Red Spot Design2, Author at The CJ Group

IRA Charitable Donations: An Alternative to Taxable Required Distributions

Posted on July 15, 2016 by Red Spot Design2

QCD

You can make cash donations to IRS-approved charities out of your IRA using so-called “qualified charitable distributions” (QCDs). This strategy may be advantageous for high-net-worth individuals who have reached age 70 1/2. It expired at the end of 2014, but QCDs were made permanent for 2015 and beyond under the Protecting Americans from Tax Hikes (PATH) Act of 2015.

To take maximum advantage of this strategy for 2016, you’ll need to replace some or all of this year’s IRA required minimum distributions (RMDs) with tax-advantaged QCDs. Here are more details.

QCD Basics

QCDs can be taken out of traditional IRAs, and they’re exempt from federal income taxes. In contrast, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).

Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions. That’s OK, because the tax-free treatment of QCDs equates to a 100% deduction — because you’ll never be taxed on those amounts. Additionally, you don’t have to worry about any of the restrictions that apply to itemized charitable write-offs under the federal tax code.

A QCD must meet the following requirements:

It must be distributed from an IRA.
The distribution can’t occur before the IRA owner or beneficiary reaches age 70 1/2.
It must meet the IRS requirements for a 100% deductible charitable donation. If you receive any benefits that would be subtracted from a donation under the regular charitable deduction rules — such as free tickets to an event — the distribution can’t be a QCD. This is an important pitfall to watch out for.
It must be a distribution that would otherwise be taxable. A distribution from a Roth IRA can meet this requirement if it’s not a qualified (meaning tax-free) distribution. However, making QCDs out of Roth IRAs is generally not advisable for reasons explained later.

Important note: You can also use the QCD strategy on an IRA inherited from the deceased original account owner if you’ve reached age 70 1/2.

Annual Limit

There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.

Tax-Saving Advantages

QCDs offer several potential tax-saving advantages:

They’re not included in your adjusted gross income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based rules. For example, a higher AGI can cause more of your Social Security benefits to be taxed, less of your rental estate losses to be deductible and more of your investment income to be hit with the 3.8% net investment income tax. QCDs are also exempt from the rule that says your itemized charitable write-offs can’t exceed 50% of your AGI. (Any itemized charitable deductions that are donations disallowed by the 50%-of-AGI limitation can be carried forward for up to five years.)
They qualify as RMDs if they’re taken from traditional IRAs. So, you can arrange to donate all or part of your 2016 RMDs (up to the $100,000 limit) that you would otherwise be forced to receive before year end and pay taxes on.
They reduce your taxable estate, though this is less of an issue for most folks now that the federal estate tax exemption has been permanently increased. (The inflation-adjusted exemption for 2016 is $5.45 million.)

In addition, suppose you’ve made nondeductible contributions to one or more of your traditional IRAs over the years. If so, your IRA balances consist of a taxable layer (from deductible contributions and account earnings) and a nontaxable layer (from those nondeductible contributions). QCDs are treated as coming first from the taxable layer. Any nontaxable amounts remain in your accounts. In subsequent tax years, those nontaxable amounts can be withdrawn tax-free by you or your heirs.

QCDs from Roth IRAs

Should you make QCDs from Roth IRAs? Generally, the answer is no. That’s because you (and your heirs) can withdraw funds from a Roth IRA without owing federal income taxes. The catch is that at least one of your Roth accounts must have been open for five years or more.

Also, for original account owners (as opposed to account beneficiaries), Roth IRAs aren’t subject to the RMD rules until after you die. The bottom line: It’s generally best to leave your Roth balances untouched rather than taking money out for QCDs, because the tax rules for Roth IRAs are so favorable.

Plan Ahead

The QCD strategy can be a smart tax move for high-net-worth individuals over 70 1/2 years old. If you’re interested in this opportunity, don’t wait until year end to act. Summer is time for mid-year tax planning, including arranging with your IRA trustee or custodian for QCDs to replace your 2016 RMDs.

Could QCDs Work for You?

High-net-worth senior citizens who can afford to donate money from their retirement accounts may benefit tax-wise from taking qualified charitable distributions (QCDs) if they match at least one of these profiles:

1. You don’t itemize deductions. Only people who itemize benefit tax-wise from regular charitable donations. Using QCDs provides a way for people who don’t itemize to gain a tax benefit from making charitable donations.

2. You itemize, but part of your charitable deduction would be phased out based on your adjusted gross income (AGI) or delayed by the 50%-of-AGI restriction.

3. You want to avoid being taxed on required minimum distributions (RMDs) that you must take from your IRAs.

The Limits of Product Liability

Posted on July 14, 2016July 22, 2024 by Red Spot Design2

Product Liability for Manufacturers

The limits of product liability are not always easy to define. But in one case, the Nebraska Supreme Court helped identify the limits by ruling that two manufacturers aren’t liable for harm caused by the criminal acts of others — even if their product’s failure led to the harm.

The court ruled that Ford Motor Co. and Bridgestone/Firestone were not liable for the death of a 19-year-old college student who was murdered by a man who offered her a ride after she had a flat tire.

“We have found no authority recognizing a duty on the part of the manufacturer of a product to protect a consumer from criminal activity at the scene of a product failure where no physical harm is caused by the product itself.”– Nebraska Supreme Court

There was no allegation that the young woman sustained any injury as a result of the tire failure itself. Instead, the student’s parents charged negligence on the part of the manufacturers, claiming that the malfunctioning Firestone tire on their daughter’s Ford Explorer set in motion a chain of events that culminated in her murder. They argued that the manufacturers knew — or should have known — of the potential for criminal assault after the breakdown of a Ford Explorer.

The court disagreed, invoking the legal concept of “proximate cause.” Under the law, it is generally not enough to show that an event would not have happened if it weren’t for another prior event. Liability generally lies with the last negligent or intentional act that leads to the harm. In this case, that act was committed by the murderer because he shot the young woman.

The court responded: “Assuming the truth of these allegations, the most that can be inferred is that Ford and Firestone had general knowledge that criminal assaults can occur at the scene of a vehicular product failure. However, it is generally known that violent crime can and does occur in a variety of settings, including the relative safety of a victim’s home.”

The court made its decision even though the federal government had found the tires on the woman’s Ford Explorer to be unsafe. Millions of ATX, ATX II and Wilderness AT tires have been recalled after it was determined that they are prone to losing their treads at high speeds. The plaintiffs argued that their daughter might not have driven alone, early in the morning, if she had known of the tire’s tendency to blow out. The court did not find this argument persuasive. (Stahlecker v. Ford Motor Co., 266 Neb. 601, 08/08/03)

While this case does express a principle that protects companies from liability from unforeseeable criminal acts, it should not be interpreted as a blanket protection from liability in all cases of criminal behavior by third parties.

A variation: A different set of circumstances could lead to a different outcome. For example, imagine a situation where a man tries to use a jack supplied by the automaker to change a flat tire. The design of the jack requires that the car be close to the edge of the road. The man is then struck by a drunk driver and killed.

This is a scenario where the automaker could be held liable for its negligent design of the jack, even though the criminal act of the drunk driver was the ultimate cause of the man’s death.

The difference: In this hypothetical case, the court could determine that the automaker should have foreseen the possibility that an accident might occur.

Top Business Challenges for Professional Service Organizations

Posted on July 13, 2016July 23, 2024 by Red Spot Design2

Professional Service Organizations (PSO) often deal in Human Capital (i.e. they sell time), which creates pressure to manage quickly but not always effectively. Even as they advise business owners, leaders in a PSO neglect many of the same operational and financial issues in their own organizations. Before client service and profits begin to decline, PSO leaders must identify their operational inefficiencies and decide if they have the resources internally or externally to address them. A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders.

Professional service organizations historically can be a scattered and distracting place. Imagine all of these intelligent individuals — lawyers, accountants, engineers or architects — selling their knowledge and time. As owner and employee numbers increase, the business model is prone to inconsistencies and neglect without an executive leadership team that focuses a percentage of time on running the business.

Some of the common operational inefficiencies we’ve seen in PSOs include:

Aging accounts receivables
Lack of tax planning
Internal control and compliance issues
Inadequate investment in technology (i.e outdated)
Misalignment between marketing strategy and the business plan
Reactive recruitment

One of the solutions in PSOs is to assign a partner or shareholder to certain areas of the business: technology, marketing, HR, recruitment, etc. However, lack of knowledge in these increasingly specialized areas can result in minor errors at best and legal issues at worst. Before going too far down that road, leaders need to take time and really assess the organization’s capacity to manage these areas of the business internally — or if outside expertise is necessary as well as valuable.

Top Business Challenges for PSOs

Distinguishing one professional service from another is dependent on the owners’ ability to communicate value. When you sell an intangible service or knowledge, value is hard to pin down. It requires market research on your target audiences, their service needs, how your competition communicates value and why your existing clients say they choose your organization. Failure to take a hard look at value makes it difficult to sell, let alone attract talent or manage service expectations.

And these are some of the top challenges for PSOs to sustain good margins and avoid commodity price pressure. Even before the recession, PSOs were looking at ways to perform projects with fewer on-site visits, more milestones built in, use of more subcontractors and the ability to efficiently deliver measurable results. Clients are more likely than in the past to put a cap on spending and demand tangible deliverables that match PSO fees.

According to an annual survey of top-performing PSOs across the US by SPI Research, the most profitable PSOs are more specialized in their service offerings and/or they concentrate on high-growth segments where they are often the market leader. A significant portion of business comes through referrals thanks to their market leading reputation, and they have created a transparent culture of communication that attracts clients and employees.

According to the 2016 SPI Research survey, top-performing PSOs averaged net profits of just over 20 percent while average firms reported net revenues of 14.9%. Interestingly, the top PSOs referenced in the survey are incorporating some level of technology consulting in their practices.

Technology Is Partial Solution

PSOs have two challenges when addressing technology needs: operational and client focused. A 2016 survey by Computer Economics showed that PSOs were more likely to budget for operational IT spending — upgrades of existing IT — than investment in new IT solutions through capital outlay. One possible explanation is the migration of many organizations to cloud technology.

When considering IT investment, it is important to look at internal as well as external investments. Demonstrating up-to-date technology is a primary recruiting tool because younger professionals prefer to work in organizations that leverage technology for efficiency (e.g. workflow, remote work, databases). The right technology investment can also help PSOs measure performance (e.g. CRM, web analytics, marketing automation, financial reporting).

In addition, technology is a selling point for clients in terms of delivering services cost-effectively, helping them translate historic data into smart business decisions and also forecast opportunities (e.g. portals, accounting software, point of sale systems, time and billing, enterprise systems).

However, new technology investment can only augment staffing, attract clients and increase revenue when it is aligned with the business strategy. Too many organizations invest in a software solution or peddle it to their clients without fully developing a strategy around its value — or providing staff training to use it effectively. Moreover, growth can delay timely investment in software or even cloud-based applications that can support efficient back-office functions.

Getting back to basics, PSOs must assess their vision and assign leaders to each area of the organization: finance, operations and marketing. Then they must name and prioritize their goals:

Increase productivity
Control cost
Attract and retain talented people
Solve complex business issues
Provide outstanding client service
Financial and tax compliance
Managing technology and future investments to stay competitive

How should finance, operations and marketing align to support these goals?

Seek New Business Opportunities

One goal not mentioned yet is the development of new business opportunities. Successful PSOs are not only expanding services with existing clients, but also adding new clients. The most successful PSOs surveyed by SPI Research derived more than 20 percent of revenue from new clients. At the same time, they kept employee headcount growth lower than revenue growth through a larger sales pipeline and efficient resource management. While the slowest-growing organizations reported higher profitability, the danger was in neglecting new business opportunities in favor of short-term profits.

In a 2015 blog post, SPI Research cautioned PSOs from discounting, as survey respondents noted a prevalence of longer sales cycles and fewer winning proposals when the PSO offered price concessions. The promise of future work rarely made up for the loss in margin because clients that demanded discounting already perceived the service as a commodity.

Other ways of expanding business can happen by positioning the PSO as a leader in a particular industry vertical, thereby elevating the sophistication of the service or consulting offered. We have also seen PSO growth through M&A.

M&A activity in PSOs can include a “horizontal merger” in which firms within the same industry merge in order to add capacity and clients as well as expand geographically. PSOs can also explore product extension mergers by aligning or acquiring complimentary services such as an engineering firm adding general contractor services or a law firm adding collections services. Of course, such mergers must occur within the legal limits of the industries involved, and there are additional costs associated with M&A.

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

Assessment: Facing the Unknowns of Succession Planning – Phase I

Posted on July 11, 2016 by Red Spot Design2

Phase I – Assessment

Because your business is probably your largest asset — and because it also is probably your largest single source of income — your decision-shaping and calendar of events for your plan are going to be built around assessing alternatives to preserve the asset, nurture the asset, monetize the asset or liquidate the asset for optimum results for you, your family and the business. Some of the questions you should ask as you begin the journey of planning your succession are:

What is your business really worth?
What do you really need in retirement?
How does ownership translate into retirement assets?
Who will step into the ownership role(s)?
What’s your Plan A and Plan B scenario?
What will you do next?
What is your timetable for fully transitioning out?

So, what is your business really worth? If you’ve never had a formal or even informal valuation of your business, now is the time to schedule it. You will need a reasonable estimated value of your business — and an honest assessment of after-tax available cash to you in the event of a sale. You need a valuation regardless of whether you desire to sell to a third party or to your management team, or create an ESOP, family gifting or charitable gifting options.

There are formal valuations and there are informal valuations. For the purposes of succession planning, most small business owners simply need a valuation professional to determine an estimation of value within $100,000. Don’t try to calculate the value online with a low-end, do-it-yourself tool. All of your decisions going forward derive from this number, so it pays to consult a professional.

Once you have a clear estimation of value, you will want to visit with your investment advisor or financial planner to assess your personal finances, current and post retirement cash flow, retirement goals and sources of cash flow up to your official retirement date. In my experience with succession planning, this process will take at least three separate meetings in order to:

Determine what you want to do in retirement
Assess the lifestyle you want to maintain
Incorporate the vision of the next successful chapter of your life into the succession plan

During this discussion, you may want to decide how much, if any, you want to continue working in the business. Independent of any valuation or legacy issues you carry, what would be a fair amount for you to be compensated in a less than full-time position at the company? What are the primary areas where you could add value to the business on a continuing basis?

Establish Plan A and Plan B

This decision, of course, hinges on the most likely acquirer of your business. You will need to rank on a 10-point scale the likelihood and viability of a sale or transfer to:

Your own family members
Your current management team or business partners
Your employees taking ownership stake through an ESOP
A strategic buyer
A private equity firm

Whichever option gets the highest ranking, call that “Plan A.” But call the second highest option “Plan B.” We’ll talk more about why having two options for potential owners are important in the execution phase of succession planning.

In addition to ranking a potential successor or outside buyer, you will need to obtain and review all of the following agreements and legal documents. You may find during this process that there are documents you don’t have and will need to create.

Will and estate documents
Emergency management plan – who gets the keys if you are temporarily out of commission
Shareholder agreements, often called buy/sell agreements
Bylaws or operating agreement of the business itself – voting, officers, classes of stock, etc.

The final piece of your Phase I Assessment is to target a specific year that will be the year of your exit — no matter what form that takes.

As you assess your current situation, including decisions around successors and timelines, your CPA should support you with a clear picture of cash flow, debt and proper entity structures. Your CPA can also help you assess certain buy-out scenarios that may involve selling to internal stakeholders, courting an external buyer or creating an ESOP. Rely on your CPA to weigh the pros and cons of your Plan A and Plan B to ensure that they are viable choices.

Once your first 90 days of planning are completed, you should begin to understand where the gaps lie in order to set the timeline for succession planning execution. Review each step that has been accomplished so far with your advisory team. Most of all, congratulate yourself for moving toward a viable plan for your business transition.

To continue reading about succession planning, read: Phase II – Sharing and Executing the Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas.

Five Mid-year Small Business Tax Planning Moves Inspired by the PATH Act

Posted on July 11, 2016July 23, 2024 by Red Spot Design2

SB Blog Cover 1200px Numerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, small business owners can plan ahead with these 5 mid-year tax strategies inspired by the recent legislation.

5 Tax Breaks for Small Businesses

1. Buy equipment. The PATH Act preserves both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year. For 2016, the maximum Sec. 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. Without the PATH Act, the 2016 limits would have been $25,000 and $200,000, respectively. The higher amounts are now permanent and subject to inflation indexing.

Additionally, for 2016 and 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Sec. 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on December 31, 2019.

2. Improve your premises. Traditionally, businesses must recover the cost of building improvements straight-line over 39 years. But the recovery period has been reduced to 15 years for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. This tax break was reinstated and made permanent by the PATH Act.

If you qualify and your premises need remodeling, you can recoup the costs much faster than you could without this special provision. Keep in mind that some of these expenses might be eligible for bonus depreciation.

3. Ramp up research activities. After years of uncertainty, the research credit has been made permanent under the PATH Act. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that’s essentially determined using a historical average of research expenses as a percentage of revenues. There’s also an alternative computation for companies that haven’t increased their research expenses substantially over their historical base amounts.

Research activities must meet these criteria to be considered “qualified”:

The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
There must be an intention to eliminate uncertainty.
There must be a process of experimentation. In other words, there must be a trial and error process.
The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Effective starting in 2016, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. In addition, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.

4. Issue more stock. Does your business need an influx of capital? If so, consider issuing qualified small business stock (QSBS). As long as certain requirements are met (for example, at least 80% of your corporate assets must be actively used for business purposes) and the investor holds the stock for at least five years, 100% of the gain from a subsequent sale of QSBS will be tax-free to the investor — making such stock an attractive investment opportunity. The PATH Act lifted the QSBS acquisition deadline (December 31, 2014) for this tax break, essentially making the break permanent.

5. Hire workers from certain “target groups.” Your business may claim the Work Opportunity credit for hiring a worker from one of several “target groups,” such as food stamp recipients and certain veterans. The PATH Act revives the credit and extends it through 2019. It also adds a new category: long-term unemployment recipients.

Generally, the maximum Work Opportunity credit is $2,400 per worker, but it’s higher for workers from certain target groups. In addition, an employer may qualify for a special credit, with a maximum of up to $1,200 per worker for 2016, for employing disadvantaged youths from Empowerment Zones or Enterprise Communities in the summer.

New transitional rules give an employer until June 30, 2016, to claim the Work Opportunity credit for applicable wages paid in 2015.

Midyear Small Business Tax Planning Meeting

We’re almost half way through the tax year. Summer is a great time for small businesses to get a jump start on tax planning. Contact your Cornwell Jackson tax adviser to estimate your expected tax liability based on year-to-date taxable income and devise ways to reduce your tax bill in 2016 and beyond.

Non-Compete Agreements: Finding the Right Balance

Posted on July 6, 2016 by Red Spot Design2

Non-compete agreements have long been a staple of executive employment contracts. Today, however, they’re becoming increasingly common even in lower-level jobs. According to the Wall Street Journal, a steady rise in litigation over non-competes “largely reflects the increased usage of non-compete arrangements among lower-level staffers, along with employees’ greater mobility and access to sensitive information.”

It might seem like overkill to require a non-compete agreement with employees below the executive level. However, an individual’s ability to damage your business by going to work for a competitor will grow over time — assuming the employee gains responsibility and knowledge that could help a competitor. If you don’t secure a non-compete agreement at the beginning of an employment relationship, you’ll probably need to jump through an extra hoop to make it legally enforceable later on.

State Law Rules

State law governs non-compete agreements, and some of the rules vary from one state to the next. In an extreme case, California generally doesn’t recognize the validity of these agreements at all.

Federal courts may also sometimes get involved. One federal court recently weighed in on a case and upheld a common principle — the need for an employee to receive “consideration” (some form of compensation) in exchange for accepting a non-compete agreement.

Ordinarily, being offered a job is deemed to be adequate consideration in itself. However, if an employee has already been working for a while, simply being allowed to keep the job might not be deemed adequate consideration. That’s how the U.S. District Court in Hawaii came down on the issue in the case of The Standard Register Co. v. Keala (No. 14-00291 JMS-RLP).

“Numerous courts have held that where an employee has already been hired, continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement,” the court held, and denied the employer’s request for a temporary restraining order against former employees.

Is the Agreement Enforceable?

One possibility for “consideration” in that situation might have been a bonus or a promotion. However, courts aren’t always predictable in what they’ll uphold. Here are other key facets of a non-compete agreement that courts examine:

Does it protect a legitimate business interest? For example, let’s say you claim that an employee possesses sensitive information which could harm you if it fell into a competitor’s hands. Unless there’s evidence that you made a real effort to protect the secrecy of that information, a court may decide your stated business interest isn’t legitimate.

What is the duration of the agreement? Courts are sympathetic to the idea that people need to earn a living. Therefore, they often frown on agreements that restrict former employees for periods longer than, for example, six months. But “reasonable” limits vary by circumstances and courts.

What are the geographic parameters? A court will try to determine reasonableness here based on the size of your market. If you don’t have many competitors beyond a certain distance, such as a 10-mile radius, you wouldn’t be able to justify an agreement based on a 50-mile radius. Again, there’s considerable variability in this parameter.

What activity is prohibited? The broader the scope of the prohibition, the less likely the agreement is to be enforceable. The most “reasonable” restriction in the eyes of the majority of courts is against soliciting your customers.

Red Pencil, Blue Pencil

If a court reviews a non-compete agreement and finds fault with it, there are three possible outcomes — depending on the state. The most restrictive standard is known as the “red pencil” rule. It requires the invalidation of an entire agreement even if only one provision is flawed. Nebraska takes the position, and South Carolina, Virginia and Wisconsin generally do as well.

Under the less draconian “blue pencil” standard, courts are allowed to invalidate specific provisions of an agreement, while leaving other ones standing. Arizona, Connecticut, Indiana, Maryland, Montana and North Carolina generally take that approach.

The best scenario is “reformation,” which is permitted in approximately 30 states. This is where the court can actually rewrite the agreement to allow it to be as faithful as possible to the employer’s original intent, but only to the extent permissible by law. That way, you might win a partial victory if you’re still allowed to restrict the former employee’s activities, even if not as thoroughly as you’d hoped.

Not all states fall into such tidy categories, and their positions evolve. Wherever you’re located, you will need to consult with a qualified attorney to draft a non-compete agreement that will hold up to local scrutiny.

Also, many job applicants will take a dim view of a requirement to sign this type of contract. With that in mind, you’ll need to balance your eagerness to hire a particular applicant with the consideration you’re willing to offer to make the agreement more palatable. Otherwise, the non-compete agreement could be a deal breaker.

Consult your Cornwell Jackson adviser for more information.

Is the Manufacturing Renaissance Over? Time Will Tell

Posted on July 5, 2016 by Red Spot Design2

CNC LPG cutting with sparks close up

The U.S. manufacturing sector has rebounded and seems poised for more growth.

But is the revival as real as some have characterized? A number of recent reports have described the resurgence in manufacturing as a modest rebound rather than a boom. Even more compelling, some suggest the renaissance is over. This article takes a closer look at where the industry stands at midpoint 2016.

The Bright Side

Let’s start with the good news. Approximately 900,000 jobs were added to the U.S. manufacturing sector between 2010 and 2016. There’s no denying the positive impact of that growth. However, after taking a brutal beating before that, some recovery had to be expected. By most standards, the improvement was modest.

Plus, a true return to more manufacturing activity in the United States, sometimes called “reshoring,” should be backed by other data, including increased productivity in consumer goods. Although the nation has been importing more vehicles than it has been exporting for several decades (with Japanese and German automakers dominating the market) some traditionally strong sectors have eroded, including airplanes, medical equipment and semiconductors. Also, other longstanding areas of growth (oil and gas, mining and construction equipment) have slowed considerably.

Studies of U.S. manufacturing activity have produced a mixed bag of conflicting results:

Boston Consulting Group, which helped popularize the concept of reshoring, has said that a number of top manufacturing executives are considering bringing back production from China. Thirty-one percent of respondents to the group’s fourth annual survey of senior manufacturing executives at companies with at least $1 billion in annual revenues said that their companies are most likely to add production capacity in the United States within five years for goods sold in the nation, while 20% said they are most likely to add capacity in China.
A.T. Kearney, however, says its U.S. Reshoring Index suggests that reshoring is an aberration, not a trend. That index tracks actual U.S. manufacturing and import data. Kearney also notes that industries trying to avoid rising labor costs in China have been moving production to other Asian countries rather than back to the United States, a trend that is unlikely to reverse anytime soon. Countries in Southeast Asia, including India, have literally hundreds of millions of workers available in largely untapped pools. This is clearly apparent in activities such as clothing and furniture production. Another development affecting manufacturing is “nearshoring” on the North American continent, particularly in Mexico where labor costs are low.
Information Technology and Innovation Foundation (ITIF), a nonpartisan think tank, suggests that the so-called renaissance doesn’t exist. It notes that the real manufacturing value added, which it says is the best measure of U.S. manufacturing, was still 3.2% below 2007 levels in early 2015, despite GDP growth of 5.6%. Among other “myth-busters,” the ITIF report, The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, illustrates that wages in China are estimated to be just 12% of average U.S. wages in 2015, global shipping costs are back to normal after falling by 93% in a six-month period in 2009 and U.S. productivity isn’t increasing faster than that of other industrialized countries. And it is actually growing much slower than China and South Korea.

Clearly these results suggest that the so-called renaissance has been highly overrated.

The Current Landscape

The economic outlook for manufacturing darkened somewhat in June. The sharp drop in hiring prompted the Federal Reserve to keep interest rates steady. The manufacturing sector lost 10,000 jobs and it showed job losses in three of the four most recent months. Year-over-year growth in manufacturing employment has been negative for three months in a row. The numbers have led some observers to suggest the end of any post-recessionary manufacturing resurgence.

What’s the reason for the turnabout? The Bureau of Labor Statistics published its Job Openings and Labor Turnover Survey the same week as the jobs report suggesting that jobs weakness in manufacturing may be the result of a lack of labor supply rather than lack of demand. In April, job openings in the industry jumped to a 15-year high while the ratio of manufacturing job openings to manufacturing job hires hit a record, suggesting that employers are having trouble finding quality workers to fill open positions. In the meantime:

Layoffs remain relatively low, with fewer reported this cycle than at any point during the previous cycle,
Manufacturing wage growth outpaced overall wage growth over the past manufacturing year, and
The unemployment rate for manufacturing workers has been comparable to the three years leading into the most recent recession, when the economy was stronger.

All of this seems to indicate that the manufacturing sector is healthy.

What can manufacturers do about increased labor costs due to a shortage of qualified workers? One possibility is to increase overtime hours for workers on the payroll. Alternatively, if output from existing workers is nearing its limit, wages may be increased to attract new-hires from other sectors, even if this slightly dilutes the bottom line. Other solutions, such as locking in output and sacrificing the potential for growth, may be more difficult to swallow.

Final Word

Whether you believe that the manufacturing renaissance is over, or you aren’t convinced that any revival was particularly robust or even existed, shouldn’t discourage your firm from its main focus. Stick to the fundamentals that your company has relied on: Remain diligent but retain enough flexibility in operations so your firm will be able to adapt quickly, if needed.

Five Mid-year Individual Tax Planning Moves Inspired by the PATH Act

Posted on July 5, 2016 by Red Spot Design2

Individual Tax Breaks from PATH Act Numerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, individuals can plan ahead with these 5 mid-year tax strategies inspired by the recent legislation.

5 Tax Breaks for Individuals

1. Consider tax breaks for college students. If you have a child in college this year, you may be eligible for tax benefits. The PATH Act makes the American Opportunity credit permanent and extends the tuition and fees deduction through 2016. Both of these breaks are subject to phaseouts based on income level. For each student, you may claim either the American Opportunity credit or the tuition and fees deduction, but not both. Thus, while it is possible to claim the credit and the deduction in the same year, you may not claim both for the same student. If your income is too high to take one of these breaks, your child might be eligible.

The PATH Act also permanently treats computers, computer equipment, software and Internet service as qualified expenses for Section 529 savings plans, so distributions for this purpose are tax-free. Summer planning can help maximize your tax benefits for costs incurred for the fall semester.

2. Shop for a new car. If you itemize deductions on your federal income tax return, you can generally deduct state and local income taxes paid for the year. As an alternative, however, you may claim a deduction for state and local sales taxes. This option — which has been permanently extended by the PATH Act — is generally beneficial to taxpayers in locales with low or no state or local income taxes. But it can also benefit taxpayers who make large purchases during the year, regardless of where they live.

The sales tax deduction is determined based on actual receipts or an IRS table that lists amounts for each state. If you opt to use the IRS table, you can add on the actual sales tax paid for certain “big-ticket items,” such as cars or boats. If you’re in the market for a new vehicle, remember this alternate tax deduction.

3. Transfer IRA funds directly to charity. After you turn age 70½, you must take required minimum distributions (RMDs) from your traditional IRAs, whether you want to or not. These RMDs are taxable in the tax year they’re received.

Under a provision made permanent by the PATH Act, if you’re age 70½ or older, you may transfer up to $100,000 directly from your IRA to a charity without any tax consequences. In other words, you can’t claim a charitable deduction for these transfers, but the payouts aren’t taxable either — even if they’re used to satisfy your RMD. Act sooner rather than later to avoid year-end scrambling. Keep in mind that this is a per person benefit. Although both spouses may individually transfer up to $100,000 from an IRA to a charity, one spouse cannot “borrow” the other spouse’s $100,000 to make a $200,000 transfer.

4. Gift property to a charity. Real estate owners can deduct the value of “conservation easements” made to a charity that preserve the property in its original condition. Charitable deductions for long-term capital gains property (appreciated property that’s been held more than one year) are generally limited to 30% of the taxpayer’s adjusted gross income (AGI). Any excess may be carried forward for up to 15 years.

Under enhancements made permanent by the PATH Act, the deduction threshold is raised to 50% of AGI (100% for farmers and ranchers) for conservation easements. Any excess may still be carried forward for up to 15 years. One catch, however, is that all such conservation donations must be made in perpetuity.

5. Install energy-saving equipment. Are you dreading the summer heat? It may be time to install a central air conditioning system. There are various requirements to qualify for the credit. First, the home must be your main home. Also, while the credit is generally equal to 10% of the cost of qualified energy-saving improvements, there is a lifetime credit limit of $500. Thus, if you’ve claimed the credit in a prior year, your current-year credit will be reduced accordingly. Other special dollar limits may apply. It’s available for a wide range of items from central air to insulation.

The PATH Act extended the residential energy credit only through 2016. So, it’s important to act before this tax-saving opportunity expires. (It may be extended again, but there are no guarantees.)

Midyear Individual Tax Planning Meeting

We’re almost half way through the tax year. Summer is a great time for individuals to get a jump start on tax planning. Contact your Cornwell Jackson tax adviser to estimate your expected tax liability based on year-to-date taxable income and devise ways to reduce your tax bill in 2016 and beyond.

Labor Department Expands on Overtime Rules

Posted on July 4, 2016 by Red Spot Design2

Businesses are still buzzing about the government’s long-awaited revised overtime rules.

The Department of Labor (DOL) had provided a sneak peek in the form of proposed regulations issued in 2015, putting many employers on high alert about the main changes. Recently, the department provided additional guidance on two exemptions that often fly under the radar.

Background

Under the Fair Labor Standards Act (FLSA), employees must be paid time-and-a-half their regular pay rate for overtime above 40 hours a week unless they fall under an exemption. Employers who don’t adhere to the rules could be liable for payroll taxes on top of the payment due for overtime.

DOL regulations have generally required each of the following three tests to be met for employees to be exempt from overtime pay:

Salary basis. The employee must be paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of work performed.
Salary level. The amount of salary paid must meet a minimum specified amount.
Duties. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.

Before the recent revised rules, the DOL last updated these regulations in 2004. At that time it set the weekly salary level at $455 ($23,660 annually) and introduced an exemption for “highly-compensated employees.”

The new regulations more than double the wage threshold to $913 a week ($47,476 a year). This limit will be adjusted every three years, beginning January 1, 2020. Employees earning less than that amount are entitled to overtime pay regardless of their job responsibilities.

A Threshold Reset

The goal of these changes is to reset the income threshold to the point it would have reached, with inflation adjustments, had it not been frozen more than a decade ago. With the higher wage threshold, millions of “white-collar” employees — including those in executive, administrative and professional capacities — will qualify for overtime pay.

In a related change, the annual pay threshold for highly-compensated employees was boosted, from $100,000 to $134,004. Employees earning more than this may be treated as exempt regardless whether the duties test would classify jobs as non-exempt.

Bottom line: Beginning December 1, 2016, employees who earn between $47,476 and $134,004 may earn overtime pay. Their status will be determined by the same duties test that has been in place for years. For this purpose, an employee’s pay includes nondiscretionary bonuses, incentive pay and commissions, as long as those payments occur at least quarterly and don’t exceed 10% of compensation.

The guidance from the DOL focuses on two types of employers, educational institutions and state and local governments.

Educational Institutions

Because of special regulations, many white-collar employees at higher education institutions aren’t subject to the salary level test or are subject to a different test. The new salary level won’t affect them.

For instance, the salary level and salary basis requirements for the white-collar exemption don’t apply to bona fide teachers. Academic administrative personnel that help run higher education institutions and interact with students outside the classroom are governed by a special alternative salary level. These employees include department heads, and academic counselors and advisors. They are exempt from the FLSA overtime requirements if they earn at least the entrance salary for teachers at their institution.

However, workers whose duties aren’t unique to the education setting, such as managers in food service or the institution’s bookstore are covered by the same salary level as their counterparts at other kinds of institutions and businesses.

State and Local Governments

Neither the FLSA nor the DOL regulations provide a blanket exemption from overtime for state and local governments. However, the FLSA contains several provisions unique to state and local governments, including compensatory time (comp time).

State or local government agencies may arrange for their employees to earn comp time instead of cash for overtime hours. Any comp time arrangement must be established under the terms of:

A collective bargaining agreement,
A memorandum of understanding,
An agreement between the public agency and representatives of overtime-protected employees, or
An agreement or understanding between the employer and employees before the work is performed.

The comp time must be provided at a rate of 1.5 hours for each hour of overtime. The comp time is paid at the regular rate of pay.

Comp Time Ceilings

Most state and local government employees may accrue up to 240 hours of comp time. Law enforcement, fire protection and emergency response personnel, as well as seasonal workers (such as those processing state tax returns), may accrue up to 480 hours of comp time in one pay period.

The FLSA also provides an exemption for fire protection or law enforcement employees working for an agency with fewer than five employees. This exemption is based on a “work period” rather than a “work week.”

A work period may be from seven to 28 consecutive days. Overtime compensation is required when an employee’s hours worked exceed the maximum hours in the regulations. An employee must be permitted to use comp time on the date requested unless that would “unduly disrupt” the operations of the agency.

The final overtime rule takes effect on December 1, 2016. That should give employers ample time to comply with the changes and to develop plans for the future.

Potential H.R. Changes

Employers of all stripes have their work cut out for them between now and December 1. This may trigger other H.R. and payroll changes in light of the new overtime requirements. Keep in mind that there’s no “wrong” or “right” way to do things. Your payroll advisers can lend a helping hand.

Do You Need a Succession Planning Starter Kit?

Posted on July 2, 2016July 23, 2024 by Red Spot Design2

You Can “Manufacture” a Succession Plan in Months,Enjoy it for Years.

As a longtime CPA in the Dallas area, I have worked with a lot of family-owned and closely held small business owners, particularly in manufacturing and distribution companies. If you are among the small and medium-sized business owners who are age 50 or older, that gives most of you a window of 10 years or less to fully execute a business transition or succession plan. Fortunately, creating the actual succession plan can take less than one year. This whitepaper can be your accounting starter kit or template for a fruitful business transition. Use it to support a healthier business and a more secure retirement. Your future begins…now.

As a business owner, you have always forged your own path, but at the height of your leadership lies the big question: What’s next?

Succession planning is like a nagging incompletion in the back of your mind. You have plenty of reminders from your attorney, your CPA, your spouse and maybe even your children. You know you need to face it, but inertia sets in. It all feels so complex, so overwhelming, and so FINAL.

One day, you overhear a conversation on the golf course (or at your favorite restaurant). “Poor Fred. After 40 years, the only thing he can do is liquidate when he finally decides to call it quits. It’s too bad…”

If you don’t have a plan, someone or something will create the plan for you. Due to the unfortunate lack of business succession planning, only about 30 percent of successful family businesses survive into the second generation, according to The Family Firm Institute. A survey of advisors through the Financial Planners Association also found that only 30 percent of their clients had a written succession plan — even though 78 percent of clients planned to fund their retirements through a business sale.

Really? A Succession Plan in Seven Months?

In our experience, about 80 percent of business succession planning can be developed in seven months. Some plans take more time, some less, but the average timetable is about 210 days.

Step one: declare your commitment to create a plan. Share this commitment with your three closest advisors. This team usually includes your attorney, your CPA and your investment advisor, but it could also include your banker, your CFO and/or members of your leadership team. This team will keep you accountable for the planning process by organizing meetings and asking important questions. Planning is divided into three phases:

PHASE I – 90 days of Assessment – facing the unknowns

What is your business really worth?
What do you really need in retirement?
How does ownership translate into retirement assets?
Who will step into the ownership role(s)?
What’s your Plan A and Plan B scenario?
What will you do next?
What is your timetable for fully transitioning out?

PHASE II – 90 days of Execution – sharing the plan and getting feedback

Who will help you execute and monitor the plan?
What are the gaps and issues?
How can you prioritize fixing the gaps and issues?
What if all doesn’t go as planned?

PHASE III – 30 days of Communication – establishing timing and deliverables

How will you communicate the plan to leaders, clients, employees, family?
What can reinforce buy-in and cooperation?
What contracts and documents must be in place?
What is the exact timetable and launch?

To dive deeper into each phase of planning a succession plan for your business, click on the links below to read more on each phase.

Phase I – Assessment: Facing the Unknowns of Succession Planning Phase II – Execution: Sharing Your Succession Plan Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan