted on by Red Spot Design2

For years, people have questioned the viability of the Social Security system going forward. In July, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds.

The report projects that the combined asset reserves of the Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds will become depleted in 2034, unless Congress takes action to reverse the situation.

In general, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are common concerns regarding the Social Security system.

What’s My FRA?

Your full retirement age (FRA) depends on the year in which you were born.

Year of Birth

Full Retirement Age
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943–1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

If you were born on January 1 of any year, refer to the previous year. If you were born on the first of the month, the SSA figures your benefit (and your FRA) as if your birthday were in the previous month.

Collecting Retirement Benefits

According to the 2017 report by the Social Security Board of Trustees, roughly 61 million beneficiaries were collecting money from the SSA at the end of 2016, including:

  • 44 million retired workers and dependents of retired workers,
  • 6 million survivors of deceased workers, and
  • 11 million disabled workers and dependents of disabled workers.

In 2016, the SSA’s total income ($957 billion, including interest income) exceeded its total expenditures ($922 billion). So, its asset reserves grew by $35 billion last year.

The reserves of the OASDI Trust Funds together with projected income should be sufficient to cover the SSA’s costs over the next 10 years. However, starting in 2022, the SSA’s total expenditures are expected to start outpacing its total income.

Is it time for you to start collecting retirement benefits? You may apply for benefits as early as age 62. Starting early will reduce your monthly benefits by as much as 30%, but, of course, you’ll receive benefits for more years.

If you want to receive full retirement benefits from the SSA, you must wait until you reach the so-called full retirement age (FRA). See “What’s My FRA?” at right. Your tax advisor can help you determine if you would likely be better off waiting until your FRA to start taking benefits.

Applying for Benefits

Apply for retirement benefits three months before you want your payments to start. The SSA may request certain documents in order to pay benefits, including:

  • Your original birth certificate or other proof of birth,
  • Proof of U.S. citizenship or lawful alien status if you weren’t born in the United States,
  • A copy of your U.S. military service paper(s) if you performed military service before 1968, and
  • A copy of your W-2 Form(s) and/or self-employment tax return for the prior year.

For most retirees, the easiest way to apply for benefits is by using the online application.

Receiving Benefits While You’re Working

If you’re under FRA and earn more than the annual limit (subject to inflation indexing), your benefits will be reduced, as follows:

  • If you’re under FRA for the entire year, you forfeit $1 in benefits for every $2 earned above the annual limit. For 2017, the limit is $16,920.
  • In the year in which you reach FRA, you forfeit $1 in benefits for every $3 earned above a separate limit, but only for earnings before the month you reach FRA. The limit in 2017 is $44,880. But the SSA only counts earnings before the month you reach your FRA.

Beginning with the month in which you reach FRA, you can receive your benefits without regard to your earnings.

Retiring after Your FRA

You can receive increased monthly benefits by applying for Social Security after reaching FRA. The benefits may increase by as much as 32% if you wait until age 70, but of course you’ll receive benefits for fewer years. After age 70, there is no further increase. Your tax advisor can help calculate the payout for waiting to collect your retirement benefits and help you determine if you likely will be better off waiting beyond your FRA to start taking benefits.

Managing Benefits for an Incapacitated Person

If a Social Security recipient needs help managing his or her retirement benefits — perhaps an elderly parent — contact your local Social Security office. You must apply to become that person’s representative payee in order to assume responsibility for using the funds for the recipient’s benefit.

Qualifying for Social Security Survivors Benefits

A spouse and children of a deceased person may be eligible for benefits based on the deceased’s earnings record as follows:

A widow or widower can receive benefits:

  • At age 60 or older,
  • At age 50 or older if disabled, or
  • At any age if she or he takes care of a child of the deceased who is younger than age 16 or disabled.

A surviving ex-spouse might also be eligible for benefits under certain circumstances. In addition, unmarried children can receive benefits if they’re:

  • Younger than age 18 (or up to age 19 if they are attending elementary or secondary school full-time), or
  • Any age and were disabled before age 22 and remain disabled.

Under certain circumstances, benefits also can be paid to stepchildren, grandchildren, stepgrandchildren or adopted children. In addition, dependent parents age 62 or older who get at least one-half of their support from the deceased may be eligible to receive benefits.

A one-time payment of $255 may be made only to a spouse or child if he or she meets certain requirements. Survivors must apply for this payment within two years of the date of death.

Paying Income Taxes on Benefits

You’ll be taxed on Social Security benefits if your provisional income (PI) exceeds the thresholds within a two-tier system.

PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers). Recipients in this range are taxed on the lesser of 1) one-half of their benefits or 2) 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers).

PI above $44,000 ($34,000 for single filers). Recipients above this threshold are taxed on 85% of the amount by which PI exceeds $44,000 ($34,000 for single filers) plus the lesser of 1) the amount determined under the first tier or 2) $6,000 ($4,500 for single filers).

PI equals the sum of 1) your adjusted gross income, 2) your tax-exempt interest income, and 3) one-half of the Social Security benefits received.

Need Assistance?

The long-term insolvency of the SSA program underscores the importance of saving for retirement while you’re working. Social Security benefits should be viewed only as a supplement to your other assets.

If you have additional questions about receiving Social Security retirement benefits, contact your Cornwell Jackson advisor. He or she can help you navigate the application process and understand tax issues related to receiving retirement benefits.

Revenue Recognition for Contracts: Changes Coming Soon

Posted on by Red Spot Design2

Revenue is the top line of your company’s income statement. So, it tends to receive a lot of attention from investors, lenders and other stakeholders. Why? Changes in revenue can tell whether your company is growing or declining. Moreover, changes in the composition of revenue can provide insight into your strategic plans.

If your company enters into contracts, it may need to update the way revenue is reported under new accounting guidance that goes into effect for public companies starting in 2018. Private companies get an extra year to change their reporting practices and systems to comply with this new standard.

Here are the details on what’s changing, including expanded disclosure requirements  that will affect a wide range of businesses.

Prepare to Add Disclosures

What’s the biggest challenge companies encounter when adopting the new revenue  recognition standard? Many companies that have already made the necessary changes report spending a significant amount of resources modifying their recordkeeping practices to comply with the standard’s expanded disclosure requirements.

Under existing U.S. Generally Accepted Accounting Principles (GAAP), most companies disclose limited information about revenue. When it comes to contract revenue, a company’s footnotes typically reveal only its general accounting policies and segment reporting.

The updated revenue recognition guidance requires all companies to provide a cohesive set of disclosures about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.

Specifically, the new standard will require you to:

  • Break down revenue into appropriate categories, such as product lines, geographic markets, contract length and services vs. physical goods.
  • Provide opening and closing balances of receivables, contract assets and contract liabilities.
  • Identify various performance obligations (or promises) in the company’s contracts, including when the reporting organization typically satisfies its performance obligations and the amount allocated to the remaining performance obligations in a contract.
  • Explain significant judgments and changes in judgments made when recognizing contract revenue.

The updated guidance also requires additional information about assets recognized from the costs to obtain or fulfill a contract with a customer.

The Basics

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, will result in a major shift in the way some companies report revenue. For simple point-of-sale retail transactions, little change is expected: Revenue will continue to be recognized when goods or services are delivered to the customer. The process gets more complicated for long-duration, multi-element contracts, sales that include incentives for customers with poor credit, and contracts with built-in discounts or performance bonuses.

The breadth of change under the new standard depends on your industry. Companies that currently follow industry-specific revenue recognition rules under U.S. Generally Accepted Accounting Principles (GAAP) will feel the biggest effects from these changes. Examples include software manufacturers, telecommunications companies, defense contractors, airlines, hospitality and gaming companies, and health care providers.

Nearly all companies will be affected by the expanded disclosure requirements, which call for more details on the composition of revenues. (See “Prepare to Add Disclosures,” at right.)

Exceptions to the new rules include insurance contracts, leases, financial instruments, guarantees and nonmonetary exchanges between entities in the same line of business to facilitate sales. These transactions remain within the scope of existing industry-specific GAAP.

5 Steps

Compared to current practice, the updated guidance requires management to make more judgment calls based on overriding principles. The new standard calls for five steps to decide how and when to recognize revenue:

  1. Identify a contract with a customer.
  2. Separate the contract’s “performance obligations” (discrete promises to transfer goods or services).
  3. Determine the transaction price.
  4. Allocate the transaction price to each performance obligation.
  5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.

Essentially, the updated standard requires companies to assign a transaction price to each of a contract’s separate performance obligations and consider whether it’s “probable” they won’t have to make a significant reversal of revenue in the future. They also may need to adjust transaction prices to reflect the time value of money. Different companies may interpret the “probable” threshold differently, however, threatening financial statement comparability among entities.

It’s important to note that the new standard doesn’t change the total amount of revenue your company reports. Rather it’s a matter of timing. Companies may report revenue sooner (or later) under the new standard, depending on the terms of their contracts and management’s application of the “probable” threshold.

Use of Estimates

Recognizing revenue under the new standard will require management to make subjective judgment calls on such issues as:

  • Identifying performance obligations,
  • Estimating standalone transaction prices for distinct goods and services, and
  • Evaluating variable consideration (such as rebates, discounts, bonuses and rights to return) when determining the transaction price.

As the start date approaches, it’s important to assess whether the use of estimates could expose your company to additional financial reporting risks. The Securities and Exchange Commission’s Office of the Chief Accountant is urging public companies to conduct a risk assessment to ensure that they meet their financial reporting responsibilities under the new standard. The implementation process may include adopting new internal controls to help prevent management bias and inadvertent errors that could mislead stakeholders about contract revenue.

In light of the increased risk of potential misstatements, expect more questions from your accountant regarding revenue. If your statements are audited, expect your auditor to request more documentation and perform different auditing procedures than in previous years. Also, understand that the new rule may result in temporary book-to-tax reporting differences. That’s because the tax rules regarding revenue recognition haven’t yet changed to jive with the new accounting standard.

Need Help?

If your company issues comparative financial statements under GAAP, you should have already started the process for adopting the new revenue recognition standard. Most public companies that have already made the changes report that it takes more time and effort than they initially expected.

Contact your accounting professional to determine the extent to which the guidance will affect your company and how to revise your recordkeeping procedures, accounting systems and internal controls to facilitate compliance.

Casualty and Theft Losses: Find the Silver Lining

Posted on by Red Spot Design2

We’re in the midst of hurricane season now, but the eastern and southern shores aren’t the only parts of the country at risk for catastrophic events. Mudslides, earthquakes and wildfires often plague the West Coast, tornadoes may touch down across the Great Plains and Midwest, and low-lying areas near rivers and tributaries across the country are prone to flooding.

Although nowhere in the United States is safe from Mother Nature, there is a silver tax  lining: If your personal-use property is struck by a natural disaster, damaged by another calamity or stolen, you may be able to obtain some relief by claiming a casualty or theft loss as an itemized deduction on your individual tax return. As with most tax breaks, however, there are important rules and limits you need to be aware of.

Close-Up on Business Casualty Losses

What happens if your business property — rather than your personal-use property — is stolen, vandalized or otherwise damaged by an event? The same basic casualty and theft loss rules generally apply, with a few notable exceptions.

Most important, the limits for individual casualty and theft loss deductions don’t apply. In other words, you don’t have to worry about the $100-per-event reduction or the 10%-of-AGI threshold. Business casualty and theft losses are fully deductible (subject to the other restrictions listed in the main article, such as those related to salvage value and insurance reimbursements).

As with income-producing property, if business property is destroyed, the amount of your loss is your adjusted basis in the property. Any decrease in fair market value doesn’t come into play.

The Basics

To qualify for a casualty loss deduction, the damage or destruction must result from a “sudden, unexpected or unusual” event. Typically, this includes damage or destruction caused by natural disasters, such as hurricanes, tornadoes, fires, earthquakes or volcanic eruptions. But casualty losses may also result from such events as automobile collisions or water pipes bursting during a severe cold snap.

Similarly, losses due to vandalism or theft of property can be deducted. These amounts are combined with casualties for tax purposes.

On the other hand, you aren’t allowed to recoup losses due to normal “wear and tear” or progressive deterioration. For example, damage to shrubbery and plants caused by a long summer drought doesn’t qualify for the casualty loss deduction. Neither does damage to a home from termites or other insect infestations over long periods of time.

Quantifying Your Loss

For personal-use property that’s partially or completely destroyed, your casualty loss is the lesser of:

  • Your adjusted basis in the property, or
  • The decrease in the fair market value of your property as a result of the casualty.

However, if your property is income-producing property, such as rental property, and it’s destroyed, the amount of your loss is limited to your adjusted basis in the property.

The adjusted basis of your property is usually your cost, increased or decreased by certain events, such as improvements or depreciation. For instance, if you bought a home for $500,000 and you’ve added an in-ground swimming pool, deck and finished basement for $150,000, your adjusted basis in the home is $650,000.

For property that’s been stolen, your theft loss is generally your adjusted basis in the property.

For both casualty and theft losses, the deductible loss must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. For example, suppose you own a barn with an adjusted basis of $25,000. The barn is destroyed by a fire and the insurance company reimburses you $15,000. In this case, $10,000 of damage is eligible for the casualty loss deduction, subject to additional limits. (See “Deduction Limits” below.)

If your property is covered by insurance, you must file a timely insurance claim for loss reimbursement. Otherwise, you can’t deduct the casualty or theft loss.

Deduction Limits

Unfortunately, you can’t deduct your entire casualty or theft loss — and you might not be able to deduct any of it, depending on the size of the loss and your income. The deduction is limited by the following two rules:

  1. The amount of your aggregate casualty and theft losses must be reduced by $100 for each separate casualty or theft loss event.
  2. You can deduct your aggregate casualty and theft losses only to the extent they exceed 10% of your adjusted gross income (AGI).

To better understand how these two rules work together, suppose your AGI for 2017 is $100,000. In July, a hailstorm causes $12,000 in uninsured damage to your home. Then your car is involved in an accident in October, and your out-of-pocket cost to have it fixed is $3,000.

Based on these facts, you may claim a deduction based on the two separate events: the hailstorm and the car accident. After insurance reimbursements, the deductible amount of your loss for damage to the home is $11,900 ($12,000 – $100), while the loss for the car is $2,900 ($3,000 – $100). Thus, the total amount of your casualty losses is $14,800 ($11,900 + $2,900). But, because 10% of your AGI is $10,000, your deduction is limited to $4,800 ($14,800 – $10,000).

If, however, your only casualty loss for the year was from the car accident, you won’t be able to deduct anything because your $2,900 loss is under the 10% of AGI threshold.

Timing of Deductions

Normally, you can deduct a casualty loss on your tax return only for the tax year in which the casualty occurred. This is true even if you don’t repair or replace the damaged property until a later tax year. For example, if your basement floods in late 2017, the resulting loss is deductible on the 2017 return you’ll file in 2018, regardless of when you repair or replace anything that was damaged or destroyed.

However, a special tax election may apply for damage occurring in an area designated by the President as a “federal disaster area,” allowing you to choose to claim the available casualty loss on the tax return for the tax year preceding the year of the event. For example, if you incur a loss in a federal disaster area before the end of 2017, you can choose to amend your 2016 return to obtain faster tax relief. You don’t have to wait until you file your 2017 return.

The timing rules for deducting theft losses are a little different. Generally, you can deduct the loss for the tax year you become aware that the property was stolen; it doesn’t matter when the theft actually occurred. However, you can’t claim a deduction while there’s still a reasonable probability that insurance will reimburse you for the loss.

So if you submit an insurance claim for a theft you discovered in 2017 but don’t find out until 2018 whether the claim will be paid, you can’t deduct a theft loss on your 2017 return. If in 2018 the insurer denies your claim (or reimburses you for less than your adjusted basis in the property), then you can deduct the unreimbursed loss on your 2018 return, provided you meet the other rules for the deduction.

Supporting Your Deduction

If you qualify for casualty and theft loss deductions, be sure to keep accurate records and evidence to support your claims. If the IRS challenges your loss deduction, you may need to supply auditors with such information as appraisals to assess fair market value, correspondence with insurance claims representatives and receipts to support the original purchase price, improvements and repair costs. Your tax advisors can help you collect the appropriate documentation to withstand IRS scrutiny.

Assessing the Demand for your Business

Posted on by Red Spot Design2

One of the big assumptions, or constraints, that holds back a business transition plan is that the owner assumes there is a future demand for the company. Before you determine how much a buyer is willing to pay for your business, you have to confirm there actually is a potential buyer.

Having no future buyer is an “undesirable effect” that can be addressed and eliminated by applying the Theory of Constraints “thinking process.” If you are concerned that there may not be a potential buyer, this is your current reality. The next step in the thinking process is to identify what can be changed to attract a potential buyer. This may include things like clean accounts receivables and strong credit terms, upgraded equipment, a highly trained and stable workforce, cash in reserves, profits and a transferable customer base. Other considerations may include:

  • Long-term demand for the products
  • Intellectual property
  • Well documented processes and systems
  • High cost to enter the industry
  • Easy access to debt financing and capital
  • Favorable tax structure

The Theory of Constraints emphasizes that increasing throughputs is more important than cutting expenses — something that seems contrary to traditional accounting. However, throughput has no limits whereas you can only reduce expenses to zero (rarely). In addition, net profit is derived by throughput minus operating expenses. In a manufacturing environment, efficient production and improving net profits are attractive to potential buyers. By contrast, inefficient production and low expenses are less attractive.

To determine the true demand for your business in the early stages of business planning, a calculation of business value can be performed to provide a baseline from which to pursue a more formal business transition plan. It will remove the constraints of owner procrastination and assumptions by putting real numbers to your future net worth.

Continue Reading: Identifying Weak Links to a Successful Transition

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.

How Theory of Constraints Applies to Your Business Transition Plan

Posted on by Red Spot Design2

Business Transition

Manufacturing firms spend a lot of time focusing on streamlined operations and leveraging technology to reduce constraints in the supply chain. What if the theories of supply chain management were applied to business transition planning? In similar ways, you must assess demand, identify and find solutions around constraints, communicate effectively and take the critical path. This article aligns supply chain theory with business transition planning to give owners and leaders common language — and maybe some motivation to get started.

At a recent three-day conference called MEP Supply Chain Optimization for Leaders, the theories presented included an overview on the Theory of Constraints. The elements of this theory, well-known to many manufacturers, took on a potential brand new application for me.

As I listened, I realized that the Theory of Constraints was the very model that could eliminate common bottlenecks for business transition planning. The Theory of Constraints (TOC), conceived by Dr. Eliyahu Goldratt, is a methodology for identifying the most important limiting factor (i.e. constraint) that stands in the way of achieving a goal. In a complex manufacturing system where multiple linked activities rely on one another for efficiency and production flow, the weakest link can take down the whole system.

Until manufacturers focus on eliminating the main constraint and pursuing a critical path toward improvement, the system remains inefficient and profits are limited. In the same way, bottlenecks in business transition planning limit success.

After years of working with intelligent and successful manufacturers, I can safely say that owners are the primary bottleneck to a successful business transition and the profits that they deserve. They are all familiar with supply chain management theory and applying it to their own operations. However, planning for the inevitable change in ownership is not a favorite pursuit. While it’s beyond rational, it’s reality.

Business transition planning is a challenge in any industry. The important thing is to get started. For manufacturers, it may help to view this process with the common experience of the supply chain. Consistent planning plus communication plus oversight should equal improved production flow and profits. Without supply chain management, you already know the risks. In the same way, here are some real risks for manufacturers that delay business transition planning.

  • Allowing someone else to decide the future of your company for you
  • Working longer than you planned
  • High legal and accounting costs for a rushed sales transaction
  • Loss of business — and personal — net worth*

*Estimates on delay of business transition planning (between ages 45 and 60 vs. age 68 or later) can cost owners increasing multiples in diminished net worth.

Often, the main bottleneck created by owners is procrastination. They usually have an idea of their transition plan, but have not taken steps to pursue it and don’t know how realistic their expectations are on paper. Expectations for business value, a realistic successor or buyer, and continuation of operations are not guaranteed without a plan.

What if your first phase of business transition planning was handled within 210 days? This is the same time frame for applying the Theory of Constraints to your supply chain. If it’s good enough for your supply chain, imagine the value to your business and future net worth if you:

  1. Assessed demand for your business
  2. Identified weak links or choke points to a successful transition
  3. Took the “critical path” that is most challenging to pursue your plan

By looking at these three areas of your business transition planning process, within a manageable 210-day time frame, you will make tremendous progress toward a successful and profitable transition. Our Succession Planning Starter Kit can provide more information on potential barriers and action steps for manufacturers over those 210 days.

Continue Reading: Assessing the Demand for your Business

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.

Reduce Your Risk of Committing Employment Discrimination

Posted on by Red Spot Design2

Whether a claim is unfounded or not isn’t apparent until it’s investigated, of course. But if statistics from the Equal Employment Opportunity Commission (EEOC) provide any insight, it’s worth noting that retaliation claims — the most common form of complaint — rose by 6% last year.

These claims involve allegations that employers took adverse action against employees who filed discrimination complaints. When an employer is found to have retaliated against a worker who files a complaint, that employer is culpable, even if the original discrimination charge proves to be invalid.

Only about one-third of retaliation charges addressed last year were determined to have had a “reasonable cause,” a fact which hasn’t changed much since the year 2000. Fighting such claims is time-consuming and disruptive, but generally necessary to avoid being stigmatized as a “bad” employer, not to mention to avoid incurring expensive penalties.

Going to the Mat

A recent federal case illustrates how far an employer might have to go to defeat an unfounded discrimination claim. A U.S. citizen of Arabic descent was given a low performance rating, and complained to the HR department that a supervisor had made a racially offensive remark. The employee was placed on a performance improvement plan, and claimed that the plan was in retaliation for his complaint about that remark.

He was transferred to another department, and two months later received another poor performance review. In keeping with company policy, the employee’s performance was later evaluated by a committee, which ultimately upheld the new supervisor’s negative review. The employee was terminated shortly thereafter.

The EEOC concurred with the employee’s retaliation claim, but the employer appealed the case to a U.S. District Court for the Southern District of Texas, which rebuffed the EEOC. The EEOC then sought help from the 5th Circuit Court of Appeals, which upheld the District Court’s ruling, seven years after the employee made his first retaliation complaint.

Lessons Learned

Needless to say, few employers have the legal budget or the appetite to stick to their guns fighting such a case all the way up to a federal appellate court. But the actions that the employer took ultimately brought vindication, and now offer important lessons to others. Here’s a quick summary of what happened in this case, which reveals why the employer may have prevailed.

  • The negative review didn’t happen until about 10 months after the employee had joined the company, suggesting that he was given plenty of time to prove himself.
  • The employer took the worker’s original discrimination complaint seriously, and transferred him to another department. The purpose of the transfer wasn’t to concede any wrongdoing on the original supervisor’s actions, but to give the worker an opportunity for a fresh start.
  • After the second supervisor gave the employee a negative review, a committee was formed to assess that review.

By taking all these measures, it was abundantly clear that the employer proceeded with intention and hadn’t acted rashly. But knowing when to “go to the mat” to defend your company against an unfounded claim isn’t always so clear.

Tips from the EEOC

Here’s what the EEOC says when it comes to developing a strategy for your company, which may help you nip employment discrimination claims in the bud.

General policies should:

  • Train human resources managers and all employees on Equal Employment Opportunity (EEO) laws.
  • Implement a strong policy based on EEO laws that’s embraced from the top levels of the organization.
  • Train managers, supervisors and employees on the policy’s contents, then enforce it and hold them accountable.
  • Promote an inclusive culture in the workplace by fostering an environment of professionalism and respect for personal differences.
  • Encourage open communication and early dispute resolution, which may minimize the chance of misunderstandings escalating into legally actionable EEO problems. An alternative dispute-resolution (ADR) program can help resolve EEO problems without the acrimony associated with an adversarial process.
  • Establish neutral and objective criteria to avoid subjective employment decisions based on personal stereotypes or hidden biases.

When it comes to recruiting, hiring and promoting employees, keep these principles in mind. It’s important to:

  • Implement EEO practices designed to widen and diversify the pool of candidates considered for employment openings, including positions in upper-level management.
  • Monitor for EEO compliance by conducting self-analyses to determine whether current employment practices disadvantage people of different races or treat them differently.
  • Analyze the duties, functions and competencies relevant to jobs. Then create objective, job-related qualification standards related to those duties, functions, and competencies and consistently apply them when choosing among candidates.
  • Ensure that selection criteria, such as education requirements, don’t disproportionately exclude certain racial groups. The exception might be if the criteria are valid predictors of successful job performance and meet the employer’s business needs.
  • Make promotion criteria available for employees to read, and also make sure job openings are communicated to all eligible employees.
  • Instruct outside agencies that you may use for recruitment not to search for candidates based on race or color. Both the employer that made the request and the employment agency that honored it would be liable.

Adopt a Policy

And finally, to minimize the chances of facing any harassment charges, adopt a strong anti-harassment policy, periodically train each employee on its contents, and vigorously follow and enforce it. The policy should include:

  • A clear explanation of prohibited conduct, with examples;
  • A detailed complaint process that provides multiple, accessible avenues of complaint, and a prompt, thorough, impartial investigation;
  • Assurance that the employer will protect the confidentiality of harassment complaints to the extent possible, and protect employees from retaliation;
  • A reasonable expectation that the employer will take immediate and appropriate corrective action if it’s determined that harassment has occurred.

The above may appear to be a daunting “to do” list, particularly if you haven’t yet given much thought to avoiding discrimination in your workplace. But every long journey begins with a single step, and the sooner you take that step, the lower the probability that you’ll wind up with a figurative knock on the door from the EEOC.

Is Your Company’s Vacation and Holiday Policy Working as Planned?

Posted on by Red Spot Design2

Presumably you have a holiday and vacation policy already in place. But what if it’s not working well for your company or your employees?

For example, if it’s vague, you may have to make decisions on the spot when an employee asks for days off at a time that is inconvenient for you and possibly for other members of your team. That can result in hard feelings if you have to say no, or extra work for you and others if you feel compelled to approve the request.

In constructing a policy, while it’s useful to consider what a perfect world would look like from your perspective, it’s also essential to begin with considering what other employers in your labor market are doing. That way you can be sure you’re reasonably competitive without giving away the store (see “Is Your Holiday Policy Competitive” below).

Vacation Request Procedures

A solid vacation policy will spell out the requirements for submitting time-off requests. For example, you might choose to give employees greater freedom to choose days off the further in advance they make the request. The more lead time you have to plan around vacation schedules, the less of a burden an employee’s absence imposes on you and your team.

Workers who make last-minute requests should know that they may be turned down. To avoid misunderstandings, define what your company means by last minute. Depending on the complexity of your scheduling, it could mean two days in advance, or two weeks or even more.

It’s also important to set a policy that establishes priority, when more than one employee asks for vacation leave for the same period of time. If three key people from a six-member department all want to take the last two weeks of August, who gets priority?

Basic prioritization systems include seniority, and first-come-first-served, or some combination of those two.

A third option is a rotational scheme. This involves having a team agree to make their vacation scheduling requests at the same time. Employees are randomly assigned a number indicating place in the request sequence, such as a number between one and six for a department of six.

The six employees then get to make their vacation requests according to the number they choose. But the employee who drew the number one moves to the end of the line (to number six) in the next round, number two moves up to number one, and so on.

Optimal Timing

If your company experiences annual slow periods, you may choose to encourage employees to take vacations during slow periods. That encouragement could take the form of a requirement that half of employees’ vacation time be used during such slow periods. However, for employees with children, school vacation schedules will be a major consideration, and you’d want to be as accommodating as possible for those workers, without leaving yourself open to an accusation of favoritism.

Some companies elect to go into a “hibernation” mode during a traditionally slow period, and essentially shut the place down, requiring employees to use most of their vacation days at that time. This is a common practice in several European countries. Employees plan around it, and nobody is left holding the bag, having to pick up the slack caused by other employees’ vacation schedules.

Cooperative Approach

Finally, if your workforce is cooperative and flexible (or you’re working to make it so), consider trying a collective process for setting vacation schedules. In other words, let a team work things out among themselves, taking into consideration each other’s needs and priorities, as well as the effectiveness and productivity of the team as a whole. Your role is to stay out of the discussions as much as possible, empowering team members to come up with their own solutions.

Potential benefits of this approach:

  • Fostering teamwork,
  • Experiencing minimum disruption to team workflow, and
  • Avoiding having to play the role of heavy.

Remember, establishing a vacation and holiday policy involves a balancing act between the operational needs of the business and employees’ desires. The process may be more of an art than a science. It’s up to you to find that proper balance.

Is Your Holiday Policy Competitive?

According to the Society for Human Resource Management (SHRM) 2017 survey, most employers pay a premium to employees when they are asked to work on holidays. Among those that do, 40% pay double-time wages to non-exempt workers, and 21% pay time-and-a-half.

Relatively few allow employees to take a floating holiday — that is, the opportunity to pick an alternative day off to a standard holiday, such as taking July 5 off instead of July 4. Similarly, only about 18% allow full-time employees to swap holidays, for example, take Chinese New Year’s day off in lieu of January first.

In case you’re wondering how your company’s holiday policy stacks up to other companies, here are the results of a 2017 SHRM survey, entitled Holiday Recognition Prevalence.

 

Percentage of surveyed employers recognizing
these holidays
Thanksgiving 97%
Friday after Thanksgiving 75%
Christmas Day 95%
Christmas Eve 62%
Week between Christmas and New Year’s Day 15%
Labor Day 95%
Memorial Day 93%
July 4 93%
New Year’s Day (Sunday in 2018) 98%
Monday after New Year’s Day (2018) 72%
Easter Sunday 51%
Good Friday 27%
Martin Luther King Jr. Day 39%
Presidents’ Day 34%
Veterans’ Day 19%
Columbus Day 11%

Appeals Court Allows Sexual Harassment Case to Proceed

Posted on by Red Spot Design2

Sexual harassment on the job remains a problem in many workplaces.

And most often, charges are filed by female employees against males. But in a recent case, the Tenth Circuit U.S. Court of Appeals rejected a district court’s ruling that a man’s sexual harassment charges against a female supervisor were improperly handled. The appeals court sent the matter back for further review.

Facts of the Case

A male mechanic for a trucking firm sued his employer for sexual harassment caused by his direct supervisor, a female who also was a shareholder in the firm. The employee alleged that he was fired because he refused to have sexual relations with the woman.

The mechanic completed the intake questionnaire that’s required in order to file a claim with the Equal Employment Opportunity Commission (EEOC). He checked the boxes for “Sex” and “Retaliation” as the reasons for his claim, as well as writing out “sexual harassment.”

In response to questions seeking more detailed explanations, the employee wrote “see attached,” referring to a six-paragraph statement he had prepared. The attachment concluded with the statement that he was terminated because he refused to agree to the supervisor’s sexual advances and rejected all such efforts by her.

Change of Form

Apparently, however, the EEOC didn’t receive the attachment, so it used a charge form based on the questionnaire alone. This form laid out the basics of the allegations, which were:

  • The mechanic was subjected to sexual remarks by his supervisor.
  • He complained about the sexual harassment to the general manager and other owners.
  • Nothing was done before the supervisor terminated his employment.

The charge, however, didn’t specify the information that was included in the attachment about unwanted sexual advances.

The EEOC issued a right-to-sue letter and the mechanic sued in federal court. He initially made two claims:

  1. “Quid pro quo” harassment, which occurs when a worker suffers an employment action such as termination for refusing a supervisor’s demands for sex, and
  2. Hostile environment harassment, which occurs when a course of conduct makes a work environment abusive.

He later dropped the hostile work environment claim.

The U.S. District Court dismissed the claim as being deficient because the charge form didn’t include the missing attachment spelling out the quid pro quo allegations. Undaunted, the mechanic appealed.

Different Outcome

The Tenth Circuit Court of Appeals was more sympathetic to the man’s plight. It determined that the charge form contained sufficient allegations to trigger an investigation into:

  • What the sexual remarks were
  • Why the employee was fired, and
  • Whether the two events were connected.

The court noted that the Supreme Court cautioned that the quid pro quo and hostile environment forms of sexual harassment aren’t “wholly distinct claims.” Instead, they’re shorthand for different ways in which such harassment can occur (see Ellerth, 524 U.S. at 754).

The appeals court refused to require that the charge be more specific about the type or form of harassment alleged. (Jones v. Needham , 2017 BL 159166, 10th Cir., No. 16-6156, 5/12/17 )

Background Information

The case highlights the two main types of sexual harassment that are subject to legal action under Title VII of the Civil Right Act:

1. Quid pro quo harassment. This occurs when employment decisions are determined by whether or not a person submits to sexual advances or demands. For instance, an employee may lose a promotion, a plum assignment or even his or her job if he or she doesn’t give in.

Specifically, unwanted sexual advances, requests for sexual favors or other verbal or physical conduct of a sexual nature constitute quid pro quo sexual harassment if:

  • Submission to such conduct is either explicitly or implicitly made as a term or condition of employment, or
  • Submission to or rejection of such conduct is used as the basis for employment decisions.

2. Hostile work environment. In this case, sexual harassment conduct makes the workplace intimidating, hostile or offensive to the point where it unreasonably interferes with an employee’s work performance.

In considering whether or not an environment is “hostile,” the courts will weigh several factors, including:

  • Whether the conduct was verbal, physical or both,
  • How frequently the conduct occurred,
  • Whether the conduct was hostile or patently offensive,
  • Whether the alleged offender was a coworker or supervisor,
  • Whether others joined in the harassment, and
  • Whether the harassment was directed at more than one individual.

Timing of a Claim

According to the EEOC, a hostile environment generally doesn’t result from a single incident or a few isolated incidents, unless the conduct is egregious. But a claim of sexual harassment is bolstered if the complaint is made soon after the event, even if it’s made after the worker quits or is fired.

Despite the distinctions between these two types of harassment, neither term is found in either Title VII or its regulations. It’s up to the EEOC to establish if there are grounds for a claim.

It’s a Woman’s (and a Man’s) World

Sexual harassment charges typically involve complaints by a female worker about a male coworker or supervisor.

However, as this case shows, sexual harassment may cross gender and sexual orientation lines. According to the Equal Employment Opportunity Commission (EEOC), both the victim and the harasser can be either a woman or a man and the victim and harasser can be the same sex.

Although there are no exact statistics on the number of men being sexually harassed at work by women or how many actually file claims for sexual harassment, it’s likely that the cases filed with the EEOC represent a fraction of the total number of incidents. Some men may choose not to report sexual harassment or file a claim with the EEOC because they’re embarrassed or afraid of being subject to ridicule.

Nevertheless, claims by males clearly are on the rise. The EEOC reports that

92% of all claims in 1990 were filed by women as opposed to 83% in 2015, representing a 9% increase in claims filed by men in 25 years.

 

How to Address Potential Construction Project Delays

Posted on by Red Spot Design2

It’s trite but true: time is money. And in the construction industry, this saying is particularly pertinent.If a project can’t be completed on time, it may result in penalties and other unwanted repercussions, not to mention the harm to a construction company’s reputation. And, in the worst case scenario, the firm may not get paid at all.

Terms of the Contract

Delays in construction aren’t unusual and are usually covered by the terms of the contract. Typically, contracts set a number of deadlines, with penalties for failing to complete each on time, barring any special circumstances. Of course, looming large is the ultimate deadline — the substantial completion date.

Besides a final payoff, the substantial completion date may affect other matters, including state and local government requirements, payments to third parties, availability of tax incentives and responsibilities to lenders. It can’t be viewed in a vacuum.

The specifics will vary, but the list of elements governed by contract terms likely is to include the following items.

Identification of deadlines.

In some cases, the contract will specify a hard-and-fast calendar due date, such as the end of business at 5 pm (insert time zone) on December 31, (insert year). Alternatively, you might tie the completion date to a specific event such as one year after the municipality issues a building permit or two years after the contract is signed.

If you use a date tied to an event, make sure that the language in the contract is clear. Also, check to avoid deadlines that occur on a weekend or holiday or make appropriate adjustments (for example, the next business day).

Excused delays.

This is often at the crux of conflict between construction firms and clients, so it’s important that excused delays are ironed out in the contract. An “excused” delay is one that couldn’t have been reasonably foreseen before the parties signed the contract.

When possible, be specific regarding events that would result in an excused delay. For example, a strike by vendors providing raw materials might be listed as an excused delay. Conversely, inclement weather might not be allowed as an excused delay, depending on the geographic location of the project.

Excused delays can be a significant negotiating point and your interests may lie in whether your firm is the general contractor or a subcontractor. Although it may be difficult to resolve these issues at the outset, it could save plenty of hassle — not to mention legal fees — by coming to a clear agreement in the contract.

Money.

If delays are caused by factors outside of your control, your firm may require an increase in pricing to meet the specs of the project. Again, your needs may vary based on your role in the process, and you might specify increases for certain types of excused delays and not for others.

Owner-caused delays.

Even though construction firms often cause delays, the fault may lie with the property owner. For instance, an owner might make substantial revisions to the building plans, fail to point out flaws in the design or other problems after work has already started or simply procrastinate when important decisions must be made. Similarly, a subcontractor may be held back by the actions, or inactions, of a general contractor.

As you might imagine, this can turn into a contentious issue, so again it’s best to address contingencies in the contract. It must be established whether the delay is caused by one party or multiple parties and how the penalties and extra costs should be allocated. It’s best to clearly define the terms before problems occur and rely on an exact formula for attributing costs.

Finally, note that delays may occur because the owner fails to make good on certain promises, such as payment at different stages of the project. It’s logical that the construction firm shouldn’t bear the burden of this type of delay and terms in the contract may address these situations.

Notification.

When a delay occurs — by either party to the contract — notification is generally required. Typically, this responsibility is triggered after a designated number of days, such as 30 days after a deadline is missed. Failure to provide proper notification will often result in a waiver of rights and price adjustments.

Not only does this provision ensure that delays are legitimate, it creates a timeline that can be easily verified, thereby ensuring enforcement of contract terms. However, frequent delay notifications may also be a nuisance and hurt the relationships of the parties. Consider this in your negotiations.

Overview of Damages

In a typical situation, one of the parties will suffer damages when delays push back completion of the project. For example:

  • Damages to property owners. Due to delays, property owners may end up losing rental income, future tenants, public incentives and tax benefits, and financing opportunities, just to name several of the main possibilities. It may also require additional interest costs on loans and other related expenditures.
  • Damages to construction firms. A firm will likely face additional overhead costs when a project drags on past the stated deadline. In addition, revenue will be lost when crews remain tied up on the job when they could be working elsewhere.

These consequential damages also may be reflected in the contract. However, based on the language of the contract, it may not be possible to recover such damages, especially when they’re speculative in nature. It may be difficult to prove the dollar value with a reasonable certainty, so some costs may have to be absorbed.

Finally, consider the aspect of liquidated damages. These are damages agreed upon in the contact if one party breaches the contract. For instance, liquidated damages may apply if a contractor breaches the contract by missing the substantial completion deadline.

This provision generally stipulates an amount (such as $1,000 for every day the project is late). The amount is usually deducted from the project price. It should be noted that liquidated damages are often contested as to the enforceability of the provision and the calculation of the damages.

Review Closely

Pay close attention when you enter into a deal no matter how profitable it initially appears. Have your legal advisor draw up the contract to help ensure you’re adequately protected in the event of any significant delays.

Airport Delays

Some construction delays have higher profiles than others.

Case in point: Work on the new $1 billion “people mover” and remote rental car facility at Tampa International Airport (TIA) is currently running more than four months behind schedule.

Problems are to be expected, of course, but some of these caught the parties by surprise, such as:

  • Travelers kept getting in the way of construction crews.
  • Workers discovered storm drains near the people mover station at the main terminal, so the foundation had to be redesigned.
  • A soil problem was discovered under the people mover route connecting the remote parking garage and rental car facility with the main terminal. Again, the foundation had to be redesigned.

Initially, the project was supposed to be completed by October 2017. Now TIA officials will gladly settle for an opening before spring break in 2018.

Do You Have a Deductible Business Loss or a Nondeductible Hobby Loss?

Posted on by Red Spot Design2

There’s a fine line between businesses and hobbies under the federal tax code. If you engage in an unincorporated sideline — such as a marketing director by day and an artist on the nights and weekends — you may think of that side activity as a business and hope to deduct any losses on your personal tax return. But the IRS may disagree and reclassify the money-losing activity as a hobby.

Lights, Camera, Action: Film Festivals Classified as a Hobby

The U.S. Tax Court recently concluded that a taxpayer who organized and operated film festivals couldn’t deduct a loss from the activity because he lacked the requisite profit motive. (Eric Zudak v. Commissioner, T.C. Summary Opinion 2017-41.)

The taxpayer was employed as the director of business development for a multimedia company. In 2013, he was paid approximately $240,000, traveled extensively and worked long hours for his employer.

The taxpayer also had an interest in film festivals. He noticed that these events were poorly organized and thinly attended. He believed that college towns would be ideal locations for film festivals, because they could be successfully marketed to students and faculty.

In 2012, the taxpayer established U.S. College Film Festival (CFF). He was the sole owner of this unincorporated organization. In 2013, CFF put on two film festivals that generated a net loss of roughly $32,000 (about $700 of revenue minus  $32,700 in expenses). The IRS disallowed the 2013 loss on the grounds that the activity was a hobby rather than a for-profit business.

The taxpayer took his case to the U.S. Tax Court. He showed that CFF’s financial results were improving: In 2014, CFF had about $29,500 of revenue and $63,200 in expenses; in 2015, CFF had a net loss of only about $1,800. Despite these improvements, the court felt there was no profit motive for the activity.

Factors that worked against the taxpayer included the following:

  • While the taxpayer was able to gather records to support CFF’s claimed expenses, he didn’t maintain those records in a businesslike manner. There was no indication that he’d prepared formal budgets, profit projections or breakeven analyses.
  • Although the taxpayer had attended a number of film festivals, he had no experience in organizing or operating them. He also didn’t consult anyone with such experience.
  • The taxpayer had no prior experience managing any kind of small business, so he couldn’t point to previous successes in similar activities.
  • CFF had a significant loss in 2013 and didn’t make a profit in either of the following two years. While the taxpayer was optimistic that CFF would eventually generate profits, it had not yet done so.
  • The taxpayer was gainfully employed full-time in a high-paying job that was his primary source of income.
  • The taxpayer enjoyed organizing, conducting and attending film festivals. He’d also used CFF, at least in part, to showcase a personal film project.

Although the taxpayer devoted much of his free time to planning, coordinating and attending CFF’s events in 2013, the court found that the facts of the case justified the IRS position that the film festival activity didn’t have the requisite profit motive. Therefore, the Tax Court concluded that the IRS had properly classified the activity as a hobby and disallowed the loss for 2013. In general, the hobby loss rules aren’t taxpayer friendly. But there’s a ray of hope: If you heed the rules, there’s a good chance you can win the argument and establish that you have a business rather than a hobby. Here’s some guidance, along with a recent example of a taxpayer who ran afoul of the rules.

Hobby Loss Rules

If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill.

On the other hand, the tax results are less favorable if your money-losing side activity is classified as a hobby, which essentially means an activity that lacks a profit motive. In that case, you must report all the revenue on your tax return, but your allowable deductions from the activity are limited to that revenue. In other words, you can never have an overall tax loss from an activity that’s treated as a hobby, even if you lose tons of money.

Moreover, you must treat the total amount of allowable hobby expenses (limited to income) as a miscellaneous itemized deduction item. That means you get no write-off  unless you itemize. Even if you do itemize, the write-off for miscellaneous deduction items is limited to the excess of those items over 2% of your adjusted gross income (AGI). The higher your AGI is, the less you’ll be allowed to deduct. High-income taxpayers can find their allowable hobby activity deductions limited to little or nothing.

Finally, if you’re subject to the alternative minimum tax (AMT), your hobby expenses are completely disallowed when calculating your AMT liability.

Why is the hobby loss issue an IRS hot button? After applying all of the tax-law restrictions, your money-losing hobby can add to your taxable income. That’s because you must include all the income on your return while your allowable deductions may be close to zero.

A Silver Lining: IRS Safe Harbor Rules

Now that you understand why hobby status is unfavorable and for-profit business status is helpful, how can you determine whether your money-losing side activity is a hobby or a business?

There are two safe harbors that automatically qualify an activity as a for-profit business:

  1. The activity produces positive taxable income (revenues in excess of deductions) for at least three out of  every five years.
  2. You’re engaged in a horse racing, breeding, training or showing activity, and it produces positive taxable income in two out of every seven years.

Taxpayers who can plan ahead to qualify for these safe harbors earn the right to deduct their losses in unprofitable years.

Intent to Make Profit

If you can’t qualify for one of these safe harbors, you may still be able to treat the activity as a for-profit business and deduct the losses. How? Basically, you must demonstrate an honest intent to make a profit. Factors that can demonstrate such intent include the following:

  • You conduct the activity in a business-like manner by keeping good records and searching for profit-making strategies.
  • You have expertise in the activity or hire expert advisors.
  • You spend enough time to justify that the activity is a business, not just a hobby,
  • You’ve been successful in other similar ventures, suggesting that you have business acumen.
  • The assets used in the activity are expected to appreciate in value. (For example, the IRS will almost never claim that owning rental real estate is a hobby even when tax losses are incurred for many years).

The U.S. Tax Court will also consider the history and magnitude of income and losses from the activity. In general, occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept.

Another consideration is your financial status — if you earn a large income or most of your income from a full-time job or another business you own, an unprofitable side activity is more likely to be considered a hobby.

The degree of personal pleasure you derive from the activity is also a factor. For example, running film festivals in lively college towns is a lot more fun than, say, working as a finance executive — so the IRS is far more likely to claim the former is a hobby if you start claiming losses on your tax returns. (See “Lights, Camera, Action: Film Festivals Classified as a Hobby” at right.)

Toeing a Fine Line

Business losses are fully deductible; hobby losses aren’t. So, taxpayers will prefer to have their side activities classified as businesses. Over the years, the Tax Court has concluded that a number of pleasurable activities could be classified as for-profit businesses rather than hobbies, based on the facts and circumstances of each case. Your tax advisor can help you create documentation to prove that you’re on the right side of this issue.

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